Paradigm Lost

DEV-IN-TRANS-BANNER

By Helmut Reisen, Scientific Advisor to the Perspectives on Global Development 2019


This blog is part of an ongoing series evaluating various facets
of Development in Transition. The
2019 “Perspectives on Global Development” on “Rethinking Development Strategies” will add to this discussion


lost-paradigmEconomics has adopted an introspective mindset since the global financial crisis erupted ten years ago. The ´markets-work-wonders´ formula of the 1980s embraced such characteristics as state withdrawal from public services, curtailment of social benefits, deregulated and borderless finance, privatised pensions, and weakened workers’ bargaining rights. At times imprecisely dubbed ´neoliberalism´1 it had 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 European Union and the United States alone.2

The free market paradigm had been oversold as the only way to achieve prosperity, resulting in liberal delusion. The ´End of History´3 — Western civilisation as the natural order of the modern world — didn´t materialise. Instead, we witness state-led prosperity in Asia, but backlash against globalisation and rising populism in market democracies4. Middle-income class concerns in advanced countries have identified bottlenecks, particularly with respect to research and development, upgrading, and skills development. Industrial and place-based regional policies are back on the table.

Indeed, new initiatives are trying to find a new economic paradigm, yet a new unifying formula is not in sight.5 So what could help find a way forward? 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

First, development theory. The 1940s and 1950s saw a vivid debate on how to develop the newly independent nations that were to overcome colonial rule. Development economics was born with theories 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 industrialisation as crucial to catch-up. These early contributions help with today’s search for a new economic paradigm. These works emphasised 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 dual 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. Such a view implied a powerful case for government activism as a way of breaking out, especially for building hard infrastructure and providing universal public education. However, attitudes about the state today remain much more dismissive in most advanced countries than they were up to the mid-1970s.

Second, the role of the state. Until recently, the state’s ability to achieve economic goals has been routinely denigrated. Yet what do Singapore’s move to the top league of the world’s rich countries, China´s uninterrupted fast-growth cruise over 40 years in the face of misguided collapse scenarios and landlocked Rwanda´s rise from the ashes of bloody genocide suggest? In terms of economic growth, health and education, the rise of developmental states — accountable autocracies — have outperformed democracies in certain cases.8

Haggard (2018)9, for one, reviews the concept of the developmental state that emerged to explain the rapid growth of East Asian countries. In a second-best world with substantial market imperfections, state intervention can better solve collective action and co-ordination problems, involving private actors and civil society in an iterative process. Based on a generous state supply of hard and soft infrastructure, effective industrial policies, helped by selective trade interventions and direct foreign investments, are forged. Governments, capable of the patient, long-term, strategic approach essential for innovation, 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, the development state needs constraining private power and imposing discipline on private actors. Such discipline is necessary not only for effective industrial policy but also for transitions toward more market-oriented policies, according to Haggard´s review of the evidence. As Danny Quah explains in a fascinating Ted Talk,11 the strong and responsible development state is duty-oriented rather than rights-based; the alternative to the free market democracy is far from the caricature sometimes drawn of a corrupted, extractive, rapacious structure that exploits its people.

Third, the global economy’s centre of gravity has shifted toward Asia. The rise and fall of superpowers historically first occur in economics, then politics and policy paradigms, and 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.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 different stages of institutional development, market informality and duality, perhaps along the ideas outlined in the structural economics of Justin Lin.13

OECD standards and best practices built up over the years are essentially Western, formed in a market economy, decentralised and unauthoritarian setting. They are quite different from Eastern policy lessons and paradigms. The only way forward then, however difficult, might be a fusion rather than an imposition of standards.14



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.

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.

14.Helmut Reisen (2011), „The OECD at 70“, shiftingwealth.blogspot.com, 11th October.