Week 13 - Industrial Policy Asia Flashcards

Question

Jostein Hauge Argument 2: Industrial Policy Must Target High Value-Added Activities Across Sectors Examples

Answer 1

- Although assembled in Asia, value is captured through high-end services like design and branding - Apple gains over 50% of retail value through R&D, branding, and design - not production - This reveals services are now central to manufacturing value chains - Cocoa value chain: Chocolate firms earn the most, while African farmers remain in low-value stages.

Answer 2

- Asian governments must not only promote manufacturing but also move up value chains into services and innovation-intensive activities - This redefines industrial policy as sector-transcending, where policy must support R&D, branding, and control of intellectual property - If not, Asia risks being trapped in assembly and commodity stages, limiting long-term competitiveness.

Answer 3

- While public discourse exaggerates fears about automation, Hauge argues its impact is context-specific and overstated - For most of the Global South (including Asia), the real constraint is not displacement but lack of automation adoption due to capital scarcity and analogue technology - In Asia, less than 5% of manufacturing firms use advanced automation, and in some countries, over 70% use analogue production.

Answer 4

- Asian industrial policy should prioritise gradual adoption of automation, especially in MSMEs and analogue industries - Policymakers must focus on re-skilling programmes and labour transitions to ensure technology complements industrial upgrading rather than disrupts it - Avoiding automation altogether would only widen the technological gap with the Global North.

Answer 5

- Hauge critiques the WTO and current trade governance as biased toward the global North, restricting developing nations’ ability to use subsidies, tariffs, and industrial protections - He argues this global governance prevents industrial upgrading and locks countries into extractive roles - He calls for democratisation of trade institutions and creation of global minimum labour standards - In Asia, Hauge praises China’s strategic integration into global value chains through bargaining with TNCs and state-owned enterprises

Answer 6

- China: Demanded joint ownership and tech transfer; more than 50,000 firms are state-owned

Answer 7

- Industrial policy will lack effectiveness unless trade governance rules allow sufficient policy space - Asian states need to push for flexible WTO rules, resist intellectual property enclosures, and rebuild bargaining power in multilateral forums - Without reclaiming trade sovereignty, any domestic industrial plan will be undermined by external legal and market constraints

Answer 8

- Hauge criticises the current green industrial policy discourse for being biased and hypocritical: the global North, despite causing the majority of ecological harm, imposes restrictions on the South - High-income countries account for over 99% of excess resource use since 1970. - Meanwhile, developing countries like China and India have gradually built green capabilities, often starting with dirtier industries

Answer 9

- Electric vehicles, wind turbines, hydropower in China, Brazil, India - highlight the need for gradual capacity-building

Answer 10

- Green transitions in Asia must be sequenced and state-supported, not imposed externally - Industrial policy should enable states to start with carbon-intensive industries while building green capacity over time - This requires climate finance, technology sharing, and global cooperation - not climate conditionalities that penalise industrial latecomers - A just green transition must protect Asia’s right to grow industrially

Answer 11

“…for a mere 1% of global excess resource use between 1970 and 2017”

Answer 12

1. The author reframes Asia’s industrial policy as strategically global - not protectionist or isolationist 2. The author expands the scope of industrial policy beyond manufacturing into value-added services and agriculture 3. The author links industrial policy to trade governance and ecological justice, exposing structural global constraints

Answer 13

- East Asian states used globalisation strategically, combining protectionist tools with export-driven integration - This means industrial policy in Asia was not about closing off economies, but about negotiating terms of engagement with TNCs (e.g., technology transfer) while still participating in global markets - This is important to our understanding of industrial policy because it challenges neoclassical critiques of industrial policy as inherently inefficient narratives that portray the East Asian model as purely export-led - It also provides insight into how Asian economies retained policy sovereignty within global structures - Hauge highlights that industrial policy can - and did - coexist with global market participation, if states remain assertive

Answer 14

- Hauge’s reconceptualisation of industrial policy as sector-transcending, arguing that industrial policy must now target high-value activities across manufacturing, services, and agriculture - This means industrial policy is about control over innovation, branding, and R&D - which increasingly capture the greater share of profits in global value chains - This is relevant because this evolves beyond the outdated dichotomy of agriculture vs industry or goods vs services - For Asian policymakers, this means crafting industrial strategies that promote climbing the value chain, not just expanding production

Answer 15

- Hauge’s emphasis that effective industrial policy in Asia requires reforming global trade rules and ecological governance, because current institutions (like the WTO) systematically undermine policy space for developing countries - This means that industrial policy must be viewed as deeply embedded in global power structures - and that reclaiming control over tariffs, technology transfer, and environmental standards is essential for Asia to chart its own industrial future - This is important to our understanding because it exposes the constraints on Asian policy autonomy that most neoclassical economic models ignore - These models often assume equal access to markets, technologies, and resources - which Hauge shows is a fiction in global practice - It also provides insight that bridges industrial policy with global justice: without reform, Asia’s green industrialisation will be hindered, and ecological transition will replicate the same North–South asymmetries as past industrial eras - This makes industrial policy a question of international fairness, not just efficiency

Answer 16

1. The analysis underplays the internal political economy and governance challenges within Asian states 2. The discussion of global trade governance lacks empirical specificity or detailed reform pathways 3. Weakness: The ecological justice argument insufficiently addresses the risks of “green lock-in” or carbon dependency

Answer 17

- Hauge focuses heavily on the external structures (e.g. global trade rules, TNCs) that limit industrial policy, but neglects the internal political and institutional conditions that made such policy effective in East Asia - This means he assumes that other Asian countries can replicate the success of South Korea or Taiwan without examining the domestic governance capacity that underpinned their success - This weakens our understanding because it downplays how state effectiveness and elite cohesion shape the outcome of industrial strategies - Without these, similar policies could lead to rent-seeking, inefficiency, or policy capture - It also overlooks that what made East Asia successful was not just policy content, but the quality of implementation - Hauge’s omission risks presenting industrial policy as a plug-and-play solution, when in reality it is highly context-dependent

Answer 18

- While Hauge rightly critiques the global trade system for limiting policy space, he stops short of offering detailed institutional reform proposals of how such reform could realistically be achieved - This means the call for trade justice and sovereign policy space remains theoretically abstract, offering little clarity on how Asia could successfully mobilise reform efforts within the WTO or global governance institutions - Without mapping practical avenues for reform, Hauge risks leaving Asian policymakers with no strategy, undermining the transformative ambition of his argument

Answer 19

- While Hauge argues that Asian countries must retain ecological policy space to industrialise, he does not confront the risk that such flexibility could lead to green lock-in - i.e., the entrenchment of carbon-intensive industries that may be hard to shift later - This means that the argument could be interpreted as justifying dirty industrialisation without a clear exit strategy for decarbonisation, which poses long-term risks for public health, and global climate obligations - This is weak in the context of international economics because industrial competitiveness is increasingly tied to green standards, ESG metrics, and carbon border adjustments - Green lock-in could limit future export potential for Asian firms and reduce access to finance and trade preferences - It also overlooks green industrial innovation, which shows that developing countries can skip polluting stages and build competitive clean-tech sectors - By not addressing this tension, Hauge risks giving an overly permissive view of carbon-intensive growth, underestimating the strategic value of early green industrial leadership for Asia.

Answer 20

- The success of East Asian economies was not a result of pure free-market mechanisms but stemmed from an active and context-sensitive industrial policy implemented by governments - This industrial policy responded to market failures, directed capital, prioritised technological and marketing spillovers, and incentivised exports - demonstrating that government intervention, when designed properly, can enhance market efficiency and drive industrial transformation

Answer 21

- East Asian governments designed industrial policies specifically to correct well-known market failures - including technological externalities and coordination failures - Instead of replacing markets, these states worked to enhance market structures, such as by promoting credit access, investing in education for technological adaptation, and supporting export-capable industries This included: - Creating institutions where markets were absent (e.g., development banks) - Coordinating investments across sectors to overcome interdependence barriers - Focusing on dynamic learning and long-term growth over short-term profits. Importantly, governments selected firms for support based on export performance, using it as a proxy for efficiency in the absence of good market signals.

Answer 22

The Japanese government helped improve product quality and brand reputation across sectors - correcting the public good nature of marketing information and creating incentives for firms to maintain high standards

Answer 23

- This shows that market failures in developing economies necessitate targeted state action - It directly challenges laissez-faire prescriptions, suggesting that active state-building can overcome underdevelopment traps and integrate countries into global value chains

Answer 24

- Export performance became an efficient benchmark because international markets provided competitive feedback, unlike potentially monopolised domestic markets Supporting exporters offered multiple benefits: - Increased discipline and accountability - Learning-by-exporting, with firms acquiring knowledge on standards and marketing - More equitable outcomes, as exporters’ success was tied to performance, not privilege - Rather than subsidising all firms, policymakers designed performance-contingent reward systems, turning industrial policy into a quasi-market mechanism that selected efficient actors.

Answer 25

Singapore’s Economic Development Board actively cultivated export markets and supported firms’ efforts to meet international standards, correcting market failures in information and reputation building

Answer 26

- This shows that export performance can substitute for imperfect signals of firm capability, enabling smarter industrial policy in contexts of weak institutions - Highlights how integration into global markets can serve as both a disciplinary tool and learning opportunity

Answer 27

- Private firms underinvest in R&D and market development because they cannot fully appropriate the returns Industrial policy can step in by: - Funding public R&D - Building brand reputation for national industries - Promoting cooperation across firms and sectors - East Asia’s governments facilitated spillovers by investing in education (especially engineering), and subsidising branding efforts - This built an ecosystem good for upgrading and catching up with advanced economies

Answer 28

In Japan and Taiwan, governments subsidised branding to allow firms to build global reputations, solving the collective action problem individual firms face

Answer 29

- These interventions underpin the importance of state-supported learning, especially when the global economy rewards knowledge and reputational capital - This demonstrates the strategic role of the state in reducing systemic innovation gaps between North and South

Answer 30

- The “real miracle” was political - East Asian states built institutional safeguards to ensure that industrial policy remained growth-oriented This included: - Clear rules and performance-based funding - Close cooperation between business and government - but with checks on collusion - This structure limited bureaucratic corruption, making industrial policy more credible, targeted, and efficient.

Answer 31

Korean banks evaluated borrowers partly based on export performance, providing incentives without politicised allocation

Answer 32

- This shows that industrial policy’s success depends on how it’s implemented, not just what is done - It refines the debate by showing that governance quality is a key variable in whether intervention promotes growth or distorts markets

Answer 33

- In some sectors, the state needed to address subtle returns to scale by promoting intermediate goods production These goods create positive feedback loops: - More variety improves final product quality - Proximity enables better information flow and coordination between producers - East Asia promoted these industries not for protectionism, but to ensure a functioning industrial ecosystem.

Answer 34

Malaysia’s local auto manufacturer enabled intermediate goods firms to develop, which later benefited other industries.

Answer 35

This insight is crucial: industrial deepening, not just specialisation, is key to long-term competitiveness in global supply chains

Answer 36

“…did matter”

Answer 37

1. The author grounds industrial policy in real-world market failures, not ideological assumptions 2. The author identifies export performance as a practical tool for disciplining and evaluating industrial policy 3. The author links industrial policy to technological and reputational spillovers that markets alone cannot generate

Answer 38

- Stiglitz’s framing of industrial policy as a rational response to well-documented market failures, rather than as a deviation from market efficiency - This means East Asian governments were not anti-market; they intervened to fill gaps in capital markets and promote learning and technology acquisition - This is important to our understanding of industrial policy because it challenges the neoclassical notion that markets are self-correcting and that government intervention inherently causes inefficiency - Stiglitz reframes the debate by showing that well-designed interventions can improve market outcomes - It also provides insight that comparative advantage models do not: that in real-world conditions (e.g. information asymmetry, missing markets), state intervention is necessary for structural transformation

Answer 39

- Stiglitz’s emphasis on export performance as a proxy for economic efficiency, used by East Asian governments to reward firms - This means states in Asia developed quasi-market mechanisms within their industrial policy frameworks, using global market competition as a benchmark for domestic policy success - without relying solely on imperfect domestic signals - This is relevant because it dissolves the binary between “state vs market” by showing that industrial policy can incorporate market-based discipline - It also provides insight that is missing in laissez-faire arguments: that industrial policy can be incentive-compatible - This hybrid model of performance-contingent support offers a concrete institutional innovation for industrial policy

Answer 40

- Stiglitz’s recognition that technological development, skill accumulation, and international brand reputation involve spillover effects - which markets systematically under-provide - thus justifying targeted industrial support - This means governments in East Asia had a strategic role in fostering innovation by subsidising R&D, supporting science/engineering education, and facilitating branding efforts - This is important to our understanding of industrial policy because it shows that competitiveness is not just about cost or factor endowments, but also about intangible capabilities (like trust and reputation) that require coordinated investment - It provides insight that sustained investment is needed to generate the positive externalities critical to climbing global value chain - This is particularly vital for Asia’s current transition from manufacturing hubs to knowledge economies

Answer 41

1. The analysis downplays the political preconditions for effective industrial policy 2. The role of external geopolitical support and Cold War context is largely ignored 3. Limited consideration of environmental and social sustainability in the industrial policy model

Answer 42

- Stiglitz attributes the success of East Asian industrial policy to economic design - using export performance as a proxy for efficiency - but neglects the political conditions that enabled such policies to be implemented effectively - This means the model risks being over-generalised, assuming that other Asian or developing countries could replicate the East Asian experience without the same institutional discipline or bureaucratic capacity - This is weak in our understanding of industrial policy because it overlooks the political economy factors - such as authoritarian developmental regimes - that were integral to policy credibility and execution in Asia - Institutional economics theory would argue that strong institutions and embedded autonomy are foundational - without these, industrial policy can devolve into rent-seeking, especially in fragile democracies - By underemphasising politics, Stiglitz’s framework may offer policy advice that is institutionally infeasible, risking poor outcomes if applied in contexts with weak governance

Answer 43

- Does not adequately address the geo-strategic context in which East Asian industrialisation occurred - especially the role of U.S. support, favourable access to Western markets, and lenient treatment by international financial institutions during the Cold War - This means it creates a sanitised picture of industrial policy success as internally driven, ignoring the external enabling conditions that shielded countries like South Korea and Taiwan from the kinds of IMF conditionality faced by other developing nations - This is weak because it distorts the replicability of the East Asian model - countries today operate in a very different international environment - marked by WTO restrictions on subsidies and a less forgiving global security climate - Ignoring these global asymmetries risks misleading policymakers in Asia today, who may attempt similar interventions without the same international leeway

Answer 44

- Ignoring the environmental or social costs of the East Asian growth model, such as ecological degradation or exploitative labour practices - This means the argument frames industrial policy as purely an efficiency and growth issue, neglecting long-term sustainability, which is now central to policymaking - especially in the Asian context where climate vulnerability is an urgent concern - This is weak for understandings of industrial policy because it fails to integrate the increasingly critical field of green industrial policy, which argues that state intervention must now aim not only at upgrading industry, but doing so within ecological boundaries - By ignoring sustainability, Stiglitz’s account offers a model that may have been historically successful, but cannot be wholly endorsed in a 21st-century context where climate risk and ESG metrics increasingly determine market access and investment flows in Asia

Answer 45

The core debate is between two contrasting views of industrial policy in developing countries, particularly in Asia: - Justin Lin’s view: industrial upgrading should follow a country’s existing comparative advantage, with the state acting as a “facilitating state” to help private firms exploit current factor endowments - Ha-Joon Chang’s view: successful industrial policy requires defying comparative advantage, because technological capabilities can only be developed through production in more advanced sectors

Answer 46

- Lin argues that successful industrialisation is best achieved by gradually upgrading sectors in line with evolving factor endowments - EG, Korea initially focused on labour-intensive sectors (e.g., garments, wigs), which enabled capital accumulation - This, in turn, shifted its comparative advantage, allowing it to move into more complex industries like steel and shipbuilding.

Answer 47

Korea’s Pohang Iron and Steel Company (POSCO), launched in 1968, was viable because it built on the success of Korea’s earlier labour-intensive growth

Answer 48

- This argument reshapes how we understand industrial transformation in Asia - as strategic developments anchored in comparative advantage - It shifts attention away from protectionism toward policy-enabled efficiency, offering a blueprint consistent with neoclassical economics

Answer 49

- Ha-Joon Chang disputes the idea that countries must wait for the “right” endowments - He argues that technological capability building inherently requires moving into sectors where comparative advantage is lacking - He challenges neoclassical assumptions of perfect factor mobility, stating that capital and labour are industry-specific, and thus skills must be developed through direct production experience

Answer 50

- Japan protected its car industry for decades through tariffs and restrictions on FDI (foreign direct investment) before it became globally competitive - Nokia took 17 years of cross-subsidised losses before turning its electronics arm profitable - this is the cost of learning and innovation

Answer 51

- This argument highlights that compliance with comparative advantage alone can lock countries out of technological progress - It suggests that state-led industrial policy must sometimes override market signals to stimulate future competitiveness

Answer 52

- Lin criticises comparative advantage-defying strategies for creating long-term dependency on subsidies, which can breed inefficient allocation of resources - Instead, he argues, comparative advantage-following strategies allow firms to compete in sectors they’re naturally suited for, which discourages unproductive rent-seeking behaviour and encourages discipline via export performance

Answer 53

Lin references Korea, noting that even protected industries were subject to market discipline - e.g., they had to prove competitiveness through exports

Answer 54

This reinforces how institutional quality and market discipline are not just peripheral concerns but central to successful industrial policy

Answer 55

- Chang critiques the idea that states should conduct cost-benefit analyses before entering new industries - He argues that you cannot predict when or how capabilities will develop, and thus governments must make entrepreneurial leaps - like Nokia did - without full information - This is the nature of industrial upgrading under uncertainty

Answer 56

Nokia didn’t know in advance it would take 17 years to make a profit from electronics; the state and firm invested anyway, accepting risk and uncertainty

Answer 57

This counters neoclassical logic with a behavioural-economics-infused understanding of policymaking under uncertainty - an insight critical to designing real-world industrial policies that aren’t over-reliant on theoretical modelling

Answer 58

- Both authors agree that markets alone cannot solve development problems - States must step in to subsidise innovation and coordinate systemic changes (e.g. skill-building, infrastructure, institutions) - This role is not antithetical to neoclassical thought - it complements it by acknowledging market failure

Answer 59

- POSCO (Korea’s steel giant) was launched when Korea’s per capita income was only 5.5% of the US’s, yet succeeded by 2000 when China - with just 2.5% of US income - became the world’s largest steel producer - Korea’s progression from textiles to shipbuilding and semiconductors mirrored its dynamic comparative advantage and capital accumulation

Answer 60

It proves that effective industrial policy is about intelligent correction of market failures - bridging liberal and interventionist schools within international economics

Answer 61

“…yield the greatest social returns”

Answer 62

1. The debate reveals industrial policy as a spectrum between market facilitation and strategic defiance 2. The arguments foreground technological capability as the foundation of long-term competitiveness 3. The text addresses institutional design and governance constraints in industrial policymaking

Answer 63

- The authors don’t treat industrial policy as a binary between state and market, but frame it as a spectrum - with Lin promoting facilitation aligned to comparative advantage and Chang defending selective defiance to build technological capabilities - This means they capture the nuanced reality of policymaking in Asia, where successful states (like Korea and Taiwan) blended both approaches over time: beginning with light manufacturing, then entering capital and technology-intensive sectors with state backing - This is important to our understanding of industrial policy because it breaks the artificial divide between neoclassical orthodoxy and heterodox developmentalism, offering a more flexible framework for evaluating which interventions work under which conditions - It also provides insight that capability-building requires time, experimentation, and policy adaptation

Answer 64

- Another strength is the shared (but differently framed) acknowledgement that technological capabilities are what ultimately sustain industrial transformation - and that states must play a role in nurturing them - This means industrial policy is not just about protecting ‘infant industries’, but about building production knowledge, skills, supply chain infrastructure, and innovation capacity - which take time and cannot emerge solely from market forces - This is relevant because international economics often focuses on factor endowments or trade openness, while neglecting how countries gain the ability to produce complex goods competitively - It also provides insight that learning-by-doing and spillover generation require targeted intervention - especially in sectors with high entry barriers, as seen in Asia’s electronics, automotive, and steel industries

Answer 65

- A third strength is that Lin, in particular, emphasises the need for industrial policy to be disciplined by market feedback, especially through mechanisms like export performance, to avoid rent-seeking - This means the authors move the debate and asks how to intervene well - a critical shift that speaks directly to real-world policy design - This is important because poor governance and institutional failure are among the most cited reasons why industrial policy fails in many developing countries - By addressing these concerns head-on, they provide a more pragmatic and politically informed framework for state-led development - Lin and Chang show that Asia’s industrial success depended not only on intervention, but on the quality and discipline of that intervention

Answer 66

1. The analysis insufficiently explains why similar industrial policies failed outside East Asia 2. There is limited engagement with the role of global trade rules and WTO constraints on industrial policy 3. The debate sidelines environmental and social dimensions of industrial transformation

Answer 67

- One weakness is that both authors draw heavily on the East Asian experience without adequately addressing why similar policies in other regions - such as Latin America or Sub-Saharan Africa - often failed to produce comparable results - This means their arguments risk selective success bias, implying that industrial policy is universally replicable, while underestimating the role of pre-existing institutional capacity, or cultural attitudes towards bureaucracy - This is weak in our understanding of industrial policy because it limits generalisability - Structuralist economists or institutionalists would argue that the institutional foundations and external conditions are crucial - By not integrating these dimensions, Lin and Chang provide incomplete guidance for contemporary policymakers - It risks encouraging overly ambitious interventions in states lacking the state capacity or global leverage that East Asian countries had

Answer 68

- Focus on domestic policy design but largely ignore the global institutional context, especially the constraints imposed by WTO rules and intellectual property regimes on the use of industrial policy today - This means their recommendations may be less feasible under modern international conditions where many of the tools used in East Asia - such as export subsidies - are now heavily restricted - This is weak because the global governance architecture is now far more intrusive - Countries pursuing industrial policy today face trade retaliation and pressure from multilateral institutions, unlike the Cold War-era East Asian economies - There is an absence of discussion on how to navigate global rules to allow for policy space - Without this, Lin and Chang’s frameworks remain externally constrained

Answer 69

- Focus almost exclusively on economic efficiency, technological upgrading, and growth, with little discussion of climate impact, ecological limits, or social inequalities tied to industrialisation - This means their conceptualisation of industrial policy risks being anachronistic - well-suited to a mid-20th century industrial context, but less applicable in today’s climate-conscious global economy - This is weak in modern international economics, where green industrial policy is a central concern - Institutions such as the UNCTAD would argue that industrial strategy today must be dual-purpose: building competitiveness and solving planetary crises - Industrial policy without a sustainability lens risks repeating past patterns of growth-driven environmental degradation, which are no longer politically or economically viable

Week 13 - Industrial Policy Asia Flashcards

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