Development theories not only explain human economic activities but also shape them by influencing public expectations and policymaking. Neoliberal economic theories from the Global North once dominated development narratives, but their policy prescriptions significantly delayed the economic modernisation and catch-up efforts of the Global South. In recent years, the theoretical foundations of neoliberalism (market fundamentalism) and its policy prescriptions (the Washington Consensus) have lost credibility, prompting the Global South to explore state-led development paths. However, summarising neoliberalism’s failures, addressing post-neoliberal challenges, and seeking alternatives remain crucial for the Global South to economically catch-up with the Global North. In this endeavour, it is imperative to avoid dependence on ‘Northern theories’ and develop ‘Southern theories’ that are rooted in the Global South’s own practices and experiences.1

The Rise and Fall of Neoliberalism​

The precise definition of neoliberalism is debatable but its core principles are uncontested: ‘more market (less state) brings prosperity’.2 Neoliberalism’s foundation lies in economics theories with market-fundamentalist traits; these theories assert that the free flow of goods, capital, and labour yields greater efficiency and welfare. At a national level, this implies that minimising all forms of state intervention in the market should automatically increase economic growth rates; internationally, neoliberalism posits that globalisation (increased economic integration among nations) is a win-win strategy for countries in both the Global South and the Global North. Neoliberalism’s policy prescription is the Washington Consensus, which confines the state’s role to providing basic infrastructure, education, and protection of property rights. Concretely, domestic economic policies should prioritise deregulation (reducing government distortions across sectors to let the market and price signals function effectively), while external economic policies should focus on liberalisation (lowering investment barriers and eliminating tariff and non-tariff obstacles to free trade).

In the 1980s, neoliberalism was propelled into mainstream development narratives through an alliance between US business groups and the then-marginalised neoliberal school. During the Third World debt crisis in 1982, the World Bank and International Monetary Fund (IMF) introduced Structural Adjustment Programmes (SAPs) as loan conditions, mandating recipient nations to implement fiscal austerity, trade liberalisation, economic deregulation, and privatisation. Subsequently, SAPs were widely imposed across Asia and Africa, effectively becoming ‘a campaign to shrink the state’ in the Global South.3 Additionally, the US spearheaded numerous multilateral and bilateral investment and intellectual property agreements that asymmetrically safeguarded the interests of US (and other developed countries’) multinational corporations vis-à-vis Global South nations. Concurrently, the notion that ‘more market (less state) brings prosperity’ gained ideological legitimacy as a consensus view. Reports from international organisations dismissed industrial policy as ineffective, reducing the success of state-led industrialisation in East Asia to simplistic explanations like marketisation or trade liberalisation. In 2002, the New York Times even declared, ‘Countries that open their economies and minimise government roles will inevitably achieve faster economic growth and rising income levels’.4

However, neoliberalism has failed to deliver the prosperity it promised. Global South countries that adopted Washington Consensus-style policy prescriptions – whether voluntarily or through coercion – have experienced pronounced economic volatility, decelerated growth, surging unemployment, and worsening social inequality. More critically, the Global South has been unable to economically catch-up with the Global North under neoliberalism. Since the 1990s, only a handful of economies successfully transitioned to high-income status, while the vast majority of Global South countries remain trapped in middle- or low-income status.5 As for the Global North, core states like the United States and United Kingdom have aggressively pursued domestic privatisation and labour market deregulation since the late 20th century. The resulting rise in income and wealth inequality has fuelled social discontent and political instability. But in recent years, the Global North has witnessed a revival of industrial policy – evidenced by the US Inflation Reduction Act and the use of ‘reciprocal tariffs’, and the European Union’s strategic interventions in the electric vehicle and semiconductor industries. In sum, the experiences of both Northern and Southern states have substantially eroded the theoretical foundations and policy appeal of neoliberalism.

While the neoliberal order has faced increasing scepticism since the global financial crisis, mainstream economists have begun using the concept of market failure to justify industrial policies that support the development of strategic industries (representative scholars include Joseph Stiglitz and Dani Rodrik). These arguments have garnered widespread attention and discussion within mainstream economics – a scenario that would have been unimaginable in the 1990s. In terms of policy practice, countries in the Global South have actively begun exploring state-led, domestically-tailored paths for economic catch-up. Many leaders in the Global South have explicitly rejected Washington Consensus-style policy arrangements and publicly advocated for an active governmental role in areas such as income distribution, foreign investment, and industrial planning.6

State-Led Industrialisation Remains Essential

Neoliberalism’s failures underscore that state-led industrialisation is indispensable for the Global South’s economic catch-up. Market mechanisms alone cannot overcome domestic and international barriers; proactive governments are vital for growing the manufacturing sector. The failure of economic catch-up in the neoliberal era has three key lessons:

1. The irreplaceable role of manufacturing.
   The pessimistic outlook for economic catch-up under the influence of neoliberalism largely stems from the stagnation of manufacturing in the Global South. Historically, the global economic North-South divide was a result of disparities in industrialisation. Industrialisation has served as the foundation for the vast majority of successful economic catch-ups. Under the neoliberal order, Africa and Latin America – regions with poor catch-up performance – are also those most severely affected by premature deindustrialisation. In many countries within these regions, labour has consequently accumulated in low-end service sectors characterised by low value-addition and a high proportion of informal employment, while capital has been channelled into rent-seeking or speculative activities in areas such as natural resources, finance, and real estate. These nations may experience rapid growth when global commodity prices are high and interest rates are low, but they quickly fall into crisis when aggregate demand in developed countries is insufficient or major central banks raise interest rates. It is this highly volatile growth pattern that prevents these countries from achieving sustained convergence with the income levels of industrialised countries.7 In contrast, China – the most promising example of economic catch-up over the past four decades – is characterised by a manufacturing sector that has continuously expanded in scale and upgraded technologically. Some argue that in the age of digital technology, the service sector can replace manufacturing as the driver of economic catch-up – a view seemingly corroborated by the rapid growth of services in countries like India, the Philippines, Rwanda, and Kenya. Nevertheless, high value-added services (e.g., research and development, production management, and e-warehousing) remain intrinsically linked to manufacturing, making it difficult for them to achieve large-scale expansion in isolation. Moreover, there are no historical precedents of successful economic catch-up driven solely by the service sector.8
2. The need for state-led industrial policy.
   The neoliberal order limited the governments’ willingness and ability to support industrial development, leading to the stagnation of industrialisation in the Global South. In the wake of economic and financial crises, many nations were pushed into Washington Consensus-style reforms: vital state-owned enterprises were privatised, controls on cross-border capital and exchange rates were lifted, tariffs were slashed, and policy tools like import quotas or mandatory technology transfers were outlawed. For example, India’s weighted tariff rate on manufacturing products dropped sharply from 42% in 1992 to 12.7% in 2005, and economic liberalisation gave rise to oligarchic and rent-seeking enterprises in sectors such as mining, telecommunications, and energy. This left India’s government with neither the resources nor the will to continuously support the development of manufacturing sectors like automobiles and pharmaceuticals.9 However, behind almost all successful economic catch-ups in history, the state has used industrial policy to mobilise various and guide resources into the manufacturing sector. Southern countries lacking proactive state action have experienced insufficient investment in manufacturing (for example, due to high uncertainty for private enterprises) and conflicts of interest surrounding manufacturing (for example, elites from the financial and mineral sectors often obstruct manufacturing development).
3. Foreign dependency hinders upgrading.
   The international division of labour within the neoliberal order is based on fragmented production. Southern countries are therefore easily locked into low value-added production activities. Southern countries participating in the international division of labour heavily rely on imported intermediate products and machinery, and are unable to obtain the necessary capital and technology for upgrading. For example, the local parts utilisation rate in South America’s export processing zones is only between 3–9% (in the Dominican Republic, it is 0.0001%).10 The reason for this situation is the unwillingness of international investors to upgrade: their incentive is to allocate investment regionally or even globally to reduce costs, and they have no intention of helping Southern countries raise their technological level. If a firm from a Southern country threatens their high value-added production activities (such as research and development, capital goods manufacturing, supply chain management, product marketing, etc.), multinational corporations use various means to limit the potential for upgrading, such as restricting the supply of capital goods and components, sharply increasing prices, or suing through the investor-state dispute settlement mechanisms. In fact, successful economic catch-ups in history have all been based on domestic enterprises with their core production activities located within their own country. Domestic enterprises naturally have the incentive to earn higher profits by upgrading to higher value-added production activities. For example, in South Korea, Taiwan Province, and the Chinese mainland, local companies in industries such as electronics have participated in transnational production through lower value-added activities while gradually moving up the industrial chain to increase domestic value-addition. At the same time, there is no case of achieving economic catch-up solely by relying on foreign investors.11 Therefore, governments should actively provide domestic enterprises with resources and opportunities for manufacturing upgrades through industrial policies.

Challenges to Economic Catch-up in the Post-Neoliberal Era

Policymakers in the Global South have begun to recognise the limitations of neoliberal theory and practice, and have turned to promoting state-led industrialisation. However, achieving this goal in the post-neoliberal era is not easy. Southern countries face at least three interconnected obstacles: digital technology, oligarchic enterprises, and great power competition. The interaction between these three factors places extremely high demands on the governments in the Global South for resource investment, making the difficulty for each country to independently advance its economic catch-up significantly greater.

1. Digital technology reduces the labour absorbed by manufacturing.
   Technology in manufacturing has a clear labour-saving tendency. For example, during their period of rapid industrialisation, the manufacturing sector’s share of employment in Europe and the US was close to 40%, whereas currently in Vietnam (a country with a relatively outstanding industrial performance), it is only 18%.12 This trend will produce a series of chain reactions. Historically, industrialisation often created a large number of stable employment opportunities, thereby cultivating social groups that supported manufacturing expansion. However, the development of digital technology is gradually reducing the size of this beneficiary group, and correspondingly increasing the difficulty for the state to obtain support for industrial policy from various social groups.13 Internationally, the investor appeal of cheap labour in Southern countries may be significantly weakened, which could lead to intense competition and further suppress the value-addition that Southern countries can obtain.Moreover, digital technology increases the investment required for upgrading. The productivity enhancement mechanism of the Fourth Industrial Revolution comes from the interconnection of numerous domains; digital islands in isolated domains (regardless of their level of technological advancement) make it difficult for Southern countries to truly enjoy the dividends of new technologies. In other words, discussing the Internet of Things, artificial intelligence, and big data analytics in an economy that has not set up the internet or popularised sensors is meaningless. However, the popularisation of sensors, network connectivity, and digital skills training in a general sense all require proactive action from the governments of Southern countries. Therefore, the advancement of digital technology makes the task of promoting basic interconnectivity in the Global South increasingly urgent.
2. Oligarchic enterprises squeeze the profit margins of Southern countries.
   Under the neoliberal order, the governments of developed countries, led by the US, were keen to sign bilateral and multilateral free trade agreements with Southern countries. But these agreements established the oligopolistic or even monopolistic status of multinational corporations. Currently, the revenue of oligarchic enterprises from industrialised countries is already comparable to the gross domestic product of many Southern countries; these enterprises have achieved dominance over global value chains through product design, manufacturing standards, process management, and market logistics, and are thus able to squeeze the profit margins of Southern countries. Apple Inc. is representative of this trend: Apple, which does not engage in any manufacturing activities, earns 58% of its final product’s value, while the share earned by labour-intensive production activities is only 1.8%.14 In the post-neoliberal era, the asymmetrical profits of multinational corporations are very likely to continue to rise. A prominent feature of manufacturing activities in the digital age is the increase in the density of intangible assets.15 Compared to tangible assets, multinational corporations have an even stronger monopoly over intangible assets. Currently, the Gini coefficient of patent holdings among different countries is close to 0.85 (far exceeding the level of income inequality in any country), and the vast majority of data storage centres and almost all influential trademarks are also located in industrialised countries. Multinational corporations are able to earn excess profits by relying on their monopoly over intangible assets. For example, in 2021, the patent royalty income of developed countries was more than twenty times that of the Southern countries, being $405.5 billion for the former and only $20 billion for the latter. Against this backdrop of multinational corporate oligopoly, it is very difficult for Southern countries to develop their manufacturing sector.
3. **Geopolitics increases the uncertainty of economic catch-up.**First, great power competition creates the risk of further ‘modularisation’ of the world economy, i.e., the division of the world into different modules of ideology, technical standards, payment systems, reserve currencies, and trade systems. This division means that Southern countries may need to purchase higher-priced intermediate and capital goods, and at the same time find it more difficult to access downstream markets to support their domestic production. These adverse conditions require more government support (for example, by subsidising machinery imports and product exports). Second, the probability of economic and financial turmoil has sharply increased. The Russia-Ukraine conflict and the ensuing sanctions caused global wheat prices to suddenly rise by 37% in 2022, triggering food crises in some countries in North Africa and South Asia.16 Meanwhile, trade-related administrative bans have surged from fewer than a thousand in 2019 to nearly three thousand in 2022.17 Such events require the state to have sufficient financial reserves to avoid the collapse of the domestic economy. These uncertainties reduce the volume of resources that Southern states can invest in manufacturing development because more resources must be set aside to respond to external shocks. Third, while there are views that ‘decoupling’ and ‘de-risking’ could bring opportunities for industrial transfer to some Southern countries, these transfers are still concentrated in labour-intensive production activities. The growth of Southern countries’ trade with the US has already triggered hostile actions from the Trump administration; in other words, the benefits that industrial transfer can bring may also be relatively limited.18

Towards a Southern Theory of Economic Modernisation

As economist Dani Rodrik notes, ‘Today we are in the midst of a transition away from neoliberalism, but what will replace it is highly uncertain.’19 The simple neoliberal narrative that ‘more market (less government) brings prosperity’ is losing its appeal and credibility in the Global South, but a new theory has yet to mature. To economically catch-up in the post-neoliberal era, the Global South must avoid uncritical reliance on and wholesale adoption of economic theories from the Global North. It is imperative to formulate a Southern theory of economic modernisation grounded in the practices and wisdom of the Global South itself.20 The experience of China – a member of the Global South with the most rapid record of economic catch-up – can serve as a crucial point of reference. Specifically, such an inquiry should entail at least three dimensions of effort.

First, it is imperative to advocate for the de-ideologisation of development theory. The evolution of social sciences in the US has always been deeply intertwined with the social values of individualism, liberalism, and universalism.21 Proponents and beneficiaries of the neoliberal order have successfully conflated its theoretical foundations with these social values. Consequently, those who oppose free trade, free investment, or free markets are typically cast as either spokespersons for rent-seeking interests or as heretics deviating from orthodoxy. However, as Karl Polanyi famously argued, ‘laissez-faire was planned’.22 The ‘freedom’ in such theories refers only to the unrestricted freedom of capitalists in trade, investment, and transactions; conversely, it entails a restriction on the freedoms of workers and the broader peoples of the Global South. For instance, the free mobility of capital is, in practice, achieved by curtailing the freedoms of numerous other actors, such as workers.23 Likewise, lowering trade and investment barriers effectively constrains the freedom of Southern countries to formulate economic policies suited to their own national contexts.24 Therefore, theoretical research on economic catch-up must be decoupled from ideological elements specific to the US. Instead, research should be grounded in a scientific examination of relevant historical experiences, particularly the state-led industrialisation of China and other East Asian economies.

Second, research should be focused on issues of production and employment. Since the 1970s, mainstream Western economics has increasingly centred on exchange efficiency and constructed theory on the micro-foundations of consumer utility maximisation. In doing so, it has neglected the intrinsic differences between production activities, beyond the requisite input ratios of production factors.25 While this focus was valuable for rethinking the inefficiencies of some import-substitution strategies, it was instrumentalised by the proponents and beneficiaries of neoliberalism to ignore production and employment. For example, rapid privatisation or stringent fiscal discipline could cause large-scale unemployment in the short term (while simultaneously benefiting creditors in developed nations), yet such policy initiatives were successfully implemented in the name of efficiency. Similarly, in international trade, a focus on primary commodity exports and labour-intensive production could lead Southern countries to lose their existing industrial base and struggle with technological upgrading in manufacturing (a situation that benefits multinational corporations headquartered in industrialised countries). A mechanistic interpretation of the theory of comparative advantage lent these policies the legitimacy of ‘enhancing trade efficiency’. In contrast, China, throughout its process of reform, has consistently focused on expanding the scale and technological sophistication of its manufacturing sector and has always placed employment at the core of its policymaking. If a new theoretical framework centred on production and employment can be developed based on the Chinese experience, it would undoubtedly be more conducive to establishing the legitimacy of actions taken by Southern countries to support their domestic manufacturing sectors.

Third, the role of the state must be re-evaluated and subjected to systematic inquiry. The research paradigm of mainstream Western economics conceives of the market as a sphere entirely separate from society, governed by its own inherent laws and insusceptible to interference from government or other social groups. Within this framework, intervention by non-market factors is posited as the primary reason why efficiency is constrained and the ‘invisible hand’ fails to function. Consequently, the state is typically perceived as an impediment to development and limited government is presented as a universally beneficial direction for reform.26 However, in Southern countries where market institutions are not yet consolidated, constraining state action is prone to generating a series of problems such as the rise of oligarchic monopolies, the erosion of the industrial base, and the prevalence of illicit activities. For example, during the initial phase of its reform and opening-up, China did not pursue the ‘limited government’ model prescribed by mainstream theory. Instead, it leveraged its existing institutional advantages, mobilising the proactiveness of government officials at all levels to engage in investment promotion activities.27 While such an institutional arrangement would be proscribed by the mainstream, it achieved performance far superior to that of the Eastern European countries which undertook reforms to limit government. In reality, the perfect market of the mainstream paradigm may not exist at all; market activities are necessarily embedded in social relations and cannot operate independently of them. The more meaningful question, therefore, is not ‘whether government’, but ‘what kind of government’. Abandoning preconceived notions about the role of the state and engaging in a systematic discussion of its function in economic development is productive for theoretical reorientation.

Notes

1 Southern theories generally adopt a stance ranging from revision or questioning to critique or negation towards ‘Northern theories’ generated in Western countries. For details, see Jing Jun: ‘What is Southern Theory?’ [什么是南部理论？], Sociological Review [社会学评论], no. 4 (2023): 28–52.

2 Rajesh Venugopal, ‘Neoliberalism as Concept’, Economy and Society 44, no. 2 (2015): 165–187.

3 Atul Kohli, Imperialism and the Developing World: How Britain and the United States Shaped the Global Periphery (Oxford University Press, 2019).

4 L. Uchitelle, ‘Challenging the Dogmas of Free Trade’, New York Times, 9 February 2002.

5 In fact, the catch-up growth of these countries (regions) has little to do with the neoliberal global development order: among them are South Korea, Taiwan Province, and the Chinese mainland, which achieved rapid state-led industrialisation and were already very close to the high-income threshold by the late 1990s; Poland and the Czech Republic, which grew due to EU integration and spillover effects; and Saudi Arabia and Oman, which reaped oligopoly profits from oil and gas resources. Among the trapped countries, less than one-tenth of middle-income countries still have the potential for catch-up growth (i.e., maintaining per capita income steadily above two-thirds of the threshold level). However, apart from China, this group tends to be prone to falling into the ‘middle-income trap’.

6 The Economist, ‘Chile’s new president promises to bury neoliberalism’, The Economist (20 December 2021).

7 Shekhar Aiyar, Romain Duval, Damien Puy, Yiqun Wu, and Longmei Zhang, ‘Growth Slowdowns and the Middle-Income Trap’, Japan and the World Economy 48 (2018): 22–37.

8 There are misinterpretations in some discussions about the ‘service economy’. For example, according to data from the United Nations Industrial Development Organisation (UNIDO), the countries with the highest per capita manufacturing output in the world are Switzerland and Singapore (often regarded as service economies), both of which still maintain world-leading positions in manufacturing sectors such as machinery, electronics, precision equipment, or industrial chemicals.

9 Adnan Naseemullah, Development After Statism (Cambridge University Press, 2017).

10 Jostein Hauge, ‘Should the African Lion Learn from the Asian Tigers? A Comparative-Historical Study of FDI-Oriented Industrial Policy in Ethiopia, South Korea and Taiwan’, Third World Quarterly 40, no. 11 (2019): 2071–2091.

11 Adnan Naseemullah, ‘The International Political Economy of the Middle-income Trap’, The Journal of Development Studies 58, no. 10 (2022): 2154–2171.

12 Qin Beichen and Hu Shulei, ‘Neoliberalism and Premature Deindustrialisation in Global South Countries’ [新自由主义与全球南方国家的过早去工业化], Beijing Cultural Review [文化纵横], no. 2 (2023): 28–37.

13 Dani Rodrik, ‘Prospects for Global Economic Convergence Under New Technologies’, in David Autor, Kaushik Basu, Zia Qureshi, and Dani Rodrik, eds., An Inclusive Future? Technology, New Dynamics, and Policy Challenges (Brookings, 2022).

14 Donald A. Clelland, ‘The Core of the Apple: Degrees of Monopoly and Dark Value in Global Commodity Chains’, Journal of World-Systems Research 20, no. 1 (2014): 82–111.

15 Intangible assets refer to non-physical knowledge-based resources that encompass: 1. value-adding intellectual properties (e.g. patents, copyrights, trade secrets), 2. knowledge embedded in digital information systems (e.g. datasets, software algorithms), and 3. operational knowledge institutionalised in business practices (e.g. supply chain protocols, brand equity management).

16 AP, ‘Wheat, Corn Prices Surge Deepening Consumer Pain’, Al Jazeera, March 2022.

17 Kristalina Georgieva, ‘The Price of Fragmentation: Why the Global Economy Isn’t Ready for the Shocks Ahead’, Foreign Affairs, September/October 2023.

18 Qin Beichen and Wang Yong, ‘China-Southeast Asia Industrial Transfer in the Context of U.S.-China Decoupling’ [中美脱钩背景下的中国—东南亚产业转移], Journal of Boundary and Ocean Studies [边界与海洋研究], no. 3 (2025): 3–26.

19 Dani Rodrik, ‘The New Productivism Paradigm?’, Project Syndicate 5, no. 7 (2022): 1–3.

20 For more systematic practices regarding the exploration and discussion of Southern Theory, see Jing Jun and Gao Liangmin (eds.), Southern Theory: The Other’s Contribution to Humanities and Social Sciences Thought [南部理论：人文社科思想的他者建树] (China Social Sciences Press, 2024).

21 Dorothy Ross, The Origins of American Social Science (Cambridge University Press, 1991).

22 Karl Polanyi, The Great Transformation (Farrar & Rinehart, 1944): 147.

23 This is because the freedom of capitalists to transfer their capital between countries or regions can only be achieved on the premise that dismissing employees in a particular location does not incur prohibitively high additional costs.

24 A prominent example of this contradiction is the European integration process, which, under the banner of ‘free flow of resources’, even deprived member states of the common market of the freedom to decide the length of their baguettes. See Joseph E. Stiglitz, The Euro: How a Common Currency Threatens the Future of Europe (W. W. Norton & Company, 2016).

25 Alice H. Amsden, ‘Bringing Production Back In – Understanding Government’s Economic Role in Late Industrialisation’, World Development 25, no. 4 (1997): 469–480.

26 In fact, after the failure of the more radical ‘Washington Consensus’ reforms, international organisations represented by the World Bank came to believe that a backward institutional environment (or ‘bad governance’) was key to the inability of Southern countries to benefit from these reforms. See M. Doornbos, ‘Good Governance: The Rise and Decline of a Policy Metaphor?’ Journal of Development Studies 37, no. 6 (2001): 93–108.

27 Yuen Yuen Ang, How China Escaped the Poverty Trap (Cornell University Press, 2018).

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