Comparative Advantage, Industrial Policy and the World Bank: Back to First Principles

This paper provides a critical analysis of the World Bank's new thinking on industrial policy. After outlining the changing perspectives on industrial policy put forward by the World Bank over the last three decades, we argue that the bank's economists have taken one step forward (the approval for the enhanced role of the state) but also one if not two steps backward (by strong encouragement to countries to seek their current comparative advantage in pursuing industrial policy). We argue that a critical analysis of the World Bank's policy stance on industrial policy as on other main issues is essential because of the institution's hegemony in policy analysis of economic development as well as its conditionality, which may now well include what this paper regards as its inappropriate industrial policy. The analysis in the paper combines classical contributions on international trade and the world economy, relevant economic history, as well as Krugman's comments on these issues in terms of modern economic analysis. The paper concludes with reflections on the appropriate industrial policy for developing countries that the World Bank should support.