The manufacturing sectors of less developed countries (LDCs) have traditionally been relatively protected. They have also been subject to heavy regulation, much of which is biased in favor of large enterprises. Accordingly, it is often argued that manufacturers in these countries perform poorly in several respects: (1) markets tolerate inefficient firms, so cross-firm productivity dispersion is high; (2) small groups of entrenched oligopolists exploit monopoly power in product markets; and (3) many small firms are unable or unwilling to grow, so important scale economies go unexploited. In this paper I assess each of these conjectures, drawing on plant and firm-level studies of LDC manufacturers. I find none to be systematically supported. Turnover is substantial, unexploited scale economies are modest, and convincing demonstrations of monopoly rents are generally lacking. Nonetheless I find some evidence that protection increases firms ’ price-cost margins and reduces average efficiency levels at the margin. Finally, although the econometric evidence on technology diffusion in LDCs is limited, it does suggest that protecting “learning ” industries is unlikely to foster productivity growth. All of this suggests that the general trend toward trade liberalization has yielded larger benefits that the traditional gains from trade.

Over the last three decades Taiwan and South Korea have seen high sustained rates of growth in output and income. While high savings rates and substantial investments in new capital equipment are clearly an important part of their success, it is impossible to ignore the role of the export market as a contributing factor. At a minimum the ability to export has allowed manufactures to specialize in a range

I discuss the concept and empirical importance of intemational technology diffusion from the point of view of recent work on endogenous technological change. In this literature, technologyis viewed as technological knowledge. I first review the maj or concepts, and how intemational technology diffusion relates to other factors affecting economic growth in open economies. The following main section of the paper provides a review of recent empirical results on (i) basic results in intemational technology diffusion; (ii) the importance of specific channels of diffusion, in particular trade and foreign direct investment; (iii) the spatial distribution of technological knowledge, and (iv) other issues.

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Fundamentally, poverty reduction is about bringing growth processes to poor areas. Because poor areas can benefit from technical and organizational innovations made elsewhere in the world, it is possible today to create productive jobs faster and in greater quantity than ever before. The puzzle is what helps spread such "best practices." Saving, investment, education, resources, and new technology are all needed---and fairly easy to obtain. What is hard to obtain are the institutions that allow these factors of production to be combined and translated into productive job creation. Firms are the key vehicles that spread best practices and productive jobs to areas where poor people live. Because we can never be sure which firm will be successful, it is necessary that new firms can enter markets, that substandard firms are allowed to fail, and that good firms face few barriers to growth. This is the definition of competition, and competition is what selects good firms and thus drives the spread of best practice and productive jobs. Governments need to provide the framework, in which capable firms can emerge. Yet, the right mix of state activity and how it best interacts with firms are not fully understood. Some selection mechanism, which allows for policy experiments and selects successful ones, is valuable for national, provincial, and local governments. Thus competition among jurisdictions and firms is an integral part of dynamic social systems that hold promise for creating wealth and ending poverty. WAYSOUT OF POVERTY TABLEOF CONTENTS List of Boxes ....................................................................................................................... 4 I. EXECUTIVE SUMMARY....................................................................................

on an earlier draft. In addition, I have benefited from the comments made by the participants during a talk I gave on this topic at a training workshop organized by the Export Competitiveness thematic group (EXCOMPETE) of the World Bank on March 9, 1999. The title of the workshop was “Export Promotion: the Dos and Don’ts. ” SUMMARY FINDINGS With import-substitution policies having failed and now discredited, there has been a shift in favor of interventions on behalf of export interests. In this paper, Panagariya argues that, upon close scrutiny, these arguments for such interventions suffer from many of the same flaws as the old arguments for import substitution. Among the conclusions reached by Panagariya are: • Under perfect competition, a country attempting to retaliate against export subsidies by its trading partners with export subsidies will only hurt itself. • The argument that export subsidies may be useful for neutralizing import tariffs is spurious. In most practical situations, this is not possible. Moreover, the removal of tariffs is a far superior policy. • In principle, a case for protecting infant export industries can be made in the presence of externalities. But the empirical relevance of externalities remains as illusory in the context of export industries as much as for import-substituting industries. • While adverse selection and moral hazard can lead to the thinning of the market for credit insurance, they do not provide a case for intervention by the government. • The experience of India shows little impact of export subsidies on exports. The comparative experience of Mexico and Brazil shows that export subsidies are a costly instrument of export diversification. • Those who subscribe to the view that pro-export interventions were important in East Asia have not provided convincing evidence establishing a causal relationship between them and growth. This initiative and support for this paper came from the World Bank’s Export Competitiveness

The debate about industrial policy occasioned by the East Asian financial crisis is the latest chapter in an ongoing discussion about the effectiveness of selective government intervention in fostering rapid industrial growth. The crisis that began in the Republic of Korea in 1997 and the weak growth in Japan over much of the 1990s have prompted a reexamination of the effectiveness of the government actions in the two countries that pursued sectoral selectivity most intensively. If indeed industrial policies were important in accelerating growth, there may be lessons for other countries still in the early stages of industrialization. Conversely, if the magnitude of the contribution was small, more conventional policies should be pursued unless it is assumed that governments can improve on the efforts of Japan and Korea. The East Asian financial crisis that erupted in July 1997 renewed interest in the East Asian miracle, a term that had only recently entered the development vocabulary. Many causes were identified quickly, ranging from the excessively rapid opening of capital markets to the decline in the extent of prudential regulation of the banking system that had characterized the countries through the early 1990s. Some analysts argued that the financial vulnerabilities revealed during the crisis stemmed in part

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University of Notre Dame. He is a development economist, occasionally serving as an economic consultant for governments of developing countries and for international agencies. His career includes four years as a Rockefeller Foundation scholar in East Africa, two years as a senior economist with the Agency for International Development, and short stints as an economic advisor or consultant at such institutions as the Hudson Institute, UNIDO, and the National Financiera in Mexico. He has published extensively in over fifty professional journals and edited volumes in the areas of development studies, international trade, econometrics, development planning, and industrialization, with a special interest in East Africa, East Asia, and Mexico, and edited Papers on

This paper was prepared with assistance from Carsten Fink, Faezeh Foroutan, Aaditya Mattoo, Marcelo Olarreaga, Garry Pursell, and the staff of the IMF Policy Development and Review Department---in particular, Geoffrey Bannister, Anne McGuirk, and Kamau Thugge. The report benefited from helpful comments and suggestions from Brian Ames, Ataman Aksoy, Ishac Diwan, Philip English, Simon Evenett, Mike Finger, Jeni Klugman, Will Martin, Brad McDonald, Richard Newfarmer, Jayanta Roy, and John Wilson. Maria Kasilag provided excellent support in the preparation of the manuscript. The views expressed are those of the authors and do not necessarily reflect those of the World Bank