A New Developmental State?

24 Apr

Cornel Ban

The term neo-developmentalism was first used in 2003 by Brazilian economist and former policy maker Luiz Carlos Bresser-Pereira, in an attempt to define an alternative to the Washington Consensus orthodoxy (Bresser-Perreira 2003; 2004; 2007; 2009, 2010). Similarly important in this debate has been the advocacy of Antonio Barros de Castro, a state bank official during the Lula years (Castro 2008) and the work of sociologist Celia Kerstenetzky on the importance of marrying developmentalism and the welfare state (Kerstenetzky 2010; 2011). By the end of the decade, the term caught up in some quarters of Brazilian economics and political economy (Sicsu et al 2004; Arbix and Martin 2010; Doctor 2009; Morais and Saad-Filho 2011) just as it began to enter the international development discourse (Khan et al 2010). In 2010, at a Sao Paolo convention prominent Brazilian and international scholars merged structuralist and Keynesian thinking into a new development paradigm in a manifesto entitled “Ten Theses on Neo-Developmentalism.” [1]

According to its advocates, neo-developmentalism entails a new form of state activism. Its core is a national capitalist development program meant to guide the transition of developing countries away from the Washington Consensus. The main aim of this program of national capitalist development is the achievement of full employment in conditions of price and financial stability. In terms of its intellectual lineage, neo-developmentalism shares a number of characteristics with ISI or “old” developmentalism. [2] The first is the assumption that the world economy consists primarily of nation-states that compete with each other through their firms, an assumption that entails the espousal of varying degrees of economic nationalism. But rather than lead to some variant of ISI, in the case of neo-developmentalism economic nationalism means the adoption of a development strategy that allows domestic firms to seize global economies of scale and technological updating processes, but also innovation policy and an activist trade policy targeted at strong intellectual property regimes and investment opportunities for domestic firms. The second commonality is an understanding of economic development as a structural process. This entails commitment to the mobilization of all available labor resources, increasing productivity in each industry and the steady transfer of finance to high wage and high value added sectors.

On other fronts, the differences with old developmentalism are more marked. Unlike the protectionism and export pessimism of old developmentalists, neo-developmentalists think that since middle-income countries have overcome the infant industry stage, protectionism should be scrapped and the goal of the open economy should be accepted as fundamental. This acceptance is predicated on important interventionist qualifications, however. The goal of the open economy should be complemented by the goal of using industrial policy to increase the share of medium and high value added products and services. This is to be done through industrial policies targeted at firms judged to be able to compete internationally.

This renewed stress on industrial policy comes at a time when new frameworks for rethinking development such as “new structural economics” (Lin 2011; Lin and Chang 2011) are picking up steam in academia and the IFIs (Joon Chang 2011; Krueger 2011). Justin Lin, the World Bank’s chief economists, recently advocated for a “new structuralism” that emphasizes the centrality of both market mechanisms and state interventions in development. Lin stresses that there are large gains to be made from state-sponsored industrial upgrading and diversification strategies that build on a country’s existing comparative advantage. Other scholars have disputed this approach and argued that industrial policy should target technologically advanced industries in which the country does not necessarily have a comparative advantage, albeit without making excessive leaps away. In this market-making approach the state nudges domestic and foreign producers to go faster up the ladder of technological sophistication than the market “tells” them to, thus fostering comparative advantage over time (Joon Chang 2009; Wade 2010).

While there is no manifest consensus among neo-developmentalists on the weight of market-conforming industrial policies versus market making ones, the Sao Paolo manifesto contributes to this debate by stressing the macroeconomic dimension of industrial policy. Drawing on a mix of post-Keynesian and structuralist thinking in economics, its signatories argue that “the demand side is where the major growth bottlenecks unfold” and that “in developing countries there are two additional structural tendencies that limit demand and investment: the tendency of wages to increase at rates below the growth of the productivity, and a structural tendency to overvaluation of the nominal exchange rate.” (Sao Paolo Manifesto 2010). To address the first predicament they advise the adoption of increasing the legal minimum wage, cash transfers to the poor, and a government guarantee to provide employment at a living wage. And to address exchange rate overvaluation and fluctuations in market sentiment, neo-developmentalists suggest that economic development should be financed essentially with domestic savings.

Finally, contrary to the old developmentalist complacency towards inflation, the neo-developmentalists join the orthodox in upholding an unwavering inflation aversion. Yet, unlike the orthodox, neo-developmentalists think that this objective should not come at the cost of high interest rates. The goal of macroeconomic stability found in the Washington Consensus is complemented with a firm commitment to full employment and a more progressive distribution of income. The orthodox faith in untrammelled free trade is replaced with acceptance of capital controls, conservative foreign indebtedness ratios and the accumulation of domestic public savings in order to increase the investment rate.

All these concepts are obviously ideal types. If old developmentalism and the Washington Consensus are the extreme ends of the liberal-statist policy spectrum, neo-developmentalism is somewhere in an uneasy middle. As my analysis shows, Brazilian policy elites certainly accepted enough of the neo-developmentalist theses to fit under the aegis of this term but yielded to enough economic orthodoxy to be closer to the liberal end of the neo-developmetalist spectrum. The use of the adjective “liberal” in “liberal neo-developmentalism” could be useful for future scholars who may wish to distinguish Brazil’s policy regime from other neo-developmentalist alternatives in the Latin American region and elsewhere.

[1] The Sao Paolo meeting of a group of economists self-describes as “sharing a Keyensian and structuralist development economics approach” was financed by the Ford Foundation and organized by the structuralist development macroeconomics center of the Sao Paolo School of Economics of the Getulio Vargas Foundation. The meeting resulted in the adoption of a manifesto called “ten Theses on New Developmentalism” and was signed by a long list of Brazilian and international luminaries including Phillip Arestis, Luiz Carlos Bresser-Pereira, Ha-Joon Chang, Paul Davidson, James Galbraith, Luiz Fernando de Paula, Adam Przeworski, Osvaldo Sunkel and Robert Wade.

[2] For the application of the concept of “old” or ISI developmentalism to Brazil see Leff (1968), Bergsman (1970), Fishlow (1972), Suzigan (1976), Cardoso and Faletto (1979), Evans (1979), Geddes (1990), Sikkink (1991), Schneider (1991; 1997), Kohli (2004).

Excerpt from “Brazil’s Liberal Neo-Developmentalism: Edited Orthodoxy or New Paradigm:” forthcoming in Review of International Political Economy.

cornel ban_brazil_revised

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