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an integrationist approach, getting closer to the independent approach followed by the East Asian NICs, going from assembler to outsourcer, and finally to a net high technology exporter country, with its own internationally competitive brands and a bigger presence in the world markets.
1.3. Literature Review
The post-World War II period has been characterized as a time of economic expansion in most of the globe, with important cases of rapid high-growth, such as the reconstruction of Western Europe and Japan, and the development of the so-called newly industrializing countries (NICs). Being greatly influenced by Keynesianism and the success of the New Deal in the United States, the post-war international economic organizations sanctioned a more interventionist role of the state in the economy, and other important mechanisms which allowed different parts of the world to achieve higher levels of industrialization and development. It was John Ruggie who better captured the tendencies of the time, when he adopted the term ‘embedded liberalism’ in 1982, to describe this combination of promotion of free trade on one side, with domestic instruments to regulate the economy, in order to maintain proper degrees of welfare, employment and growth, on the other side.13 It was also during the 1980s that the economic performance of Japan was consensually accepted as the most extraordinary economic miracle of the postwar era.14
Spending many years studying the Japanese case, Chalmers Johnson published one of the first serious analysis on the developmental state, the same year as Ruggie’s article. In MITI and the Japanese Miracle, Johnson made an important effort to explain the main features which can be found in a developmental state, insisting on the relevance of institutions and their capacities to promote economic growth through the elaboration of industrial
13 John Gerard Ruggie, “International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order,” in International Organization, 36, no. 2 (Spring 1982): 379-415; also found in John Gerard Ruggie, Constructing the World Polity: Essays on International Institutionalization. (New York:
Routledge, 1998).
14 Some of the most remembered works on this topic include: Herman Kahn, The Emerging Japanese Superstate:
Challenge and Response. (London: Penguin Books, 1973); and, Ezra F. Vogel, Japan as Number One: Lessons for America. (Boston: Harvard University Press, 1981).
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policies, and the selection of winning and losing sectors within the economy. Similar institutions to the Japanese Ministry of International Trade and Industry (MITI) could also be identified in other places, making different authors interested in explaining the phenomenon of developmental states in other countries, following Johnson’s example.15 The mid-1980s and early 1990s saw a series of important works on the concept of developmental state, identifying it as one of the main causes for the successful industrialization of those countries in East Asia, particularly the so-called Four Tigers (Hong Kong, Singapore, South Korea, and Taiwan), as well as other parts of the world with lesser achievements.
Works like the volume edited by Frederic Deyo, The Political Economy of the New Asia Industrialism, in 1987, containing relevant observations by promising development scholars of the time, such as Richard Barrett, Bruce Cummings, Peter Evans, Stephan Haggard, Chalmers Johnson, and Hagen Koo, among others, emphasized the importance of the concept of developmental state to understand the successful economic trajectories followed by the NICs in East Asia.16 Months later, in 1989, Alice Amsden published her research on the role of state institutions in the industrialization and rapid economic growth process in the Republic of Korea (ROK), under the title Asia’s Next Giant: South Korean and Late Industrialization, which became a reference in the study of developmental states.
Amsden’s arguments became popular, for challenging the orthodox approach to free markets as the best tools for development, noting that one of the main features of South Korean successful industrial promotion was precisely ‘getting the prices wrong.’ This meant that the state used mechanisms to distort the markets, in order to encourage large investments in those sectors primarily considered as strategic for future economic prosperity.17
This view was also displayed, together with other elements stressing the use of comprehensive industrial policies, by Robert Wade in his book, Governing the Market:
Economic Theory and the Role of Government in East Asian Industrialization. One of the key features, according to Wade, which made the countries in the region more successful than other developing nations, was that of the skillful mobilization of resources by the state,
15 Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975. (Stanford:
Stanford University Press, 1982).
16 Frederic C. Deyo (ed.), The Political Economy of the New Asian Industrialism. (Ithaca: Cornell University Press, 1987).
17 Alice H. Amsden, Asia’s Next Giant: South Korea and Late Industrialization. (New York: Oxford University Press, 1989).
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derived from higher saving rates imposed on their populations.18 That same year, Stephan Haggard published Pathways from the Periphery: The Politics of Growth in Newly Industrializing Countries, where he also noted the strength and weaknesses of developmental states, particularly those in East Asia, but also compared them to those in Latin America, specifically Brazil and Mexico. The main difference identified by Haggard, between these two groups of countries, was that the latter followed a strategy of import substitution industrialization (ISI), depending largely in their domestic markets; while the former combined some of the ISI elements, with an export-oriented strategy, due mainly to their smaller populations and limited natural resources.19 That year marked the end of a decade that had separated developmental states in both regions, regarding East Asian countries as the ultimate winners in a competition to achieve higher levels of industrialization, while the Latin American states performed poorly and went from crisis through crisis during the 1980s and early 1990s, suffering the consequences of mismanagement and overexposure to foreign capital.
This distinction was at the center of the debate, which made the works cited above powerful responses to the academic trend being followed in many universities and institutions in the West. After the breakup of the Bretton Woods System, and the related crises of the 1970s in the developed world, the classic approach was regaining force, and the ideas of prewar and wartime scholars, like Friedrich Hayek, were rescued by Milton Friedman and other economists, who made the state and its excessive intervention in the markets, as the sole responsible for the chaotic state of the economy during those years.20 A plea for more open markets, lesser regulations, and the rapid and large-scale privatization of the economy were the main components of a prescription suitable for all cases, according to this trend, later known as economic neoliberalism. Having strong defenders and proponents
18 Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. (Princeton: Princeton University Press, 1990). Wade published a new edition of his book in 2003, updating some of his ideas, and explaining some of the causes of the 1997 Asian Financial Crisis.
However, the basic arguments remained unchanged, suggesting that neoliberal paths were not the answer, but part of the problem in finding a sustainable way for industrialization and economic development.
19 Stephan Haggard, Pathways from the Periphery: The Politics of Growth in Newly Industrializing Countries.
(Ithaca: Cornell University Press, 1990).
20 Friedrich A. Hayek, The Road to Serfdom. (Chicago: The University of Chicago Press, 1944); and, Milton Friedman, Capitalism and Freedom. (Chicago: The University of Chicago Press, 1962). Some of the chapters of these books were reproduced in: Naazneen H. Barma and Steven K. Vogel (eds.), The Political Economy Reader: Markets as Institutions. (New York: Routledge, 2008): 87-116.
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in the American and British administrations of the 1980s, neoliberal views were replacing those of an embedded liberalism, promoting an economic liberalization across the world, and a fairer competition for international capital and investments. Therefore, the international financial institutions started the advancement of a set of policies, later known as Washington Consensus, emphasizing the importance of macroeconomic stability, mainly through monetary policy, as the basic framework for a sustained and healthy economic growth.21
The literature on the concept of developmental state of the late 1980s and early 1990s was thought as a response to orthodox economists, from political scientists in the Political Economy study field, stressing the importance of institutions in the success of late industrializing countries, and the weaknesses of markets for that purpose. Therefore, ideas as those advanced by Amsden, Haggard, and Johnson, among others, were relevant to give an alternative view to neoliberalism, inviting to look at the case of East Asian countries, to understand the difficulties of proposing a universalistic prescription for development.
However, and despite the huge success and resilience of those states, the rest of the developing world, particularly Latin American, Eastern Europe and Africa, were in high need of foreign capital and investments, hence taking the decision to embrace the Washington Consensus, partly or mostly liberalizing their economies, and putting aside their desires to adopt certain features of the East Asian developmental states.
As an effort to discredit the interventionist state, some scholars started to respond to the developmental state literature, arguing that the success of East Asian countries owed more to their responsible management of macroeconomics, which also led to the formation and accumulation of human and physical capital, rather to an indiscriminate intervention in the economy. This vision was best portrayed in a famous report, The East Asian Miracle:
Economic Growth and Public Policy, elaborated by the World Bank, and published in 1993.
One of the purposes of that study, was recommending other developing countries not to formulate comprehensive industrial policies and other mechanisms which could distort the functioning of free markets, which eventually created more difficulties than solutions.22 In
21 For a complete analysis on the effects and motivations behind the Washington Consensus, please refer to John Williamson and Pedro P. Kuczynski (eds.), After the Washington Consensus: Restarting Growth and Reform in Latin America. (Washington, DC: Institute for International Economics, 2003).
22 World Bank, The East Asian Miracle: Economic Growth and Public Policy. A World Bank Policy Research Report. (New York: Oxford University Press, 1993).
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the same tune, one year later, Paul Krugman published an article in Foreign Affairs, trying to diminish the furor over the East Asian developmental states, by claiming that their growth was based on the mobilization of resources, but not on the increase of the total-factor productivity, which is the one allowing the developed societies to sustain growth even after decades of having achieved a higher industrialized stage. In his argument, Kruger predicted a slower growth for the East Asian countries in the years ahead, also showing himself critic of some of the policies followed by developmental states in the NICs.23
The 1997 Asian Financial Crisis (AFC) put a lot of pressure on the developmental states in the region, reinforcing the view of the necessity of having more liberalized economies, and the failure of state intervention to prevent these kind of attacks on national currencies, which was started to being common place in developing countries during the 1990s. Neoliberal reforms were promoted in these countries of East and Southeast Asia, weakening the popularity once enjoyed by the developmental state in this part of the world.
The constant attacks on the developmental state, and the increasing trend of globalization and liberalization of economies around the world, led to a partial or full dismantlement of its institutions on most of the countries that had adopted this strategy in the past. After a decade of neoliberal-inspired changes, new works on the developmental state went on the defensive, insisting that industrial policies were the key to success for some of the NICs, and using a comparative framework to counteract the assumption of a universal remedy for late industrializing countries to catch up with the West, as the Washington Consensus attempted to claim for its recipes.
Some of the most important works include that of Peter Evans, Embedded Autonomy:
States and Industrial Transformation, in particular its chapter on States, where the author elaborates a fine comparison based on the relative embedded autonomy of states and their bureaucracies, from other social and foreign interests, identifying the developmental states of East Asia as those more successful in the combination of embeddedness and autonomy, leading to a more rapid industrial transformation, as compared to predatory and intermediate states, being Zaire, and Brazil and India, respectively, illustrative cases.24
23 Paul Krugman, “The Myth of Asia’s Miracle,” in Foreign Affairs, 73, no. 6, (November/December 1994):
62-78.
24 Peter Evans, Embedded Autonomy: States and Industrial Transformation. (Princeton: Princeton University Press, 1995).
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Those new works emphasized the comparative element, to show that the success of East Asian developmental states went beyond their fine macroeconomic performance, as claimed by the neoliberal theory.25 Emphasizing the role of institutions, but also of cultural factors, geography, and historical processes, experts on developmental states offered a response to neoliberalism, and tried to influence on the changes that were taking place on those countries. Other relevant books comprise the volume of Meredith Woo-Cumings, The Developmental State, where she reunited some of the most renown scholars on this field, who identified the most common characteristics in developmental policies followed by different states across the world, particularly the first part, with chapters by Bruce Cumings, Chalmer Johnson, T.J. Pempel, and Ha-Joon Chang, approaching the concept from a historical and institutional perspective; while the second part consists of chapters illustrating the experiences of more states in other regions, highlighting their successes and failures, such as the cases of France in Western Europe, Brazil and Mexico in Latin America, and India in South Asia.26
Following this comparative trend, Alice Amsden published The Rise of the Rest:
Challenges to the West from the Late-Industrializing Economies, in 2001. Amsden’s is a detailed account of the historical processes followed by a group of late-industrializing countries, identified by the author as “the rest”, as opposed to the Western developed economies and Japan. The analysis associated the degree of success on late industrialization to the existence of certain features, mainly the well-functioning institutions capable of promoting the development of knowledge-based assets rather than commodity or primary product-based assets, meaning more technological capabilities, as well as the so-called three-pronged investments.27 In her work, Amsden highlighted the successes of those countries
25 Comparative studies were not new in this field. After the collapse of Latin American economies in the 1980s, and the interruption of rapid economic growth in the region, particularly in those countries previously considered as miracle economies, Brazil and Mexico, some analytical comparisons between this region and East Asia began to be arise. A good example is the book written by Ching-yuan Lin, who performs a detailed analysis on the possible causes of the Latin American economic difficulties, the successful management of the East Asian economies, and their different reactions to external shocks, such as the 1970s oil crises. Lin, Ching-yuan, Latin America vs East Asia: A Comparative Development Perspective. (New York: M. E. Sharpe Inc., 1989).
26 Meredith Woo-Cumings (ed.), The Developmental State. (Ithaca: Cornell University Press, 1999).
27 According to Amsden, the three-pronged investments consist in investment on 1) large-scale production units and capital goods; 2) modern management practices and railroad infrastructure; and, 3) distribution networks.
Combined, these three-pronged investments could help explain the success of late-comers in the
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whose paths or models were more institutionally integrated with the developmental state, and offers an important distinction in response to the neoliberal challenges, between those countries of the rest following an independent strategy (China, India, Korea, and Taiwan), and those following an integrationist strategy (Argentina, Brazil, Chile, Mexico, and Turkey).
The main difference between these two groups of states, is that the former prioritized the creation and development of domestic knowledge-based assets, while the latter opted for the acquisition of technology coming from abroad, and embraced more liberal policies, as a way to attract more foreign investment and business know-how practices from more developed economies (Figure 1.1).28
The first decade of the new century experienced a change on the way to approach the concept of developmental state. The neoliberal triumph meant that this idea, as commonly conceived, was no longer useful to explain the current economic situation of countries in East Asia and Latin America. Therefore, many scholars decided to study the impact of different sociopolitical and economic developments on the notion of developmental state. The arrival of electoral democracy in these two regions of the world, particularly in South Korea and Taiwan, meant a difference of practice on the institutions related to the developmental states, as noted in articles by Lowell Dittmer, Yun Tae Kim, Joseph Wong, and Yu-shan Wu.29 At the same time, by the end of the decade, some debates about the fate of the developmental state unfolded, noting the weakened position it held during the globalization era, as compared to the postwar decades. Examples of this debate are the analysis of Hugo Radice, Richard Stubbs, and particularly a volume on the applicability of the developmental state institutions during the 21st century in South Africa, edited by Omano Edigheji, containing important contributions from Peter Evans and Ha-Joon Chang.30
industrialization process, contrasting with the early arrivals of the countries in the North Atlantic. Amsden, op.
cit., 2001: 70-97.
28Ibid: 284-294. A more detailed explanation of the differences between the independent approach and the integrationist approach will be elaborated in the following chapters.
29 The referred articles are: Lowell Dittmer, “The Asian Financial Crisis and the Asian Developmental State,”
in Asian Survey, 47, no. 6 (November/December 2007): 829-833; Yun Tae Kim, “Neoliberalism and the Decline of the Developmental State,” in Journal of Contemporary Asia, 29, no. 4 (1999): 441-461; Joseph Wong, “Re-Making the Developmental State in Taiwan: The Challenges of Biotechnology,” in International Political Science Review, 26, no. 2 (2005): 169-191; and, Yu-shan Wu, “Taiwan’s Developmental State: After the Economic and Political Turmoil,” in Asian Survey, 47, no. 6 (November/December 2007): 977-1001.
30 The referred articles are: Hugo Radice, “The Developmental State under Global Neoliberalism,” in Third World Quarterly, 29, no. 6, (2008): 1157-1177; and, Richard Stubbs, “What Ever Happened to the Developmental State? The Unfolding Debate,” in The Pacific Review, 22, no. 1, (March 2009): 1-22. The
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Figure 1.1. Differences between the Independent and Integrationist Approaches
Independent Approach Integrationist Approach Use of financial
assets
Preference for banks to finance industrialization, rather than relying on stock exchange markets Emphasis in a strict control and banking regulations, and an important role of state-owned finance institutions.
The state limits or bans foreign participation in the domestic banking system.
Noticeable use of capital controls and moderate intervention in exchange rates.
The state continues relying heavily in foreign and domestic borrowing for its projects.
The state encourages the existence of a mix banking system, with public- and private-owned banks.
Total or partial foreign ownership of banks is not regarded as entirely negative, considering the better and modernizing practices they could bring with them. local industries, selecting only those where FDI is not perceived as a threat.
Preference for joint ventures with a strong emphasis in technology
Preference for joint ventures with a strong emphasis in technology