Such policies have been controversial. Some argue that government is not good at picking winners. Some argue that it makes no difference whether a country produces potato chips or computer chips.
Both perspectives are misguided. The purpose of such policies is to address well-known limitations in markets — for example, the important learning externalities, as skills relevant to one industry benefit nearby industries.
The goal of industrial policies is to identify these spillovers, and governments have done a very credible job in this respect.
In the US, the government promoted agriculture in the 19th century; supported the first telegraph line (between Baltimore and Washington, demonstrated in 1844) and the first transcontinental line, thereby launching the telecommunications revolution; and then nurtured the Internet revolution. Inevitably, government — through its infrastructure, laws and regulations (including taxation) and education system — shapes the economy.
For example, the US’ tax and bankruptcy laws, combined with deregulation policies, effectively encouraged the creation of a hypertrophied financial sector.
With resources so scarce, developing countries cannot afford the luxury of such waste. They have to think carefully about the future direction of their economies — about their dynamic comparative advantages.
The world’s most successful developing countries — those in East Asia — did just this, and among the lessons to be shared are those concerning how they conducted industrial policies at a time when their governments lacked the sophistication and depth of talent that they have today.
Weaknesses in governance may affect the instruments of industrial policy, but not its use.
Japan has other lessons to teach as well. Key elements of its development strategy — including its stress on education, equality, and land reform — are even more important today in Africa.
The world has changed markedly since East Asia began its remarkable developmental transition more than a half-century ago; and differences in history, institutions and circumstances mean that policies must be adapted to local conditions.
However, what is clear is that Japan and other East Asian countries followed a markedly different course from that recommended by the neo-liberal “Washington Consensus.” Their policies worked; all too often, those of the Washington Consensus failed miserably. African countries will benefit from reflecting on these successes and failures, and on what they mean for their own development strategies.
Joseph Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University.
Copyright: Project Syndicate