STATIST

INSTITUTIONALIS
M Module IV, Slide Deck 1

International Political Economy: Theory and Problems

(POLIECO)
Celito F. Arlegue
 MAIN REFERENCES

Caldentey, E.P. (2008). The concept and evolution of the developmental state.
International Journal of Political Economy, 37 (3), 27-53.

Chang, H. (1999). The economic theory of the developmental state. In M. Woo

Cummings (ed.) The developmental state. London: Cornell University Press,
pp. 182-199.

Onis, Z. (1991). Logic of the developmental state. Comparative Politics.

October, 109-126.

Williams, D. (1998). Economic development and the limits of

institutionalism. SAIS Review, 18 (1), 1-17.
 OUTLINE
Introduction: The Rise of New Institutionalism

Analysis of Developmental State

 Defi nition
 Features
 Functions
 Governed Market Theory
 The Case of South Korea
 Key Lessons from the East Asian Model of Development

Critique of New Institutionalist / Developmental State Theory

Conclusion
Introduction
“…markets do not just evolve on their own but
that their development and effective functioning
is dependent upon the existence of well-
structured institutions, including legal, financial,
and banking systems… and it is the state that
plays an indispensable role in creating the right
institutional environment for economic
development and sustained economic growth.”

David Williams
Economic development and the limits of
institutionalism (1998)
 MAIN ARGUMENT

The rise of new institutionalist /statist

institutionalist / developmental state theory
provides a powerful critique to the neoclassical
paradigm and the neoliberal policies it
espouses. Part of the appeal of this theory is
that it is supported by empirical examples
from East Asia which demonstrated that the
state could play a significant role in facilitating
economic development.
 INTRODUCTION

 “Structuralist” development theory had been the prevailing

orthodoxy during the 1950s and early 1960s.

 A central idea associated with structuralism was the belief that

market failure is a pervasive feature of the underdeveloped
economy with the corollary that the state has an important role
in correcting it.

 In the late 1970s to early 1990s, structuralism was attacked by

neoliberal ideas, advocating individualism, market liberalization,
and contraction of the state.

(Onis, 1991)
 INTRODUCTION
 Neoclassical attack on structuralism:

1. Extensive state intervention to promote import-substitution

industrialization had generated inefficient industries,
requiring permanent subsidization for their survival with
little prospect of achieving international competitiveness.

2. Extensive government intervention tended to generate

“rent-seeking” on substantial scale, which detracted
attention of economic agents from productive activities into
lobbying for increased allocations of government subsidies
and protection.

(Onis, 1991)
 INTRODUCTION
 Neoclassical attack on structuralism:

3. Empirical evidence on the experience of the most successful

countries to emerge from the Third world, namely the four
East Asian countries, Taiwan, South Korea, Hong Kong, and
Singapore, showed that these countries achieved
extraordinary rates of economic growth, which moreover
had been consistent with a relatively egalitarian distribution
of income. The unique performance of these economies has
been generated by using an outward-oriented model driven
by market incentives and a strong private sector.

(Onis, 1991)
 INTRODUCTION
 In the neo-classical view, one of the reasons for the poor economic
performance of many less-developed countries was that the
government had intervened far too much in the regulation of economic
activity and the allocation of economic resources and, as a result, had
prevented the market from producing the mutually beneficial
outcomes predicted by the theory.

 Like its Keynesian inspired predecessor, the neo-classical approach

considered the problem of economic development as primarily an
economic issue and concluded that the problem should be resolved
using the various tools of economic theory (based on developed
market).

(Williams, 1998)
 INTRODUCTION

 Neither of these economistic understandings of economic

development took seriously the complex and reciprocal
relationship between the state and the economy. They either
presumed that the state was both benevolent and more or less
omnipotent (Keynesian version) or that it should play only a
minimal role in guiding economic activity (neo-classical version).

 In both its Keynesian and neo-classical manifestations, this

economistic understanding of economic development created a
dichotomy between the economy (or market or private sector)
and the state, effectively treating them as discrete entities .

(Williams, 1998)
 INTRODUCTION
 Problems with the neoliberal argument

1. Market failures can result from individual rational decisions

2. Emphasis on the attainment of static allocative efficiency at

the cost of dynamic efficiency

3. Problem of defining what constitutes a “free market”

4. Lack of institutional specifications for the “free economy”

(Onis, 1991)
“If the pursuit of self-interests by individuals leads
to socially beneficial outcomes in the market and
socially harmful results in politics (by “corrupting”
economic policies of the government), would it not
be better to depoliticize the economy by
emasculating those who can exercise political
influence on government economic policies
(namely, politicians, bureaucrats and interest
groups?”

Ha-Joon Chang
The economic theory of the developmental
state (1999)
 INTRODUCTION
 Problems with depoliticizing the economy

1. The fundamental assumption behind the neoliberal

political economy that self-interest prevails in the polity
in the same manner as in the economy is problematic.

2. It is not clear whether depoliticization is a politically

feasible option.

3. It is not clear whether depoliticization is an economically

attractive option.

(Chang, 1999)
 INTRODUCTION
 By the 1980s, a new consensus has emerged which stresses the crucial role
that institutions play in the process of economic development and, as a result,
recognizes the complexities that the relationship between the state and the
economy should embody.

 Factors that contributed to this consensus:

1. structural adjustment was not producing the expected results

2. vibrant market economy does not follow from reduction of the role of the
state

3. New developments in economic theory and economic history

(Williams, 1998)
 INTRODUCTION
World Bank’s World Development Report (1997) argued that that
the state has a number of fundamental tasks:
1. establishing a foundation of law
2. maintaining a non-distortionary policy environment
3. investing in basic services and infrastructure
4. protecting the vulnerable
5. protecting the environment
6. establishing effective regulatory mechanisms
7. stimulating industrial production through reducing coordination
problems and gaps in information
8. encouraging the development of markets
9. managing the privatization process effectively

(Williams, 1998)
“…the phenomenon of ‘late development’ should be
understood as a process in which states have played a
strategic role in taming domestic and international market
forces and harnessing them to national ends… Key to rapid
industrialization is a strong and autonomous state,
providing directional thrust to the operation of the market
mechanism.”

David Williams
Economic development and the limits of
institutionalism (1998)
 JOURNAL OF SELF-REVIEW
QUESTIONS
While the phenomenal economic development
of East Asian states until the early 1990s has
been cited as proof of the important role
played by the state in the economy, some say
that the Asian financial crisis of 1997-98 shows
the limitations of the developmental state, and
consequently, the validity of neoclassical
prescriptions. Do you agree or disagree with
such claim?
Developmental
State
“…in economies seeking to make up for lost
ground on already existing capitalist powers, it
was quite common to find that the state itself
led the industrialization drive, that is, it took on
developmental functions.”

D. Coates
Models of capitalism: Growth and
stagnation in the modern era (2000, cited in
Caldentey, 2008)
“All successful cases of ‘late industrialization’ have been
associated with a significant degree of state intervention.
The problem, therefore, is to find the appropriate mixture
of market orientation and government intervention
consistent with rapid and efficient industrialization.
Equally central is the issue of which set of institutional
and political arrangements is compatible with the
appropriate mix of state intervention and market
orientation in the economy.”

Ziya Onis
Logic of the developmental state (1991)
 DEFINITION
 Developmental State – refers to a state that intervenes and guides
the direction and pace of economic development

 The developmental state is mainly associated with the type of

economic policies followed by East Asian governments in the
second half of the twentieth century and, in particular, with the
post World War II Japanese economic model

 It be traced to Chalmers Johnson’s (1982) study of Japan’s Ministry

of International Trade and Industry (MITI) and industrial policy

(Caldentey, 2008)
 FEATURES
 Interventionist
 Intervention through policy instruments, not through
public ownership
 Degree and type of intervention varies over time in
scope and content
 Requires the existence of a bureaucratic apparatus to
implement the planned process of development
 Requires active participation and response of the
private sector to state intervention

(Caldentey, 2008)
 FEATURES
 Components of State Intervention

1. Direct ownership and control of industrial production is of

secondary importance as compared with the process of building
up economic infrastructure through education, training and
research

2. State performs a key role in the promotion of cooperative labor-

management relations

3. State undertakes a leading role in the creation of comparative

advantage
(Onis, 1991)
 FUNCTIONS

 Coordination for Change

 Provision of Vision

 Institution Building

 Conflict Management

(Chang, 1999)
 GOVERNED MARKET THEORY
 The superior economic performance of East Asian economies is
to a large extent the consequence of a very high levels of
investment, more investment in certain industries than would
have occurred in the absence of government intervention, and
exposure of many industries to international competition in
foreign markets, though not in domestic markets.

 These outcomes are the causes of a specific set of policies which

enable the government to ”guide” or ”govern” the process of
resource allocation so as to produce a different production and
investment profile than would result under a free market system.

(Wade, 1990 cited in Onis, 1991)

 GOVERNED MARKET THEORY
 The set of incentives, controls and mechanisms to spread risk,
which may all be gathered under the banner of strategic
industrial policy, are in turn supported by specific political,
institutional and organizational arrangements pertaining to both
the state apparatus and private business as well as their mutual
interaction.

(Wade, 1990 cited in Onis, 1991)

 SOUTH KOREA
 South Korea may be characterized as a prototype case of guided
market economy in which market rationality has been
constrained by the priorities of industrialization.

 Government has performed a strategic role in taming domestic

and international forces and harnessing them to national
economic interests – Economic Planning Board or EPB
(counterpart of Japan’s MITI).

 Rapid industrialization has been the overriding consideration, as

opposed to maximizing profitability on the basis of current
comparative advantage.
(Amsden, 1989, cited in Onis, 1991)
 SOUTH KOREA
 The state has heavily subsidized and directed a selected group of
industries and subsequently exposed them to international
competition.

 Industries apart from the priority sectors experienced policy

intervention only intermittently, while the remaining industries
have been exposed unaided to the rigors of market competition.

 State has provided a stable and predictable environment within

which the corporations could undertake long-term risks.

(Amsden, 1989 cited in Onis, 1991)

 SOUTH KOREA
 The large diversified groups, Chaebols, have developed under
direct state influence and guidance. Nonetheless, the state has
attempted explicitly to prevent the abuse of monopoly power by
imposing stringent price controls negotiated on an annual basis.

 The government’s fiscal policy complemented highly

interventionist policies. Expenditures from the budget have been
directed almost exclusively to long-term investment. The state
invested heavily in education and human capital formation.

(Amsden, 1989 cited in Onis, 1991)

 KEY LESSONS
 There is no correspondence between effective market-augmenting
state intervention, on the one hand, and the size of the bureaucratic
apparatus or the public sector, on the other.

 Small but powerful pilot agency such as MITI or EPB can provide
strategic guidance in the selection of key industries to be encouraged
and also in the provision of stable and predictable environment for
private investors to undertake risky, long term investment projects.

 Factors such as traditions of social and political hierarchy and group

solidarity have played a role in East Asian industrialization, but it would
be wrong to associate the degrees of social consensus and cooperation
with purely cultural explanations.

(Amsden, 1989 cited in Onis, 1991)

“The discipline exercised over private firms
involved both rewarding good ones as well as
penalizing the poor performers. The government
has deliberately refrained from bailing out firms
which were badly managed in otherwise profitable
industries… the government not only subsidized
industries to stimulate growth, but also set
stringent performance criteria in exchange for
these subsidies.”

Ziya Onis
Logic of the developmental state (1991)
 JOURNAL OF SELF-REVIEW
QUESTIONS

One central feature associated with

developmental state is the unusual degrees of
bureaucratic autonomy. How does one acquire
bureaucratic autonomy and how can it be
subsequently directed to developmental goals?
How does one balance autonomy with
accountability?
 JOURNAL OF SELF-REVIEW
QUESTIONS

How is the developmental state connected with

corporatism? How can we distinguish the
European or Scandinavian experience of
corporatism with that of East Asia? What are
the similarities and differences?
 JOURNAL OF SELF-REVIEW
QUESTIONS
Is the developmental state model
transferable? Is it compatible with political
liberalization and democratic forms of
governance? Does the developmental state
create the seeds of its own destruction in the
long-term by creating big conglomerate groups
whose activities the state could not control?
 JOURNAL OF SELF-REVIEW
QUESTIONS
Is the developmental state a ‘strong state’?
How does the distinction between ‘despotic’
and ‘infrastructural’ state power can explain
this association of developmental state to the
strong state? How does this relate to state
autonomy and state capacity?
Critique
 CRITIQUE
 ”Institutionalist framework underlying the developmental
state thesis provides a serious critique of the one-
dimensional, universalist logic of neoclassical development
theory, with its emphasis on a specific set of policies
designed to establish a free market, regardless of the
historical, institutional and political context.” (Onis, 1991)

 “Institutional development also requires an acute grasp of

the functioning of the economy and its relations with the
world economy, an awareness of the politically difficult and
sensitive nature of the reforms being attempted, and a
pragmatism which is necessary to successfully undertake
the art of institutional development.” (Williams, 1998)
 CRITIQUE
 “There remain serious questions about whether
institutional development - assuming it can be undertaken
successfully - will in fact reduce the discrepancies between
the developed and the developing  countries of the world.”
(Williams, 1998)

 Bureaucratic autonomy can lead to a predatory state –

autonomous actions by self-maximizing bureaucrats and
politicians can result in malevolent state action and
misallocation of resources
Conclusion
 CONCLUSION
 New institutionalism, to which the developmental
state theory is based, provides an alternative
perspective on how economic development can be
achieved.

 However, there is a question on the value of the

theory considering its supposed non-replicability to
other contexts.

 Formulation of strategic industrial policies have been

facilitated by specifi c political and institutional
preconditions – the same set of policies will be
counterproductive or at least ineff ective in the
absence of the associated set of institutional and
political structures or contexts.