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Development Economics Conference

Markets as Means or Master?
"New-Developmentalism" vs. Neoliberalism

Mount Holyoke College
Department of Economics
November 14-16, 2008

For further information please contact: Jens Christiansen, 413-536-5659, or Shahrukh Khan,

Paper Abstracts

Abugattas, Luis and Eva Paus

Domestic Resource Mobilization for a Neo-Developmentalist Strategy: Fiscal Policy Space in Latin America
A neo-developmentalist, capability-based strategy is aimed at `bringing the state back in' to achieve structural change in developing countries, moving up the value chain and assuring a better living standard for most of the citizens. In addition to providing investment in basic infrastructure and education, governments - in some areas in collaboration with the private sector - are to implement pro-poor policies, provide support for productive sectors with high spillover potential, and build institutional capacity (among others).
Whatever the specific combination of neo-developmentalist policy suggestions, a substantial increase in fiscal revenue is at the core of governments' ability to implement the new strategy. But in the current global-national context, the increased need for public revenue conflicts with the declining ability of governments to raise it.
In this paper, we will discuss the key elements of a capability-based strategy and analyze how external and internal factors constrain governments' ability to raise fiscal revenue. The main external constraints are international trade agreements and competition for foreign direct investment, whereas the principal internal constraints are the size of the informal sector, institutional capacity for tax collection, and political economy considerations. We will explore possible national and international policies to broaden the fiscal policy space for development.

Cimoli, Mario and Gabriele Porcile

Volatility and Crisis in Catching-up Economies: Industrial Path-Through under the Stickiness of Technological Capabilities and “The Red Queen Effect
The focus of this paper is on the microeconomic consequences of volatility and instability in prices and how they interact with long run growth in production and productivity. We model a price shock, consisting of a temporary rise in the price of commodities, as was recently experienced by several Latin American economies. This favors sectors which are less technology-intensive. The persistence of the shock for some time results in a resources shift to less technology-intensive activities. As a result, the shock produces more than short-term fluctuations. When relative prices return to their pre-shock levels, the capabilities lost in the adjustment process are not easily recovered contrary to a key assumption of smooth, rather than sticky, adjustments in neo-classical economics. The economic structure that emerges after the adaptation process has lower aggregate capabilities, is less diversified and has less ability to respond to new challenges. An offset for this negative scenario is having an appropriate technology and industrial policy in place. This paper shows the above scenario as a reality for several Latin American countries, and indeed others, attempting to catch up. The dominance of neo-liberal thinking prevented appropriate policy responses and hence they fell further behind despite a favorable opportunity.

Chang, Ha-Joon

Hamlet without the Prince of Denmark: How ‘Development’ has Disappeared from Today’s 'Development' Discourse
Since the rise of neo-liberalism, the notion of development, which used to imply economic and social structural transformation, has been ‘neutered’ into marginally improving things within the given framework without fundamental socio-economic transformations. Thus development economics is now ‘economics of developing countries’ rather than ‘economics of how to transform developing countries’. The MDG (Millennium Development Goal) is basically about poverty reduction without any reference to the transformation of underlying economic structure. Doha ‘Development’ Round at the WTO is about how to make developing countries even less developed in the traditional sense, by encouraging them to specialise in agriculture even more (by opening more widely the agricultural markets in rich countries) and discouraging their industry (by forcing them to abolish tariffs). After criticising these recent trends, I would argue for a new discourse on what we may call ‘New Developmentalism’, which advances the ideas about structural transformation in old-school development economics while paying more attention to issues such as institution building, policy implementation, and social cohesion, which were poorly discussed (if not completely missing) in the traditional developmentalist thinking.

Gallagher, Kevin P., Mehdi Shafaeddin, Hong Song, and Roberto Porzecanski

Policies for Industrial Learning in China and Mexico
China's industrial development is occurring at an unprecedented rate, as shown through the increasing level of value added in its products and its export competitiveness in world export markets. The policies and performance of China stand in stark contrast to those of Mexico, where China's development is seen as “threatening” Mexican manufactures exports and development. Mexico and China share similar export structures and the share of world exports for many Mexican export sectors is contracting while China's share in the same sector is expanding at an unprecedented rate. This paper will conduct a comparative analysis of government policy in the two countries to examine the extent to which China and Mexico's industrial policies affect industrial learning and upgrading in the manufacturing sector. The paper will examine how relative trade, exchange rate, science and technology, finance, and industrial policies determine the relative decline in value added and world export markets that Mexico is experiencing vis a vis China. Lessons from this analysis will be drawn out to provide general lessons for the merits of neo-liberal development policy versus what could be termed the neo-developmental industrial strategy that is currently being practiced in China and other large developing countries.

Grabel, Ilene

Cementing Neo-liberalism in the Developing World: Ideational and Institutional Constraints on Policy Space
This paper investigates the diverse ways by which bi-lateral trade and investment agreements instantiate neo-liberalism in developing economies. They do this in a number of ways. First, they explicitly demand of governments particular neo-liberal reforms, such as the provision of national treatment of foreign investors. Second, they entail internal and external mechanisms that lock-in these reforms—not least, by creating penalties for institutional reversal. Critical in this regard are the extraordinary juridical rights provided to foreign investors to bring legal action against governments that they view as enacting measures contrary to their interests. Third, they reinforce a more general trend toward an increase in the exercise of private authority in the global economy. Fourth, and as a consequence, these agreements constrain domestic policy space to pursue developmental economic and social policies. For example, they preclude policies that prevent, ameliorate, or respond to financial crises; and bar development-oriented industrial policies.

Khan, Shahrukh

New Developmentalism
This paper contends that, in varying forms, "neo-developmentalism" is the agenda of developmental states. While there is considerable variation in detail, there are sufficient commonalities to be able to make a case for this contention. The paper first explores the historical roots of neo-developmentalism and then draws on the literature to review the agenda of the developmental state, with a particular focus on the conceptualization of industrial policy as the key element in this agenda. The paper ends with an exploration of the institutional mechanism for achieving industrial policy.

Malhotra, Kamal

National Trade and Development Strategies: Suggested Policy Directions
The impressive performances of some Asian economies, whose gains have been translated into significant poverty reduction and human development advances, have been based on a variety of innovative domestic policies and strategies underpinned by a selective, purposeful and strategic approach to economic integration and globalization. The key to their success has been the state's effective management of economic and financial globalization. The relevant policy debate, therefore, is not about whether to integrate with the global economy but how best to do so in a pro-active and strategic manner which serves to reinforce a virtuous cycle between economic growth and human development. To enable this, a key policy question is not whether governments should intervene, but how, where and when they should do so, providing leadership and showing agility in the process.
The paper has two main sections. The first one provides a global overview of the contentious and often misunderstood relationships between trade liberalization, economic growth, poverty reduction and human development, drawing on the empirical evidence globally, but particularly in the Asian region. Major lessons for policy are synthesized in this section's conclusions and inform the next section, which identifies the key ingredients of a successful policy package based on successful Asian cases. The paper emphasizes the role of public investment in all levels of education, including the tertiary level, as well as in R&D, technology policy development and infrastructure. It also prioritizes the need for strategic national trade and industrial policy focusing particularly on selective, strategic but time-bound infant industry protection, which it argues should be integrally linked to exports, technological development and public-private partnerships as key national strategies, and subject to domestic competition policy. It also emphasizes the importance of other sectoral policies, particularly in agriculture and services trade. Last but not least, macroeconomic policies which affect the exchange rate, foreign exchange reserves, interest rates and fiscal space are regarded as key to successful strategic national trade policy. Key policy messages in the current context of accelerating globalization are highlighted by way of conclusion.
This abstract is based both on the UNDP co-sponsored publication “Making Global Trade Work for People” (Earthscan, 2003) of which Kamal Malhotra was the lead author and coordinator and “National Trade and Development Strategies: Suggested Policy Directions” (April 2006), which was prepared by the author as a key background paper for the 2006 UNDP regional report “Trade on Human Terms: Transforming Trade for Human Development in Asia and the Pacific” (UNDP, June 2006). The views and interpretations in this article are those of the author and do not necessarily represent the views and policies of the United Nations Development Programme or other institutions of the United Nations system.

Ndikumana, Leonce

Enhancing the Developmental Impact of Growth in Africa: Challenges and Opportunities
Since the turn of the century, African countries have experienced substantial improvement in economic performance marked by higher GDP growth rates, increased exports and better macroeconomic balances. This growth recovery represents a major turn around from the history of economic stagnation and decline suffered over the ("lost") decades of the 1980s and 1990s. However, despite this encouraging growth recovery, African countries still face serious challenges of deep poverty, mass unemployment, high exposure to external shocks, and marginalization in the global economy.
Thus, much is needed to both accelerate growth and increase its developmental impact. This paper examines the sources of the recent growth recovery, analyzes its weaknesses, and discusses strategies for increasing growth rates, broadening the growth base and accelerating progress towards reaching national development goals.

Reinert, Erik S., Yves Ekoué Amaïzo and Rainer Kattel

The Economics of Failed, Failing and Fragile States: Productive Structure as the Missing Link
Industrialization and production systems that revolve around increasing returns activities and the synergies they create are essential for the convergence of low income countries to higher levels of income. Industrialization and knowledge creation need a strong industrial policy and governmental administrative capacity. A trade theory that does not include the synergies of knowledge production makes it possible for nations to specialize according to a comparative advantage in being poor and ignorant. The economies of failed, failing and fragile states must be restructured away from their present dependence on raw materials (diminishing returns) activities. The identification of constraints to productive networking, innovation and the building of competencies and administrative capacity are absent from current donor initiatives such as the African Growth Opportunity Act (AGOA), the Economic Partnership Agreement (EPA), Everything But Arms (EBA), the Aid for Trade package of the World Trade Organization, and other bilateral and multilateral initiatives.

Shapiro, Helen

The Pernicious Legacy of the Rent-Seeking Paradigm
This paper will argue that the rent-seeking critique of state intervention, first elaborated in the 1970s and 1980s, continues to shape mainstream policy recommendations in two ways. First, it successfully shifted the focus from markets to states, so that the untested counterfactual that state failure is worse than market failure still holds sway. Second, it has influenced the recent emphasis on state reform. The initial rent-seeking paradigm provided the theoretical basis for a minimalist state. Based on countries' experiences with economic liberalization, mainstream policymakers now argue that a reformed and strengthened state is required to implement these policies - hence, the “second-wave” of reforms. However, these reforms are motivated by an instrumental view of politics and institutions, in which the “right” institutions are those that deliver the “right” policies. Yet, the nature of those policies remains unquestioned. Moreover, an appropriately reformed state is essentially considered to be one whose policy-making apparatus is staffed by enlightened technocrats and limited to non-targeted programs in order to remain insulated from rent-seeking pressures. The paper will argue that these legacies of the rent-seeking approach have hampered the promotion of industrial policies.

Wade, Robert

The Market as Means rather than Master: The Crisis of Development  and the Need to Rethink the Role of Government
The First-World debt crisis may serve to waken minds from "the deep slumber of a decided opinion" (Mill) and direct attention to ways of "governing the market", including - as the crisis begins to sweep through them too - in developing countries.  Here I first establish why the prevailing approach to development strategy (variously called neoliberalism, the Washington Consensus, or the globalization consensus) needs rethinking of its assumptions about the role of the market and the state.  One important reason is evidence of (a) the failure of catch-up growth since the global shift towards neoliberalism in the 1980s, and (b) the plight of Southeast Asian economies, which appear to be leading contenders to enter the ranks of the "rich" countries but which are in fact caught in a "middle income" trap.  This evidence constitutes a wake-up call to individuals and organizations still convinced that market liberalization should be the microeconomic core of development strategy. 
Then I show that the prevailing neoliberal position on the appropriate role of the state in a developing market economy - to enhance the efficiency of markets and reduce transactions costs, by strengthening the rule of law, cutting corruption, reducing the regulatory burden, maintaining political stability, and so on  -- rests on strikingly weak
empirical foundations.  I elaborate an alternative "growth-enhancing" role, embracing both policies and governance arrangements.   Northeast Asian governments show effective growth-enhancing governance mechanisms in action.   
Finally I turn to the question of why the neoliberal approach has been so widely accepted in western development circles and in developing countries integrated into those circles.  The answer leads back to the fall in the share of labor and the rise in the share of capital in western GDP, and to the New Wall St System which evolved in response to these changes in income shares and intensified them further.  Neoliberal
ideology about the market and the government provided a powerful narrative to legitimize these changes.  Western development agencies translated the ideology into policy and governance agendas and projected them into the developing world, with consequences described earlier. 

Van Harten
, Gus

Investment Treaties as a Constraining Framework
The theme of 'strong states, free markets' informs the neoliberal project for restructuring of government and its regulatory relationship to capital. At the international level, this is represented by steps taken by major capital-exporting states (ie, states whose nationals own more FDI abroad than are owned within the state by foreign nationals) to establish investment treaty arbitration as a lever to constrain the democratic choice and policy space of capital-importing countries. The lever is more powerful than comparable legal mechanisms for five reasons. First, it requires capital-importing states to consent to mandatory arbitration of
disputes with any foreign investor (read, multinational firm) whose assets are subject to regulation by the state. Second, it assigns to foreign investors the triggering authority for the arbitration mechanism. Third, it creates a structural bias in favour of foreign investors by delegating to private arbitrators, rather than judges, the authority to determine the legality of regulatory acts of the state and the state's obligation to pay public funds to foreign investors. Fourth, to discipline states, it relies on broadly framed standards that are subject to wide discretion in their interpretation by arbitrators. Fifth, it utilizes the remedy of state liability and
permits enforcement of damages awards against the unsuccessful state's assets abroad.
The paper will trace the recent experience of Latin American states, including Argentina, Bolivia, Ecuador, Mexico, and
Venezuela as targets of this lever of constraint in recent years. It will in particular examine the specific operation of the legal mechanism in constraining policy space, as well as various responses to the force of the lever. It will conclude with a brief discussion of the alternative option of an international (or regional) investment court to replace the current system.

Zarsky, Lyuba

Climate Resilient Development: Can Foreign Direct Investment Play A Positive Role?
New Models and Policies for a Climate Constrained World have made clear that human adaptation to climate change is both unavoidable and urgent. The call for adaptation is coming during a period of intense globalization: the centrepiece of mainstream development policy is to maximize inflows of foreign direct investment (FDI).
What does adaptation mean in the context of development theory and policy, especially for industry growth and transformation in a global economy? What new modes of thinking and policymaking are needed to promote sustainable industrial development in a climate-constrained world? Is FDI a help or hindrance?
This paper is in three parts. Part I defines the overarching concept of sustainable industrial development (SID) and then articulates three variants:
1. Neo-liberalism Plus: Current policy framework aimed at maximizing FDI inflows by MNCs and exports plus upgrading with cleaner technology, supply chain management, and environmental management systems;
2. Green business: Pro-active and coherent industry and environment policy aimed at promoting high-employment, globally competitive industries that integrate economic, environmental and social objectives;
3. Sustainable Livelihood: Pro-active policy and public-private partnerships to create pro-poor economically viable enterprise in environmentally sensitive manner.
For each model, Part II considers the dissonance and complementarities with the neo-liberal model, the potential positive contribution of FDI, and the policy innovations that are needed to capture the positive benefits.
Part III concludes with reflections gleaned from all three models and recommendations for developing country policy in promoting a climate-constrained industrial development path.









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