Big push or big failure? On the effectiveness of industrialization policies for economic development

The role of the government in industrialization is heavily debated. Some claim that extensive government involvement is key to initiate a sustainable development process, others see the government as an obstacle to it, pointing to the importance of government failure. We formulate a model, which explains why even a highly inefficient industrial policy can successfully promote big-push development. Moreover, we show that extensive government intervention is more likely to be successful when the initial level of development is low.

► We develop a theoretical model analyzing the effectiveness of industrialization policy in a setting of policy inefficiencies. ► When market failures are severe, even imperfect policies can be better than no intervention to stimulate industrialization. ► Industrialization policies are likely to be more effective and less distortive in the least developed countries. ► In these countries, deregulation and privatization may be counterproductive.