Wednesday, 4 April 2018

Paradigm Lost

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”,, 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”, .
[8] Tim Besley and Masayuki Kudamatsu (2007), “What Can We Learn from Successful Autocracies?”,, July.
[9] Stephen Haggard (2018), Developmental States, Cambridge University Press.
[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.
[12] Andrew Sheng (2018), “ The Asian Values Debate Returns”, Project Syndicate, 2nd March.
[13] Justin Yifu Lin (2012), The Quest for Prosperity, Princeton University Press, Chapter 9.

No comments:

Post a Comment