Industrial policy has played a major role in enabling the Chinese ‘economic miracle’ in recent decades. This kind of catch-up development requires institutional and policy incentives for firms to learn to acquire and use existing technologies. China seems to have had success in this area, but its extent and future prospects, particularly in relation to its large state-owned enterprises, remain subject to debate. It is widely recognised that reforms are now needed, but at the interface between industrial and macro policy, the state is finding it hard to achieve what is necessary economically.
This week’s Economist magazine features a useful article on China in its Business section. It argues that foreign multinational companies (MNCs) with operations in China are finding it harder to compete with domestic firms that are becoming increasingly successful in supplying their home market. Many of the latter have been closing the technological gap with their foreign-owned rivals. While the article does not consider the implications of this for assessing the success of China’s industrial policy, the evidence is provocative. This post will attempt to outline the theory of industrial policy for ‘catch-up’ development and its application in China in recent decades since the period of ‘reform’ and ‘opening up’ began in the late 1970s. Continue reading →
Mushtaq Khan is a professor of economics at SOAS, and has dedicated much of his career to researching ways of tackling corruption in developing countries as part of a successful long term development strategy. Corruption itself need not be a barrier to development. Historically, the effective checks and balances which counter it have tended to emerge with successful development rather than preceding the the process. Khan argues that, rather than corruption being necessarily ‘cultural’ or innate to individuals in a poor society, it is more often contextual, depending on economic structure and power relations. It can therefore be changed through policies which incentivise productivity growth and the expansion of the formal sector in developing countries, typically on a small scale which is more feasible to begin with, but ultimately on a larger scale by promoting broader socioeconomic development.
This video features Professor Khan talking about all of this. He covers some fascinating and important ideas. The first ten minutes cover the main points if that is what you’re after, but watching the whole video is more rewarding, particularly for those of you interested in this oft-neglected but vital area of development studies.
I have resisted posting my top ten most viewed posts over the last twelve months; nevertheless this post takes a longer view back in time to assess the content and direction of this blog, and looks forward to the year ahead in the worlds of economics and political economy. The Political Economy of Development is perhaps a bit of a mouthful and not very catchy as a blog title, but it was in fact the name of my masters degree course at SOAS in London which, although my studies there finished 20 years ago, continues to inspire my thinking and writing. This blog is an outlet for both. The economics department at SOAS is well known for its focus on development, and on political economy and heterodox or non-mainstream approaches to it in particular.
Despite the blog’s title, I do not focus exclusively or even mostly on development, developing countries or emerging markets. As something of a get-out, I take the view that the process of economic and social development is ongoing and does not stop if or when countries ‘graduate’ to ‘advanced’ status and relatively high levels of income and wealth. Successful development is also more than a simple rise in GDP or national income. It is a process of socioeconomic transformation, encompassing technological progress, rising productivity and living standards, creative destruction a la Schumpeter (as old industries decline and new ones expand), and social and political change. If such processes are to be successful, we now realise that they need to be sustainable, economically, socially and environmentally, or they will undermine the very basis of human progress. Continue reading →
In this post I praise a new book on how innovation in the form of creative destruction drives economic growth and the implications of this for a wide range of contemporary economic problems. I go on to suggest that, despite this, a richer political economy approach can offer some deeper insights into such problems, with some of the ideas examined in the book as points of departure.
This blog is often critical of mainstream economics, broadly conceived. A new book exploring what it calls the “upheaval” generated by capitalism which it argues is part of the process of wealth creation has made me question this negative attitude, to a degree. The Power of Creative Destruction by Philippe Aghion, Céline Antonin and Simon Bunel argues that cumulative innovation is the main source of the growth in output and productivity which underpins collective prosperity. Creative destruction is a term originally coined by Joseph Schumpeter to describe the turbulent processes which result as entrepreneurs innovate, generating new products and processes, enter and disrupt old markets, create new ones, and innovations diffuse throughout the economy, driving the constant change that a successful capitalism seems to require. Continue reading →
This is the second in a series inspired by Vince Cable’s new book Money and Power. It follows last week’s discussion of history as a great deal more than the story of “great men”. Since the book takes great men (and women) and their making of economic history as its focus, I will once again take this as my point of departure, but this time I will explore some of the deeper and more complex reasons for developmental success, or otherwise.
As already pointed out, (economic) history is much more than the story of great men and their actions when in power. One of Cable’s central themes in the book is the economic ideas which his politicians drew on to inform their policies: they were all, he argues in the spirit of John Maynard Keynes, “slaves of defunct economists”. Ideas are undoubtedly important, but the focus on a few powerful individuals remains a somewhat popular analysis. It is perhaps apposite in an age of celebrity and social media influencers, but I would point out that more can be gleaned from a broader social science, and in particular from political economy. Continue reading →
This brief article draws on the research of the authors and the ACE to outline some general principles for developing countries to use in their response to the Covid-19 pandemic, particularly in scaling up the overall response via a coordinated effort from a variety of agencies.
The authors write:
“the reality is that in many countries, corruption and governance constraints will limit the rapid scaling up of responses to COVID-19. As we explain in a SOAS-ACE policy brief, this will not only undermine treatment responses, but result in cycles of unsustainable lockdowns and massive economic deprivation.”
“…The enormity of the crisis justifies thinking in terms of a wartime response and asking how the different parts of this strategy could be provided by mobilizing different delivery agencies to achieve the most cost-effective and rapid scaling up.”
“[D]eveloping countries could temporarily mitigate corruption and low capacity by involving public, private and third sector actors to enable scaling up on the basis of revealed competence. This does not get rid of corruption but reduces its level to maximize scaling up. This is very different from the optimization strategy of standard economics.
…[In addition] we were deliberately suggesting building in redundancy. In a storm, even if you are building a small hut, you would do well to build some redundancy into each wall. A leaner approach may look more cost effective, till the storm blows it away. It is only if developing countries have an effective strategy of strengthening their health responses in the storm can lockdowns be relaxed in a sustainable way.”
Last week I finished some lockdown reading, following my perennial interest in industrial policy and how it impacts development. This time it was the edited 2019 volume How Nations Learn, subtitled Technological Learning, Industrial Policy and Catch-Up.
HNL explores industrial policy in the context of ‘learning’ by governments and firms in ways which can accelerate industrial growth and development. That is, learning by governments in the process of policy making for development and learning by firms in the form of using and adapting already existing technologies to drive productivity growth in the catch-up process.
It is fair to say that most of the chapter authors hold to the idea that industrialisation and the growth of the manufacturing sector in late (relative to today’s advanced countries) developers is a primary driver of learning and of development. In this vein development is seen as more than periods of growth, but as an economic transformation. It is this continuous transformation in economic structure which makes long term growth and broad increases in living standards possible. Continue reading →
There has been a resurgence of interest in the theory and practice of industrial policy in recent years. To many, the financial crisis of 2008 exposed a general failure of the ideology, if not the practice, of a minimal state. Although the interventions that resulted were necessarily imperfect, they reawakened among more mainstream economists and other social scientists ideas that had for some time been confined to the heterodox margins of academia, at least in economics.
Meanwhile, the experiences of economies in East Asia, such as Japan, South Korea, Taiwan and Singapore, which all experienced significant periods of rapid catch-up growth to advanced country status, revealed that, if one cared to look closely enough, industrial policy had never really gone away.
Moving to the present day, policy-makers all over the world have engaged in unprecedented intervention to try and protect parts of the economy during the Covid-19 pandemic and subsequent widespread lockdown. While these are more general than traditional industrial policies, those economists more sympathetic to state intervention are making the case that economies should learn some lessons from the current crisis, such as that there is very often a need for the state to work with the private sector to tackle public ‘missions’ at the national and international levels. Continue reading →
In the video, Khan ranges over the differences between ‘rule-following’ in advanced and poor countries, and the incentives facing individuals in economies which are largely informal.
He makes a point of distinguishing between forms of corruption which are damaging for growth and development and those which are associated with the promotion of these processes. He cites examples from the past such as South Korea, Taiwan and China where the latter has occurred.
Khan also mentions the problem of reform fatigue in cases where plenty of money and effort has been spent fighting corruption with little in the way of positive results. The answer, he says, is not to give up, but to intervene in ways which actually work. This may involve policies which operate at a relatively small scale to begin with, rather than blanket top-down interventions, so that successes are sustainable and gradually build support for further changes across the economy and society.
Corruption is generally seen as a major social problem, and is particularly prevalent in many developing countries (DCs), but also to a lesser degree in middle income and advanced economies. We frequently read in the media about new political leadership in all sorts of places promising to fight corruption in order to improve the social, political and economic environment, from China and Angola to South Africa and Mexico, to take some fairly recent examples.
Unfortunately, such battles against corruption in DCs frequently end in failure, an outcome that is demoralising, not least for the populations of the countries concerned, but also for those external actors who set great store by these kinds of reforms.
Corruption is often conceived of as a moral issue, but some heterodox economists have argued that it is frequently much more than this. They contend that it is more a political and structural problem symptomatic of societies undergoing change as new social forms struggle to emerge. This is typically the case in poor countries experiencing a socioeconomic transformation towards capitalism. Continue reading →