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EFFICIENCY, FINANCE, AND VARIETIES OF INDUSTRIAL POLICY Initiative for Policy Dialogue at Columbia: Challenges in Development and Globalization INITIATIVE FOR POLICY DIALOGUE AT COLUMBIA: CHALLENGES IN DEVELOPMENT AND GLOBALIZATION JOSÉ ANTONIO OCAMPO AND JOSEPH E. STIGLITZ, SERIES EDITORS Escaping the Resource Curse, Macartan Humphreys, Jeffrey D. Sachs, and Joseph E. Stiglitz, eds. The Right to Know, Ann Florini, ed. Privatization: Successes and Failures, Gérard Roland, ed. Growth and Policy in Developing Countries: A Structuralist Approach, José Antonio Ocampo, Codrina Rada, and Lance Taylor Taxation in Developing Countries, Roger Gordon, ed. Reforming the International Financial System for Development, Jomo Kwame Sundaram, ed. Development Cooperation in Times of Crisis, José Antonio Ocampo and José Antonio Alonso New Perspectives on International Migration and Development, Jeronimo Cortina and Enrique Ochoa-Reza, eds. Industrial Policy and Economic Transformation in Africa, Akbar Noman and Joseph E. Stiglitz, eds. Macroeconomics and Development: Roberto Frenkel and the Economics of Latin America, Mario Damill, Martín Rapetti and Guillermo Rozenwurcell, eds. Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises, Guzman, Martin, José Antonio Ocampo, and Joseph E. Stiglitz, eds. EFFICIENCY, FINANCE, AND VARIETIES OF INDUSTRIAL POLICY GUIDING RESOURCES, LEARNING, AND TECHNOLOGY FOR SUSTAINED GROWTH Akbar Noman and Joseph E. Stiglitz, Editors Columbia University Press New York Columbia University Press Publishers Since 1893 New York Chichester, West Sussex cup.columbia.edu Copyright © 2017 Columbia University Press All rights reserved Library of Congress Cataloging-in-Publication Data Names: Noman, Akbar, editor. | Stiglitz, Joseph E., editor. Title: Efficiency, finance, and varieties of industrial policy : guiding resources, learning and technology for sustained growth / Akbar Noman and Joseph Stiglitz, eds. Description: New York : Columbia University Press, [2017] | Includes index. Identifiers: LCCN 2016033888 | ISBN 9780231180504 (cloth : alk. paper) | ISBN 9780231542777 (E-book) Subjects: LCSH: Sustainable development. | Economic development. | Industrial policy. | Development banks—Finance. Classification: LCC HC79.E5 E3324 2016 | DDC 338.9/27—dc23 LC record available at https://lccn.loc.gov/2016033888 Columbia University Press books are printed on permanent and durable acid-free paper. Printed in the United States of America Cover image: ©zhaojiankang/iStockPhoto INITIATIVE FOR POLICY DIALOGUE AT COLUMBIA: CHALLENGES IN DEVELOPMENT AND GLOBALIZATION JOSÉ ANTONIO OCAMPO AND JOSEPH E. STIGLITZ, SERIES EDITORS The Initiative for Policy Dialogue (IPD) at Columbia University brings together academics, policymakers, and practitioners from developed and developing countries to address the most pressing issues in economic pol- icy today. IPD is an important part of Columbia’s broad program on devel- opment and globalization. The Initiative for Policy Dialogue at Columbia: Challenges in Development and Globalization book series presents the latest academic thinking on a wide range of development topics and lays out alternative policy options and trade-offs. Written in a language accessible to policymakers and students alike, this series is unique in that it both shapes the academic research agenda and furthers the economic policy debate, facilitating a more democratic discussion of development policies. Many of the most fundamental and frequent controversies in economics revolve around the issues of the salience and significance of market failures and the role of the state in overcoming them. They arise in a particularly acute form in the literature on industrial policies. Broadly understood, “in- dustrial policy” refers to public policy measures aimed at influencing the allocation and accumulation of resources, and the choice of technologies. A particularly important set of industrial policies, at the center of many of the papers in this volume, comprises those targeted at activities that promote learning and technological upgrading. They are sometimes more accurately labeled as “learning, industrial and technology” (LIT) policies. There has been a resurgence of interest in industrial policies in recent years, and such policies have even come to be advocated by the World Bank. This revival prompted IPD and Japan International Cooperation Agency (JICA) to establish a joint task force on industrial policies motivated in part by the neglect of research into industrial policies in the long period the subject was neglected. Issues requiring further exploration included those pertaining to development finance and the links between the recent literature on industrial policies and that on growth and structural transformations. So did new em- pirical work on experiences with industrial policies; and new insights into the debate on static vs. dynamic efficiency and on mitigation of risks. This volume hopes to inform the policy choices facing countries both in the advanced world and in emerging markets and less developed countries, and to help them design institutions and policies appropriate for them. For more information about IPD and its upcoming books, visit www. policydialogue.org. CONTENTS 1. Learning, Industrial, and Technology Policies: An Overview 1 Akbar Noman and Joseph E. Stiglitz PART I Theoretical and Conceptual Foundations 21 2. Industrial Policies in Learning Economies 23 Mario Cimoli and Giovanni Dosi 3. Dynamic Efficiency: Structural Dynamics and Economic Growth in Developing Countries 65 José Antonio Ocampo PART II Development Finance 103 4. Uncertainty, Investment, and Financing: The Strategic Role of National Development Banks 105 João Carlos Ferraz 5. The Roles of Development Banks: How They Can Promote Investment in Europe and Globally 131 Stephany Griffith-Jones and Giovanni Cozzi 6. Inside the Black Box of Japan’s Institution for Industrial Policy: An Institutional Analysis of the Development Bank, Private Sector, and Labor 156 Go Shimada viii CONTENTS 7. Development Banks and Industrial Finance: The Indian Experience and Its Lessons 191 Deepak Nayyar PART III Practice and Proposals 223 8. Industrial Policy Revisited: A New Structural Economics Perspective 225 Justin Yifu Lin 9. Varieties of Industrial Policy: Models, Packages, and Transformation Cycles 245 Antonio Andreoni 10. Industrial Strategies: Toward a Learning Society for Quality Growth 306 Akio Hosono 11. Could Technology Make Natural Resources a Platform for Industrialization? Identifying a New Opportunity for Latin America (and Other Resource-Rich Countries) 353 Carlota Perez 12. Manufacturing Development: The Role of Comparative Advantage, Productivity Growth, and Country-Specific Conditions 390 Nobuya Haraguchi 13. Does Manufacturing Colocate with Intermediate Services? Analyzing the World Input-Output Database 447 Ming Leong Kuan Acknowledgments 483 Contributors 485 Index 493 EFFICIENCY, FINANCE, AND VARIETIES OF INDUSTRIAL POLICY CHAPTER 1 Learning, Industrial, and Technology Policies AN OVERVIEW Akbar Noman and Joseph E. Stiglitz Many of the most fundamental and frequent controversies in economics revolve around two related sets of issues: the salience and significance of market failures and the role of the state in overcoming them. They arise in a particularly acute form in the literature on industrial policies. Broadly understood, industrial policy refers to public policy measures aimed at influencing the allocation and accumulation of resources, and the choice of technologies. A particularly important set of industrial poli- cies, at the center of many of the chapters in this volume, comprises those targeted at activities that promote learning and technological upgrading. They are sometimes more accurately labeled as learning, industrial and technology (LIT) policies. We use the term to cover both deliberate and self-described industrial policies as well as policies that have a similar effect though they are not labeled as “industrial policies” (this is particu- larly well illustrated by Antonio Andreoni’s contribution, chapter 9). Industrial policies became virtually ousted from the set of policy pre- scriptions proffered by economists—even if they were often resorted to in practice—in the heyday of neoliberalism, with the Washington con- sensus policies heavily biased in favor of largely unfettered markets.1 There has been a resurgence of interest in industrial policies in recent years, and such policies have even come to be advocated by the World Bank.2 This revival prompted the Initiative for Policy Dialogue (IPD) and Japan International Cooperation Agency (JICA) to establish a joint task force on industrial policies. The task force’s work was motivated in part by the neglect of research into industrial policies in the long period the subject was in exile from academic research and policy analysis, and especially from that of multilateral organizations. Issues requiring further 2 LEARNING, INDUSTRIAL, AND TECHNOLOGY POLICIES exploration included those pertaining to development finance and the links between the recent literature on industrial policies and that on growth and structural transformations. There has been, moreover, new empirical work on different experiences with industrial policies and new insights into the debate on static vs. dynamic efficiency and on mitigation of risks. The historical experience of advanced economies at or near the frontier of technology, attests to the vital role that industrial policies played in sustained economic growth and transformation.3 This provides compel- ling testimony to the critical role of governments in fostering sustained economic progress. Moreover, there are good theoretical reasons for the type of public policy interventions that constitute what we have called LIT and industrial policies. These are elaborated in chapter 2 by Mario Cimoli and Giovanni Dosi, and in chapter 3 by José Antonio Ocampo. Before we turn to these and the other chapters that comprise this volume, it would be apposite to comment on one objection to industrial policies: What may be good in theory may be vitiated by the risks of poor design and implementation. The answer to this objection is, first, that while industrial policies are not sufficient by themselves for success in economic development, both historical experience and theory indicate that they are virtually necessary. Second, yes there are risks stemming from institutional imperfections and political economy “failures,” but such problems are by no means confined to industrial policy as demonstrated, for example, by many failed programs of macroeconomic stabilization or of liberalization and privatization. The challenge for public policy is to get the risk–reward ratio right. That industrial policy has the potential to provide plentiful rewards and that there are ways to obtain them and mitigate risks of fail- ure are amongst the central contentions of this collection of essays. The rest of the volume comprises three parts. Part I elaborates on the conceptual and theoretical foundations of LIT or industrial policies. Part II focuses on an aspect that has been relatively neglected in the recent literature, even as its importance has been widely recognized: develop- ment finance, in particular development banks. The primary focus of part III is on experiences and experiments with industrial policies, their lessons, and proposals about their design and implementation. In this overview, we pay particular attention to part I. This quick sketch cannot, of course, do justice to the chapters and is aimed more at whetting the appetite and drawing some salient links between the various contribu- tions than at providing a summary.

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Industrial policy, once relegated to resource allocation, technological improvements, and the modernization of industries, should be treated as a serious component of sustainability and developmental economics. A rich set of complimentary institutions, shared behavioral norms, and public policies ha
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