The contemporary global resurgence of industrial policy, driven by concerns over supply chain security and strategic competition, reopens a fundamental historical question. Why did the Asian miracles — Korea, Taiwan, Singapore, Hong Kong, and Japan — succeed so spectacularly with state-led industrialization in the second half of the 20th century while most other developing countries failed?

A new perspective on the literature on Asian rapid growth suggests that their success stems from three features of their industrial policy which set them apart from the rest of the developing world.

First, the Asian miracle economies compelled firms to submit to the discipline of the global market instead of shielding them from it. Second, their approach was to create domestic firms at the forefront of advanced production, innovation, and homegrown technology creation in sophisticated industries early on, instead of relying solely on foreign direct investment and hoping for technology transfers. Finally, their institutional architecture was adapted to the conduct of industrial policy with a leading agency in charge of accumulating industry- and context-specific knowledge through continuous experimentation and feedback from the market, including in Hong Kong.

Though leading agencies used subsidies or trade protectionism at different times, these tools were only part of an extensive and evolving arsenal of policies and, in retrospect, might not have been critical to their success. What was important was promoting fierce domestic competition and ensuring accountability for any support that was provided.

Most developing countries in the second half of the 20th century in Latin America, the Middle East, and South Asia attempted some sort of import substitution industrialization, and for most it failed. The strategy consisted essentially of protecting infant domestic industries and heavily subsidizing a few national champions, typically state-owned enterprises, to serve a captive domestic market.

Despite relative improvements in capabilities and increased production, the lack of incentives to achieve economies of scale, build deeper domestic value chains, and innovate, undermined the international competitiveness of the protected industry. The fate of those countries was sealed when the protections had to eventually be lifted because of external shocks, economic crises, or lack of public funds.

In contrast, the Asian miracles operated on the principle that the state could provide a broad-based support to the industry — including adequate infrastructure, worker training, and research and development — but the global market provided the discipline. Market signals from export markets were indispensable to force domestic firms to compete and innovate, while failing firms were eventually restructured. That is, they relied on ‘export discipline’ to create sustainable and competitive industries.

Sustained rapid growth in the Asian miracles resulted from building capabilities in sophisticated or technologically advanced sectors such as electronics, automobiles, and machinery rather than relying on natural resources, foreign direct investment, or low-skill manufacturing. These sectors are important because they generate strong spillovers across the economy. They demand skilled labor, stimulate learning by doing, and foster innovation. Sophisticated industries tend also to be tradable in nature, necessitating competition in global markets and facilitating economies of scale and integration into global value chains.

Sophisticated industries require a comprehensive and evolving package of policies. Simply opening markets or improving the business climate is insufficient to spur private investment because of high risks, long learning periods, and uncertain returns in these industries. Instead, industry-specific policies such as coordinated investment in specialized skills and infrastructure, relevant legal and regulatory frameworks, export promotion, and supplier networks were critical in helping firms succeed. Innovating early on by spending substantially on research and development and public research institutes was critical in giving them an edge in the global market.

The success of the Asian miracle economies stemmed from an institutional architecture, centered on a leading agency tasked with identifying and implementing the complex spectrum of policies needed to build competitive, sophisticated industries. These leading agencies, modelled after Japan’s Ministry of International Trade and Industry, shared key features that distinguished them from typical planning bodies.

These institutions had ambitious goals for targeting sophisticated sectors and, thanks to strong political backing and being endowed with ‘embedded autonomy’, had the agency to pursue them. They relied on elite recruitment and enforced accountability, internally and externally, and adapted to changing technological and market conditions. These features enabled them to coordinate across government and industry, accumulate sector-specific knowledge, and deploy policy tools to nurture competitive industries.

In today’s environment of rising protectionism, geopolitical fragmentation, and the need for sustainable, inclusive growth, many countries are contemplating a revival of industrial policy. The current debate has equated industrial policy with ‘hard’ tools such as tariffs, subsidies, and export bans, which typically promote self-sufficiency or domination in certain industries. But the experience of the Asian miracle economies provides new perspectives on this debate.

State-market collaboration, competition, and continuous learning to resolve constraints are the defining elements of the industrial policy practiced by the East Asian economies. Their experience shows that international competition is not only consistent with a successful industrial policy but a prerequisite for it.

Their approach went far beyond simply providing subsidies to specific firms or industries. Building genuinely competitive firms in sophisticated industries required a collaborative relationship between key state institutions, especially a leading agency and firms. This leading agency — by promoting experimentation and market feedback amid intense competition and accountability for the support provided — would identify a host of policy tools spanning financing, research and development, specific infrastructure and skills, and regulation to foster these industries.

The ambition to build competitive, sophisticated industries required continuous trial and error, learning, and adaptation to changing economic conditions to ensure success.