State and Market


The question about the appropriate role of the state in economic development processes is constituent to economic theory and policy-making alike. The pretended dichotomy of states and  markets  as  well  as  seemingly  straight-forward  models of  policy  advisors  such  as  the  Washington  Consensus  dominated  academic and political  discussions for a long time. The global financial crisis in 2007 broke to certain extent the dominance and persuasiveness of the neoliberal paradigm and its advocacy for a minimal state and opened the room to new policy approaches.


In particular, with regard to low- and middle-income countries (LMIC), a greater openness for experimentation with market interventions has begun to emerge. The higher vulnerability of LMIC’s economies for external shocks, the significant need for output-legitimation of politics by economic performance as well as the emergence of alternative role models such as China and East-Asian countries make LMIC especially receptive to an altered role of the state in the economy.


Central to most policies is the attempt not to replace market but to overcome market and coordination failures by state interventions and regulations in order to enhance functioning market mechanisms. The research group contributes to the analysis of contemporary forms  of  state  activism  and  the  emergence  of  a possibly  new  economic  paradigm  relevant  for  a  growing  number  of  LMICs.



Governance and State Performance


In general, it is a serious challenge for emerging economies to create and maintain functioning state structures and provide public goods. The long-lasting debate about good governance illustrates the difficulty for LMIC of implementing effective governance, rule of law or fighting corruption.


Promoting economic development by state activism is even more demanding than the creation of a minimal state and the implementation of liberal reforms. Economic coordination adds more complex tasks and requirements to state structures and policy-makers. This makes state failure not less likely than market failure. The history of unsuccessful industrialisation and modernization programs provides eloquent witness. Furthermore, common phenomena such as rent-seeking, business-capture or populist policies of the government are very likely to be even more prominent in an interventionist state.



Given the willingness to intervene in economic processes, policy-makers are requested to come up with solutions to meet the complex requirements towards governance structures. In order to assess the potential success of state-activist measures, the GEE applies a performance-oriented governance framework. The analysis is centered on specific state governance performances that can be distinguished on three levels: 1) structural performances as capability to create and adapt effective governance structures, 2) policy performances as the provision of state services and regulations as specific solutions for market and coordination failures and 3) embedding performances as the ability to embed the economic model and its specific incentive structures within the given socio-political order.



Institutions and Regulations

The conceptual framework is informed inter alia by the New Institutional Economics and the Developmental State literature based on the historical experiences of the East Asian region. Following the understanding of institutions as rules that constrain social behaviour, GEE puts institutions into the centre of its analysis and focuses on the specific incentive structures shaping the interaction within the administration and between state and private sector.


The applied performance-oriented governance approach gives opportunity to study governments’ responses and the making of appropriate incentive structures to create a capable and adaptive-efficient administration, to mobilize and direct economic resources or to build effective partnerships in order to enhance economic performances.



Emerging economies differ in their specific historic, political and economic conditions. The specific institutional solutions may differ accordingly. Governance in Emerging Economies is dedicated to investigating the varieties of solutions and detecting institutional equivalents for commonly-shared economic policy challenges and will, therewith, deepen our knowledge about the chances and obstacles for the state to actively promote economic development.