Cheong Kee Cheok

English

Research Papers in Economics

International Journal of Institutions and Economies
Vol. 2, No. 2, October 2010, pp. 244-248
Book Review
Industrial Policy and Development: The Political Economy of Capabilities 
Accumulation, by Cimoli, M., Dosi, G. and Stiglitz, J.E., Oxford: Oxford 
University Press, 2009; pp. xix, 575.
Amidst a growing body of scholarly work on the economics of development, 
this book makes a major contribution not only to this field but also to our 
understanding of economics. Its most important achievement lies not in the 
rich tapestry of experiences of nations, or even in the breadth and depth 
of expertise of its 27 contributors, but by reconnecting economics with 
the complementary disciplines of history, politics, and political economy, 
and setting it within the context of culture, institutions and organizational 
behaviour. This represents a refreshing reversal of the trend of “scientification” 
of economics that began with the marginalist revolution and continued with 
the quantification of practically every aspect of economic behaviour. In the 
process, simplifying assumptions like economic rationality and convergence 
towards equilibrium have given the discipline the mathematical elegance of 
the physical sciences but at the cost of realism. In rejecting this approach 
to economics, this book issues a stark warning that it has gone too far. In 
doing so, the book’s authors give greater substance to what one of them, 
Stiglitz (2005: 132), noted earlier: “In a market economy with imperfect … 
information and incomplete markets – which is to say, every economy – the 
reason that Adam Smith’s invisible hand is invisible is that it does not exist.” 
This re-orientation could not have come at a better time, as the onset of the 
current Global Crisis is calling into question the many dogmas of market 
fundamentalism that has dominated current economic thinking, and indeed, 
the very relevance of economics itself. 
The tone of the book is set by the broad definitions accorded to its theme 
– industrial policy. Unlike the conventional understanding of this topic to 
mean policy interventions by government in industry, the book defines this 
to encompass education and training, trade and technology policies, as well 
as targeted industrial interventions (Cimoli, Dosi and Stiglitz – Chapter 1). 
It rejects the widely held orthodoxy of such policy as a necessary evil in the 
context of market failure but treats it as a part of the development process. 
The book’s title refers to “political economy” rather than “economics”, while International Journal of Institutions and Economies      245
“technology upgrading” is discussed in the broader context of “capacities 
accumulation”. And in its discourse on institutions, non-market institutions 
like public agencies play as vital a role as market institutions (Cimoli, Dosi 
and Stiglitz – Chapter 2). Even for market institutions, intangibles such as 
trust and reputation play an important role (Mayer – Chapter 16).
Incorporating all disciplines pertinent to development also resolves the 
debate over exceptionalism, which, in the latest incarnation has taken the 
form of “Asian values”. Its detractors may have a point insofar as Asian 
values, taken in isolation, represent a far-fetched explanation of the East Asian 
miracle. However, taking into account the mix of conditions that fostered in 
these countries’ high savings, investment in human capital, and technology 
upgrading, the East Asian experience is no more and no less exceptional than 
Europe’s leadership in the industrial revolution that Landes (1998) and others 
explain through a “Protestant work ethic” and “scientific attitude”. Indeed, as 
de Maio (Chapter 5) argued, East Asian countries follow paths, given their 
own institutions and the external environment they face given they were 
latecomers, not dissimilar to those followed by advanced countries. 
The book puts forward three main lines of argument. First, relying 
exclusively on “getting the price right” can go wrong for latecomer countries’ 
development. This is because the many “truths” of market fundamentalism 
have been shown to hold no water. Thus, globalization will not lead to 
international convergence (Castaldi et al. – Chapter 3). Indeed, that it will 
not “lift all boats” has already been quite well documented (for example 
Birdsall, 2007, Polaski, 2006, 2007), while even the World Bank has revised 
downward drastically the expected benefits of WTO membership (Blustein, 
2005). This is because incentives alone, released by letting the markets rip, are 
not by themselves sufficient. The evidence marshalled in various chapters of 
the book (Chapters 2, 8, 13) in contrasting the Latin American with the Asian 
experience speaks eloquently to this reality. In particular Singh (Chapter 11) 
refuted the conventional view that it was liberalization that brought on India’s 
growth spurt after 1990.
Second, leaving aside the many developing countries that have pursued 
policies that stifle development, even sound macroeconomic policies are not 
sufficient. Kosacoff and Ramos (Chapter 9) showed that in Argentina, exclu-
sive focus on macro management with little regard for micro-management 
(where technological capabilities are developed) in situations of volatility 
had adverse consequences for long-term growth. By way of contrast, Brazil 
actually was successful enough with its macro stabilization policies to begin to 
focus on industrial policies only to face the challenges of a new environment 
posed by a rising China (de Castro – Chapter 10).
Third, the inadequacy of relying solely on the market and/or macro-
economic policies to promote growth clears the way for the primary role 246     Book Review  
of proactive industrial policy, in which institutions, including those of 
government and education and training, provide vital support (de Maio 
– Chapter 5 and Mazzoleni and Nelson – Chapter 14). Development then 
depends on how well “the productive forces are constructed” (p. 3) by 
these institutions. Government’s role is in moving resources to product 
diversification towards growth enhancing activities, by compelling companies 
to devote resources in this direction. Especially in the context of production 
diversification through technology enhancement, the book’s authors (for e.g. 
Reinert – Chapter 4) argue that governments must play a proactive role in 
enabling emulation before opening up to allow comparative advantage to 
take its course. Unfortunately, as Akyuz (Chapter 6) noted, advanced nations, 
through institutions like the WTO, are doing their best to deny merging 
economies seeking technological catch-up the very opportunities they 
themselves enjoyed to get ahead. Intellectual property regimes, ostensibly 
instituted to protect the creators of new technology, have in effect served to 
preserve the technological edge of existing leaders over late-comers (Cimoli, 
Coriat and Primi – Chapter 19).
Viewed from this (more comprehensive) perspective, many existing 
policies are shown to be wrong-headed. A policy prescription that is associated 
with the neo-liberal view of the “state under the surveillance of the market” 
(Palma – Chapter 8) is the primacy of competition policy, in which industrial 
policy is seen as detracting from the former’s role. Possas and Borges 
(Chapter 17) argue, however, this trade-off does not exist if a dynamic view 
of competition in which market success comes from innovation and adaptation 
to changing environments rather than in terms of static efficiency, is taken. 
In similar fashion, empirical evidence from developing countries also rejects 
the Schumpeterian concept of entrepreneurship based on risk-taking and 
innovation that shapes and misguides many governments’ SME policies today 
(Hobday and Perini – Chapter 18).
Since the empirical basis for contradicting neo-liberal notions of the role 
of government in general and industrial policy in particular rests essentially 
on the East Asian (and Indian) experiences, several caveats need be noted 
in interpreting these experiences collectively. First, the inclusion of the 
“continental” states China and India in the group should not diminish the fact 
that there exist important differences between these behemoths and smaller 
nations. There exist capabilities that are available to countries of this size 
and complexities that are not available to smaller countries. In the context 
of industrial policy, they have the advantage of the size, actual or potential, 
of the domestic market to force technology transfer by foreign firms, and the 
depth of human capital to assimilate what is transferred (Dahlman – Chapter 
12). Their complexities also allow for examination of issues that are generally 
absent or are much less significant among smaller countries. For instance, International Journal of Institutions and Economies      247           
China’s technology scene is characterized by the simultaneous existence of 
high- and low-tech sectors (World Bank, 2007) that is a direct contradiction 
of the “flying geese” model other East Asian countries had adopted. In India’s 
case, the existence of technologically capable elites, sizable in number but 
very small as a proportion of the population, is able to drive a productive 
service sector more commensurate in size to countries much more advanced 
in terms of overall technological capacity.
Second, in reviewing the growth performance of these two countries, it 
should not be forgotten that their present states is being shaped by their very 
different past. Most strikingly, while both the Indian and Chinese civilizations 
are ancient, the millennia-old Chinese “civilization state” has been credited as 
being a source of strength, thanks to the relative homogeneity of its population 
(Jacques, 2009) whereas the ethnic and cultural diversity in India has produced 
political bargains, institutions and governance that had to manage these 
inequalities (see for instance Jayal, 2006; Kasturirangan, 2008). These, and 
other factors, help explain the vast differences in social structure, institutions 
and political governance between the two countries. Direct comparisons 
between them, especially of the genre of who will do better (e.g. Huang and 
Khanna, 2003) are not particularly helpful. These comparisons also fail to 
recognize government’s ability to reshape comparative advantage through the 
kind of industrial policy the book’s authors emphasize.
Finally, the comparison of East Asia with Latin America does neither 
region full justice. The East Asia repeatedly cited as successful examples of 
technology catch-up through proactive industrial policy consists of Japan, the 
NIEs and China, countries that have invested heavily in human capital and 
produce a high proportion of graduates in the hard sciences. For the other 
countries of Southeast Asia, a different reality exists. For example, Palma’s 
(Chapter 8) characterization of the Latin American elite – that they were 
able to “appropriate large income streams through rent-seeking in a political-
institutional settlement with the leadership” fits Southeast Asia’s situation to 
a tee and is a contributory factor in the Asian Crisis of 1997-98. In Malaysia, 
education policies that produce an inadequate supply and quality of graduates, 
with a low proportion being in the physical sciences, have left the country 
with limited technology capacity despite its head start in hosting FDI (see for 
instance Rasiah, 2002). At the same time, through strengthening institutions 
including in education, Chile has achieved sufficient progress to be invited by 
the OECD in December 2009 to become a member, a first for Latin America 
(Forero, 2009).
None of the arguments advanced by the book’s authors is novel, having 
been discussed by them in earlier work and by others (e.g., Birdsall, 2007; 
Chang, 2002; Easaw and Savoia, 2009; Milanovic, 2003; Polaski, 2006). 
However, by drawing together these diverse arguments, the book’s authors are 248      Book Review  
able to propose a coherent “novel international consensus” (Cimoli, Dosi and 
Stiglitz – Chapter 20) as an alternative to the failed Washington consensus. 
Will this new consensus fare better? At least, as detailed in the book, it has 
history on its side.
 
Cheong Kee Cheok
University of Malaya
References
Birdsall, N. (2007) “Inequality matters: why Globalization doesn’t lift all Boats”, 
Boston Review, March/April.
Blustein, P. (2005) “World Bank Questions Free Trade’s Benefits”, Washington Post, 
17 December.
Chang, H.J. (2002) Kicking Away the Ladder: Development Strategy in Historical 
Perspective, London: Anthem Press.
Easaw, J. and Savoia, A. (2009) “Inequality in Developing Economies: The Role of 
Institutional Development”, Working Paper 2009-121, Society for the Study of 
Economic Inequality, August.
Forero, J. (2009) “In Chile, many are Optimistic that Prosperity is Coming”, 
Washington Post, 17 December.
Huang, Y. and Khanna, T. (2003) “Can India Overtake China?”, Foreign Policy, 1 
July.
Jacques, M. (2009) When China Rules the World: The Rise of the Middle Kingdom 
and the End of the Western World, London: Allen Lane.
Jayal, N.G. (2006) Representing Indias: Ethnic Diversity and the Governance of 
Public Institutions, United Nations Research Institute for Social Development, 
Basingstoke: Palgrave.
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at http://www.indiatogether.org/2008/may/rkr-nation.htm. 
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128-134.
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Can India Overtake China?”, Foreign Policy,

In Chile, many are Optimistic that Prosperity is Coming”,

Inequality in Developing Economies: The Role of Institutional Development”, Working Paper 2009-121, Society for the Study of Economic Inequality,

Inequality matters: why Globalization doesn’t lift all Boats”,

Kicking Away the Ladder: Development Strategy in Historical Perspective,

Malaysia and the Knowledge Economy: Building a World-Class Higher Education System,

Representing Indias: Ethnic Diversity and the Governance of Public Institutions,

Review: The Ethical Economist: Growth may be Everything, but it is not the Only Thing”,

Systemic Coordination and Human Capital Development: Knowledge Flows

The Nation and the Nation State”,

The Two Faces of Globalization: Against Globalization as We Know It”, World Development,

The Wealth and Poverty of Nations: Why Some Are So Rich and Others So Poor,

U.S. Living Standards in an Era of Globalization”,

When China Rules the World:

Winners and Losers: Impact of the Doha Round on Developing Countries,

World Bank Questions Free Trade’s Benefits”,

Book Review: Industrial Policy and Development: The Political Economy of Capabilities Accumulation, by Cimoli, M., Dosi, G. and Stiglitz, J.E., Oxford: Oxford University Press, 2009; pp. xix, 575.

http://ijie.um.edu.my/RePEc/umk/journl/v2i2/bkrv1.pdf

Book Review: Industrial Policy and Development: The Political Economy of Capabilities Accumulation, by Cimoli, M., Dosi, G. and Stiglitz, J.E., Oxford: Oxford University Press, 2009; pp. xix, 575.

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