Compare and Contrast Neoliberal(Neoclassical) Development Theory vs Development State Theory

There are two prominent development theories that suggest on how a state can develop its country: neoliberal theory and development state theory. The suggestions made by these two theories are almost completely contradict with each other. Neoliberal theory for development believes that the state role in the economy ought to be minimal and the market should be left to the free dealings of its citizen, and the organizations they freely choose to establish and take part in (Dag Einar Thorsen, Amund Lie, n.d.). On the other hand, development state theory believes that for one country to develop, the government needs to play an important role in the economy by directing the economy rather than let the market itself drives the economy.  Most developed countries support neoliberal dominant theory for development policies while many other developing nations, especially East Asia countries, advocate development state theory. There has been a lot of discussions about which of these two development theories is better for development policies. In this essay, we would like to compare and contrast the suggestions of neoclassical view versus the suggestions of heterodox economics view on four main components of development policies in each state: industrial policy, international trade, foreign direct investment (FDI), and macroeconomics policy.

To begin with, neoliberal dominant theory has been the dominant development theory during this last decade. Neoclassical ideology has been utilizing by World Bank, International Monetary Fund and World Trade Organization to advice developing countries on how they can develop their countries. Neoliberal view advocators believe on market efficiency. They claim that the market can produce an efficiency outcome by itself and market failures are usually the result of the government actions try to correct the market. Extensive state intervention for local firms/ particular industries can cause domestic firms to rely heavily on their state in which they cannot generate efficient industries (Onis, 1991). In addition, it is also hard for the state to choose which firms to support and what firm's/industry's criteria should be qualify for state invention. Thus, the state should give equal opportunity for all local firms and should not provide any subsidiary to any particular industry. Neoliberal theory is the main advocator for free trade policy. It suggests that free trade competition will lead to innovation efficiency. In this respect, local firms will try to develop technology to increase efficiency in their productions because of an immense competition in the international market. If the state wants to impose infant industry policy as heterodox economics view suggests, this will hurt consumers as they cannot enjoy the full benefits of economies of scale and also inefficient companies will benefit from this policy. In order to attract FDIs, the home country government needs to establish good institutions like rule of law, property rights, contract enforcement, propose a set of regulations, and social insurance. Furthermore, the state should not impose any requirement on foreign firms who invest its own territory as the requirements could discourage investors. It is possible, but not require, for the state to implement regulations that favor FDI in positive list industries. However, it should be noted that the government role in facilitating FDI should be only very limited in neoliberal dominant theory. Neo-classical theory also explains that in order to stabilize the economy for prosperity growth, the state should implement inflation targeting policy. If the government allows the inflation to vary accordingly to the market, this can lead to instability in the future which can destroy the prospect growth of the market.  

Moving onto development state principle, a development state usually has a strong state intervention, and extensive regulations and planning imposed by the state. Development state policy has been used successfully by East Asia countries such as Hong Kong, Taiwan, and South Korea to develop their countries to emerge from the Third World countries. Development state theory suggests that all four main components of development policies require an intervention from the state. To begin with industrial policy, a government needs to direct and subsidize a selective group of industries in which its country has a comparative advantage or it deems to have potential growth in the future. Without government intervention, firms in developing nations can barely compete with firms in developed nations as firms in developed countries are already well established and be able to operate efficiently. A state cannot provide incentives/subsidies to every industry in its economy due to resource limitation; thus, there is a need to “pick winners”. By picking winners, a country can focus its resource allocation toward a small group of industries rather than spreading its resources across different industries which can reduce its effectiveness. However, it is important for the government to impose stringent performance requirements on selective firms in return for the subsidies it has provided. If the government does not set goals and stringent policy, firms are unlikely to develop under government subsidize scheme as they rely on supports from the government and do not put an effort to improve their productions. Hence, development state theory advises the government selective industrial policy should only be used temporarily. After a selective group of industries has been nurtured, the government should abandon this policy and expose those selective industries to international competition. Moving onto international trade policy, development state view suggests the state in each country to implement strategic trade policy in order to serve industrial policy. As mentioned earlier, the state should select a couple of important industries (Picking Winners) in the economy and impose tariff policy on these industries to protect them. If the government allows free trade competition as neoclassical view suggest, it will ruin local industries since firms in Third World countries often do not have the economies of scale that their older competitors from other developed countries may have. Nonetheless, it should be noted that high tariff policy for any particular industry is hard to implement these days than in the past because of WTO agreements in which WTO requires all its member countries to liberalize their trades. Similar to neoclassical view for FDI policy, development state theory also recommends the government to establish good institutions and encourage foreign investors to invest in positive list industries. Beyond this suggestion, development state concept also urges the government to impose regulations that require foreign companies to include local products into their productions and transfer technology to local firms after a specific period of time. If there are no such requirements for localization and technology transfer, there will be no much positive spillover effects on local firms/home country from FDI. Rather, it would hurt some local firms in the industries in which there is a huge foreign direct investment.  In contrast with neoliberal dominant theory that suggests a state should pursue inflation targeting policy, development state theory encourages the government to implement pro-growth policy which allows for some inflation. It demonstrates that the inflation targeting policy can refrain the economy from growing to its capacity. In this way, a lot of developing economies such as China and Cambodia usually experience more than 5% rate of growth every year and if their governments pursue inflation targeting policy, they would not be able to grow at a rapid pace like nowadays. Therefore, development state policy conceives that for a country to develop to its capacity, it needs to set up a pro-growth policy that allows for some inflation.

To sum up, the neoclassical view on development policies is really in contradict with development policies of heterodox economics view. Neoclassical ideology prefers a weak state and strong private sectors while development state prefers a strong state to support nascent private sectors. In general, neoliberal dominant theory try to promote equal opportunity for all businesses in every state, free trade competition, the establishment of good institutions, and the pursuance of inflation targeting policy. In contrast, development state theory try to advocate infant industry protection, strategic trade policy, the establishment of good institutions plus selective investments and localization, and the implementation of pro-growth policy allows for some inflation. There is still an ongoing discussion on which development theory is better; we hope the discussion will end soon and find out which development theory is better for developing countries to emerge from the Third World countries. In our opinion, we think development state theory is more suitable for development policies in Cambodia than neoliberal theory because most of business private sectors in Cambodia are still very young and uncompetitive; hence, they really need support from their government for their survival. If the Cambodian government does not support its fledging industries, we believe Cambodian firms will still remain uncompetitive in the future and can barely compete with those well-developed international firms. Therefore, we recommend the Cambodian government to try as much as she can to support the main industries in her economy and also establish good institutions in order to attract more investments into Cambodia. 

References

Dag Einar Thorsen, Amund Lie. (n.d.). What is Neoliberalism? Retrieved from folk.uio.no/daget/neoliberalism.pdf

Onis, Z. (1991, October). The Logic of the Developmental State. Retrieved from Jstor: http://www.jstor.org/stable/422204