20 Other recent approaches to structural transformation have emphasized the determinants of technological upgrading and innovation, which are essential ingredients for long-run productivity growth. In low-income countries, where budgets for research and development are scarce and industries located far from the technological frontier, technological upgrading and innovation typically take the form of adaptation and adoption of known technologies rather than the introduction of new ones (see Libecap and Thursby 2008; Aghion 2006; and Aghion and others 2005).

Despite the importance of these issues, mainstream development economics in recent decades has paid only limited attention to industrialization and its role in structural transformation. This may be explained primarily by the failure of industrial policies in developing countries, and the theoretical argument that the state cannot do better than the private sector in identifying new industries. The pervasive failures of government interventions—notably in Latin America, Africa, South Asia, and the countries of the former Warsaw Pact—have led to the dominant view that policies aimed at ―picking winners‖ are bound to create unsustainable and socially costly distortions.

While some countries have actively and successfully pursued industrial policies—mainly in East Asia—the dominant view in the economic literature is still a skeptical one. In their critical review of rationales for industrial policy, Pack and Saggi (2006) note sarcastically that the knowledge civil servants need to successfully design and implement government interventions would make them omniscient. But much of the literature on industrial policy fails to make an important distinction among country strategies: policies supporting new industries that are inconsistent with the comparative advantage of the economy or attempting to protect old industries that have lost comparative advantage generally fail, while policies facilitating the development of new industries that are consistent with the comparative advantage of the economy often succeed (see Lin and Monga 2011).

Beyond the widespread skepticism about industrial policies, establishing the empirical regularities of the changing patterns of industrial structure and technological upgrading across the world is not a straightforward exercise. Industrialization has been a key feature of successful developing economies lifting themselves out of poverty, but the recent trend in the most advanced economies has been toward deindustrialization—that is, a decline in manufacturing employment as a share of the total that mirrors a decline in the share of manufacturing value added in GDP. This trend has been observed not only in the United States and Europe but also in the newly industrialized East Asian economies (Hong Kong SAR, China; Korea; Singapore; Taiwan, China). By contrast, the share of employment in the services sector has increased steadily in both high- and low-income economies.

These trends, whether similar or contrasting, reflect fundamentally different patterns of change. Deindustrialization in advanced and successful developing economies might suggest at first glance that domestic spending on manufactured goods has declined while spending on services has increased. But empirical analyses and country studies reveal that this is not the case. Measured in real terms, the share of domestic expenditure on manufactured goods has been