Chapter 11: Industrial Policy for Diversification, Innovation, and Growth

Policymakers in developing economies, including resource-rich ones, face a common grand challenge of economic diversification. That is, the countries need to implement policies to diversify their economies away from the dependence on commodity exports or low-skill industries such as tourism or textiles. The pressure to diversify their economies stems from the need to escape various development traps: low- or middle-income traps or resource curse, including the risks associated with a dependence on different types of commodities. Policymakers understand that the growth model pursued so far has not, by and large, delivered substantial gains in income. For instance, growth was not sufficient to alleviate poverty sufficiently or reduce dependence on commodity exports, exposing countries to the vagaries of international commodity markets and volatile commodity prices. The engine of a growth model relies on the vitality of the export industry, which for a large majority of developing economies remains limited to a few low-skill sectors or commodities. In other words, there is a need to move away from these activities toward new ones. The main issue then is which sectors to diversify into and how to do it.