Paper short abstract:

This paper revisits the literature on the 20th century industrialization experiences. Taking into account the significant changes in the global economy since then, it develops a framework for industrial policy design in the 21st century - for both learning in GVCs and domestic market formation.

Paper long abstract:

This paper summarizes the literature on different industrialization experiences of the 20th century. Revisiting this literature shows that some key learnings emerge:

1. Learning and the build-up of technological and organizational capabilities in the domestic economy are the essence of economic development.

2. Large demand, both from the domestic market and from exports, creates the necessary space for learning by allowing for economies of scale and the accumulation of production experience.

3. Whether sufficient domestic demand emerges to facilitate a dynamic of domestic market formation depends on domestic purchasing power and domestic income distribution, as well as on the availability of surpluses that can be redistributed.

4. The technological and organization capabilities have usually been accessed and developed through cooperation with foreign technological leaders. Exporting compels learning.

5. Industrial policy is most successful where it nudges and supports firms to engage in technological efforts to build up these capabilities.

When applying these learnings, it is important to realize that the global economy has changed significantly since the industrialization experiences of the 20th century. We are living in a world of global value chains (GVCs) and global production networks. This allows developing country firms to access technology and to acquire technological capabilities, but falling unit prices and the so-called supplier squeeze render the returns from participating in GVCs insufficient to kick-start domestic market formation. This is why this paper proposes a framework to design industrial policy for both learning in GVCs and domestic market formation.