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States and Markets

Time (GMT +00) 17:00 18:30


Ha-Joon Chang, Reader in the Political Economy of Development, University of Cambridge


Mick Moore, Institute of Development Studies (IDS) at Sussex

In his presentation Ha-Joon Chang summarized his paper on "Breaking the mould: an institutionalist political economy alternative to the neo-liberal theory of market and state". The paper criticises the current dominant neo-liberal discourse on the role of the state and proposes an alternative approach especially in analysing the role of institutions and politics.

Definition of neo-liberalism: Chang defined it as an "unholy" alliance between neo-classical economics (which provided the analytical tools) and Austrian-Libertarian thought (which provided the political and moral philosophy).

Chang questioned 4 fundamental assumptions underlying neo-liberal discourse on the role of the state:

  1. What is the free market? Conventionally a free market can be defined as a market without state intervention. Chang argues, however, that no market is absolutely "free". All markets have some state regulation on who can participate and on what terms but these may become "invisible" if there is a high degree of social acceptance for the interventions and the rights and obligations they creates. For instance, prohibition of child labour.

  2. What is market failure? Market failure refers to a situation when the market does not work like what is expected of the ideal market. Neo-liberals claim that markets only fail rarely and the effects are better than what would be produced by government intervention. They also essentially see the "market" as the "economy". Chang argues that the market is only one of the many institutions that make up a "market economy" and how market "failures" are defined essentially depends on the specific theory of the market that is being used.

  3. Were there markets in the beginning? Chang challenges a fundamental assumption in neo- classical economics that markets are inherently natural institutions. This "Market Primacy" assumption is an inconsequential one for Chang because in the real world markets have nearly always needed state intervention. Recent experiences also show the state's involvement in creating new markets (mobile communications, electricity, internet service etc).

  4. Can we remove politics from markets? Neo-liberalism argues to "depoliticise" the economy on the basis that politics prompts irrational interventions in the markets Chang believes this stance is self-contradictory at best and dishonest at worst because the market is itself a political construct: a) Property rights such as the right to self ownership (for slaves) or the right to vote (for women) were usually established in the beginning through very political processes and b) no prices in reality are without "political" influences. Wages, for example, is an important price modified by through minimum wage legislation and other regulations around trade unions, welfare entitlements and immigration controls.

In calling for depoliticising neo-liberals may be undermining processes of democratic control. Chang does not deny that some distancing between politics and the market may be necessary to maintain an objective anchor but not to the extent that neo-liberals demand.

Chang stated that in order to overcome these analytical weaknesses the development of a different framework was required: one which he calls institutionalist political economy. He outlined its central theoretical features:

  1. Analysis of the market: This framework emphasises that understanding markets requires an analysis of complex set of formal and informal institutions in both their definition and operation. Institutions that need to be incorporated into the market may be "invisible" but these need to be subjected to scrutiny as well. These include institutions that: a) limit participation for example laws and private sector agents such as professional organisations can specify who can participate in which labour markets b) determine the legitimate objects of market exchange for e.g. human organs may be excluded from market participation c) define what exactly each agent's rights and obligations are in which areas for e.g. fire regulations effects on property rights in land and d) regulate the process of exchange itself such as social conventions.

  2. Analysis of the state: This framework adopts a more complex view of the inter-relationship between motivation, behaviour and institutions. It proposes that human motivations are varied and interact with each other in complex ways. These motivations are internalised from the institutions surrounding individuals what he calls the "constitutive role of institutions". Behaviour can be altered not only through changing institutions that define incentives but also through ideological and institutional changes that influence individual motivations themselves.

  3. Analysis of politics: Neo-liberalism has addressed the role of politics in the market. In their view politics is inevitably corrupts the market but markets are themselves political constructs. Neo-liberals also fail to see that institutions influence individuals motivations and worldviews directly through influencing: a) perceptions of their interests by individuals for e.g. with more class conscious political parties many more voters will vote on "class lines", b) people's views on what kinds of issues are legitimate targets of political action c) how individuals perceive the legitimacy of particular types of political actions.

Mick Moore
clarified certain parts of the discussion. He stressed that neo-liberalism is not the same thing as faith in markets. Neo-liberalism is faith in markets and "anti-politics". He disagreed with Chang in that for him probably only economists believed that markets implement before neo-liberalism. He said that Chang had focussed on the real problem: neo-liberalism's impact on development policy. It offered a convincing story for why international financial institutions and other organisations were needed and it empirically fit into what could be done in Africa.

Moore felt that neo-liberalism grew out of very specific needs and now those needs have been met. One of the biggest casualties of neo-liberalism was the re-invigoration of an old scenario in which advanced countries put laws to keep developing countries out. But we may be past that because a) most of the things done in Africa under neo-liberalism have been done b) other things are coming on the agenda such as the impact of the new Asian economies c) advanced countries may not be able impose laws because Asia is changing the terms of trade.

Points raised in the discussion centred on the following points:

8. Content of presentations:

  • The Washington Consensus and its ideas about the state mainly draw on the US's development experience in Latin America. This is often overlooked.

  • Advanced countries may impose stricter terms on developing countries to "save them from themselves" for instance current WTO discussions proposing faster dismantling of trade barriers in developing countries because of the level of rent-seeking behind tariffs compared with advanced countries.

  • Neo-liberalism may not be on the decline as Asia's growth doesn't necessarily propose a different model or a more constructive one e.g China's role in Africa. Chang commented that China offer certain countries bargaining leverage which can be useful.

  • There is a difference between capitalism and markets. The best way to build up capitalism may actually be through state interventions which the East Asian experience exemplifies.

  • Countries are not significant units in determining economic growth it is actually space that matters. For instance it is not "Asia" that is expanding rapidly but a whole host of coastal cities that are growing.

  • Neo-liberalism offered clarity. Developing countries needed to privatise, deregulate, liberalise and control inflation. Now the debate is either on a) PR Reductionism: property rights are key for development b) laundry list: everything you want in society.

  • State intervention may have not worked well in the 60s and 70s but developing countries were growing with bad policies had an economic growth rate of 3% while in the 90s s it was below 2%. Even in terms of growth performance has been falling.

  • There has been very little change in the models used by advanced countries except changes required for EU integration.

Way forward:

  • On aid agencies genuinely changing their approach to take the state more seriously and allow for more "messiness". Aid agencies have realised that old simplistic models don't work but they still have their particular vision of the "right" economic policies and the "right" society. Aid agencies have also lost the complete autonomy they had to prescribe policies. Aid flows are declining in importance except in Africa and even there China is making its presence felt.

  • Aid agencies should still emphasize technocracy. We shouldn't reduce its worth my emphasizing politics.

  • Best proxy for economic growth is the rates of private investment.

  • In a capitalist world with globalisation, reduced transport costs, there will be a lot of investment in countries with governments that are "not too bad".

  • Gradualism is an important feature of any state developing. Whether to achieve it top down or bottom up depends on the situation at hand. Japan for instance has a patchwork of institutions.

  • More investment is needed in the ideas industry. Think tanks that actually engage decision makers have to be supported.


Ha-Joon Chang discusses an alternative to the neo-liberal theory of market and state in the fifth meeting in the '(Re-)Building Developmental States: From Theory to Practice' series.