Second Draft: August 2006.as+gd.2.19.08 1 The Political Economy of Industrial Policy in Asia and Latin America

Industrial policy – in the definition we adopt here- consists of sector- and industry-specific policies that aim to direct industrialization in line with some definition of the national interest. Whatever the broader national goals of development are, achieving them is more likely if industrialization achieves rapid productivity growth by absorbing and learning to use the best possible technologies. Indeed, sustaining productivity growth in line with international competitors is a fundamental condition for the sustainability of any industrialization strategy. In this chapter, we focus on some very specific problems of achieving and sustaining productivity growth in late developers as one of the conditions for a successful industrial policy. We draw a fundamental distinction between sustaining productivity growth in sectors that are already market competitive, where the role of industrial policy is limited to regulating the market to ensure sustained compulsions for productivity growth, or maintaining what the World Bank refers to as the ‘investment climate, ’ and achieving rapid productivity growth in sectors or firms that are catching up to become market competitive in the future, for which policies target specific firms or sectors. We argu