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Reinventing Industrial Strategy: The Role of Government Policies in Building Industrial Competitiveness

By Sanjaya Lall

University of Oxford, Department of International Development (Queen Elizabeth House), September 1, 2003

Sanjaya Lall

As liberalization and globalization gather pace, concern with industrial competitiveness is growing, not just in developing countries but also in mature industrial ones. But it is the former that face the most intense competitive pressures: many find that their enterprises are unable to cope with rigours of open markets – in exporting and in competing with imports – as they open their economies. Some countries are doing very well; the problem is that many are not. Diverging industrial competitiveness in the developing world is one of the basic causes of the growing disparities in income that are now a pervasive feature of the world scene. The immense potential that globalization offers for industrial growth is being tapped by a relatively number of countries, while liberalization is driving the wedge deeper.

Much of this is widely known. The Millennium Development Goals of the United Nations were conceived to deal with just such concerns. However, there is little consensus yet on what can be done to deal with them, particularly in the industrial sphere. What can poor countries do to strengthen their industrial competitiveness in the international economic setting? Should they persist with liberalization and hope that free market forces will stimulate growth and bring about greater convergence? Or is there a need to look again at national and international policy? What, in sum, is the correct role of government in stimulating industrialization and using it as an engine for growth and structural transformation?

There are essentially two approaches to the issue of policy: neoliberal and structuralist. The neoliberal approach is that the best strategy for all countries and in all situations is to liberalize – and not do much else. Integration into the international economy, with resource allocation driven by free markets, will let them realise their ‘natural’ comparative advantage. This will in turn optimize dynamic advantage and so yield the sustainable growth attainable – no government intervention can improve upon this but will only serve to reduce welfare. In this approach, the only legitimate role for the state is to provide a stable macro-economy with clear rules of the game, open the economy fully to international product and factor flows, give a lead role to private enterprise, and furnish essential public goods like basic human capital and infrastructure. This approach has the backing of the industrialized countries and the Bretton Woods institutions (which is why it is also referred to as the ‘Washington consensus’). It has become enshrined in the new rules of the game being formulated and implemented by the WTO.

The structuralist view puts less faith in free markets as the driver of dynamic competitiveness and more in the ability of governments to mount interventions effectively. It questions the theoretical and empirical basis for the argument that untrammelled market forces account for industrial success of the East Asian Tigers (or, indeed, of the earlier industrialization of the presently rich countries). Accepting the mistakes of past industrialization strategies and the need for greater openness, it argues that greater reliance on markets does not pre-empt a proactive role for the government. Markets are powerful forces but they are not perfect; the institutions needed to make them work efficiently are often weak or absent. Government interventions are needed to improve on market outcomes.

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Read More: Development, Globalization, Governance, Trade, United Kingdom, Global

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