Development And The State Research Paper

1. Historical Perspectives On The State’s Role In Economic Transformation

Calling the poor nations of Asia, Africa, and Latin America ‘developing countries’ implies that they are undergoing economic and social transformations that are variations of those already experienced by the industrialized countries of the North. Understanding the role of the state in earlier periods of industrialization is, therefore, important to thinking about development and the state.

Two streams of thinking are worth highlighting. First, there is the perspective of economic historians, such as Douglass North (1981), who see the provision of predictable norms and laws, particularly those which define and protect property rights, as the state’s primary contribution to development. The second view sees states as actively constructing new institutions to facilitate trade and investment and mobilizing resources in ways that accelerate the growth of new productive capacities. This view is epitomized in Karl Polanyi’s (1957 [1944], p. 140) classic statement: ‘The road to the free market [in England] was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism.’

Alexander Gerschenkron (1962), looking at ‘late developers’ in Europe, reinforced and extended Polanyi’s analysis by suggesting that countries like Germany and Russia faced a more difficult economic problem than England. They had to ‘catch up.’ By the time they began to industrialize, existing production technology required a scale that exceeded their societal capacities. Lacking both individual capitalists able to assume risks at the scale required by modern technology or private institutions able to spread risk, the state had to serve as investment banker or bear the risks itself, bringing together the necessary funds and encouraging their application in productive activities.

2. Analyzing The State’s Role In Third World Development

Perspectives, like those of Polanyi and Gerschenkron, in which development was not the spontaneous result of the activities of private economic actors but had to be explicitly fostered by the state, resonated in the Third World. In Asia, Africa, and Latin America, the gap between local capacities and the institutional scale required to be competitive with firms in the industrialized North was much bigger than the gap Russia and Germany had faced a century earlier. Local elites were too often wedded to maintaining agrarian structures that preserved their privilege at the expense of national productivity. The fact that the United States and Europe were just emerging from a period in which substantial increases in state intervention, first to combat the Great Depression and then to mobilize for World War II, made this perspective even more plausible.

2.1 Development Planning, Import Substitution, And The Entrepreneurial State

The conviction that Third World countries could not develop unless they managed to escape their traditional dependence on exports of agricultural products and raw materials was a key impetus to increased state involvement. Manufacturing products locally rather than importing them was seen as a central part of development and emerging local manufacturers needed protection from established rich-country firms if they were going to succeed at this process of ‘importsubstituting industrialization.’ They also needed public investments in energy production and transportation. Deciding which of these investments made sense required planning. Private investors also faced a collective action problem. Investment in manufacturing would make more sense if other local entrepreneurs were making complementary investments that would provide needed inputs. Active state involvement was a way of giving entrepreneurs confidence that they were part of a general, mutually-reinforcing set of investment decisions.

Without advocating expansion of the state’s role, Albert Hirschman was one of the most creative contributors to thinking on these issues. Hirschman carried Gerschenkron’s argument a step further, arguing that a dearth of entrepreneurship in the simple sense of ‘the perception of investment opportunities and transformation into actual investments’ (Hirschman 1958, p. 35) stood in the way of ‘late late industrialization’ more than the lack of capital. The state could help induce private capital to become more entrepreneurial by providing incentives that made decisions harder to avoid. In Hirschman’s view, inventing a national project of entrepreneurship is the key to development and the state can be an important participant in the process of invention.

2.2 Neo-Liberal Critiques Of State Intervention

Import-substituting industrialization and the state involvement that went with it resulted in impressive rates of economic growth during the 1950s and 1960s in countries ranging from India to Brazil, but by the end of the 1970s development strategies in Africa, Latin America, and South Asia were in disarray. Imports were growing faster than exports, creating balance of payments problems and state expenditures were increasing more rapidly than revenues, creating fiscal problems. One of the responses to this disarray was a renewed interest in the state on the part of neoclassical political economists.

Like Marxists, neoclassical political economists saw the state as the instrument of special interests rather than universal ones. Unlike Marxists, they applied the utilitarian logic of individual maximization to actors within the state itself. They saw the state extracting rents and giving entrepreneurs the wrong incentives rather than solving collective action problems and inducing more entrepreneurship. Theorists like Anne Krueger (1974) applied this logic to strategies of import-substituting industrialization, arguing that the desire to gain protection from foreign competition led entrepreneurs to focus on the unproductive quest for state favors rather than on competitiveness. Studies like Robert Bates’ (1981) analysis of the perverse effects of state intervention on the development of African agriculture helped build the case that there were serious problems with earlier optimistic visions of the state’s role in development.

These critiques were on the mark in many ways. Development planning had indeed presumed an unrealistically benign state, ignoring the self-seeking behavior of state elites. Corruption was rife in developing states. Entrepreneurs in industries like textiles did indeed continue to demand that indulgent states provide them with protection long after they should have become mature and internationally competitive. Nonetheless, these neo-liberal theorists lacked good answers as to how developing countries could overcome the weaknesses of their private entrepreneurial classes. Their theories also failed to acknowledge that there were important variations, even among poor countries, in the behavior and capacities of states.

3. The Developmental State

Some states fit the negative neo-liberal image. They are predatory states: aggregations of self-interested elites that extract society’s surplus wealth and income, use it for their own benefit, and provide so little in the way of collective goods in return that development becomes impossible. Zaire under the rule of Mobutu in the 1970s and 1980s was a classic example. Under Mobutu, the income of Zaire’s citizens shrank at over 2 percent a year, while state officials acquired multiple European mansions and Swiss bank accounts. For most states, however, the neo-liberal view is partial and therefore misleading. The state apparatus may extract, sometimes corruptly, but it also provides essential collective goods without which development could not proceed.

Most interesting is the subset of states that are able to foster long-term entrepreneurial perspectives among private elites, help solve collective action problems, and supply essential public investments in education and infrastructure. The elites that control these states may not be immune from using society’s surplus for personal ends, but the nations they govern enjoy faster rates of development because of the collective goods they supply. This category of ‘developmental states’ is best illustrated by looking at East Asia from the 1950s through the 1980s.

3.1 The East Asian ‘Miracles’

Japan’s successful challenge of the industrial supremacy of Europe and the United States in the 1950s and 1960s was followed by the developmental success of Korea, Taiwan, and Singapore. These countries grew six times faster that the advanced industrial countries had grown in the nineteenth century during the industrial revolution. They are unique in the Third World in the degree to which they have managed to change to their position in the world economic hierarchy. These states are considered developmental, not just because the nations they governed grew, but because the transformation involved in that growth was directly related to the behavior of the state.

3.2 The Analytical Characteristics Of The ‘Developmental State’

Starting with Johnson’s (1982) analysis of the Japanese case, a variety of analysts have tried to specify what makes states developmental (see, for example, Akyuz 1999, Amsden 1989, Chang 1994, Wade 1990). The debate continues, but there are surprising elements of consensus that extend into mainstream development economics (see Meier and Rauch 2000, Chap. 9) and the international policy community (see World Bank 1997).

One key structural feature of developmental states is a capable, coherent economic bureaucracy closely connected to, but still independent of, the business community. The roots of capable bureaucracies lie, in turn, in mechanisms familiar to students of Max Weber, such as meritocratic recruitment and public service careers that offer long-term rewards commensurate with those available in the private sector. These simple indicators predict more rapid economic growth, not just in East Asia, but also across a broad range of developing countries. The qualities that allow such bureaucracies to develop close ties to private elites without being ‘captured’ by those elites are harder to specify. Nonetheless, the success of developmental states depends on their ability to maintain autonomy from private elites while simultaneously developing close ties to them (Evans 1995).

The policies of developmental states mirrored the behavior Gerschenkron and Hirschman argued was needed in order to promote late industrialization. Investments in essential modern infrastructure, such as telecommunications, helped set the stage for industrial growth. Entrepreneurs were induced to make long-term investments that raised national productivity. Subsidies and selective protection against external competition led to the creation of industries like semiconductors, steel, and shipbuilding that private entrepreneurs would never have embarked on without state support. Exports, overall output, and real wages all grew at unprecedented rates. Public investments made rapid rises in education levels possible and health measures, such as infant mortality levels, improved along with education.

4. Contemporary Issues And Future Directions

Current thinking about development and the state has been thrown into question from at least three different sources. The recent evolution of the global political economy has brought into question the capability of individual states to shape developmental trajectories. At the same time, the efficacy of the developmental state has been brought into question by the East Asian financial crisis of 1997–8. In an even more fundamental challenge, the validity of traditional strategies of development is increasingly contested. In combination, this questioning suggests a redefinition of the role of the developmental state.

4.1 Globalization And The Role Of The State

The reorganization of production, and more crucially finance, around global networks, in combination with

the increasing hegemony of market-oriented Anglo-Saxon ideology and legal norms, makes traditional industry-focused state strategies more difficult, even when these strategies combine import substitution with export promotion, as in the case of developmental states. Even though global organizations, like the World Trade Organization, continue to depend on the institutional capacities of individual states to implement global governance rules, the leeway that states have in making their own rules to increase local entrepreneurship has been restricted. Even developmental states have felt the effects of globalization.

4.2 The Crisis Of The Developmental State

The dominant tenor of first reactions to the 1997–8 Asian financial crisis was that either globalization has turned the developmental state into an anachronism or it was a hoax to begin with. More sober reflection produced a different diagnosis. One of the lessons of the crisis was that states cannot afford to relinquish controls over international financial flows before constructing appropriate mechanisms for regulating national financial markets. Abandoning its previous role, not clinging to it, was the developmental state’s failing.

This failing did not result simply from the pressures of globalization. It also reflected a change in the politics and policies of the developmental state itself. Having achieved impressive gains in global markets, local corporate elites were less likely to believe that a coherent, capable state bureaucracy was relevant to their success. Global ideology favoring the dismantling of the state’s regulatory capability also became more popular within the state apparatus. Even though financial stability and growth were restored with remarkable rapidity, the crisis revealed that, precisely because of its economic success, the state’s alliance with private capital was no longer likely to produce the same developmental results. At the same time, the ‘accumulation-oriented’ definition of development that had formed the basis of this alliance was increasingly criticized.

4.3 The Contested Definition Of Development

The strategy of the developmental state, like the strategy of import-substituting industrialization before it, was built on the premise that investment in local manufacturing would produce jobs and that the incomes from these jobs would generate widespread increases in well-being. There have always been critics of this view, but recently they have become more vociferous (e.g., Escobar 1995, Sachs 1992). Critiques argue that as manufacturing becomes more capital intensive, manufacturing investment consumes a disproportionate share of the social surplus relative to the number of jobs that result. Even when the money incomes of some ordinary workers do increase, improved overall well-being is not necessarily the result. Their ownership of more consumer goods does not compensate for the environmental degradation, increasing inequality, and destruction of intangible social and cultural assets that accompany the accumulation of productive capacity. For too large a proportion of the citizens of poor countries, the new global cornucopia of heavily advertised consumer goods remains beyond economic reach but still devalues prior cultural and social satisfactions. While such perspectives, which ignore the benefits of investment in productive capacity, are one-sided, it is still getting harder to defend development policies premised on the idea that the best way to promote well-being is simply to induce entrepreneurs to invest more.

4.4 Redefining The State’s ‘Developmental’ Role

If development is really about well-being rather than about accumulating industrial capital, then what is the role of the state? A ‘well-being-centered’ redefinition of development implies a more aggressive focus on the state’s traditional role in delivering collective goods and services, like health, education, clean air, water, and sewage disposal, and in preserving the collective environment, both natural and cultural. The kinds of state behavior and structures required by this redefined developmental role are surprisingly consistent with early thinking. Hirschman’s notion of inducing decision-making among private economic agents becomes an even bigger challenge if the focus is on the provision and preservation of collective goods. Finding ways to convince entrepreneurs that they should invest in clean production techniques or take into account the social impact of investment decisions requires much more skill and capacity than helping them increase their profits through subsidies and protection. The greater magnitude of the challenge makes the emphasis on a capable, coherent state bureaucracy, which is central to thinking about the developmental state, more important than ever.

The biggest single change implied by redefinition is already foreshadowed by the crisis of the developmental state. State-society relations dominated by close ties to industrial elites at the expense of other social groups will provide neither the political will nor the societal collaboration necessary to execute a ‘wellbeing-oriented’ strategy of development. A more broadly defined set of state-society relations is imperative. There are some studies of the role of more broadly-based state-society ties in promoting development (e.g., Evans 1996, Heller 1999), but extending and deepening this kind of analysis is the most obvious challenge confronting contemporary work on development and the state.

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