The State and Neoliberalism
Based on Cypher and Dietz
The Process of Economic Development
Chapter 7
Origins of Neoliberalism?
(Economic) Liberalism: The body of economic ideas and
doctrines which suggest that unrestrained “laissez faire”
as the best means to advance the wealth of the nation.
• Basic assumption: universal economic being whose
main objective is to further her self-interest (synonymous
with maximizing consumption).
• Liberals argue that the “invisible hand” of the free
market, i.e. price mechanism, is the best coordinating
system for economic activities.
• State regulation is a source of economic inefficiency
Hence the role of the state in economic affairs should be
minimized simply to
1. Enforce property rights
2. Maintain order and social stability
3. Provide for public defense
from Economic Liberalism to
Neoliberalism
• Manchester liberals (late 18th / early 19th century England)
• Spread of the Marxist Paradigm (late 19th to early 20th
century)
• Keynesian economics (1940s – 1970s)
• Oil Crisis (1973)
• New International Economic Order (1970s)
• The Debt Crisis (1982)
• Thatcher and Reagan era (1980s)
• From Monetarism to Neoliberalism
• Retreat of Communism / Centrally Planned Government
– China Tiananmen (1989)
– Collapse of the Berlin Wall (1991)
– Dissolution of USSR (1989-1990)
Neoliberal Paradigm in
Development Economics
P.T. (Lord) Bauer (1980s)
• Field research in colonial rubber production in Malaysia
and role of traders in West Africa (Ghana and Nigeria)
• Rejects ideas of “cumulative causation” and “vicious
cycles” of poverty
• Criticism of “the developmental state” (put forth by the
developmentalist economists) on three pillars:
i. Public sector over-extended in the economy;
ii. Public sector over emphasized capital formation and mega
investment projects;
iii. Public sector causes proliferation of economically distorting
controls that create incentives for inefficient production and
inefficient economic structures.
Criticisms of Bauer
Empirical criticism: Studying West Africa which is a very
extreme and specific example and drawing
generalizations is not objective.
Public sector over-extended?
What if size of public sector itself is determined by the
degree of market failures in society?
Public sector over-emphasized the role of capitalformation in development?
Neoclassical and endogenous growth theory related
research argue and show just the opposite.
Public sector as the source of economic inefficiency?
How about market failures as sources of inefficiency?
Market Failures vs.
Government Failures
• “Government failures” at distorting markets and
causing economic inefficiency is the pillar of the
neoliberal argument for minimizing the State.
• Opponents quote “market failures” as the main
reason against the neoliberal argument.
• Market failures occur in situations in which social
costs or benefits differ from the private costs or
benefits of firms or consumers; best known
examples are public goods, externalities, and
market power
What are Market Failures?
• Inability of the market to operate in a perfectly
competitive manner
• Perfect competition ensures an equilibrium
price where
marginal cost to producers = P = marginal benefit to
consumers
Market failure = all the circumstances in which the
marketmechanism is inefficient and the above condition is not
satisfied
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Sources of Market Failures
1. Imperfect Competition
Firm sets P>MC=MR,
i.e. Consumers pay more than marginal cost because firm
produces too little
2. Externalities (can be +ve or –ve)
When one person’s actions have direct benefits or costs for
other people such that there is divergence between social
versus private costs and benefits
When a person’s consumption or production affects another
person’s production or consumptiom
• Noise from a house renovation construction;
• Gold mining in Kazdağları
• Public goods
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Private and public goods
• A private good
– if consumed by one person, cannot be consumed
by another person.
• e.g. dental treatment
• A public good
– even if consumed by one person, can still be
consumed by other people.
• e.g. street lighting
The strong externalities associated with public goods, mean
that government intervention may be justified to ensure
appropriate provision.
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Anne Kruger’s Factional State
•
•
•
•
Chief economist of World Bank (1982-87)
Deputy Director of IMF (2001 – present)
Draws on Bauer and Lal, and argues:
State’s ability to authorize licenses, provide subsidies or
tax exemptions, impose tariffs, etc. potentially leads to
“windfall profits” or “rents.”
• Those groups who receive the rents have vested
interests in creating and sustaining a factional state.
• Factional state further promotes a rent-seeking society.
• Rent-seeking society deteriorates the growth and
development process
An Assessment of
the Neoliberal Theory of the State
•
Positive contribution for endogenizing the state into development theory (rather than
treating it as an exogenous factor).
•
Neoliberal arguments are based on the presumption that minimization of the State will
create the conditions of “perfect competition”; yet usually the markets are prone to
failures themselves; e.g. tendency towards monopoly/oligopoly profits.
•
Also; prerequisites of perfect competition do not exist because society already has a
class structure where equal access to knowledge and know-how does not exist;
hence there is no equal grounds for fair competition. Consequently, gross inequalities
in income distrinution or widespread poverty emerge as common outcomes.
•
Even when competitive conditions exist, market may not provide the incentives for
undertaking of necessary investments in infrastructure, social overhead capital
(education and health system), technology R&D, etc.
•
Empirical evidence disvalidating neoliberal theory:
–
–
–
Mexico
Asian tigers (South Korea, Taiwan, Singapore, Hong Kong)
Turkey
Embedded Autonomy:
A Theory of the Developmental State
(Evans, 1995)
• The Predatory State
• The Intermediate State
• The Developmental State
– Custodian
– Producer
– Midwife
– Husbandry
Predatory state
• appropriation of unearned income via rentseeking
• Political office is a means for accumulating
wealth.
• authoritarian leader and its presidential clique;
• traditionalism & arbitrariness of pre-capitalist
countries.
• Scarcity of trained bureaucrats.
• Absence of meritocracy & rule-governed
behavior.
• LAC, Africa, Middle East.
Intermediate state
• elements of the predatory state;
• but also pockets of efficiency
– state managers’ ability & professionalism in designing
& implementing efficient developmental policies
• Yet not a full system of meritocracy
– bureaucratic fragmentation
• in some sectors professionalism
• in others corruption and patronage.
• e.g. Brazil and India.
Developmental state
• Embedded autonomy
– state apparatus & the private sector interact - constructive
– e.g. South Korea and Taiwan
• Four roles:
– Custodian:
• formulate and enforce rules and regulationswatchman/caretaker activities
– Producer:
• produce adequate social overhead capital or infrastructure public goods
– Midwife:
• steering, assisting, inducing private firms to areas of high
priority.
– Eg. Lower risks on investment by allocating credit;
providing subsidies
– Husbandry:
• undertake complementary activities to private sector
– R&D; production of technologically challenging inputs to
The developmental state
D e v e lo p m e n ta l
S ta te F o rm a tio n
=
Pow er
+
↓
c o h e s iv e c a p a c ity to :
• d ir e c t & p r io r itiz e a
P u rp o s e
+
C a p a c ity
↓
↓
( m o b iliz a tio n o f a
d e v e lo p m e n t v is io n )
( c o m p e te n c e
↓
c iv il s e r v i c e
•d em an d p erfo rm an ce
I S I & /o r E L I
• m e r it - b a s e d
( p o lic y )
em beddedness)
↓
d e v e lo p m e n t p r o je c t
c o m p lia n c e ( a u to n o m y )
↔
• r u le - b a s e d
• m a in ta in a n a ll ia n c e
• in te r - a g e n c y
w ith b u s in e s s e lite
co h eren c e
↓
in d u s tr y - s ta te b o a r d s
↓
p r o d u c tio n /k n o w le d g e b a s e
↓
te c h n ic a l, m a n a g e r i a l, la b o r
• d ire c tin g a n d p rio ritiz in g a d e v e lo p m e n t p ro je c t = c o h e r e n c e
• t o d e m a n d a n d a c h i e v e p e r f o r m a n c e c o m p l i a n c e = d is c i p l i n e c a p a b i l i t y
Thailand
Board of Investment, 1960
Promotion of Industrial Investment Act
S T IM U L U S P O L IC IE S
P ER FO R M A N C E STA N D A R D S
1 . T a x E x e m p t io n s
E x p o rt T a rg e ts
2 . T a r if f P r o t e c t io n
L o c a l- C o n t e n t S t a n d a r d s
3 . S u b s id iz e d C r e d it ( L o a n s )
D e b t / E q u it y C e ilin g s
4 . D e v e lo p m e n t a l B a n k s
N a t io n a l O w n e r s h ip F lo o r s
5 . E n t r y R e s t r ic t io n s
6 . S p e c ia l B e n e f it s t o
F o r e ig n F ir m s
7 . Im p o r t D u t ie s o n L u x u r ie s
8 . D u t y E x e m p t io n s o n M a c h in e r y
( n o t m a d e in T h a ila n d )
O p e r a t in g S c a le M in im a
H ir i n g L o c a l M a n a g e r s
T e c h n o lo g y T r a n s f e r s
I n v e s t m e n t T im e T a b l e s
R e g io n a l L o c a t io n
R e q u ir e m e n t s
Amsden (2001: 20-24)
Korea
The case of advanced electronics
• 1970s, key sector for promotion
• two previous decades: electronics assembly industry
• to make the leap into the production of high value-added
products, demanding advanced technologies
• government- funded and run Electronics and
Telecommunication Research Institute (ETRI)
– 1,200 highly skilled technicians and research personnel
– to develop the technology for the production of large-scale
computer chips
– to match the pace of technological advance in the semiconductor industry set by Japan
– Cooperative research conducted by the industry and the
government
• involved with industrial giants Samsung and Goldstar
• Selective prodding by the government,
• the allocation of generous loans
• workers’ wage were able to rise too
•
Amsden (1989: 81–83); Evans (1995: 141).
The Brazilian state: the intermediate state
Source: Cypher & Dietz (2004): p. 216
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The South Korean state: the development state
Source: Cypher & Dietz (2004): p. 217
20