Stuck in the Middle: Premature Deindustrialisation and Industrial Policy

Abstract

Premature deindustrialisation is a threat to low- and middle-income countries, as it shrinks their opportunities for technological development, and their capacity to add value in global value chains and tradable sectors, thereby ultimately reducing their scope for productivity increases. This paper investigates the specific industrialisation challenges faced by middle-income countries today and provides global and regional evidence for the different premature deindustrialisation trajectories that countries have followed, with a specific focus on South Africa. Against this background, the paper develops an industrial policy framework highlighting three main aspects, namely (i) the importance of selecting appropriate instruments targeting specific production, technological and organisational challenges; (ii) the need for coordinating these instruments in coherent industrial policy packages; and, finally, (iii) the governance challenges that middle-income countries will face in managing these policy instruments. The challenges in implementing and governing complex industrial policy packages are highlighted by reviewing successful sectoral interventions in Brazil, China and Malaysia. Country and sectoral cases are finally used to extract a number of industrial policy implications for South Africa.