Industrial policy has long been debated in developing countries, where building a strong industrial base remains a critical development challenge.
The principle of comparative advantage, formulated by the 19th-century British economist David Ricardo, is a foundational concept in international trade theory. A country has a comparative advantage in producing good A if its opportunity cost, measured by the amount of good B forgone to produce one unit of good A, is lower than that in other countries. By specializing in the production of good A and engaging in international trade, the country can expand its consumption possibilities beyond what would be possible without trade.
A straightforward application of this principle might suggest that developing countries should specialize in agriculture and labor-intensive manufacturing, where they may already have a comparative advantage.
However, specializing solely in these sectors may make it difficult to shift toward high-value-added industries, such as automobile manufacturing. Therefore, industrial policy is often regarded as necessary to create new areas of comparative advantage.
A classic rationale for such policies is the infant industry argument. This argument holds that governments should temporarily support nascent domestic industries with high production costs through tariffs and subsidies until they become internationally competitive.
Some empirical studies provide support for this argument. Research by Réka Juhász, an associate professor at the University of British Columbia, showed that, during the Napoleonic Wars, France’s mechanized cotton-spinning industry developed more successfully in regions more effectively shielded from British import competition by the blockade against Britain.
Even so, caution is needed when using the infant industry argument to justify modern industrial policy. In the decades following World War II, Southeast Asian countries pursued import-substituting industrialization, seeking to promote domestic production by temporarily restricting imports. However, the scope for this approach was limited by small domestic markets and insufficient competitive pressure. Later, many countries shifted their policy emphasis toward export-oriented industrialization, drawing on foreign capital to develop export industries.
Industrial policy in developing countries should not be viewed simply as an attempt to protect domestic industries. Rather, it should be considered from a broader perspective that encompasses structural transformation, learning from international markets, and the acquisition of technological capabilities.
>> Original text in Japanese
* Translated by RIETI.
August 7, 2026 - Published in Nihon Keizai Shimbun's " Introduction to Economics—New Trend in Industrial Policy "
