The development of economic thought on proper public policy has followed (if not led) political tides in developing countries. In the expedition for paradigm dominance in economics and sub disciplines such as development economics, neo-classicism appears to have won out.
The market leaning thrust of the development “counter revolt” is now reflected in the conditionality underlying international policy restructuring, that is, the escalating pressure exerted on developing countries to lessen the scope of government intervention, craft more open policies, and the distended use of conditional development assistance as a means of enforcing conformity. This must be interpreted from the viewpoint of a more invasive worldview that has perceived excessive government contribution as becoming more obtrusive in more developed and developing countries alike.
Mill defined clearly the policy reform of classical economic liberalism. Thus it is helpful to look at the justified government interventions listed in his Principles. He begins his chapter ‘Of the Grounds and Limits of the Laissez-faire or Non-interference Principle’ by distinctive types of intervention. The first he calls authoritative intrusion, by which he means legal prohibitions on private actions. Mill argues on moral grounds that such prohibitions must be limited to actions that affect the interests of others.
Although even here the obligation of making out a case always deceit on the defenders of legal prohibitions. Scarcely several degree of utility, short of absolute necessity, will rationalize a prohibitory regulation, unless it can also be made to suggest itself to the general principles. The second form of intervention he calls government agency, which exists ‘when a government, instead of issuing a command and enforcing it by penalties, [gives] advice and promulgates information . . . or side by side with their [private agents] arrangements [creates] an agency of its own for like purpose’.
Thus the government can provide various private and public goods, but without prohibiting competing private supply. The examples Mill gives are banking, education, public works, and medicine. (Mill, 1909) The majority of the government interventions Mill permits belong to this second category. But he warns against their costs: they have great fiscal consequences; they boost the power of the government; all additional function undertaken by government is a fresh job imposed upon a body already charged with duties.
So that most things are ill done; much not done at all,’ and the consequences of government agency are expected to be counterproductive. In a passage that is prophetic about the structure of numerous public enterprises in developing countries, he writes: The inferiority of government agency, for example, in any of the common operations of industry or commerce, is proved by the fact, that it is hardly ever able to maintain itself in equal competition with individual agency, where the individuals possess the requisite degree of industrial enterprise, and can command the necessary assemblage of means.
All the facilities which a government enjoys of access to information; all the means which it possesses of remunerating, and therefore of commanding the best available talent in the market–are not an equivalent for the one great disadvantage of an inferior interest in the result. (Mill, 1909) On these grounds he concludes: ‘few will dispute the more than sufficiency of these reasons, to throw, in every instance, the burden of making out a strong case, not on those who resist, but on those who recommend, government interference.
Laissez-faire, in short, should be the general practice: every departure from it, unless required by some great good, is a certain evil’. (Mill, 1909) But Mill also gives a bridge to the ideas that were later to weaken economic liberalism. The most significant of these was the collective ideal of equality, which was later used to develop a powerful cure to the liberal tradition through Marxism and was executed as state socialism by the Bolsheviks.
Thus Mill permits various forms of government agency; numerous of which echo what later came to be accepted as causes of market failure, that prima facie could rationalize appropriate government intervention. Such grounds might be externalities in the stipulation of basic education and public services (like lighthouses), and the require to administer financial institutions against fraud, or to resolve diverse forms of what today would be called Prisoners’ Dilemmas. Mill also cited the relief of poverty as another potential reason for government involvement:
The question arises whether it is better that they should receive this help exclusively from individuals, and therefore uncertainly and casually, or by systematic arrangements in which society acts through its organ, the state (Mill, 1909). Hence, he argued, the claim to help, . . . created by destitution, is one of the strongest which can exist; and there is prima facie the amplest reason for making the relief of so extreme an exigency as certain to those who require it, as by any arrangements in society it can be made (Mill, 1909).
On the other hand, in all cases of helping, there are two sets of consequences to be considered; the consequences of the assistance, and the consequences of relying on the assistance. The former are generally beneficial, but the latter, for the most part, injurious; so much so, in many cases, as greatly to outweigh the value of the benefit. And this is never more likely to happen than in the very cases where the need of help is the most intense.
There are few things for which it is more mischievous that people should rely on the habitual aid of others, than for the means of subsistence, and unhappily there is no lesson which they more easily learn. The problem to be solved is therefore one of peculiar nicety as well as importance; how to give the greatest amount of needful help, with the smallest encouragement to undue reliance on it (Mill, 1909). This is a discerning summary of both the attractions and consequences of welfare programmes, which has since been authorized empirically.
Though, by assigning a larger and endogenous role for the state or public sector in the economy, Keynes set the way for the explanation of development policy in terms of a discretionary, type of economic management at the state level. Thus, planning came to be viewed as a helpful mechanism for overcoming the deficits of the market-price system, and for enlisting public sustain to attain national objectives linked to economic growth, employment formation, and poverty mitigation.
It was against this backdrop that the pioneers of contemporary development economics developed Keynesian and Pigovian critiques of the market-price means to advocate the need for planned development. Since development could not be left completely to market forces, government investment was thought to be desired to create “social transparency capital” as a means of laying the basics for the developing countries to “take off” on the flight toward self-sustained economic growth.
From the viewpoint of Pigovian externalities, the private sector could not be estimated to invest at adequately high levels in the formation of such forms of capital as of increasing returns to scale, technological externalities, and the reality that such investments tend to exhibit the characteristics of public goods. As neo-classical-type adjustment or marginal changes could not effectively address the problem at hand, planning was visualized as a necessary means of developing macroeconomic targets and providing the organizing efforts and consistency requisite for the preferences of society to be recognized.
In the economic management of both the more developed and less developed countries, a good deal of controversy has surrounded Keynes’s advocacy of more state intervention. As he wrote in his Essays in Persuasion, “I think that capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself, it is in many ways extremely objectionable. Our problem is to work out a social organization which shall be as efficient as possible without offending our notions of a satisfactory way of life. “
Contextually, Keynes’ rejection of laissez-faire cannot be construed as an support of the bureaucratic type of planning that was once popular in former socialist countries and the developing world. The issue had surfaced throughout the celebrated Socialist Calculation debate of the interwar years as a means of showing why a decentralized market economy is probable to provide a greater degree of socio-economic coordination than a central one. Specifically, Nobel Laureate Friedrich Hayek (1935) had argued that growing political involvement in the economic system would ultimately lead to totalitarian dictatorship.
Hayekian anti-Keynesianism was to conduct in the idea of a “dirigiste dogma,” or the potential dangers innate in government solutions to economic and social problems. Yet, it can be contradicted that the “dogma” was perhaps more pertinent to his disciples than to Keynes himself. As, his analysis of the British economy throughout the thirties was based on assumptions concerning rationally functioning markets. The case for planning was restricted to the concern of a macroeconomic framework in which microeconomic choices could be reasonably orchestrated.
The guiding viewpoint was that in the absence of a proper macroeconomic “enabling” environment, markets will engender the kind of stagnation implied in underemployment equilibrium. At the international level, as a result, the counter-revolution was translated into a revisionist loom to North-South relations based on an extolment of the advantages of Adam Smith’s “invisible hand” over the difficulties of the “visible hand” of statism. Contextually, the “poverty of development economics” has been accredited to the “policy induced, and thus far from expected distortions formed by irrational dirigisme” (Lal 1983: 1).
In his view, conventional development economics was not simply too dogmatic and dirigiste in its orientation, but also sustained by a number of “fallacies,” including: (i) the belief that the price-market mechanism must be displaced rather than supplemented; (ii) that the efficiency gains from enhanced allocation of given resources are quantitatively irrelevant; (iii) that the case for free trade lacks soundness for developing countries; (iv) that government control of prices, wages, imports, and the allocation of productive assets is a indispensable prerequisite for poverty improvement; and (v) that rational maximizing behavior by economic agents is not a common phenomenon. Besides advocating a smaller role for the state, Lal also joins hands with Hayek in arguing that nothing must be done about income distribution. “We cannot . . . identify equity and efficiency as the sole ends of social welfare . . . Other ends such as liberty are also valued. . .
. [And] if redistribution entails costs in terms of other social ends which are equally valued it would be foolish to disregard them and concentrate solely on the strictly economic ends” (Lal 1983: 89). This argument can be construed to mean that no matter how considerable the welfare gains that are probable to accrue from redistributive policies, no liberty is ever worth trading or forfeiting. Besides the ideological tunnel vision that lies at the heart of such a claim, it can be argued that the potential of attaining authentic development depend as much on the sensitivity of the state to distributive justice as on the competence and locative goals stressed in neoclassical economics or the “liberty” that is the focus of “new” classical political economy.
Peter Bauer, another inner figure in the counter-revolution, challenges the major variations in economic structure and levels of developmental attainment among countries must be explained in terms of equivalent differences in resource endowments and individualistic orientations. This viewpoint rests on a basic belief that the inherent potentials of individuals can be drawn out throughout the play of market forces. Contextually, he states (1981: 8s), “the precise causes of differences in income and wealth are complex and various. . . . [I]n substance such differences result from people’s widely differing attitudes and motivations, and also to some extent from chance circumstances. Some people are gifted, hardworking, ambitious, and enterprising, or had farsighted parents, and they are more likely to become well off. “
In turn, such attributes are measured accountable for the East Asian success stories, or a demonstration of the legality and correctness of the individualistic free market approach to economic development. In more general terms, the achievement of these countries is interpreted as a substantiation of the domain assumptions of neo-classical economic theory: that competent growth can be promoted by relying on free markets, getting prices to replicate real scarcities, liberalizing trade policy, and authorizing international price signals to be more generously transmitted to the domestic economy. On the whole idea, therefore, is that market-oriented systems with private incentives lean to show a superior performance in terms of growth attainment.
In general, critics of the “dirigiste dogma” such as Hayek, Lal, and Bauer assert that, compared to countries in the more developed division of the world, most governments in the less developed sector lack the type of knowledge and data required for rational intervention, are often less democratic, and often exhibit motives that are at inconsistency with Keynesian-type or structuralist objectives of growth with redeployment and full employment. The reaction is that markets in both sectors of the world are less liberated than is usually supposed, lack the capability for making rational decisions, and particularly in the developing world, not always adequately organized to effectively convey the essential price signals. There is numerous element of truth in both the anti-Keynesian and Keynesian/structuralist perspectives. Where the balance is lastly drawn becomes an issue of ideology and slanted judgment rather than scientific economic analysis. In any event, the path followed by any particular country is typically constrained by its historical and socio-cultural situation.
In addition, the obstruction of local forms of industrial development led to the configuration of a modern middle class of “petit bourgeoisie” comprising army officials, government bureaucrats, civil servants, teachers, and related cadres. In certain regions and countries, they integrated small traders, “progressive farmers,” “middle peasants,” and similar groups that come to obtain increasing importance in the absence of meaningful industrialization. They were to become the prime advocates of state capitalism and other forms of “national developmentalism. ” In conclusion, approximately all states in the developing world are domineering in varying degrees. Several are classic cases of the predator or rentier state in which everything is part of a ruler’s individual fiefdom and high offices are up for sale to the highest bidders.
There are a few cases, yet, where governments have established some measure of institutional consistency in the detection of collective development goals. Needless to say, the situation diverges from one historical or political framework to another. The majority of developing countries have no substitute but to rely on a strong and focused government to map out a strategic development way. The obstinate theoretical and practical question relics why different types of interventionist states with command over similar resources and instruments of control tend to show extremely conflicting development orientations and end up on dissimilar development paths.
The consensual view is that the great majority have remained “regulatory” or “obstructionist” and are far back on the road to becoming real “development states” that portray the vision and capability needed to promote necessary development goals. Achievement of the latter depending not so much on the dimension of the government apparatus but more on its quality and efficiency. This has been established by the development experience of Nordic and East Asian countries, which have been thriving in meshing interventionist schemes with the market mechanism, as well as in cultivation resilient coalitions of modernizing interests in the structuring of national development agendas. Traditionally, such coalitions have resultant their integrity, credibility, and political legality from the nation’s collective aspirations.
The centralization of decision making has been efficiently combined with flexibility in dealing with technical and market conditions. Goals and policies have been continually interpreted and reinterpreted on the basis of organizational networks between party organizations, public officials, and private entrepreneurs. This is not meant to propose that what has worked in the flourishing corporatist models of the Nordic countries and the Sinitic world, particularly Japan, can or should be replicated in the late-developing world. In the first place, the social and cultural homogeneity in both regions have made the counterfeiting of a political consensus much easier.
Second, the tensions that continuously arise between the spoken interests of organized classes, pressure groups, and the state influential responsible for policy formulation and implementation cannot be resolved in a context free or institutionally neutral manner. The state remains a “strategic actor in the game of mixed conflict and cooperation amongst other groups” (Bardhan 1988: 65). Under the conditions, the nature of developmental outcomes eventually depends on its ability to determine conflicts and make compromises in an open political milieu. The directness of the political process determines the nature and efficacy of the development delivery system and the degree to which consensual relationships can be recognized and nurtured with labor, business, people’s organizations, and the rustic sector.