Paper - Initiative for Policy Dialogue

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to that of the countries that are now developed: the state has played a much more activist
role than allowed by the neo-liberal perspective. 31
Advocates of the minimalist role for the state might agree on the theoretical
importance of the government dealing with externalities and providing public goods, but
even these roles are often downplayed. (Coase, for instance, argued that these could be
dealt with through bargaining arrangements 32 .) And the critics of government worry, at
least as much about government failure as about market failure; government
interventions should, in their view, be exercised with great circumspection, and in
general, the less the government does to hinder the “invisible hand” of the market the
better.
In the neoclassical models underlying the Washington consensus policies, there is
no room for technology acquisition or learning since technology and knowledge is
assumed to be exogenous and freely available to all economies; hence the structure of the
economy is irrelevant: whether an economy produces computer chips or potato chips
does not matter. 33 But what countries produce or export matters a great deal as different
activities have differing learning and technology intensities and linkages with the rest of
the economy. Learning and acquiring technology is central to “catching up”. The
externalities associated with learning and their public good dimension means that the
market will undersupply them. The potential returns to state interventions to correct this
inherent deficiency of markets can be and often have been extremely high.
Thus, while the Washington consensus policies focused on ensuring that a
country’s resources were efficiently allocated—given a particular level of knowledge
(and even here, their conclusions were also flawed because of the failure to take into
account market imperfections), the impacts of economic structure on societal learning
may be far more important, especially in the long run. Solow argued, for instance, that
some seven eighths of all the increase in per capita output was the result of improvements
in efficiency. Yet the Washington Consensus models pretended that these improvements
were unaffected by decisions, for instance, about whether a country produces rice, potato
chips, or computer chips. There may be trade-offs between dynamic growth and static
inefficiency. The Washington Consensus models were framed in such a way that the
issue was never considered.
Given the pervasiveness and seriousness of market failures both in theory and in
practice, the continued influence of the overly market-friendly Washington Consensus
orthodoxy in one of its many variants (emphasized, in particular by the contributions of
31 See Ha-Joon Chang’s Kicking Away the Ladder: Development Strategy in Historical Perspective
(Anthem; 2002) and Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism
(Bloomsbury; 2008). Chang also argues that the even in the case of Britain’s industrial revolution the role
of government was much more extensive than allowed in the interpretation of history that makes it conform
to the neo-classical or neo-liberal view.
32 Ronald Coase (1960), “The Problem of Social Cost.” Journal of Law and Economics 3 (October): 1–44.
33 Michael Boskin, Chairman of the Council of Economic Advisers under the first President Bush,
famously declared, “It does not make any difference whether a country makes computer chips or potato
chips.”