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In Pursuit of Prosperity: The Politics of Economic Modernization in Post-War France and Beyond Charles R. Hankla Associate Professor Department of Political Science Georgia State University Atlanta, GA 30302-4069 USA 1-404-413-6169 [email protected] Website: http://www2.gsu.edu/~wwwpol/2756.html Visiting Scholar Sciences Po Lille and CERAP (CNRS), France 33-(0)9-52-29-67-75 Abstract In this project, I seek to explain both the form and impact of economic modernization policy using a new political economy framework. Specifically, I focus on three important characteristics of countries – the economic preferences of their governments and interest groups, the interest representation of their farmers, businesses and workers, and the relative centralization of their political institutions. I contend that, when a country’s political institutions are centralized and its farm, business, or labor interests are decentralized, the preferences of the government will largely determine policy. By contrast, when a centralized state faces centralized interest representation, economic policy-making will broadly reflect the corporatist model, with the interests of the government tempered though negotiations with organized groups. In a third case, where a country’s political institutions are decentralized but its interest representation is centralized, policy outcomes will reflect only the negotiated preferences of the centralized interest groups. Finally, when both political institutions and interest organizations are decentralized, policy-making will generally embody the pluralist model, with disparate state and private interests setting policy within a variety of separate issue areas. Moreover, I argue that government will be most successful in promoting economic modernization when its level of centralization is aligned with that of interest groups. Cooperation between the state and interest groups, rather than dominance by one or the other, is critical for effective economic management. I test my contentions with an examination of economic policy outcomes in France during the period 1945-68, my dependent variable. France is an excellent laboratory for evaluating my framework because, by moving from the 4th to the 5th Republics and from agriculture to industry, I am able to examine all possible combinations of my independent variables. In addition, to ensure the broader applicability of my arguments, I also include a briefer application to the case of post-independence India as well as a cross-national quantitative analysis. My project moves beyond existing research by combining preferences, interest groups, and political institutions into a single theoretical framework. It also speaks to prior research on both corporatism and the developmental state, but emphasizes that policy-making styles are not fixed characteristics of countries but can vary both across time and, critically, across sectors of the economy. It may also prove useful to policy-makers in thinking about the best ways for states to promote economic growth and social stability, a question that has been on the minds of many since the financial crisis. 1 Chapter 1: Building the Modern Economy The pursuit of national prosperity is nothing new. States have played an active role in promoting economic modernization at least since the upheavals of the industrial revolution. This state engagement reached a new urgency after the Second World War, when reconstruction and decolonization forced modernization onto the top of the political agenda nearly everywhere in the world. In Europe, many leaders saw an opportunity in the war’s destruction to create modern economies and prosperous societies freed from the bonds of the past. In the newly independent states, the drive for rapid economic transformation was felt even more acutely. Inspirational leaders such as Nehru in India and, a decade later, Nkrumah in Ghana promised to liberate their countries from the economic subservience of colonialism and carry them into an industrialized future. While ideas about modernity and the role of government have evolved since that heady time, the notion that national authorities must take action to ensure the economic prosperity of their peoples has remained a fixture of political discourse. This is as true today as it was fifty or one hundred years ago; even a cursory glance at the rhetoric and policies of many modern states reveals a preoccupation with how government can transform economic outcomes. Despite this continuity, few studies of economic modernization consider anything but the very recent past. In addition, the near-universal focus on the “developing world” as a distinct entity means that the experiences of industrialized states have rarely been brought to bear on the economic development issues of today.1 This book leverages the past experiences of one industrialized modernizer – France just after the Second World War – to improve our understanding of modernization policy more generally. The experiences of France during this 1 The classic study by Gerschenkron (1962) is a notable exception. 2 period are particularly relevant to the many industrialized modernizers of today, namely those middle-income countries that have achieved a certain level of economic development but that are seeking to upgrade further their productive capacity. What, then, is the meaning of economic modernization? I adopt a broad definition that encompasses a fairly wide variety of economic outcomes. For me, modernization (which I will also refer to as transformation) is the process of upgrading a country’s productive capacity. Successful modernization, therefore, involves the enhancement of national productivity through the development of human, industrial, and agricultural capital. This enhancement, in turn, results in the creation of higher value-added goods and in the achievement of higher aggregate national income. My particular interest here is in the efforts of states to promote this modernization through specific constellations of national policy. When are modernization policies successful and when do they fail? And, at a time when so many states are committed to economic transformation and when so many experts are ready to provide technical advice on how to do it, why are development outcomes so mixed? Drawing on the experiences of postwar France and, to a lesser extent, post-independence India, I develop a new theory that seeks to explain both the form and success of modernization policy. This new theory considers the preferences and the organization of states and interest groups in an interactive model. Its key insight, to be explained in more detail below, is that the most effective modernization programs are crafted and implemented with the cooperation of both state and private interests. This cooperation is best achieved when the state and interest groups are characterized by a similar degree of organizational centralization. What matters most critically for economic outcomes, then, is not fundamental characteristics of states such as geography, though these do set the circumstances under which states must operate. Nor is it transient factors 3 such as choosing the “right policies”, which in any case can vary depending on national circumstances. What matters most in the success of modernization policy is instead the right process of policy development and implementation. Even this process is not a fixed characteristic of countries, but rather can vary across sectors of the economy and across relatively short periods of time. Getting this process right improves the likelihood that countries will development and implement modernization policies that fit their circumstances and needs, policies that can transform the material future for their citizens. Explaining the Success of Economic Modernization: Past Approaches Given the importance of economic modernization, with its impact on the lives of millions and on the basic contours of the international system, it is not surprising that many scholars have taken a stab at explaining it. Some researchers have found the wellsprings of development in factors outside the control of states. These include such fundamental and slow-changing national characteristics as culture, geography, and placement within the international system. Indeed, in recent years there has been an explosion of work asking basic questions about the origins of global inequality. Perhaps the most well-known is Jared Diamond’s popular 1997 book Guns, Germs, and Steel, in which he argues that the availability of animals and plants for domestication in Eurasia, as well as the supercontinent’s east-west axis, contributed to its higher level of development. On a smaller scale, Faye et al. (2004) has argued that landlocked countries, which are quite common in Africa, face significant development challenges due to their lack of access to world markets. And Bloom and Sachs (1998), among many others, have found that the greater disease burden of many tropical countries has impeded their economic modernization. 4 On the question of culture and development, the classic work is of course Weber’s The Protestant Ethic and the Spirit of Capitalism, which linked the protestant idea of “the calling” with the capitalist accumulation of wealth. More recently, scholars such as Clark (2007) have drawn a link between the cultural characteristics of Europeans and the economic dominance of the West since the Industrial Revolution. Other researchers focusing on the underlying circumstances of countries have attributed global economic inequality to international or systemic factors. The international and regional circumstances in which states find themselves, these scholars argue, may well limit or expand their development options. One of the key questions here -- whether the economic globalization that characterizes the modern international system benefits modernizing countries or impedes their economic transformation -- remains hotly debated among political economists. Some answer the question with an unequivocal “yes” or “no”, while others assert that the answer lies somewhere in the middle. The most famous “no” undoubtedly comes from dependency theory (e.g. Cardoso and Faletto 1979), which links underdevelopment in the “periphery” to discriminatory economic policies in the “core”. Other scholars have attested to the development benefits of international trade and investment (e.g. Krueger 1998), seeing globalization as providing valuable opportunities for states to move up the value chain. A third group, concerned mostly with understanding the impact of foreign direct investment on development, has adopted a more nuanced response, seeing different sorts of FDI as having different types of impacts on the modernization of recipient states (e.g. Moran, Graham, and Blomström 2005). Other important strands of the literature attribute economic success or failure to the structure and quantity of foreign aid (e.g. Sachs 2006) or to the presence of civil war or state collapse in a country or its neighbors (e.g. Collier 2007). 5 Do the underlying circumstances of countries leave any room for state or private sector action in promoting economic modernization, or are outcomes predetermined by these constraints? There is no question that any explanation of growth must consider fundamental distinctions of history and geography. The rapid modernization of the Asian tigers is all the more extraordinary given their lack of an industrial heritage, while the solid postwar performance of Germany or France may seem less surprising. That said, it is reasonable to ask whether such relatively fixed characteristics can explain the rapidly transforming economic landscape of the last 200 years. And one might wonder whether culture can be defined independently of the political and economic institutions that directly impact growth. It seems equally reasonable to suspect that economic and political transformation informs cultural characteristics as the other way around (see Acemoglu and Robinson 2012). The best way to understand these fundamental characteristics, then, is to see them as constraints on the range of modernization policy options available to states. In the large number of cases, these constraints will structure the modernization policies that states can reasonably choose, and they will undoubtedly make economic transformation more difficult in some contexts than in other. The best modernization strategy will be different for a landlocked country with little existing industry versus a middle-income country with excellent ports. All the same, the underlying constraints facing states will rarely determine economic outcomes in any real sense. Excepting cases of widespread civil violence or state failure, modernization policy options are available to states that can improve their economic trajectories significantly. The question, of course, is how these policies can best be developed and implemented. Setting aside for the moment geographic, cultural, and international factors, by far the most common focus of modernization research has been on the specific economic policies of 6 states. Scholars in this school of thought take the opposite position from their counterparts discussed above; the key to development lies not in the basic circumstances of states but in the relatively transient adoption of “correct” economic policies. For many (but not all) researchers in this school, the correct policies are, in their essence, fixed and unchanging regardless of a country’s existing circumstances. The key challenge of development, then, is to convince uninformed or irresponsible governments to take the measures necessary to transform their economies. In other words, the challenge of modernization is a challenge of “political will”. In this school of thought, one finds the familiar debates between advocates of the free market, advocates of the command economy (now quite rare), and supporters of various stripes of mixed economies. The literature here is vast, and its impact on development policy has been even more striking. In the immediate postwar era, most scholars backed the idea of state involvement in the development process, and the policies of the newly-formed international financial institutions and bilateral aid agencies reflected this consensus. With the economic crises of the 1970s and disappointment in the growth trajectory of many dirigiste states in the developing world, the pendulum swung to a more laissez-faire conception of the state’s role, something embodied most famously in the “Washington Consensus”. The global financial crisis and the recent success of China, hardly a paragon of free-market liberalism, may well signal a new shift in the economic policy debate. Whatever the case, it is impossible to deny that economic policies matter for economic outcomes, and scholars and practitioners will no doubt continue to have lively debates about what policies developing countries should pursue (for recent popular examples, see Easterly 2002, Sachs 2006). Arguments over economic policy, however, beg the broader political questions. Why do countries choose the economic policies that they do? And might the same 7 formal policies work better in some national contexts than in others? Indeed, are all economic policy choices available to all countries, or does a country’s institutional and political context circumscribe its options? A growing literature takes these questions seriously and advances the notion that variation in ideology and institutions, both political and economic, underlies differences in economic trajectory. From this point of view, the causes of growth are to be found in a wide variety of factors, including the ideology of governments and their democratic openness, the existence of a “developmental state” devoted to growth and able to work in concert with the private sector, and the presence of more basic institutions that ensure private property and the enforcement of contracts.2 In this book, I develop a theory that falls within this broad tradition, but I take it a step further. I do this by bringing political institutions, interest groups, and the preferences of state and private actors into the same model, specifying when each should matter in the formation of modernization policy. Moreover, my purpose is not only to explain policy outcomes themselves, but also to propose an original argument for when these policies will produce stagnation and when they will set a country on a trajectory towards economic modernization. Preferences, Institutions, and Modernization My goal in this book is to develop a new theory that will improve our understanding of what separates the success stories of economic modernization from the failures. An obvious first step down this path is to note my assumptions and highlight the cases to which my argument applies. Because I am interested in the form and success of modernization policy, I am 2 Rodrik (2007) for example argues that a wide variety of country-specific economic policies can produce positive outcomes as long as they are in keeping with the fundamental principles of neo-classical economics. 8 concerned only with those countries that can be said to have developed and implemented such a policy in one of its myriad forms. This category evidently includes a large number of countries in the world today, but excludes failed or purely klepocratic states. It also, at least in theory, excludes countries pursuing purely laissez faire economic policies or policies oriented only at maintaining the status quo, but there are few such cases in existence. I build my theory around a close examination of domestic politics. Specifically, I focus on three important characteristics of countries – the economic preferences of governments and interest groups, the centralization of business, labor, and agrarian representation, and the centralization of political institutions. For my purposes, centralization means that a relatively small group of leaders dominates an institution. Political centralization can take many forms in a democracy; for example, a state is centralized when a powerful executive controls most of the levers of policy or when a single disciplined party dominates the legislature. Likewise, an interest group is centralized when its executive is able to determine its bargaining position and impose that position on the membership, or when its rank-and-file are so united on an issue that they act as one. I do not consider state dominated interest groups, which are especially common in autocratic systems, to be centralized because they do not represent the independent preferences of private actors. Instead, I classify systems with state dominated interest groups, or with no interest groups at all, as characterized by highly decentralized private interests. For this book, I take both centralization and actor preferences as exogenous and do not seek to explain them. I provide more detail on the measurement of these concepts in my empirical chapters. How do institutions and preferences interact to produce economic policy? I contend that, when a country’s political institutions are centralized and its business, labor, and farm interests are decentralized, the economic preferences of the governing party or elites will largely 9 determine state policy. As discussed below, prior research has found that political centralization tends to insulate policy-makers from interest group power. This is because more centralized political institutions provide fewer “access points” through which interest groups can influence policy (Ehrlich 2011). When policy is controlled by a small number of individuals at the center of power, changing that policy will be more challenging for private sector interests than when decisions result from a more decentralized process. The greater insulation of a centralized state, combined with a decentralized and unorganized structure of interest group power, will provide governments with maximum freedom to carry out their economic policies. Under such conditions, state authorities are unlikely to face coordinated opposition to their decisions and will be in a better position to play one private sector group against another. A state dominated economic policy will be the outcome. By contrast, when a country’s political institutions are centralized and its business, farm, and / or labor representation is as well, state officials will have to consider the preferences of organized interest. The centralized political institutions will, however, provide political leaders with a modicum of insulation, allowing them some room to pursue their preferred policies. Put differently, interest groups will have difficulty influencing the centralized policy process on the front end, but, by the same token, political leaders will need to consider the possible response of private interests to their enunciated policies. Under these conditions, economic policy will be corporatist in nature, with outcomes determined by bargaining among representatives of the state and the peak-level interest groups. Both state and interest group leaders will begin the bargaining process with internally formulated preferences, but also with an understanding that coordination will be required for effective policy. And, in keeping with the corporatist mold of 10 policy formation, only a small number of influential actors will be given a seat at the table when that coordination takes place. In a third case, where a country’s political institutions are decentralized but its interest representation is centralized, government officials will have little opportunity to resist the power of organized business, labor, or agriculture. These interest groups will have the ability to inject themselves into the policy formation process itself by lobbying legislators, ministers, bureaucrats, and other influential state actors. And, once the policy is made, they will have the power to threaten coordinated non-cooperation if the government’s decision does not accord with their desires. Consequently, economic policy outcomes will reflect the preferences of these centralized interest groups, and the state’s preferences will be effectively captured by organized social interests. In the final case, when both political institutions and interest organizations are decentralized, policy-making will embody the pluralist model most closely, with smaller interest groups lobbying multiple different state actors to affect policy. State leaders will be heavily constrained by these interest groups, but will have some ability to build different winning coalitions to maintain office. Policy will reflect the interests of these state-society coalition members. For example, business associations may fracture by sector of the economy and, likewise, different state agencies may be responsible for economic policy-making in different industries. In this scenario, the ultimate results would be state-private sector coordination at the sectoral rather than national level, with different actors involved in coordinating different elements of economic policy. Such a process would be open and decentralized, with important roles to be played by different components of government and the private sector. 11 In which of these four cases is state intervention most likely to be effective in promoting economic modernization? Making such a prediction is perilous, as economic upgrading is likely to depend on a wide variety of factors, many of them outside the control of governments and interest groups. That said, my theory does point to some preliminary expectations. In general, I argue that government will be most successful in promoting economic modernization when its level of centralization is aligned with that of interest groups. For my purposes, success is defined with a counterfactual: a successful modernization program is one that produces better economic outcomes (measured most directly by change in national income) than the status quo policy. Obviously, measuring success is fraught with myriad complications, and I will return to this issue in the empirical chapters which follow. I argue, then, that centralized governments cooperating with centralized business, labor, and agricultural interests in a corporatist framework, along with decentralized governments cooperating with decentralized business, labor, and agriculture interests in a pluralist framework, will be in a good position to shepherd the economy. By contrast, government dominated and interest group dominated economic systems will be less successful in promoting upgrading. The logic is that cooperation between the state and interest groups is critical for economic management. When institutions are such that either side can effectively ignore the preferences of the other, the quality of policy will suffer. In state-dominated systems, for example, we would expect the linkages between government agencies and interest groups to be weaker, something that is likely to impair the development of realistic policies (see Evans 1995). Even when these links are well developed, the absence of a coordinated interest group preference may also intrude on the development of an effective policy. A dominant state must still understand the needs of the private sector to 12 construct effective modernization policy, and when these private actors are not able to speak with a single voice, this task is complicated considerably. In the reverse case, where interest groups are dominant, their overwhelming power can lead to redistributional policies that impair competitiveness. It is always easier for private actors to engage in rent-seeking than to compete on world markets. When these actors dominate the policy-making process at the expense of the state, they are more likely to demand subsidies, trade protection, and other benefits than the more challenging policies that can contribute to long-run growth. As theorists of the developmental state have pointed out, strong states with an interest in the aggregate welfare of the country are more likely to develop and implement such policies (see Johnson 1982, Wade 2003). To summarize, corporatist and pluralist systems will make economic policy in very different ways, but the outcomes will reflect a broader level of social and political buy-in than policies produced in state or interest dominated countries. What are the implications of these arguments for the oft debated impact of regime type on economic development? While I do not attempt to draw a direct link between democracy and the success of economic modernization policies, my theory broadly points to the potential benefits of democratic systems of government. To the extent that autocracies are more likely to be centralized politically and to have decentralized interest groups, they would be at a disadvantage in crafting economic policy. Of course, many democracies also suffer from a misalignment in the centralization of state and private actors which could likewise impair their economic performance. As I will discuss in more detail below, the book deals with two cases – postwar France and, secondarily, post-independence India – that have experienced a sharp break with the past. I examine these cases not because the pursuit of economic modernization requires such a break, 13 but because most countries that have dedicated themselves fully to economic change have done so following some internal or external political shock. Moreover, if Olson (1982) is correct, the introduction of new modernization policies may only be possible after a major shock has washed away many of the institutional accretions of the past. Countries building from the ground up have fewer status quo actors standing it their way. It thus makes sense to examine countries seeking to transform their economies after some watershed event in their histories because the hypothesized relationships will be in clearer relief. Readers will notice immediately that my theory ascribes a central role in the content and success of modernization policy to the state. Some may question my argument on its very basic level by pointing to a nation’s economic and social fundamentals (education level, capital formation, etc.) as the source of its success or failure. I recognize here the importance of such factors, and I control for them by comparing policies and outcomes within the same countries but across time and sector. Others, more wedded to purely market solutions, will object that state intervention in economic affairs leads inevitably to disaster. I never deny that state intervention can lead to disaster, but I follow a large number of political economists in asserting that states can also play a key role in promoting industrial upgrading and modernization. After all, states perform a variety of critical economic functions that are well recognized by neoclassical economics. These include providing a wide variety of public goods, enforcing contracts, protecting property rights, ensuring the provision of market related information, and the like. Perhaps more controversially, many scholars have argued that states can also play a role in encouraging economic modernization by helping to overcome the collective action problems inherent in upgrading (e.g. Waldner 1999). 14 Ultimately, my purpose here is to understand the politics behind state policies and their success, a goal that I pursue by exploring how the state and private actors interact. As noted above, I do not advocate any single strategy for economic modernization, and indeed one implication of my theory is that appropriate strategies will need to be hammered out by representatives of the state and private sector in each country. I am interested only in explaining the policy that is made and in trying to understand the political process that is most likely to achieve an effective modernization strategy. I hope that, by the end, skeptics will be convinced that states can facilitate as well as impede economic progress. In the next section, I turn to a discussion of my strategy for testing this theory with the case of postwar France. Economic Modernization in Postwar France France emerged from the Second World War with its economy and infrastructure devastated. Nearly two million buildings had been damaged, extensive areas of farmland had been rendered unusable, and both train and ship transport was at a virtual standstill (Eichengreen 2007). But the country’s technocratic elite also saw in the destruction an opportunity to set France on a path towards economic modernization that had eluded it for decades. As a consequence, the first twenty-five years after the war gave birth to French economic policy as we know it today. Those years began with a turn to large-scale indicative planning and dirigisme in an effort to reconstruct the French economy. The post-war period also saw a dramatic expansion of the French welfare state and an unprecedented growth in the public sector’s social role. And, perhaps anomalously, France played a major role during those years in creating the European Community, an organization that, at least on the face of it, did not seem to be in keeping with the country’s state capitalist orientation. 15 French leaders adopted these policies as part of a broad economic modernization strategy, pursued at a time when the dangers of permanent stagnation loomed in the aftermath of occupation and war. These policies continue to structure the economic debate in France today, whether over welfare benefit cuts, government support for national champions, or the expansion versus deepening of the European Union. And their importance does not end with France. Dirigisme and indicative planning have been emulated in a number of countries around the world, and French policy continues to leave its mark on the structure of European integration. To test the theory outlined above, I present a close examination of the form and impact of France’s three major post-war economic policy choices – indicative planning, the welfare state, and European integration. A study of France during this period will allow me to investigate the origins of a new growth strategy developed after a significant political disruption. A disruption of this sort creates new opportunities for transforming policy as fresh ideas and institutions gain prominence. Moreover, studying post-war France allows me to vary each of my key independent variables and therefore permits a comprehensive examination of the theory. France under the Fourth Republic (1946-58) was characterized by relatively decentralized political institutions; it was a parliamentary system with proportional representation, creating unstable coalition governments. This political decentralization combined with the decentralization of interest representation in the industrial sector and centralization in the agricultural sector (Eichengreen 2007, Zysman 1977). The country’s political institutions then centralized in 1958 with the establishment of the Gaullist Fifth Republic and its strong President (Debré 1981). This new centralized state in turn faced, for the most part, the same structure of interest representation that had confronted its predecessor. The exceptions are a brief period of centralization in business representation that occurred during the mid-1960s (Hall 1986) and a shift to a new leadership 16 and a new ideology in the agrarian lobby during the early 1960s (Keeler 1981). By examining how French economic policy varied from the Fourth to the Fifth Republics and from the industrial to the agriculture sector, I am thus able to examine all of the variation present in my model. In effect, therefore, I am adopting a most-similar-systems research design (see, for example, Meckstroth 1975), where I seek maximum variation on the independent variables of interest and minimum variation elsewhere. By examining a single country, I am better able to hold potentially confounding cultural, social, and economic factors constant while I investigate the effects of changes in my independent variables. To complete my qualitative analysis of postwar France, I draw on the secondary literature in both English and French, as well as on an extensive examination of primary sources. These sources include memoires of the key actors during the period, government and interest group documents maintained in various French archives, and contemporary journalistic accounts. My model predicts that, during the Fourth Republic, industrial policy in France should be dominated by a pluralist collection of small but powerful interest groups cooperating with different components of a decentralized state. Agricultural policy, on the other hand, should reflect the dominant power of the organized farmers’ lobby. During the Fifth Republic, by contrast, the state should be able to pursue its preferred policies unimpeded in the industrial sector, at least until the centralization of the patronat during the mid-1960s. Agricultural policy during this period should reflect a negotiated settlement between state and agricultural interests, in the corporatist fashion. Testing my argument requires two tasks. First, I “code” my dependent and independent variables. In the context of my qualitative study, this task involves classifying each of my 17 variables according to the theoretical framework that I have developed. Second, I draw a causal link between the political factors I examine and the policy outcomes I want to explain. In carrying out this task, I make use of process tracing (Mahoney 2003) to undertake a careful analysis of economic policy decision-making in France. Such an analysis allows me to test whether the causal mechanisms highlighted by my framework actually produce the economic policy outcomes predicted. Moreover, the approach permits me to expand the number of observations that I consider to include each step in the chain linking cause and effect. Some readers might wonder why I rest my argument primarily on qualitative evidence within a single country. First, I believe that my theory is best tested with a detailed historical analysis because it specifies not just a hypothesized relationship between independent and dependent variables, but a full causal process. My approach allows a more complete examination of this process than would a quantitative study. Also, a number of the variables that are central to my argument are difficult to operationalize accurately in a large-N study. Finally, and more to the point, my cross-temporal and cross-sectoral most-similar-systems framework makes it possible to hold a number of potentially confounding variables constant while honing in on the key factors of interest. My findings from the French cases provide strong support for my expectations. Under the Fourth Republic, the predicted pluralism of industrial policy accords well with the important role played by the “modernization committees” during the first few plans (see Hall 1986, Eichengreen 2007). These committees, made up of representatives of labor and industry, cooperated with the French planning bureaucracy to set the broad guidelines for planning during the 1950s. Critically, the modernization committees represented business interests at the industry level, rather at the peak level, as would be expected of a more corporatist arrangement. 18 French planning policy therefore represented a complex series of agreements between an influential state, ideologically committed to planning, and a large number of independent interest groups. Similarly, the expansion of the welfare state during this period represented an effort by the French state, under pressure by moderate labor unions, to achieve labor quiescence during the critical period of industrialization while heading off any potential threat from radical left unions. Moreover, as the theory would predict, the French welfare state represented a pluralist structure of state-society relations, with different interest groups and state agencies taking a leading role in creating different components. For this reason, for example, family policy was separated from income support policy as the structure of social transfer was established (Nord 2010). French agricultural policy under the decentralized Fourth Republic was dominated by an effort to appease the country’s highly organized agricultural interests in their demands for costly price supports (Keeler 1981). The willingness of French authorities to ignore the need for land reform in favor of supports accords well with the theory’s predictions of agricultural dominance. Likewise, a strong French motivation for the negotiation of the Rome Treaty and the creation of the European Community was to maintain agricultural price supports while reducing their cost to the French state. Deep French involvement in the creation of the EC was also motivated by a desire to ensure that state planning would be permitted within any regional integration arrangement (Gueldry 2001). French planning continued under the Fifth Republic, but in an altered form. President De Gaulle and his advisors were ideologically committed to planning but preferred channeling state support to a small number of large businesses in an effort to create “national champions” (Hall 1986, Zysman 1977, Schmidt 1996). This strategy, far from representing the influence of major corporations, indicated instead the ability of the newly centralized French state to do whatever it 19 wanted with industrial policy. The greater centralization of the patronat during the late 1960s ushered in a brief period of corporatism into this era of state dominance, but that was not to last. Things were a bit different with agricultural policy, however. In this sector, the centralized power of the state met its match in the political strength of agrarian interests, and the Fifth Republic was unable to dictate its own terms as it was in the industrial sector. Political leaders were, however, in a better position to force the changes in agriculture that they believed necessary than they had been during the shifting coalitional politics of the Fourth Republic. These dynamics explain the seemingly corporatist cooperation between Fifth Republic planners and agricultural association leaders in effecting agrarian reform within the protective context of Europe’s Common Agricultural policy (see Keeler 1981). They can also explain why President De Gaulle compromised his European policy of the “empty chair” after farmers forced him into a second round in the election of 1965. How does the evidence accord with my predictions about which configuration of stateinterest relations is most effective in promoting economic modernization? My framework would predict that pluralist industrial policy under the Fourth Republic and corporatist agricultural policy under the Fifth Republic would prove more successful than the interest dominance of Fourth Republic agrarian policy and the state dominance of Fifth Republic industrial policy. These predictions are also borne out by the evidence. Industrial transformation proceeded at a rapid clip during the 1950s, but the less cooperative industrial policy of the De Gaulle years, while it did enjoy some successes, also saddled the French economy with a series of large, unproductive firms (see Adams 1989, Eichengreen 2007, Hall 1986). Likewise, agricultural policy under De Gaulle succeeded in promoting agricultural modernization in a way that Fourth Republic agrarian policy was not able to do (Keeler 1981). 20 India and Beyond As noted above, I also devote a smaller portion of the book to applying my theory in the case of post-independence India. This analysis is also based on both primary and secondary sources gathered in India. The inclusion of India may at first seem strange, and indeed comparisons between industrialized countries in Europe and developing countries in Asia are rarely performed. It is my belief, however, that such a comparison provides a more rigorous test for my theory while also highlighting some surprising similarities between the cases. Just as France wished to launch itself on a rapid growth trajectory after the devastating conclusion of the Second World War in 1945, India’s leaders sought to modernize and industrialize their country after achieving independence from Britain in 1947. Both made use of state planning in promoting growth, although the Indian version introduced more state controls. Likewise, while France grappled with whether to devote its limited resources to industrial modernization, price supports for farmers, or welfare benefits for workers, India struggled with the trade-offs between channeling support to nascent industry, modernizing its vast but inefficient farmland, or providing public goods such as primary education to its people. How each of the countries resolved these dilemmas depended, I argue, on the relationship between ideology, interest group organization, and political centralization. In the case of India, the state was dominated by the Congress Party throughout the period under study. But the structure of this party changed in important ways after the death of Nehru in 1964 and the growing dominance of his daughter Indira Gandhi. Under Nehru, the party was significantly decentralized, with local elites holding significant influence over the polity, whereas Gandhi centralized authority under the office of the prime minister. As a result, Indian centralization is less a matter of formal political institutions, as in France, and more a question of intraparty structures. Interest groups in India, by contrast, were weak and relatively 21 decentralized. My theory therefore anticipates that Indian economic policy should take-on a pluralist structure during the Nehru years and shift to a state dominance arrangement under Gandhi. The structure of planning in India does indeed bear out those expectations. As in France, outside interests were incorporated into the planning system in Nehru’s India, but were largely shut out by Indira Gandhi, who increasingly used the planning process to her political benefit. Not surprisingly, economic modernization policy was more effective under Nehru than under Gandhi, despite some serious problems in both periods. Finally, to highlight the generalizability of my argument, I undertake a quantitative study of all countries, contingent on data availability. Many of my variables are difficult to operationalize in a large-N context, but I make use of the closest proxies available, focusing on the theory’s implications for economic success. The findings of this quantitative analysis will hopefully provide a final piece of support for the argument. Understanding Economic Modernization With the arguments presented in this book, I hope to contribute in a number of ways to our knowledge of the politics of economic modernization. For my inspiration, I draw on the insights of an extensive literature linking government preferences, interest group organization, and political centralization with economic policy outcomes. On the question of preferences, scholars have long debated why governments opt for certain policy choices over others. One prominent group sees the preferences of democratic leaders as fundamentally determined by their links to the electorate. To take a small number of examples from this large literature, Milner and Judkins (2004) find that in developed countries, left parties tend to prefer more protectionist trade policies because of their benefits to workers, 22 while Quinn and Inclan (1997) make a similar case for constituency linkages as a driver of international financial policy. In the area of monetary policy, Hibbs (1977) sees left parties as internalizing labor’s willingness to accept high inflation in exchange for low unemployment. And in the same vein, explanations of welfare state development often draw a connection between the structure of social benefits and the partisan make-up of governing coalitions (Esping-Anderson 1990, Huber and Stevens 2001). Another group of researchers, those associated with the constructivist school of thought, argue that preferences are not just a function of the political needs of leaders or the material interests of their constituents. For constructivists, ideas truly matter; they are internalized by actors and form a key part of their socially-constructed reality. In the past, constructivists have spent little of their time analyzing economic policy, but this neglect is beginning to dissipate. In a 2007 book, for example, Abdelal explains capital liberalization in recent decades with ideational changes in Europe and the United States. Similarly, Woll (2008) develops a constructivist explanation of corporate lobbying in trade policy, arguing that material interests cannot fully explain firm preferences. And McNamara (1999) attributes European monetary integration at least in part to changed ideas among the key actors on the continent. I sidestep much of this debate by taking government and interest group preferences as exogenous to my model. In other words, I am interested in the impact that these preferences can have on policy outcomes, but I am not concerned here with explaining why governments and interest groups desire what they do. My project, then, assumes that state preferences can be understood independently of constituent interests, but also recognizes that the preferences of organized social groups can matter tremendously in the formation of policy. Part of my purpose 23 is to specify how and when the preferences of these actors are most likely to affect policy outcomes. The constraining effect of interest representation on state economic policy has also been the subject of much research. Many scholars in this area focus on understanding lobbying coordination within industries, while others are interested in explaining the changing preferences of interest groups. In the first category, Busch and Reinhardt (2000) link the geographical and industrial concentration of firms with a louder voice for their preferences in the trade policy process. Similarly, Frieden (1991) argues that policy-makers in Latin America have provided more public resources to firms that were both mobilized and vulnerable to economic downturn. And in a piece that fits into the second category, Milner (1987) finds that the economic crises of the 1970s did not produce a global collapse in trade (unlike during the Depression) in part because the more globalized firms of the era opposed significant protectionism. A third school of interest group researchers examines shifting factor coalitions but is less concerned with the organizational make-up of representation. For example, Rogowski (1989) links alterations in the economic policies of key states with changing coalitions of land, labor, and capital. Gourevitch (1986), for his part, examines how external economic crises have led to new domestic political coalitions. And Hiscox (2002) identifies the mobility of labor and capital as the key determinant of how interests mobilize to influence trade policy. My project will look much more at the economy-wide organization of interest representation (or its lack) to explain economic outcomes. In this way, it takes the approach of scholars who have argued that the centralization of interest representation can have a dramatic impact on economic outcomes (e.g. Freeman 1989). 24 In the final analysis, however, my project draws most directly on research seeking to understand the role of political institutions in economic policy. Prior to the 1980s, social scientists tended to focus on individual and mass behavior and to ignore (or discount) the role of institutions, but more recent scholarship has shown convincingly that institutions can matter critically to policy outcomes. Most modern research on institutions can be classified into one of two broad categories – rational choice or historical. Rational choice institutionalism begins by identifying actors and their preferences, and then moves into an investigation of how institutions transform these preferences into outcomes. By contrast, historical institutionalism focuses on the evolution of institutions over time, asking how institutions form and why they sometimes produce counterintuitive results. Together, these schools of thought have contributed significantly to our understanding of economic outcomes. For example, the reform literature points to the importance of low party fragmentation and high state insulation in the success of economic transformation (e.g. Haggard and Kaufman 1995, Wade 2003), trade openness (e.g. Ehrlich 2011), and the balancing of budgets (e.g. Roubini and Sachs 1989). At the same time, researchers identify high fragmentation, and a significant number of veto points more generally, as contributing to policy stability (Tsebelis 2002). In a similar vein, Bueno de Mesquita et al. (2004) associate a variety of economic policy outcomes with the size of a government’s “selectorate”, the portion of the population that has influence over political outcomes. Przeworski et al. (2001) explore the relationship between democracy and economic development, and find no systematic connection between the two (although their evidence indicates that democracies do enjoy a more balanced distribution of wealth). Waldner (1999) investigates the institutional determinants of a state’s ability to assist the private sector in overcoming the collective action problems that impede 25 development, concluding that states with more unified elites tend to be more successful. Likewise, scholars in the trade literature have examined a number of specific institutions, finding greater insulation, and thus freer trade, in countries with proportional electoral systems (Rogowski 1987), unified government (O’Halloran 1994), centralized parties (Nielson 2003, Hankla 2006), and other institutional features. And perhaps more relevant to our interests here, scholars of Europe have investigated how the autonomy of state institutions impacts the ability of governments to effect economic transformation (e.g. Hall 1986, Zysman 1977). Of course, all these works provide only a taste of the vast and growing literature linking political institutions with economic outcomes. In this book, I move beyond existing research by combining all of the factors discussed above – preferences, interest groups, and political institutions – into a single framework. My argument is similar to that developed by Hall (1986), but in that classic book no specific framework for understanding outcomes is developed and the focus is entirely on planning. I also draw on the work of Haggard (1990), who sees development policy outcomes as resulting from the interaction of actor preferences on the one hand and institutional or international constraints on the other. I take the same position, but flesh out in more detail the expected outcomes from different combinations of institutional constraint and preference. In addition, unlike much of the scholarship that has come before, I develop predictions both for policy outcomes and for the effectiveness of policy in promoting economic upgrading. I also emphasize aspects of the policy-making process that are sometimes ignored in past studies. For example, a potential problem with much of the research linking preferences with economic policy is the assumption that partisan differences depend not on genuine beliefs but on differing societal supports. As a result, states are often not considered independent actors but rather the 26 servants of social interests and public opinion. My project seeks to explain when states will take the lead in economic policy and when they will follow the interests of sub-national groups. My book also speaks to prior research on both corporatism and the developmental state. Scholars of corporatism, who have focused their analyses on Western Europe and Latin America, highlight the importance of interest group centralization to the coordination of economic policy between the state and private actors (e.g. Schmitter 1974). It is this peak-level coordination that defines corporatism and distinguishes it from more pluralistic systems. Advocates of corporatism often tout its ability to generate macroeconomic stability (Garrett 1998), an equitable distribution of income (Freeman 1989), and, more broadly, mutually beneficial cooperation across all segments of an economy (Katzenstein 1985). Along similar lines, more recent scholarship identifies the existence of distinct “varieties of capitalism” in which institutional configurations in a variety of areas (education, industrial relations, finance, etc.) fit together to produce a coherent political-economic system (Hall and Soskice 2001). This research highlights the benefits of coordinated market systems in which state and private institutions are mutually influential in the production process. By contrast, scholars of the developmental state emphasize the role of technocratic, centralized state bureaucracies in efforts to spur industrial upgrading, especially in the East Asian tigers. Scholarship in this area focuses not only on the benefits of elite bureaucratic power (such as the classic Japanese MITI discussed in Johnson 1982), but also on the ability of these bureaucracies to communicate effectively with business leaders (Evans 1995). Some scholars of the developmental state also emphasize its sidelining of labor, the better to promote investment over consumption (Kohli 2004). Overall, however, scholars of the developmental state see 27 coordinated and firm state action as the best method available for industrializing states to build comparative advantage in high value-added products (e.g. Wade 2003). I draw on the important innovations found in both literatures, but go beyond them in three ways. First, I argue that a complete explanation of economic policy-making requires an understanding of how state centralization and interest group centralization interact. To be sure, scholars of corporatism and the developmental state are both interested in the relationship between government and interest groups. Neither approach, however, fully theorizes the organizational structure of both state and private institutions. Corporatists are primarily interested in interest group structure and consider state organization only secondarily, while developmental state theorists have the opposite focus. In this book, I examine both state and interest organization and develop expectations for their joint and mutually contingent influence. Second, I emphasize that corporatism and pluralism, state dominance and interest dominance, are not fixed characteristics of countries. Rather, I argue that they can vary both across time and, critically, across sectors of the economy. My approach is in contrast to most theories of corporatism and the developmental state, which imply that these characteristics are relatively fixed elements of “national systems of political economy” (see Gilpin 2001). Third and finally, my research combines the regional interests of both literatures by looking at Europe and (secondarily) at Asia, allowing for new insights with this cross-regional comparison. A further benefit of my project is the light it sheds on post-war French economic policy, above and beyond any theoretical consideration. While there have been several important studies of this topic in the past, most scholars have examined only one aspect of French policy at a time. For example, some focus their attention on the negotiations for European integration, usually looking at systemic factors. Others are interested in the welfare state, and still others 28 target their efforts towards economic planning. I examine all three at once, a strategy that allows me to undercover the inevitable interrelationships that exist across these important policy decisions (see Judt 2006). Beyond France, the historical portion of my project also sheds light on the origins of the European Union, which few scholars have examined from a domestic political economy perspective (but see Moravcsik 1998). Moreover, my project is selfconsciously interdisciplinary. It is rooted primarily in political science, but it draws heavily on insights from economics, history, and sociology. My hope is that it may appeal to scholars in all of those fields, as well as to policy-makers interested in the best ways for states to promote economic growth and social stability, a question that has been on the minds of many since the financial crisis. I devote the book’s next chapter to a detailed discussion of my independent variables, namely the ideologies and relative centralization of interest groups and the state in postwar France. The purpose of the chapter is to identify variation over time and space in each of these key factors. After this discussion, I focus in Chapter 3 on an evaluation of the first of my three policy areas – indicative planning. Here, I link the four possible combinations of state and interest group centralization discussed above with the nature of the planning process in postwar France, as well as with its success. My purpose is to use both primary and secondary sources to trace the causal linkages between each organizational combination and its predicted outcome. I do the same for the expansion of the welfare state in Chapter 4 and for the France’s Europe policy in Chapter 5. After completing my analysis of France, I devote my final substantive chapter (Chapter 6) to testing the theory in other cases. 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