Different Models of Developmental State by Prof. Ha Joon Chang
By: Prof. Ha-Joon Chang
“To put it bluntly, there isn’t one economic theory that can single-handedly explain Singapore’s success; its economy combines extreme features of capitalism and socialism. All theories are partial; reality is complex”
The ‘classic’ developmental state is an ideal type derived from the East Asian – more specifically Japanese – experience between the 1950s and the 1980s.
There were of course variations even within East Asia. Korea actually went further down the road than Japan did, although now it has moved to the opposite extreme, embracing neo-liberalism as if there is no tomorrow. Between the 1960s and the 1980s, the Korean state pursued some of the most market-defying selective industrial policies, using an extremely powerful pilot agency (the Economic Planning Board, or the EPB) and total state ownership of the banking sector, both of which were missinf in Japan. The Taiwabese state may have intervened in the affairs of the private sector less forcefilly and dramatically than Japan or Korea did but that was in part because there were few no large private sector firms in whose affairs the state felt the need to intervene. The other side of the coin of the weakness of the private sector in Taiwan was that SOEs (especially in upstream intermediate inputs industries, where scale economy is crucial) and state financed R&D played a more important role in Taiwan than in Korea or Japan. Singapore used yet another model combining free trade, a welcoming (albeit carefully targeted) approach to foreign direct investment, and a massive SOE sector (one of the biggest in the non-oil-producing world, producing 22% of GDP when the world average is 9-10%).
Even the ‘classic’ developmental state was, however, not confined to East Asia. During the same period, under a similar political condition of nationalistic, interventionist rightwing hegemony, France used a very similar strategy of economic development, involving (indicative) planning by Commissariat Général du Plan (the planning commission), sectoral industrial policy (of course, somewhat constrained by the imperatives of European integration) led by elite bureaucrats, and aggressive use of SOEs (Cohen, 1977, Hall, 1986, Hayward, 1986, and Chang, 1994). There is even anecdotal evidence that Japanese bureaucrats stationed in France were reporting on French policy practice.
If we broaden our definition of the developmental state to include any state that deliberately intervenes to promote development, we could argue that the Scandinavian countries also practised a variety of developmentalism, especially since the 1950s.
Of course, in Scandinavia, except in Finland until the 1970s, political hegemony was with the left, and political legitimacy was derived from the welfare state and full employment, rather than rapid growth, so the Scandinacian countries do not fit the ‘classic’ developmental state ideal-type. However, there are a few good reasons to describe Scandinavian states as developmental states, if not of the ‘classic’ variety.
First of all, while not as extensively as the East Asian states, the Scandinavian states also engaged in selective industrial policies. The Swedish state developed some strategic sectors through public-private partnership from very early on – iron & steel (mid 18th century), railways (the 1850s), telegraph and telephone (the 1880s), and hydroelectric power (the 1890s) (Chang, 2002, pp.40-1). In the late 19th and the early 20th century, it also provided targeted protection for the emerging heavy industries (Chang, 2002, p. 39). From the 1930s, the Danish state was deeply involved in the management of international marketing of agricultural exports, which were then the engine of growth (Murphy, 1957). Finland and Norway also practised strong sectoral industrial policies (Vartiainen, 1995, for Finland and Fagerberg et al., 1990 for Norway).
Second, the Scandinavian states have strongly promoted R&D. Support for R&D is often taken as a ‘horizontal’ or ‘general’ industrial policy that does not involve selectivity, but it is still highly selective in the sense that it favours technology- intensive industries. Moreover, one does not support R&D in genral – one often supports particulat projects looking for particular technological solutions for particular industries. Especially the Swedish state started promoting R&D from 1820s bu establishing a series of research institutes, such as the Stockholm Institute of Technology, the Chalmers Institute of Technology (Gothenburg), the School of Mining (Filipstad), the Stockholm College of Forestry, and the Falun School of Mines (Chang & Kozil-Wright, 1994, p. 871). In the last few decades, all the Scandinavian countries have been at the top of the world league in R&D spending (as a proportion of GDP), with public agencies playinf a key role (the best example being Finland’s SITRA, established in 1967).
Moreover, the Scandinavian welfare policy was closely integrated with strategies to promote structural change towaes high-productivity sectors (Kuhnle & Hort, 2004). Strong universalistic welfare state provided social insurance to workers against the risks emanating from structural changes, thus reducing their resistance to changes. Welfare policies were always tied up with policies of re-training and help with job search (the so-called ‘active labour market policy’), enabling workers not just to maintain their standards of living during the adjustment period but also enabling them to find new more productive jobs.
In the Swedish case, the so-called solidarity wage policy (equal pay for equal work, regardless of the company or the industry) was used to promote structural change towards high-productivity sectors, as explained in the historical document by the trade union organization, LO (Lands organizationeni Sverige) (LO, 1963). The policy forced low-productivity sectors to upgrade or fold, while allowing high-productivity sectors to earn higher profits than was possible under free labour market conditions and thus invest more aggressively, The Scandinavian experience shows that the developmental state does not need statist rightwing hegemony (with the partial exception of Finland). Developmentalism can emerge under different political conditions and (to an extent) be achieved through a combination of different tools (less sectoral industrial policy and more welfare-labour policies in Scandinavia than in East Asia).
The case of the US is even more interesting. Chalmers Johnson, in his original Formulation of the developmental state theory juxtaposed Japanese developmental state against the ‘regulatory state’ of the US. In doing so, however, he unintenionally down played two importanat dimensions of the US experience.
First of all, description of the US state durinf the post-WWII period as a ‘regulatory’ state, while not totally inaccurate (see below), gives the mistaken impression that the US state has always been like that. From its early days, the US was a pioneer of the developmental state model (Chang, 2002 and 2007; Rauchway, 2007). The core of devlopmentalist theory – the infant industry argument – was invented by none other than the first American finance minister (Treasury Secretary), Alexander Hamilton, in his 1791 report on the subject of Manufactures by the Treasury Secretary. Although it took a few decades since the publication of the report until the pro-devleopmentalist faction in US politics became strong enough to implement Hamilton’s programme, from the 1830s the US remained the most protectionist country in the world until World War II. Although its tariff protection lacked the careful selectivity of its East Asian counterpart, it was not a blanket protection either. Especially between the mid-19th century and the mid-20th century, the US government also invested heavily in infrastructure, higher education (e.g., land grant colleges), and R&D (especially in agricultire), with fair bit of explicit targeting – for example, the Pacific Railways the mid-western canacls, and agricultural research.
Even after WWII, when the country attained industrial supremacy and started championing the cause of free trade and free market, the US developmental state survived. As Fred Block shows in a recent important paper (Block, 2007), during the post-WWII period, the US has had a developmental state that is ‘hidden’. Block argues that the US has had a very strong ‘developmental network state’ (as opposed to ‘developmental bureaucratic state’ of East Asian kind), which is focused on translating cutting-edge technological research into commercial use through cooperation among a network of people with high levels of technological expertise – variously situated in state agencies, industries, universities, and other research institutes.
Once again, different political and economic conditions made the US developmental state very different from the ‘classical’ ones – even more so than in the case of the Scandinavian ones. Given the dominance of free-market ideology, the supporters of developmentalism have had to maintain low profile. There was no question of creating an over-arching super-agency like the Korean EPB (Economic Planning Board). Given the political climate, it was not possible even for an existing agency to be given an explicitly developmentalist role, as in the case of Japan’s MITI. Many of the developmentalist projects had to be pursued under the guise of ‘defense’ policy through agencies like ARPA (Advanced Projects Research Agency) of the Pentagon or ‘health’ policy through the National Institutes of Health.
The US developmenatal state in the post-WWII peiod was limited in scope and had various limitations due to its ‘clandestine’ nature – lack of legitimacy, unstable funding, lack of coordination, and excessive commoditization of knowledge (Block, 2007). However, on the whole, it has been quite successful, as testified to by the fact that many sectors where the US has international competitiveness have been developed through public fundinf of R&D and public procurement for ‘defence’ (computer, semiconductors , aircraft, internet) and ‘health’ (drugs, genetic engineering) (Medeiros, 2003; Block, 2007).
Dr. Ha-Joon Chang is a South Korean economist, specialising in development economics. Currently he is a reader in the Political Economy of Development at the Unversity of Cambridge . Chang is the author of several widely discussed policy books, most notably Kicking Away the Ladder: Development Strategy in Historical Perspective (2002). In 2013, Prospect Magazine ranked Chang as one of the top 20 World Thinkers. He has served as a consultant to the World Bank, the Asian Development Bank, the European Investment Bank, as well as to Oxfam and various United Nations agencies.