State Capacity Economic Upgrading and Industrial Policy in Developing Economies: A Political Economist Perspective

Felix Hellfeier & Vincent Paul Wache

Student thesis: Master thesis


In this thesis we study the potential conditioning effect of state capacity on the effectiveness of industrial policy in low and lower-middle income countries. Drawing from the literature on global value chain theory and state capacity, we argue that the state faces two challenges when conducting industrial policy: (1) It needs a be able to determine an appropriate set of policies in the context of globally fragmented production chains, (2) it needs to have the capacity to enforce these policies against the potential resistance of powerful interest groups, such as incumbent firms in traditional industries. In order to measure the degree to which a country has the capacity to do so, we develop an index consisting of two components: administrative capacity and coercive capacity. We use public capital stock (% of GDP) as a proxy for industrial policy. We then test the effect of state capacity and public capital stock on GDP per capita growth, using panel data on 57 countries over a time period from 2004-2014. We find that public capital stock and state capacity do not have a significant effect on GDP per capita growth individually. However, the interaction of both variables has a highly significant and positive impact on growth. We therefore conclude that the state's capacity to implement policies conditions the impact of industrial policy on growth. We summarise that industrial policy can make a positive contribution to economic development if the state has the sufficient degree of capacity to implement policies effectively.

EducationsMSc in International Business and Politics, (Graduate Programme) Final Thesis
Publication date2018
Number of pages109
SupervisorsAradhna Aggarwal