The role of the state in escaping the middle-income trap: the case for smart industrial policy

Western states and western-run international organizations have advocated the Washington Consensus development agenda for the rest of the world since the 1980s. The consensus implies that capitalist developing countries will be able to create sufficient income and wealth as to become “developed” provided the government limits itself to doing what is needed to make markets work well, and not more (for example, not industrial policy which pushes investment beyond existing comparative advantage). Yet the number of non-western countries which have become developed in the past two centuries is less than 10, and they are almost all small in population. Stylized facts of this kind provide evidence for the non-Washington Consensus idea of a “middle-income trap” (MIT) or “non-convergence trap”. This paper summarizes evidence for the existence of a MIT, outlines several plausible mechanisms, explains why proactive trade and industrial policies are an (almost) necessary condition for getting through the middle income range at more than a snail’s pace, and suggests some “rules of thumb”, based on experience of actual cases, for how to do trade and industrial policies well – rather than, as the mainstream view says, less