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( 21)


””. 1968. Asian Drama, 3 vols. New York: Pantheon.
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””. 1984. “International Inequality and Foreign Aid in Retrospect,” pp. 151“65 in Gerald Meier and
Dudley Seers (eds.), Pioneers in Development. Oxford: Oxford University Press.
Ocampo, Jos© Antonio and María Angela Parra. 2007. “The Continuing Relevance of the Terms of
Trade and Industrialization Debates,” pp. 157“82 in Esteban P©rez Caldentey and Matías Vernengo
(eds.), Ideas, Policies and Economic Development in the Americas. London: Routledge.
Palma, Gabriel. 1989. “Structuralism,” pp. 316“22 in John Eatwell et al., The New Palgrave: Economic
Development. New York: W.W. Norton and Co.
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Prebisch, Raúl. 1950. The Economic Development of Latin America and Its Principal Problems. New York:
United Nations.
””. 1984. “Five Stages in My Thinking,” pp. 175“91 in Gerald Meier and Dudley Seers (eds.),
Pioneers in Development. Oxford: Oxford University Press.
Sapsford, D. 1985. “The Statistical Debate on the Net Barter Terms of Trade: A Comment,” Economic
Journal 95 (September): 781“8.
Sapsford, D. and J. Chen. 1998. “The Prebisch-Singer Terms of Trade Hypothesis,” pp. 27“34 in David
Sapsford and John-ren Chen (eds.), Development Economics and Policy. London: Macmillan.
Sarkar, Prabijit. 1986. “The Singer-Prebisch Hypothesis,” The Cambridge Journal of Economics 10
(December): 355“72.
Singer, Hans. 1950. “The Distribution of Gains between Investing and Borrowing Countries,” Amer-
ican Economic Review 40 (May): 473“85.
””. 1984. “The Terms of Trade Controversy,” pp. 275“303 in Gerald Meier and Dudley Seers (eds.),
Pioneers in Development. Oxford: Oxford University Press.
””. 1989. “Terms of Trade and Economic Development,” pp. 323“8 in John Eatwell et al., The New
Palgrave: Economic Development. New York: W.W. Norton and Co.
Spraos, J. 1980. “The Statistical Debate on the Net Barter Terms of Trade,” Economic Journal 90
(March): 107“28.
””. 1983. Inequalising Trade? Oxford: Oxford University Press.
Sunkel, Osvaldo. 1990. “Reflections on Latin American Development,” pp. 133“58 in James Dietz and
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”” (ed.). 1993. Development from Within. Boulder, CO: Lynne Rienner Publishers.
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Warren, Bill. 1980. Imperialism: Pioneer of Capitalism. London: Verso.
Part 3

The structural transformation
7 The state as a potential agent of
From neoliberalism to embedded autonomy

after reading and studying this chapter, you should better understand:
• the neoclassical perspective on the role and nature of the state in the economy;
• P.T. Bauer™s critique of developmentalist theories and his case for spontaneous
• the origins and importance of market failure versus government failure;
• the nature of the so-called New Political Economy and DUP activities;
• the importance of government leadership versus government followership;
• how state activities can result in crowding-out or crowding-in of private investment;
• the crucial role of a meritocracy of state employees to successful development;
• the debate over corruption, development, and the state
• the characteristics of the non-cohesive, the fragmented-intermediate, and the
developmental state;
• the meaning and significance of embedded autonomy and state capacity;
• the four roles of the developmental state.

This chapter concentrates on one of the most disputed areas of development studies, the role
of the state in the process of economic transformation. It begins by framing the discussion
within the context of major socio-economic realignments of the 1980s which set the stage for
a renewed debate over the role of the state. It concludes with recent research which attempts
to reaffirm the potential of the state as an agent of economic growth, a view widely held by
the early developmentalists as well as the heterodox thinkers discussed in the previous two
While England was passing through the agonies and ecstasies of the Industrial Revolution
(1750“1840), a group of industrialists, pundits, and economists urged unrestrained laissez-
faire as the best means to advance the wealth of the nation, and they made an impression in
national political-economic debates of the period. Because many were located in the thriving
industrial town of Manchester, they became known as the “Manchester Liberals.” In their
view, if the British government would only eliminate almost all regulations and constraints
on market behavior, then england would forge ahead even faster.1
economic liberalism receded into the background in the latter part of the nineteenth century,
however, and it seemed to have all but disappeared by the time that Keynesian economics
204 The Process of Economic Development
dominated policy-making and economic theory, from the 1940s to the mid-1970s, except
among economists associated with the Austrian school and monetarist doctrines. As Keynes-
ianism appeared unable to cope with the turmoil of inflation, instability in global commodity
markets, and recurrent business cycles that swept the advanced nations in the 1970s, a counter-
revolution in economics began to emerge. At first this new liberalism appeared to be restricted
to the economic policies of the United Kingdom under the prime ministership of Margaret
Thatcher (1979“90) and of the United States under President Ronald Reagan (1981“9),
but the political changes in those countries opened the door wide to a rethinking of many
economic concepts.
Very briefly, this counter-revolution in economic thinking found its way into develop-
ment issues. Perhaps most telling was the Cancún Conference in Mexico in 1981, when the
Mexican President Jos© López Portillo (1976“82) hosted the assembled dignitaries of the
“North” and “South” in what was to have been the first in a series of global conferences
designed to establish a New International Economic Order (NIEO).
The NIEO concept had arisen in the course of the 1970s; at best, it constituted a hazy
vision of a revised global economy wherein the needs and aspirations of the developing
nations were to be given new and greater consideration by the already-developed nations.
The NIEO concept reflected the fact that in the 1970s in many less-developed nations a new
optimism and assertiveness had replaced the caution and uncertainty of the 1960s vis-à-vis
the developed nations.
The Organization of Petroleum Exporting Countries, OPEC, above all, had made great
strides in its bid to confront the transnational oil companies of the advanced nations by
pushing up oil prices via a classical cartel arrangement. The funds earned by OPEC were
to a large degree deposited in private banks in the major financial centers of London, New
York, Frankfurt, and Tokyo. Dubbed “petro-dollars,” these funds were subsequently recycled
back to the less-developed nations, where they became an important means of financing new,
often grandiose, development projects, and, just as often, conspicuous consumption contrib-
uting to the debt crisis which overwhelmed many less-developed nations in the 1980s (see
Chapter 16). Privately owned corporations in many less-developed nations also had been
courted assiduously by investment bankers from Europe, Japan, and the United States, who
sought to offer loans without serious investigation of these firms™ repayment capacities.
At the Cancún Conference, both Mrs. Thatcher and President Reagan attacked the NIEO
concept, expressing their distaste for the stabilization of raw material export prices and the
enhancement of foreign aid spending from the developed nations that formed two key planks
of the NIEO proposal. At the same time, though, Mrs. Thatcher™s and President Reagan™s call
for a greater reliance on the free market as the vehicle for promoting economic development
seemed to fall on deaf ears. But not for long.
By late 1982, the debt crisis was in full swing, and as a result of a recession in the advanced
nations which had begun in 1981, oil prices fell rapidly and the terms of trade began to
move strongly against the less-developed nations. economic crisis spread through the world
economy, hitting many less-developed nations particularly hard, especially the Latin Amer-
ican and African nations which had accumulated huge, and unsustainable, external debts.
Not all the less-developed nations had borrowed heavily, however; or if they had, some had
apparently used their loans more productively. Nor did all the less-developed economies
have their economic dynamic closely tied to the export of raw materials, which especially
suffered from the world recession.
A small number of East Asian nations, South Korea and Taiwan in particular, seemed able
to adjust to the changing economic circumstances of the 1970s and 1980s with a minimum
The state as a potential agent of transformation 205
of distortion to their economic and social growth. Most less-developed nations, however, were
not so fortunate. With the global economic environment so drastically changed, the basis
for the hopeful assertiveness of the less-developed nations apparent at the beginning of the
1970s, which had been based on a growing world economy, quickly evaporated. The ideas
and policies advocated by Mrs. Thatcher and President Reagan soon became central to the
new economics of the late 1970s and beyond. And there was to be no subsequent North“
South conference to give voice to the concerns of the less-developed nations. Brief and never
very productive, even the idea of a “North“South” dialogue seemed moribund.
Giving initial shape to the new economic policies advocated by Thatcher and Reagan were
a group of economists known as monetarists. Like the Manchester Liberals before them,
monetarists abhorred government regulation, advocated a minimalist role for the state to
enforce property rights, to maintain order and social stability, and to provide for the public
defense. They interpreted the economic turmoil of the 1970s as largely the result of too much
governmental intervention in private markets. In time many monetarists became associated
with a new school of thought termed “neoliberalism,” since the new policies they would
recommend went beyond the old monetarist formulations.
The neoliberal program was broader and more fundamental in advising novel policies
in all spheres of the economy, compared to the earlier monetarist policy package which
centered on limiting the rate of growth of the money supply to control inflation and spur
growth. By the mid-1980s, the term neoliberal had supplanted monetarism as a label to
describe the predominantly laissez-faire, market-driven economic policies sweeping across
the globe from advanced countries to less-developed nations and to the newly formed repub-
lics emerging after the collapse of the Soviet bloc in 1989.

Origins of the neoliberal paradigm
P.T. (Lord) Bauer (1915“2002), a Hungarian-born economist whose research work in England
elevated him to the peerage in 1983, was an early pioneer in development economics, with a
strikingly different perspective from any discussed in previous chapters. Lord Bauer attrib-
uted his distinctive insights to reasonably long stints in the tropics, first studying colonial
rubber production in Malaysia and later examining the role of traders in West Africa who
provided both inputs to the production of cocoa, peanuts, cotton, and kola nuts and then,
later, acted as intermediaries when they bought the cash crops for sale on the world market.
Based on his field experience and his interpretation of cause“effect relationships,
Bauer boldly rejected many of the most widely used concepts that had become central to
the emerging field of development economics. For example, he denied that there was any
evidence of vicious circles of poverty in less-developed nations or “cumulative causation,”
as Gunnar Myrdal had called these mechanisms which exacerbate poverty where it already
exists. At the same time, in observing key export crops such as rubber, cotton, and cocoa,
he maintained that the benefits of expanded production of these crops spread down to even
the very small farmers; there were no “enclaves” in the export-oriented economy that did
not gain from export expansion. Thus, Bauer returned to the Smithian idea that the market
“harmonizes” the interests of all participants: everyone gains. Even major investments in
infrastructure by government, he claimed, were not necessary to start off, accelerate, or push
the process of development forward, a view distinctly contrary to what other development
economists had claimed, as we read in Chapter 5.
Bauer™s criticism of traditional development economic ideas is so sweeping that it is worth
citing him at length, to capture the breadth and intensity of his views.
206 The Process of Economic Development
The historical experience I have noted was not the result of conscription of people or the
forced mobilization of their resources. Nor was it the result of forcible modernization
of attitudes and behavior, nor of large-scale state-sponsored industrialization, nor of any
other form of big push. And it was not brought about by the achievement of political
independence, or by the inculcation in the minds of the local people of the notion of
national identity, or by the stirring-up of mass enthusiasm for the abstract notion of
economic development, or by any other form of political or cultural revolution. It was
not the result of conscious efforts at nation building or the adoption by governments of
economic development as a formal policy goal or commitment. What happened was
in very large measure the result of the individual responses of millions of people to
emerging or expanding opportunities created largely by external contacts and brought
to their notice in a variety of ways, primarily through the operation of the market. These
developments were made possible by firm but limited government, without large expen-
ditures of public funds and without the receipt of large external [aid].
(Bauer 1984: 30“1)

For Bauer, then, it was not government intervention, a driving vision of the future,
a desire for development, infrastructure creation, a “big push” of industrialization, or
anything other than the pursuit of individual gain by individual members of society, medi-
ated by the market, that resulted in economic growth and development. Bauer™s view,
then, is little more than a restatement of Adam Smith™s praise of the invisible hand as a
coordinating mechanism and of how the decisions of individuals to accumulate capital
in the pursuit of profit lead to social progress. But it is important to draw the distinction
between Lord Bauer having concluded this is how development was taking place in the
less-developed nations and his providing any evidence as to whether, in fact, this is what
was actually happening.

The free market, exports, and the nature of colonial rule: a case-study
of British West Africa
How is one to assess Bauer™s view that development is really a very simple process that
results from allowing unimpeded market forces to work, thus permitting individuals to freely
pursue their self-interest in a free market setting? This is an important question to pursue.
A complete answer would take us into a complex study of British West Africa and Malaysia,
subjects far from the theme of this chapter. Nonetheless, a brief discussion is in order, and
our comments will be limited to the situation in West Africa.
To begin, it is necessary to restate the obvious: in Ghana (known as the Gold Coast in
the colonial era) and Nigeria, it was British colonial policy in the era described as “mature
colonialism” in Chapter 3, rather than unregulated and impersonal free market forces, which
determined economic results. Furthermore, in the case of tropical West Africa, it is important
to understand that the leading theorists of colonial rule were committed to the concept of
native paramountcy; they sought to preserve indigenous cultural patterns and structures
of production. Foremost in taking this position was F.D. Lugard, who was born in India
and made a career in the British military and as an administrator of the British empire.2 (In
pointed contrast, in East Africa the British sought to introduce large plantations and turned
over the bulk of the economically desirable resources to British subjects. The case of land
settlement in Kenya is described in Chapter 11.) In West Africa there were few large mineral
deposits which could form the basis for a mining enclave economy.
The state as a potential agent of transformation 207
Many West African peasants had established skills in the cultivation of export products.
After the elimination of the slave trade in the nineteenth century, many small farmers, through
the intercession of traders, maintained centuries-old trade links with the global economy.
Peasant agriculture, geared to the rapidly expanding global market, became the new motor-
force of the West African economy. When the British expanded their colonial empire into
West Africa in the late nineteenth century, Lugard™s new principles of colonial rule were
easily adapted to fit the West African situation. This created a modicum of stability, permitting
the British to operate profitably within an established economy based on peasant production
for the global market:

[The] first principle was that African colonies should be supervised by strong central
British governments, but that actual administration should be left to “native authori-
ties,” preferably hereditary chiefs, who must be both “unfettered” and yet “subordinate.”
“Unfettered” meant that they were largely autonomous, with their own treasuries, courts,
laws, etc. “Subordinate” implied that they lost control over foreign relations, obeyed laws
made by the colonial government and the order of the British officials, and contributed
part of their revenues to the colonial treasury. Thus the system tried to balance native
autonomy and imperial authority, enabling non-europeans to take an active part in their
own government without weakening British control.
(Fieldhouse 1967: 299)

What quickly becomes obvious, then, is that whatever the merits of Bauer™s observations,
he managed to conduct his research in an area of the British empire which was extremely
atypical, even in relation to the rest of Africa, where plantation-based and/or mining enclave
economies were the rule, not the peasant-based, export-oriented structures found in West
The British sought to press their advantage in West Africa via their control of inputs and
outputs, leaving direct cultivation of crops to native cultivators. By all accounts the peasant
cultivators did respond to market (or price) incentives. Yet it is important to recognize that
while small farmers were free to respond to price changes, they did not own the land they
farmed. Villages and tribes owned this land and determined individuals™ access to it. Custom,
therefore, served as a barrier to the emergence of a landed aristocracy. Consequently, one of
the basic elements of a market economy, a free market in land, did not exist.
Perhaps the greatest stimulus to increased export production arose from strategic govern-
ment investments in infrastructure. For example, between 1898 and 1932 the colonial
government built 2,100 miles of railways and 6,000 miles of roads in West Africa. The
new transportation system permitted peasants to deliver their crops more easily from the
hinterlands to the global markets. Previously, cultivators had been restricted to transporting
marketable surpluses via small river canoes and human porterage over crude trails where no
draught animals were used.
Furthermore, the native crops proved to be atypical, in that prices generally rose over time,
with the terms of trade either working to the advantage of West African commodities, or at
least not moving strongly to the disadvantage of such commodities (Kemp 1989: 180“1).
Nigeria was atypical, too, in that it sold a small but diversified range of commodities, such
as cotton, peanuts, palm oil, rubber, and cocoa, which generally maintained their value in the
global market. Therefore, it was not dependent on merely one cash export crop. Moreover,
the absence of mineral resources encouraged the development of indigenous cultivators.3
Thus, based upon native cultivation and strong prices, an indigenous middle class began
208 The Process of Economic Development
to emerge, composed of prosperous peasants, small tradesmen and shopkeepers, astute
middlemen traders, and well-trained African employees of the colonial administration.
But the West African situation left the indigenous population dependent on foreign manu-
factured goods, since colonial rule had precluded industrialization. Meanwhile, large, usually
British-owned, trading companies eventually bought the commodities produced in Africa
and made profits on shipping, insurance, and finance. A division of labor imposed by colonial
rule, not by the market, permitted the West African middle class to share in the economic
prosperity, though this was not wholly of the market™s making. And, although Bauer dwelt
upon the individual initiative of the native cultivators, major changes in agricultural tech-
nique were, in fact, brought about by the government™s Agricultural Department in the 1920s
and 1930s, not by small-scale decision-makers in the fields (Kemp 1989: 179).
The Depression of the 1930s and the turmoil of the Second World War ushered in a
fifteen-year period of debate and experimentation, leading to an attempt by the British to
foster economic development in West Africa via an activist role for government. Bauer,
writing in the early 1950s, deemed this experiment a failure. His critique concentrated on
the role of marketing boards which, beginning in Ghana in 1939, began to buy up all the
main export crops, ostensibly in order to maintain and stabilize prices. Under this scheme,
individual West African middlemen buyers could still negotiate with peasant cultivators,
but they were forced to sell to the government at a fixed price. Rather than actually bene-
fiting the peasants, the marketing boards were a disguised means to help finance Britain™s
war effort. To understand the size of the wedge which the government had driven into the
export market, immediately after the war the marketing boards were absorbing 42 percent
of the value of the Nigerian cotton crop, 40 percent of the peanut crop, and 39 percent of
the cocoa (Kemp 1989: 182). Compounding difficulties was the fact that prices began to fall
in the 1950s, and the terms of trade started to turn against West African primary producers.
Meanwhile, the marketing boards used their vast surpluses to finance colonial rule and
to subsidize a range of infrastructural investments and development programs (Helleiner
1966: 32“3). As one result, British-financed public investment flowing into British West
Africa was greater in the period 1946“60 than it had been in the previous forty-five years
(Hopkins 1973: 280).
examining the role played by the marketing boards, long after Bauer had chronicled their
failure to either stabilize prices or help the small producers, Gerald Helleiner argued that
Bauer had misrepresented the changing objectives of colonial rule. For Helleiner, the boards
were to be judged not as instruments to protect the interests of the small cultivators, but as
devices to facilitate the economic development of Nigeria. He concluded that, on the whole,
the marketing boards had used their surpluses wisely, investing in agricultural research, road
construction and local industry (Helleiner 1966: Chapter 10). In doing so, hypothesized
Helleiner, they had successfully forced the prosperous peasantry to save and invest a portion
of output that would otherwise have been spent on imported consumer goods. The marketing
boards, then, were instrumental in helping to break the vicious circle of the open economy,
whereby the lack of a balanced infrastructure and industry had forced West Africa to depend
upon and perpetuate a primary commodity-based development strategy, which had reached
its limits by the early 1950s, if not earlier.4
No one seems to question the entrepreneurialism and market responsiveness of the peasant
cultivators of Ghana and Nigeria. Yet those characteristics alone have been insufficient to
lift West Africa from economic backwardness, Lord Bauer™s analysis notwithstanding. By
all accounts, West Africa™s relative success with an open economy based upon the supposed
comparative advantage in commodities such as cotton, palm oil, peanuts, coffee, and cocoa
The state as a potential agent of transformation 209
had been exhausted by the early 1950s, when the terms of trade moved against West
Africa, as they tend to do for most primary products.
Today, Nigeria, despite its good fortune in having discovered massive petroleum reserves
since Bauer conducted his research, is one of the poorest nations in the world. In the World
Bank™s listing of 133 nations, Nigeria was thirteenth from the bottom ($930 in PPP), with
a per capita average income of $390 per year in 2004. For the period 1990“2000, average
per capita income decreased by 1.0 percent per year, while rising oil and commodity prices
pushed per capita GDP growth to a respectable 4.7 percent rate in 2002“5.
On the human development index, Nigeria ranked eighteenth from the bottom out of 177
countries (down seven since 1999), with an HDI value of 0.45. Life expectancy at birth was
only 43 years (down 17 percent since 1999!), while only 52 percent of the population had
access to safe (potable) water, and 71 percent lived on less than $1 per day in 2003. Ghana
(with $2,280 in PPP) had a much higher ranking “ thirty-ninth from the bottom in the World
Bank™s 2004 listing. Ghana enjoyed modest per capita growth of 1.7 percent per year, 1990“
2000, but its per capita income peaked in 1978. On the HDI Ghana was forty-one from the
bottom (down two positions since 1999), with an HDI value of 0.53, life expectancy at birth
was 57 years, and 25 percent of the population lacked access to safe water.
To what degree have forces totally beyond the control of these nations been instrumental
in their development experience? How much of what has occurred, or has not occurred, since
the 1940s in terms of development can be accounted for by factors stressed by the develop-
mentalist and/or the heterodox economists discussed in the previous two chapters? In order
for Bauer™s view to be accepted, he would have to address these issues with care. This he
never did, as John Toye has argued (Toye 1987: Chapter 3).
Did Bauer actually uncover through his studies evidence that the market and laissez-faire
are key to economic development, or did he merely observe an unusual series of virtuous
circles operating at a point in time that led him to be unduly optimistic about what the market
might achieve on its own? Michael Lipton has maintained that Bauer observed situations that
were extreme and atypical, and that it would be inaccurate to draw broad conclusions from
such research.

export-crop production and trade in Dutch and British colonies in some areas received
significant inflows of private foreign capital from 1900 to 1940. The local farmers and
traders in a few such areas “ having much spare land and enjoying population growth
well beyond present rates in poor countries “ built significant growth, quite widely
shared, upon these inflows. Because rubber (and tin) and, in the early stages, cocoa
and robusta coffee faced promising markets, international commodity cartels “ or even
agreements “ were nuisances, not necessities. But were these realities too specific and
temporary to allow us to transfer the lessons to other situations?
(Lipton 1984: 48)

Lipton is of the opinion that Bauer failed to demonstrate the generality of his examples. As
a counter-example, Lipton offered the case of Bangladesh, where the two main exports are
jute and tea; both faced a price-inelastic world market demand. Bangladesh failed to attract
foreign capital inflows, unlike Ghana and Malaysia, there is little spare land, and the popula-
tion has a low capacity to save and invest that could allow them to shift production to other
crops that might be more advantageous or to industrialize (Lipton 1984: 49“50). Lacking the
fortuitous inflows of foreign capital may account, at least partly, for the extremely low level
of per capita income of $380 in Bangladesh in 2000, the thirty-fourth-lowest among the 133
210 The Process of Economic Development
larger countries the World Bank lists, with an HDI value of 0.470, one hundred and thirty-fifth
out of 175 in ranking.

Ethnicity and race
For Bauer, growth is due to both reliance on the free market and intangible characteris-
tics which he believes are “natural” to certain ethnic groups. For example, Bauer made the
following comparison: “Indians have many valuable economic qualities, especially when
they are not hampered by a very restrictive social environment, they are nevertheless generally
less ingenious, energetic, resourceful and industrious than the Chinese, as is suggested by
the relative performance of Chinese and Indian emigrants” (Srinivasan 1984: 52“3). T.N.
Srinivasan cites a study conducted by an Australian expert invited by the Japanese to analyze
their economy in 1915 that offered similar “cultural” observations to those of Bauer:

My impression as to your cheap labour was soon disillusioned when I saw your people
at work. No doubt they are lowly paid, but the return is equally so; to see your men at
work made me feel that you are a very satisfied easy-going race who reckon time no
object. When I spoke to some managers they informed me that it was impossible to
change the habits of national heritage.
(Srinivasan 1984: 53)

No development specialist would agree with such a characterization of the Japanese today
(or of the Indians and Chinese). For institutional economists, such as Ayres (see Chapter
6), the great change in the Japanese workforce arose through evolutionary change in the
institutions of Japanese society and economy that brought on changes in attitudes and work
behavior. The “nature” of the Japanese was not immutable for all time, assuming that the
characterization in the above quotation was ever reasonable. And, one would presume, had
evolutionary changes identical or similar to those in Japan taken place in other nations, or
were they to take place in the future, they too would exhibit a history of emerging economic
development, as the “traits” of the population changed to fit the evolving social and productive
structure™s needs. Racial and ethnic theories of development have been dismissed by careful
empirical research, yet they seem to resurface in subtle ways in some scholarly circles again
and again for those looking for easy explanations for differences in levels of development
among nations.

Government in the process of development
Bauer™s perspectives have been applied selectively by the advocates of neoliberal economics.
For example, race and ethnicity do not play an explicit explanatory role in neoliberal thinking.
Yet one of Bauer™s major themes has become the pivotal point of neoliberal analysis: the
essentially negative role of government. If one were to express in a sentence the essence of
the neoliberal approach to development issues, it would be the following: “Nations are not
poor because they are poor, that is, because of vicious circles; rather they are poor because
of too much government interference.” Bauer and others have constructed their criticism of
the state on three pillars:

1 The public sector has become over-extended in the economy.
2 The public sector has over-emphasized capital formation and mega-investment projects.
The state as a potential agent of transformation 211
3 The public sector has caused the proliferation of economically distorting controls in
the economy that create incentives for inefficient production and ineffective economic

One difficulty with the first proposition is that Bauer and others fail to demonstrate an
operational definition of the proper size of the public sector; thus “over-extended” becomes
little more than an ideological construct, sometimes supported by anecdotes of government
inefficiency suggesting the need for a smaller state.5 Regarding the second statement, Bauer
maintained that relatively little initial capital investment is needed to foster more rapid devel-
opment, and consequently foreign aid is unimportant, as is any “big push” to kick-start the
On this detail, Bauer is very much the exception within the neoliberal school. Neo-
liberals in power typically regard foreign aid and technical assistance as extremely
important instruments of influence which can be utilized to impose their policies on less-
developed nations that otherwise risk forgoing such assistance. In the 1980s and 1990s, the
World Bank and the International Monetary Fund became extremely influential in curbing
the public sector in the less-developed world, and in the transitional economies of the
former Soviet bloc, by using the threat of withholding aid and loans as their prime instru-
ment for gaining policy agreements with less-developed nations that were consistent with
neoliberal precepts.
Furthermore, Bauer™s position suggesting but a modest role for capital formation in
the process of economic growth has not received much theoretical or empirical support
(remember the neoclassical growth model of Chapter 4; see Chapter 8 on endogenous growth
theories). Clearly, however, there have been instances when mega-projects, such as a huge
irrigation complex of dams and canals, have been poorly thought through and executed and
where, alternatively, small sums spent on large numbers of individuals, small farmers for
example, ultimately could have benefited society more than the mega-project. At the same
time, one can find instances when funds spent on small businesses and micro-industries were
squandered or poorly conceived from a social point of view. Such anecdotal information,
however, proves nothing (see Focus 7.1).
In many instances, the size of government is determined by the degree of market failure
in society, that is, by the extent to which unregulated market outcomes are inefficient or by
situations when the market does not perform the desired function at all. In societies where
there are pervasive monopoly and oligopoly forces, government action is clearly called for
to reconstitute competitive forces. Likewise, if there is widespread hunger and malnutrition,
subsidized food programmes aimed at the needy poor may be both a social and political
necessity, as well as being economically sound, since healthy and adequately fed workers are
likely to be more productive as well.
If employers are few and powerful, that is, if there is monopsony in the labor market, a
government policy of minimum wages and protection for unions may be called for. Many
essential infrastructure and social overhead capital projects, including the provision of
universal public education, will not be provided via the free market, because the private rate
of return is too low, and the payout period too long, to interest private investors, though the
social rate of return can be quite high and the benefits to future economic and social growth
The list of possible situations wherein there may be a need for corrective or complemen-
tary government action in the private sector could easily be extended, but the point is that
because of the failure of the market system to deliver results that are either economically
212 The Process of Economic Development

The World Bank™s World Development Report for 1983 argued that governmental poli-
cies led to large-scale price distortions and that such distortions negatively affected the
growth process. The study was based on thirty-one less-developed nations, and it did
show that governmental controls over the foreign trade sector, such as over- or under-
valued exchange rates, tariffs, and subsidies, which introduced large price distortions,
were, in fact, correlated with slower growth rates.
However, such large distortions could explain only 25 to 34 percent of the variance in
growth between nations. The World Bank could not account for the most important factors
which determined differences in the growth process between nations. At least part of the
remaining two-thirds to three-quarters of the determinants of growth divergences may be
due to positive effects associated with government spending on infrastructure, education,
public health, and other government-induced forms of expenditure. Analyzing the World
Bank™s conclusions, John Toye noted “[The World Bank study] cannot be expanded into a
justification for ¦ the unrestricted play of market forces and government non-intervention
in economic life.”
Following a close study of the East Asian economies (see Chapter 8 for more details),
the World Bank has suggested the extreme importance of human capital formation to
economic development. And government action in this arena is a fundamental source
of such investment, which so positively influences future growth rates and the level of
per capita income. Government intervention of this type is a kind of “policy distortion”
that is favorable. As we shall see, there is no doubt government policies can adversely
affect growth and development. However, there is nothing about the experiences of the
successful developers to suggest that this must be the outcome. There is good state
policy and there is bad state policy creating “good” distortions and “bad” distortions.
Sources: Toye 1987: 86; World Bank 1993

efficient or socially acceptable, there is a legitimate role for government that most econo-
mists accept as necessary to improve the operation of the entire economy, including the
private capitalist sector.
Where to draw the line between legitimate and illegitimate public sector activity cannot be
determined without a careful examination of the needs and situation of each nation. Should
a government own the railways, or a bicycle factory, subsidize health care, provide subsidies
to export businesses, tax imports, provide low-cost loans, or control the price of life-saving
pharmaceuticals? There is no a priori answer that is correct for all time and all circum-
For neoliberals, however, the answer to these questions is almost invariably, no. Govern-
ment should do as little as possible and never should it favor one sector of the economy
over another, what neoliberals call trying to “pick the winners.” Commenting on this, John
Toye draws the contrast between the neoliberal interest in proving “government failure” and
their corresponding lack of interest in studying, or sometimes even acknowledging, market

All the well-known causes of market failure “ including various types of monopoly “ are
brushed aside as insignificant, while “government failure,” in the form of corruption,
centralization of power and loss of individual liberty is brought to centre stage. But the
ploy of using government failure to outweigh that of market failure is a shallow one.
Apart from the fact that the methods for balancing one kind of failure against another
cannot be specified, the underlying assumption that the two types of failure are separate
The state as a potential agent of transformation 213
and unconnected is false. All markets are made within some legal, social and political
framework of institutions. One of the most familiar causes of market failure, for example,
public goods externalities, is precisely an explanation of why this must be so. ¦
But just as importantly, the causal link also works in the other direction, from
market failure to government failure. Technical externalities are a source of monopo-
listic behavior and oligopolistic behavior. Monopoly or oligopoly firms which are also
large can usually exercise considerable political power and influence. This is not just a
matter of contributing to political parties™ funds. It extends more subtly to other forms of
patronage ¦ [e.g. good jobs to former state employees].
(Toye 1987: 67)

This argument reveals another cornerstone of neoliberal analysis: the market is presumed
to be the repository of efficiency. Government, on the other hand, is the root of inefficiency.
The two sectors of the social economy are treated as autonomous, as if there were a firewall
between them.
What if, however, government inefficiency arises, at times, from powerful economic inter-
ests, such as an agro-export-financial elite, who exercise determinant power over government
policy in certain areas? Shrinking the size of government under these conditions actually
might increase the latitude of power of these private sector groups which are unconstrained
by competitive markets.
This result is assumed not to occur, however, because neoliberal economists make the
critical, if typically unspoken, assumption that less-developed nations operate within a
framework that is essentially a competitive market system. What happens if one drops the
competitive assumption? Then, as Adam Smith understood (see Chapter 4), much of the
supposed efficiency of markets disappears as more powerful interests can manipulate the
market system in their favor. The need for government and public sector action as a counter-
weight becomes more compelling.

The neoliberalism of Deepak Lal
Deepak Lal was professor of political economy at University College, London and is currently
at the University of California, Los Angeles, and has conducted a great deal of research under
the auspices of the World Bank. He is perhaps best-known for his 1985 book The Poverty
of Development Economics. He had earlier assisted in an influential compendium under the
editorship of Ian Little which was critical, but not dismissive, of the role of the state in devel-
opment (Little et al. 1970).
In his 1985 book, Lal attempted to dismiss virtually the entire body of thinking, analysis,
and research conducted by the developmentalist and the heterodox thinkers discussed in the
previous two chapters. Utilizing a polemical style, Lal maintained that heretofore development
economics has been subject to what he termed a “dirigiste dogma,” that is, a preference for
state-led development strategies. He suggested that development economists had embraced
instinctively the notion that the price and market system should be “supplanted (and not
just supplemented) by various forms of direct government control ¦ to promote economic
development” (Lal 1985: 5).
Lal, however, offers not a single example of such thinking. One might reasonably ask,
exactly where in their writings have the major contributors to development economics advo-
cated the elimination of market processes? Certainly there were some who strongly advocated
development planning to propel forward certain projects and sectors. But this, in itself, falls
214 The Process of Economic Development
far short of “supplanting” markets throughout an economy and replacing them with “direct
government control.”
Within the broad spectrum of development ideas there is, as noted in earlier chapters, a
healthy skepticism regarding the degree of efficiency of many markets in less-developed
nations. This skepticism has not arisen, however, from a “dogmatic” rejection of markets,
nor from any lack of knowledge as to what markets can accomplish when they function well.
Rather, it is due to an understanding that markets often do not function properly in a society
that is in transition from a pre-capitalist, dualistic social formation to a fully articulated
capitalist society.
The need to supplement the market process in many areas has been vigorously advocated,
but supplanting the market has not been a major or even a minor theme of development
economics. Virtually no economist would deny the importance of the information and coor-
dination functions of properly functioning markets. Markets are an essential component of
any well-functioning economy, and the more efficient such markets are, the better. The role
of government will likely be less when markets work well, but every society needs some
degree of state intervention to have a well-functioning social system, of which the economy
is only a part, albeit an important part.6
Lal further attacks development economics for its emphasis on macroeconomic considera-
tions, such as growth, industrialization, investment, and employment, rather than on micro-
efficiency. This, of course, is a valid observation. But the corrective is not to be found in the
direction which Lal advocates: emphasizing micro-efficiency, while assuming that the “big
picture” macro-issues will somehow take care of themselves as a result of the focus on the
microeconomic matters.
Refutation of Lal™s microeconomic perspective has come from various respectable quarters,
for example the eminent development economist Gerald Meier and, more recently, the World
Bank. The Bank has shown that the successful less-developed economies, such as South
Korea and Taiwan, owe their success not to “getting prices right” (i.e. micro-efficiency)
but to finding the right dynamic strategies at the macro-level and the micro-level that can
accelerate growth and improve productivity (World Bank 1993).
Meier shows that the arguments made in favor of import substitution industrialization,
emphasizing the dynamic effects of policies while devoting relatively little attention to
micro-inefficiencies which may either arise or be exacerbated by such policies, actually have
their application in the so-called export-led success cases (Meier 1990: 155“69). Hla Myint,
another admirer of the neoliberal school, makes a similar observation:

Is it really true that the export-oriented countries are free from trade distortions in the
neoclassical sense? ¦ the export-oriented countries, such as Korea, appear “to have
intervened virtually as much and as ˜chaotically™ on the side of export promotion as
others have done on the side of import-substitution” and their success cannot be attrib-
uted to “the presence of a neoclassically efficient allocating mechanism in toto in the
(Myint 1987: 117)

What is most interesting here is that the study cited by Myint in support of government
intervention (Bhagwati and Krueger 1973) was written by two of the most prolific and
influential contributors to the modern neoliberal school! In looking at some countries, the
least successful less-developed nations, neoliberals argue that government intervention has
slowed economic growth. In other cases, such as Japan and East Asia, they suggest that
The state as a potential agent of transformation 215
government intervention has not slowed growth and may even have accelerated it. So even
from their own observations it would seem that it is not whether there is government inter-
vention into the economy, but rather the nature of such intervention. Again, policy can be
either good, enhancing growth and human development, or it can be bad, consistent with
A third component of Lal™s critique of development economics concerned the abandonment
of the theory of comparative advantage, as a result of export pessimism (declining terms of
trade). He maintains that the East Asian “miracle economies” have employed a policy of
virtual free trade (Lal 1985: 47“8), by which he seems to mean that the Asian economies
tampered just enough with market outcomes, and that a little fudging against the doctrine
of laissez-faire is permissible if one ends up promoting exports. An observer might reason-
ably ask, “Why is it wrong to promote industrialization policies designed to expand the
internal market (ISI), but correct to utilize the same degree of government policy guidance
to promote the external market?” Why term one approach “dirigiste dogma” and the other
“virtual free trade”? Cannot both be equally effective?
Such questions are not adequately addressed by Lal. However, in much neoliberal analysis
it is argued that the state can, and perhaps should promote exports, but only as long as the
domestic economy is “open” to the world market. The need for openness arises from the
desire to achieve micro-efficiency. It is argued that if domestic producers are cut loose from
all price supports, tariffs, and subsidies they will be forced by the market to either become
competitive with imports, or die.7
This “do-or-die” imperative can have unfortunate collateral effects, however. It can flood
an economy with imports, thereby creating a balance of payments crisis. It can also produce
a general business slump. In other words, the search for micro-efficiency via the neolib-
eral shock treatment may create macroeconomic instability. Furthermore, the idea of both
promoting exports and forcing a laissez-faire regime on domestic producers is logically
flawed. Countries on the receiving end of export promotion policies may wish to retaliate,
for good reason, when such policies affect their domestic production and employment.
Furthermore, an extensive econometric study by Dani Rodrik points to the conclusion that
“there is no economic argument for government policies that favor export activities” (Rodrik
1999: 37)

The claims made by the boosters of economic integration ¦ are frequently inflated or
downright false. Countries that have done well in the postwar period are those that have
been able to formulate a domestic investment strategy to kick-start growth and those
that have had the appropriate institutions to handle external shocks, not those that have
relied on reduced barriers to trade and capital flows. Policymakers therefore have to
focus on the fundamentals of economic growth “ investment, macroeconomic stability,
human resources, and good governance “ and not let international economic integration
dominate their thinking on development.
(Ibid.: 13)

Other difficulties with Lal™s analysis arise when he seems to simultaneously decry all
government interventions, and hold up government policy as the chief source of economic

It can be argued that the very large increase in infrastructure investment, coupled
with higher savings rates provides the major explanation of the marked expansion in
216 The Process of Economic Development
the economic growth rates of most Third World countries during the postwar period,
compared with their own previous performance and that of today™s developed countries
during their emergence from underdevelopment.
(Lal 1985: 72)

This would seem to be a justification of government intervention, at least as it extends to
the provision of infrastructure. But, only a few pages on, government seems to again have
become the root of all evil!

Most of the more serious distortions in the current working of the price mechanism
in the Third World countries are due not to the inherent imperfections of the market
mechanism but to irrational government interventions, of which foreign trade controls,
industrial licensing and various forms of price control are the most important. In seeking
to improve upon the outcomes of an imperfect market economy, the dirigisme to which
numerous development economists have lent intellectual support has led to so-called
“policy-induced” distortions which are more serious than any of the supposed distor-
tions of the imperfect market economy it was designed to cure.
(Ibid.: 77)

Why, one might ask, if governments were so astute as to create the proper amount of
infrastructure, were they so incapacitated in pursuing policy elsewhere? Lal™s all-out attack
on earlier development economists has provoked a strong response, particularly from John
Toye, who has analyzed the propositions and analytical constructs of the neoliberal school:

The idea that development economists approve all forms of economic controls, whatever
their defects, and whatever their costs, is a total misrepresentation of other people™s
views. ¦ It can easily be shown that, for example, Gunnar Myrdal, who is named by
Lal as an arch dirigiste, published his criticisms of economic controls in India before the
publication of the OECD volume [Little et al. 1970] and that the details of the criticism
are very similar.
(Toye 1987: 77)

The new political economy
From 1982 to 1987, Anne Krueger was the chief economist of the World Bank, the largest
economic research organization in the world. During that period, the World Bank™s shift
toward neoliberalism was consolidated. In 2001 Krueger was appointed First Deputy
Director of the International Monetary Fund, the second-ranked position in that vastly influ-
ential organization.
Professor Krueger has authored numerous books and articles on development policy, and
she is one of the most renowned advocates of the neoliberal perspective. Although Krueger
draws extensively on the work of Bauer, Little, and Lal, her own research lacks the stridency
of tone and/or the broad sweep of much of the work of the other major contributors to the
neoliberal perspective. Professor Krueger has concentrated on the economic waste and social
distrust and instability which occur when the state has the capacity to redistribute income
to selected elements of society. For example, import licenses create monopolies and permit
the earning of economic profits for those who receive the licenses. If the price of the license
is less than the economic advantage of owning such a license, the fortunate importer is in a
The state as a potential agent of transformation 217
position to receive revenues that have not been earned. Such revenues are “windfalls” which
constitute unearned sources of income, or rents. Krueger has argued that the large state
sector in many less-developed nations creates widespread opportunities for such rents, and
under such conditions one should expect a pathological result: the rent-seeking society.8

The factional state and rent-seeking behavior
In Krueger™s interpretation, the state is a ready source of rents via subsidies, tax exemptions,
tariffs, and a wide range of government policies. Once such rents have been captured by
certain interests, those groups have a vested interest in keeping such policies in place. The
implication seems to be that state activities drain the economy of its dynamism. Wrong-
headed policies are maintained, because groups with an interest in the rents to be derived
from such policies exert pressure on the state to maintain those policies. As a consequence,
consumers end up paying unnecessarily high prices, production costs are too high, and tax
revenues are squandered, as state functionaries fail to pursue the general welfare in deference
to vested interests.
The above is a description of what Krueger depicts as the “factional state” (Krueger
1993: 66). The factional state can be either democratic or authoritarian. In either case, such
a state can be riddled with corrupt and inefficient behavior. Under such conditions, what can
be done? Krueger and neoliberal thinkers advocate the shrinking of the state to a minimum
by selling off government-owned firms via privatization programs, the elimination of tariffs
and import licenses, the end to special subsidies, and the elimination of any policy that might
create gains for special interests.

an assessment of the neoliberal theory of the state
This school of thought has made a contribution to mainstream economic theory by arguing
that the state should not be treated as exogenous and given in constructing economy theory
and analysis. Rather, the state should be seen as endogenous to the economic system. This
insight, hardly a path-breaking advance for heterodox theorists, who have taken such a posi-
tion from the outset, could be the building block for a much more powerful understanding
of the development process. How this can be achieved will be the subject of the remaining
sections of this chapter.
Development economics needs a detailed theory of the state, and it also needs a body of
research which reveals the extent to which rent-seeking prevails both within the structure of
the state and within the private sector. Since by definition rent-seeking is socially wasteful
and usually regarded as parasitic, it is often a difficult task to conduct research on such a
topic. How can reliable research be conducted when those who receive rents and those who
permit such rents to occur are determined to hide their activities?
The assumption that rents arise uniquely in the state sector is unwarranted. It is presumed
that within the private sector there is either perfect competition or enough “workable”
competition to eliminate rents. Throughout the developing world, however, there is scarce
evidence to support such a proposition. One of the conditions for perfect competition is
that all participants in the market have equal access to knowledge of the conditions of
the market “ the perfect, or symmetrical, knowledge assumption. Knowledge is a scarce
commodity, however, often closely guarded. This is part of the problem. Also, there is
often an absence of knowledge or information. In a society that has not reached a certain
level of development, the mechanisms to produce and diffuse knowledge, such as journals
218 The Process of Economic Development
and professional associations and their congresses, often do not exist, or do not exist to a
sufficient degree. Public records may be either incomplete or very difficult to obtain. The
difficulty in obtaining information means that there is a greater cost involved, compared to
more developed nations, in terms of time required to search out relevant information, and
even though the value of time may be lower in poorer nations, inaccessible information is
just that “ inaccessible, at least to some. Participants in the market will have different access
to knowledge (asymmetric information), at least partly because of their varying ability to pay
in terms of time devoted to the search for accurate information.
Of course, perfect competition entails much more than symmetric knowledge. The defini-
tion of free competitive markets is so restricted that even in the advanced nations there are
few sectors that come close to this “norm” of orthodox economics. To make the assumption
that the less-developed nations have efficient competitive markets, and are merely saddled
by a corrupt state, as do the neoliberals, serves only to undermine the neoliberals. At the very
least, the burden of proof is on those who boldly assert the existence of competitive markets.
The literature which we have reviewed in this chapter does not present such a proof, nor does
it explore this all-important theme.
Has neoliberalism run its course, to be replaced by yet another major focus in the early
twenty-first century? There is strong reason for thinking this to be the case. First, the coun-
tries which have received the strongest inducements to shift toward neoliberalism have fared
rather poorly, with the case of Chile requiring careful interpretation (Cypher 2005).
The largest social experiment with neoliberalism has been conducted in Mexico. The
neoliberals strongly believe in using aid from World Bank funds, IMF funds, and bilateral
institutions to induce a shift toward neoliberal policies. Mexico received more assistance
from such sources than any other nation in the late 1980s and early 1990s. The shift toward
neoliberalism seemingly succeeded in bringing inflation under control. But, since 1987, the
primary device used to control inflation has been a tripartite agreement between the govern-
ment, business, and organized labor, such that major prices have been set by decree, exactly
the opposite mechanism from that advocated by neoliberals. The government™s deficit was
eliminated, but this was due in large part to the massive one-time sell-off of most of the
government-owned firms. Where will the government find revenues once the funds from
privatization have been spent?
While the neoliberals are anxious to point out their victory over inflation and their taming
of the government™s deficit, the Mexican economy has been plagued by modest growth,
declining or stagnant living standards, massive migration into the United States, and the
near-elimination of much of the small-business sector. As the Mexican economy slid into
recession in 1995, neoliberals seemed to lose interest. Yet, the lessons are there to be learned.
Neoliberalism did not revive the Mexican economy (Cypher 2001a; Delgado Wise and
Cypher 2007). And, given the magnitude of the effort and the willingness of the Mexican
policy-makers to introduce neoliberal policies, it is doubtful that a better case study of neolib-
eralism can be found (Cypher 2001b).
Neoliberalism faces a deeper difficulty than the failed experiment in Mexico, however; it
falsely claims that the Asian miracles of Taiwan, South Korea, Singapore, and Hong Kong
were models of free market economies which successfully developed. In the following
chapters, we discuss the process of development in these nations, showing how this
process radically diverged from the market-driven interpretation of the neoliberals. For the
moment we cite only the conclusions of an important study of the industrialization poli-
cies of Taiwan and South Korea. Here Robert Wade poses the question: “Did government
policies lead the industrialization process, or did government policy follow where the free
The state as a potential agent of transformation 219
market would have taken these nations?” If the first part of Wade™s inquiry is answered in
the affirmative, then Taiwan and South Korea would be seen as successful examples of
state-led development. If the latter part of his question is answered in the positive, they
would be seen as having received a modest boost from the government, arriving at the
same destination as they would have without any government intervention. Here are his
major findings:

We began with the mainstream interpretation of East Asian success within economics,
which I called the self-adjusting market theory. It gives government an important but
background role as regulator and provider of public goods. Whatever else we conclude
from the present evidence, we can surely say that the governments of Taiwan and
South Korea have gone well beyond this theory “ beyond the role described for them in
neoclassical accounts, and beyond both the practice of Anglo-American governments
and the neoclassical principles of good economic management.
The second conclusion is that much of this intervention has been of a leadership rather
than just a followership type. It has done more than assist private producers to go where
they have gone anyway.
(Wade 1990: 260)

As a result of the critical scrutiny of the state that the neoliberals undertook in the 1980s, a
new and more robust conception of the role of the state in the development process has begun
to emerge. By forcing such a reassessment, the neoliberals have made a positive contribution
to our understanding of the process of development. This reassessment is based upon the
concept of the endogenous nature of the state. It is increasingly understood that all successful
development has depended on an activist state (Adelman 2001; Chang 2002; Morris and
Adelman 1988).
Working with a set of studies conducted by the World Institute for Development Economics
Research (WIDER), Shapiro and Taylor demonstrate that “getting prices right,” the neolib-
eral recommendation for the ills of less-developed nations, is not enough. They find that
only if attempts at price reform are coupled with large-scale state interventions, such as
aggregate demand manipulation, export subsidies, public investment, and barter trade deals,
can countries improve their economic performance (Shapiro and Taylor 1990).
The neoliberal school often cites Turkey as an example of a successful development path
based on free market principles. Shapiro and Taylor point, however, to a WIDER study
which discovered the following set of relationships almost the reverse of the account offered
by the neoliberals.

Turkey™s export “miracle” in the first part of the 1980s rested upon a preexisting
industrial base created by ISI, policies leading to contraction of domestic demand for
manufactures, attempts at general price reform, subsidies of up to one-third of export
sales plus related incentives, and rapid growth in the demand for the products the country
could produce by culturally compatible buyers in the region (the Gulf countries and both
sides in the Iran-Iraq war). Had any one of these factors been missing, the boom probably
would not have occurred.
(Ibid.: 866)

Research conducted by WIDER also shows that public investment tends to stimu-
late private capital formation; this is in direct opposition to the presumed relationship
220 The Process of Economic Development
postulated by the neoliberal school. For them, public investment crowds out private
investment. A large body of research suggests that this is simply not true. Indeed, these
studies suggest that on average every dollar of public investment induces one dollar or
more of private investment. In other words, public spending results in the crowding-in
of private investment.
The practitioners of the “New Political Economy” believe that the state should be a maxi-
mizer, rationally finding the right combination of minimalist policies which free the “natural”
development forces in an economy. According to their view, nations such as South Korea
owe their success to their willingness to follow the guidelines of neoclassical economic
theory. Writing on the Asian miracles, Gottfried Haberler flatly stated: “These economies
pursue, on the whole liberal market-oriented policies. ¦ Their success is fully explained by,
and confirms, the neo-classical paradigm” (Haberler 1987: 62). Such a perspective is totally
alien to specialists who have studied these economies. Tun-jen Cheng notes that factors
never mentioned by neoliberals, particularly colonialism, transnational firms, and the World
Bank, had much to do in shaping development strategies which were spearheaded by the
state (Cheng 1990: 141).
As the logical critiques mounted and as the empirical research proliferated, those who
continued to favor the neoliberal theory of the state faced deepening skepticism within the
field of development economics. Major theoreticians and researchers, particularly the Nobel
Prize recipient Joseph Stiglitz, have sought to advance the discussion of the role of the state.
By the late 1990s Stiglitz was urging the creation of a “Post Washington Consensus” that
would refocus the entire discussion of the state toward (1) concepts and policies originally
advocated by the Developmentalists (see Chapter 5); and (2) a detailed emphasis on lessons
to be learned from the experience with successful forms of state intervention in selected
developing nations (Amsden 2001; Evans 1998; Stiglitz 2001). It is to that discussion that
we now turn in the closing sections of this chapter.

Embedded autonomy
Peter evans has made great strides in the development of a robust theory of the state in
less-developed nations. evans maintains that it is possible to identify three archetypes of
the state: (1) the predatory state; (2) the intermediate state; and (3) the developmental state
(Evans 1995). In his conceptualization, states can vary, depending on the historical evolution
of specific societies. States are the result of complex historical forces and relationships, but
they are also actors or agents potentially capable of shaping and influencing the ongoing
process of historical evolution:

States are the historical products of their societies, but that does not make them pawns
in the social games of other actors. They must be dealt with as institutions and social
actors in their own right, influencing the course of economic and social change even as
they are shaped by it.
(Ibid.: 18)

In Evans™s richly detailed study one finds a thorough depiction of both intermediate and
developmental states. These are states where the structures and capacities deployed by the
state serve as agents of societal transformation and growth. In these states and societies, there
exists a viable joint project, wherein civil society (the private sector) and the state managers
are able to constructively and dynamically interact to engage in societal transformation.
The state as a potential agent of transformation 221
While Evans offers a theoretical conceptualization of states, he does not present a dynamic
analysis of why and how his three archetypical states come into existence, how they are
perpetuated, or how they metamorphose from one archetype to another. In this dynamic
sense, he does not offer a complete theory. Subsequent research following the opening created
by evans has been impressive, but the terrain is vast and many questions remain. Most of
this research has been focused on East Asia and China and on the concept of the develop-
mental state. Research on the intermediate state has been focused on India, and has brought
that giant nation into closer focus (Chibber 2003; Kohli 2004; Pingl© 1999). Atul Kohli™s
comprehensive study State-Directed Development addresses the question of the origin of
state types. The type or form of colonialism which was imposed on the nation determines to
a great degree the nature of the state form that will endure long after formal independence
(Kohli 2004: 27“61, 225“55, 301“23).

Colonialism has proved to be the most significant force in the construction of basic state
structures in the developing world ¦
Much of the developing world was dragged into the modern era by colonialism. However
one judges it, this is a historical legacy with which all scholars interested in the political
economy of development ¦ must come to terms. Colonialism everywhere was a system of
direct political control created to enhance the political and economic interests of the ruling
power ¦ These colonial constructed political institutions, in turn, proved to be highly
resilient, influencing and molding the shape of sovereign developing country states.
(Ibid.: 409)

In brief, Kohli finds that to an important degree the distinct type of colonialism the Japa-
nese imposed “ what we have termed progressive colonialism in Chapter 3 “ helped put
Korea (and Taiwan) on a very different path that positioned it well to catch the opportunities
thrown up in the 1950s. But this was not the case for India.
The British evolved a contradictory combination of institutions, many retarding, while
some were highly functional in terms of operating a state system that would nurture the
growth process. Thus the case of India is one where the concept of the intermediate state
can be applied. Meanwhile in Nigeria (and in British West Africa) where P.T. Bauer had
maintained that promising results were to be expected, the British imposed a distinct form
of state structure and colonial rule, constructing a set of retarding institutions that have been
entrenched through adverse path dependence. Once a nation becomes “locked in place” state
forms tend to be reproduced and perpetuated (Chibber 2003). Military coups, democratic
surges, and other factors that can lead to regime change may also fundamentally alter the
structure of the state. So too might incremental change, but solid advance on this question
awaits detailed case-studies.

The non-cohesive state
The non-cohesive state (termed “predatory” by Evans) is one where the appropriation of
unearned income via rent-seeking has become endemic and structural. everything is for
sale: the courts, the legislature, the military, the taxing authority, etc. Government employees
use their authority to maximize, in the shortest possible time, their accumulation of wealth.
Political offices are held not for the reason of providing service to a nation, but for the
purpose of individual gain in a society which may offer few alternative avenues to wealth
accumulation. With corruption endemic, “rational” individuals may prepare for their own
222 The Process of Economic Development
economic demise by establishing secret bank accounts in Switzerland or other havens for
flight capital.
evans did not devote much of his research to the non-cohesive state, and a critical review
of this construct has stressed the fact that he here neglects the possible causal linkages
between a predatory private sector and the state as the two collude (Kohli 1999: 99). He does
show, nonetheless, that this formulation closely fits the Congolese state, and probably aptly
describes many other states in Africa, Latin America, and the Middle East.
In the non-coherent state, we find a vitriolic mixture of traditionalism and arbitrariness char-
acteristic of pre-capitalist societies. There is a scarcity of trained bureaucrats, and an absence
of both a meritocracy and rule-governed behavior throughout the state apparatus. The state
operates according to the whims of a strong president or leader who functions in the “patri-
monial tradition” of an absolutist ruler. Around the president is clustered the “presidential
clique” of perhaps fifty people who control the state apparatus and use it for their own ends,
as a result of their personal and perhaps familial ties to the leader. Beyond the inner circle lies
the “presidential brotherhood,” the second circle of power, where state managers seek to both
plunder society and continue to pledge their allegiance to the inner circle of power. Some of
the most notorious features and results of the predatory state are (Evans 1995: 12, 248):

“Predatory states extract at the expense of society, undercutting development even in the

narrow sense of capital accumulation.”
“Predatory states lack the ability to prevent individual incumbents from pursuing their

own goals.”
“Personal ties are the only source of cohesion, and individual maximization takes pre-

cedent over pursuit of collective goals.”
“The predatory state deliberately disorganizes civil society.”9

Evans™s general concepts fit well into an analysis of Nigeria: “The British ¦ ran Nigeria
on the cheap” (Kohli 2004: 291“2). The British were unwilling to commit the expertise
and financial support needed to create a viable centralized state. The British approach in
Nigeria (unlike that in India) was to foster indirect rule (using existing structures of power
and control), giving rise to a state riddled with personalistic leaders who were unconstrained
by strong institutional structures. Public officeholders used their positions to control and
privatize public resources.
Nigeria™s colonial state was formed with weak and incompetent bureaucracies, as no
strong civil service developed. The state was so weak and decentralized that no effective
means of direct taxation was achieved. “The British slowly but surely ceded power to a
variety of indigenous forces that were divided along ethnic and tribal lines” (ibid.: 292)
giving rise to a geographical division between the north and the south-east and south-west.
State power was never directed toward promoting a national project of economic develop-
ment. The Second World War changed the dynamics of the economy and society in Nigeria
as the British sought expanded production of commodities and imposed greater state control
regarding production. But the paucity of administrators caused by the war led to more
power being exercised by the three key regions, fragmenting Nigeria further. All this led to
a disunited anti-colonial/nationalist perspective that lacked cohesion.
In 1960 the British ceded independence to the Nigerians, who were divided by tribal,
personal, and regional interests, while the northern interests scarcely participated in the push
for independence. But it was the British state that created, facilitated, and exacerbated many
of the regional tensions of Nigeria with its divide and rule on the cheap strategy.
The state as a potential agent of transformation 223
In lieu of creating a national civil service that might have been a uniting force, by 1945
the British employed only 75 Nigerians as senior civil servants. The remaining 1,375 British
senior civil servants, selected without a rigorous merit-based process, ran the infrastructure
and government agencies (ibid.: 318) Subsequently, “Nigerianization” led to a haphazard
process whereby between 1955 and 1960 Nigerian senior civil service employees surged
from 550 to 2,308 “ most poorly trained and selected less on merit than political considera-
tions (ibid.: 319).
Nigeria is not the story of failed developmental efforts, but rather of the failure to ever
make the effort to make a commitment to a vision and a policy of economic development.
This failure of vision includes the lack of promotion of an indigenous cadre of entrepreneurs,
the neglect of a strategy to focus on possible applications of modern technology “ particularly
in agriculture “ and the omission of a policy to engender a technologically competent, disci-
plined working class.
The problem with the indigenous business managers was not one of “willingness,” but
rather “ability,” while the state had no strategy to enhance the technical and organizational
capabilities of this vital stratum. That is, the state failed to set up business schools, large-
scale engineering programs or forms of technical training for selected business owners. Little
effort was made to find a way to initiate the transference of know-how via “learning by
doing” and other forms of spin-off from the foreign firms to indigenous managers and techni-
cians. Nor were efforts made to train the working class.
Instead, from 1966 to 1970 the military exploded from 11,000 to 270,000, while the number
of federal employees soared from 65,000 in 1965 to 300,000 by 1984. Including regional
governments, para-state firms, etc., over 2 million worked in the public sector in 1986 (ibid.:
344“7). The oil boom of the 1970s led to a policy of undisciplined public sector job creation
without regard for the broadening/diversification of the oil-dominated production base.
Oil revenues as a share of all governmental revenues leapt from 25 percent in 1970 to
between 70 and 80 percent throughout the 1970s and 1980s. As a consequence investment
jumped from 12 percent of GDP in 1950 to more than 30 percent in the1970s. But little of
lasting value occurred, as the state spent on grandiose construction projects such as stadiums
and a new capital city, Abuja, or infrastructural projects (many abandoned in the 1980s,
when oil prices declined). Costs were driven to unknown levels (200 percent above those
of Kenya) as a result of expensive imports, incompetence, the paucity of technical workers,
and corruption in contract management (ibid.: 356). When oil prices declined in the 1980s
Nigeria lost close to 50 percent of its manufacturing production (ibid.: 351).

The fragmented intermediate state
Many states are fragmented intermediate states where inconsistencies reign, yet (unlike the
non-cohesive states) they are able to mount and sustain a development project. Such states
do, at times and within specific sectors, exhibit the loathsome features of the predatory arche-
type. But they also exhibit a complex range of attributes which cannot be explained within
the neoliberal paradigm which accepts the non-cohesive state as an inevitability.
The fragmented intermediate state exhibits “pockets of efficiency,” where state managers
demonstrate both their professionalism and competence in designing, promoting, and
completing imaginative and important projects, either jointly with the private sector, or on
their own through state-owned enterprises (SOEs). A particularly good example of this is
to be found in Alice Amsden™s careful treatment of the very successful Brazilian develop-
ment bank BNDES (Amsden 2001: 141“5; see also Chapter 9, Focus 9.3 in the present
224 The Process of Economic Development
work). But the state apparatus is not built on a pure meritocracy. Intermediate states fall
victim to “bureaucratic fragmentation,” where professionalism dominates in some sectors
and agencies, while personal ties and/or corruption form the basis for decision-making and
authority in other parts of the state apparatus.
Such a state fails to confirm the neoliberal portrayal of utterly futile and unproductive state
intervention. Yet intermediate states lack the means to consistently transform society, even as
they are able to engineer successful sectoral transformations.
Such societies do not suffer from too many bureaucrats, but too few, according to evans.
For Evans, invoking the concepts of Max Weber, a fully formed and fully functioning
bureaucracy entails merit-based recruitment, long-term career rewards for state managers,
social status for government employees, and a coherent institutional structure which can
form a constructive counterpart to private-sector institutions. Intermediate states demon-
strate some of these Weberian attributes, some of the time, in some sectors of society. But
pervasive imbalance is endemic.10 We can summarize the results of much research on the
fragmented intermediate state “ particularly as it has been studied in India “ as exhibiting the
following five characteristics:

• state authority is fragmented: intra-elite and elite“mass conflicts are pervasive
• while pursuing state-led industrialization the state also aspires to redistribute income
and create a social safety net
• the citizenry is frequently mobilized and weak political institutions fail to channel this
• relations between state and capital are volatile “ close at some moments, distant or
confrontational at others
• the state demonstrates moderate levels of professionalism among its bureaux.

These concepts can be employed to understand both Brazil and India, as discussed in Chapter
9, Focus 9.5, “Is India a free market miracle?” (Chibber 2003; Herring 1999; Kohli 2004:
219“28; Pingl© 1999; Schneider 1999). But to really understand the use of the term “fragmented
intermediate,” it is necessary to view this type of state in relation to Evans™s third possible state
form, the developmental state. Understanding this third archetype will sharpen our conceptions
of the other two state forms, and it will allow us to introduce a concept which will become an
integral component of the development process as described in Chapters 8“11.

The developmental state
The key characteristic of the developmental state is embedded autonomy. An embedded
state possesses a variety of institutionalized channels where the state apparatus and the
private sector continually interact in a constructive manner via a “joint project” of fostering
economic development. The developmental state is clearly endogenous; it is broadly
embedded in civil society via a dense web of networks. Some parts of the state apparatus
may be tightly linked to specific sectors. These broad and dense institutionalized channels
of communication and interaction provide the links whereby the state is continually in the
process of constructive negotiation and renegotiation of policies and goals intended to move
a society toward a higher and higher level of economic and social development (Pempel
1999: 141“60). “Embeddedness ¦ implies a concrete set of connections that link the state
intimately and aggressively to particular social groups with whom the state shares a joint
project of transformation” (Evans 1995: 59).
The state as a potential agent of transformation 225
But embeddedness alone is not enough, for there is always the danger that the state
apparatus can be “captured” by the very interests and sectors it seeks to guide, promote,
and control. In order to guard against the risk of capture, the state apparatus must have
integrity, loyalty, and cohesiveness. In short, the state must also exhibit the characteristics of
autonomy. Autonomy implies that the state can stand alone, above the fray and beyond the
controlling reach of vested interests which would seek to capture the power of the state and
turn that power to their very specific, short-term advantage.
An autonomous state has to be able to draw on its own vision of economic transformation,
and this vision has to be the result of a highly competent group of state managers who have
achieved their power via proven performance and professional competence which undergird
the merit-based hierarchy of state employees. State managers cannot be mere visionaries;
they must develop their own capability to deliver technological entrepreneurship to selected
sectors of the economy (see Focus 7.2).
Obviously, the pure concept of embeddedness logically leads to the capture of state policy-
making by the sectors which the government seeks to guide and promote. The pure concept
of autonomy leads to the problem often exhibited by the Indian state; a merit-based state
management which is culturally cut off from the wider society and which lacks the ability
to find the common ground for “joint projects” leading to economic transformation. Each
concept alone is an insufficient, though necessary, characteristic of the successful state.
Combining the two enables the state to overcome the risk of “capture” while avoiding the
trap of pure autonomy whereby there is no effective means of constructively interacting with
the private sector (Evans 1998). Figure 7.1 illustrates the nature of the developmental state,
focusing on three key variables “ power, purpose, and capacity.
The power variable focuses our attention on the issue of compliance “ the ability of the
state to actually achieve coherent consent regarding the prioritization of the development
project. But this power is conditioned by a deep alliance with the business elite to ensure that
the nation will not be stalemated by factional disputes over state-led initiatives.

Developmental State Formation =
Power + Purpose + Capacity
¯ ¯ ¯
cohesive capacity to: (mobilization of a (competence « embeddedness)
• direct & prioritize a ¯ ¯
development vision)
development project ¯ civil service industry“state boards
• demand performance • merit-based ¯
compliance (autonomy) ISI &/or ELI • rule-based
(policy) production/knowledge
• maintain an alliance • inter-agency
with business elite coherence
technical, managerial,
• directing and prioritizing a development project = coherence
• demanding and achieving performance compliance = discipline capability

Figure 7.1 The developmental state.
226 The Process of Economic Development

Situated next to the US, where the contrast could not be more acute, Mexico is a nation
whose citizenry frequently ruminate on the reasons for their low standard of living. The
litany tends to be: Mexico has oil, gold, silver, lead, coal, and a vast range of other minerals,
it has extensive farmlands and hard-working, creative people, so how can it be so poor?
Normally, the questioner has a quick, one-word answer: “corruption.” Unquestionably,
since the sixteenth century, at least, Mexico has had a corruption problem, partly as a
residual of centuries of colonial rule when the rigid Spanish empire was commonly lubri-
cated and drained through corrupt practices.
Corruption is difficult to measure and analyze. With that in mind, it is interesting to note that
the most prosperous nation in Latin America is also widely considered to be the most corrupt
“ Argentina. How can Mexico™s corruption be the cause of mass poverty in that nation and at
the same time not generate, even when it reaches a higher level, a similar result in Argentina?
Such seeming paradoxes can be repeated: Italy and Japan are both nations where corruption
is considered to be widespread, yet these nations are extremely prosperous.
Given the above, development economists had not devoted much attention to corrup-
tion. But recently, as a result of the rising influence of neoliberal and neoclassical economic
analysis in the field of development, the issue of corruption and “government failure” has
been given much attention. Indeed, during his brief stint as president of the World Bank
(2005“7) Paul Wolfowitz defined the issue of fighting corruption to be the Bank™s “mission.”
Following in the tradition of Peter Bauer, Deepak Lal, and Anne Krueger, the neoliberal
recipe for corruption is straightforward: corruption occurs when employees of the state accept
payments to provide benefits to business and other interests that they could not receive under
the established rules of the society. The cure? Shrink the state to that of a simple “watchman
state” through the privatization of state-owned enterprises, while eliminating as far as possible
all other forms of state intervention such as tariff and trade policies and regulations designed
to support infant industries, food and safety standards, and work conditions.
Implicit in this approach is the idea that if “resources” are not used by the state they
will be “freed-up” for use by the private sector where a perfectly functioning free market
system will automatically “allocate” these resources to their best possible societal use.
This perspective, sometimes known as “the new development economics” essentially
does away, by assumption, with the entire field of development economics. The advocates
of the new development economics assume that in the private sphere the operations of
the market system (and the production system) are identical in rich and poor countries.
Given this, what is holding poor countries back? The state, where the “unproductive,”
“rent-seeking” activities flourish to such a degree that the poor nation is locked into a situ-
ation of stasis, or a downward spiral.
After twenty-five years of poor results from the imposition of neoliberal and neoclassical
structural adjustment policies (see Chapter 17) advocates of these policies have refused
to acknowledge that such ideas are largely without substance in terms of promoting devel-
opment: instead they now argue that had it not been for corruption the poor nations would
have flourished with the guidance of the neoliberal and neoclassical policy prescriptions
applied broadly since 1981.
Almost without exception, the role of state spending in developing nations is substan-
tially lower than that of the advanced industrial nations. If corruption and rent-seeking
behavior are destined to run rampant in the absence of a competitive market (i.e. in the
state sector) “ an essential tenet of the “new development economics” “ why do advanced
industrial nations have larger state sectors, where presumably the level of “misallocation”
of society™s resources would be even higher? Alternatively, why did once rapidly developing
The state as a potential agent of transformation 227
nations, such as the US in the late nineteenth century, have a small state, runaway levels
of corruption, and the highest economic growth ever?
Ha-Joon Chang has noted that in Zaire (now the Democratic Republic of the Congo)
under Mobutu™s rule, this infamously corrupt leader removed from that terribly poor nation
between 1965 and 1997 a sum equal to 4.5 times Zaire™s 1961 national income. Mean-
while, in an identical thirty-two-year period (1966“98) the ruler of Indonesia, Suharto, took
for his own use a sum of money equivalent to 5.2 times the 1961 national income of
Indonesia. By 1997 Zaire™s per capita income in purchasing power parity terms was only
one-third the level achieved in 1965, while Indonesia™s per capita income was 300 percent
higher in 1997 than it was in 1966. (From 1966 through 2004 Indonesia maintained a
strong 4 percent per year per capita growth rate of GDP.)
Chang brings into the analysis a very important issue, virtually unmentioned by the
neoliberal and neoclassical advocates of the “new development economics” “ capital
flight. Capital flight is the rapid movement offshore (to safe banking havens such as
Switzerland) of liquid funds when macroeconomic and/or political conditions are risky or
when individuals receive massive payments that are likely to prove illicit. Capital flight is
a serious problem for poor nations, but according to the advocates of the “new develop-
ment economics” states are not to impose capital controls to limit the flow of funds across
borders. Such regulations, it is argued, will interfere with the “free and rational” allocation
of resources and will further serve to limit foreign direct investment by transnational corpor-
ations. What Mobutu stole of Zaire™s wealth was frequently shipped offshore to Europe.
Suharto™s graft was mostly redeposited in Indonesia™s financial system and then
circulated through this system, where it served to support whatever spending, wise or
unfounded, borrowers and lenders settled upon. Eventually, then, the funds were likely
turned into construction activities or business loans whereby actual production in
Indonesia increased, as did jobs, etc. This tells us that corruption varies in its impact and
that corruption alone does not explain the lack of development or economic growth. It also
tells us that the issue is quite complex, hardly reducible to a simple prescription of “good
The fact that economic development can occur, and has occurred, in nations riddled
with corruption is not an argument for ignoring corruption or downplaying its negative
characteristics. But the “new development economics” argues that the elimination of
corruption is a precondition for development. Doing away with the state (constructing the
minimal state and contracting out to the private sector every conceivable state-managed
activity) is seen as a prerequisite to development.
One problem with this approach is that there are simply no examples of any poor coun-
tries that have first controlled corruption in a manner typical of the advanced industrial
nations and then achieved high growth. High-growth developing nations such as China
and India today, or Korea over the past forty-five years, were not models of “good govern-
ance” nor do they have minimal states. In fact, the causality has run the other way: state
policies have been used to create the conditions for rapid development, in spite of the
nagging problem of corruption. Indeed, the only hope for making progress against corrup-
tion seems to arise when nations have a higher standard of living, allowing them to pay
public sector workers more and to institute and accelerate programs of professionalization
among those employed by the state. Such steps, along with the implementation of over-
sight boards and procedures, have often served to damp down the level of corruption.
China™s labor market has long been corrupt in every sense, often as a result of “market
forces” driven by transnational corporations in collusion with captive unions and govern-
ment officials. Partial resolution to this situation appeared to arrive in 2007. New policies
have strengthened the lax regulatory grip of the state, now ensuring work contracts for
migratory workers (guaranteeing pay), enforcing the minimum wage for these workers, and
228 The Process of Economic Development
increasing access to severance pay and many other important features extending legal
protection to the majority of workers, all, presumably, arising from societal bargaining in
the context of the growth already achieved by China.
Sources: Beatty 2007; Chang 2007: Chapter 8; Fine 2006; Khan 2006;
Khan and Barboza 2007; Weisman 2006
The purpose variable emphasizes the fact that the developmental state is capable of
projecting a viable vision of development; often through harnessing a strong and broadly
accepted conception of nationalism. This vision can find policy expression through the
adoption of Import Substitution Industrialization or Export-Led Industrialization (ELI)
policies (these policies are discussed in Chapters 9 and 10). Of greater importance than the
discussion of preferred policies (for an Ag-led strategy see Focus 11.4) is the ability of the
state to demonstrate “capacity.”
Capacity breaks into two components: First, competence, which includes the capability
of coordinating processes among competing agencies (“inter-agency coherence”). Second,
embeddedness, which begins at the level of industry“state coordinating boards, but then
reaches down into the production and knowledge bases where the society maintains and
advances its production apparatus, bringing into motion and furthering its technical abili-
ties, its managerial skills and capacities and its trained/skilled labor force. (Focuses 7.3 and
7.4 show in concrete terms the application of the concept of state capacity in Thailand and

The four roles of the developmental state
Developmental states, such as those in South Korea and Taiwan, have the discretionary
power to adopt several roles, depending on the needs and demands of society in general and
the specific needs of sectors of the economy. Autonomy allows the developmental state to
switch roles in specific sectors, as conditions dictate. Here we review the four roles described
by Evans, utilizing his sometimes colorful terminology.

The custodian role
All states must have the ability to formulate and enforce rules and regulations. This role embodies
the functions of the minimalist state, or the state conducting its “watchman/caretaker” activities.

The producer role
even a minimalist state must produce adequate social overhead capital, or infrastructure,
wherever and whenever there is a need for collective goods of this type. Beyond this rela-
tively passive role, accepted as legitimate even by neoliberal critics of the state, there may be
a need for the demiurge function. Here the state shifts to creating certain types of goods via
state-owned enterprises or via joint venture schemes which link state investment funds with
private-sector investors.

When the state decides to play demiurge, it becomes involved in directly productive
activities, not only in ways that complement private investments but also in ways that
replace or compete with private producers. ¦
Playing the demiurge implies strong assumptions about the inadequacies of private
capital. Local capital is presumed incapable of becoming a “transformative bourgeoisie,”
The state as a potential agent of transformation 229

Thailand would seem to have a fragmented intermediate state. This nation adopted meri-
tocracy as its civil service employment standard in 1932. Many of the best-trained univer-
sity students were attracted to government employment “ particularly with the Board of
Investment (BOI) “ the key institution that oversees the promotion of industry in Thailand.
The BOI was created in 1960 as the result of the Promotion of Industrial Investment Act.
“A very large number of investment projects grew up under the BOI™s wing. ¦
According to the BOI™s own estimates it was involved in roughly 90 percent of Thai-
land™s major manufacturing projects covering both the private and public sectors and
foreign and local firms.” As the BOI™s influence rose after 1960, the average annual rate
of growth of manufacturing production surged by 60 percent in the 1960s to 9.1 percent
and then to 10.1 percent in the 1970s. As the share of manufacturing climbed the BOI
used a variety of forms of industrial stimulus, but only to the degree that reciprocity
occurred in the form of performance.
Many of the forms of stimulus and the performance standards devised by the BOI are
listed below simply in order to put in a more concrete form how both intermediate and
developmental states might proceed to both encourage and influence the process of
industrialization. For example, companies were granted targeted tax exemptions, but only
on the condition that they would “perform” by meeting export targets. Failure to comply
meant the end of the exemption.

Stimulus policies Performance standards
1 Tax exemptions Export targets
2 Tariff protection Local-content standards
3 Subsidized credit (loans) Debt/equity ceilings
4 Developmental banks National ownership floors
5 Entry restrictions Operating Scale Minima
6 Special benefits to Hiring local managers
foreign firms Technology transfers
7 Import duties on luxuries Investment timetables
8 Duty exemptions on machinery Regional location
(not made in Thailand) requirements

The BOI has been viewed as “daring” and innovative, but also, at times, as indiscrimi-
nate in its support. Thus, while the rules of “micro”-efficiency may have been violated this
has been considered insignificant in light of the growth achieved by the BOI™s policy of
tying programs of economic stimulus to tailor-made performance standards.
While Thailand™s growth was interrupted by the Asian crisis of 1997, nonetheless annual
per capita income growth in the 1990s was a respectable 3.3 percent, and in the 2002“5
period it has averaged a strong 5.1 percent.
Source: Amsden 2001: 20“4

of initiating new industries and sectors. Transnational capital is presumed uninterested
in local development. If local capital is indeed unable, and transnational capital is in fact
unwilling, to develop a new sector, then taking the role of demiurge may be the only way
to move industrial development forward.
(Evans 1995: 79)11

But, evans cautions, the demiurge role is potentially dangerous, because it may create
a climate wherein the state is tempted to expand beyond a point where it can effectively
230 The Process of Economic Development

In the 1970s, the Korean government isolated the electronics industry as a key sector
for promotion. For the two previous decades, Korea had developed a robust electronics
assembly industry. Now it was to make the leap into the production of high-value-added
products, commodities demanding advanced technologies in both production and
design. To enable the electronics industry to make such a change, the Korean govern-
ment took many steps to assist the growth of the industry. Among these was the crea-
tion of the government-funded and -run Electronics and Telecommunication Research
Institute (ETRI).
By the mid-1980s, ETRI employed 1,200 highly skilled technicians and research
personnel. ETRI was then deeply involved with industrial giants Samsung and Gold-
star, and many other firms, to develop the technology for the production of large-scale
computer chips. The objective was for Korea to match the pace of technological advance
in the semi-conductor industry set by Japan. Cooperative research conducted by the
industry and the government, and careful monitoring of technical progress by ETRI, was
one major component of the process.
Selective prodding by the government, along with the allocation of generous loans, was
the other major component for achieving success. All the companies eventually involved
in the project acknowledged the constructive and crucial role of government cooperation
with the private sector. Korea achieved its goal of shifting from low-value-added assembly
electronics to technology-intensive, high-value-added electronics production over the
planned period. As a result, workers™ wages were able to rise, too.
Sources: Amsden 1989: 81“3; Evans 1995: 141

marshal its limited capabilities to act as an agent of economic transformation. Further,
organizational problems may surface when state managers seek to expand or diversify an
SOE into an area where it performs poorly and where the motivation to expand arises from
the organizational structure of the SOE, rather than from the imperatives of transformational
development. Finally, evans points out that both the custodial role and the demiurge role
arise from essentially negative conceptions of the private sector and of market structures.

The midwife role: a “greenhouse” policy
Here the developmental state acts as a facilitator by steering, assisting, and inducing the
private firms to attempt new production challenges in areas which are of high priority.
The state can lower risks, or increase the rate of return on investment, by allocating credit,
limiting import competition, or even by providing subsidies. essentially, midwifery entails
the shifting of production activities into new areas which are believed to be conducive to
development and which would not be areas where private capital would venture if left to
market forces alone.

The role of husbandry: a policy of prodding and supporting
Husbandry tends to accompany and complement the role of midwifery. Often, in creating a
new industry, there are related tasks which the state can undertake in order to help ensure the
successful emergence of a new industry. Such activity will vary greatly with circumstances.
examples might be the state setting up research and development facilities or laboratories
The state as a potential agent of transformation 231
which undertake research which is complementary to a new industry. It might entail the
establishment of state-owned facilities to produce the most technologically challenging
inputs into an industry which the developmental state seeks to foster.

Depicting state forms
In Figures 7.2(a) and (b), we sketch the outlines of the Brazilian and South Korean states
in order to exemplify the archetypes of the fragmented intermediate and developmental
state. In both instances, the state essentially arises from two interrelated foundational pillars.
Supporting the state on one side is its internal organization. Here one finds the characteristics
which serve to define the cadre of the state employees. In Brazil (Figure 7.2(a)), one finds
pockets of efficiency, but in general there is endemic organizational weakness “ particularly
because the 60,000 state workers who gain positions with each election are an appointive
bureaucracy that is not embedded.

Officials in an appointive bureaucracy rarely have the time to develop the long-term
relations of trust and reciprocity with business that characterize developmental states
in Asia because officials move to another job in another area of the State or the private
sector whenever ¦ presidents change.
(Schneider 1999: 304)

Imbalance reigns between the competent and cohesive portions of the state apparatus,
and the wider areas where professionalism is in short supply. This gives state policy its ad
hoc and irregular character. The state lurches toward viable projects, only to slide toward a
morass of futility. But it does not stay mired. It demonstrates integrity and incompetence. It
cannot generalize its successes, however.
The second foundational pillar undergirding the state is the state“society relation. Here,
argues Evans, the Brazilian state has been unable to achieve embeddedness with indus-
trial interests, because of the continuance of a strong agrarian sector of huge landowners
who seek to utilize the power of the state to further their own interests. To a degree,
because of its lack of autonomy from backward-looking agrarian interests, the Brazilian
state is unable to pursue industrialization with all of its resources and capabilities. It has
divided loyalties. It is partially captured by the agro-export interests, and therefore only
intermittently does it exercise its transformational potential by establishing and nurturing
a strategic industrial sector. Thus connecting the two foundational pillars is problematic.
The state is “shaky” because at the foundational level there is some “interactive disso-
nance.” Adding to this tension, the regional states exercise some autonomy, as they are
not fully subordinated to the Federal State. At the crucial point of linkage between the
two foundational pillars, we find both vicious circles of dissonance and virtuous circles
of interaction.

A depiction of the Korean state
Our last consideration in this chapter is to turn to a description of the Korean state. Figure
7.2(b) depicts the concept of embedded autonomy. Notice that within the pillar of internal
organization we find that employment is based on merit. Therefore a professional, coherent
state bureaucracy is able to exercise autonomy and utilize its power to deliver administrative
guidance to the civil society. At the same time the second pillar, state“society relations, is
Brazil™s state structure

Internal organization State”society relations

Imbalance Federation of
strong states
Too weak to
Ad hoc promote
successes transformation

Appointed Strong agrarian
bureaucracy sector



Vicious Circles Virtuous

Figure 7.2(a) The Brazilian state: the intermediate state.

Korea™s state structure

Internal organization State“society relations



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