Industrial Structure and Technological Innovation: From the Perspective of New Structural Economics

This lecture highlights three points. First, to become a dynamically growing high-income country is a dream shared by all developing countries. Since World War II, among nearly 200 developing economies, only two have moved from low-income to high-income. China may become the third one by 2025. A developing country enjoys the latecomer advantage in technological innovation and industrial upgrading. Potentially, a developing country can grow faster than a developed country and catch up to high-income status. As John Maynard Keynes said: “It is ideas, not vested interest, which are dangerous for good or evil.” Here, the framework of New Structural Economics is useful. It is an application of the neoclassical economics approach to study the determinants of economic structure and its evolution in development, which is the nature of modern economic growth. There are two reasons why I call this approach New Structural Economics: by convention, it should be called structural economics, and I added “new” to distinguish it from structuralism. Second, following an economy’s comparative advantage (determined by its structure of endowments) to develop the economy’s industries and hard and soft infrastructures is the best way to achieve dynamic growth and convergence. In this process, a developing country can have the latecomer advantage and thus faster technological innovation and industrial upgrading than high-income countries, leading to convergence to high income. Suppose the government of a developing country plays a facilitating role in an effective market to enable innovations according to the industrial structure to turn industries from latent to actual comparative advantage. In that case, the country can grow faster than high-income countries and avoid the low- and middle-income trap. Third, industrial policies are essential for the government to play a facilitating role in the country’s innovation. Almost all governments in the world have attempted to use industrial policies to play this role, but most have failed. The reason is that the government’s targeted industries went against the country’s comparative advantage. For an industrial policy to be successful, it should target industries that conform to the economy’s latent comparative advantage. How can the government pick the industries that are in line with the economy’s latent comparative advantage? From the perspective of New Structural Economics, depending on an industry’s distance to the global technology frontier, innovation cycle, and strategic significance, there are five types of industries in a middle-income country: catching-up industries, leading-edge industries, comparative advantage–losing industries, short innovation cycle industries, and comparative advantage–defying strategic industries. Historical evidence shows that successful countries in their catching-up stage all used industrial policies to facilitate their industrial upgrading, and their industrial policies targeted industries in dynamically growing countries with similar endowment structures and moderately higher per capita income. For countries with a similar endowment structure, the forerunners’ successful and dynamic industrial development provides a blueprint for the latecomers’ industrial policies.