All the Way to the Top: Industrial Policy, Innovation, and Sustained Growth
IMF Blog, November 13, 2019
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Bibliographic details
- Authors: Reda Cherif, Fuad Hasanov
- Published: November 13, 2019
Key findings and context
- Publication date: November 13, 2019.
- Between 1960 and 2014, only 16 developing economies worldwide were able to vault into high-income status.
- Many of the successful cases benefited from either discovering oil or joining the European Union.
- The notable "miracles" cited include Hong Kong SAR, Korea, Singapore, as well as earlier successes in Japan, Germany, and the United States.
- Common characteristics of the miracle economies: ambition, accountability, adaptability, development of sophisticated industries beyond prior technological abilities, export-powered growth, and fiercely competitive businesses.
- The authors define the successful state role as a “true” industrial policy, specifically a Technology and Innovation Policy (TIP), that builds sophisticated sectors, fuels high and sustainable economic growth, and ultimately benefits the whole society.
The role of technological leap and domestic firms
- Making a miracle depends critically on a technological leap early on toward sophisticated industries—mostly in manufacturing—led by domestic firms.
- Successful economies entered industries where they had no previous experience and no reasonable expectation of success (examples given: computers, electronics, pharmaceuticals, transport, and machinery).
- The wild successes resulted from unique public-private partnerships in which:
- The state intervened to remove market obstacles.
- Businesses innovated, invented, and accepted accountability for the support they received.
Three TIP approaches (classification)
- Snail Crawl:
- Adapts a standard growth recipe: improving the business environment, restructuring institutions and infrastructure, preserving macro-stability, investing in general education, and minimizing government interventions.
- Described as the lowest gear of TIP.
- Generally does not generate high sustained growth; commonly results in relatively low growth.
- Barely any economies following this path catch up with advanced countries.
- Tends to fix “government failures” but fails to fix “market failures,” especially for developing sophisticated sectors beyond comparative advantage.
- Leapfrog:
- The middle gear: focused on attracting foreign direct investment in sophisticated industries and/or climbing the quality ladder around existing industries such as commodities (example countries: Malaysia and Chile).
- May provide relatively high growth leading to middle-income status.
- Unlikely to catapult an economy to high-income status within a couple of generations (that is, within the lifetime of a new entrant to the workforce).
- In addition to the standard growth recipe, requires active policies to attract foreign direct investment in manufacturing and develop industries around comparative advantage sectors.
- Moonshot:
- The approach underlying the Asian miracles.
- The state intervenes to fix market failures so that competitive domestic firms in sophisticated industries with frontier technologies can develop.
- Market failures may include firms not fully incorporating productivity gains from entering a sector or not getting compensated for investment that benefits other firms—barriers to entry for sophisticated sectors.
- The state’s role goes beyond general infrastructure, education facilitation, and a favorable business environment; it is proactive to increase the odds of success, encourage firms to enter sophisticated sectors, and create conditions for sustained high growth.
Policy implications and principles
- Successful TIP requires coordinated actions by both the state and the private sector — “both wings to fly.”
- The state should proactively fix market failures that prevent firms from entering sophisticated sectors and should create conditions for domestic firms to compete domestically and internationally.
- Ambition, accountability, and adaptability are essential attributes for governments and firms pursuing TIP.
- The example of the “Asian miracles” offers a promising roadmap: identify and implement the three key principles of TIP to increase the odds of achieving high and sustained growth.
Source: All the Way to the Top: Industrial Policy, Innovation, and Sustained Growth (IMF blog, November 13, 2019).
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