Rethinking industrial policy from the perspective of new structural economics

Justin Yifu Lin and Jiajun Xu

Industrial policy is back to the agenda of international development (Stiglitz, Lin, & Monga, 2013), as industrialization and economic structural transformation is at the heart of Sustainable Development Goals (SDGs) succeeding Millennium Development Goals (MDGs).1 Though the basic consensus on ‘why industrial policy’ is needed given market failures, researchers disagree with each other on ‘how to implement industrial policy’ (Rodrik, 2009). Should the government adopt a comparative advantage conforming strategy or a comparative advantage defying one (Lin & Chang, 2009)? Should the government intervention be sector-targeted? Can the government tackle the challenge of incapability and rent-seeking to overcome government failures? While the popular perception that most industrial policies fail miserably has tempted us into saying ‘no’ to all kinds of industrial policies, a more constructive approach is to delve deeper into comparative studies of both successes and failures in an effort to make prudent recommendations on how to make industrial policy work better in practice.2 Indeed, empirical evidence shows that some countries have successfully deployed industrial policy to promote industrial upgrading and structural change both in the past and at present (Amsden, 1992, Chang, 2002, Mazzucato, 2014, Wade, 1990). This symposium on New Structural Economics is an endeavour towards a deeper understanding about under what conditions industrial policy works. Recognised as the third wave of development thinking after structuralism and neoliberalism,3 New Structural Economics (NSE), which uses neoclassical approach to study the determinants of economic structure and structural evolution, is proposed by Professor Justin Yifu Lin with the aim of advancing frontier research on structural change and promoting structural transformation in developing countries (Lin, 2012).