Digesting Onis’ Logic of Developmental State

August 7, 2009

Cyl Bryan A. Bagadiong, Meiji University, Graduate School of Governance Studies, Tokyo Japan

  Ziya Onis remembers that in 1950s until early 1960s, STRUCTURAL DEVELOPMENT THEORY[1] is the prevailing sound doctrine in developmental policies. However, in late 1960s and early 1970s, this was replaced by the NEOCLASSICAL PARADIGMS[2]  which was the orthodox even prior to 1950s. On the former, State is a major player in the development while in the latter, free market must prevail. The latter attacks the former on three grounds: extensive state intervention develops inefficient industries; extensive government intervention develops large scale rent seeking; and the four East Asian Countries achieved extraordinary economic growth through a model which was characterized by market incentives and strong private sector.

In trying to explain the phenomenon of the East Asian’s economic growth,

it would seem that it cannot be attributed to the symptomatic exhibitions of neoliberalism but instead a new counter critique is being advanced – namely the “Institutionalist” approach. Under this, the mastering and harnessing of the market forces by the state to serve its developmental goals and the accompanying synergy between the state and the market as the base of the developmental experience were given focus. The broad institutionalist perspective goes beyond the limit of Structuralist Development Economics and Neoclassical resurgence. It posits that development cannot simply be attained by sticking to market-oriented approach or state-led approach but not both. Instead, it argues that, by citing the cases of “late industrialization”[3] , both approach can be combined and that it will boils down to how the state intervention, through various institutional policies, can transform and develop its economy within the market-oriented and capitalist spheres, thus, resulting to a robust economic performance.

Moreover, it argues that the question that should not be ask is which among the Structuralist or Neoclassical/Neoliberalism is the better approach, but the question that should be ask is on what form and what degree is the proper mixture of market-orientation (neoclassical argument) and government intervention (structural development argument) should be employed in order for a state to have the perfect formula of effective, sustained, and consistent development?

THE DEVELOPMENTAL STATE AND STRATEGIC INDUSTRIAL POLICY

According to Chalmers Johnson pioneering concept, a “Capitalist Developmental State” is a development model anchored on institutional arrangement and characterized by the following:

1.      1. Economic Development, defined in terms of growth, productivity and competitiveness, must be the foremost priority of state-action while commitment to equality and social welfare is absent.

2.      2. Economic development goals are concretized by benchmarking.

3.      3. There is a basic commitment to private property and market which limits the state intervention, however, the market is shaped by elite economic bureaucracy.

4.      4. Presence of closed institutionalized links consensus-building, information exchange, policy formulation consultation and implementation between the elite economic bureaucracy and the major private sector firm, and;

5.      5. Politicians “reign” while the Bureaucrats “rule”

According to Professors Alice H. Amsden and Robert Wade, the core of developmental state model is Strategic Industrial Policy. It is the specific political, institutional, and organizational arrangements supporting the set of incentives, control, and mechanism to spread risk that pertains to the state apparatus and private business as well as their mutual interaction.

Amsden explained the Strategic Industrial Policy approach in a “governed market” model of development. She explained that market economy can be harnessed and rationalized by using strategic policies employed by state so that it can be maximized towards the economic goal. This will involve the: 1). prioritization of industrialization over the traditional maximization of comparative advantage model; 2). employing state intervention on selective strategic industries by means of distortion of relative prices and subsidies; 3). “stick and carrot” method of discipline to industries to encourage cooperation and competition for market shares; 4). Regulation of financial system geared towards preventing capital accumulation, rent-seeking, capital flight, remittance of liquid capital overseas; 5). Acquisition of technology through investment in foreign licensing and technical assistance; 6). Public Sector’s budget geared towards long-term investment such as Education and formation of Human Capital and finally; 7). Absence of welfare function. 

INSTITUTIONAL AND POLITICAL BASIS OF THE DEVELOPMENTAL STATE

Under the developmental state model, the existence and co-existence of a highly autonomous bureaucracy and public-private cooperation are critically important so that state intervention will be effective otherwise it will degenerate to “weak state” and surge of private interests. How do you come up with an autonomous bureaucracy? An extremely rigorous meritocratic recruitment system to attract the best managerial talents within the small bureaucratic elite ensures a high degree of capability and a sense of unity and common identity among the elite bureaucrats. Having acquired a higher status in the society, they identified themselves with the national goals and had imbued the sense of mission. Amakudari and the shifting to political career enhance the power and legitimacy of bureaucrats. Plus the fact that elite bureaucrats, the executives, and the entrepreneurial elites have common educational backgrounds.

To prevent abuse of power of the autonomous bureaucracy and establish accountability, Developmental state model employed the following mechanisms:

1.      1. The size of the bureaucracy was kept relatively small to consolidate the position in the society of the bureaucrats and contain the problems involving lack of control and accountability associated with large bureaucracy.

2.      2. Balancing the power granted to pilot agency by confining their powers to a limited number of selected strategic sectors of economy.

3.      3. Division of labor within the state among the bureaucrats and the executive (postwar Japan) and/or Military (Korea and Taiwan) in a context of letting the former to “rule” while the latter/s to “reign”.

4.      4. As fourth element, albeit weak, hyperactive civil society also helps to check the bureaucratic and governmental abuse.

However, Public-Private cooperation is not a voluntary compliance of the private sector brought about by the cross penetration of the elite bureaucracy to the private and political sector. An element of deliberately engineered compulsion by the bureaucratic elite to business elite had been employed. This compulsion was done by nurturing the peak of the private organizations through the state’s control of the financial system and the dependence of the conglomerates on bank finance, thereby forcing them to toe the requirements of the strategic industrial policy enforced by the state.

Thus it can be said that this unique government-business cooperation on the national goals cannot be solely attributed to the given cultural environments but also largely created by the state elites through a special set of institutions relying on a significant element of compulsion.

THE HISTORICAL ORIGINS AND SPECIFITY OF THE EAST ASIAN DEVELOPMENTAL STATES

There are two factors, shaped by historical circumstances that might explain the deep commitment of the developmental state’s elites to growth, productivity and international competitiveness. One is the unusual degree of external threat faced by East Asian states in the post war period, thus, helped to bolster the nationalistic vision inherent in these states and the unique commitment to the long-term transformation of the economy and also enable the state elites to ignore income distribution and social welfare. 

Another factor is that Major East Asian economies all experienced a major redistribution of income and wealth from the outset with the corollary that the industrialization derive in the post war period has been initiated from a relatively egalitarian base.

As much as Japan, Korea and Taiwan has similar influencing factors such as the taking advantage of geostrategic significance and exclusion of the labor group from political process at the outset thereby avoiding legitimization problem unlike that of Latin Americas, yet, these three developmental state under studies have striking differences among the variants of developmental approaches. They differ on the degree of bureaucratic autonomy, public-private cooperation, and institutional links, among others.

THE DEVELOPMENTAL STATE AND CORPORATISM

To examine the corporatist political arrangements in the East Asian Developmental State model both in broad and specific level, we have to conceptually define the “authoritarian or exclusionary corporatism “ which can be said applicable to Korea and Taiwan and the “societal or democratic corporatism” which is applicable to Japan. In the former, it is more of institutionalized collaboration between the state and the business elites in the policy formulation and implementation process accompanied by severe repression of popular groups and the exclusion of labor from the political arena, whereas in the latter, it involves institutionalized cooperation between the state elites and business groups for the realization of the strategic goals within the democratic political institutions. (Underscoring supplied)

The case of Japan, Korea and Taiwan deviate from the model of “democratic corporatism” in two ways: 1). labor had been systematically excluded from the policy process from the outset and; 2). the interaction is not between among equal partners as state here possesses more leverage over the business group in securing compliance. However, The East Asian model cannot also be considered as “authoritarian corporatism” like that of Mexico, in such a way that East Asian Cases are not a single party regime, have a very different set of strategic choices and policy outcomes, and Mexico can hardly be considered a case of economic success.

The East Asian Model can be considered loosely as corporatist in a general manner there having an institutionalized government-business cooperation but on the deeper level, Corporatist arrangement cannot just solely be attributed as the main factor of success without the previous contributing factors mentioned earlier; and the macroeconomic stability, income redistribution and build-up of welfare state are corporatist arrangement characteristics but not of developmental state.

IS DEVELOPMENTAL STATE MODEL TRANSFERABLE?

Can we apply the model to other countries? No because the three critical elements inherent to a developmental state is ahistorical, unless history repeats itself and other countries experience the same situations. These three elements are 1). The extraordinary single-minded adherence to growth and competitiveness brought about by severe external threats suffered by the three countries helping them too to legitimize the long-term growth strategy; 2). The experiencing and extraction of extraordinary advantage from United States (in case of Japan) and Japan (in case of Korea and Taiwan) brought by the geostrategic position they held during the cold war significantly contributing to the consolidation and formation of state autonomy and capability and; 3). The unusual combination of an authoritarian regime and relative egalitarian distribution which are also a product of their history.

Is developmental state model compatible with political liberalization and democratic form of governance? No because 1). The desirability of the East Asian state forms in a democratic values environment and institutions of wide spread political participation is questionable 2.) A country which experienced a long period of democratic development will not accept a sudden stoppage of state in providing welfare service to concentrate instead on growth and productivity objectives; 3). Extreme concentration of private and public power is incompatible with widespread political participation of all societal sectors;

Is developmental state stable in the long term? No because there is an inherent tension between “bureaucratic autonomy” and “public-private cooperation”.

What are the lessons that can be learned from the developmental states? 1). There is no relation whatsoever between an effective market-augmenting state intervention and the size of the bureaucracy; 2) A small and but powerful state agency (such as the MITI or EPB) can provide important strategic guidance in the selection of key industries to be nurtured and provide a stable and predictable environment for private industry to undertake risky, long-term investment projects; 3). Effective market-augmenting forms of state intervention require both bureaucratic autonomy and close public-private cooperation; 4). The institutional conditions are not a product of culture thus transferable albeit difficult and; 5). Bureaucratic reforms and the institutions of organized bargaining and cooperation between public and private spheres is very critical to improve the effectiveness of state intervention in a market-oriented setting.

TOWARDS A NEW PARADIGM

The developmental state thesis suggests that “strong” states are those 1) with high degree of autonomy and capacity and 2) has an institutionalized interaction and dialogue between the state elites and the autonomous centers of power within the civil society. To understand the concept of strong state, we have to understand that highly centralized and authoritarian states which possess “despotic power”[4] will not necessarily have the “infrastructural power[5]” which would allow them to elicit consent for their policies, organize and coordinate society, and mobilize resources for long-term development. However, it should be noted that this autonomy must be embedded in the concrete set of social ties which bind the state and society. This embedded autonomy also provides, instead of restricting, institutional channel for the continuous negotiations and renegotiations of goals and policies.

In the corporatist literature, in order for the state to effectively create and consolidate corporatist structure for the smooth industrial transformation, it must be autonomous enough in the policy formulation and implementation process not to be overwhelmed by special interest groups but weak enough to recognize that the costs of imposing a policy authoritatively will exceed its benefit. It must be willing to trust some organizations which it cannot control to exercise some of its power (i.e.; legitimate coercion).

Moreover, the state must be able to focus their attention almost exclusively on increasing productivity and profitability and restrict their intervention to the strategic requirements of long-term economic transformation. The intervention must give primary priority on building up economic infrastructure through education, training and research as opposed to direct ownership and control of industrial production; promotion of cooperative labor-management relations; and create comparative advantage without exercising direct control. This means Developmental states must systematically managed the market and employ it as a tool of industrial policy by exposing particular industries to competitive pressures.

Finally, departing from the one-dimensional, universalist logic of neoclassical theory, along with public choice theory, that espouses the idea that state intervention will necessarily result to malevolent state action and misallocation of state resources despite constitutional restriction, the developmental state model proves that state action can have a positive developmental effect and highlights the importance of multiple logic in the interaction of governments and markets in the development process.

STUDENT’S PERSONAL COMMENTS

1.      The three primary dissertations of Professor Alice H. Amsden (1989)[i], Chalmers Johnson (1982)[ii] and Frederic C. Deyo (1987)[iii] indeed gave the strong foundation for concepts that comprise the Developmental State model which can be classified, in general, as an institutionalist approach vis the neoclassical and the structuralist theories prevailing in development policies and economic theories discussions. The developmental state largely explained the economic miracle that the East Asian countries had undergone. It seemingly unveiled the mystery under the extraordinary economic resurgence of the developmental states and gave me the clear understanding that the concept has the potential to transform and propel economic growth albeit a painful sacrifice for the people – that is lying of the welfare and labor interests at the back seat. One of the several key lesson that was impressed on my mind is the criticality of finding the perfect balance, in a katana blade edge, of the power of an autonomous state elite and the public-private cooperation to harness the power of the state economy within the framework of free market through an institutionalized mechanism to negotiate strategic economic policies towards the development goals. The developmental state model, which I consider as a hybrid between free-market and state-led approaches but a notch higher than the governed-economy approach, impressed upon me the key factor of finding the right mix of state intervention to transform a bureaucracy for it to be able to be strong to steer the country and it to be weak for other actors to be able to row towards a destination both commonly shares.

2.      However, to propose in a general sweeping conclusion that a strong state intervention which directs the speed and route of development of the private sector, thus shaping the industrial structure itself is the prime culprit for success will be quite premature. Prof. Amsden  (1989: 14) attributed the South Korea’s success to the discipline the state imposes to the private sector, thus, enhancing its potency towards development. It is my contention that factors inherent to international market played a very major role in South Korea’s development and that cannot be solely attributed to state’s ability to discipline. I believe that, due to the complexity of the world economic market, the state’s ability to respond immediately, timely, and proactively is also critical. The dynamics of global market is so huge that it cannot be shaped by one country alone but with the aid and participation of other countries too. Empirically, Hamilton and Zeile (1990:1611)[iv] countered that discipline imposed by the markets itself and the liberalization reforms made by the Park’s government including the major exchange-rate reform in the early 1960’s played a very major role in South Korea’s development.  

3.      One aspect in the article, and the most grave, that I am having difficulty to understand is on the aspect of public-private sector cooperation (corporatism) wherein it stipulated that in the concept of developmental state, a strong and unique interaction of the government and the business elite in pursuit of its economic goals can only be made in an autocratic regime excluding other societal actors, thus, will be incompatible in a democratic framework. It cited South Korea, Taiwan and Singapore as its empirical evidence but excluded Japan being Japan was able to foster this government-business interaction with the participation of other societal actors. It does not explained how come Japan was able to do it in a democratic framework while others cannot,  yet, issued a sweeping statement that the “corporatism” aspect under the concept of developmental state is incompatible with democracy that espouse full participation in policy formulation.

 Added to this, it sweepingly claimed that under the developmental state model, especially in the case of Japan, cultural and sociological factors doesn’t have any connection with economic development, yet again, failed to explain that despite the absence of autocratic regime in Japan, said country exhibited a high degree of consensus and group solidarity.

 I therefore respectfully beg to dissent. It is my belief that this argument should be reconsidered. I believe that the explanation why Japan was able to come up with an institutional framework that permits and nurture an extraordinary solidarity and an effective government-private cooperation towards its development goals, without the need to be despotic, has something to do with sociological and cultural factors. Not only history had bounded the people of Japan to posses that extraordinary solidarity but social imperatives and cultural influences aided them so.

To support my hypothesis, may I be allowed to find refuge in Kozo Yamamura (1983: 210-211)[v] when he said that had Mr. Chalmers Johnson read the works of Eshun Hamaguchi, Takie Lebra, Masumi Tsuda, Moriaki Tsuchiya, Kazuko Tsurumi, Thomas Rohlen, Shichihei Yamamoto and the famous Bunmei to shite no ie-shakai by Y. Murakami, S. Kumon and S. Sato explaining the relationship between Japanese culture and its economic performance, he would had been more reluctant to conclude that Japanese extraordinary “consensus and group solidarity” can be explained by “situational motivations” alone.

 (Insert CONCEPTUAL FRAMEWORK OF DEVELOPMENTAL STATE MODEL (WORLDBANK 1993a:88)[vi])

 

POLICY CHOICES                                                   COMPETETIVE DISCIPLINE                              GROWTH FUNCTIONS                           OUTCOMES

ACCUMULATION ·         Increasing human capital ·         High Savings ·         High Investment

RAPID AND SUSTAINED GROWTH ·         Rapid export growth ·         Rapid demographic transition ·         Rapid Agricultural transformation ·         Rapid industrialization

MARKET-BASED ·         Export Competition ·         Domestic Competition

FUNDAMENTALS ·         Stable macroeconomy ·         High human capital ·         Effective and secure financial systems ·         Limiting price distortions ·         Openness to foreign technology ·         Agricultural development policies

                                                                                                                                                                                                                                          

EXPLANATION/S:

A.      East Asian governments POLICY CHOICES had two components: those affecting Economic FUNDAMENTALS and those belonging to the realm of SELECTIVE INTERVENTION. The policy choices and their sustained implementation were contingent on a set of INSTITUTIONal arrangements that entailed:

a.      Wealth sharing programs to include non-economic elites in the growth

b.      Economic technocrats insulated from narrow political pressures (technocratic insulation and high quality civil service)

c.       Mechanism for sharing information with, and to win the support of, business elites.

B.      POLICY CHOICES evolved in a context of COMPETETIVE DISCIPLINE that affected the behavior of firms.

C.      This distinctive East Asian innovation of COMPETETIVE DISCIPLINE was both MARKET-BASED (stemming from international and domestic competition) and CONTEST-BASED (such as allocation of credit to firms, dependent on the firm reaching the prescribed export performance standards)

D.     The interaction of POLICY CHOICES with COMPETETIVE DISCIPLINE yielded GROWTH FUNCTIONC that economist can usually measure: High savings, high investment, rapid skill accumulation, effective utilization of capital and labor, and improved factor productivity driven by adaptation of technology and innovation.

E.      The OUTCOME was rapid, sustained and equitable growth in East Asia.

 

WHERE WAS THE PHILIPPINES DURING THE LATE INDUSTRIALIZATION PERIOD? ECONOMIC-WISE, WHY THE PHILIPPINES WAS LEFT BEHIND?

It is because the Philippines adopted the “Anti-Development State Model” , according to Walden Bello[vii] which is characterized by the following:

1.      Weak state- influence of American model of governance that guided the colonial and post-colonial state where weak central authority co-exist with a powerful upper-class social organization (“civil society” in today’s parlance)

2.      No egalitarian base – Failure to implement a true agrarian reform program, enactment of an agrarian reform law with “1,001” loopholes.

3.      Adoption of wrong model – Failure of Marcos’ IIS and OEO (Keynesian) Model due to crony capitalism, and Ramos’ too much liberalization and deregulation, adopting the Thailand Model that overheated and burned during the Asian Financial Crisis, thus, wrongly identifying the proper state intervention due to diluted power of the state and emasculating the state’s ability to lead the change.

4.      Wrong Priority – Instead of prioritizing developmental goals, the government prioritized payment of foreign debt especially to WB.

5.      No Japanese Capital – From 1985-1990, Japanese invested in Thailand $3.1B, Indonesia $3.1B, Malaysia $2.2 B while the Philippines only received $797M. Japanese, being a strategic investors, by-passed the Philippines due to the fact that the Aquino Regime sacrificed development, expansion of market and poverty reduction over IMF debt repayment as national priority, thus, the Philippines then was a “depressed market”.

 

ADDITIONAL AND CROSS-REFERENCES:

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[1] Structural Development theory is an economic hypothesis that states that underdevelopment is due to underutilization of resources arising from structural or institutional factors that have their origin in both domestic and international dualistic situations, thus, requires a structural transformation. In order to do this transformation, the government therefore must initiate the process of alteration in the industrial composition of an economy, i.e., transform the basic industrial structure of an economy so that the contribution to national income by the manufacturing sector increasingly becomes higher than that by agricultural sector.

[2] Neoclassic Economic Theory is an economic approach that emphasizes utility, profit maximization, and determination of equilibrium and focuses on the efficient allocation of resources (economic efficiency theory) through the price system and the forces of supply and demand. In other words, a free private-enterprise economy governed by consumer sovereignty, a price system, and the forces of supply and demand.

[3] According to Prof. Alice H. Amsden,  late industrialization  is a phenomenon, of extraordinary rapid economic growth of a group of state or society that industrialized “late” or sometimes after the beginning of 20^th century.

[4] “Despotic power” or “coercive autonomy” maybe associated with highly centralized and authoritarian states in which the state elites extensively regulate economic and political activity but at the same time take decisions without the routine, institutionalized negotiations with groups in civil society.

[5] “Infrastructural power” signifies the ability of the state to penetrate society, organize social relations, and implement policies through a process of negotiation and cooperation in society.

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 [i] Alice H. Amsden, Asia’s Next Giant: South Korea and Late Industrialization, New York, Oxford University Press, 1989

 

[ii] Chalmers Johnson, MITI and the Japanese Miracle, Stanford, Stanford University Press, 1982

 

[iii] Frederic C. Deyo, ed., The Political Economy of the New Asian Industrialism, Ithaca, Cornell University Press, 1987

 

[iv] Gary G. Hamilton and William Zeile, The American Journal of Sociology V95N6, The University of Chicago Press, 1990,

 

[v] Kozo Yamamura, Journal of Japanese Studies V9N1, The society for Japanese Studies, 1983

 

[vi] Iyanatul Islam and Anis Chowdhury, The Political Economy of East Asia:Post Crisis Debates, Oxford University Press, 2000

 

[vii] Walden Bello,  The Anti-Development State: The Political Economy of Permanent Crisis in the Philippines, University of the Philippines, 2004