Underdevelopment and unregulated markets: why free markets do not lead to catching-up

Hansjörg Herr
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Hansjörg Herr: Berlin School of Economics and Law, FMM Fellow and Berlin Institute for International Political Economy (IPE), Germany

European Journal of Economics and Economic Policies: Intervention, 2018, vol. 15, issue 2, 219-237

Abstract: After World War II, only a few developing countries were able to catch up to the real GDP per capita levels prevailing in developed countries. These successful countries in almost all cases were in Asia and did not follow the free-market doctrine in the tradition of the Washington Consensus. There must be theoretical explanations as to why underdevelopment is reproduced and most countries in the world do not catch up. This essay reviews different economic approaches that attempt to explain the lack of convergence. The aim is to explain why neither trade based on comparative advantages, nor on economies of scale, nor in global value chains, can cure the lack of sufficient productivity development. The essay will also cover special features like negative terms-of-trade effects, abundance of scarce resources, and premature de-industrialisation. Also distorted financial systems, high inequality, and restrictions on macroeconomic demand management are briefly discussed. As most developing countries suffer from several of these factors, this approach can explain why development is only possible with the support of comprehensive regulatory government policies and a change in global governance.

Keywords: underdevelopment; financial system; free trade; inequality; Keynesian paradigm; Washington Consensus (search for similar items in EconPapers)
JEL-codes: B50 F40 O11 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (4)

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