Late Industrialization, Knowledge Acquisition, and Institutional Building

This blog is part of a series of podcasts and thought pieces commemorating the tenth death anniversary of Professor Alice Amsden, the foremost heterodox economist who taught at MIT.

Rolph Van Der Hoeven has held many positions including Chief Economist of UNICEF, Manager of the ILO’s Interdepartmental Project on Structural Adjustment and Employment, and later as Chief of the Macro-Economic Policies Branch. He is an Emeritus Professor of Employment and Development Policy at the International Institute of Social Studies (ISS) of the Erasmus University (EUR) in The Hague.

Collaboration with Alice Amsden

Alice and I worked in 1984 with Gerry Helleiner and Lance Taylor in a UNU-WIDER research project reviewing the stabilization policies proposed and undertaken by the Bretton Woods institutions (synthesized in Taylor 1988: Varieties of stabilization experience: Towards sensible macro-economics in the Third World). Alice contributed to Korea and I in Kenya (contributions which later grew out into Amsden 1989 and Van der Hoeven 1988). Almost a decade later we analyzed how wrongly applied macroeconomic and adjustment policies led to ‘Labor’s loss in non-Southeast Asian developing countries’ (Amsden and van der Hoeven, 1996). The ongoing liberalization and privatization policies fed into a rapid process of globalization, often to the detriment of labor. In 2003 Alice and Alisa Di Caprio joined my research group for The World Commission on the Social Dimensions of Globalization. They concluded that development in most poorer developing countries was seriously hampered by wrongly recommended, or even enforced macro-economic and adjustment policies and that these countries therefore could not take advantage of the special treatment they were granted under various WTO regulations, and recommended a substantial revision in the international financial and trade regime. (Di Caprio and Amsden 2004). Alice and I continued our collaboration later in a project of the International Institute of Social Studies on Employment, Inequality, and Globalization (van der Hoeven 2011) where Alice very lucidly analyzed that, while poverty alleviation and human development had become accepted objectives of development policies, a neglect of appropriate macroeconomic and structural change policies to increase demand for labor, resulted in slower structural transformation (Amsden 2011).

Alice was always a visionary. In her book, Amsden (2007), she predicted that the dominance of US international trade and financial policies would gradually change from benign support to more adversarial macroeconomic and trade policies.

In 2024 we would all have wished that prediction would have been wrong ….

Late Industrialization, Knowledge Acquisition, and Institutional Building

Heterodox development economics challenges conventional or orthodox economic theories. While neoclassical economics emphasizes market efficiency, deregulation, and the importance of free markets, heterodox approaches argue that development is a complex process requiring state intervention, historical context attention, and restructuring or building social and economic institutions.

Amsden’s work on South Korea (Amsden, 1989) presents a compelling case for the role of the state in promoting industrialization in the Global South, challenging the prevailing narrative that the free market primarily drives economic growth and instead argues that state-led initiatives were central to South Korea’s rapid transformation. The state played a critical role in guiding industrialization by providing subsidies, regulating industries, and promoting strategic sectors, which Alice called the “governed market”. Rather than allowing industries to develop purely according to market forces, key sectors for development, such as steel, automobiles, and electronics, are identified, and financial support and incentives are provided.

Another important concept that Amsden introduced to heterodox development economics is the idea of “late industrialization,” where countries that industrialize later must learn from the experiences of early industrializers. Latecomers face significant disadvantages, such as a lack of technological capabilities and established industries. However, these latecomers can overcome these obstacles through a process of learning, often facilitated by the state. Late industrializers must build “learning capabilities” to catch up with advanced economies through acquiring technology, mastering production processes, and gradually improving productivity. The state plays a crucial role by investing in education, providing subsidies to nascent industries, and fostering relationships with foreign firms to acquire technology and expertise. Development is not merely a matter of capital accumulation but also knowledge acquisition and institutional building.

However, the catching-up process also depends on macroeconomic policies and on how states have dealt with structural adjustment. In our academic collaboration on this issue, we found that in the period of structural adjustment in the 1980s and early 1990, various East Asian countries managed to implement, in different varieties, heterodox economic policies. However, other Asian, African, and Latin American countries, mostly under the tutelage of the Bretton Woods institutions, followed more orthodox economic policies (the Washington Consensus). Amsden and van der Hoeven concluded that the contractionary global environment of the 1980s inhibited expansion in precisely those industries that are typically regarded as the comparative advantage of developing countries. This showed that forcing firms to restructure under highly contractionary (and destabilizing) conditions stymied rather than stimulated change (Amsden and van de Hoeven, 1996).

Alice’s heterodox approach to development economics also highlights the importance of equity and social policy in promoting development and structural change. While many orthodox economists emphasize the importance of economic growth, she was particularly concerned with how growth is distributed and with the social consequences of industrialization, arguing that development should not only aim to increase national income but also improve the population's living standards. In South Korea, for example, the state implemented policies that promoted a relatively equitable distribution of income and wealth, such as land reforms and investment in education. These policies helped to reduce inequality and ensured that the benefits of industrialization were broadly shared across society. By promoting both growth and equity, South Korea was able to avoid some of the social problems that have plagued other developing countries in periods of adjustment and liberalization, such as high levels of poverty and social unrest.

Heterodox Approaches to Poverty Alleviation

In her concern for poverty, though, Alice rightly warned that policies for the poor are poor policies and that dominant attention on poverty alleviation could stand in the way of necessary structural transformation. She emphasized the importance of productive employment and decent wages: ‘To slay the dragon of poverty, deliberate and determined investments in jobs above starvation wages must play a central role, whether for self-employment or paid employment. The grass-roots approach to solving poverty does not go far enough, because it aims only at improving the supply side of the labor market, making job seekers more capable, and not the demand side, making new jobs available for them’, (Amsden, 2010). ‘Simply because the supply of jobseekers is better clothed, housed, and fed will not result in higher levels of employment’. She observed that by not strengthening the demand side for labor supply-side poverty alleviation has left poverty rates for the poorest people often unchanged and that employment generation is different from poverty alleviation because it has a concept behind it, ‘capital’. The labor market is influenced by, and influences, all flows through the savings-investment nexus, including accumulation, distribution, and innovation. It is at the heart of political conflict. Multi-faceted policies, therefore, are required to promote employment growth, from fiscal and monetary to industrial and trade. ‘Poverty alleviation has its policy rages, too, but they are more confined, outside the capital accumulation process. Still, the co-ordination of policies to create employment in the Third World’s most impoverished regions is not impossible even if it is multifaceted. Excellent work in the 1970s was produced on the subject, only to be shelved in the 1980s for political reasons (Amsden 2010).

A Final Word

Alice’s contributions to heterodox development economics had a lasting impact, particularly her emphasis on the role of the state, the importance of learning in late industrialization, and the need for equitable social policies. Her work challenges the dominant neoliberal paradigm, arguing that markets alone cannot drive development in late-industrializing countries. Amsden’s insights continue to shape debates about development policy and provide a valuable framework for understanding how countries in the Global South can achieve sustainable, inclusive growth.

Alice’s work remains extremely relevant to current globalization and deglobalization. Developing countries, especially the least developed countries, continue to grapple with the challenges of industrialization in an increasingly integrated global economy. While globalization has opened up new opportunities for trade and investment, it has also exposed developing countries to intense competition from more advanced economies. Industrial policy remains, therefore, critical in this context, as it can help developing countries build competitive industries and avoid becoming dependent on low-wage, low-skill sectors.

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References

Amsden, A. (1989) Asia’s Next Giant: South Korea and Late Industrialization, Oxford University Press, Oxford,

Amsden, A. (2007) Escape from Empire, The Developing World’s Journey from Heaven and Hell, Cambridge (USA), MIT Press. Boston.

Amsden, A. (2010) ‘Say’s Law, Poverty Persistence, and Employment Neglect,’ in van der Hoeven (ed.), (2010))

Amsden, A. & R. van der Hoeven (1996) ‘Manufacturing output, employment and real wages in the 1980s: Labour's loss until the century's end’, The Journal of Development Studies, 32:4, 506-530,

Di Caprio, A. and A. Amsden (2004) Does the New International Trade Regime Leave Room for Industrialization Policies in the Middle-Income Countries? International Labour Office Working Paper No. 22,  http://dx.doi.org/10.2139/ssrn.908169

Taylor, L. (1988) Varieties of Stabilization Experience, Towards Sensible Macroeconomics in the Third World, Clarendon Press (OUP) Oxford,

Van der Hoeven, R. (1988) Planning for Basic Needs: A Soft Option or a Solid Policy? A Basic Needs Simulation Model Applied to Kenya, Gower, Aldershot, 1988

Van der Hoeven R. (2008) ‘Interview with Alice Amsden’ in Development and Change, Vol 39 No 6,

Van der Hoeven (ed.), (2010) Employment, Inequality and Globalization: A Continuous Concern, Routledge, Abingdon, UK