Market-led explanation for successful industrial development

• Market-led development – Loosely associated with “Washington Consensus”– Long history

• Adam Smith’s Wealth of Nations (1776)

– Main claims• Minimal government

– Provide order, protect property rights, enforce contracts, provide basic infrastructure, provide basic education» Government should not finance or own firms» Government should not use taxes to manipulate firms’ behavior

• Free markets– Firms should be free to enter/exit the market – Prices should be free to reflect supply and demand

» Government should not provide subsidies

• Free trade– Goods should flow freely across borders

» Government should not employ tariff barriers, other obstacles to free trade

State-led explanation for successful industrial development

• State-led development – Loosely associated with “Beijing Consensus”– Long history

• Friedrich List’s, National System of Political Economy (1841)

– Main claims• State-led industrialization is key element in establishing an

independent national state and economy• Active government and industrial policy

– “Infant” industries require government assistance» Protection from competition» Assistance with capital accumulation» Assistance with technology acquisition

• Technocratic bureaucracy– Effective government assistance requires competent bureaucracy

» Historically conditioned, hard to build

Industrial policy

• Definition– “coordinated government action aimed at

directing production resources to domestic producers in certain industries to help them become more competitive (Tyson as cited by Stiglitz)”

– Shape a country’s relationship to the global economy

– Gereffi, p.23

– ISI and EOI are examples of industrial policies

Tools of industrial policy

• Tariffs to protect targeted industries• Tax holidays for targeted industries • Subsidized inputs (especially credit) for

targeted industries • State-owned enterprises in targeted industries • Exchange rate manipulation to favor targeted

industries

Technocratic bureaucracy

– Merit/skill-based recruitment technocrats, specialized state agencies

– Monitoring of technocratic performance– Performance-based rewards• Competitive salaries, performance-based promotion

– Insulation from direct societal pressures – Power to formulate and implement policy– Belief in bureaucratic mission