Industrial Policy in Response to the Middle‐income Trap and the Third Wave of the Digital Revolution
| DOI | http://doi.org/10.1111/1758-5899.12364 |
| Author | Robert H Wade |
| Published date | 01 November 2016 |
| Date | 01 November 2016 |
Industrial Policy in Response to the Middle-
income Trap and the Third Wave of the Digital
Revolution
Robert H Wade
London School of Economics and Political Science
Abstract
The ‘middle-income trap’(MIT) is ‘real enough’for policy makers in developing countries to take it as a serious threat to pro-
spects for achieving ‘high’average income. Those prospects are further clouded by the major changes occurring as the digital
revolution moves from connecting people to the internet to connecting the internet to everything else, across many sectors
of human life (the Third Wave). Both sets of forces raise the potential advantages of pro-active industrial policy. Yet main-
stream economic thinking –and the consensus of international development organizations like the World Bank –has long
tended to disapprove of it, in the spirit of ‘The best industrial policy is none at all’. In light of the middle-income trap, the
Third Wave, and other conditions in the world economy, this essay discusses some of the big issues in the design of industrial
policy, on the theme of how to do it well rather than how to do it less.
Policy Implications
•Sectorally-targeted industrial policy can help to speed a middle-income country through the ‘glass ceiling’and into the
high-income segment.
•Industrial policy should aim to diversify and upgrade the economy’s export composition and raise the proportion of local
value-added, with particular attention to ICT, pharma, instruments, and other machinery.
•The potential contribution of one or more industrial policy agencies is all the greater today, as the Third Wave of the digi-
tal revolution rolls out. As industries vital to the lives of earlier generations were transformed by electricity, industries vital
to our daily lives are being transformed by the application of internet connectivity. Governments have a critical role in
steering this transformation.
•Governments should be cautious about accepting the deal on offer in free trade agreements with western governments:
‘improved access to our market, but you must give up your policy space’. Governments should be doubly cautious about
agreeing to give up the ability to control capital movements across the national boundary.
•Comparison of the organization of more, and less, effective public agencies suggests rules of thumb for making an effec-
tive industrial policy agency, even in the context of generally ineffective government agencies.
Introduction
From the mid nineteenth century till the 1990s western
economies plus Japan grew faster than non-western
economies, making for ‘divergence, big time’(Pritchett
1997). From the late 1990s till 2008 the majority of
developing countries grew faster than the US, appearing
to confirm that ‘globalization works’. Since 2008 the
majority of developing countries have grown more
slowly than the US. This is generally understood as an
aberration, until the benefits of globalization for devel-
oping countries reemerge-provided they adopt yet more
free market reforms.
This understanding overlooks evidence of the long-term
difficulty facing developing countries in achieving ‘devel-
oped country’economic structure and performance.
For example:
•Less than 10 non-western countries have become devel-
oped during the past two centuries –even stretching the
categories of non-western, developed, and country to
include Hong Kong, Singapore, Russia and Israel. They are
almost all small in population.
•A World Bank study (2013) identifies 101 countries in
1960 as ‘middle-income’. Of those, only 13 had reached
‘high-income’by 2008.
1
•A study by IMF researchers (Cherif and Hasanov 2015)
defines its income thresholds in terms of percentage of US
GDP per capita ($PPP 2005), in contrast to the World Bank
study which uses absolute per capita income thresholds.
2
Of
167 low- and middle-income economies in 1970, only nine
(5%) reached high income by 2010 (46% of US GDP per
Global Policy (2016) 7:4 doi: 10.1111/1758-5899.12364 ©2016 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 7 . Issue 4 . November 2016 469
Research Article
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