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# **3. Picking Winners or Losers: Lessons from Experience**

There is wide consensus among economic historians on the important role played by the state in facilitating structural change and helping sustain it across time and across developed countries. However, except for a few successful cases post World War II, the governments in most developing countries have failed to play that desirable facilitating role. It is therefore essential to briefly review the historical and contemporary experiences of state intervention in the process of industrial upgrading and diversification, both in advanced economies and in developing countries, to draw lessons from the many failures and few successes.

# **_The Role of the State in Structural Change in Advanced Economies_**

There is ample historical evidence that today’s most advanced economies heavily relied on government intervention to ignite and facilitate their take-off and catch-up process, which allowed them to build strong industrial bases and sustain their growth momentum over long periods. In his well-known survey of trade and industrial policies that led to early economic transformations in the Western world, List (1841) documented various policy instruments through which governments protected the domestic industries or even intervened to support the development of specific industries—many of which became successful and provided the bedrock for national industrial development.<sup>13</sup> Likewise, Chang (2003) has reviewed economic developments during the period when most of the currently advanced economies went through their industrial revolutions (between the end of the Napoleonic Wars in 1815 and the beginning of World War I in 1914). He has documented various patterns of state interventions that have allowed these countries to successfully implement their catch-up strategies. Contrary to conventional wisdom that often attributes the industrial successes of Western economies to laissez-faire and free-market policies, the historical evidence shows that the use of industrial, trade, and technology policies was the main ingredient to their successful structural transformations. This intervention ranged from the frequent use of import duties or even import bans for infant industry protection to industrial promotion through monopoly grants and cheap supplies from government factories, various subsidies, public-private partnerships, and direct state investment, especially in Britain and in the U.S. (Trebilcok 1981).

All European countries trying to catch up with Britain devoted efforts to technology policy. Up to the middle of the first Industrial Revolution, the main important channel for technological transfer was the movement of skilled workers who embodied new knowledge. Latecomers to the industrialization process, such as France, attempted to acquire them on a large scale from Britain but the government there banned the emigration of skilled workers for more than a century, starting in 1719.<sup>14</sup> When new technologies became embodied in machines, they too were put under government control—various laws were adopted throughout the 18<sup>th</sup> and 19<sup>th</sup> centuries to ban the export of “tools and utensils.”

> 13 List’s book covers the rise of economic powerhouses in a variety of contexts, from Italian cities such as Venice to Hanseatic cities such as Hamburg or Lübek, and countries such as the Netherlands, England, Spain, Portugal, France, Germany and the United States of America.

> 14 The ban lasted until 1825. See Landes (1969).