Debates on industrialization and industrial policy have historically had a supply-side bias: development planners focused on strengthening inter-industry linkages, mobilizing savings to finance investment, and the accumulation of technological knowledge. Aggregate demand was expected to accommodate and even facilitate the structural change brought about by the industrialization process. However, botched industrialization experiences in South East Asia, Latin America, and Africa demonstrate that failures to manage demand in ways supportive of industrial policy can slow or even derail industrialization. We use an open-economy growth model of a late industrializing economy, featuring cumulative causation and a (long-run) balance-of-payments constraint, to investigate conflicts and complementarities between macroeconomic and industrial policies. We identify key macro mechanisms that undermine industrialization processes—and highlight macro policies in support of industrial diversification, structural change, and upgrading. We close by arguing that from a macro point of view, the widely held claim that labour laws are a ‘luxury’ developing countries cannot afford, is wrong. Labour regulation and higher real wage growth, when given adequate macroeconomic policy support, can be made to further industrialization.
Structural Change with Long-run Income and Price Effects