E-LEARNING COURSE MODULE 1

FACTSHEET: MODULE 1
INDUSTRIAL POLICY: CHALLENGES AND OPPORTUNITIES GREEN ECONOMY & TRADE
WHAT IS STRUCTURAL MEASURE OF STRUCTURAL TRANSFORMATION
Share of employment by economic sector, Japan (1872-2012)
TRANSFORMATION?
100%
Structural transformation is a shift in the share of economic
90%
activity between different economic sectors. Historically, such
80%
transformation typically entailed a progressive shift of labour
70%
and capital from agriculture towards more productive activities.
60%
Manufacturing, in particular, is associated with technological learning
50%
and economies of scale. However, high-productivity segments of
40%
services and agriculture can also drive structural change.
30%
Importantly, structural transformation has increased overall 20%
productivity, created jobs, and generated economic growth. This 10%
becomes evident if we look at the relative contribution of each sector 0%
to employment and GDP. First in Europe, then in the United States

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and Japan and most recently with the ‘East Asian Tigers’ in the 1960s
and ‘70s, structural transformation has also been accompanied by
considerable advancements in social and human progress.1 Agriculture Manufacturing Services

WHAT IS INDUSTRIAL POLICY? Source: Author, based on Our World in Data.5

Industrial policy encompasses “measures that governments use to

influence a country’s economic structure in pursuit of a desired resources towards dynamic activities that foster restructuring,
objective.” Traditionally, this objective was to enhance productivity diversification, and technological innovation as a vehicle for long-
and competitiveness to allow for economic growth. In almost all term economic growth.6
of today’s industrialized economies, structural transformation has
GREEN ECONOMY AND TRADE 1
been supported by a form of industrial policy.2 WHAT ARE THE RISKS INVOLVED?
Industrial policy can entail both “vertical” measures, aimed at MISALLOCATION OF RESOURCES
strengthening specific economic sectors (i.e. the automotive Governments cannot predict with absolute certainty whether an
industry), and “horizontal” measures, which are sector-neutral (i.e. investment in a particular sector, technology, or business model
general export-promotion). Such government action is particularly will pay off. Designing industrial policy requires information: on
relevant in the presence of so-called “market failures.”3 markets (i.e. product and labour) and export trends, technologies and
innovation, and potential obstacles. In the absence of such information,
“Market failures” commonly refer to situations in which markets governments run the risk of misallocating public resources.
by themselves do not lead to economic efficiency or societal
well-being. In such instances, industrial policy can be justified as POLITICAL CAPTURE
a corrective measure which ensures that resources are directed Historically, industrial policy has been susceptible to capture by
towards activities with high productivity and value-added.4 powerful vested interests and lobby groups, who then manipulate
such policies for their own purpose. Industries may exploit
However, a new generation of thought now calls for a more information asymmetries to demand favourable treatment, and
“entrepreneurial” approach towards industrial policymaking. Here, then resist such treatment being withdrawn. Likewise, policymakers
government intervention is no longer restricted to correcting may allocate resources to reward political allies at the expense of
“market failures,” but also extends to proactively channelling broader public objectives.7

1  For further reading, please see: Rodrik, D., “Industrial Policy for the Twenty-First Century” (2004); Altenburg, T. and Rodrik, D., “Green Industrial Policy: Accelerating
Structural Change Towards Wealthy Green Economies” in PAGE, Green Industrial Policy: Concepts, Policies, Country Experiences (2017) pp. 1-22.; Pegels, A. and Lütkenhorst,
W., “Green Industrial Policy: Directing Private Investment” in Eaton, D. and Sheng, F. (eds.), Inclusive Green Economy: Policies and Practice (2019) pp. 9.0-9.31.; UNCTAD,
Virtual Institute Teaching Material on Structural Transformation and Industrial Policy (2016); and Naudé, W., “Industrial Policy. Old and New Issues” (2010) UNU-WIDER Working
Paper 2010/106.
2  Altenburg and Rodrik; and UNCTAD.
3  The boundary between what is considered to be industrial policy, and what is considered broader economic policy, are fluid. See Pegels and Lütkenhorst; and Weiss, J.,
“Strategic Industrial Policy and Business Environment Reform: Are they Compatible?” (2013) DCED Working Paper, June 2013.
4  “Market failures” may be classified in different ways by different authors. For typologies, see Pegels and Lütkenhorst; Naudé; and Altenburg, T., “Industrial Policy in De-
veloping Countries: Overview and Lessons from Seven Country Cases” (2011) DIE Discussion Paper 4/2011. See also Stiglitz, J., Lin, J., and Monga, C., “The Rejuvenation of
Industrial Policy” (2013) World Bank Policy Research Working Paper 6628.
5  Ortiz-Ospina, E. and Lippolis, N., “Structural Transformation: How did Today’s Rich Countries become ‘Deindustrialized?’” (2017) Our World in Data (retrieved from https://
ourworldindata.org/structural-transformation-and-deindustrialization-evidence-from-todays-rich-countries). Based on Herrendorf, B. et al., “Growth and Structural Trans-
formation” (2013) NBER Working Paper No. 18996.
6  Mazzucato argues that the State has not only fixed “market failures”, but also shaped and created markets. See Mazzucato, M., The Entrepreneurial State: Debunking Public
vs. Private Sector Myths (Anthem Press 2013). See also Rodrik; and Stiglitz et al.
7  Rodrik; Altenburg and Rodrik; UNCTAD; and Devarajan, S., “Three Reasons why Industrial Policy Fails” (2016) Brookings Institute. Future Development Blog.
Such “government failures” need to be taken seriously – but they by removing the main channel through which rapid development
apply equally to any field of government policy. Industrial policy has been achieved in the past.12
should not be rejected on this basis, but instead carefully designed
to ensure that its benefits prevail. Risks can be mitigated by Developing countries thus need proactive industrial policies, as part
following three key policymaking principles: of a wider enabling framework. However, the countries that need
it the most also tend to have the weakest governance – and are
EMBEDDEDNESS therefore more susceptible to “government failures.”13
Maintaining close relationships with businesses can mitigate infor-
PREMATURE DEINDUSTRIALIZATION
mation asymmetries and improve government decision-making.
Manufacturing value added (% of GDP) (1980-2018)
DISCIPLINE
To avoid political capture, governments should retain full 30

autonomy in decision-making and discipline instances of abuse

(e.g. “sunset clauses”).
25
ACCOUNTABILITY
Industrial policymaking should be held to account, through the use
of reporting and disclosure requirements.8
20

… THE RIGHT WAY OF THINKING OF INDUSTRIAL

POLICY IS AS A DISCOVERY PROCESS – ONE WHERE 15
FIRMS AND THE GOVERNMENT LEARN ABOUT
UNDERLYING COSTS AND OPPORTUNITIES AND
ENGAGE IN STRATEGIC COORDINATION.9 10

WHAT CHALLENGES DO DEVELOPING 5

COUNTRIES FACE?
Historically, structural transformation entailed two shifts: first a 0
period of industrialization, as societies shifted from agriculture to
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manufacturing, and then a period of deindustrialization, as economic
wealth drove a second shift towards service-based economies.10

However, many developing countries are now experiencing East Asia & Pacific North America

“premature deindustrialization”, where the peak of manufacturing Europe & Central Asia South Asia
happens at much lower levels of income – and without such Latin America & Caribbean Sub-Saharian Africa
countries having completed a “full” industrialization process as Middle East & Nort Africa World
typically observed in other regions. In Sub-Saharan Africa, for
instance, the ratio of manufacturing value added to GDP is lower
today that it was in the 1980s.11 Source: Author, based on World Bank Open Data.14

One reason for this is that, within an asymmetric globalised

economy, industries in “latecomer” countries find it increasingly
difficult to compete with highly competitive global corporations, LIMITATIONS ON THE CAPACITY OF
which have accumulated historical knowledge and already exploited GOVERNMENT SHOULD AFFECT THE CHOICE OF
the economies of scale associated with global markets. INSTRUMENTS FOR CARRYING OUT INDUSTRIAL
POLICIES, BUT NOT WHETHER THEY SHOULD
As a result, labour tends to migrate from low-productivity agriculture
UNDERTAKE INDUSTRIAL POLICIES.15
to low-productivity services. “Premature deindustrialization” is
therefore presumed to have a negative effect on economic growth,

8  Rodrik; Altenburg and Rodrik; and Pegels and Lütkenhorst.

9 Rodrik.
10  Altenburg and Rodrik; UNCTAD; and Rodrik, D., “Premature Deindustrialization” (2016) NBER Working Paper No. 20935 [Rodrik (2)].
11 Devarajan.
12  Altenburg and Rodrik; UNCTAD; and Rodrik (2).
13 UNCTAD.
14  As the graph shows, the trend towards “premature deindustrialization” has been most visible in Latin American and the Caribbean and Sub-Saharan Africa. World Bank,
“Manufacturing, Value Added (% of GDP)” (n.d.) World Bank Open Data (retrieved from https://data.worldbank.org/indicator/NV.IND.MANF.ZS?year_high_desc=true).
15  Stiglitz, J. "Industrial Policy, Learning, and Development" (2015) UNU-WIDER Working Paper 2015/149.

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