Development is fundamentally about learning to use modern technologies to create jobs and prosperity in poor countries. Poor countries cannot produce their way out of poverty despite their low wages because even if they have some formal skills, they cannot actually use modern machines at competitive levels of efficiency. The most important missing ingredient is tacit knowledge, the knowledge that cannot be learnt in manuals but has to be acquired through learning-by-doing. The implication of this simple observation is that startup firms in developing countries will have to finance periods of loss-making while the tacit knowledge is being acquired through practice. The market failure that constrains economic development most seriously is that investors cannot be sure that they will be able to enforce the levels of effort that will make this investment viable. The institutional and governance conditions that ensure high levels of effort in learning in at least some sectors are vital and perhaps the most important preconditions for any policy aiming to sustain development.
Old-style investment policies failed because they could not ensure effort. The abandonment of ambitious industrial policy did not remove the market failure, which still needs to be addressed. Today, firms and countries are trying to finance these learning attempts in a multitude of different ways. The success of countries and sectors in ‘the market’ depends on the variables that determine whether their financing strategies will work. We argue that the effectiveness of any ‘financing instrument’ applied to the learning process depends on the interaction and appropriateness of three other sets of variables: the governance agencies implicitly responsible for enforcing the terms of the instrument, the firm structures describing the internal hierarchies of firms, their relationships with the state and the markets they operate in and the broadly defined political settlement that describes the relevant distribution of power between the different agents involved in the learning and financing process.
Through a set of extensive case studies of Thailand, India, Bangladesh and Tanzania, we show that this approach can explain the emergence of competitive success in their most important high growth sectors. The success of these sectors depended not just on access to the market in a liberal economy but much more fundamentally on deliberate and accidental factors that combined specific financing instruments with appropriate combinations of governance, market and political factors that ensured high levels of effort, and therefore the achievement of global competitiveness. As these factors are interactive, blueprints are not transferable, but the methodology provides a guide for thinking through in policy terms, the types of financing instruments and governance capabilities that are most likely to work in different contexts. The analysis also prioritizes different types of market failures affecting technology acquisition, and allows us to think through the most effective way of sequencing policy. It establishes the importance of limiting technology support to sectors where success is most likely. But it also establishes that without specific policies to develop technological capabilities, the market by itself will not pull sectors, regions and countries with low capabilities towards sustained development.