Capability Failure and Industrial Policy to Move beyond the Middle-Income Trap: From Trade-based to Technology-based Specialization

The disappointing economic performance of the past two decades under the Washington Consensus of the 1980s and 1990s and the impact of the 2008 global financial crisis have resulted in the revival of industrial policy as a keyword in development literature. New literature in the same vein includes the works of Cimoli, Dosi, and Stiglitz (2009), as well as those of Lin (2012), Lee and Mathews (2010), and Wade (2012). Industrial policy is a broad concept. According to Johnson (1982), it refers to policies that improve the structure of a domestic industry in order to enhance a country’s international competitiveness. Variants of industrial policies existed in successful countries, such as the UK from the 14th to the 18th centuries, the USA and Germany in the 19th century, Japan in the late 19th century, and Korea and Taiwan in the late 20th century (Cimoli et al., 2009).