Industrial policy reform in six large newly industrializing countries: The resource curse thesis

Abstract

All six large newly industrializing countries (NICs) in this study favored an autarkic industrial policy (AIP) in the 1950s. AIP required, however, the rapid build-up of heavy and chemical industry (HCI) which caused foreign exchange shortages if the HCI matured slowly. This is because the import and subsidy demands of the growing protected HCI sector became too burdensome for the competitive primary sector whose rents shrank in relative importance as the economic structure evolved. The two least well-endowed NICs abandoned AIP early in favor of a competitive industrial policy (CIP) which relied on labor- intensive exports to earn foreign exchange and resulted in rapid economic growth. In contrast, the resource bonus of the four best endowed NICs sustained AIP longer, but the longer AIP lasted the harder it became to reform and the slow-maturing HCI sector adversely affected economic growth. In this way the resource bonus became a curse rather than a blessing.