The Limits of Neoliberalism: Toward a Reformulation of Development Theory

By Onis, Ziya | Journal of Economic Issues, March 1995 | Go to article overview
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The Limits of Neoliberalism: Toward a Reformulation of Development Theory


Onis, Ziya, Journal of Economic Issues


Neoliberalism, based on a public choice perspective, has established itself as the dominant paradigm in development theory during the past two decades. This paper challenges the neoliberal claim to provide a comprehensive understanding of intercountry differences in development performance. My central claim is the neoliberal approach to development draws excessive attention to competition and free markets as sources of industrial success, yet the degree of competition per se provides en insufficient basis for explaning highly successful cases of industrial development. Through an examination of the stylized features associated with three major success stories - East Asia under the developmental state, small European countries under democratic corporatism, and Italy with small firms and flexible specialization - I seek to demonstrate that a high degree of exposure to competitive pressures constitutes only one aspect or precondition of industrial success. What happens to be common to all three successful models of development is a mix of competition and cooperation and the creation of appropriate institutions designed to sustain a desirable mix. The idea that there is a desirable mix of competition and cooperation can be utilized as a basis for constructing a new institutionalist paradigm of development, which incorporates the strong and positive insights of the dominant paradigm of development in the postwar period - structuralism and neoliberalism - yet has the potential to transcend both of these paradigms in terms of its ability to account for successes and failures in development.

Transcending Structuralism: Origins of the Neoclassical Resurgence in Development Theory

The theory that dominated postwar development theory well into the 1960s was structuralism. The dominant theme in structuralism was the notion that underdeveloped economies were characterized by pervasive market failures. Given the importance of externalities and the high degree of complementarity between key sectors of the economy, a development strategy that relied on free market forces would naturally result in both suboptimal levels and composition of productive investment. The highly influential early models of development - the Harrod-Domar, the Lewis, and the input-output models - were all based on the idea of a rigid productive structure characterized by a high degree of complementarity in the production process. A fixed coefficients production function, which rules out the possibility of substitution between key inputs, is central to all these models. Models of this type are clearly "bottleneck models" in the sense that the basic preoccupation is to identify the key bottleneck or constraint on economic growth whether it be a shortage of foreign exchange capital or some other input. Once the critical bottleneck has been identified, the central concern for policy is to remove the bottleneck via an increase in the quantity of the scarce factor. The presence of widespread and pervasive market failures implies that state intervention is critical for the success of the development project.(1)

Structuralist development theory was attractive to both theorists and policymakers, which explains, at least in part, its rise to the status of the dominant paradigm during the 1950s and the early 1960s. Structuralists made an important contribution by drawing attention to the significance of capital accumulation, externalities in the production process, and manufacturing economic growth. They also illuminated the dangers of a strategy that involved indiscriminate integration into the free international division of labor, particularly for a country in the early stages of development. However, the structuralist theoretical schema also contained a number of weaknesses or loopholes that the neoliberals were able to exploit rather effectively from the mid-1960s onward. In retrospect, the central weaknesses of structuralist development theory were its exaggerated vision of the rigidity of the productive process and the degree of complementarity that characterized the links between the key sectors of manufacturing industry.

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