Industrial Policy in Response to the Middle-income Trap and the Third Wave of the Digital Revolution

The ‘middle‐income trap’ (MIT) is ‘real enough’ for policy makers in developing countries to take it as a serious threat to prospects for achieving ‘high’ average income. Those prospects are further clouded by the major changes occurring as the digital revolution moves from connecting people to the internet to connecting the internet to everything else, across many sectors of human life (the Third Wave). Both sets of forces raise the potential advantages of pro‐active industrial policy. Yet mainstream economic thinking – and the consensus of international development organizations like the World Bank – has long tended to disapprove of it, in the spirit of ‘The best industrial policy is none at all’. In light of the middle‐income trap, the Third Wave, and other conditions in the world economy, this essay discusses some of the big issues in the design of industrial policy, on the theme of how to do it well rather than how to do it less. Sectorally targeted industrial policy can help developing countries escape the middle‐income trap, and was (probably) effective in East Asia. But it is anything but a silver bullet – more for political rather than narrowly economic reasons.