Industrial Policy In Less Developed Countries

The idea of industrial policy is to cure perceived market failures of various sorts. This also has been the meat of development economics for decades. Moreover, strong similarities exist between the specific goals of industrial policy advocates for developed countries and goals of governments in less developed countries. Both groups seek to pick industrial winners, deal with externalities, improve the balance of trade, and attract high‐tech industries. Given that markets appear not to operate as well in developing countries as in their developed counterparts, we would expect industrial policy to work particularly well in LDCs since many important market failures should be relatively easy to identify and the gains from correcting them should be great. Moreover, because LDCs tend to intervene more than their developed counterparts, we would expect them to exhibit particularly strong effects of this intervention. Thus, the experiences of LDCs constitute a well endowed laboratory to study the effects of industrial policies in practice, and to yield lessons relevant for both industrial and developing countries. This paper explores these experiences, and closes with some lessons for the design of sensible industrial strategy.