Download The Neoclassical and Dependency Perspectives

Paths of Industrialization: An Overview
(Chapter 1 Gary Gereffi)
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Latin American and East Asian NICs are among the most industrialized nations in the developing
world – but have followed different paths of industrialization.
Latin American NICs focused on import-substituting investments in advanced manufacturing
industries (eg. Automobiles, chemicals, machinery, pharmaceuticals) – where output was primarily
for large domestic Latin American markets.
East Asian NICs (Hong Kong, Taiwan, South Korea, and Singapore) more outward oriented
industrialization to generate foreign exchange of manufactured exports (textiles, garments,
consumer electronics) – and later Taiwan, South Korea, and Singapore moved to heavier
industries (steel, shipbuilding, petrochemicals, vehicle manufacturing, and computers)
While the East Asian countries have performed better, both economically and socially, both sets of
countries have been motivated by their comparative advantages, attempting to shift them into
competitive advantage.
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While the East Asian and Latin American NICs are vastly different, they do share some similar
characteristics:
Rapid and relatively sustained economic growth based on a sharp increase in the manufacturing
sector’s share of total output and employment
A growing diversification of industrial production that permits each nation to make ever broader
ranges of manufactured goods
A fast expansion of exports with an emphasis on manufactures
Both sets of countries are considered upper-middle income by World Bank standards, however,
the East Asian NICs grew strongly durin g the 1980s while the Latin American NICs declined.
South Korea and Taiwan did not experience accelerated rates of growth until the mid 1960s while
Mexico and Brazil were well on their way – contrastingly South Korea and Taiwan took off during
the 1980s, so the author asserts that it is perhaps too early to overemphasize the recent
developments of the East Asian NICs without keeping them in the global context.
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Today, East Asian NICs have established themselves as the Third World’s main exporters.
3 East Asian “superexporters” : Taiwan, Hong Kong, and South Korea.
East Asian NICs far more dependent on external trade than Latin America or Japan because of
their smaller size. These exports have been driven by the phenomenal growth of their
manufactured exports.lat profile of income distribution
Latin American NICs export a more diversified range of products because of their natural
resources, while East Asian NICs export more technology-intensive products.
East Asian NICs tend to have a very flat income distribution while Latin American NICs have more
inequitable distributions (eg. Brazil in 1976 – top 1percent received a larger slice of national
income than the entire 50 percent).
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Development patterns have 3 dimensions:
 1. Types of industries that are most prominent in each phase of a country’s economic
development
 2. The degree to which these leading industries are inwardly or outwardly oriented (ie.
Whether production is destined for the domestic market or for export)
 3. The major economic agents relied on to implement and sustain development.
Five main phases of industrial development:
Outward looking:
1. commodity export phase
2. Primary export-oriented industrialization
3. Secondary export-oriented industrialization
Inward looking
4. Primary import-substituting industrialization (ISI)
5. Secondary ISI
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Figure 1.1 p. 18 shows how both E.A and L.A followed a mix of these phases.
Export oriented and Import substituting industrialization phases are complimentary and
interactive.
Both sets of strategies are subject to constraints (eg. Balanace-of-payment problems,
inflation, trade disruption), but both sets of NICs have adapted or switched strategies and
diversified their patterns of export growth in the 1980s.
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Development strategies: sets of government policies that shape a country’s relationship to the
global economy and that affect the domestic allocation of resources among industries and major
social groups.
Working Hypothesis: state-led industrialization has become the norm in the Latin American and
East Asian NICs since the 1950s, although the motives, instruments, and consequences of this
government involvement vary. (p. 23)
The Neoclassical
and Dependency
Perspectives
(Haggard Chapter 1)
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Both the liberal (neoclassical) and dependency perspectives share a common
tendency to ignore how domestic political forces constrain economic policy and shape
state responses to the external environment.
Neoclassical perspective argues that economic success can only result from the
“correct” policy choices.
Haggard argues that while many countries can benefit from market-oriented reforms,
but that it is unlikely that the East Asian model could be exported to other LDCs. East
Asian NICs successes rest not only on the policies, but also the political and
institutional environments.
Dependency perspective argues that countries are “dependent” by their
characteristics, regardless of what actions or policies they take.
Haggard argues that such a view is much too rigid as the international environment
should be viewed as shifting constraints through which states could learn and expand
and change. He goes on to say that “preoccupation with dependency deflects
attention from the central theoretical question. Under what conditions will the state
supplant foreign investment in strategic sectors, support local capital in doing so, or
tighten its regulatory grip?”
Neoclassical
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In viewing economic development of NICs, both the neoclassical and dependency perspectives
neglect politics and institutions.
Import-substituting Industrialization (ISI) – strongly advocated by Raul Prebisch for Latin America.
Argued that primary producers faced price volatility in the short run and declining terms of trade
over the longer run – the cure: Industrialization through protection.
By 1960s, neoclassical critics of ISI argued that problems within developing countries could be
traced to misguided government intervention. This argument had three parts:
1. Stressed the benefits of participation in the international division of labor.
2. Stressed the costs and distortions of ISI
3. Stressed the performance of countries pursuing market-conforming policies.
Liberal thinking rejected thoughts that trade between developed and developing countries as
being harmful to development.
Evidence accumulated contradicting the claim that producers in developing countries faced a
secular decline in prices, and short-term market volatility was found to be less disruptive than
thought.
Contemporary liberals continued to ignore the political dimension of the political economy.
Remained unconcerned with unbalanced power relationships, and viewed them as being the
exception rather than the norm.
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Argued that the market must take reforms to ensure both international and domestic markets to
work efficiently.
Comparative Advantage example on p. 11.
ISI lack of exports made balance-of-payment difficulties met by increasing control over foreignexchange transactions – foreign aid, direct investment, and commercial borrowing – ended up
increasing external vulnerability.
Because capital-intensive production processes halted the ability of the industrial sector under ISI
to increase labor, relatively high wage employment coexisted with high rates of under and
unemployment.
State control of import licensing and foreign exchange led to more corruption, smuggling, and
black markets along with inefficient resource allocation.
Most developing countries did not have the political or administrative capacities for ISI to really
work.
Haggard: “A central argument of this book is that the shift to export-led growth was also
accompanied by economic, legal, and institutional reforms that the neoclassical interpretation has
generally ignored.” (15)
Explaining Development Strategies
(Haggard Chapter 2)
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3 historical patterns of growth in developing countries:
1. import-substitution trajectory (characteristic of Mexico and Brazil)
2. export-led growth trajectory (Korea and Taiwan)
3. entrepot path (related to export-led – see Singapore and Hong Kong)
For all of these transitions, policy played an important role.
4 components of national strategy: p. 27-28
1. orientation
2. instruments
3. agents
4. integration or coherence.
Purpose of the chapter: to advance the logic of different theoretical arguments and identify the
reasons why some causal factors are likely to operate more powerfully than others. Also, to
establish a set of dimensions by which the cases may be compared and identify some of the
problems and puzzles facing certain cases.
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Table 2.1 p. 25 explains best the three development trajectories
Several economic forces help explain transitions between different growth phases including the
accumulation of capital and changing comparative advantage. –policy also important.
Haggard wants to know: how politics affects the internal coherence of policy and the consistency
with which it is pursued over time. (p 28)
Purpose of comparative historical analysis: weigh competing explanations of policy change,
generate some contingent generalizations, and develop more convincing explanations of
particular cases.
4 distinct levels of analysis: the international system (most powerful in policy reform), domestic
coalitions, domestic institutions, and ideology.
Haggard: “method of agreement” and “method of difference” – compares and contrasts countries
with similar growth paths and those with alternative paths. Explores variations among countries
following a similar path to isolate peculiarities in cases.
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External economic shock is likely to have an important influence on outward-oriented
policies regardless of if it is based on entrepot activities or the export of products or
manufactures.
Also must consider international political pressures from external political actors.
Summary of influence of the international system p. 33 table 2.2
Societal or interest-based explanations of policy: policy will reflect the interests of
dominant coalitions, whether seen as ruling parties, sectors, classes, or shifting
coalitions of interest groups. The state is an “arena” where coalition battles are
waged.
The ability to influence policy by social groups- agriculture, working class, and
business groups- best understood through the institutional links that they have to the
state.
Haggard: “To summarize, policies reflect the effort to build and sustain coalitions, but
available organizational resources expand or contract politicians’ freedom of
maneuver. Characteristics of the state as an institution – the degree of autonomy
from social forces, the cohesion of the policy-making apparatus, and the available
policy instruments – are crucial in understanding policy reform.
The Neoclassical Explanation
(Wade Ch. 3)
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Widely agreed that the cause of Taiwan’s industrial success is the coming together (1958-1962) of
4 key conditions: virtual free trade regime for exporters and a lowering of protection more
generally; a free labor market; high interest rates; and conservative government budgeting.
Throughout 1950s gov’t operated under import substitution policy, but then took steps: unitary
exchange rate, reduced tarrffs, export promotion, and foreign investments.
Shift towards outward orientation: affected GNP and exports chiefly through prices.
Fast export / home market growth = growth in employment, real wages, and lowering of poverty
Demand pulled up labor costs, savings grew, shift in economy towards capital and technology
intensive exports.
Conditions for free trade: able to import inputs into export production without restrictions and
tariffs, and exchange rate facing exporters should be equal to the hypothetical free trade rate.
For the first condition, Taiwan largely met this – for the second, Taiwan had the smallest difference
between official exchange rate and hypothetical exchange rate.
The labor market in Taiwan = competitive labor market due to government repression of
institutions (eg. Weak trade unions / collective bargaining), low level of unemployment, and
constant growth of real wages.
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Taiwan one of first developing countries to adopt a high real interest rate policy. – this came in
response to hyperinflation.
High price of credit has helped exports, but has also meant that exporters have to carry the
interest costs greater than those of their competitors.
Direct taxes are low and there is “plenty of incentive to make money”
Indirect taxes however are high (customs duties, etc.)
Overall development policy has resulted in budgetary surpluses
Little has been spent on environmental or social welfare – instead household income pooling,
dense network of wholesale and retail trade.
Government budget surpluses have kept inflation in check and kept exports competitive and
investment high.
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Five more conditions that have been important for growth:
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A remarkably stable real exchange rate – great help to investors
High savings – highest savings ration in the world – much less inflation and foreign borrowing – (important to
note that people have to save for their future as pensions are rare and lump sum payments are common –
also savings for children’s education and a lack of a social net)
Well trained labor supply – high concentration on vocational training, high pay/prestige for engineers
securing national control over technology imports and mastery of these technologies – Taiwan also has third
highest level of labor efficiency beating out even the U.S in a study of 9 Asian countries plus the U.S.
Competitive Industrial Structure – flexibility, low overheads, and lack of monopoly power = small family firms
and business clusters. – Dualistic economy with large sectors of small-scale firms and large-scale firms – in
1985 firms with less than 300 employees accounted for 65% of manufactured exports – but big firms used
as input suppliers (petrochemicals, textiles, steel, etc.) to the small firms. Wade argues this way that firms
are organized and do business presents a gap in the argument of his book.
Stable Government – one-party state by the Nationalist party (Kuomintang, or KMT) – powerful executive
branch – this has allowed Taiwan to avoid the pitfalls of many developing countries as business people can
have faith that there is stability.
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Wade’s problem: “How can we decide to what extent Taiwan’s exceptional economic performance
is due to the presence of many of the neoclassical growth conditions and to what extent to the
government’s selective promotion policies?” (72)
Wade argues that it is enough to demonstrate how the government has been guiding the market
on a large scale and that others have overlooked this.
Questions
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Looking at the case study of Taiwan, do you feel that it is an exportable formula to Latin American
countries? Is it too early to tell if this model actually succeeds or is there enough evidence to
argue that the strong presence of government has in fact guided the market?
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Do you agree with Haggard’s argument that both the neoclassical and dependency schools of
thought tend to ignore domestic political forces too much in their views of policy?
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What do you think are the successes and pitfalls of each school of thought? In which ways do you
think they are right, and in which ways do you think they’ve been too narrow minded?