Developing countries often fail to industrialize not because they lack potential, institutions, or capacity, but because both the global economic system and domestic policy choices hinder their ability to follow the historical path that enabled nations like Britain, the U.S., Japan, and China to achieve industrialization. As Ha-Joon Chang argues, rich countries impose neo-liberal rules—premature trade liberalization, restrictive intellectual property regimes, and limits on state intervention—that block the very tools historically used for development. Complementing this, Yi Wen emphasizes that successful industrialization requires following the correct sequence, beginning with rural proto-industrialization to build markets, skills, and capital, before advancing to heavy industry and modern institutions. Together, these perspectives highlight that industrialization is not merely about investment, institutions, or liberal reforms, but about creating the right conditions and sequencing development in a way that allows economies to grow organically and sustainably.
1. The Perils of Premature Trade Liberalization in Developing Economies
Developing countries often face intense pressure to open their markets to international competition before their domestic industries are sufficiently mature. This premature trade liberalization exposes infant industries to advanced foreign competitors, leaving them unable to survive in the absence of protective measures such as tariffs, subsidies, or regulatory support. Without this crucial breathing space, emerging sectors struggle to develop competitiveness, innovation, and scale, and in many cases collapse entirely under the weight of foreign competition.
A historical illustration of this phenomenon can be seen in Mexico under NAFTA, where widespread liberalization in the 1980s and 1990s led to the deindustrialization of entire sectors. Industries that had not yet achieved efficiency or global competitiveness were forced out of business, resulting in job losses, reduced domestic production, and an economy increasingly dependent on imports. This pattern underscores the dangers of imposing liberalization before domestic capacities are fully established.
In contrast, today’s advanced economies, such as the United States and Britain, historically relied on high tariffs and protectionist policies for decades—sometimes over a century—before gradually opening their markets. These measures allowed domestic industries to mature, accumulate technological know-how, and build the foundations for sustainable economic growth. As Ha-Joon Chang observes, while free trade may improve consumption in the short term, implementing it prematurely can condemn developing countries to a persistent specialization in low-productivity sectors, effectively locking them into underdevelopment.
2. How Restrictions on Policy Tools Hinder Industrial Development
Developing countries today face significant constraints on the policy instruments historically used to promote industrialization. International agreements such as the WTO’s TRIPS, TRIMS, and NAMA limit the ability of governments to protect and nurture emerging industries. Measures such as tariffs, subsidies, and targeted support—which allowed early industrializers to grow domestic capabilities—are now restricted or prohibited, leaving countries unable to shield infant industries from foreign competition or stimulate strategic sectors of the economy.
In addition, regulations on foreign direct investment (FDI) and stringent intellectual property rules further constrain development. By limiting the ability to selectively manage foreign investment and restricting technology transfer, these rules prevent developing countries from learning, adapting, and improving upon advanced technologies. Historically, now-rich countries freely borrowed and even copied foreign innovations to accelerate industrial growth, but today’s developing nations are denied this same opportunity to acquire knowledge and build domestic capacities.
As Ha-Joon Chang argues, this represents a deliberate asymmetry in the global economic system: the rich countries are effectively “kicking away the ladder,” preventing others from climbing the same path they used to achieve industrialization. By restricting the very policy tools that made past industrial revolutions possible, these measures trap developing countries in low-productivity sectors, limit their ability to create competitive industries, and undermine the long-term prospects for sustainable economic growth.
3. The Impact of Overly Restrictive Macroeconomic Policies on Developing Economies
Developing countries often face macroeconomic constraints imposed by international financial institutions, which mandate policies that prioritize short-term stability over long-term growth. Conditions such as extremely low inflation, high real interest rates, and balanced budgets during recessions are frequently required, regardless of their effects on economic development. While these measures may appear prudent from a financial perspective, they severely limit the ability of governments to invest in infrastructure, education, and industrial capacity—critical foundations for sustainable industrialization.
These restrictions stifle private investment and job creation. By keeping borrowing costs high and limiting government spending, developing economies are denied the fiscal flexibility needed to stimulate growth, support domestic industries, or expand productive capacity. Without such interventions, emerging markets struggle to compete globally, leaving them trapped in cycles of low productivity and slow development. The enforced austerity and restrictive monetary policies undermine the very conditions that historically enabled industrialization in now-rich nations.
In contrast, early industrializers, such as the United States and Britain, relied on expansive fiscal and monetary policies during their development phases. They ran significant deficits, maintained low interest rates, and invested heavily in infrastructure and human capital to accelerate industrial growth. Ha-Joon Chang succinctly captures this double standard: “Keynesianism for the rich, monetarism for the poor.” Overly restrictive macroeconomic policies, therefore, are not neutral measures of prudence but systemic barriers that prevent developing countries from replicating the strategies that historically fueled industrialization.
4. The Risks of Misguided Privatization and Deregulation in Developing Economies
State-owned enterprises (SOEs) have historically played a crucial role in national development, and when managed effectively, they can achieve world-class performance. Examples include Korea’s POSCO and Brazil’s Petrobras, which successfully drove industrial growth, technological advancement, and global competitiveness. These cases demonstrate that public ownership, coupled with competent management, can be a powerful tool for industrialization, particularly in sectors requiring large-scale investment or long-term strategic planning.
However, many developing countries have been encouraged—or pressured—to pursue rapid privatization before regulatory and institutional capacities were sufficiently developed. Premature privatization in weak governance environments often results in asset stripping, elite capture, and corruption, rather than fostering competitive and efficient markets. Similarly, excessive deregulation without robust oversight can create shadow markets in licenses, permits, and contracts, further undermining economic development and equitable growth.
As Ha-Joon Chang observes, corruption in such contexts is often not a product of too little market activity but of too many unregulated market forces. Policies that blindly prioritize privatization and deregulation ignore the developmental potential of well-managed state enterprises and the necessity of effective regulatory frameworks. Misguided emphasis on these reforms can therefore destabilize emerging economies, weaken state capacity, and derail the industrialization process.
5. The Role of Intellectual Property Regimes in Hindering Technology Transfer
Intellectual property (IP) regimes in developing countries are increasingly shaped by international agreements such as TRIPS, which make it costly or even illegal to access, copy, or adapt advanced technologies. While these frameworks are intended to protect innovation, in practice they restrict the ability of emerging economies to learn from and build upon existing technologies. For countries still developing their industrial base, such restrictions can severely limit opportunities for technological catch-up and domestic capacity building.
Historically, the most successful industrializers relied heavily on technology transfer, often by copying or adapting foreign innovations. The United States pirated British machinery during the 19th century, and Switzerland adopted German chemical techniques to develop its own industries. These practices allowed early industrial nations to acquire knowledge, improve productivity, and create competitive industries. Denying similar opportunities to today’s developing countries disrupts the natural process of technological learning and industrial advancement.
As Ha-Joon Chang vividly observes, strict enforcement of intellectual property rights can act as a barrier rather than a facilitator of development: “Strengthening IPRs has made economic development more difficult… it is like a dam turning fertile fields into a technological dustbowl.” By locking developing countries into dependency on imported technologies, IP regimes prevent domestic innovation, limit industrial growth, and perpetuate global inequalities in technological capabilities.
6. The Loss of Fiscal Capacity in Developing Economies
For many developing countries, tariffs constitute a significant portion of government revenue. When trade liberalization policies are imposed prematurely, tariff income is sharply reduced, depriving governments of the funds needed to invest in critical sectors such as infrastructure, education, and healthcare. This decline in public resources undermines the state’s ability to support industrial development and to provide the basic foundations for sustained economic growth.
The erosion of fiscal capacity has long-term consequences for development. Without adequate funding, governments cannot nurture infant industries, build market infrastructure, or invest in human capital—key elements required for industrialization. As a result, trade liberalization that ignores the fiscal realities of developing countries often weakens state capacity, leaving economies trapped in low-productivity sectors and unable to climb the ladder of industrial development.
7. The Ideological Misdiagnosis of Development Challenges
Developing countries’ economic difficulties are often misattributed to culture, corruption, or societal laziness rather than to structural and policy constraints. Such narratives suggest that underdevelopment is the result of moral or behavioral failings, obscuring the critical role of global economic rules, domestic policy decisions, and historical context in shaping development outcomes. By focusing on perceived cultural deficiencies, policymakers and international institutions overlook the actual mechanisms that impede industrial growth and economic advancement.
Historical evidence further challenges this ideological framing. Now-rich nations were frequently corrupt, politically unstable, and socially unequal during their own periods of industrialization. For instance, 19th-century Britain and the early United States faced significant governance and institutional weaknesses, yet both countries successfully industrialized over time. These examples illustrate that corruption and instability are often symptoms of underdevelopment rather than its root causes.
As Ha-Joon Chang emphasizes, underdevelopment should be understood in material and institutional terms: “Underdevelopment is not a state of mind—it is a state of material and institutional capacity.” Economic development itself creates the conditions for stronger governance, reduced corruption, and more effective institutions. Misdiagnosing the problem ideologically, therefore, leads to misguided prescriptions—such as imposing liberal reforms or blaming societal behavior—while ignoring the structural and policy reforms necessary to facilitate industrialization and sustainable growth.
8. The Consequences of Skipping the Proto-Industrialization Stage
Successful industrialization historically began with a stage of rural proto-industrialization: labor-intensive, market-oriented production of simple goods in the countryside. This early phase absorbed surplus peasant labor without threatening food security, while simultaneously building grassroots purchasing power and fostering commercial networks. By creating rudimentary supply chains and generating early capital accumulation, proto-industrialization laid the essential foundations for subsequent stages of industrial growth.
Many developing countries, however, bypass this critical stage and attempt to move directly into capital-intensive heavy industries or modern financial systems. Without the incremental buildup of labor skills, domestic markets, and basic infrastructure, such ventures are often unprofitable and unsustainable. Heavy industries imposed prematurely can fail to find sufficient demand, lack skilled labor, and overextend scarce resources, leading to economic inefficiencies and financial strain.
As Yi Wen emphasizes, industrialization cannot be achieved simply by injecting large amounts of capital into advanced technologies: “An industrial revolution cannot be detonated simply by a spurt of high investment in modern technologies… it must start humbly in rural areas.” Skipping the proto-industrialization stage undermines the sequential logic of development, depriving countries of the social, economic, and institutional foundations necessary for sustainable industrial growth.
9. The Misunderstanding of Markets in Developing Economies
A critical barrier to industrialization in developing countries is the widespread misconception that markets naturally exist and function efficiently without state intervention. In reality, markets are not self-generating; they are costly to establish and require careful coordination, infrastructure, and social trust. Effective markets depend on organized distribution systems, financial institutions, and reliable legal frameworks—all of which take time and deliberate effort to create.
Liberal reforms often assume that removing government involvement will automatically unleash the power of the market. However, in agrarian or largely rural societies, mass markets for manufactured goods rarely exist, and the demand necessary to sustain large-scale industrial production is absent. Without such markets, investments in modern industries, technology, or capital-intensive projects are often unprofitable, leading to business failures and wasted resources.
As Yi Wen notes, “The ‘free’ market is not free. It is a fundamental public good that is extremely costly to create.” Developing economies cannot rely on abstract market principles alone; instead, markets must be actively built through state coordination, infrastructure investment, and the creation of demand. Misunderstanding this role of markets undermines industrial policy and prevents countries from achieving sustainable economic growth.
10. The Danger of Confusing Consequences with Causes in Development
A common misconception in development theory is the assumption that democracy and inclusive institutions are the primary drivers of industrialization. Many institutionalist frameworks argue that political freedoms, rule of law, and inclusive governance must precede economic growth. While these factors are important, this perspective risks overlooking the historical sequencing of successful industrialization.
Yi Wen emphasizes that inclusive institutions and stable political systems are often outcomes rather than prerequisites of industrialization. In historical cases such as Britain or the United States, economic growth and industrial expansion occurred long before widespread suffrage or fully inclusive political institutions were established. Industrialization created the economic base that made such political and institutional reforms sustainable.
Prematurely imposing democratic institutions in developing countries, before establishing a strong economic foundation, can undermine state capacity and disrupt industrial policy. Without a robust economic base, governance structures may lack resources, legitimacy, and coordination capacity to support industrialization. Recognizing that institutions often follow economic development rather than precede it is essential for designing policies that facilitate sustainable growth rather than imposing reforms that the economy is not yet ready to support.
11. Why Foreign Aid and Capital Cannot Replace Market Creation
Foreign aid and external capital inflows are often promoted as solutions to underdevelopment, yet they frequently fail to generate sustainable industrialization. Aid provided by institutions such as the IMF or other international lenders tends to finance top-down, capital-intensive projects—such as steel mills, large infrastructure complexes, or airports—without sufficient consideration of domestic demand, labor skills, or distribution networks. In the absence of these foundational conditions, such investments rarely integrate into the local economy or stimulate broad-based industrial growth.
Without prior proto-industrial development, these externally funded projects lack the markets needed to absorb their output. As a result, they often become “white elephants”: technologically impressive but economically unviable, requiring continuous subsidies and accumulating debt. Instead of fostering self-sustaining growth, they impose heavy financial burdens on governments and crowd out investment in labor-intensive industries that could have generated employment, learning, and domestic demand.
In contrast, China’s industrialization was largely financed internally, drawing on savings and capital generated through rural, labor-intensive production and export-oriented manufacturing. As Yi Wen notes, heavy industries introduced without market foundations “end up with unbearable financial burdens, bankruptcy, and defaults.” This contrast highlights a fundamental lesson: capital and aid cannot substitute for the gradual creation of markets. Sustainable industrialization depends not on the scale of external financing, but on building demand, capabilities, and production networks from the ground up.
12. The Consequences of Lacking a Market-Creating State
Successful industrialization has historically depended on the presence of a state—or, in some cases, a powerful merchant class—that actively created markets rather than merely regulating them. As Yi Wen emphasizes, early industrializers relied on coordinated efforts to organize production, build infrastructure, establish trust, and connect rural producers to regional and national markets. These market-creating functions were essential for transforming fragmented local economies into integrated systems capable of sustaining large-scale industrial activity.
Many developing countries lack such institutions or deliberately weaken them through liberal reform agendas that prioritize deregulation and minimal state intervention. At precisely the stage when coordination, investment, and leadership are most needed, the state is often constrained or sidelined. Without an actor capable of reducing transaction costs, enforcing contracts, and facilitating market access, producers remain isolated, and potential economies of scale fail to materialize.
Yi Wen argues that this “missing-market problem” cannot be resolved by market forces alone: it “can be overcome only through government assistance and leadership.” The absence of a market-creating state leaves developing countries trapped in fragmented, low-productivity economies, unable to mobilize resources or generate the demand necessary for industrialization. Effective state involvement, therefore, is not an obstacle to markets but a prerequisite for their emergence and long-term viability.
Summary & Implications: Policy Space, Developmental Sequencing, and the Industrialization Ladder
Developing countries frequently fail to industrialize because they are denied both the policy space and the correct sequence of development that historically enabled successful industrialization. As Ha-Joon Chang argues, advanced economies impose neo-liberal rules—through trade liberalization, investment restrictions, and intellectual property regimes—that prevent latecomers from using protection, technology transfer, and state-led coordination. At the same time, many developing countries are encouraged to adopt misguided reforms—such as rapid liberalization, privatization, and reliance on foreign aid—that weaken the state and fail to create domestic markets. These constraints systematically block the tools that earlier industrializers relied upon to build productive capacity.
Yi Wen’s analysis reinforces this argument by emphasizing the importance of developmental sequencing. Countries that skip proto-industrialization and attempt to leap directly into heavy industry or modern institutions lack the market foundations, labor absorption mechanisms, and capital accumulation necessary for sustainable growth. China’s success lies not in institutional imitation or external financing, but in rediscovering and compressing the historical sequence of industrialization—from rural proto-industrialization to light industry and finally heavy industry—within a single generation. The central lesson is clear: industrialization is not achieved by copying institutions or injecting capital, but by building markets, preserving policy autonomy, and allowing the state to coordinate development in its early stages. Denying countries this ladder—or forcing them to climb it out of order—virtually guarantees failure.
References
- Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. By Ha-Joon Chang, 2007
- Kicking Away the Ladder: An Unofficial History of Capitalism, Especially in Britain and the United States. By Ha-Joon Chang, 2002
- The Making of an Economic Superpower: Unlocking China’s Secret of Rapid Industrialization. Yi Wen, World Scientific. 2016