Industrial policies in developing countries

Industrial policy - that is, proactive management of structural change using sector-specific incentives - is necessary to correct market failures. For example, non-market coordination may be needed to ensure that many investors engage in complementary activities that are needed to start a new economic activity.  Also, environmental costs are not fully reflected in market prices. Such market failures tend to be particularly pervasive in developing countries.

Targeted support for specific subsectors however also entails risks - from misallocation due to price distortions to clientelism and outright corruption. Also these risks tend to be higher in developing countries whose political systems have fewer in-built checks and balances.

Against this background, the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) conducted comparative studies on industrial policies in Egypt, Ethiopia, Mozambique, Namibia, Syria, Tunisia and Vietnam. The project aims at a better understanding of the prospects of success and the risks of industry policies in countries with differences in private sector development and governance efficiency. In addition to some already published studies, we are currently working on several comparative reports. Also, additional work has been started to study the use of "green" industrial policies.