Author
Joseph Wong
University of Toronto
Biography
Joseph Wong is the Vice President, International, at the University of Toronto, where he is a professor of political science in the Munk School of Global Affairs and Public Policy. He was the Roz and Ralph Halbert Professor of Innovation from 2013 to 2023. His most recent book is From Development to Democracy: The Transformations of Modern Asia (with Dan Slater), published by Princeton University in 2022. He also publishes widely on the developmental state and welfare politics in East Asian democracies, including South Korea and Taiwan, as well as on innovation throughout the Global South. Professor Wong is a senior fellow at the Center for Asia-Pacific Resilience and Innovation.
Once maligned as the antithesis of efficient market forces, industrial policy is once again gaining traction around the world. Broadly speaking, industrial policy involves the distortion of otherwise unfettered markets in the allocation of public and private resources through deliberate government intervention in the national economy. Monetary policy to artificially devalue national currencies, for instance, makes exports more attractive in global markets. Government spending on research and development (R&D) addresses inherent market failures in long-term technological innovation. Direct investment in firms through credit, subsidies, and strategic tax holidays can mitigate the risks associated with entry for firms into new industrial sectors. The strategic use of tariffs, most effectively deployed by East Asia’s postwar economic dynamos, such as Taiwan and South Korea, is intended to protect infant industries so that emergent firms can develop their capacities to compete in international markets.
The motivation to craft and deploy industrial policies has long varied. Alexander Gerschenkron, in his volume on the advantages of economic “backwardness,” famously asserted that government intervention allows late-developing economies to leapfrog stages of industrial development, thus accelerating growth among otherwise economic laggards.[i] Being economically backward does not mean that national economies must remain stuck in their state of underdevelopment. Friedrich List argued that industrial policies and the use of tariffs (i.e., the formation of a customs union in his case) effectively address the unequal distribution of natural economic “endowments,” a refutation of free-market notions of the natural order of things (and of comparative advantage). Underpinned by a strong sense of nationalism, List stressed how government intervention in emerging economies can create comparative and competitive advantages where few existed before.[ii]
Both Gerschenkron’s and List’s theories of political economy informed East Asia’s postwar developmental state. Guided by highly capable and developmentally oriented states, East Asia’s once laggard economies, notably Taiwan and South Korea, implemented strategic industrial policies to facilitate industrial development and economic growth at annual rates of nearly 10% during the 1970s and 1980s. Tariff policies protected infant industries and promoted import substitution, specifically in labor-intensive manufacturing industries. Currency devaluation (and, in Taiwan’s case, the use of dual exchange rates) eased their transitions into the export market. Banking-sector centralization in South Korea allowed the developmental regime to allocate industrial credit to high-performing firms, while Taiwan used fiscal tools (i.e., tax credits) to protect and nurture industrial firms. In the 1980s, massive government investment in R&D and the establishment of publicly funded industrial technology research centers made industrial upgrading possible by mitigating the risk of entry for firms and creating comparative advantages in sectors such as semiconductors and IT hardware.
Importantly, however, because these political–economic regimes were developmentally oriented at their core, industrial policies were intended to spark economic upgrading and development but not at the expense of other national economies. East Asia’s developmental states “husbanded,” as Peter Evans observed, nationalistic but not chauvinistic economies.[iii] They depended on trade and investment from global markets, notably economic relations with the US and its allies. They were, as Chalmers Johnson argued, interventionist states but ultimately market regarding.[iv] They, as Robert Wade put it, “governed” the market. In other words, industrial policies in East Asia’s developmental states were intended to complement global market forces.[v] East Asia’s growth benefited the region, just as it did the rest of the global economy.
That was then.
Today’s economic uncertainty and slower growth among both high- and low-income countries are compelling governments to deploy new industrial policies, including tariffs, to bolster national prosperity. Furthermore, the challenges of postindustrial innovation and development, especially in cutting-edge technology sectors, have refocused attention on states and their capability (and willingness) to husband cutting-edge technology firms. Meanwhile, the imperatives of sustained and inclusive development are demanding more, not less, government intervention.
However, the impetuses driving renewed strategic thinking on the utility and purpose of industrial policies in the present moment—economic uncertainty, postindustrial innovation, and inclusive development—are also hindering their effective use. There are limits to what industrial policies can achieve and, indeed, dangers to the global order if used maliciously.
Three challenges stand out:
First, President Trump’s invocation of industrial policy and the introduction of massive tariffs, seemingly indiscriminately and worldwide in scope, are a perverse distortion of market forces that are motivated by punitive goals, rather than developmental ones. Ultimately antidevelopmental in their effects (e.g., contributing to inflation, firm relocation, and diverted investment), Trump’s tariffs reflect a chauvinistic, mercantilist logic. If mismanaged, mercantilist policies can lead to destabilizing, beggar-thy-neighbor responses, such as during the interwar period of the 1930s. Punitive mercantilist measures undermine the complementary potential of coordinated (i.e., market-regarding) industrial policy regimes, which were critical for global economic growth in the postwar period.
As other industrial powers and late-developing economies deploy industrial policies to safeguard their economies against Trump’s aggression, they should be encouraged to pursue complementary and interdependent economic policies. Negotiated trade diversification and the rewiring of global supply chains through renewed trade pacts and investment deals, for instance, are critical to curtailing the malicious intent and effects of current US economic policies.
Second, the end of the Fordist manufacturing era of industrial development has resurrected the belief that strategic government interventions, that is, industrial policy, can foster the growth of cutting-edge, high-value-generating, technologically innovative firms. Just as developmental states once used industrial policies to mitigate the risks of industrial and technological upgrading, there remains the belief that they can do the same to spur postindustrial development in sectors such as biotechnology, advanced information technologies, alternative energies, and artificial intelligence. However, unlike in the past, when industrial policies mitigated risks for firms looking to “catch-up” and climb the technological value chain, the demands of cutting-edge innovation pose altogether new kinds of uncertainty that governments, even the most capable and developmental ones, are increasingly unable to manage. Innovation requires long-term, high-stakes investments in R&D and basic science research because cutting-edge technological development takes a long time and failure rates are high. Product life cycles, once innovative technological products have been introduced into the market, are extremely short and dynamic such that the stakes are extremely high and costly. My 2011 study on life sciences innovation in East Asia argued that success in strategic planning is difficult to replicate in innovation-driven industrialization. Technological uncertainty as well as market and regulatory uncertainty elude industrial policies.[vi]
More investment in universities and in general research capacity is required to promote open-ended, basic science research. The global circulation of talent, a reflection of more open rather than closed immigration policies, is necessary for postindustrial innovation. Higher thresholds for failure, and the sunk costs that come with them, are critical if economies are to be successful in innovation-driven industries. Only a few very large economies, such as the US and China, have the scale advantages and risk capacity to pursue such high-stakes industrial policies. The replication of postwar industrial policy regimes, such as those in postwar East Asia, is highly unlikely to be able to meet the challenges of being at the cutting edge of innovation-driven postindustrial development.
Third, the challenges of promoting sustained economic development more broadly and inclusive development specifically are creating new political–economic cleavages. We are seeing how the failure to promote inclusive development is contributing to greater political instability, political polarization, the rise of populist politics, and the erosion of democracy. Democratic backsliding and the failings of democracy are due in part to the failure to promote more inclusive development.[vii]
Industrial policies thus need to be more expansive and, in particular, include policy instruments that promote more inclusive development. Active labor market policies, for instance, are a kind of industrial policy instrument that promotes more productivity and protects those who fall outside the labor market. Social policies, especially those that mitigate the risks of poor health, unemployment, undereducation, and undertraining, ought to be considered part of the industrial policy mix, both to provide a more inclusive social safety net and to encourage more economic participation and productivity. In East Asia, investments in the education sector were critical to facilitating not only rapid but also remarkably equitable economic growth during the postwar period. According to the World Bank, the universalization of education was the single most important factor in promoting inclusive and rapid development in East Asia.[viii] This is not just an East Asian phenomenon. The notion that inclusive social policies are consistent with development has long been integral to European industrial policy regimes. In rich northern European economies, for example, the postwar welfare state was seen to be essential to industrial development. Social policies were not, in the European context, anathema to economic growth; instead, they supported industrial development. In other words, industrial policy regimes in the current moment should comprise inclusive social policies that promote stable, sustainable, and ultimately shared economic development.
[i] Alexander Gerschenkron, Economic Backwardness in Historical Perspective (Harvard University Press, 1962).
[ii] Friedrich List, The National System of Political Economy (1841).
[iii] Peter Evans, Embedded Autonomy: States and Industrial Transformation (Princeton University Press, 1995).
[iv] Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975 (Stanford University Press, 1982).
[v] Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton University Press, 1990).
[vi] Joseph Wong, Betting on Biotech: Innovation and the Limits of Asia’s Developmental States (Cornell University Press, 2011).
[vii] Eli Rau and Susan Stokes, “Income Inequality and the Erosion of Democracy in the Twenty-First Century,” Proc Natl Acad Sci U S A. 122, no .1 (2025).
[viii] World Bank, The East Asian Miracle: Economic Growth and Public Policy (Oxford University Press, 1993).
Global Innovation Reimagined
Global Innovation Reimagined showcases reflections and research on innovation in its many forms across Asia, North America, and Europe. The perspectives offered herein draw from discussions during the trilateral Reimagining Entrepreneurship and Innovation conference, hosted by CAPRI, CAPRI USA, the University of Virginia, and Copenhagen Business School from July 22 to 25, 2025.
Industrial Policy for the Current Moment
Author
Joseph Wong
University of Toronto
Biography
Joseph Wong is the Vice President, International, at the University of Toronto, where he is a professor of political science in the Munk School of Global Affairs and Public Policy. He was the Roz and Ralph Halbert Professor of Innovation from 2013 to 2023. His most recent book is From Development to Democracy: The Transformations of Modern Asia (with Dan Slater), published by Princeton University in 2022. He also publishes widely on the developmental state and welfare politics in East Asian democracies, including South Korea and Taiwan, as well as on innovation throughout the Global South. Professor Wong is a senior fellow at the Center for Asia-Pacific Resilience and Innovation.
Once maligned as the antithesis of efficient market forces, industrial policy is once again gaining traction around the world. Broadly speaking, industrial policy involves the distortion of otherwise unfettered markets in the allocation of public and private resources through deliberate government intervention in the national economy. Monetary policy to artificially devalue national currencies, for instance, makes exports more attractive in global markets. Government spending on research and development (R&D) addresses inherent market failures in long-term technological innovation. Direct investment in firms through credit, subsidies, and strategic tax holidays can mitigate the risks associated with entry for firms into new industrial sectors. The strategic use of tariffs, most effectively deployed by East Asia’s postwar economic dynamos, such as Taiwan and South Korea, is intended to protect infant industries so that emergent firms can develop their capacities to compete in international markets.
The motivation to craft and deploy industrial policies has long varied. Alexander Gerschenkron, in his volume on the advantages of economic “backwardness,” famously asserted that government intervention allows late-developing economies to leapfrog stages of industrial development, thus accelerating growth among otherwise economic laggards.[i] Being economically backward does not mean that national economies must remain stuck in their state of underdevelopment. Friedrich List argued that industrial policies and the use of tariffs (i.e., the formation of a customs union in his case) effectively address the unequal distribution of natural economic “endowments,” a refutation of free-market notions of the natural order of things (and of comparative advantage). Underpinned by a strong sense of nationalism, List stressed how government intervention in emerging economies can create comparative and competitive advantages where few existed before.[ii]
Both Gerschenkron’s and List’s theories of political economy informed East Asia’s postwar developmental state. Guided by highly capable and developmentally oriented states, East Asia’s once laggard economies, notably Taiwan and South Korea, implemented strategic industrial policies to facilitate industrial development and economic growth at annual rates of nearly 10% during the 1970s and 1980s. Tariff policies protected infant industries and promoted import substitution, specifically in labor-intensive manufacturing industries. Currency devaluation (and, in Taiwan’s case, the use of dual exchange rates) eased their transitions into the export market. Banking-sector centralization in South Korea allowed the developmental regime to allocate industrial credit to high-performing firms, while Taiwan used fiscal tools (i.e., tax credits) to protect and nurture industrial firms. In the 1980s, massive government investment in R&D and the establishment of publicly funded industrial technology research centers made industrial upgrading possible by mitigating the risk of entry for firms and creating comparative advantages in sectors such as semiconductors and IT hardware.
Importantly, however, because these political–economic regimes were developmentally oriented at their core, industrial policies were intended to spark economic upgrading and development but not at the expense of other national economies. East Asia’s developmental states “husbanded,” as Peter Evans observed, nationalistic but not chauvinistic economies.[iii] They depended on trade and investment from global markets, notably economic relations with the US and its allies. They were, as Chalmers Johnson argued, interventionist states but ultimately market regarding.[iv] They, as Robert Wade put it, “governed” the market. In other words, industrial policies in East Asia’s developmental states were intended to complement global market forces.[v] East Asia’s growth benefited the region, just as it did the rest of the global economy.
That was then.
Today’s economic uncertainty and slower growth among both high- and low-income countries are compelling governments to deploy new industrial policies, including tariffs, to bolster national prosperity. Furthermore, the challenges of postindustrial innovation and development, especially in cutting-edge technology sectors, have refocused attention on states and their capability (and willingness) to husband cutting-edge technology firms. Meanwhile, the imperatives of sustained and inclusive development are demanding more, not less, government intervention.
However, the impetuses driving renewed strategic thinking on the utility and purpose of industrial policies in the present moment—economic uncertainty, postindustrial innovation, and inclusive development—are also hindering their effective use. There are limits to what industrial policies can achieve and, indeed, dangers to the global order if used maliciously.
Three challenges stand out:
First, President Trump’s invocation of industrial policy and the introduction of massive tariffs, seemingly indiscriminately and worldwide in scope, are a perverse distortion of market forces that are motivated by punitive goals, rather than developmental ones. Ultimately antidevelopmental in their effects (e.g., contributing to inflation, firm relocation, and diverted investment), Trump’s tariffs reflect a chauvinistic, mercantilist logic. If mismanaged, mercantilist policies can lead to destabilizing, beggar-thy-neighbor responses, such as during the interwar period of the 1930s. Punitive mercantilist measures undermine the complementary potential of coordinated (i.e., market-regarding) industrial policy regimes, which were critical for global economic growth in the postwar period.
As other industrial powers and late-developing economies deploy industrial policies to safeguard their economies against Trump’s aggression, they should be encouraged to pursue complementary and interdependent economic policies. Negotiated trade diversification and the rewiring of global supply chains through renewed trade pacts and investment deals, for instance, are critical to curtailing the malicious intent and effects of current US economic policies.
Second, the end of the Fordist manufacturing era of industrial development has resurrected the belief that strategic government interventions, that is, industrial policy, can foster the growth of cutting-edge, high-value-generating, technologically innovative firms. Just as developmental states once used industrial policies to mitigate the risks of industrial and technological upgrading, there remains the belief that they can do the same to spur postindustrial development in sectors such as biotechnology, advanced information technologies, alternative energies, and artificial intelligence. However, unlike in the past, when industrial policies mitigated risks for firms looking to “catch-up” and climb the technological value chain, the demands of cutting-edge innovation pose altogether new kinds of uncertainty that governments, even the most capable and developmental ones, are increasingly unable to manage. Innovation requires long-term, high-stakes investments in R&D and basic science research because cutting-edge technological development takes a long time and failure rates are high. Product life cycles, once innovative technological products have been introduced into the market, are extremely short and dynamic such that the stakes are extremely high and costly. My 2011 study on life sciences innovation in East Asia argued that success in strategic planning is difficult to replicate in innovation-driven industrialization. Technological uncertainty as well as market and regulatory uncertainty elude industrial policies.[vi]
More investment in universities and in general research capacity is required to promote open-ended, basic science research. The global circulation of talent, a reflection of more open rather than closed immigration policies, is necessary for postindustrial innovation. Higher thresholds for failure, and the sunk costs that come with them, are critical if economies are to be successful in innovation-driven industries. Only a few very large economies, such as the US and China, have the scale advantages and risk capacity to pursue such high-stakes industrial policies. The replication of postwar industrial policy regimes, such as those in postwar East Asia, is highly unlikely to be able to meet the challenges of being at the cutting edge of innovation-driven postindustrial development.
Third, the challenges of promoting sustained economic development more broadly and inclusive development specifically are creating new political–economic cleavages. We are seeing how the failure to promote inclusive development is contributing to greater political instability, political polarization, the rise of populist politics, and the erosion of democracy. Democratic backsliding and the failings of democracy are due in part to the failure to promote more inclusive development.[vii]
Industrial policies thus need to be more expansive and, in particular, include policy instruments that promote more inclusive development. Active labor market policies, for instance, are a kind of industrial policy instrument that promotes more productivity and protects those who fall outside the labor market. Social policies, especially those that mitigate the risks of poor health, unemployment, undereducation, and undertraining, ought to be considered part of the industrial policy mix, both to provide a more inclusive social safety net and to encourage more economic participation and productivity. In East Asia, investments in the education sector were critical to facilitating not only rapid but also remarkably equitable economic growth during the postwar period. According to the World Bank, the universalization of education was the single most important factor in promoting inclusive and rapid development in East Asia.[viii] This is not just an East Asian phenomenon. The notion that inclusive social policies are consistent with development has long been integral to European industrial policy regimes. In rich northern European economies, for example, the postwar welfare state was seen to be essential to industrial development. Social policies were not, in the European context, anathema to economic growth; instead, they supported industrial development. In other words, industrial policy regimes in the current moment should comprise inclusive social policies that promote stable, sustainable, and ultimately shared economic development.
[i] Alexander Gerschenkron, Economic Backwardness in Historical Perspective (Harvard University Press, 1962).
[ii] Friedrich List, The National System of Political Economy (1841).
[iii] Peter Evans, Embedded Autonomy: States and Industrial Transformation (Princeton University Press, 1995).
[iv] Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975 (Stanford University Press, 1982).
[v] Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton University Press, 1990).
[vi] Joseph Wong, Betting on Biotech: Innovation and the Limits of Asia’s Developmental States (Cornell University Press, 2011).
[vii] Eli Rau and Susan Stokes, “Income Inequality and the Erosion of Democracy in the Twenty-First Century,” Proc Natl Acad Sci U S A. 122, no .1 (2025).
[viii] World Bank, The East Asian Miracle: Economic Growth and Public Policy (Oxford University Press, 1993).
Global Innovation Reimagined
Global Innovation Reimagined showcases reflections and research on innovation in its many forms across Asia, North America, and Europe. The perspectives offered herein draw from discussions during the trilateral Reimagining Entrepreneurship and Innovation conference, hosted by CAPRI, CAPRI USA, the University of Virginia, and Copenhagen Business School from July 22 to 25, 2025.
About the Author
Joseph Wong
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