Published :
Updated :
For all latest news, follow The Financial Express Google News channel.
The concept of developmental state has gone through various phases. Chalmer Johnson in 1982 provided the original framework of what is a developmental state. Johnson's original conceptualisation of the developmental state placed primary emphasis on the shared goals and ambitions of the policy making elite such as national industrial transformation and achieving international competitiveness. Also, shared ideas about how these goals might be achieved, usually via strategic intervention in the market by the state.The developmental state in essence refers to countries that achieved late development compared to western industrial economies such as Japan, South Korea and China. Therefore, it is argued that the developmental state is an alternative to the liberal state.
Johnson provided an account of Japan's Weberian ideal type of an interventionist state that joined private enterprises to foster close working relationship. In such a relationship the state provided the guidance.State control of finance through controlling interest rates and bank loans helped private enterprises to obtain industrial finance instead of using equity capital.
State control of finance was the linchpin of the developmental state. As such the Japanese state substituted for a missing capital market. This was supplemented by a combination of incentives and command structure in which the economic bureaucracy played the prominent role. However, such state interventions were successful because of the existence of industrial cartels like Zaibatsu in Japan and Chaebol in South Korea.
Johnson also argues that while state control of finance was the linchpin of the developmental state but that was combined with other incentives. The autonomy of economic bureaucracy and the existence of Zaibatsu further helped propel system in Japan. In fact, economic bureaucracy played a dominant role in shaping investment decisions, therefore profits. The bureaucracy representing the state played the role as the partner with the private sector in the national industrial transformation.
A developmental state singularly focused on productivity improvements rather than relying on its market size and used it as the driving force not only for promoting economic growth but also the transformation of political economy in the state. But the system that evolved in Japan and South Korea has in effect resulted in rampant corruption and industrial policy has been used to promote vested interests over economic development. The developmental state in effect has turned into a vehicle for promoting big business interests.
The developmental state based economic growth model eventually led to the emergence and the subsequent dominance of both the Japanese and South Korean economies and politics by oligopolistic conglomerates like Keiretsu (which is horizontal in structure with a bank in the centre while Zaibatsu is vertical in structure) in Japan and Chaebol (A large industrial Korean conglomerate run and controlled by a individual or family. Chaebol structure can encompass a single large company or several groups of companies) in South Korea.
Such close nexus between the state and industrial conglomerates in Japan and South Korea and the lack of transparency of such relationship as well as close ties with banks and political parties have opened strong possibilities of moral hazards that foster corruption.
But in the 1980s, this nexus, more precisely the leading role of the state in governing the market increasingly came into question and the focus shifted to a new framework providing a role for the state in a largely deregulated and more open economy. It was also a time many East Asian economies were growing so fast that it was genuinely believed that they would soon become developed economies. In fact, developmental states such as South Korea and Singapore and many others transformed into close to neoliberal states during this period.
The 1980s also saw the emergence leading to the dominance of neoliberalism in the realm of economic policy formulation not only in developed countries but also in developing countries including developmental states. Neoliberalism as a doctrine views competition as the defining characteristic of human relations. Attempts to limit competition are treated as inimical to liberty. Neoliberalism, in fact, is an updated version of the classical liberal economic thought. Neoliberalism as it stands now is both a body of economic theory and a policy stance.
The neoliberal doctrinaire views eventually found their expression in what has been described as the "Washington Consensus" - a consensus reached between the World Bank, International Monetary Fund and US Department of the Treasury. This has significant consequences for developing economies because policies included in the consensus contradict developing economies that embraced state dominated system that evolved in the 1950s and 1960s. It was also expected that the "Washington Consensus" would bring countries into the US crafted the rule based global order and incentivise them to adhere to those rules, or more precisely submit to US diktats.
As the traditional understanding of the developmental state undergone radical change, in fact moved beyond the historical experience of countries like Japan, South Korea and Singapore, as the world economy has become increasingly interdependent which has been described as globalisation. It is to be noted that neoliberalism is the main driver of globalisation (some describe it as neoliberal globalisation). The process of globalisation has accelerated due to increased trade, capital and labour mobility. Therefore, some economic analysts see globalisation as both the effect of and a move towards global neoliberalism.
The Asian Financial Crisis in the late 1990s (started in Thailand in 1997) which spread across East Asia wreaking havoc in the region. Many analysts thought it was the end of the developmental state as a model of economic development. In fact, in the wake of the crisis the developmental state became synonymous with "crony capitalism" which had been blamed for the crisis.
The Asian Financial Crisis of 1997 appears to have propelled South Korea to move quickly through a transition to neoliberal economy. Surprisingly the Global Financial Crisis (GFC) of 2007-09 again renewed the interest in the developmental state because of the role played by the state in mitigating the crisis.
However, it is to be recognised that economic growth dynamics are remarkably heterogeneous for developing countries. It is generally suggested that sources of growth and economic shocks lead to divergence in growth patterns. Also, financial and political crises can impact on average and long term growth. Despite such a generalisation and a large body literature on it, we are still a long way to go to get a better appreciation of growth or more precisely why growth experience of countries differ so much including developmental states.
Even more fundamentally why growth fluctuates over time and only a very handful of developing countries, mostly in East Asia such as South Korea and Singapore have succeeded in attaining income levels comparable to developed countries but a country like Malaysia failed to do so.
In fact, many aspirant developing countries continuing their efforts to achieve income levels observed in developed countries but have resulted in getting stuck in the "middle income trap" and are unable to wriggle out of it. In summary the developmental state model has worked for some countries but not for large number of East Asian countries.
Therefore, it is important to understand what growth is all about. When one peruses economic literature, economic growth is defined as steady state of long-term average rates of growth of output per capita (GDP/Population). Such a statistical measure also provides the basis for comparing relative levels of income among countries. In other words growth means GDP growth. This has led to the acceptance of an economic paradigm based on the single-minded pursuit of GDP growth.
There is an assumption that all growth is good, and the type of growth does not matter. It is also premised that growth in itself will cause "trickledown effect", but in reality growth further enriched already very wealthy instead of "lifting all boats". Also, GDP data do little to alleviate the fear about what the next decade may look like, as well as the uneven income distribution, wage and job security within the countryeven in successful developmental states.
This is because GDP was never designed to measure social wellbeing, but only to measure the size of the economy. Simon Kuznets who developed the concept of GDP pointed out its limitations and wrote "the welfare of a nation can scarcely be inferred from a measure of national income". This is why the continuing use of GDP as a policy goal has not been able to address issues of income distribution or social wellbeing or damage to the environment.
It is clearly understood that growth is not the end goal but a means to several ends: poverty alleviation, human development, health, opportunity to work productively and to be creative. Growth also raises the question that "perpetual growth on finite planet will inexorably lead to environmental catastrophe".
Economic growth has been markedly slower in the post-GFC era not only in developed countries but also in developing countriesincluding developmental states in East Asia than it was in in the preceding decades. The strains on the global economy became apparent during the GFC but now geoeconomic fragmentation is posing a much bigger challenge and has created a highly uncertain global economic environment.
In such an economic environment export led economic growth oriented towards developed countries markets as pursued by developmental states in East Asia since 1950s likely to prove less effective. Instead, these countries now need to focus on domestic and regional markets and redesign their industrial and trade policy accordingly with an emphasis on maintain macroeconomic stability.