Comparative advantage, industrial policy and the World Bank: back to first principles

Abstract

This paper provides a critical analysis of the World Bank's new thinking on industrial policy. After outlining the changing perspectives on industrial policy put forward by the World Bank over the last three decades, we argue that the bank's economists have taken one step forward (the approval for the enhanced role of the state) but also one – if not two – steps backward (by strong encouragement to countries to seek their current comparative advantage in pursuing industrial policy). We argue that a critical analysis of the World Bank's policy stance on industrial policy as on other main issues is essential because of the institution's hegemony in policy analysis of economic development as well as its conditionality, which may now well include what this paper regards as its inappropriate industrial policy. The analysis in the paper combines classical contributions on international trade and the world economy, relevant economic history, as well as Krugman's comments on these issues in terms of modern economic analysis. The paper concludes with reflections on the appropriate industrial policy for developing countries that the World Bank should support.

Keywords:

• World Bank
• industrial policy
• economic development
• trade

Notes

1. In writing this paper I have updated material from Singh (1995, 2002).

2. Apart from these academic attacks on the World Bank's theses on the East Asian economies, there was importantly criticism from the Japanese government. See Shiratori (1993) and Lall (1994).

3. This paper assumes that perspective put forward by Lin in the Chang Lin debate is intended to be operational in due course. Justin Lin is not only the chief economist but also the senior vice-president of the World Bank and therefore writes with the full authority of his office.

4. In Lin (2009) the capital movements are not explicitly discussed but there is no ambiguity about the paradigm which he favours.

5. This part of the paper is based on and updates unpublished notes written by the late Prof. Sukhamoy Chakravarty (an eminent economic planner) and myself. Interested readers may obtain a copy of these notes by application to the author and to the World Institute of Development Economic Research (WIDER), Helsinki.

6. See for example Arrow and Hurwicz (1977), Calsamiglia (1977) and Heal (1973).

7. See Arrow and Hahn (1971). They write: ‘we will find it convenient to consider some commodities as being private to a firm or group of firms (e.g. managerial ability or in the case of foreign trade, domestic factor supplies’).

8. On these issues see further Singh and Zammit (2011, forthcoming). See also the special issue of the Cambridge Journal of Economics on the crisis (June 2009).