Ha-Joon Chang

Should Industrial Policy in Developing Countries Conform to Comparative Advantage or Defy it? A Debate between Justin Lin and Ha-Joon Chang

This is the first in an occasional series of DPR Debates, designed to illuminate specific issues of international development policy. Each debate will bring together two well-known researchers or practitioners, giving them the opportunity, over three rounds, to test and challenge each others ideas. The debates are intended to be robust but accessible, rooted in rigorous research but useful to the wide readership of Development Policy Review.

Korea: The misunderstood crisis

Abstract The article argues, against the conventional wisdom, that the current Korean crisis is a crisis from underregulation, rather than from overregulation. It argues that ill-managed financial liberalization, abandonment of investment coordination, and poor exchange rate management were the underlying causes of the crisis. It then argues that, while certain structural changes made such policy shifts somewhat inevitable, there were also poor strategic choices and ideological prejudices involved. The article finally discusses whether the current International Monetary Fund program of institutional “reform” in the Anglo-American direction will be able to revive the Korean economy in the long run.

Institutions and economic development: theory, policy and history

The article tries to advance our understanding of institutional economics by critically examining the currently dominant discourse on institutions and economic development. First, I argue that the discourse suffers from a number of theoretical problems – its neglect of the causality running from development to institutions, its inability to see the impossibility of a free market, and its belief that the freest market and the strongest protection of private property rights are best for economic development. Second, I point out that the supposed evidence showing the superiority of ‘liberalized’ institutions relies too much on cross-section econometric studies, which suffer from defective concepts, flawed measurements and heterogeneous samples. Finally, I argue that the currently dominant discourse on institutions and development has a poor understanding of changes in institutions themselves, which often makes it take unduly optimistic or pessimistic positions about the feasibility of institutional reform.

The Hazard of Moral Hazard: Untangling the Asian Crisis

The paper critically examines the explanations of the Asian crisis which emphasize the role of national policies and institutions that allegedly created moral hazard by overprotecting the investors - industrial policy, crony capitalism, and government guarantees accorded to banks and industrial firms that are considered too important to fail. We also discuss the international dimension of the moral hazard argument in the presence of International Monetary Fund (IMF) bail-out. The paper finds these explanations theoretically ill-defined and empirically weak, and argues that the prescriptions for changes in policy and institutions based on them are unlikely to prevent similar kinds of crises in the future.

Rethinking public policy in agriculture: lessons from history, distant and recent

This article reviews the histories of agricultural policy in 11 of todays developed countries between the late-nineteenth and the mid-twentieth century and in 10 developing and transition economies since the mid-twentieth century. After discussing the theoretical limitations of the prevailing orthodoxy, the article discusses the history of a wide range of agricultural policies concerning issues like land, knowledge (e.g., research, extension), credit, physical inputs (e.g., irrigation, transport, fertilizers, seeds), farm income stability (e.g., price stabilisation measures, insurances, trade protection), marketing, and processing. The article ends by discussing the policy lessons that may be learned from these historical experiences.

New perspectives on East Asian development

Conventional explanations of rapid growth in East Asia have focused on the efficient allocation of resources resulting from market-led outward-oriented strategies. This study challenges that approach. East Asian success has centred around the accumulation dynamic both because of its direct importance to the growth process and also because of its close and interdependent linkages with exports. On this basis the study considers the institutions and policies which were used to manage economic rents in support of rapid growth and to ensure a more strategic and orderly integration into the world economy. The study also examines the contribution of regional trade and investment flows to East Asian industrialisation. The potential for replicating similar strategies is considered.

The Microfinance Illusion

In both developing and transition economies, microfinance has increasingly been positioned as one of the most important poverty reduction and local economic and social development policies. Its appeal is based on the widespread assumption that simply ‘reaching the poor’ with microcredit will automatically establish a sustainable economic and social development trajectory animated by the poor themselves. We reject this view. We argue that while the microfinance model may well generate some positive short run outcomes for a lucky few of the ‘entrepreneurial poor’, the longer run aggregate development outcome very much remains moot. Microfinance may ultimately constitute a new and very powerful institutional barrier to sustainable local economic and social development, and thus also to sustainable poverty reduction. We suggest that the current drive to establish the central role of microfinance in development policy cannot be divorced from its supreme serviceability to the neoliberal/globalisation agenda.

The Political Economy of Privatisation

This paper examines some of the main arguments relating to the effect of privatisation on efficiency. It is concerned with both narrow economic issues and wider political issues. After a critical examination of some theories, which assert that private ownership is intrinsically more efficient than public ownership, it is argued that for large scale enterprise there are no strong economic reasons for believing in the superiority of private enterprise. As long as the government in question has the will and the power to make a public enterprise function in a socially efficient fashion, the public enterprise may be just as efficient as private enterprise whilst offering additional economic and social advantages.

Conditions For Successful Technology Policy In Developing Countries—Learning Rents, State Structures, And Institutions

The paper develops an analysis of the economic, political, and institutional conditions for successful design and implementation of technology policy in developing countries. After a brief introduction (Section I), we discuss contending economic theories of technological change and technology policy (Section 2). It is concluded that, despite many pro-market arguments, market imperfections inherent in the process of technological change make the creation of learning and innovation rents by the state potentially very beneficial, especially in developing countries. The next section (Section 3) analyses the political and institutional factors that determine how effectively such rents can be created and managed. After an assessment of technology policy record in developing countries (Section 4) we discuss how the scope of such policy is affected by the recent changes in domestic and international policy contexts such as domestic deregulation and the emergence of a ‘liberal’ world order represented by the WTO (Section 5). The paper ends with a brief conclusion (Section 6).

State, institutions and structural change

Abstract This article develops an ‘institutionalist’ theory of state intervention, especially in relation to the process of structural change. After critically examining the two dominant perspectives on state intervention, namely, welfare economics and neoliberalism, it develops an alternative theory which emphasizes the fundamental uncertainties and the conflicts which pervade economic life. Two key roles for the state in facilitating structural change are identified, namely, ‘entrepreneurship’ in the sense of providing the ‘vision’ for the future and building new institutions and the ‘management of conflicts’ which inevitably arise during the process of structural change. The theory is illustrated by comparing the experiences of the ‘industrial policy states’ of East Asia and France and the ‘social corporatist’ economies of Scandinavia in managing structural change.