The turn of the twenty-first century brought a reassessment of development economics. The global commodity boom of the 2000s ushered in windfall profits for resource-rich countries in the global South, and with them came new agendas for growth. In 2002, economists like Dani Rodrik were hailing the decline of political support for the Washington Consensus and wondering what would come after neoliberalism.1
The 2008 financial crisis and the economic disruption of the Covid-19 pandemic underlined the question for governments of the global North. But the record of neoliberalism was always patchier in the South—successful, arguably, as a crisis mitigation strategy, it failed as a coherent program for long-term growth and economic stability. Along with the political rejection of neoliberal globalization, the demand for more interventionist state policy spread across the global South. Mineral-rich states pursued “resource nationalism.” Across Latin America, a “new developmentalism” was being pursued. Industrialization and structural transformation returned to the development policy agenda.2 The “advance of the state” in China3 presented another decisive challenge to the Washington Consensus and an alternative growth strategy that emphasizes the centrality of export manufacturing to industrial upgrading, and, more critically, the importance of strategic state control to create a new productive basis for a national economy.
For development economists, the proliferation of state-led industrial policy across the global South in recent decades holds a crucial lesson: there is not one path to economic transformation. Rather than prescribing a fixed developmental strategy, we ought to encourage experimentation and adaptation—with sensitivity to the inherited institutional, social, and economic infrastructure in a given policy-making environment.
Moving away from “one size fits all”
The aspiration towards structural transformation has been persistent among middle-income economies across Latin America and East Asia. The model for such an achievement has been largely borrowed from the newly industrializing countries (NICs) of the late twentieth century, who gained success through promoting domestic champions, capturing value addition in globalized supply chains of production, and developing indigenous technological innovation. South Korea and Taiwan built their globalized companies like Samsung and TSMC by promoting specific sectors and establishing tightly woven relationships with leading domestic firms. In South Korea, the state industrialized by shifting from labor-intensive textile and apparel in the 1960s towards heavy capital–notably ship-building—and “high tech” semiconductors—since the mid-1970s.4 Similar to East Asia, Brazilian elites developed a distinctive state capacity to coordinate industrial sectors, create corporatist relationships with organized business and labor, and successfully align state-led finance with experimental policies for sectoral promotion.5 Despite neoliberal reforms, for example, Brazil maintained its domestic content requirement laws in the oil and gas industry, generating substantive research and development (R&D) investments and development of domestic firm capabilities.6
Some of these reforms have been more successful than others. In response to the changing global political economy of automotive manufacturing, Thailand became an assembly hub for cars through an extensive growth strategy, while Korean chaebols became global automakers with world-class engineering and design capabilities.7 Korea, a typical example of an intensive growth strategy, combined its capacity for technological innovation with participating strategically in global supply chains.
Drawing on the Korean example, middle-income countries have increasingly begun to introduce intensive growth strategies in emerging key industries to overcome the middle income trap. In 2014, Indonesia introduced a ban on raw nickel exports to increase value in the mineral supply chain and induce an investment regime for domestic processing facilities. The policy aims to increase the participation share of Indonesian companies in mineral processing and to create more linkages with technology-intensive sectors, such as battery production and electric vehicles. While the mining policy by itself does not constitute an industrial strategy, building economic linkages among interrelated sectors signals the position of the mining industry as a pillar of structural transformation. With the export ban, Indonesia saw an increase in foreign direct investment (FDI) on nickel processing and export value (see Figure 1). Following on early successes in nickel, under the National Development Plan the government has extended the downstreaming policies to other minerals, such as copper, bauxite, tin, and agricultural commodities. This policy will be supported by the construction of smelters that focus on nickel (twenty-two smelters), bauxite (five smelters), iron (two smelters), lead (one smelter), and copper (one smelter).8
In a June 2023 Assessment Report by the IMF, FDI increased by 47 percent in 2022, mostly related to the downstream segment with China and Hong Kong accounting for almost half of the investments. Several foreign investors have built smelters in the remote provinces of Central Sulawesi and North Maluku, with some raising equity on the Jakarta stock exchange. Investment realization in nickel and bauxite smelters during 2021–22 has reached about US$5.5 and US$3 billion respectively, though broader reforms concerning labor market efficiency, infrastructure, and financial deepening remain recommended.
Figure 1: Performance of Nickel Industry in Indonesia
China’s new industrial policy
Despite the importance of the South Korean example, its various applications demonstrate that a template for industrial policy neither exists nor is desirable. China’s industrial policy development is emblematic of this view: built through experimentation, Chinese industrial policy drew from the experiences of both the Soviet-style public enterprise regime and the centralized, state-driven sectoral development observed in East Asian developmental states. China’s institutional configurations were products of a co-evolution between states and markets, whereby the establishment of complementary institutions in response to external changes was key.9
“Made in China 2025,” China’s industrial strategy, deploys multiple policy instruments: tax preferences to incentivize foreign companies to move their R&D programs to China; formal regulations and informal certification schemes requiring foreign companies to partner with Chinese firms into joint ventures; extensive use of state funding known as government guidance funds (GGFs) to support domestic R&D spending and overseas acquisition; funding of strategic acquisitions of assets to building Chinese firm capabilities; and foreign technology and equipment acquisition especially from US-led technology companies to fill in existing gaps in Chinese technological capabilities/10
Figure 2: Domestic Content Goals under Made in China 2025 Plan
The policy reserves a central role for the state in increasing the participation share of national champions, whether domestic companies or state-owned enterprises, in manufacturing supply chains. It aims to strengthen the Chinese export manufacturing sector through continuous investment in research and development (R&D) and gradual technological advancement to move up the hierarchy of global value chains. Crucially, it seeks to combine sector-specific interventions—such as demand creation and risk-taking in high-tech, infrastructure, and capital-intensive industries—with incentives for businesses to expand markets overseas. During the 1990s and 2000s, Chinese policy experimentation was achieved through coordinated planning and a focus on creating economic competition among firms and political competition among regional elites to build FDI-conductive regimes within China.11 After 2016, the deployment of subsidies to inject capital into joint ventures, promotion of state-sanctioned mergers and acquisitions in critical minerals sectors like rare earths elements (REEs), and active support for technological upgrading to concentrate processing and refining technologies in lithium, REEs, and other metals have also emerged as key strategic aims. In strengthening China’s hold on the critical minerals sector, the supply chains of energy transition metals have become concentrated in the hands of Chinese states and companies, fueling Western countries’ anxiety as they became heavily dependent on minerals extraction from China.12
Failures and successes
Both China and South Korea demonstrate the importance of path-dependent circumstances in shaping industrial policy trajectories. Successful industrialization requires a comprehensive understanding of national political contexts, identifying how available policy instruments can support export promotion, and promoting state capacity to mobilize domestic resources for sectoral development. Apart from building institutional capacities such as a professional bureaucracy and centralized regulatory agencies for economic planning—what Vu calls a strong “developmental structure”—political leadership or “developmental will” is also significant in contexts where insulated bureaucracies are untenable. Although states choose intensive or extensive growth strategies depending on their political contexts, both strategies still require institutions capable of coordinating multiple agents who hold resources to be mobilized for specific policy objectives like technological learning. Similarly, in contemporary China, coordination policies for sectoral investment have been achieved through centralized regulatory agencies, for example through the State-Owned Assets Supervision and Administration Commission (SASAC) for public enterprises.13 Apart from creating relatively autonomous institutions, political leadership can demonstrate resolute commitment by ensuring expertise and technical capacity in these agencies can be sustained for continuity in policymaking. Without a knowledge base and ability for sectoral development, industrial policies not only encounter resistance from outside but can easily be hampered by the lack of sufficient knowledge on how to resolve coordination problems to induce domestic firms becoming more competitive.
External factors also figure prominently among the conditions for successful industrialization. In the Korean electronics industry, Japanese firms’ decisions to move investments in Korea and then Southeast Asia have played a decisive role in creating opportunities for technological learning among Korean companies via joint ventures.14 By 1980, the degree of foreign domination in electronics declined as chaebols participated in the production of consumer electronics. Although leading Korean firms with sizable electronic affiliates kept their ties with larger Japanese companies, joint ventures and outsourcing enabled Samsung, Daewoo, and others to build a production network linking smaller domestic companies onto the supply chain. For developing countries, it is imperative that their trade and investment strategies are aligned with countries where lead firms are likely to shape the trajectory of the supply chain. Alternatively, as in the case of Indonesia, they can maintain strategic autonomy through an open globalization strategy to effectively engage with opportunities brought by geopolitical competition.
Geopolitical factors have hugely influenced state decisions to pursue industrial policy. 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.15
In the 2000s, Latin American countries pursued resource-based industrial policy at the back of a resource commodity boom, justifying state intervention as necessary to maximize mineral revenues capture and to strengthen the role of public enterprises in the context of volatile and cyclical commodity prices.16 These efforts have been encouraged by the growing demand for so-called “critical minerals.” Apart from the raw nickel ban in Indonesia, battery production for electric vehicle (EV) cars and green infrastructure require lithium and cobalt—both of which are concentrated in Latin America and Africa.
Chile, the largest lithium producer, has set out a nationalization plan aimed at creating a public enterprise for joint ventures. In this policy, the state ambition is to increase mineral processing within Chile and enhance the possibility for Chilean companies to participate in the battery supply chain. Moving away from Chile’s traditional view of neoliberalism, economic linkages are seen as the answer to escape raw material dependence and participation in low value-added activities. Although Chile will fall short in designing a comprehensive industrial policy on lithium, state ownership—as it has happened in copper in the twentieth century—plays a vital role in enhancing its capacity as a mineral producer to maximize the benefits from the current scramble for resources.
Policy adaptation as a globalization strategy
Countries across the global South face an uphill battle to industrialize effectively. Growing protectionism in advanced industrialized countries poses a key challenge for developing countries whose export earnings depend on their capacity to access lucrative markets abroad. For example, the Critical Raw Materials (CRM) Act passed in the European Union (EU) aims to increase the extraction and processing capabilities of European firms within the region. As part of its geopolitical strategy, the EU has used trade agreements to secure minerals from third countries while simultaneously investing heavily on manufacturing and processing capacities. Such policies might contravene efforts by mineral producers to increase value-added activities as they attempt to incorporate their exports into the supply chain of clean energy technologies. Through its regulatory powers for compliance, the EU has also been seeking to establish a “club of like-minded countries” to strengthen supply chain resilience, thereby using its single market as leverage to promote its own environmental standards.17 However, what remains uncertain is the degree to which non-compliance can penalize mineral producers especially in the context where critical minerals are perceived to be in short supply given the trajectory of green infrastructure for the clean energy transition. In other words, the advance of industrial policy in the global North might have uneven effects in the developing world.
China’s shift from multi-billion infrastructure spending through the Belt and Road Initiative (BRI) towards “small but beautiful” projects is also likely to hamper resource flow towards the global South. Those African, Asian, and Latin American countries that have received substantial support from China through a combination of Chinese FDI and development cooperation programs may need to recalibrate their expectations, and therefore their industrial plans, given the shrinking financial support available in the post-2022 context. This, in turn, might also require ensuring their industrial policy is flexible and pragmatic to avoid the excesses of state-led growth often associated in the past failed attempts at structural transformation.
In both its successes and failures, the re-emergence of industrial policy initiatives demonstrates the need to do away with a one-size-fits-all approach to economic development. Instead, close attention to inherited domestic infrastructures and changing international circumstances must inform our understanding of economic transformation.
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