Development
matters – not just in poorer countries. Economics, a soft but pretentious social
science occasionally unsettled by self-doubt, has adopted an introspective
mindset since the global financial crisis erupted ten years ago. The ´markets-work-wonders´
formula of the 1980s (state withdrawal from public services, curtailment of
social benefits, deregulated borderless finance, privatised pensions, weakened workers’ bargaining rights) –at times imprecisely
dubbed ´neoliberalism´[1] - has
left a bland aftertaste. Growth in advanced countries was slow, crisis prone
and unjust, failing the bottom third. Today, absolute poverty by global
standards hits more than 12 million people in the EU and the US alone[2].
The free
market paradigm had been oversold as the only
way to achieve prosperity. But the
´End of History´[3]
- Western civilization as the natural
order of the modern world - didn´t materialize. Instead we witness state-led
prosperity in Asia, but backlash against globalization and rising populism in
market democracies[4].
Concerns about the
middle-income class in advanced countries have identified bottlenecks,
particularly with respect to R&D, upgrading, and skills development.
Industrial and place-based regional policies are back on the table. New
initiatives try to find a new economic paradigm, yet a new unifying formula is
not in sight[5].
Currently, the debate seems lost in the fog of undisciplined complexity. My
explanation: The Western debate on a new economic paradigm is still too little
inspired by i) development theory, ii) the rise of the developmental state, and
iii) the shift of the global economy’s centre of gravity toward Asia[6].
i) The 1940s
and 1950s had seen a vivid debate on how to develop the newly independent
nations that had just overcome colonial rule. Development economics was born, a
number of theories centering on a virtuous circle driven by externalities. In “The
Fall and Rise of Development Economics”[7], Krugman
distills basic insights of development economics. He dates the beginning of
(“high”) development economics with Paul Rosenstein-Rodan´s (1943) Big-Push model and its end with
backward/forward linkages of Albert O. Hirschman´s (1958) Strategy, via Arthur Lewis´ (1954) surplus labor model that emphasised dualism and Gunnar Myrdal´s (1957) circular causation. Krugman could have added Alexander
Gerschenkron´s (1962) emphasis of
industrialization as crucial to catch-up. These early contributions can
help us today in the search for a new economic paradigm. They emphasized self-reinforcing
development driven by externalities, increasing economies of scale, the
fallacies of excessive specialisation, the importance of public infrastructure
and of public provision of education, innovation and technology, and the productive
potential of urbanisation in the
presence of dualistic labour markets.
Some countries,
according to early development theory, remained underdeveloped because they
failed to get a virtuous circle going, and thus remained stuck in a low level trap.
That view implied a powerful case for government activism as a way of breaking
out, especially for building hard infrastructure and providing universal public
education. By contrast, attitudes to the state remain much more dismissive in
most advanced countries than they were up to the mid-1970s.
ii) Until recently, the ability of the state to
achieve economic goals has been routinely denigrated. Singapore moving to the
world top league of rich countries, China´s uninterrupted fast-growth cruise
over forty years in the face of misguided collapse scenarios, and landlocked
Rwanda´s rise from the ashes of bloody genocide, what do these countries
suggest instead? Be inspired by the rise of the developmental state, even if your
gut feelings despise autocrats. In terms of economic growth, health and education,
accountable autocracies have outperformed democracies when leadership was
performance dependent and could be overthrown by a ´selectorate´.[8]
Haggard
(2018)[9] reviews
the concept of the developmental state that emerged to explain the rapid growth
of a number of countries in East Asia. In a second-best world with substantial
market imperfections, state intervention can better solve collective action and
coordination problems involving private actors and civil society in an
iterative process. Based on generous state supply of hard and soft
infrastructure, effective industrial policies are forged, helped by selective
trade interventions and direct foreign investments. Governments, capable of the
patient, long-term, strategic approach essential for innovation, should take an
unabashed role as “investor of first resort”—acting as a proactive investor in
major innovations, and getting returns on that investment[10].
To overcome pervasive rent seeking
through private lobbies, the development state imposes discipline on private
actors. Such discipline is not only necessary for effective industrial policy
but for transitions toward more market-oriented policies as well, according to
Haggard´s review of developmental state work. As Danny Quah explains in a
fascinating Ted Talk[11],
the strong and responsible development state is duties oriented rather than
rights based; the alternative to liberal democracy is far off the caricature sometimes
drawn as a corrupted, extractive, rapacious structure that exploits its people.
iii) Historically,
the rise and fall of superpowers first occur in economics, then politics and
policy paradigms, finally militarily. The spread of the Asian economic paradigm
to advanced countries on both sides of the Atlantic hits some stumbling blocks,
however: English-language publishers still tend to encourage analysis of global
affairs from a Eurocentric perspective; Non-Western thinkers often are
not translated into English; and scholarly articles on China often seem to
stoke China-phobia or overstate the risk of crisis or collapse[12].
Asia-inspired policy advice will
have to de-emphasise efficiency and re-emphasise accumulation and resource
shifts. It will require shaping policy advice for various
different stages of institutional development, market informality and duality,
perhaps along the ideas outlined in the new structural economics of Justin Lin.
Even for high-income countries already at the global technology frontier, some
Asian lessons are essential for reigniting growth in rust-belt regions: avoid
comparative advantage defying support and identify latent comparative
advantages first; then create capacities through government facilitation; not
least, build an innovation system that unites public education for skill
development, incentives for private-sector R&D and fosters collaboration
between private entrepreneurs and the entrepreneurial state[13].
[1] Simon Wren Lewis (2016), “Neoliberalism”,
mainly macro, 2nd May.
[2] Angus Deaton (2018), “The US Can No Longer
Hide From Its Deep Poverty Problem”, The
New York Times, 24th January.
[3] Francis Fukuyama (1989), “The End of
History?”, The National Interest,
Summer, pp. 1-18.
[4] Ivan Krastev (2016), “The Unraveling of the
Post-1989 Order”, Journal of Democracy
16.4, pp.5-15.
[5] Thomas Fricke (2017), “The New New Deal”, https://www.ineteconomics.org/perspectives/blog/the-new-new-deal, 26 May.
[6] Danny Quah (2011),
„The Global Economy’s Shifting Centre of Gravity”, Global Policy 2.1., January,
pp. 3-8.
[7] Paul Krugman (1994), “The Fall and Rise of
Development Economics”, http://web.mit.edu/krugman/www/dishpan.html .
[8] Tim Besley and Masayuki Kudamatsu (2007),
“What Can We Learn from Successful Autocracies?”, voxeu.org, July.
[10] Mariana Mazzucato (2013), The Entrepreneurial State, Anthem Press.
[11] Danny Quah (2017), “Liberal promises,
liberal delusions - Emergence of new global powers”, TEDx Talks, 3rd
April.
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