Doing industrial policy with limited government capacity

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Responding to a post on Duncan Green's excellent From Poverty to Power blog, World Bank Chief Economist Justin Lin argues that his proposal for an updated version of industrial policy does not assume exceptional talent on the part of government institutions:

I certainly do not assume that “states possess a well informed, effective bureaucracy”. In fact development is a challenging process everywhere and all types of public policies and strategies—from education to health, from structuralist import substitution to Washington Consensus reforms—require some government capacity. However, the required capacity for the proposed Growth Identification and Facilitation framework is relatively minimal, compared to almost any other policy proposal: many of the specific instruments recommended in the paper are far easier to implement in low-capacity environments: setting up an export-processing zone for instance requires much less capacity than building infrastructure for the whole country as often advocated; implementing tax exemption schemes for a few years to attract investments in industries with latent comparative advantage is easier than collecting large tax revenues or repressing the financial system to subsidize nonviable firms for endless years in industries that are inconsistent with a country’s comparative advantage.

The whole thing is worth a read. Also check out my previous coverage of the debate between Bill Easterly and Justin Lin on the same topic and a post where I take on Dani Rodrik's argument that industrial policy is making a comeback.


Ryan Hahn

Operations Officer

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