Debunking the ‘Free Market Miracle’: How industrial policy enabled Chile’s export diversification

Assessing industrial policies in Chile remains a rather contentious and divisive topic. Chile has long been held up as an almost‐textbook example of the success of ‘letting the market work’, as there was a broad agreement among mainstream economists that Chile has largely succeeded in promoting strong and stable growth because it has embraced free market policies. At first glance, this may seem believable.  Afterall, Chile has one of the fastest growth rates in Latin America since its neoliberal turn in the 1970s. Despite the continuing significance of copper, it has also managed to diversify into other sectors and acquire new competitive advantages between the 1960s and 1990s. The dominant view sustains that the successful emergence of new competitive sectors in Chile’s export basket are the result of four decades of commitment to liberalization and free market policies. However, this post, which is based a recent study, shows that Chile’s export diversification was not the result of free market policies, but of carefully crafted government interventions. The idea of Chile as a ‘free-market miracle’, as first described by Milton Friedman, is therefore one of the most enduring myths associated with recent economic development history.

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A new Washington Consensus on the role of the state?

By Ilias Alami, Adam Dixon and Emma Mawdsley

In a recent op-ed, Martin Sandbu of the Financial Times argues that “the conversion by the IMF and World Bank to support the activist state would put Saul of Tarsus to shame.” According to him, we may be witnessing the rise of a new Washington Consensus, which embraces deficit spending (by rich countries), “temporary solidarity surtaxes” on the rich and businesses, green public investment, and other forms of government intervention. This is not only to address the short-term effects of the pandemic, but also to stimulate demand across the world economy. Sandbu finds evidence of this new consensus in the benign view that the IMF has taken on Biden’s “rescue package”, and claims that “the new Washington consensus could prove as politically powerful as the old one.” In another op-ed in October 2020,

Sandbu characterised this new consensus as follows:

“After 1945, the guiding assumption was, first, that the state knew best, then that the private sector was best. We are about to transcend both, in favour of an economic worldview based on finding ways in which government intervention can guide the private sector to perform better. In that sense, economic planning and the activist state are back.”

It is indeed striking that the IMF, the World Bank, the OECD, the G20, and other multilaterals, have adapted their discourse on the role and place of the state in development. This predates the COVID-19 pandemic. In an open access paper recently published in Antipode, we document the emergence of this new vision of the state in development and outline its key features. Since the early 2010s, these institutions have produced a remarkable wealth of material explicitly concerned with old and new forms of state ownership and intervention. Witness, for instance, this November 2020 EBRD Transition report titled The State Strikes Back, or this chapter dedicated to state-owned enterprises in the IMF 2020 Fiscal Monitor. Our analysis of such policy documents and others suggests that we are witnessing a gradual yet fundamental reorientation of official agendas and discourses about the state. This emerging vision embraces a fuller role of the state in development (than the post-Washington Consensus), including as promoter, supervisor, and owner of capital. Our analysis expounds the material context in which this vision is emerging. Two interrelated transformations are particularly important.

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Economic Sovereignty for Developing Countries: What Role for Modern Money Theory?

With modern money theory (MMT) receiving impressive attention, the implications this theory has for developing countries have also been discussed more intensely. Emphasizing both its strengths and gaps provides a great chance to further develop macroeconomic strategies for poverty reduction and environmental sustainability.

In brief, the theory starts from the statement that money is issued by the government and brought into circulation via its expenditures. The government does not rely on taxes to fund expenditures when it is itself the source of money. Therefore, money can be created upon demand, is not limited, and can be used by the government to finance all expenditures it considers necessary to achieve policy goals such as full employment or a Green New Deal. The reason why agents in the economy accepts this money only consisting of numbers without any intrinsic value is the obligation to pay taxes. Since the state has the power to impose taxes, individuals need to get hold of money as this is the only way to meet their obligations; this is how the currency is accepted as a means of payments. The government thus has the power to run unlimited deficits because the fact that money is needed to pay taxes guarantees its acceptance even if those taxes do not cover expenditures. In fact, the government should run deficits because it creates the demand required for full employment while a balanced budget constrains it. The government cannot go bankrupt because there is no lack of currency it issues itself. The conditions identified by MMT for the system to work are the following: 1) the country must be sovereign of its own currency and 2) inflation needs to be kept under control. Once the latter starts accelerating due to increased nominal demand stemming from government expenditures, taxes can be increased in order to withdraw money from circulation. However, as long as full employment is not achieved, prices are argued to remain stable.

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Developmental Agency under the Radar: Developmental States and Coalitions in Dependent Market Economies and Low-Tech Sectors

In a recent paper co-authored with László Bruszt and published in a Special Issue of Review of International Political Economy, we identify a developmental state in the least likely  of times – the period of hegemonic neoliberalism in the 1990s and early 2000s –  and the least likely of places, namely the post-socialist Central Eastern European (CEE) economies conventionally described as FDI-dependent Dependent Market Economies (DMEs). 

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COVID-19: how to transform the industrial policy toolkit in developing nations


COVID-19 presents some leeway for countries to pursue industrial policy on their own terms. However, as crisis conditions dissipate, current economic theory is of little help. Current perspectives range from the almost theological to the overly positivistic. Mainstream economists who have tried to ‘mainstream’ industrial policy in recent times offer simple econometric-centred reasoning that seeks to find cross-country regularities instead of nuanced and real-world application based on a country’s economic history. They apply highly positivistic and proscriptive worldviews claiming industrial policy should reveal latent ‘comparative advantage’. On the other hand, and perhaps equally misguided, heterodox scholars who reclaim the structural roots of industrial policy have anchored it in increasingly irrelevant empirical foundations that would only be useful for countries with already existing manufacturing bases. The latter have opted for the more theological approach that presupposes classical growth as an end of any industrial policy as a positive development. I hope that we seize the chance to encourage a new paradigm for industrial policy beyond narrow prescriptions and dominant worldviews.Read More »