Title Page
INTERNATIONAL MONETARY FUND
AFRICAN DEPARTMENT AND INSTITUTE FOR CAPACITY DEVELOPMENT
DEPARTMENTAL PAPER
Industrial Policy for Growth and Diversification A Conceptual Framework
Prepared by an IMF team led by Reda Cherif, Fuad Hasanov, and Nikola Spatafora and comprising Rahul Giri, Dimitre Milkov, Saad Quayyum, Gonzalo Salinas, and Andrew Warner
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Copyright ©2022 International Monetary Fund
Cataloging-in-Publication Data
IMF Library
Names: Cherif, Reda, author. | Hasanov, Fuad, 1978-, author. | Spatafora, Nikola, author. | Giri, Rahul, author. | Milkov, Dimitre, author. | Quayyum, Saad, author. | Salinas, Gonzalo, author. | Warner, Andrew M., author. | International Monetary Fund, publisher.
Title: Industrial policy for growth and diversification : a conceptual framework / Prepared by an IMF team led by Reda Cherif, Fuad Hasanov, and Nikola Spatafora and comprising Rahul Giri, Dimitre Milkov, Saad Quayyum, Gonzalo Salinas, and Andrew Warner.
Other titles: International Monetary Fund. African Department (Series). | International Monetary Fund. Institute for Capacity Development (Series).
Description: Washington, DC : International Monetary Fund, 2022. | 2022 Sep. | Departmental Paper Series. | DP/2022/017 | Includes bibliographical references.
Identifiers: ISBN 9798400214271 (paper)
9798400214387 (ePub)
9798400214424 (web PDF)
Subjects: LCSH: Industrial policy. | Economic Development.
Classification: LCC HD3611 .C4 2022
Acknowledgments
The authors are grateful to Andrew Berg and Abebe Selassie for their overall guidance and to Corinne Delechat, Sean Nolan, Chris Papageorgiou, Catriona Purfield, and Zeine Zeidane for their constant support. Special thanks go also to the members of the Inter-Departmental Working Group on Diversification and the reviewers, including in particular Dennis Bautista, Valerie Cerra, Maria Coelho, Mattia Coppo, Era Dabla-Norris, Pasquale Di Benedetta, Astou Diouf, Allison Holland, Ziji Huang, Giovanni Melina, Rose Nyongesa, Cedric Okou, Karen Ongley, Melanie Putic, Xin Tang, Jinhyuk Yoo, and colleagues at the central bank of the Philippines for their helpful comments, suggestions, and inputs at various stages of the project. The authors would also like to thank Fatma Ibrahim and Ruchun Li for editorial assistance, and Lorraine Coffey for leading the publication process.
The Departmental Paper Series presents research by IMF staff on issues of broad regional or crosscountry interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Contents
Executive Summary
1. Introduction
2. Guiding Principles: Market Failures versus Government Failures
A. Externalities and Sector Selection
B. Cost-Benefit Test
C. Government Failure: Incentives and Information
D. Designing Policy to Mitigate Risks
3. Policy Tools
A. Product Market
B. Capital Market
C. Labor Market
D. Land Market
E. Technology
4. Decision-Making Framework
5. Conclusions
Annex 1. Sector Selection
References
BOXES
Box 1. A Stretch of Industrial Policy for Critical Medical Products
FIGURES
Figure 1. Decision-Making Framework: Implementation Considerations
Executive Summary
As countries strive for a strong recovery and to recoup the losses incurred during the COVID-19 pandemic, they need to map out a new path for development and high and sustained growth. Promoting diversification, developing new industrial capabilities, and designing the policies needed to achieve this goal should be a priority. A successful diversification strategy should tackle both broad policy failures, such as an unfavorable business environment and investment climate and sector-specific market failures. This departmental paper presents a conceptual framework to analyze industrial policy, defined as targeted sectoral interventions. The authors first discuss the key principles that should guide policymakers, that is, a focus on the market failures that could justify targeted sectoral interventions, as well as the potential government failures that can undermine these interventions. The authors then discuss some commonly employed policy tools, their rationale, and the associated pitfalls. Finally, the authors outline a stylized decision-making framework.