Most economists spent decades warning governments to stay out of industry. Let markets allocate resources, the textbooks insisted. Yet the world's most dramatic development successes—South Korea, Taiwan, Singapore, and now China—all featured extensive state intervention in industrial development. This creates an uncomfortable puzzle for development practitioners.

The evidence suggests neither pure market liberalization nor heavy-handed state control reliably produces sustained growth. What matters is not whether governments intervene, but how they intervene—the institutional design, the accountability mechanisms, and the political economy surrounding industrial policy. Getting these conditions right separates expensive failures from transformative successes.

Understanding when industrial policy works requires moving beyond ideological debates. We need systematic analysis of market failures that justify intervention, the political and administrative obstacles that derail most attempts, and the specific design principles that characterized successful cases. The answers have profound implications for development strategy today.

Standard economic theory assumes markets efficiently allocate resources across sectors. But developing economies face systematic market failures that this assumption ignores. Capital markets in poor countries consistently underinvest in new industries, even when those industries could eventually become globally competitive. Banks prefer lending to established businesses with collateral over funding uncertain industrial ventures.

Coordination failures compound the problem. A steel mill needs reliable electricity, trained workers, and port facilities to succeed. A port needs sufficient cargo volume to justify investment. Each investment depends on others happening simultaneously, but no single firm can coordinate the entire system. Governments can solve this by orchestrating complementary investments that no private actor would undertake alone.

Information spillovers create another rationale. When a pioneer firm discovers that a country can competitively produce electronics components, competitors benefit from this knowledge without bearing the discovery costs. This reduces incentives for experimentation below socially optimal levels. Someone has to bear the costs of learning what a country can produce—industrial policy can spread these costs appropriately.

These market failures are not hypothetical. The semiconductor industry required massive government R&D investment before becoming commercially viable. Korea's steel industry needed state coordination of inputs, infrastructure, and financing that private markets never would have provided. The question is not whether market failures exist, but whether governments can address them without creating worse distortions.

Takeaway

Market failures in capital allocation, coordination, and information discovery provide legitimate economic rationales for industrial policy—but identifying these failures is easier than fixing them effectively.

If market failures justify intervention, why does industrial policy fail so often? The answer lies in political economy and information problems that development practitioners frequently underestimate. Governments rarely possess the information needed to pick winning industries, and the political process for making these choices is easily captured by special interests.

Rent-seeking transforms industrial policy from a development tool into a redistribution mechanism. Firms lobby for protection and subsidies regardless of their competitive potential. Politicians distribute benefits based on political support rather than developmental logic. The result is expensive support for industries that never become competitive. Brazil's computer industry protection in the 1980s produced technologically backward firms at enormous cost to downstream users.

Once established, industrial policy creates constituencies that resist reform. Protected firms employ workers and generate profits that fund political campaigns. Sunset clauses become politically impossible to enforce because beneficiaries organize while diffuse consumers remain passive. India's licensing system persisted for decades after its developmental rationale disappeared because incumbent firms benefited from restricted competition.

Information problems plague even well-intentioned interventions. Bureaucrats cannot know which technologies will prove viable or which firms have genuine potential. They rely on information from the very firms seeking support, creating obvious conflicts of interest. Even Korea's successful interventions involved expensive mistakes—the heavy chemical industry drive initially created massive overcapacity before eventual success.

Takeaway

Political capture, information asymmetries, and the difficulty of withdrawing support transform most industrial policies into expensive mechanisms for redistributing resources to politically connected firms rather than developing competitive industries.

Successful industrial policies share common design features that unsuccessful ones lack. Export orientation provides the crucial discipline mechanism that separates East Asian successes from import-substitution failures elsewhere. Firms receiving support must compete internationally, providing objective performance benchmarks that domestic markets cannot.

Taiwan and Korea embedded reciprocity into industrial policy. Government support came with explicit performance requirements—export targets, technology adoption milestones, and productivity improvements. Firms that failed to meet benchmarks lost access to subsidized credit and protection. This created selection pressure that import-substituting policies lacked, weeding out uncompetitive firms rather than indefinitely subsidizing them.

Bureaucratic autonomy from political pressure proved essential. Korea's Economic Planning Board and Taiwan's Industrial Development Bureau operated with unusual insulation from particularistic political demands. Technocrats could impose performance requirements and withdraw support from failing ventures because politicians delegated genuine authority. Where industrial policy became a tool for distributing patronage, as in the Philippines, results diverged dramatically.

Successful cases also limited the scope of intervention. Rather than attempting to direct all industrial activity, East Asian planners focused on specific coordination problems and externalities. They provided infrastructure, subsidized credit for targeted sectors, and facilitated technology transfer—but maintained competitive pressure within supported industries. Multiple firms competed for government favor based on measurable outcomes, preventing the emergence of unaccountable national champions.

Takeaway

Export discipline, reciprocal performance requirements, bureaucratic insulation from political capture, and competitive structures within supported sectors distinguished developmental industrial policy from its many failures.

Industrial policy is neither inherently developmental nor inherently wasteful—outcomes depend entirely on institutional design and political context. The evidence from successful cases provides clear lessons: export orientation, performance conditionality, bureaucratic autonomy, and limited scope.

These conditions are demanding. Most governments lack the administrative capacity and political insulation to implement industrial policy effectively. Recognizing this limitation is itself an important policy insight—poorly designed intervention typically produces worse outcomes than market failures it attempts to address.

For development practitioners, the implication is not to avoid industrial policy but to design it carefully. Focus on coordination failures where government has genuine comparative advantage. Build in sunset provisions and performance benchmarks. Above all, create mechanisms for withdrawing support when interventions fail—because many inevitably will.