State- led development models
Early theories of state led development
1. Keynesian thought
- Emphasis on full employment and demand-driven growth (low demand = high
unemployment)
- Role of state is to stimulate economic growth, not to leave economy activities in the
hands of the market
- Strategy: Fiscal expenditure and taxation measures to stimulate aggregate demand
- Examples: Public works infrastructure to generate employment and state-run central
banks to lower interest rate (make borrowing cheaper)
2. Albert Hirschman
- Problem of underdevelopment is lack of entrepreneurial skills and managerial
knowledge (investment across industries not suitable for developing countries)
- State must protect and invest in a small number of strategic sectors (high capacity to
generate supply and demand for other sectors)
- Role of the state: to foster unbalanced growth by picking winners and losers through
sectoral intervention
- Example: Investment in steel high demand for iron construction and automotive
3. Structuralism in Latin America
- Prebisch and Singer
- Declining terms of trade between cheap primary goods and expensive manufactured
imported goods
- Strategy: Block imports in the name of industrialization (ISI model)
- Progressive taxation and nationalization of strategic industries
, A knowledge-based asset approach to
development
- Economic development as a move from a set of assets based on primary products (raw
materials, commodities) exploited by unskilled labour towards assets based on
knowledge exploited by skilled labour
- Human and physical capital from rent-seeking, commerce and agriculture into
manufacturing
- Knowledge-based assets: a set of skills that allow producers to sell and distribute their
products at above market prices
- Perfect knowledge impossible to achieve = firm specific and proprietary to earn
technological rents
Features of non-industrialized economies
- Too few knowledge-based assets lack of competitiveness among countries despite
their comparative advantage
- Technology difficult to acquire and managerial expertise absent
- Model of comparative advantage does not hold anymore!
o latecomers = poor + lower wage vs. industrialized = higher productivity
o Industrialization by subsidizing learning rather than cutting wages
o Example: Martial law in Korea and Taiwan BUT interventionist, institutional
solutions also put forward
Key strategies of NICs
1. Getting the prices wrong
- Economic engineers’ job was to make manufacturing profitable
o Rest are price takers; goal was to circumvent prevailing market prices
o Strategy: Get the price wrong while reinforcing the principle of reciprocity
o Ex 1: Cotton textile industry protected from competition under condition of fulfilling X
targets
o Example 2: Right to sell under tariff protection in domestic markets in automobile was
tied to ’localization of parts and components of manufacture’
2. RCM
- 1950s onwards systematization of how subsidies were allocated (except in Argentina)
o Corruption was managed by letting owners of capital go bankrupt and ensuring
production capacity is intact
Early theories of state led development
1. Keynesian thought
- Emphasis on full employment and demand-driven growth (low demand = high
unemployment)
- Role of state is to stimulate economic growth, not to leave economy activities in the
hands of the market
- Strategy: Fiscal expenditure and taxation measures to stimulate aggregate demand
- Examples: Public works infrastructure to generate employment and state-run central
banks to lower interest rate (make borrowing cheaper)
2. Albert Hirschman
- Problem of underdevelopment is lack of entrepreneurial skills and managerial
knowledge (investment across industries not suitable for developing countries)
- State must protect and invest in a small number of strategic sectors (high capacity to
generate supply and demand for other sectors)
- Role of the state: to foster unbalanced growth by picking winners and losers through
sectoral intervention
- Example: Investment in steel high demand for iron construction and automotive
3. Structuralism in Latin America
- Prebisch and Singer
- Declining terms of trade between cheap primary goods and expensive manufactured
imported goods
- Strategy: Block imports in the name of industrialization (ISI model)
- Progressive taxation and nationalization of strategic industries
, A knowledge-based asset approach to
development
- Economic development as a move from a set of assets based on primary products (raw
materials, commodities) exploited by unskilled labour towards assets based on
knowledge exploited by skilled labour
- Human and physical capital from rent-seeking, commerce and agriculture into
manufacturing
- Knowledge-based assets: a set of skills that allow producers to sell and distribute their
products at above market prices
- Perfect knowledge impossible to achieve = firm specific and proprietary to earn
technological rents
Features of non-industrialized economies
- Too few knowledge-based assets lack of competitiveness among countries despite
their comparative advantage
- Technology difficult to acquire and managerial expertise absent
- Model of comparative advantage does not hold anymore!
o latecomers = poor + lower wage vs. industrialized = higher productivity
o Industrialization by subsidizing learning rather than cutting wages
o Example: Martial law in Korea and Taiwan BUT interventionist, institutional
solutions also put forward
Key strategies of NICs
1. Getting the prices wrong
- Economic engineers’ job was to make manufacturing profitable
o Rest are price takers; goal was to circumvent prevailing market prices
o Strategy: Get the price wrong while reinforcing the principle of reciprocity
o Ex 1: Cotton textile industry protected from competition under condition of fulfilling X
targets
o Example 2: Right to sell under tariff protection in domestic markets in automobile was
tied to ’localization of parts and components of manufacture’
2. RCM
- 1950s onwards systematization of how subsidies were allocated (except in Argentina)
o Corruption was managed by letting owners of capital go bankrupt and ensuring
production capacity is intact
