February 10, 2014 | Contribution by
Mushtaq Khan is a Professor of Economics at University of London
Textiles in Bango Bazaar, Dhaka, Bangladesh. Photo: Dan Nevill
As developing countries increasingly experiment with "industrial policies," a big question is how to get the incentives right for these policies to work. The JKP recently spoke with an expert on the topic — Mushtaq Khan, Professor of Economics at the School of Oriental and African Studies, University of London. In Part 1 of this series, he explores how countries should develop their industrial policies. He says the first step is to identify the type of market failure preventing growth of competitive employment generating industries, which in many developing countries is developing greater organizational capacity (i.e., countries suffer from both insufficient institutional capabilities and a weak ability to develop those capabilities). The second step is to recognize that different policies could address similar market failures, but not all policies are implementable in different political and institutional contexts. Countries have distinct "political settlements" defined by the relative power of organizations affected by particular policies to modify or block their implementation. Policy design has to be informed by an understanding of the relevant political settlement so that likely distortions are minimized.