Neoliberalism has not been all bad for developing countries. Any program for economic change must confront their unique challenges.

This forum is featured in Boston Review’s Summer 2019 issue Economics After Neoliberalism.

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After nearly four years of working as chief economic adviser to the government of India, I find the Economics for Inclusive Prosperity (EfIP) initiative frustratingly peripheral to the concerns of developing countries, especially the poorer among them. Full disclosure: Dani Rodrik is a friend and long-time collaborator on work that challenges aspects of EfIP’s paradigm..

To begin with, the EfIP critique responds to problems in advanced economies. It is true that in the rich world, the neoliberal model has failed to deliver much of anything besides enormous returns to the rich and decent GDP growth (and even the latter has not always been a given). Productivity growth has slowed to a crawl, median incomes have stagnated, mobility has declined, and inequality has increased sharply. These problems have in turn bred the political pathologies of democratic authoritarianism and illiberal populism.

In the rich world the neoliberal model has failed, but in the developing world things have largely gone right.

But in developing countries over the past quarter century—the high noon of the neoliberal paradigm—things have largely gone right. As Justin Sandefur, Dev Patel, and I showed recently, standards of living across the developing world have begun to catch up to those of the rich world in a way that has not happened for centuries. To be sure, this performance is not guaranteed to continue. But the question remains: What is the problem to which the EfIP critique is offering a solution?

The mismatch is most apparent in EfIP’s specific policy proposals, aimed at the pitfalls of austerity, secular stagnation, the new focus on “predistribution” (for example, via minimum wage increases) as opposed to traditional redistribution, and the reining in of runaway finance. None of these would feature in the list of policy priorities for the average developing country.

Even on the most important contribution of the Ef IP critique— that inclusiveness should be central to the discourse of growth, rather than an afterthought—there are risks for developing countries. This is not because income is distributed more equally there; far from it. But high marginal income taxes and wealth taxes are less feasible and less effective in countries with weak state capacity, which breeds evasion and corruption. Moreover, there is the risk of overcorrection; if the pendulum should swing too far away from a focus on economic growth, progress for the lives of billions will remain limited.

If the pendulum should swing too far away from a focus on economic growth, progress for the lives of billions will remain limited.

The EfIP agenda also seems to ignore the lessons learned by policymakers in developing countries. It stresses the defects of markets and the virtues of the state, suggesting the perceived imbalance can be restored by reinvigorating the state. It is certainly true that the neoliberal paradigm exaggerated the virtues of markets. But it is also true that the performance of developing countries improved in part because they adopted some (but not all) of the neoliberal paradigm, such as the need to ensure macroeconomic stability and eschew value-destructive policy interventions.

The greatest flaw of the EfIP critique is the dichotomy that it poses—or, perhaps, presupposes—between states and markets. The reality in developing countries is that both states and markets are weak. One might say that this is the very condition of underdevelopment. Essential public services are delivered poorly or not at all, while at the same time markets are afflicted with cronyism, inadequate contestability, and excessive concentration of power. When India dismantled the License Raj, for example, in order to allow a greater role for the private sector, some of these markets then developed a concentration of power that reflects a serious regulatory failure on the part of the state itself. Meanwhile, other markets, such as banking and aviation, malfunction because the state is unable to facilitate the exit of the inefficient, politicized public sector incumbents.

As a result, in developing countries the task is not to redress an imbalance between two robust forces—markets on the one hand, states on the other—but to create and strengthen them in the first place. In some sense, this double challenge is unsurprising, for Karl Polanyi pointed out long ago how deeply markets are embedded in the state and other social institutions.

But how can state capacity be improved? This is a mystery. After all, the Indian state has for decades been unable to deliver basic health and education. But the same Indian state has been effective in implementing something as politically, technologically, and administratively complex as the Goods and Services Tax (GST). Similarly, India has been able to regulate capital markets reasonablywell, but has had only limited success in regulating pollution. Why the difference? Truth be told, we do not have a clue.

The task is not to redress an imbalance between two robust forces—markets and states—but to create and strengthen them in the first place.

Some time ago, economists hoped the problem would solve itself, at least to some extent, because institutions would improve as incomes rose. But this has not happened with any regularity. Most strikingly, educational outcomes in India have remained flat or even deteriorated, despite 40 years of high GDP growth (often well above 6 percent annually) and soaring private returns to education. I cite India not because it is representative but precisely because it is an outlier. If serious problems of state capacity and institutions persist even after four decades of stellar economic growth, imagine the plight of most countries, which have experienced much less dynamism.

The EfIP agenda would be more compelling to a global audience if it made these issues central to its thinking. In the end, the real contribution of the critique is one of sensibility. Its emphasis on moving from certitudes to openness, narrowness to ecumenicism, and templates and best practice to “it all depends” and “context matters” represents real progress. Humility replacing hubris is unambiguously good news.

But humility may not be enough. Perhaps there is a deeper truth that we are condemned to accept. Economics might well help us understand the world but give us little guidance on how to change it. It may not have much to say on reforming the big things that really matter, such as basic institutions and the markets they support—a task that is central to countless economic and social outcomes. And that seems to be as true of the new critique as it was of the neoliberal paradigm that the brave new warriors are seeking to supplant.