The advance of the state and the renewal of industrial policy in the age of strategic competition

Abstract

Many developing countries have recently adopted a swathe of development strategies ranging from extremely selective to non-discretionary, functional policies – some if not all of which constitute what we may term ‘industrial policy’. The collection provides an overview on the state of the art about new industrial policy and the place of politics in contemporary analysis of state intervention in the global political economy. This introduction revisits the importance of state-backed economic policies not simply as a reaction to the limitations of market reforms implemented in the 1980s and 1990s, but as a radically new development strategy moving on to the twenty-first century. The task of the paper is two-fold: first, it maps out the lessons from East Asian industrial policy and demonstrates how a new generation of political economy scholars have brought in a more political approach to industrialisation; and second, it synthesises the political economy literature to build a framework that incorporates new aspects of industrial policy, notably on the significance of economic linkages and rent management as a way of addressing global value chains.

Keywords:

• Industrial policy
• East Asia
• economic linkages
• global value chains
• manufacturing
• rent management

‘Imagine if India and China follow in Korea’s footsteps and build up their nationally owned automobile industries (which both are trying to do) … who will triumph – Brazil’s and Mexico’s foreign-dominated automobile industries, with their concern for static efficiency, or Korea’s, India’s, and China’s nationally dominated ones, with their concern for expanding markets? Or will Toyota Motors sweep every board?’¹

Alice Amsden¹

A decade or so ago, Alice Amsden posed the questions above – whether foreign-owned subsidiaries of multinationals (FOEs) or private nationally owned enterprises (POEs) are more competitive, which one can deliver technology transfer and learning, and, importantly, whether they can become conduits of long-term structural transformation. The answers are not obvious. Many factors might influence the argument, notably the specific arrangements of joint ventures, the stages of development of an emerging economy, or the degree of state commitment to industrial catch-up. Yet Amsden (2009, 2001, 414, 416) makes two things clear: foreign investors did not create new industries (with the exception of raw materials extraction), nor did developing countries enter the orbit of modern world industry without pre-war manufacturing experiences. At the centre of Amsden’s concern is how industrialisation became the overarching driving force of change in East Asia, and the extent to which politics and institutions shaped the successful experiences of these countries.

While development studies and political economy have substantively moved away from narrow concerns about economic growth, the fundamental basis upon which poverty reduction has been achieved is through structural transformation of national economies. The success of broad-based economic growth led to higher standards of living, better social and poverty indicators, and greater prosperity to be shared among citizens (see Tables S1 and S2) – most especially in China and the rest of East Asia. Industrialisation requires a shift in organisational structures and transformation of the productive base of the economy, which can be observed in the integration within supply chains and the shift of economic activities towards higher value-added activities. As Table S1 shows (see the Supplemental material), developing countries have increased their share of manufacturing and industry over time, eclipsing agriculture and low-value services. The process of structural transformation is linked with broad improvements in gross national income, poverty indicators, and income distribution between the rich and poor. In other words, exports were the source of income that financed massive investments in infrastructure, new cities, housing, and supporting supplier industries after World War II in Korea, Japan, Taiwan and, recently, China (Lewin, Kenney, and Murmann 2016, 1). This collection returns to the industrial policy question precisely because these successes are related to the virtuous cycles of economic growth in the twentieth century. As the political economy scholarship suggests, state-driven innovation and technology acquisition were part of the story of industrialisation in East Asia. Yet industrialisation is far from being an economic question. Instead, as we observe in the industrial transformation experience in the West during the eighteenth and nineteenth centuries, the story of national innovation is shaped by the interplay between politics and institutions on the one hand, and the domestic political dynamics vis-à-vis external forces on the other.

Many developing countries have recently adopted a swathe of development strategies ranging from extremely selective to non-discretionary, functional policies, notably Botswana, India, Uganda, South Africa and – in Latin America – Argentina, Brazil and Colombia (Clapham 2018; Ocampo and Porcile 2020). The number of countries that implemented national development plans increased from 62 in 2006 to 134 in 2018 – a clear reflection of the shift towards the renewed role of national states rather than unfettered markets as the answer to productivity, innovation and long-term growth (Chimhowu, Hulme, and Munro 2019). In developmental states, notably Singapore, South Korea and Taiwan, national governments continue to pursue sectoral policies – with varying levels of success – to create new industries and promote cutting-edge technologies as a response to the realities of economic globalisation (Thurbon and Weiss 2021; Yeung 2016). Even Japan, despite recent emphasis on its regulatory governance arrangements to deal with the shock of its post-1990 political economy, has retained key institutional arrangements exhibiting strong reliance on exports-led growth, a dominant role for conglomerates, and selective capital controls (Kim 2023). Such purposeful intervention in selected sectors – often understood as sectoral development – is aimed at promoting industrialisation, which refers to the ‘sustained structural transformation of a traditional economy into a modern economy driven by high productivity activities in the manufacturing sector’ (Szirmai, Naudé, and Alcorta 2013, 3). The collection places politics at the heart of the industrialisation debate (see Table S1).

This introductory essay offers a roadmap for how to analyse industrial policy beyond East Asia. In so doing, it revisits the importance of state-backed economic policies not simply as a reaction to the limitations of market reforms implemented in the 1980s and 1990s, but as a radically new development strategy for the twenty-first century. The task of the paper is two-fold: first, it maps out the lessons from East Asian industrial policy and demonstrates how a new generation of political economy scholars have brought in a more political approach to industrialisation; and second, it synthesises the political economy literature to build a framework that incorporates new aspects of industrial policy, notably on the significance of sectoral development and economic linkages as a way of addressing global value chains (GVCs).

From East Asian developmental state to industrial policy approach

Studying the political economy of East Asia in the twentieth century offers several advantages in theorising industrial development in the Global South. Firstly, by and large, there now exists an intellectual consensus that sustained, rapid industrialisation among the East Asian Tigers – Japan, South Korea, Taiwan and Singapore – was the hallmark of developmental success in the past century. The East Asian Tigers became known for their industrial strategy emphasising indigenous technology creation through export-oriented industrialisation (EOI) (Amsden 1992; Wade 1990). As economic globalisation accelerated from the 1980s onwards, countries in Southeast Asia sought to participate in globalised value chains. Thus, their industrial strategies necessarily differed from earlier developmental states – as opposed to self-sufficiency, seeking foreign direct investment (FDI) in manufacturing and natural resources sectors became their globalisation strategy (Doner, Noble, and Ravenhill 2021; Gereffi 1989, 2018). As technology, capital and labour moved from East to Southeast Asia, a new dynamic but complementary political economy was consolidated in the Asia Pacific. The flying geese pattern of industrial upgrading has continued as new market players – Viet Nam and China from 2000s onwards – participate in the supply chains of manufacturing, and even more, begin to move from low technology to mid-tier and high-tech sectors (Ang 2016, 2018; Zhang and Gallagher 2016). Put simply, East Asia has forged a regional political economy of global significance in terms of economic dynamism through their deployment of industrial policies to establish leading sectors in the world economy.

In this context, the primary drivers of East Asian industrialisation are often related to economic factors. However, political economists emphasise the unrelenting role of politics – eg societal bargaining and business–state relations – as opposed to policy design as key to developmental outcomes. Facing external military threats and internal social fragmentation, East Asian state-crafting produced diverse industrial strategies aimed at expanding their export basket beyond traditional comparative advantages. Economic growth became the ideational anchor to maintain national unity and mobilise domestic resources for industrial catch-up (Nem Singh 2022, 101). Specifically, the institutional configurations of technology acquisition and rent management shaped how East Asian states produced effective competition policies targeted towards overseas markets (Khan and Blankeburg 2009; Ricks and Doner 2021). Because each East Asian country adapted their industrial policy within their own national contexts, the lesson is not simply about how to design state intervention. Instead, their leaders crafted political arrangements in ways that turned geopolitical vulnerabilities into opportunities for structural transformation. Viewed this way, industrial policy can also be understood as a tool of political stability and as a strategy for coalition-building with contending economic groups.

The literature on East Asian industrial policy generated robust evidence on the significance of ‘embedded autonomy’ between states and industrial elites as well as the role of professionalised bureaucratic agencies to lead industrial planning (Evans 1995; Wade 1990; Yeung 2017b). Both insights take ‘politics’ as a driving force for developmental states to overcome their historical constraints. Coherent industrial strategies were reflective of successful political compacts with powerful social groups. Building on such foundational work, a new generation of developmental state scholarship has focussed on broadening other dimensions of ‘politics’ as a causal condition to theorise development strategies in the twenty-first century. For example, state–business relations were traditionally used as a lens to explain Korean and Taiwanese industrial policy. In the context of economic globalisation, new industrial strategies must be understood as a bargaining process between the state and business groups whose attempts at internationalisation require a new configuration of power beyond embedded autonomy (Lim, Gomez, and Wong 2021; Yeung 2014, 2016). The second dimension of politics – not necessarily unique to East Asia – probes into the role of crony capitalism and rent-seeking as intrinsic elements of industrial growth models (Ang 2016; Khan and Blankeburg 2009; Wedeman 2012). Corruption has become a contested feature of developmental states often emphasised by the World Bank and the International Monetary Fund (IMF) during the 1997 Asian financial crisis, and such governance problems have often been underplayed in the much-touted developmental state literature (see Nem Singh 2022; Nem Singh and Ovadia 2018). Yet for many developing countries subject to the scrutiny of the World Bank, IMF, and donor agencies, policymakers could not – perhaps rightly so – turn a blind eye to the deleterious effects of corruption on economic growth, income redistribution, and accountability in governance. Indeed, anti-corruption campaigns were forged amidst the heyday of neoliberal reforms. In China, where steady growth rates went hand in hand with high levels of predatory corruption, President Xi Jinping (2013–present) has actively pushed for an anti-corruption campaign targeting high-profile politicians and party members (Ang 2020, 1).² While the earlier generation of developmental state scholarship was agnostic to rent-seeking, recent studies in East Asia have examined the mechanisms linking corruption and developmental outcomes.

In this collection, we aim to push the literature further by broadening the dimensions of politics perceived to be causal conditions for industrial success. The authors of this collection unpack coalition-building among elites and with other social groups (Camba, Lim, and Gallagher 2022, on Southeast Asia; Schlogl and Kim 2023, on Indonesia), institutional complementarities in highly centralised regimes (Chen and Chulu 2023, on China), and distributive politics which can undermine state capabilities in formulating a coherent industrial policy (Naseemullah 2022, on South Asia). Beyond rent-seeking, political economy analysis of industrial upgrading also examines the structural conditions that make industrialisation possible in the era of economic globalisation, as demonstrated by Hauge’s (2023) emphasis on the manufacturing–digitalisation nexus and Odijie’s (2023) work problematising the incompatibility between regional integration and national industrial ambitions in Africa.

The intellectual work on developmental states often interpreted East Asia’s historical context as an enabler of economic growth. Accordingly, East Asian success was attributed to favourable geopolitical conditions inherited from the post-war years. For instance, emphasis is often placed on access to US markets and the Korean War as primary shapers of how elites forged their industrial policy strategies (Slater 2010; Yeung 2017a). Although Korea, Taiwan and Singapore faced systemic vulnerabilities, forcing elites to decisively undertake difficult economic reforms (including land reforms and high-risk technology acquisition strategies), Southeast Asian states like Malaysia, Thailand and Indonesia have faced moderate levels of threats against their national elites. With limited threats against elite survival, their industrial strategies were far more risk averse, drawing from FDI rather than domestic savings as the key source of investment (Doner, Noble, and Ravenhill 2021, 78–80; Doner, Ritchie, and Slater 2005). In the 1960s to the late 1970s, ‘techno-nationalist’ strategies were adopted in East Asia, which embedded national security as an overarching framework upon which development policies were to be pursued (Keller and Samuels 2003; Breznitz 2007). Following this argument, Southeast Asian states pursued agriculture, mining, and labour-intensive manufacturing, with less success compared to the more ambitious Korean and Taiwanese industrial policy based on heavy capital goods.

Beyond area studies, the comparative political economy literature finds geopolitical arguments less persuasive in determining industrial success. If binding historical constraints were transformative for high-growth regimes in East Asia, the evidence for other regions suggests contrary outcomes. Many developing countries equally faced threats for survival in one form or another. One simply needs to look at state-building in Africa and Latin America to realise that state capacity and external threats do not translate into coherent industrial strategies (Bayart 2009; Centeno 2002; Centeno and Ferraro 2014; Herbst 2000). For East Asia, systemic vulnerability took the form of realistic possibilities of a war or invasion, as in the case of Korea and Taiwan, and expulsion from the Malaysian Federation for Singapore. For others, elites constructed threats as a way of generating an internal logic of state coherence, or as a means to forge social cohesion especially in the context of strong opposition, as the case of communism in Brazil and the rest of Southeast Asia vividly demonstrate (Hendley 2015; Slater 2010). While geopolitical vulnerabilities and external threats may be a shared experience among developing countries, East Asian states appear to be more effective in using economic growth as an engine of political stability and a source of state legitimacy. Political elites constructed ideational paradigms to mobilise domestic resources for POEs, to forge alliances with business groups, and to promote institution-building compatible with technology acquisition and productivity growth.

Yet development studies cannot simply draw textbook lessons from East Asia – a typical tendency within the field of political economy, which took the form of studies identifying specific policies and generating know-how to create societally insulated, technocratic states (see Hobday 2017). To move forward, the collection suggests refocusing from the developmental states perspective, which accounts for the idiosyncratic factors leading to East Asian industrialisation, towards a narrower ‘industrial policy’ approach. In the latter, the main contention hinges on the possibilities for state-led innovation and techno-nationalism without necessarily having the prerequisites of strong states and institutional capabilities to implement coordinated industrial strategies like Japan, Korea, and Taiwan during the post-war years. By taking industrial policy as a focal point of analysis, this collection takes the state intervention debate further than either state capitalism or developmental state arguments.

To undertake such an exercise, our project applies two key analytical strategies across all the papers. Firstly, all of the authors unpack the distinctive geopolitical and economic contexts of the twenty-first century to avoid the uncritical deployment of industrial policy tools based on the East Asian story into the new international context. In the tradition of political economy scholarship, the authors reflect on what is ‘old’ and ‘new’ about the contemporary geopolitical order, and from there, draw out the specific state responses to promote structural transformation. Some initial observations can be made here already: the geopolitical configuration as we close out the first quarter of the twenty-first century is remarkably unstable and crisis prone. The world faces an unprecedented climate crisis caused by anthropogenic activities, which has been compounded by dim growth prospects off the back of the COVID-19 pandemic and persistent supply disruptions and trade protectionism, both of which were partially fuelled by rapidly escalating hegemonic rivalry as China seeks to redefine the global economic order. Such dramatic reframing of the globalisation narrative in favour of geopolitics and security perspectives is reminiscent of the inter-war years, which led to highly varied economic and political responses. As uncertainty remains amidst the complex dynamics of Ukraine–Russia conflict and US–China rivalry, industrial policy might well serve as a vehicle for legitimacy for some states, enabling political leaders to design growth-oriented policies as their raison d’être amidst new forms of systemic vulnerabilities. Although the Washington Consensus paradigm has suffered a loss from retaining credibility as a development paradigm since the 2000s, whether shifts in power politics offer opportunities to widen spaces for development remains an empirical question.

Secondly, and building upon the point above, our case studies do not simply analyse domestic politics in a vacuum; instead, the authors regard the forms, scope and variation in coalition-building in which new industrial strategies are deployed as a function of the global–domestic nexus. The collection takes comparative political economy – especially those works that emphasise compatible institutions and politics as causal conditions for successful industrial policymaking – as a departure point to enrich our understanding of diverse industrial strategies. While scholars often look at the East Asian developmental experience as a sui generis phenomenon, regional experts have demystified the lack of a single pathway for industrialisation. While all countries shared a similar trajectory of moving from agriculture towards heavy capital-intensive sectors, the particularities of each Asian Tiger meant that their specific industrial policy instruments were practical responses to specific political conditions and institutional dynamics. For example, Brazil developed a mix of natural resource and heavy capital goods as the basis of its industrialisation in the 1970s (Nem Singh, forthcoming; Priest 2016). In the context of global competition, recent examples of developmental states in Africa and Southeast Asia emphasise alliances with foreign and domestic capitalists, with regulatory policies in place to promote value addition in supply chains and incentivise technology transfer as a way to overcome the middle-income trap (Kang and Jo 2021; Kang and Paus 2020; Lim, Gomez, and Wong 2021).

Taking these two strategies together, we find a highly complex environment in which industrial policy could be deployed, despite the contestation over the Washington Consensus prescriptions. To start with, emerging markets – those middle-income countries that benefitted from economic globalisation (Milanovic 2016) – must navigate the globalised value chains of production while also responding to the tendencies of industrialised countries towards ‘reshoring’ and a return to regionalised supply chains (Kamakura 2022; Lund and Steen 2020). Hence, the papers in the collection take theories of industrial policy as a focal point to explore how domestic elites respond to the challenges of globalisation and deglobalisation. It must be noted, however, that only after the supply disruptions and COVID-19 pandemic swept the world did we think it was possible to reverse neoliberal globalisation. Indeed, the globalisation argument appeared incontestable, that meaningful industrialisation in the twenty-first century requires integration in the GVCs and upgrading within the value chain, thereby shifting policy instruments from traditional tools of trade protectionism, exchange rate policy, and quotas towards strategies fostering technological innovation, transport and agglomeration effects (Szirmai, Naudé, and Alcorta 2017, 26).

Industrial policy and economic globalisation – a complex relationship

This section makes clear why we should analyse economic development from the perspective of structural transformation in the era of economic globalisation. Firstly, the external constraint imposed by the Washington Consensus is now over – countries are pursuing various forms of state-led development, especially in the context of China’s successful industrialisation. The heyday of neoliberalism meant the universal rejection of self-sufficiency and autonomous national development as organising principles of state action (Grugel, Riggirozzi, and Thirkell-White 2008; Naseemullah 2019). As Dann Naseemullah (2022) revisits in his article, even in India where the best conditions exist for a successful open-economy industrial strategy, the institutional relationships among states, multinationals and domestic firms after neoliberal economic reforms were forged in ways that enabled multinationals to generate constraints in executing externally oriented industrial policies. However, the World Trade Organization rules and economic globalisation have not fully dissuaded Asian countries from promoting structural transformation, demonstrating state agency over development policy. China, Malaysia and Indonesia have been capable of leveraging FDI to promote value upgrading and participation in technology-intensive segments of the value chain in the twenty-first century (see Camba, Lim, and Gallagher 2022; Chen and Chulu 2023). Even older developmental states like Singapore and South Korea have continuously relied upon globalised firms in conduit with state-backed financial institutions to maintain global industrial competitiveness (Kim 2020; Kim and Kwon 2017; Woo 2019). Thus, the collection identifies the political and institutional conditions in East Asia that generated possibilities for structural transformation policies against the constraints of neoliberal economic reforms.

As of the end of 2022, the most common theme within political economy is deglobalisation, ‘slowbalisation’, or outright decoupling of supply chains currently dominated by Chinese manufacturing. Moving away from neoliberal orthodoxy, our world is now viewed in terms of geostrategic competition between China and the US. China’s distinctive model of state capitalism has shifted policy interpretations on the inevitability of market rule towards new possibilities for a growth model based on more cautious state-led approaches to technological innovation and economic growth. As China consolidates its global influence, geopolitical competition is inadvertently shaping domestic economic policies in the Global South. Specifically, strategic competition between China and the US has produced geo-economic alliances around the ‘Quadrilateral Security Dialogue’ (US, Australia, India and Japan) as well as energy-, natural resources- and trade-based agreements, such as the US-led Indo-Pacific Economic Framework³ and EU-led Global Gateway⁴ strategy – initiatives that since 2020 have sought to counterbalance China’s Belt and Road Initiative launched in 2013. Accordingly, critical minerals and natural resources – most conspicuously observed in Russia and China – have been viewed as geopolitical weapons for China, steering economic cooperation and diplomacy that rebalances the current Euro-centric/North American world order underpinning inter-state relations.

Relatedly, the lesson from East Asia on the importance of national ownership in imperfect markets is gaining relevance in the context of state capitalism. Among the East Asian Tigers, state-owned enterprises (SOEs) were instrumental in building up heavy industries, including the initial investment towards petrochemical and steel industries – two major pillars of manufacturing-led industrialisation. In the example of Korea’s POSCO, the company was established in 1968 as a ‘private enterprise’ financed through special legislation providing majority government ownership. In pursuing profit as its core business strategy, POSCO built two world-class facilities ahead of schedule, enabling the company to provide high-quality steel to various steel consumers ranging from automobiles to appliances and ship-building (Hogan 2001, 24–25, 29–30). Where the private sector has lacklustre performance, or its interest is incompatible with the national state, political elites forged – often against established wisdom during the initial years – industrial policies to support the creation of strategic sectors that could potentially incubate internationally competitive firms in the long run. And in contrast to Soviet Union’s highly restrictive state planning, family owned POEs such as Japan’s keiretsu and South Korea’s chaebols had strong bargaining power vis-à-vis their national governments to promote a coordinated export-led manufacturing strategy that would lead to the globalisation of East Asian firms. Crucially, these firms combined their unique organisational management with close alliances with the national state to promote relentless innovation, create productive rents, and move on to capital-intensive industrial activities (Di Maio 2009, 117–19; Reinert 2009, 80–81).

In this respect, as Chen and Chulu (2023) argue, the ‘China model’ built over 40 years of institutional experimentation is an attempt at responding to economic globalisation through industrial policies in an open-economy setting. Unlike that of developmental states, Chinese industrial strategy was neither always efficient nor successful at choosing the ‘right winners’ in the market. What China’s industrial strategy achieved, however, was to create an environment in which market adjustment was possible amidst intense competition with firms in advanced industrialised countries. Through careful institutional reforms since 1978, the Chinese state pursued trial-and-error, knowledge discovery, and mutual learning among firms. Thus, the lesson on industrial policy is not the uncritical emulation of export-led growth manufacturing; rather, industrial development is a process of discovery for governments and firms. Determining whether to take risky investments is not only a function of political will. Rather, the literature shows the need for a robust understanding of institutional capabilities of lead agencies to direct and steer private capital as well as the processes by which governments resolved the bottlenecks on information asymmetry between states and domestic capital. Overall, the revival of industrial policy comes at an important moment – the weakening of the Washington Consensus and the active efforts of states in the Global South to reclaim their developmental space for further policy experimentation in the twenty-first century.

The diversity of industrial strategies in the twenty-first century

While different industrial policies are being deployed in the new geopolitical context, the core principles of state action do not differ across countries. The differences can be observed in the policy instruments because governments deploy them as a matter of political choice, and based on how they can align existing interests with structural transformation. Reflecting on China’s dual-track approach to liberalisation, Yingyi Qian (2017, 28–29) argues that general principles of market reform follow broad prescriptions from economics. However, pursuing reforms requires institutional changes linked to improving efficiency and the politics of coalition-building and bargaining between regional elites and the centralised party state. In terms of the general principles, the literature is adequate in mapping the key elements of a national industrial strategy: (1) the overall strategic vision of the state setting out the rationale for government intervention; (2) the process of ‘constructive contestation’ between actors concretely expressed in terms of dialogues and institutional arrangements between the public and private sectors; and (3) the variety of policy instruments utilised to effect change (Weiss 2013, 394). The three elements are reconfigured very differently across cases, reflecting the variety of understanding on the role of industrial policy – identified in terms of the role of export markets, the power of manufacturing in driving innovation and effective allocation of capital and labour – all of which are constitutive of what scholars call as the ‘logic of state action’ upon which leaders may justify their approach to structural transformation. Table S3 summarises the varying perspectives on industrial policy.

Manufacturing-led development remains the major pathway for catch-up in the fourth industrial revolution. While East Asia and China have used exports as the driver of structural transformation, for developing countries a narrow focus on manufacturing might be insufficient given intense global competition. For instance, traditional sectoral development policies are deemed ineffective in globalised supply chains (Gereffi 2018). As Hauge (2023) points out, digital technology bears both opportunities and constraints for value addition and participation in technology-intensive segments of the GVCs. Manufacturing companies and workers based in the Global South have increasingly found themselves losing in the battle for control and participation in the GVC of production (Hauge 2020). Multinational capital from the West and emerging East Asia has thus far successfully exercised power through maintaining technological dominance and supporting their firms to keep their industrial competitiveness either by retaining control over intellectual property rights – aided by the global architecture of trade liberalisation on services and goods – or by taking advantage of lower trade barriers in domestic markets of developing countries. Asymmetric power relations between lead multinational companies (MNCs) and their counterparts, combined with a lack of state capacity in the Global South to leverage their regulatory powers over multinationals, have reinforced patterns of inequality in GVCs.

Importantly, the expansion of GVCs favouring lead MNCs to gain unfettered market access within digital technologies and beyond has become a major constraint for industrial catch-up outside the Global North. Even China, whose industrialisation strategy brought benefits from globalisation, has initially suffered from transnational corporations’ ability to prevent Chinese companies from breaking into higher value-added industries and higher stages of production in value chains. For this reason, China’s globalisation strategy has switched in favour of heavy state protectionism combined with regulatory policies creating domestic demand. This approach enabled China to break into the higher value-added activities in digital, energy, and manufacturing sectors, as shown in emerging new energy vehicles (NEVs), wind power, and advanced manufacturing (Jackson, Lewis, and Zhang 2021; Shen and Xie 2018; Yeung 2019; Zhang et al. 2020; Zhang and Gallagher 2016).

In the absence of privately owned national enterprises, some states have relied on expanding the participation of SOEs in GVCs. As Nem Singh (forthcoming) points out, SOEs were created as both political and economic weapons – a means of asserting political authority over strategic industries. Since their inception, state enterprises have fallen under the jurisdiction of the state economic bureaucracy and are characterised by a ‘distinctive bureaucratic governance structure, a distinctive state mechanism for the provision of social services and welfare’ (Bian 2005, 1). While economists have debated the merits of public enterprises for efficiency and in generating long-run economic growth (Krueger 2002; Trebat 1983), political scientists have emphasised how SOEs act as political entities that are part of a historical process and have become actors and decision makers in their own right.

As a result of liberalisation reforms, SOEs in emerging markets were subject to public enterprise reforms promoted by the Organisation for Economic Co-operation and Development (OECD) and international financial institutions, leading to institutional changes in ownership and control. SOEs, thus, become hybrid organisations exposed to competing institutional logics. These quasi-market entities were compelled to balance incompatible logics within a single institutional template; in some cases, state managers were expected to resolve within the institutional framework the competing interests between state demands and market imperatives (Pache and Santos 2010, 2013, 973). Nevertheless, traditions of state control over strategic sectors have shielded SOEs from outright political interventions. With commercial goals providing a counterbalance to political objectives, SOEs perform two functions, one as a political entity meant to extend state goals, and the other as a for-profit private entity tasked to do business on behalf of its citizens. It must be noted, of course, that politicisation of SOEs would never fully disappear given that SOEs are intrinsically public entities which must deliver state goals. Thus, SOEs act as institutional containers enmeshing multiple objectives, such as national security, industrial catch-up, strategic autonomy from multinational capital, and exercise of sovereign power over strategic assets (Horner and Alford 2019; Nem Singh and Chen 2018).

Perhaps most crucially, the politics of institutional innovation cannot be left out of contemporary debates on industrial policy. While we have established wisdom on the significance of institutional quality and state capacity as prerequisites of industrial development, there are multiple pathways upon which countries might arrive in building institutional capacity for industrial promotion. For one, Khan and Blankeburg (2009) emphasise the role of rent management in order to sustain productivity growth. Here, they distinguish the institutional preconditions between countries that are already market competitive and those catching up to become market competitive in the future. East Asia’s industrial policies in the twentieth century have allowed states to achieve the institutional capacity to steer their national champions to compete directly in world markets. This, in turn, implies regulatory market powers and policies aimed at a ‘sound investment climate’ might be sufficient since their multinationals might need less state support in the international markets (Khan and Blankeburg 2009). By contrast, lower middle- and low-income countries still require basic capabilities to accelerate the absorption and learning of technologies. The process of channelling rents into productive activities through industrial policy is therefore quite different between them. In sectors with existing market competitiveness, industrial policy may well be a non-targeted, investment climate type, also known as ‘weak’ or ‘horizontal’ industrial policy. When states create the general conditions to secure investment and increase profit, current technological capabilities are likely to ensure the profitability of low-technological and low-value added activities. By contrast, ‘strong’ or ‘targeted’ industrial policies are needed to accelerate technology acquisition and productivity growth. Yet these choices are also conditioned by the degree of ambition of political leaders since elite motives determine the choice of which industrial policy instruments to implement, rather than being a function of institutional capacities (Amsden 2001; Vu 2010).

To put it crudely, politics is the missing link in industrial policy debates within development economics and political economy. Let us take the choice of which public agencies should lead industrial planning as an example. In the East Asian examples, pilot agencies led the planning process, where detailed exchange of information took place between bureaucrats and business elites and the executive branch had strong control over how financial incentives were distributed among firms. Yet, partly due to growing distance between state and capital in addition to the democratisation of political systems after 1980s, it became more difficult to maintain a technocratic approach to industrial planning. Thus, executive prerogatives through the leading role of the office of Prime Minister or through intermediary institutions like coordination councils increasingly became the channels through which industrial planning could be formulated (Aiginger and Rodrik 2020; Chang and Andreoni 2020). Countries aspiring to deploy industrial policy have therefore had to adapt to the changing political context to maintain institutional coherence and visionary policy designs. Even within East Asia, old ways of doing industrial policy were muted to pave the way for a messier, complex process of negotiating interests and policy formulation.

Articles in the collection

While there are inter-related literatures on the rise of state capitalism and developmental states, this collection opens a new phase in the discussion of industrial development in the Global South. Authors emphasising state capitalism (Alami et al. 2022; Musacchio and Lazzarini 2014; Tsai and Naughton 2015) and developmental states (Carroll and Daryl 2017; Haggard 2018; Nem Singh 2022) are generally interested in the political economy of state transformation and state–society relations, mostly examining the political conditions that have led to growing state presence in the economy, broadly defined. Some authors in this collection have contributed to this research agenda (Hauge 2019; Kim 2019, 2021; Nem Singh and Ovadia 2018; Nem Singh and Chen 2018).

However, we bring forth a new theoretical framework that can be used to examine the political agency of states in the context of geostrategic competition. This requires placing industrial policy at the centre of political economy analysis. To start with, the response of the United States and European Union to China through ramping up subsidies, bolstering public investments, and reshoring of manufacturing is now legitimately called industrial policy, all of which were counter-intuitive to neoliberal orthodoxy (Binz et al. 2021; Bulfone 2023; Hassink, Isaksen, and Trippl 2019). Our collection takes this further: we provide evidence on how industrial policy – far from disappearing – was always a part of the development agenda in the Global South.

The collection consists of six articles. After this introductory essay, Schlogl and Kim (2023) address head-on the basic question: What happens to industrial policymaking after democratisation? While many scholars have called for the end of the developmental state or the need to reform the state apparatus to effectively respond to contemporary challenges of popular participation and political inclusion, Schlogl and Kim (2023) identify how countries might be able to manage this transition in power structure and decision-­making processes. Governments redeploying industrial policy are faced with power contestation and institutional constraints because of democratisation. The rejection of top-down, highly technocratic, and centralised state–business relations has paved the way for new dynamics which governments must manage. Specifically, governments navigate a complex political system to finance ambitious industrial targets while also generating political consensus through parliaments and other institutions. Importantly, diverse political voices channelled through democratic institutional settings add pressure to consensus-building. These challenges are particularly conspicuous in large middle-income countries whose industrial policies in the twentieth century drove structural transformations that have been largely successful but remain incomplete due to the need to overcome the middle-income trap.

The second paper examines the challenge of industrial policy in the context of countries that failed to challenge the dominance of multinational capital in technological learning and enhancing productivity growth. Adnan Naseemullah (2022) argues that neoliberal reforms and international trade rules established since the 1980s have created limited possibilities for state actors to exercise their autonomy and steer domestic firms in a strategic direction. Changes in the institutions of global trade and investment diminished bargaining chips for developing country governments. Drawing on the example of India’s various sectoral policies, Nasseemullah argues that industrial policy literature must pay attention to how multinationals respond to state objectives. While garnering domestic capacities might be necessary in designing an industrial strategy, governments may have to craft wider responses that challenge the structural constraints imposed by the architecture of global trade and investment.

Next, Jostein Hauge (2023) examines manufacturing, the sector most widely studied by industrial growth research, in the context of the digital age. While many posit that digital technologies threaten manufacturing, Hauge (2023) argues that digital services are not replacing manufacturing as the engine of productivity growth and trade nor can digital technology generate job creation at the same levels. Employment creation was, and remains, best achieved through the expansion of labour-intensive manufacturing. However, digital technologies do have uneven effects, in which transnational corporations headquartered in the Global North appropriate shares of profits over large markets at the expense of manufacturing firms and workers in the developing world. Backed by their technological dominance and strong protection of intellectual property rights, transnational corporations entered domestic markets in the Global South with lower trade barriers and privileged access to low-cost capital and labour. Put simply, digital technologies reinforce asymmetric power relations and make participation in high-value-added activities in supply chains difficult for less technology-intensive firms based in the Global South.

Moving away from thematic analysis, the following articles shift the focus towards an empirical analysis of industrial policymaking across diverse contexts. In the fourth article, Chen and Chulu (2023) trace China’s industrial policies as the economic system moved from socialist planning to market economy. Drawing from the institutionalist tradition, they emphasise the significance of Chinese elites’ efforts at promoting industrial policy through a series of complementary institutions. The main attributes of the complementary institutions are dispersive autonomy, intergovernmental competition, and policy inclusiveness – all of which are associated with the market. Since 1978, China’s successful 40-year period of rapid economic growth was underlined by two forces: first were the Chinese government’s ambitious economic reforms to open up its large domestic market, to selectively cultivate market entities, and to improve the basic mechanisms of the market; and second, concerned with the fate of the former Soviet Union, the Chinese state retained in-depth government intervention to guarantee industrial restructuring, technological catch-up, and coordinated market planning. This dual strategy successfully expanded China’s market size and international share although the effects of industrial policy implementation have varied. The market mechanism remains imperfect despite 40 years of global market integration. As a result, the China model is likely to retain strong government intervention and selective liberalisation in the coming years.

Michael Odijie (2023) moves attention to a core problematique among political economists: the pursuit of national industrial strategies within a regional free trade bloc. On the one hand, restructuring industrial sectors is not necessarily incompatible with the formation of the Regional Economic Communities (RECs) and continental integration. On the other hand, African countries have faced a dual crisis of implementation and coordination because market-building regional integration projects often seek to lower trade barriers and eradicate protectionist policies. Although several RECs have produced documents on regional industrial policy, these intentions to support national industrial plans in Africa fall short of articulating a clear framework to harmonise national efforts at expanding trade, investment and production. Attempts at building regional value chains with emphasis on structural transformation in the African context have been criticised for (a) neglecting the influence of domestic politics and (b) failing to emphasise sector-specific coordination at the regional levels to ensure greater alignment with state-led sectoral development policies (Odijie 2023, 6–7). Conversely, industrial policies often create national winners. If RECs are meant to promote domestic capitalists’ interests at the regional level then the very process of regionalism produces losers through selective expansion of market access. Furthermore, in the absence of a regional coordination mechanism, selected national winners face market access issues because national industrial policies in other countries are unlikely to permit their producers to lose from inter-firm competition. Without a distinctive regional logic of market integration, national industrial policies follow domestic political logics and, therefore, become subject to duplication, contradiction, displacement, changing demands, or even lack of management (Odijie 2023, 10–11).

In the final article, Camba, Lim, and Gallagher (2022) apply two logics of industrial policy to compare the developmental outcomes in Malaysia and Indonesia. These two countries have a history of successfully utilising FDI, specifically natural resources, as leverage for industrial strategy (Doner, Ritchie, and Slater 2005; Doner, Noble, and Ravenhill 2021; Lebdioui 2022). The authors examine how states enacted policies outside the rules of the World Trade Organization and the OECD’s Development Assistance Committee (DAC) to attract Chinese capital and foster industrialisation. Comparing their strategies of seeking Chinese FDI to finance industrial parks and consolidate mineral processing, two pathways can be discerned: Indonesia has followed the ‘leading sector’ strategy to increase nickel processing capacity and to prevent the re-primarisation of the economy – this pertains to Hirschman’s concept of ‘intermediate investments’ or ‘sectoral linkages’, whereby a chosen sector is used to maximise forward and backward linkages across different parts of the economy; while Malaysia has followed the ‘dual economy’ strategy, whereby semi-finished goods are imported and assembled into finished goods as high-value-added exports – this approach minimally depends on forward and backward linkages while relying less on technology transfer, skills formation and creation of a new sector. Unlike the former strategy that depends on foreign capital, the Malaysian government hopes that the success of its industrial park to house steel smelting technology will further the investments of existing firms and attract new manufacturing firms within the sector.

Overall, the collection offers theoretical insights about the principles and policy design of industrial strategies that can be applied to the twenty-first century. Crucially, the authors draw from their extensive fieldwork experience to examine contemporary challenges in promoting structural transformation, and in so doing, provide new empirical evidence to analyse the causal effects of politics in industrialisation in the Global South. The collection contributes to defend the case for an industrial policy approach in the study of economic development. In the epilogue (Nem Singh, 2023), I take the collective lessons from the collection a step further to examine how political economy scholarship can contribute to finding innovative solutions for developing countries as the climate crisis and energy transition reshape the geopolitical environment and broader international economic order. Unpacking what ‘green industrial policy’ might look like in the twenty-first century opens a new phase of research in the political economy of industrial development.

Acknowledgements

I thank Dann Nasseemullah for his comments on the paper.

Disclosure statement

No potential conflict of interest was reported by the author.

Additional information

Funding

This project received funding from the European Research Council Starting Grant No. 950056.

Notes on contributors

Jewellord T. Nem Singh

Jewellord T. Nem Singh is Assistant Professor at the International Institute of Social Studies, part of Erasmus University Rotterdam, The Hague. He is a Global Fellow at the Wilson Center, Washington DC and an Affiliate Research Fellow at the International Institute for Asian Studies (IIAS), Leiden. He is the principal investigator of a five-year research programme entitled Green Industrial Policy in the Age of Rare Metals: A Trans-regional Comparison of Growth Strategies in Rare Earths Mining (GRIP-ARM), funded by the European Research Council (Starting Grant No. 950056). He is the author of at least 45 publications, including Business of the State: Why State Ownership Matters for Resource Governance (Oxford University Press, forthcoming) and Developmental States Beyond East Asia (Routledge, 2020).

Notes

1 Amsden (2009, 413).

2 Ang (2020, 7–14) calls attention to the need to unbundle corruption, and in her book, she examines how different types of corruption – paying special attention to whether elites or non-elites are involved – have multiple causal effects on economic growth. Corruption involving theft often leads to predatory rent-seeking and is considered growth-damaging due to its emphasis on the accumulation of private and public wealth towards individuals and social groups. By contrast, exchange-based corruption (or speed money) enhances efficiency because non-elites engage in corruption to overcome administrative hurdles and delays. By contrast, ‘access money’ is called the steroid of capitalism because it stimulates commercial transactions and investments; people often pay bureaucrats to get privileged access to contracts and transactions while bureaucrats serve capital’s interests by generating regulations in favour of businesses.

3 The Indo-Pacific Economic Framework was launched by the US government to incorporate several initiatives into a coherent approach. Strategic countries identified within the framework include Australia, Brunei, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Viet Nam. See https://www.whitehouse.gov/briefing-room/statements-releases/2022/05/23/fact-sheet-in-asia-president-biden-and-a-dozen-indo-pacific-partners-launch-the-indo-pacific-economic-framework-for-prosperity/.

4 The EU Global Gateway reflects the recent efforts of the EU to mobilise up to €300 billion in public and private financing to promote major investments in infrastructure development around the world, notably in Africa. The Global Gateway has been framed as the EU’s attempt at counter-balancing China’s Belt and Road Initiative. See https://ec.europa.eu/info/strategy/priorities-2019-2024/stronger-europe-world/global-gateway_en.