Beyond Market-Driven Development

Costas Lapavitsas, Costas Lapavitsas

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134240692
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

Because their economies were regulated, their financial systems 'repressed' and their states interventionist, for many years the countries of East Asia challenged the Washington consensus, offering an alternative development paradigm. However, in the 1990's, Asian capitalism was disrupted following Japan's stagnation and the financial crisis of 1997-98.

Treading the unexplored theoretical terrain created by the simultaneous decline of the Washington Consensus and Asian developmentalism, this revealing book analyzes the comparative political economy of East Asia and Latin America. Divided into four key sections, it covers:

• Theoretical Framework
• Results of Globalization
• Converging and Diverging of Paths of Economic Development
• Finance and Regionalism.

Through the juxtaposition of countries in East Asia and Latin America, leading academics analyze the impact of government intervention, institutional malfunction, social transformation and financial change as well as conflict and power on economic development. This book will prove to be invaluable to students and academics of development economics.

Part I
Theoretical framework

1 Beyond the developmental state

Towards a political economy of development

Ben Fine

Introduction

The state has always been at the centre of the study of development. This is not just because of its overwhelming importance but also because the way in which the state is understood is part and parcel of how the economy and development are conceived. Crudely simplified, development in the post-war period was first understood through modernisation, Keynesianism and welfarism, with socialist planning and Marxism as the alternative. This gave way to the neo-liberal Washington consensus in the 1980s, a developmental agenda of market versus the state, with the idea of the developmental state in opposition to the pro-market ideology of the World Bank and IMF.¹ The turn of the millennium has witnessed something of a reaction against the Washington consensus as it has been super-seded, at least in rhetoric, by the post-Washington consensus. Meanwhile, far from progressing, the idea of the developmental state has also gone into decline following the Asian crisis of 1997.

The result is to open up the issue of development to more radical thinking, as is argued in the closing section of this paper, for matters are not so simple as suggested in the previous paragraph. In the next section, selectively drawing predominantly upon the most recent literature, it is argued that the developmental state literature can be divided into two schools, the political and the economic. Each of these was declining prior to the crisis of 1997. The political school had been forced to recognise the presence, for it the emergence, of powerful class interests. Its response has been to delimit the life of the developmental state to historically contingent opportunities for state autonomy. The economic school, on the other hand, as is argued in Section 3, has been analytically out-flanked by the post-Washington consensus. The latter, too, suggests a limited life for the developmental state but for different reasons than for the political school. Development is about handling market, especially informational, imperfections through efficacy of the financial system and institutions such as the state. Consequently, the developmental state is limited to latecomer catch-up after which market imperfections are less pervasive and intervention, as opposed to market regulation, less necessary.

The demise of the political school and the capture of the economic school by the post-Washington consensus will leave dissatisfied many of those who study development. As argued in the closing section, questions concerning the nature of contemporary capitalism as a system, and the role of classes and of conflict, appear to evaporate as market and nonmarket phenomena are reduced to the rationality of responses to market imperfections. As a result, there are bright prospects for radical political economy to contest the emerging orthodoxy.

The political and economic schools

In earlier work, literature on the development state has been interpreted through the prism of two distinct approaches or schools, the political and the economic (Fine and Stoneman (1996) and Fine and Rustomjee (1997, Chapter 2)). For the political school, focus has been concentrated on the nature and capacity of the state. In a nutshell, what is it that enables the state to adopt developmental policies whatever they might be? Kohli (1999, p. 94) recognises the mission of the political school in terms of the ‘the prior question of why the South Korean state was able to do what it did’. Such is one way of interpreting Johnson’s (1982) founding contribution to the literature, his classic study of Japanese late development. His implicit attachment to the political school is confirmed by his recent retrospective in which the decisive factor is perceived to be the relationship between the state and the private sector (Johnson 1999).² He reluctantly furnishes a model with four elements:³ a small, elite top quality management within the state to select and promote industries, and to supervise competition; a political system which enables this; market-conforming methods of intervention; and an organisation such as MITI to effect implementation. Further, Johnson explicitly praises Castells’s (1992, pp. 56–7) account of the developmental state, his definition having been widely cited by others:

A state is developmental when it establishes as its principle of legitimacy its ability to promote and sustain development, understanding by development the combination of steady high rates of growth and structural change in the productive system, both domestically and in its relationship to the international economy . . . Thus, ultimately for the developmental state, economic development is not a goal but a means.

So the developmental state concerns political legitimacy with the economy as a sideshow.

For the political school, the passage from Johnson to the present has been marked, as in his initiating work, by identifying decisive characteristics of the state and/or the mechanisms by which it becomes develop-mental. As previously argued in Fine and Stoneman (1996) and Fine and Rustomjee (1997), these factors have expanded to accommodate a widening range of empirical case studies, successes or failures that have not otherwise fitted comfortably within the narrower set of characteristics/mechanisms. Starting with its autonomy, it was found that the state could either be developmental or parasitical. Accordingly, it also needed, somewhat inconsistently, to be embedded. But then we enter a universe of qualifications and extensions – (relatively) autonomous and embedded in what ways and with whom? Thus, in pursuit of the democratic developmental state, White (1998) ranges over the following factors: consensus, institutions, political participation, authoritarianism, inclusion and exclusion, international environment, and social structure comprising class, gender, ethnicity, culture and religion.

Similarly, Chan et al. (1998a, pp. 1–4) add bureaucratic cohesion, depoliticisation, weakness and strength, efficacy, adaptability, networks and politics in all its forms (leadership choice, regime maintenance and interaction between economic performance and coalition formation). In the context of Japanese agriculture and national food supply, Francks (1998 and 2000) emphasises the importance of a dedicated bureaucracy, giving rise to a bureaucratic developmental state. For Koh (1997), Singapore’s developmental state is attached to a mission-oriented bureaucracy. Drawing upon South Korean experience, Chibber (1999) insists that such a bureaucracy be of high quality and selective in its targeting. But ideology is also crucial for such bureaucracies, as is more general opinion formation in Marsh’s (1999) account of Asian developmental states, with Williams (1997) arguing that the failure of developmental discourse to reach beyond an elite is crucial in explaining the failure of the Indian developmental state. Grabowski (2000) points to the importance of national identity. Indeed, p. 274 states:⁴

The developmental state is not rooted solely in the existing economic and social structure, but also in the future social and economic structure. This has generally involved the building or rebuilding of the national economic identity.

The same issue is approached differently in terms of corporatism and consensus, central to Riain’s (2000) and O’Hearn’s (2000) debate over the Irish (flexible) developmental state in an era of globalisation. Xia (2000) perceives China as a dual developmental state, supported by both legislative and local political institutions, with structures at both central and local levels. Emphasis is placed on networks, with heavy analytical reliance on the transaction costs approach to the firm for understanding political hierarchy – ‘although transaction costs analysis is a theory of the firm, it has utilities for our understanding of politics, international affairs, sociology, and law’ (p. 9).

In short, the political school focuses on the politics of economic policy with little or no interest in economics as such. In contrast, the economic school is almost exclusively concerned with the necessity for economic policy at the expense of the political conditions that allow it to be identified and adopted. It is an approach to the developmental state that is inspired both by the notion of market imperfections and by an antipathy to neo-liberalism. It is aptly summed up in the catch-phrase associated with Alice Amsden of ‘getting the prices wrong’, although this is symbolic of a more general commitment to state interventionism, especially in industrial and trade policy and state control of finance. Although Amsden (1989) and Wade (1990) are best known as leading representatives of the economic school, the most prolific and wide-ranging contributor in this vein has been Ha-Joon Chang, not least because he has addressed both theoretical and empirical issues, especially as regards South Korea for the latter. Starting with Chang (1994), his work has covered most aspects of industrial policy, finance and ‘cronyism’. For each, a clear case is made for the pervasive presence of market imperfections, the need for the state to intervene and correct or temper them, for the inappropriate perspective offered by the neo-liberal Washington consensus, and the latter’s lack of correspondence to empirical realities.⁵

Ultimately, Chang has been drawn into emphasising the institutional preconditions for a successful developmental state as part of a more general theory or political economy of development itself (Chang 2000b; Chang and Evans 2000). This, however, merely pushes back the issue of political capacity one step. For, in part, the political school is concerned with what makes developmental institutions possible. The economic school begins where the political school ends. This confirms the division of the literature between the two schools, as has been neatly summarised by Cumings’s (1999) simile of economic analysis as a spider without a web and of political analysis as a web without a spider. This opens the option of each school complementing the other. But, to belabour the metaphor, how do we know we have put the right spider in with the right web? The two schools only offer a neat fit in the vacuous sense of occupying analytical terrains that do not overlap. Each has progressed within the confines of its own territory: the political school by refinement with an expanding range of case studies and evidence, the economic school by widening the scope of what constitutes market imperfections and how they have or have not been appropriately handled.

The division between the two different approaches has, if anything, been accentuated by the Asian crisis of 1997. First, consider the political school. Because it tends to stand aloof from economic analysis as such, it is confronted most sharply by the analytical problem posed by the crisis – how is it that a developmental state has proven incapable of safeguarding itself against crisis, certainly of 1997 proportions? The school has offered a particularly ingenious answer, one that was already in place prior to the crisis itself.⁶ This is to argue that the developmental state is, by its nature, of limited duration. Specifically, it is confined to catch-up by latecomer industrialisers. As Moon (1999, p. 220) puts it:⁷

The developmental state is a transitional phenomenon. It worked well in the earlier stage of economic development and industrialization. As national economies become more mature and sophisticated, the state becomes a liability rather than an asset.

The most significant factor in cutting off the life of the developmental state is that its success undermines its own conditions of existence. More specifically, most notably for Korea, the ‘relative’ ‘autonomy’ enjoyed by the state in its developmental phase gives rise to large-scale conglomerates, the chaebol, which eventually become too powerful to be subordinate to the state. From the created instrument of the state, large-scale capital comes into conflict with it (Lee 1997; Kim 1999). More generally, the developmental state induces other interests and demands upon itself as development raises the prospect of modernisation in a Western image.⁸ As White (1998, p. 44) puts it, in the context of prospective democratic developmental states:⁹

It is defined in terms which are potentially contradictory and difficult to achieve: autonomy and accountability; growth and redistribution; consensus and inclusiveness.

In addition, continuing or aspiring developmental states are, in token deference to intellectual fashions, taken to be subject to the constraints imposed by ‘globalization’ (Gereffi 1998; O’Hearn 2000), although Lee (1997) argues that there are limits on response due to weaknesses in internal financial and ownership structures of East Asian economies.

Thus, the political school views the developmental state to be limited by its own internal dynamic and by increasing external pressure (to liberalise). Such limits on its life are complemented by those surrounding its birth. The emergence of a developmental state is perceived to be dependent upon the now analytically eponymous ‘initial conditions’, those that allow the state to act both developmentally and, consequently, independently of special interests. Thus, for Aoki et al. (1998a, pp. 25–7):¹⁰

Northeast Asian economies seem to have a unique initial condition of economic development: the absence of a dominant economic class . . . Before the postwar development process took off in those economies, there were no individual capitalists who had amassed enormous assets and controlled the supply of financial and industrial capital . . . Furthermore, political leaders and bureaucrats in these economies had no incentive to distribute political rents in favor of any particular economic class, because if that class were to become sufficiently powerful in the future, the favored class might thereby be able to threaten these leaders’ autonomy someday in the future. Thus the ‘shared growth’ phenomenon in Northeast Asia seems to be a pro-foundly path-dependent phenomenon that evolved from the unique historical conditions prevailing immediately after the Pacific War. It was not something intrinsic to a Confucian tradition of the East Asian bureaucracy. Because of its apparent autonomy, the permanent bureaucracy in the East Asian state is sometimes characterised as ‘strong’. Paradoxically, however, it may be also regarded as ‘weak’. Both strength and weakness arise from the same source – the absence of a dominant economic class.

With the life-span of the developmental state hedged between fortuitous initial conditions and mounting internal and external pressures, the political school accommodates the crisis of 1997 by interpreting it as signifying the death throes of the developmental state as it undertakes transition to new state forms. What these are is rarely specified, but some sort of idealised Western democracy is never far from sight. In this light, the developmental state is a temporary but beneficial aberration in the phase of catch-up as if the ‘catchees’ were themselves free of state intervention, the exact opposite of the truth as far as the developed world is concerned.¹¹ Inevitably, given the dramatic form taken by the crisis, the political school emphasises how financial liberalisation has been damaging, appropriately weakening state control over finance but without putting alternative forms of regulation in place.

From developmental state to post-Washington consensus

Not surprisingly, this is a rare entry point, shared in common with the economic school. More generally, it has also needed to address the miracle or crisis syndrome – how could one become the other? It, however, has a richer tapestry of explanations that fall into two types. One is to view the miracle and the crisis as entirely independent of one another, with the crisis explained by a fragile financial system, both created and destabilised by inappropriate financial liberalisation and neo-liberal macroeconomic policy. Such a stance is best represented in extreme form in the work of Krugman, not least because he has also been at the forefront in denying the miracle in the first place – with East Asian growth explained by growth of factor inputs. In short, he merely needs to explain the crisis independently of longer-term economic performance.

This is admirably illustrated by his ‘Analytical afterthoughts on the Asian crisis’ (1999). Essentially, his argument is that aggregate demand in an economy might not increase monotonically with a fall in the exchange rate since the latter may lead to loss of confidence in foreign investors and loss of net worth and investment by domestic firms: ‘a loss of confidence by foreign investors can be self-justifying, because capital flight leads to a plunge in the currency, and the balance-sheet effects of this plunge lead to a collapse in domestic investment’. Krugman formalises the model and discusses its im...