The Quality of Industrial Policy as a Determinant of Middle Income Traps

Kenichi Ohno
National Graduate Institute for Policy Studies (GRIPS)
Roppongi, Tokyo

Prepared forSingapore Economic Review Conference (SERC) 2015
Singapore, August 5-7, 2015

Abstract
A middle income trap is defined as a situation where an economy is unable to create
value beyond what is delivered by given advantages. Such advantages include natural,demographic, and geographical factors as well as external factors such as trade, aid,
and investment inflow. The private sector should be the main driver of economic growth,
but it is generally recognized that the proper guiding role of government is equallyimportant. This paper presents the hypothesis that the lack of policy quality is the major
cause of middle income traps among today’s emerging and developing economies.
While policy must be improved on all fronts including productive, social, andmacroeconomic aspects to overcome the trap, this study focuses on the quality ofindustrial policy. Various sub-components of industrial policy are evaluated, and grades
are given to selected Asian and African governments based on interviews with policy
makers, businesses, and other stakeholders in each country. Improving industrial policy
requires not just discussion of what needs to be done but, more importantly, a reform ofpolicy methodology in which appropriate design, implementation, and monitoring ofindustrial policy must be learned and practiced.

Key words: emerging economies, industrial policy, middle income trap
JEL: O14, O25

1. Introduction
The present study looks at middle income traps not so much in their phenomenal aspects but
from the perspective of identifying their causes and suggesting remedies. Arguments given below
are empirical in the sense that they were derived from extensive interviews with policy makers,
enterprises, researchers, and business organizations in selected Asian and African countries
rather than from pure theory. Sustainable economic growth and transformation are generated byvarious national factors including private sector dynamism, leadership and politics, and theknowledge of appropriate policy methods, all of which are distributed unevenly across countries
and periods. This study confines its attention to the last factor, namely, the amount of practicalpolicy knowledge each country possesses, while the others are treated as background factors that
influence the efficiency with which each government learns and practices policy. The hypothesis
advanced here is that the quality of industrial policy matters greatly in overcoming a middle income
trap. The way to measure industrial policy quality is also proposed.
2. Definition
A middle income trap may be described generally as a situation in which a nation is unable torise above middle income for a long time. “A long time” may be specified as spending at least 28
years in lower middle income or 14 years in upper middle income, as suggested by Felipe, Abdon& Kumar (2012) who examined the data of 124 countries over 1950-2010. Other technicaldefinitions should also be possible. However, for policy makers a more analytical, rather thanstatistical, definition of a trap is desired in order to investigate its possible causes and remedies.
Discussions that point to this direction in the East Asian context include Suehiro (2014) who
contends that a middle income trap arises when industrialization driven by low-cost advantages(cheap labor and capital) comes to an end, and Kwan (2013) who says that a country unable tofind new sources and pattern of growth will fall into a trap. In addition to such supply-side problems,
Hara (2014, 2015) cites inability to cope with gaping income gaps as an equally important cause ofa trap. Tran (2010, 2013) points to the lack of high-quality institutions as a deeper cause of suchpolicy failure. These arguments imply that a country at some point on its growth path enters aphase in which more proactive policy response is required besides just liberalization, privatization,and integration.
The present study defines a middle income trap as a situation where an economy is unable tocreate new value beyond what is delivered by given advantages. Here, given advantages include
natural, demographic, and geographical factors as well as external factors such as trade, aid, andforeign investment. Development in the true sense occurs when value (GDP) is created andconstantly augmented by domestic citizens and enterprises. When the main engine of growth is1economic liberalization, new trade opportunities under globalization, export of natural resources,
inflows of foreign capital and investment, aggressive public spending, real estate bubbles, and soon, chances are that domestic citizens and enterprises are not creating much value. Furthermore,
the presence of such advantages often impedes accumulation of knowledge, skills, andtechnology because of various psychological, political, and economic reasons. The Curse of
Natural Resources, also known as the Dutch Disease, is well publicized. But having non-resource
advantages can also negatively affect industrialization. Another way to put it is that growth
generated by given advantages is mostly quantitative rather than qualitative.
Three additional comments are in order.
First, any country that has suffered an internal or external conflict or private sector suppression,and starts from a very low level of everything, can enjoy rapid growth for a decade or two simply byliberalization, privatization, and integration. However, as one-time freeing effects are exhausted, acritical moment arrives when growth begins to slow and Washington Consensus measures are nolonger effective in stimulating it. That is when most countries realize that they are trapped. Beyond
this point, fast growth can be sustained only if proactive industrial policy is installed to revitalize theprivate sector to meet a greater challenge. Although some still argue that freeing markets willautomatically put a country on a high growth path, this paper does not share such optimism.
Second, even after the trap sets in, the economy can continue to grow as long as given
advantages—public spending, capital inflow, land inflation, etc.—are still at work. It is not thatgrowth suddenly drops to zero but just that remaining growth momentum is insufficient to propel
the economy to high income even in the long run. The situation is illustrated in Figure 1.

Figure 1. Divergence of Growth Paths

2

Third, given our definition, a trap may occur at any income and in any country when domestic
value creation is limited. If given advantages are small relative to population, a country falls into a
low income (poverty) trap. If the situation is reverse, citizens can enjoy good life without making
any effort, which may be described as a high income trap. Meanwhile, most countries withaverage population and average advantages are likely to be trapped in the middle. Analytically, allthese cases are similar except for their initial conditions. The critical issue is whether income isgenerated by effort or luck, and not what level it reaches.
3. The hypothesis
While the world continues to debate whether industrial policy of one kind or another is possible
and/or desirable, we stand on the premise that the effectiveness of any policy, including industrial
policy, is conditional on how it is designed and implemented. Our study starts with the observationthat proficiency with which industrial policy is practiced varies significantly across countries, andthat policy skills can be learned rather than eternally given for any government. From thisperspective, it is pointless to ask whether any industrial measure—be it SME development, export
promotion, or technology upgrading—is effective without specifying a country because successhinges on the acquired policy capability of each government. We also hold it self-evident that theprivate sector must be the main driver of economic growth, but that the state also has an importantrole of guiding and assisting private effort. These assumptions are the background for our main
analysis below that compares the quality of industrial policy across countries.
The hypothesis presented in this paper is that the lack of quality in industrial policy is the maincause of a middle income trap. The corollary is that installation of high-quality policy that actively
supports value creation by the private sector, beyond just freeing and opening markets, is required
to escape the trap. Policy innovation must occur not so much in policy scope—because industrial
policy menus are similar across emerging and developing economies—but in how effectively
commonly practiced policies are executed. This does not mean that other factors such as history,geography, natural resources, and capital inflow are unimportant. These are important and affectgrowth but they do not critically determine the long-term growth trajectory of a country as policy
quality does.
As noted above and illustrated in Figure 1, even a mediocre country starting from low income
and low policy skills can grow rapidly by adopting a Washington Consensus policy package. In thisearly stage the quality of industrial policy does not really matter in attaining growth. But slowdown
begins at some point—typically a decade or two later—which largely depends on the relative sizeof available advantages. This is a critical moment in the history of this country. If policy quality
remains the same, growth will not pick up and the country will fall into a middle income trap. If
policy innovation occurs, it will jump onto a path leading to high income backed by ever-improving

3human capital. Experiences show that policy innovation at middle income is a difficult task in which
few countries have succeeded. Among non-Western latecomer economies, only a handful rose tohigh income through domestic value creation—Japan, Singapore, Hong Kong, Taiwan, andKorea—while most others remain trapped at some levels.
To overcome the trap, there are three distinct policy areas that need improvement.
First, industrial policy in the narrow sense which generates and sustains the sources of growthmust be activated. This is primary in the sense that growth slowdown cannot be reversed without
improvement in this area.
Second, social problems caused by rapid growth must be dealt with. Income and asset
inequalities that emerge across individuals, regions, and social groups are the most challenging
among them. Environmental destruction, uncontrolled migration and urbanization, traffic andhousing problems, cultural change, generation gaps, and a surge of materialism and corruption
are also commonly observed. Importance of social policy in a high-growth period has long beenstressed by various authors including Huntington and Nelson (1976), Murakami (1994), and Hara(2014, 2015). If left unattended, these problems will destabilize society and undermine growth.
Third, macroeconomic management must be upgraded under financial integration. In the pastwhen a center country offered global financial stability or when capital transactions were restricted,
or both, latecomer economies were largely guarded against financial shocks emanating from therest of the world. In those days, inflation and debt crises were blamed on the nation’s fiscal andmonetary mismanagement. Now, all nations regardless of development stage or domestic policy
stance are exposed to large swings in global assets, interest rates, and market sentiments. As
McKinnon consistently warned, financial liberalization of latecomers must follow certain steps, andmisguided bilateral trade and currency negotiations must be refrained to avoid calamity in a world
with no anchor country or currency (McKinnon 1993, 1996, 2005, 2012; McKinnon & Ohno 1997).
The Asian Financial Crisis of 1997-98, the Lehman Shock of 2008, the ongoing Euro Crisis, andmany other global, regional, and local financial instabilities attest to increased external risks on our
financially integrated planet. Decent domestic macroeconomic management is no longer enough.
The weights of these policy areas differ across countries that are trapped in middle income. For
many, the main problem is inability to generate high growth. For other countries where high growth
fails to bring benefits to all, social instability is the central issue. Still others lose fruits of growth byrecurrent external financial crises. The rest of the paper discusses the first policy area only, namely,
policy for producing growth.
4. Proactive industrial policy
What should be the content of industrial policy for revitalizing growth momentum? This importantquestion was the topic of other works (Ohno 2013, VDF & NEU 2014), and space does not allow

4

full exposition here. But a brief discussion should be appropriate.
Even under WTO and deepened global and regional integration, industrial policy is not only
possible but even more critical for latecomer countries wanting to catch up in income andtechnology (Cimoli, Dosi & Stiglitz 2009, p.542). There are a wide range of untried policy areas
which do not violate any international rules such as vision-setting and strategy making, humanresource development, enterprise capacity building, FDI marketing, logistic efficiency, financial
access, product standards and safety, industrial clustering and networking, and countless others.
Even if high tariffs, non-tariff barriers, and discrimination against foreign businesses are no longer
permitted, remaining policy measures are so rich and numerous that developing country
governments need not worry too much about the slightly modified policy space. The true cause ofpolicy failure often lies in inability to use permitted policies fully and effectively.
Proactive industrial policy fit for the twenty-first century is different from any of the pastdevelopmental regimes, whether it is socialist planning, state-led heavy industry drive, infantindustry protection, market-friendly or market-enhancing selective intervention, or the Washington
Consensus formula. Today, industrial policy must simultaneously satisfy several conditions
including (i) acceptance of globalization and markets; (ii) a strong state; (iii) retaining andmobilizing sufficient policy tools for latecomer industrialization; (iv) dynamic capacity developmentof both private players and government; (v) internalization of knowledge, skills, and technology as
the top national goal and obsession; (vi) substantive (not superficial) public private partnership;and (vii) sharing of deep industrial knowledge between policy makers and businesses. For market
fundamentalists these conditions may seem contradictory because they promote both markets
and state power, but there is actually no conflict here. In the eyes of policy pragmatists, that isexactly how it should be because both are needed to cope with complex reality.
Apart from such obvious prerequisites as macroeconomic stability and infrastructuredevelopment, proactive industrial policy must focus on building private sector capabilities as itscore objective. The policy menu for strengthening the private sector is globally well known andfairly standard. They cover, for example, legal and policy frameworks; industrial skills upgrading;enterprise support in management, marketing, and technology; financial access; strategic FDI
attraction; FDI-local firm linkage formation; industrial clustering and networking; standards andtesting; startup assistance; and technology and innovation1. In East Asia, there are additional
popular measures such as kaizen (efficiency improvement at factories), shindan (SME
management diagnosis and advice), decades-long support for engineering universities andtechnical colleges, linkage between training institutions and industrial labor needs, high-quality
industrial parks, and strategic policy intervention to create a new industry from scratch.

1

Each policy action area can be further divided into sub-actions and detailed items. For a full list of policy actions
actually available for industrial human and enterprise capacity building, see, for example, The Guidebook for Using
SME Support Policies by Japan’s SME Agency or The White Paper on Small and Medium Enterprises in Taiwan by
Taiwan’s SME Administration, both of which are regularly updated.

5

Clearly, a latecomer country cannot introduce all policies at once. Selectivity, simplification, andproper sequencing are therefore needed. Because proper policy design differs across countries,
careful research and deliberation are needed to create the one most suitable for the home country.
In addition to policy content, policy procedure and organization that produce effective actions must
similarly be learned by adopting international best practices to the country context. For thispurpose, customized and intensive policy dialogue with experienced foreign industrial experts isextremely useful, but the number of policy instructors equipped with broad and pragmatic
industrial knowledge is limited.
5. Assessing policy quality
We propose to evaluate the quality of industrial policy by looking at the following ten
sub-components: (i) industrial human resource; (ii) domestic enterprise development; (iii) businessclimate; (iv) power and logistics; (v) export promotion; (vi) strategic FDI marketing; (vii) industrial
parks; (viii) supporting industries and FDI-local firm linkage; (ix) productivity, technology, andinnovation; and (x) standards and testing. Because we look at industrial policy in the narrow sense,social and cross-cutting considerations such as greenness, gender equality, workers’ rights,
community empowerment, and so on, are not included in our examination. These worthy causesshould be evaluated by other mechanisms. For each sub-component, ten common aspects as wellas aspects specific to each sub-component are checked, and grades from zero (non-existent orworse) to five (excellent) are given (Table 1).
Regarding the economic impact of policy, it should be noted that industrial performance is jointly
determined by private dynamism, policy quality, and luck (all other factors which are beyond thecontrol of either businesses or government). This means that policy quality, though important, isonly partly responsible for outcome, and its effectiveness should be assessed accordingly. The
fact that there is no one-to-one correspondence between policy quality and industrial resultscomplicates our investigation but does not negate it. Luck may matter greatly in the short run but
policy impact should become more visible in the long run.
Assessment given below should be regarded as a pilot project produced under considerable
budget and staff constraints. For this reason, the results should be interpreted with usual carethough we doubt if fuller research will produce entirely different conclusions about individual
countries. If additional resources become available, the work should be extended by including
more countries, refining sub-components, and regularizing and systematizing data collection.

6

7

Specific Aspects

Industrial humanresource

Science and technology engineering universities and colleges and technical and vocational
education and training (TVET) in sufficient number that meets the nation's industrial humanneeds; raising popular mindset for quality, efficiency, and manufacturing pride.
Existence of clear goals, policy organizations, and coordination among many ministries andDomestic enterprise
policy areas; effectiveness of individual measures covering support for management,
development
marketing, technology, finance, IT, and networking; interlink and synergy among policies.
Identification of the nation's current status, and serious effort for improvement; transparency
and reliability of laws and procedures; tax, accounting, and customs clearance; foreign
Business climate
currency and capital control; comparative business costs; effective public-private dialogue.
Status of power supply irregularities and remedying actions; status and plans for transport
infrastructure; efficiency of port, airport, dryport, and bonded warehouse operation; export,
Power and logistics
import, and border-crossing procedure; logistic service quality and competition; IT use.
Appropriate export targets; integrated export promotion mobilizing many measures andministries rather than temporary and ad hoc actions; a regular and effective monitoring andExport promotion
problem-solving forum; support and use of policy by targeted domestic exporting firms.
Full understanding of foreign investors' needs; effective one-stop investor service and followStrategic FDIup; appropriate incentives; selectivity proper to development stage; quality of promotional
marketinginformation and presentation; actual results in project registration and implementation.
Full understanding of investors' needs; proper division of labor between government andprivate sector in designing, building, and operating industrial parks; provision of necessary
Industrial parks
infrastructure and soft support; customer satisfaction and arrival of targeted foreign firms.
Supporting industries Clear recognition of importance of supporting industries and services in upgrading domestic
capability; effective database, match-making, incentives, and follow-up measures; closeand FDI-local firminteraction with targeted domestic and FDI firms; actual growth of supporting industries.
linkage
Proper targeting of needed technology and innovation for the nation; suitable promotion
Productivity,
measures in close cooperation with the private sector without coersion; protection oftechnology, andintellectual property rights; effective research and supporting institutions and mechanisms.
innovation
Existence of organizations, laws and regulations, and human and physical capital forStandards and testing ensuring product quality, safety, environment, labor conditions, etc.; sufficient testing
facilities; actual effective use of standards and testing facilities by the private sector.

Sub-component

Common aspects(i) Policy ownership(ii) Vision & commitment of top leader(s)(iii) Policy drafting procedure(iv) Authority & capacity of policy organizations(v) Mindset & competency of implementing officials(vi) Budgeting & staffing(vii) Inter-ministerial coordination(viii) Involvement of key non-official stakeholders(ix) Monitoring & evaluating mechanisms(x) Impact on the real economy

Table 1. Evaluation Criteria for Industrial Policy Sub-components

Quality of industrial policy partly overlaps but is not identical with national competitiveness orbusiness climate captured by the Global Competitiveness Index of the World Economic Forum,
the Doing Business Report of the World Bank, and the like. We gauge a nation’s policy capacity inassisting private sector growth rather than current competitiveness or ease of doing business. Our
scope is also much wider than just how smoothly businesses can be set up and run. Thus, ourcountry evaluation should in general produce different results from existing national scorecards.
Assessment of industrial policy quality is given in Table 2 for selected Asian and Africancountries for which we have sufficient knowledge through research, visits, and interviews.
Four points are worthy of note even in this small sample.
First, there is a huge gap in industrial policy quality among governments from excellent to poor.
Any commercial or official traveler who covers a wide ground should be aware of this fact, but ourpolicy evaluation confirms and quantifies this informal awareness. Looking at individual countries,
not all Asian governments have high scores in comparison with some proactive African
governments such as Mauritius, Ethiopia, and Rwanda.
Second, industrial policy quality and per capita income are positively correlated. Within our
limited sample of 13 countries in Table 2, the coefficient of correlation is 0.748. It should
immediately be noted that correlation does not prove causality. Moreover, industrial policy quality
is a concept more associated with growth potential than the current level of income. Nevertheless,positive correlation is at least suggestive, and consistent with the hypothesis that the lack ofquality in industrial policy is the main cause of a middle income trap.
Third, within each country, marks given to various policy sub-components are highly correlated.
If one policy is bad, others are likely to be also bad. There is a common policy culture within any
government that largely determines the effectiveness of all policy measures, with quality variation
among them usually small and accidental. The existence of the same policy procedure and similar
mindsets of policy makers and implementers in each country can be cited as the backgroundreason for this intra-government uniformity.
Fourth, no clear relation is detected between policy quality and the possession of natural
resources. Resource-rich countries such as Malaysia and Indonesia do not show any outstanding
quality in industrial policy. At the same time, countries that have excellent industrial policy in our
sample, as well as more generally, are those poorly endowed with natural resources2. The result is
consistent with the Curse of Natural Resource. While heavy reliance on natural resources isknown to impede industrialization through economic and political channels, our study suggeststhat the lack of policy quality may be an additional reason for slow industrialization in resource-richcountries.

However, we should be mindful of the winners’ bias in judging the Curse of Natural Resources. Countries thatsucceed in industrialization look relatively resource-poor ex post facto even if they initially had the same degree ofnatural resource dependence as others. To remove this bias, natural resource dependence of each country should
be compared at the starting point and not after some have succeeded in industrialization.
2

8

9

142
135
46

$1,498
$950
$639

D
D
C

1.4
1.5
2.7

1
1
1

1
0
2

1
0
2

2
3
4

1
2
4

3
1
3

2
3
3

1
4
4

1

1

2

1.5

1

0

2

3.0

Continuous
since 1995

Sep. 2012

May 2015

Aug. 2014

Continuous
since 2008

Vietnam

India

Cambodia

RwandaEthiopia

1.9

2

1.7

2

3.1

2

3.9

2

4.3

3

4.4

1

2.0

1

3.2

1

2.0

2

4

5

5

5

3.0

1.8

3.4

4.7

4.3

4.2

B

D

B

A+

A

A

$505

$3,475$5,779$22,597$25,977$46,330

on which measures are evaluated and how much weight is given to past achievements relative to present policies.

4/ It is somewhat difficult to evaluate the policy of a mature economy, such as Japan and Korea, with a large number of industrial policy measures in the past and at present. Grades may differ depending

3/ Evaluation of policy prepared and implemented by national government only; results obtained by private effort, international cooperation, or external conditions are excluded.

2/ Letter grades: A+ (4.5 or above), A ( <4.5), B (<4), C (<3), D (<2), F (<1).

1/ Evaluation: 0 (non-existent or worse), 1 (little), 2 (some), 3 (moderate), 4 (good), 5 (excellent). For Vietnam and Ethiopia, for which detailed data are available, points are given to the first decimal point.

Notes:

78$1,910
D
1.8
1.5
1.4

1.5

2.2

1.7

1.6

2.8

2.0

1.8

2

2

Jun. 2014

4

Indonesia

43

2005, 2009,2013, 2015

Thailand

4

4

3

4

5

4

4

4

4

4

Oct. 2012

Mauritius
3

4

1

4

5

4

5

4

4

3

2006, 2010,
2013

Malaysia

4

5

…

5

4

3

5

5

5

5

Mar. 2011

Taiwan4

28$9,478
B
3.9

3

4

…

4

3

5

5

4

4

5

Nov. 2010

Korea

2

18
$10,538
B
3.8

4

4

…

3

3

4

5

4

132

114

26

19

5

29

1

5

$55,183

5

A+

Continuous

4.7

Japan

5

5

4

Doing Businessranking (WB,
2014, among
189 entries)

5

Per capita
income (WB,
2013, USD)

5

Grade

4

Average

5Standards
and testing5

Supporting
Productivity,
industries &
technology &FDI-local
innovation
firm linkage

4Industrial
parks

5

Strategic
FDImarketing

Aug.-Sep.
2010

Exportpromotion

Singapore

Power andlogistics

Industrial
human
resource
BusinessclimateFor reference only

Date ofresearch

Domestic
enterprisedevelopment

Evaluation of industrial policy sub-components

Table 2. International Comparsion of Industrial Policy Quality

6. A note on mindset change
Before concluding, let us take note of a different group of policies which are often adopted bygovernments with relatively high capability. As argued earlier, industrial results depend jointly on
private dynamism, policy quality, and luck. Good industrial policy alone may not stimulate
industrial growth if the nation’s private sector is inactive, interested in short-term gains only, oraverse to risk taking and technology learning. In reality, business culture differs significantly acrossnations and ethnicities despite the claim of market fundamentalists that all economic men andwomen are created equal. In Malaysia, Former Prime Minister Mahathir (1970) once lamented thelack of economic dynamism among native Malays in comparison with Chinese immigrants. In
Ethiopia, Former Prime Minister Meles asked a visiting East Asian delegation, “Why do my people
pour money into real estate speculation instead of building factories?” (Ohno, 2013, p.40).
The standard policy to cope with this problem is initiation of a national movement of one sort oranother, which is at a higher level than the policy sub-components we examined in Tables 1 and 2
because it changes the nature of the private sector rather than taking it as given. National
movements aim to elevate productivity and competitiveness by instilling the sprit of activism andcooperation into the public. Successful examples include Japan’s Rural Life Improvement
Movement (1948-) and Quality and Productivity Movement at factories (1950s-), Korea’s Saemaul(new village) Movement (1970s-), Singapore’s Productivity Movement (1980s-), and Malaysia’s
Look East Policy (1980s-)3. But not all cases produce results. A good start was not followed up
with political commitment or business support in the productivity movements of Mauritius,
Botswana, and Burkina Faso around the 1990s, all of which learned from and were assisted by
Japan or Singapore. More complete failures are found in the forced production drives at collective
farms and state-owned factories in the past socialist bloc. They failed because the communist
ideology totally ignored motives and incentives for peasants and workers.
These historical cases teach us that, to be successful, national movements require (i) strong
personal commitment of the top leader; (ii) top-down instruction for grassroots participation; (iii)
performance-based rewards and recognition; (iv) supporting institutions; (v) authorized andwell-designed training programs; and (vi) concentrated nationwide effort for a long time, usually up
to a decade or more. Top-down instruction for grassroots participation (item (ii)) may soundcontradictory, but contradiction will evaporate if the movement is so crafted as to gradually attract
the genuine interest of participants, instead of reluctant obedience, because they see concrete
benefits to their income and life. While elements of coercion cannot be entirely eliminated innational movements, they should be regarded as success if intended economic results are3

The starting years of national movements are easy to identify but the end point is usually more difficult to pin
down. This is because successful movements undergo different stages and eventually become part of national
culture. Impacts of the national movements listed here are still present in respective countries.

10

realized at the end.
A national movement to transform popular mindset is not included in our policy evaluation partly
because not all countries practice it and partly because it calls for more complex and long-term
assessment. But there is no reason to continue to exclude it from policy evaluation in the future.
7. Concluding remarks
This paper has proposed a hypothesis that the lack of quality in industrial policy is the maincause of a middle income trap, a situation in which a nation is unable to produce economic value
beyond what is delivered by given advantages. A pilot project for policy evaluation is presented
and initial results are reported. While the method can surely be strengthened in terms of number ofcountries and assessment criteria, even the initial results are sufficient to confirm enormous
difference in industrial policy quality among nations, correlation between policy quality and income
achievement, relative uniformity of policy quality within any government, and possible irrelevanceof richness in natural resources for industrialization.
Our argument highlighted policy as the key determinant of the long-term economic fate of anation. Improving industrial policy requires not just discussion of what needs to be done but also,
more fundamentally, a reform of policy methodology in which proper policy sub-components mustbe identified for each country, and appropriate design, implementation, and monitoring of policy
measures should be learned and practiced.

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