D. Developmental states

The last section suggested that development policy is about triggering and sustaining a cumulative growth process around a profit- investment-export nexus to generate more productive jobs, rising incomes and better social conditions. From this perspective, one of the least helpful ideas promulgated by policy makers and their advisers in the western market economies since the early 1980-s is that the state is an obstacle to economic progress and should be «rolled back». After the collapse of communism in Eastern Europe in 1989 the constantly repeated slogan was to «get the state out of the economy», and suggestions that industrial policy, for example, might have a useful role to play in restructuring and influencing the future path of economic growth were usually caricatured as an attempt to restore central planning. Despite romantic, conservative notions of a return to the «night-watchman state» that would be confined to the tasks of defence, education, law and order, and the protection of property rights, the weight and role of the state in the rich market economies remains large, in the region of 40 per cent of GDP or more, and has changed only marginally in the last 20 years or so¹¹. [45]

The anti-state rhetoric, however, employs language that implies the state is somehow external or foreign to the market economy and that it «intervenes» or «meddles» in matters that should be none of its business. This is largely ideology and ignores the fact that the state has always been an important actor in the market economy and indeed an integral part of it. Historically, the state has always been an instigator of innovation in successful economies: it was institutional development by the state that laid the basis for the «efficient set of markets that make possible the growth of exchange and commerce» (North, 1990:130). Neo-liberal rhetoric, however, has helped to obscure the real problem for transition and developing countries, which is not so much to roll back the state as far as possible but to transform

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it in order for it to perform efficiently the functions required of it in a market-based democracy.

In the years following World War II, the major achievement of the western democracies was to temper the violence of the competitive individualism of the 19-th century and to avoid a repetition of the failures of capitalism in the inter-war years of the 20-th in such a way that full employment and economic growth, driven mainly by market forces, could be combined with objectives for equity and social justice. Governments set out to improve the efficiency of the market system by correcting for market failure, especially in non-competitive markets, and to accelerate growth by promoting collaboration among enterprises and governments in the areas of long-term investment, research and development, education and training, and so on. Doing so involved a new set of policy instruments, which ranged from nationalisation, indicative planning and incomes policies at one extreme to fiscal reform, active labour-market policies and measured trade liberalisation on the other. Such policies, in combination with «Keynesian» demand management, laid the basis of what was known at the time as the «mixed economy» and, in retrospect, is now often referred to as a «golden age»¹². [46]

None of this should be taken to imply that states are invincible or unable to fail, which is clearly not the case. Rather it is to recognise that when we compare the European countries, let alone North America and Japan, we find that the market economy can operate efficiently within a wide spectrum of different political and social arrangements. Moreover, when the market economies are compared over time, we see a considerable evolution in their various political and social arrangements, suggesting on the one hand that what works in one period may fail in another and, on the other, that successful economies are those that have or develop the capacity to adapt their institutions and behavioural conventions to changing circumstances and evolving political and social preferences. To repeat, this means that beyond a few core elements there is no single homogeneous model of state- market relations. Each country must experiment and find the configuration of institutions and conventions that will work best in its national conditions

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and meet the expectations of its population. What will work, however, and whether the system will prove adaptable to changing circumstances, will depend on the interaction between cultural, political and economic factors¹³. [47]

We have to admit that our knowledge of such interaction is at best rudimentary and is often insufficient for precise recommendations. The unprecedented rates of economic growth during the «golden post-war years» in Western Europe suggest that capitalism is most productive when it is embedded in a political and social system where its more destructive characteristics are subject to effective constraints. But the positive role of the state in managing capital accumulation and structural change along with a rapid pace of output growth in poorer countries has been generally downplayed by market fundamentalists. Such a role was certainly present in catch-up economies after 1945, notably in Japan, but also in some smaller economies on the European periphery such as Finland and Austria, and more recently Ireland. Not only did these economies have a strong encompassing vision of development which was not entrusted entirely to the care of market forces, but a defining feature of their success was the design of effective mechanisms to encourage and discipline private investors by raising profits above those generated by competitive market forces alone and directing them to areas where the economic and social returns might be particularly high.

In all these cases, policies to ensure that profits would be used to increase productive capacity and employment and encourage technological progress included credit rationing, subsidised credit, fiscal concessions, targeted industrial policies and active labour-market measures (Vartianen, 1995). Governments enjoyed a substantial degree of autonomy, particularly with respect to the local business class and international capital, as well as the requisite degree of capacity and credibility to act in the wider public interest. Moreover, this combination of autonomy, capacity and credibility was essential to adapting policy to changing circumstances as these economies climbed up the development ladder.

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The previous section suggested that most developing countries are also faced with the task of designing appropriate incentives and disciplines to raise the rate of investment and direct it to the most productive activities. The potential advantages of «economic backwardness» (Gerschenkron, 1962) have usually implied a more prominent role for the state in providing the institutional and financial resources to turn that potential into sustained and rapid rates of industrialisation. The record in this respect, however, has often fallen well short of expectation, in part because there has been a narrow focus on scale effects rather than on the linkages and feedback mechanisms discussed earlier.

From his study of socio-economic change in Asia, Gunnar Myrdal (1968:Chap.l8) had already concluded in the 1960-s that a dividing line between developed and underdeveloped countries was the presence in the latter, to varying degrees, of «soft states», that is, states with «low levels of social discipline» that were vulnerable to capture by narrow interest groups and unable to address the various bottlenecks and hurdles blocking the path to faster rates of catch-up growth. Myrdal did not provide a blueprint for a «hard» state, although fighting corruption and land reform were uppermost on his agenda for creating harder states in Asia¹⁴. [48] Irma Adelman (2000:71-76) has provided a clearer notion of the elements that make up a hard state. These include a substantial degree of autonomy, capacity and credibility to set policies in the national interest; leadership commitment to economic development; good economic policies; and a necessary degree of economic autonomy with respect to the international environment.

Somewhat ironically, given Myrdal's own pessimistic assessment, the states that evolved in East Asia during the 1960-s and 1970-s exhibited these kinds of qualities¹⁵. [49] They created a predictable economic environment involving reasonably secure property rights, a predominant role for market competition and a broadly pro-business stance. They also invested heavily in human capital to bring the labour

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force closer to international standards. But beyond this the state also saw its central task as increasing the supply of investible resources and socialising long-term investment risks. State-sponsored accumulation involved variously the transfer of land and other assets, control and manipulation of the financial system, a pro-investment macro- economic policy, as well as direct public investment in some lines of activity. This did not mean setting policy according to the dictates of the business community: instead, there was a considerable amount of state supervision to «govern the market» in accordance with a politically defined notion of national development (Wade, 1990).

These «developmental states» (Johnson, 1982) did not simply measure success in terms of raising investment to fuel economic growth, but also in terms of guiding investment into activities that could sustain a high-wage future for their citizens. This meant a coordinated effort to shift resources from traditional sectors by raising agricultural productivity and channelling the resulting surplus to emerging industrial activities (Grabowski, 2003). It also meant deliberately reducing risks and augmenting profits in industries deemed important for future growth (Wade, 1995:120). Like their 19th-century precursors, this meant making full use of innovations induced by the creative impulses of markets, even as some domestic producers were being protected against excessive competition, particularly from international markets. This did not so much involve the state in inventing a new set of policy instruments as in adapting a familiar set of macroeconomic, industrial, educational, financial and trade measures to a set of goals that were themselves evolving with each new stage in the development process (UNCTAD, 1997:177-79).

A key feature of such successful policy regimes was the state's growing ability to manage rents in support of infant industries and to foster a more strategic pattern of integration into the global economy. This included ways to discipline the recipients of those rents through the setting of performance criteria and by managing the decline of exceptional rents as firms became more competitive on world markets (Akyuz et al., 1999:15-18). Doing so often meant the state devising institutional arrangements to better coordinate its relations with the business sector (World Bank, 1993) and also with organised labour (UNCTAD, 1997). This institutional learning helped policy makers to be highly selective in providing support, not so much in terms of

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«picking winners» but rather in pursuing competitive advantages based on a longer-term vision of developing activities of ever-increasing technological sophistication, capital and knowledge intensity (Weiss and Hobson, 1995:148-56). In other words, in their vision of the future, policy makers did not accept an historically determined set of comparative advantages but instead decided what they wanted them to be in the future.

Significantly, these states had previously been accused of clinging to conservative practices and of lacking the competence to organise their economic development. Moreover, their evolution into harder states did not follow a single path. Rather, the organisational resources and potential political leverage reflected distinct historical and cultural roots. Korea's interventionist policies under the Park dictatorship (1961-79) relied heavily on close consultation between (compromised) business leaders and government, with a notable role played by very large diversified corporations and a state-controlled financial sector. In contrast, the state-business relationship in Taiwan, particularly in its formative years, was more distant and fragmented, in large part due to strained relations between the transplanted political structures (bureaucracy and military) and the indigenous business elite; large state-owned corporations in some key sectors coexisted with smaller firms elsewhere, and with room for the evolution of a good deal of strategic planning in between. The pattern of business-government relations in the more commodity-dependent and ethnically mixed South-East Asian NIEs was different again¹⁶. [50] In all these cases, however, it was only through persistent efforts to reform recruitment, promotion, compensation and training that their bureaucracies were improved. Much the same can be said of other related institutions that helped to create and strengthen the profit-investment nexus, such as industry associations, semi-public trading agencies and various public research institutes (Evans, 1999; Cheng et al, 1998).

All this was ignored or played down in the 1980-s when the advice from developed countries and international financial institutions focused on defining private property rights and giving full rein to market forces, via liberalisation and privatisation, and diminishing

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the role of the state. This emphasis was supported by the cynical assumption of neo-liberal public choice theory that politicians and civil servants are motivated only by their self-interest, which they try to maximise in just the same way as private enterprises focus on profit¹⁷. [51] This is little more than prejudice, but when constantly repeated it can help to undermine confidence in democratic politics and honest administration. There is plenty of evidence of a strong public ethos governing the behaviour of bureaucrats and politicians, despite the inevitable exceptions to the rule, but this has to be nurtured by appropriate institutional structures. Moreover, the history of West European countries provides many examples of corrupt and inefficient bureaucracies being successfully reformed, Britain and France in the 19th century being prominent examples (Wraith and Simpkins, 1963) and the United States in the early 20th another (Glaeser and Goldin (eds.), 2006). The danger perhaps is not so much that political leaders and civil-service elites pursue their private interests but that they lose touch with civil society and grassroots institutions and conclude, like many other professional elites, that only they know what is best in the public interest. But this is a risk that can be better handled with the help of an active civil society and appropriate institutions than by minimising the functions of the state and neglecting the need for an effective public service¹⁸. [52]

This is not to deny that for many developing and transition economies the issue is how to reform a dysfunctional, underdeveloped and, sometimes, corrupt administration. Rather, as Mkandawire (2001) has argued in the case of Africa, it is to recognise that many such problems have emerged (or been reinforced) in the context of adjustment programmes which are aimed at creating an enabling environment for the private sector but which instead often lead to «soft authoritarian states». As he notes: «Wanton liberalisation of markets without careful consultation with business classes,

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privatisation that provides no special privilege to local capitalists, cessation of directed credit or development finance, high interest rates, all these underscore the distancing of the state from local capitalist interests and the pre-eminent position of IFIs' interests and perceptions in policy-making» (ibid.:309). Restoring an effective role to the state will require a break with these programmes and much less intervention by the international financial institutions. Honest, impartial and competent administrative, judicial and law-enforcement systems are crucial not only for upholding the rule of law, protecting property rights and ensuring personal security but also for building an atmosphere of trust in public institutions without which any state may prove highly fragile. Reforming these institutions and weeding out criminal and corrupt elements is perhaps the one area where carefully prepared «shock therapy» may be highly effective. Again, East Asia provides some lessons in this respect. Large salary increases for the civil service, the judiciary and the police, combined with rigorous selection procedures for new entrants, should be considered an urgent priority, and support to cope with the budgetary implications should be regarded as an appropriate candidate for international financial assistance¹⁹. [53]

The need for highly qualified and dedicated bureaucracies in the developing countries is not simply based on the need for effective implementation of the usual demands on the state. As we have shown earlier, in all countries where economic development has been successful, whether Britain in the 18th century, North-West Europe and the United States in the 19th, or East Asia in the 20th, the early stages of growth have always been assisted in varying degrees by the active intervention of the state.

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The developmental state is essentially a version of the mixed economy, namely, one where policy makers leave market forces to determine as far as possible the prices and quantities supplied of most goods and services but where they consider certain key objectives will not automatically be generated by markets or that they will not be achieved fast enough or in a manner desired by government policy. Among these objectives are the institutions that shape the incentives that determine whether markets behave efficiently and lead to socially acceptable outcomes. As we have suggested throughout this chapter, for most developing countries the focus is likely to be on stimulating, directing and coordinating the process of capital accumulation²⁰. [54]

The developmental state, we have argued, requires the creation of civil-service capacities and agencies capable of drawing up coherent development programmes and implementing specific policies, such as the development of infant industries, for example, so that they serve the broader national interest and are not captured by private, corporate interests. The burden on national bureaucracies, however, is now much heavier than it was for earlier developers because an increasing number of microeconomic policies have become subject to international negotiation, while at the same time the international coordination of macroeconomic policies has weakened. This shift in the balance of micro- and macro- in international policy coordination reflects the rise of neo-liberalism and the liberalisation of international capital markets since the early 1980-s. For market fundamentalists, the mixed economy, as an expression of incomplete trust in market forces, is anathema, while the free movement of capital is held to make macro-policy coordination unnecessary or unfeasible. Developing countries, however, find themselves in a relatively weak position in such negotiations as they are conducted for the most part in the IMF, the World Bank and the WTO, where the developed countries have the financial leverage and organisational abilities to defend their own interests and determine the overall agenda. The understaffing, in terms of numbers and expertise, of developing-country delegations to the WTO, for example, is cynically exploited by the EU and the USA through manipulation of the agenda, by holding several

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meetings or working groups simultaneously, drafting proposals in closed meetings, and generally using informal consultations among small groups to push forward much of the serious work of interest to the rich countries. Although, formally, all the members of the WTO are equal, unlike in the IMF and the World Bank where voting is weighted by contributions, a large number of the developing countries are effectively marginalised in the WTO²¹. [55] To defend their interests effectively in such forums, the developing countries need a significant strengthening of their civil-service capacities for policy analysis and negotiations. This will require, inter alia, policies to attract able graduates to stay at home instead of rushing off to better-paid jobs in the developed world or in international institutions, and greater cooperation in regional bodies that are still very weak in the developing world compared, for example, with the European Union.