This paper, authored by Dani Rodrik, explores the role of industrial policy in economic restructuring and growth, particularly in developing countries. It argues that while market forces and private entrepreneurship are crucial, governments must also play a strategic and coordinating role to encourage restructuring, diversification, and technological dynamism. The paper identifies two key market failures—information and coordination externalities—that hinder economic diversification and require government intervention. Information externalities involve the discovery of cost structures and the need for subsidies to support new activities, while coordination externalities require simultaneous large-scale investments to become profitable. The paper emphasizes the importance of institutional arrangements that balance autonomy and embeddedness, ensuring transparency, accountability, and effective communication between the public and private sectors. It also provides design principles for industrial policies, such as targeting new activities, setting clear success and failure criteria, and ensuring competence and accountability in implementing agencies. The paper concludes by highlighting the need for a process-oriented approach to industrial policy, where the focus is on identifying and addressing market failures rather than specifying outcomes.This paper, authored by Dani Rodrik, explores the role of industrial policy in economic restructuring and growth, particularly in developing countries. It argues that while market forces and private entrepreneurship are crucial, governments must also play a strategic and coordinating role to encourage restructuring, diversification, and technological dynamism. The paper identifies two key market failures—information and coordination externalities—that hinder economic diversification and require government intervention. Information externalities involve the discovery of cost structures and the need for subsidies to support new activities, while coordination externalities require simultaneous large-scale investments to become profitable. The paper emphasizes the importance of institutional arrangements that balance autonomy and embeddedness, ensuring transparency, accountability, and effective communication between the public and private sectors. It also provides design principles for industrial policies, such as targeting new activities, setting clear success and failure criteria, and ensuring competence and accountability in implementing agencies. The paper concludes by highlighting the need for a process-oriented approach to industrial policy, where the focus is on identifying and addressing market failures rather than specifying outcomes.