The Changing Ingredients in Industrial Policy for Economic Growth: Moving Beyond Market Fundamentalism and Institution Fundamentalism
31 Pages Posted: 13 Feb 2012 Last revised: 23 Mar 2020
Date Written: August 11, 2012
The literature on the industrialization process in East Asia and Latin America South Korea is like the fable of the three blind men who were asked to describe an elephant after touching it. The literature has now evolved from the debate between the Washington Consensus framework and the Developmental State framework to their fusion in late 1990s to the currently dominant growth paradigm of Institution Fundamentalism. We argue here that Institution Fundamentalism is gravely flawed because it pays inadequate attention to the role of geography and science in economic growth. The outcome is that Institution Fundamentalism does not recognize the existence of growth traps, and hence advocates self-help as the best cure for poverty.
The neglect of geography has meant denial of the virulence of diseases and the limited potential for large gains in agricultural productivity in the tropics as key obstacles to growth in most of Africa. This is why Institution Fundamentalists ignore the obvious biology-based explanation for the upward income gradient that begins at the equator and, propose the alternate explanation that the distance from the equator proxies for the relative penetration of European economic institutions (and European-style economic institutions are the ultimate engines of growth).
We note that there was nothing automatic about the catching up phenomenon in the United States; it occurred because of the massive state investments in the poor regions e.g. rural electrification, an extensive national transportation system, large-scale water works projects implemented through the Army Corp of Engineers. If we take an extremely destitute medium-size landlocked country (surrounded by poor neighbors) that has no vibrant income growth in any of its provinces, the scope for cross-region subsidies is non-existent. Hence, some extremely poor countries are caught in poverty traps because they are too poor to make the critical amount of investments that will free them from the interlocking vicious cycles of illiteracy, disease, physical isolation and poverty. The self-help logo of Institution Fundamentalism can unfortunately serve as a cover for moral callousness.
One effective instrument that the Federal government used to promote growth in the poorer US states was the land grant state university system. The state universities not only increased human capital formation but also mobilized science to overcome the ecology-specific barriers to higher productivity yield in agriculture and to better health within the local populations. Thus, for many of the least developed economies, where agricultural would continue to be the mainstay of their economies, the developed countries should focus a large part of their increased aid to raise agricultural productivity and demand for the agricultural output through the application of science, establishing regional agriculture research centers for each of the distinct ecosystems in the least developed countries (e.g. tropical monsoon region of East Asia, high plateau area of Latin America, and tropical grassland territory of Africa).
In short, we must now add the three ingredients of 'get the physical infrastructure right', 'get the external assistance right' and 'get the science right' to the existing recipe of 'get the prices right', 'get the macro balances right' and 'get the institutions right'. We predict that many more principles will be added to the recipe book for growth as we understand more about the development process in different growth stages and in different time periods with different international environment.
Keywords: industrial policy, economic growth, Washington consensus, development state, institution fundamentalism, poverty trap, foreign aid, East Asia, Latin America, Africa, Taiwan, South Korea
JEL Classification: B500, F130, F140, N150, N160, O100, O140, O190, O250, O430, O530, O540
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