Industrial Policy in Developing Countries

Industrial Policy in Developing Countries

Failing Markets, Weak States

Tilman Altenburg and Wilfried Lütkenhorst

Against the backdrop of persistently high levels of poverty and inequality, critical environmental boundaries and increasing global economic interdependence, this book addresses the role and impact of industrial policies in developing countries. Accepting the reality of both market failure and policy failure, it identifies the conditions under which industrial policy can deliver socially desirable results. General conclusions on the political economy of development are complemented by country case studies covering Ethiopia, Mozambique, Namibia, Tunisia and Vietnam.

Chapter 5: Governance and governments: balancing market and state failure

Tilman Altenburg and Wilfried Lütkenhorst

Subjects: development studies, development economics, economics and finance, development economics, industrial economics


In the preceding chapters, we dealt with the normative foundation of industrial policy and its principal function to contribute to the achievement of goals that societies consider worth striving for. We demonstrated that industrial policy is necessarily faced with multiple social goals, intrinsic uncertainty, long time horizons and complex trade-offs. As a result, the demands on government capabilities – and, in the first place, government willingness – to adopt rational and consistent policies are exceedingly high. Now, in Chapter 5, we will first address technical questions of how specific approaches of industrial policy can be conceptualised and what this implies for the scope and depth of intervening in markets (Section 5.1). We will then take up the political dimension of industrial policy in terms of the motivations and drivers of government action (Section 5.2) and the capabilities required to ensure rational and effective policymaking (Section 5.3). We will conclude with developing a set of principles that need to govern the delivery of smart industrial policy (Section 5.4). Recapitulating a Long DebateThere has been a protracted debate on the role of industrial policy, especially with regard to latecomer development. This debate goes back to Alexander Hamilton and Friedrich List, who both advocated measures to protect the emerging industries of their home countries (the US and Germany, respectively) against the more competitive industries of Britain.

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