Two conflicting perspectives on the role of the governmentcame to prominence in the 20th century, namely the neoclassical viewand the state-interventionalist view. The neoclassical explanation, or oftenreferred to as the Washington Consensus, due to strong connections to the US government and to Washington D.C. basedorganizations such as the IMF and the World Bank, takes a market-enablingposition as the best method of achieving growth and industrial transformation.This was the predominant explanation in the latter half of the 20thcentury, particularly among the governments of western industrializedcountries. An opposing view, namely, the statist view, orstate-interventionalist perspective, also held solid support, taking a positionthat a government intervening in the market can produce higher growth rates andexacerbate industrialization. The two opposing perspectives on IP and the role of the government in enabling industrialization have made up one of the most divisive debates in the field of developmenteconomics (UNECA, 2016, p.
28). However, since the turn of the 21st century, a new camp has emerged, taking a differentapproach, that of the institutionalist perspective. This approach has particularlygained ground since the 2009 recession withthe focus on the institutional context within a country. Since largecollections of each perspective are widelyavailable, this section provides only an overview, summarizing the primaryarguments, the strengths, and the weaknesses of each theoretical perspective. 2.1.
Neoclassical Explanation Theneoclassical explanation of industrial transformation is rooted in free-marketeconomics and comparative advantage. This “market-friendly” view argues thatthe best method of achieving industrialization, and economic growth in general,is for the government to take> a “limited,” “passive” role, focusing on thebasics of governance (World Bank, 1993, p. 10). This means creating a “stable macroeconomicenvironment and a reliable legal framework to promote domestic andinternational competition” (World Bank, 1993, p.
9). Economic openness isregarded as a key factor in the neoclassicaltheory; openness to international trade encourages technologicaladaptation, learning, entrepreneurial maturation and provides access to largermarkets allowing developing countries to fully exploit their comparativeadvantages (Wang, 2000). The role of the government,aside from the previously mentioned stable macroeconomic environment and legalframework, is to provide education, healthcare, and public infrastructure, aswell as to remove any distortionary policies. The primarystrength of this theoretical perspective lies in the responsibility it placeson governments to deliver public goods.
By placing the role of the governmenton limited and general policies, then if the policies fail, the policies mayhave still produced positive public goods, which may have long-term benefits.1These public goods, such as health and education improvements andinfrastructure, can still be a societal benefit even without any economicbenefit, as opposed to sunk costs of firm-specific industrial policy failures,which the neoclassical view sees as propping up inefficient enterprises. Furthermore,either under neoclassical or interventionists policies, political andmacroeconomic stability and rule of law can hardly be argued against with anyeconomic views. Therefore, the greatest strength of the neoclassical view interms of the role of the government is in its promotion of societal-wide intrinsicgoods. The mostapparent weakness of the neoclassical view on the role of government is theassumption that government failure is somehow worse than market failure (Wade,2010). Frequent mention of the failures in Latin America and Sub-Saharan Africamay be easily used to back up these claims; however, two poignant examples ofthe East Asian Tigers’ experience and the Great Recession, both providecontrary arguments.2 Theneoclassical view provides limited insight into how exactly greater openness tointernational trade facilitates the industrial transformation, upgrading, andlong-term growth. Wang (2000) argues that the high significance of tradeopenness is a view of looking from the top downor looking from the perspective of developed countries.
Such an argument ishighly disputed as many now developed countries utilized protectionistspolicies at some point in their histories (UNECA, 2016; Wang, 2000). Wade (1990,pp. 14-22; 2010) finds evidence that contradicts the assumption of tradeopenness and upward mobility, noting the presence of a middle-income trap. Furthermore,the significance of comparative advantage has been disputed by Rodrik (2004)and Lin and Chang (2009), who note the importance of diversification ratherthan specialization as a driver of growth.1 Fail in this instance can beregarded as a failure to catalyze industrial growth and broader economic growth.2 The Asian Tigers’experience is argued to provide evidence of government intervention leading toexemplary growth, while the Great Recession provides an example of marketfailure with consequences on a global scale.