1. The State and Neoliberalism
Based on Cypher and Dietz
The Process of Economic Development
Chapter 7

2. 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

3. 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 ( )

4. 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.

5. 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 capital-formation 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?

6. 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

7. 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

8. Sources of Market Failures
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

9. 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
See Section 16-2 of the main text
The strong externalities associated with public goods, mean
that government intervention may be justified to ensure
appropriate provision.

10. Anne Kruger’s Factional State
Chief economist of World Bank ( )
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

11. 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

12. Embedded Autonomy: A Theory of the Developmental State (Evans, 1995)
The Predatory State
The Intermediate State
The Developmental State
Custodian
Producer
Midwife
Husbandry

13. Predatory state appropriation of unearned income via rent-seeking
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.

14. 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.

15. Developmental state Embedded autonomy Four roles: Custodian: Producer:
state apparatus & the private sector interact - constructive
e.g. South Korea and Taiwan
Four roles:
Custodian:
formulate and enforce rules and regulations- watchman/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 private industry, etc.

16. The developmental state

17. Thailand Board of Investment, 1960 Promotion of Industrial Investment Act
Amsden (2001: )

18. 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 semi-conductor 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).

19. The Brazilian state: the intermediate state19
Source: Cypher & Dietz (2004): p. 216

20. The South Korean state: the development state20
Source: Cypher & Dietz (2004): p. 217