Demand-led catch-up: A history-friendly model of latecomer development in the global green economy

This article examines the role played by demand in catching up and in leadership changes in green industries, motivated by the belief that demand-led catch-up is a prevalent pathway in such industries. The article first examines stylized cases of sectoral green catch-up by China in which the local market and domestic demand played an important role before the sector started expanding globally. In particular, the focus is on three industries: wind, biomass and hydropower. Then, it uses a history-friendly model to study the effects of a major increase in domestic demand (a “demand window”) in a green industry. The baseline simulation first examines the effects of a demand window in promoting learning and capability building by latecomers and in triggering a catch-up process. Then, the counterfactual simulations show that (i) a technological discontinuity which takes place after the demand window could reduce the effectiveness of the demand window in the catch-up process; (ii) the specific timing of the demand window could significantly alter the dynamic patterns of catch-up; (iii) protectionism is a necessary condition for the demand window to have its effect; and (iv) regimes of slow capability accumulation could turn out to be beneficial for the latecomer when a technological discontinuity follows the demand window. These results can help policymakers in identifying key conditions related to demand-led catch-up strategies.