Industrial policies for avoiding the middle-income trap: a new structural economics perspective

Justin Lin ()

Journal of Chinese Economic and Business Studies, 2017, vol. 15, issue 1, 5-18

Abstract: Economic development is a process of structural transformation with continuous technological innovation and industrial upgrading, which increases labor productivity, and accompanied improvements in infrastructure and institution, which reduces transaction costs. The middle-income trap is a result of a middle-income country’s failure to have a faster labor productivity growth through technological innovation and industrial upgrading than high-income countries. Industrial policy is essential for the government of a middle-income country to prioritize the use of its limited resources to facilitate technological innovation and industrial upgrading by overcoming inherent externality and coordination issues in structural transformation. The industries in a middle-income country may be classified into five different types, depending on their distance to the global technology frontier: catching-up industries, leading-edge industries, comparative advantage-losing industries, short innovation cycle industries, and comparative advantage-defying strategic industries. Industrial policy should be designed accordingly.

Date: 2017
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DOI: 10.1080/14765284.2017.1287539

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