Industrial policies in developing countries

Industrial policy is necessary to correct market failures. In developing countries, market failure is pervasive. At the same time, industrial policy entails risks of misallocation and clientelism, particularly where political institutions are still weak. This project dealt with following questions: In which low- and lower middle income countries and in what conditions have industrial policies been successful? What systematic differences do we observe compared to industrial policy in OECD countries?

Project Lead:
Tilman Altenburg

Project Team:
Markus Loewe

Time frame:
2009 - 2015 / completed

Project description

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.


Wasser und Armut: Schlussfolgerungen für die Umsetzung des Aktionsprogramms 2015