Reshaping Narrow Law and Art: Developmental State

A developmental state is one in which the authorities (included foreign aid agencies) favor the development of alternative business sectors. Reasons may include:

the businesses in which the country is strong do not employ remotely enough people (because of the production function existing for those businesses);
the businesses in which the country is strong include a small number of markets for which output and prices are too vulnerable for stable monetary management;
the businesses in existence are extractive, and therefore discourage the development of national loyalties, a professional class, or a viable state.

Developmental states are extremely commonplace, and typically refer to a function of the national government, rather than a specific country. For example, the early federal government of the USA had a cluster of policies known as the "American system,"¹ whose purpose was to liberate the nation from economic dependence on Great Britain, stimulate a balanced economy, and prevent the recurrence of depression. It differed from French dirigisme in the sense that the Federalist/Whig policies focused on altering market conditions within the USA, as opposed to supplanting the market itself.

Chalmers Johnson defines the [capitalist] developmental state thus:

The communist-type command economy characteristically retains all ownership and control in the hands of the state, whereas the capitalist developmental state (CDs) rests on genuine private ownership of property but indirect state control of economic decisions. The CDS is infinitely more efficient than its communist rival, but not as efficient as the ideal market economy with perfect competition.
(pp.45-46)

Johnson, whose writing really opened up the controversy over"economic revisionism," argued that countries such as Japan, Germany, Korea, and Taiwan flourished economically as developmental states, i.e., by rejecting the orthodox model of economic growth and adopting various schemes of growth management. Japan's economic growth was managed mainly through the Ministry of International Trade and Industry (MITI), but also through the Ministry of Finance (MoF), which managed the city banks and long term capital banks. Germany relied on different instruments during different phases of its recent history, but the most enduring and pervasive approach was through the cartel, which authorized price cooperation and higher profits, in exchange for fulfilling state objectives. Another Northern European form of developmentalism was the commissioning of entire industries, such as railroads and heavy shipping.²

Developmentalism was embraced wholeheartedly by the northern German states, particularly after the formation of the Zollverein (customs union; 1834). In Austria/Austria-Hungary, the main element was protectionism; in Prussia and the German Empire (1870-1918), protectionism played a relatively minor role, and was supplemented by the creation of the Navy and a dynamic chemicals industry.³ However, one of the most spectacular cases of developmentalism in a modern European state was Finland.⁴

The opposite of developmentalism is not laissez-faire, but colonial underdevelopment. At least in theory, a country with an idealized market economy will accumulate capital based on the optimal trade-offs between present and future consumption. This is likely to slow down as certain industries that have already developed enjoy a permanent premium in ROI, which is, nonetheless, subject to diminishing marginal returns (Swan-Solow Classical Growth Theory). On the other hand, underdevelopment is a process in which development is actually reversed.

[Andre Gunder Frank] wrote of underdevelopment as an historical process which was causally related to the 'pattern of evolution' of developed, industrial societies. In one part of the world, the North, the process whereby producers were separated from their means of production was matched by one in which they were reabsorbed and reintegrated in the production process as proletarian wage-workers.⁵

In other words, underdevelopment is a process in which capital accumulation in the colonial metropole leads to the loss of domestic ownership over the means of production. When this happens, increased productivity in the colony does not lead to increased income for the people who live there, since the business enterprise is foreign-owned and its profits flow abroad. Since the residual gains to the colony consist only of wages paid to workers in the exporting industry, and since those wages must pay for imports from the metropole (with its monopoly on exports to the colony), it logically follows that the terms of trade for the colony must get progressively worse. Locally-owned resources, such as land and water, can be bought with derisory amounts of the foreign currency (because the local currency will be worth almost nothing).

Under colonial rule, this is exactly what happened to the nations of Africa and South Asia (and, to a lesser degree, Latin America). An obscure process to people living in the Developed North, it was very easily understood and observed by the peoples of the South. Idealistic leaders who had guided their countries to independence in the mid-20th century perceived the need for a developmental policy.⁶ In a few cases, such as the Republic of Korea, Singapore, and Malaysia, such policy has been an unqualified success. In other cases, such as Chile (since 1990), Costa Rica, and Uruguay, developmentalism has mainly targeted general social indicators, such as infant mortality, literacy, and so on. In such countries, disappointing long-run economic growth may jeopardize political support for developmentalism.

Abuses of the Developmental State

Furthermore, the developmental state may had undergone a political upheaval that repudiates the old order; in that case, it may require a developmental policy for the revolutionary government to be strategically tenable. In some cases, the objects of nationalism, national defense, and ideological ascendancy may be so strong they lead to disastrous developmental policies, such those of the Democratic People's Republic of Korea (DPRK); more commonly, the effects merely depress economic growth. An example is the policy of many governments to develop flagship industries such as auto production. For developing nations like Indonesia, the production of autos is really an inappropriate use of scarce resources, and in fact the Astra conglomerate took up the enterprise as part of an elaborate scam on behalf of Gen. Suharto's family.⁷

Supporters of a laissez-faire minimalist state approach have argued that Suharto is the norm; even notable success stories, such as Singapore, Taiwan, and Korea have paid high prices in political freedom (or simply enjoyed peculiar advantages, such as Cold War alliances with Washington). Part of the problem, however, is that the propensity for corruption and extortion is a deeper problem than one related to economic policy choices. Haiti is not a mess because since administrators succumbed to the false promise of developmentalism; it's a mess because it suffers from retarded civil society and a predatory comprador class, which foreign powers have been all too eager to utilize.
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NOTES:

Here, "American System" refers to a series of proposals made by Alexander Hamilton and endorsed by, inter alia, Henry Clay and H. Charles Carey. It included federal (hence, "American," in the sense of "all-American" or "all-Union") improvements on interstate roads, canals, and seaways; protectionism, as a deliberate policy of import substitution; and direct federal involvement in the creation of the financial infrastructure. For a summary of the views of H.Charles Carey, see "Henry Charles Carey, 1793-1879," CEPA History of Economic Thought. The Wikipedia entry for this is especially good.

See also Alexander Johnston & James Albert Woodburn, American Political History, 1763-1876 (complete text online) G.P. Putnam's Sons (1913); XVII: "The American System: Internal Improvements and the Tariff," p.341.

The phrase "American System" is a bit overused, and was subsequently used to refer to the concept of line manufacturing, in which items are fabricated from inventories of identical parts assembled by specialized workers.

The literature on developmentalism in Europe is amazingly chaotic. Few, if any works exist on the general phenomena of developmentalism in non-Communist states, unless we count Ha-Joon Chang's Bad Samaritans (Bloomsbury Press, 2008; mainly an indictment of World Bank/IMF policies towards underdeveloped countries). Instead, one is stuck with monographs on the history of specific industries in specific countries. For example, buried in Jürgen Kocka's Industrial Culture and Bourgeois Society: Business, Labor, and Bureaucracy in Modern Germany, Berghahn Books (1999), there is the following reference to developmentalism in Bismarckian Prussia:
Consequently, strong and efficient public administration played an important role in the process of economic, social, and political modernization in Prussia and in other German states during the early nineteenth century. This role was in part helpful and in part harmful to economic growth. Industrialization was started and continued partly under governmental supervision, partly with limited administrative help, mostly under strong bureaucratic influences...

There were many channels through which bureaucratic patterns spread to the factory system and its management. Various amalgamations and interdependencies between governmental agencies and civil servants, on the one hand, and early enterprise, on the other, continued after the mercantilist period. Prussian civil servants acted as entrepreneurs, and the government continued to run some enterprises, especially in mining (until the 1860's), and later in the railroad sector. Civil servants played a leading role in the system of technical and industrial education begun in the 1820s and also in early scientific and industrial associations. Engineering expertise was concentrated in the Prussian technical administrative branches and military men where hired by private entrepreneurs who paid higher salaries than the government...
[p.28-29]
In regards to the commissioning of a national railroad network and mining, see Hajo Holborn, A History of Modern Germany, Princeton University Press (1982): p.11-12; additional discussion of the ideas and influence of Friedrich List appears later in the same chapter.

For a brief discussion of the role of the German developmental state in the creation of a chemicals industry, see Ernst Homburg, A. S. Travis, & Harm G. Schröter, The Chemical Industry in Europe, 1850-1914, Springer (1998) p.99ff. Mostly the Federal Republic of Germany (1949-present) has been regarded as averse to state developmentalism, but
The Weakest tradition of State interventionism is clearly to be found in West Germany—although the picture is much more complex than is sometimes supposed, In the first place, there is a surprisingly big public industrial sector in the Federal Republic. The State has a 25 percent or more stake in some 130 companies with over 800 subsidiaries and these include industrial giants such as Salzgitter, Viag, and Saarbergwerke (with majority stakes), Veba and Volkswagen. Secondly, Bonn has never hesitated to use tariffs and quotas to protect industries such as ship-building, coal mining, textiles, food-processing, aircraft, and metal production. Third, the State has poured subsidies into industry in the shape of cheap loans, guarantees, special depreciation allowances, tax privileges, anti-pollution grants, research and development aid.
See Yves Meny, Vincent Wright, Martin Rhodes, The Politics of Steel, Walter de Gruyter (1987), p.41

Markku Kuisma & Kari-Erik Micheisen, "Nationalism and Industrial Development in Finland" , Business and Economic History Second Series, Volume Twenty-one (1992).
A committee set up by private business associations in 1913... recommended, first, that Finnish companies that exported goods should form cartels to minimize domestic competition, and second, that the government should take strict measures to protect domestic industries (iron and steel, textiles, food stuffs) from foreign competition. In the midst of the political chaos, the Finnish government quickly introduced a new economic policy based on these two recommendations...

In addition, Parliament passed laws prohibiting foreign enterprises from purchasing or owning land, forests, hydro power resources or mineral ore deposits. New tariff regulations and tax reductions were introduced which gave domestic industries almost total protection against foreign competition... Cartels also promoted the increase of exports by establishing broad networks of sales branches in major European, North and South American, and Asian cities. In addition, Finnish export cartels collaborated with other Scandinavian paper and timber cartels, for instance with Scannews and Scankraft.

The new economic policies were highly successful. The volume of
Finnish industrial production increased at almost 8% annually during the
interwar period.
Similar policies, albeit less extreme, were adopted by other Scandinavian countries.

Michael Cowen & Robert W. Shenton, Doctrines of Development, Routledge (1996), p.57-58.

In some cases, such as the Arab Middle East, this was conveniently impossible thanks to the political arrangements prevailing at independence. Much of the conflict that raged in the period 1954-1990 was directly linked to this problem. As developmentalism took hold, conservative/obscurantist opposition took the form of Deobandi or Salafist movements (see Import Substitution, nt.1). In other cases, such as the Philippines, the terms under which independence was granted made developmentalism difficult and unpopular (e.g., the Bell Trade Act of 1946). In still other cases, such as Congo-Kinshasa, independence was essentially thwarted by Western intelligence agencies, and rule persisted through surrogates like Mobutu Sesse-Seko (r.1963-1994). Other interesting cases include Haiti and Madagascar.

Suharto seized power in a coup in September 1965, and launched a massacre of political opponents that may have killed about one million. It is generally understood that he was assisted by the CIA, and not only targeted ethnic Chinese and Communists, but also rival factions in the Indonesian military. One of the sleaziest despots of the 20th century, he developed a vast commercial empire through family seats on the boards of companies like Astra International. See "Dad, Can I Have the Keys to Indonesia's Auto Industry?" BusinessWeek (18 Nov 1996). For a general overview of the Suharto family, see "All in the Family," Time (CNN 1999).