Development and Underdevelopment in the History of Economic Thought

Hamlet returns (with a twist): industrial policy and development assistance in historical perspective

Silva Joao, Centre for African and Development Studies/ Lisbon School of Economics and Management - University of Lisbon

In 2010, Ha-Joon Chang argued that, while productive transformation had once been the most central concern, it had disappeared from the development discourse – development had become ‘Hamlet without the prince of Denmark’. Nevertheless, in the last decade, Hamlet has returned. This paper analyses this ‘return’ by exploring, in historical perspective, two important fields in the development arena – industrial policy and foreign aid. The first part of this paper examines the rise and fall of productionism, i.e., the focus on productive transformation. In the three decades after World War 2, ‘Big Push’ and other interventionist theories fostered industrialization-focused economic planning in developing countries. Faced with the Cold War, industrialized countries started providing significant sums of aid that supported recipients’ agendas, largely based on ‘two-gap’ models. However, as Neoliberalism took root in stagnant industrialized nations in the late 1970s, foreign aid became a tool to promote Neoliberal policies in developing countries. After the ‘raw’ Neoliberalism of the 1980s, Endogenous Growth theories, Human Development, and New Institutionalism, provided a foundation for aid to be geared towards education, health, poverty alleviation, and ‘good governance’, in roughly the thirty years that followed. In the last decade, however, productionism has been revived, as analysed in the second part of this paper. The rise of China in the foreign aid landscape, with deep pockets and a focus on infrastructure and productive transformation, has provided developing countries with alternatives to traditional donors, which themselves have started emulating Chinese aid strategies. Inspired by Chinese state-led industrialization, developing countries have been re-adopting production-focused development planning. Parallel to these actions, industrial policy has been re-entering the mainstream of economic thought in academia and in policy circles of industrialized countries.

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Keywords: Development; Industrial Policy; Foreign Aid; Development Assistance