Two conflicting perspectives on the role of the government
came to prominence in the 20th century, namely the neoclassical view
and the state-interventionalist view. The neoclassical explanation, or often
referred to as the Washington Consensus, due to strong connections to the US government and to Washington D.C. based
organizations such as the IMF and the World Bank, takes a market-enabling
position as the best method of achieving growth and industrial transformation.
This was the predominant explanation in the latter half of the 20th
century, particularly among the governments of western industrialized
countries. An opposing view, namely, the statist view, or
state-interventionalist perspective, also held solid support, taking a position
that a government intervening in the market can produce higher growth rates and
exacerbate 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 development
economics (UNECA, 2016, p. 28). However, since the turn of the 21st century, a new camp has emerged, taking a different
approach, that of the institutionalist perspective. This approach has particularly
gained ground since the 2009 recession with
the focus on the institutional context within a country. Since large
collections of each perspective are widely
available, this section provides only an overview, summarizing the primary
arguments, the strengths, and the weaknesses of each theoretical perspective.

2.1. Neoclassical Explanation

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neoclassical explanation of industrial transformation is rooted in free-market
economics and comparative advantage. This “market-friendly” view argues that
the best method of achieving industrialization, and economic growth in general,
is for the government to take> a “limited,” “passive” role, focusing on the
basics of governance (World Bank, 1993, p. 10). This means creating a “stable macroeconomic
environment and a reliable legal framework to promote domestic and
international competition” (World Bank, 1993, p. 9). Economic openness is
regarded as a key factor in the neoclassical
theory; openness to international trade encourages technological
adaptation, learning, entrepreneurial maturation and provides access to larger
markets allowing developing countries to fully exploit their comparative
advantages (Wang, 2000). The role of the government,
aside from the previously mentioned stable macroeconomic environment and legal
framework, is to provide education, healthcare, and public infrastructure, as
well as to remove any distortionary policies.

            The primary
strength of this theoretical perspective lies in the responsibility it places
on governments to deliver public goods. By placing the role of the government
on limited and general policies, then if the policies fail, the policies may
have still produced positive public goods, which may have long-term benefits.1
These public goods, such as health and education improvements and
infrastructure, can still be a societal benefit even without any economic
benefit, 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 and
macroeconomic stability and rule of law can hardly be argued against with any
economic views. Therefore, the greatest strength of the neoclassical view in
terms of the role of the government is in its promotion of societal-wide intrinsic

            The most
apparent weakness of the neoclassical view on the role of government is the
assumption that government failure is somehow worse than market failure (Wade,
2010). Frequent mention of the failures in Latin America and Sub-Saharan Africa
may be easily used to back up these claims; however, two poignant examples of
the East Asian Tigers’ experience and the Great Recession, both provide
contrary arguments.2 The
neoclassical view provides limited insight into how exactly greater openness to
international trade facilitates the industrial transformation, upgrading, and
long-term growth. Wang (2000) argues that the high significance of trade
openness is a view of looking from the top down
or looking from the perspective of developed countries. Such an argument is
highly disputed as many now developed countries utilized protectionists
policies at some point in their histories (UNECA, 2016; Wang, 2000). Wade (1990,
pp. 14-22; 2010) finds evidence that contradicts the assumption of trade
openness 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 rather
than specialization as a driver of growth.

1 Fail in this instance can be
regarded 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 to
exemplary growth, while the Great Recession provides an example of market
failure with consequences on a global scale.


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