We do not claim that the policy framework in the two countries before reforms did not lead to misallocation of resources, shortages, and price distortions. Instead, we argue that industrial policies and targeting helped both countries accumulate critical capabilities in core sectors. Without these policies, and given their low per capita, the two would have shied away from those industries. Going forward, both China and India need to exploit their relatively strong position (see Felipe et al. 2010c) in the core sector, as well as in sectors of their comparative advantage. This does not mean a hands-off policy but rather support from the government to address the externalities associated with cost-discovery. Rodrik (2004) provides a broad outline of a modern industrial policy framework, one which entails private-public dialogue to uncover opportunities and obstacles to industrial growth.
This paper represents the views of the authors and not necessarily those of the Asian Development Bank, its Executive Directors, or those of the countries that they represent.
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i Felipe and McCombie (2010) question the empirical evidence provided by Chow (1993).
ii The Capability Theory (Hidalgo 2009) suggests that not all activities have the same consequences for a country’s growth prospects. A country’s ability to foray into new products depends on whether the set of existing capabilities necessary to produce these products can be easily redeployed for the production and export of new products. What are these capabilities? They are human and physical capital, the legal system, institutions, etc. that are needed to produce a product (hence, they are product-specific, not just a set of amorphous factor inputs); and at the firm level, they are the “know-how” or working practices held collectively by the group of individuals comprising the firm.
iii Following Hausmann et al. (2007), we calculate the level of sophistication of a product (PRODY) as a weighted average of the GDP per capita of the countries exporting that product. Algebraically:
where xvalci is the value of country c’s export of commodity i and GDPpcc is country c’s per capita GDP. PRODY is measured in 2005 PPP $. PRODY is then used to compute EXPY as:
EXPY is measured in 2005 PPP $.
We use highly disaggregated (SITC-Rev.2 4-digit level) trade data for the years 1962-2007. Data from 1962-2000 is from Feenstra et al. (2005). This data is extended to 2007 using the UNCOMTRADE Database. PRODY is calculated for 779 products. PRODY used is the average of the PRODY of each product in the years 2003-2005. GDP per capita (measured in 2005 PPP $) is from the World Development Indicators.
iv Revealed comparative advantage (RCA) is the ratio of the export share of a given product in the country’s export basket to the same share at the world level We use the measure proposed by Balassa (1965), Algebraically:
A country c is said to have revealed comparative advantage in a commodity i if the above defined index, RCAci, is greater than 1. The index of revealed comparative advantage can be problematic, especially if used for comparison of different products. For example, a country very well endowed with a specific natural resource can have a RCA in the thousands. However, the highest RCA in automobiles is about 3.6.
v These numbers are the net gain. It is the difference between the number of (new) products in which a country acquires revealed comparative advantage and the number of (old) products in which it loses revealed comparative advantage.
vi Core products include metal products, machinery, and chemicals. These are, on average, more sophisticated than other products.
vii Terminology for the sectors is as used by Leamer (1984).
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