Failing Markets, Weak States
Chapter 9: Rethinking industrial policy in developing countries
Throughout our analysis, we have highlighted a central dilemma of industrial policymaking in most developing countries. On the one hand, there are good reasons to cast doubt on many governments’ ability to manage industrial policies effectively. Financial and administrative resources are scarce, and the democratic institutions that hold governments accountable are often rather weak. Many scholars therefore hold that countries at early levels of institutional development should avoid selective policies and focus instead on reforming the overall investment climate. Even Lall (2004, p._101), a strong supporter of industrial policy, argues that ‘in general, the lower the capabilities, accountability and commitment of the government the lower the degree of selectivity it can safely be entrusted with’. On the other hand, market failure is pervasive, especially in poor countries where the development of entrepreneurship and market institutions is relatively recent. In Chapter 2, we argued that industrial policy involves far more than correcting market failures and externalities, that it is essentially about supporting societal goals and hence must be framed in a genuinely normative perspective. As we also stressed, this does not, however, detract from the relevance of market failures as a determinant of industrial policy and as one of the building blocks of its raison d’être. In Box 9.1, we thus recall the most important market failures and illustrate what they imply specifically in poor countries that are caught in poverty traps, with mutually reinforcing constraints on the supply and the demand side.
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