These theories emerged in the mid to late 1980s as alternatives to what has been commonly referred to as neo liberalism, a powerful political economic current based on neoclassical economic theory that swept the world and ultimately led to the victory of liberal capitalism and democracy over socialism.
New growth and neo institutionalism sought to reaffirm that social and political institutions had a key role to play in the market aside from their influence on the allocation and cost of labour and capital. The two theories proposed that economies were not simply machines that spontaneously created or destroyed wealth, but were social constructions informed by knowledge. This knowledge component, in its varied forms of formal academic knowledge, technology, modes of behaviour, institutional culture, cultural traditions and inclinations, and policy could positively (and negatively) affect growth and development.
These propositions were common sense. However, they lacked formal theoretical foundations, analytical models and empirical testing in the real world to challenge the supremacy of the scientifically sophisticated and well institutionalised orthodox paradigm.
Developmental state theory offered a potent challenge to the neoclassical views on economic growth in the analysis of the performance and non-performance of “third world” countries. The theory gained wide recognition for its work on east Asian countries, then referred to as “newly industrialising countries”.
One view was that the core problem of development is productivity – that is, how efficiently a country uses its factors of production. Developing countries face a productivity gap that cannot be bridged by reliance on the comparative advantage resulting from their natural resources and FDI. Even a successful exploitation of comparative advantage in, say, labour costs, will not bridge the gap because advanced economies benefit from increasingly rapid productivity gains. In effect, productivity gains are dependent on technological progress in production-related activities. And technology is path-dependent and self-reinforcing. So there is no prospect for less advanced economies to ever catch up if they leave it to free trade and the neoclassical allocative efficiency of unfettered markets.
According to developmental state theory, productivity gains do not result from the functioning of the market but are the result of institutional arrangements. These arrangements constitute clear instances of market failures, resulting from non-market transactions between institutional partners. In contrast with advanced economies, developing countries face a chronic lack of capable institutional actors with the exception, in the successful cases of emergence from chronic underdevelopment, of the state. Economic development can only result from state-led policies designed to address the numerous production failures and bottlenecks that characterise the economies of underdeveloped countries.
It has been argued that Japan and South Korea were able to develop by distorting the market to create comparative advantage in specific industries. There is a suggestion that latecomer governments in post-war capitalist countries assisted the private sector in building professionally managed, large-scale modern corporations and in entering mid-technology industries (starting usually with cotton weaving and spinning). To construct those competitive assets for production purposes, governments rigged key exchange prices, such as the price of foreign currency, credit, and labour (by weakening its bargaining power); that is, they deliberately got relative prices “wrong”.
Others have argued through historical analysis that, in all instances of successful national economic growth and development, the state played the defining role in creating the condition for rapid industrialisation. They argue that the neoclassical economists’ and the World Bank’s accounts of development in the east Asian region in the past decades mistook qualitative changes in state intervention for liberalisation and a quantitative diminution of the role of the state.
Critics of neoclassical theory propose that rather than liberalising trade to remove a bias against exports, the Koreans and Taiwanese set about restructuring their trade regimes to ensure that, in given industries, export sales were more profitable than domestic ones. This required action on two fronts: discouraging production for domestic sales via penalties, tariffs and restrictions on imported inputs; and buttressing the penalties with a host of special rights and export promotion subsidies.
Instead of having created a neutral incentive trade regime, as neoclassical analyses of the newly industrialised countries (NICs) propounded, the east Asian states conceived a trade regime that was distinctly export oriented.
The heterodox perspective views EPZs as having important dynamic functions, albeit very different from the dynamic functions considered by the World Bank. Under this perspective, EPZs play a crucial initiating role in the development of national industrial capacity by:
- offering a platform for internationally mobile productive units;
- creating an environment conducive to concentrated exchanges between domestic and foreign private sector actors;
- initiating a shift in the orientation of the domestic private sector toward export activities;
- leading government and the public sector to adopt a more proactive and responsive attitude toward the private sector’s requirements of regulatory and administrative efficiency.
However, these long-term benefits will not develop spontaneously. They occur within a broad and concerted policy framework geared toward accelerated productivity through export-oriented industrial growth. The EPZ, in this framework, is both a catalyst for fast learning for all major national stakeholders (policy makers, entrepreneurs and labour) and a pioneer in the attraction of FDI.