Download The many channels of the relationships between state intervention

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The many channels of the relationships between state intervention and
growth: can high-growth developing countries be examples for poorer
countries?
Alice N. Sindzingre
Research Fellow, National Centre for Scientific Research (CNRS, Paris)-University
Paris-10-EconomiX; Visiting Lecturer, School of Oriental and African Studies (SOAS,
University of London), department of economics; Associate Researcher, CEAN (Centre
d’Etude d’Afrique Noire, Institut d’Etudes Politiques, Bordeaux); Email:
[email protected]
International Political Science Association 21st World Congress of Political Science,
Santiago (Chile), 12-16 July 2009
Research Committee RC04: Public Bureaucracies in Developing Societies. Topic 3:
‘Strengthening State Capacity’
Abstract
Since the 1980s, the reforms of the state and of government institutions in developing countries have had
the objectives of reducing the intervention of the state in the economy – reducing its size, the scope of its
policies and government spending, reforming taxation, and limiting government redistribution and
financing. Reforms also aimed at enhancing incentives in the civil service, improving accountability and
[since the late 1990s controlling corruption. These reforms were not only focused on public policies and
institutions, but also on markets: they also consisted in reforms liberalising the economy, promoting
privatisation, deregulating trade and lifting barriers to it. This has been the case for the reforms
recommended by the international financial institutions to low-income countries, e.g., in Sub-Saharan
Africa. These reforms were, and arguably continue to be, grounded on economic theories that consider
that ‘big government’ is detrimental to growth and that there is a positive correlation between
liberalisation and the minimising of state intervention in an economy on the one hand, and variables such
as growth or the welfare of the society, on the other. These theories, however, remain debated, both in
their conclusions and methodologies. Moreover, empirical evidence does not always confirm the
effectiveness of these reforms and the relevance of the associated theories. Indeed, most countries that
exhibited the highest growth rates since the 1960s (e.g. South Korea, then China) relied on strong states.
Even if the functioning of markets was liberalised, governments intervened in the economy: but they did
this in original ways, such as fostering the effectiveness of bureaucracy, investment in education,
selective support to particular economic sectors, industrial and export-oriented policies. The instruments
were less linked to taxation - as they had been in European welfare states - than credible and growthoriented policies that were often helped by specific types of political regimes – authoritarian – and rulers
who used growth as a political tool enhancing their legitimacy, which neutralised the distortions created
by cronyism. In contrast, in other parts of the world, such as the Sub-Saharan African low-income
countries, governments were also often authoritarian, but sometimes implemented policies that were
‘anti-developmental’ and allowed for bureaucracies that were inefficient, inexistent or plagued by
patrimonialism, coupled with economic regimes based on extraction and rents, high inequality and very
uneven public redistribution. In this context, the reforms of the international financial institutions that
recommended a reduction of state intervention had mixed effects: they may have had the positive effects
of reducing rent-seeking in some cases, but further weakened state capacity in others, and in particular the
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capacity to implement the appropriate policies, i.e. oriented towards growth, industrialisation and
manufactured exports as in the high-growth Asian countries. This shows the interest of an analysis and
comparison of state capacity in developing countries. The paper thus explores the state institutions and
policies of countries that enjoyed spectacular growth in Asia, in particular their modes of state
intervention, and, in contrasting them with those prevailing in the low-income countries that are caught in
poverty traps, assesses the lessons that can be drawn from them.
Introduction1
Since the 1980s, the reforms of the state and of government institutions in developing
countries have had the objectives of reducing the intervention of the state in the
economy – reducing its size, the scope of its policies and government spending,
reforming taxation, and limiting government redistribution and financing. Reforms also
aimed at enhancing incentives in the civil service, improving accountability and
controlling corruption. These reforms were not only focused on public policies and
institutions, but also on markets: they also consisted in reforms liberalising the
economy, promoting privatisation, freer trade and trade openness. This has been the
case for the reforms recommended by the international financial institutions to lowincome countries, e.g., in Sub-Saharan Africa. These reforms were, and still are,
grounded on economic theories that consider that ‘big government’ is detrimental to
growth and that there is a positive correlation between liberalisation and the minimising
of state intervention in an economy on the one hand, and variables such as growth or the
welfare of the society, on the other.
These theories, however, remain debated, both in their conclusions and methodologies.
Moreover, empirical evidence does not always confirm the effectiveness of these
reforms and the relevance of the associated theories. Indeed, most countries that
exhibited the highest growth rates since the 1960s (e.g. South Korea, then China) relied
on strong states. Even if the functioning of markets was liberalised, governments
intervened in the economy: but they did this in original ways, such as fostering the
effectiveness of bureaucracy, investment in education, selective support to particular
economic sectors, industrial and export-oriented policies. The instruments were less
linked to taxation - as they had been in European welfare states - than credible and
growth-oriented policies that were often helped by specific types of political regimes –
authoritarian – and rulers who used growth as a political tool enhancing their
legitimacy, which neutralised the distortions created by cronyism.
In contrast, in other parts of the world, such as the Sub-Saharan African low-income
countries, governments were also often authoritarian, but sometimes implemented
policies that were ‘anti-developmental’ and allowed for bureaucracies that were
inefficient, inexistent or plagued by patrimonialism, coupled with economic regimes
based on extraction and rents, high inequality and very uneven public redistribution. In
this context, the reforms of the international financial institutions that recommended a
reduction of state intervention had mixed effects: they may have had the positive effects
1
The author is grateful to Raymond Toye for his very insightful comments on this paper, though the usual
caveat applies.
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of reducing rent-seeking in some cases, but further weakened state capacity in others,
and in particular the capacity of implementing the appropriate policies, i.e. oriented
towards growth, industrialisation and manufactured exports as in the high-growth Asian
countries. This shows the interest of an analysis and comparison of state capacity in
developing countries.
The paper thus explores the state institutions and policies of countries that enjoyed
spectacular growth in Asia, in particular their modes of state intervention. In contrasting
them with those prevailing in the low-income countries that are caught in poverty traps,
it assesses the lessons that can be drawn from them.
The paper is thus structured as follows. It firstly analyses the evolution of the thinking
regarding the role of the state in development economics; it assesses the paradigm that
prevailed in developing countries from the 1980s until the 2000s, which viewed ‘big
government’ as a cause of economic failure. Secondly, it presents an alternative model
of the relationships between state intervention and growth, which has been provided by
the trajectories of the so-called Asian ‘developmental’ states (e.g., South Korea,
Taiwan). The development paths of these states reveal that government intervention and
a series of active public policies – regarding taxation, trade, social issues and the like –
may have a positive impact on growth. Thirdly, these models of state and public
policies are contrasted with those which prevailed in low-income countries in other
parts of the world, via the example of Sub-Saharan African countries after independence
in the 1960s: while there are commonalities, many dimensions of government
intervention in Sub-Saharan Africa sharply differed from those in East Asia, which has
been compounded by different economic initial conditions, market structures and
political contexts. These various dimensions explain the lack of positive impact of state
intervention on growth in Sub-Saharan Africa, or at least its mixed effects. The paper
thus shows that it is not state intervention per se that has a detrimental effect on growth:
certain features of the state and public policies, and in certain historical, economic and
political contexts, may have a negative impact, while this impact, in other contexts, is
positive.
1. The paradigm prevailing in developing countries from the 1980s
until the 2000s: ‘big government’ as a cause of economic failure
The evolution of thinking about the state in development economics after WWII
The assessment of the role of the state in developing countries cannot be understood
outside the broader context of the evolution of development economics since WWII,
which witnessed many changes, especially regarding the conception of the role of the
state and its optimal modes of intervention. As shown by Adelman (2000a), a topic that
has been subject to the most crucial changes has been the model of the desirable role of
government in the economy, e.g. the degree and form of state intervention, the nature of
government-market relations and the associated policy prescriptions. The ‘founding
fathers’ of development economics at the time of WWII argued that there is scope for
choice in institutions, policies and their sequencing, and these choices generated in turn
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the initial conditions for subsequent development: there are alternative trajectories in
development.
The role of governments in economic development has contrasted among countries. In
some East Asian countries, governments played an ‘entrepreneurial’ role, which
appeared to lead to successful economic outcomes. This has been the case of the
latecomers to the Industrial Revolution, also coined as ‘developmental states’, i.e.
Japan, South Korea and Taiwan. These countries grounded their growth on policies that
mixed government and market and adapted the further they grew. They showed that
governments may promote industrialisation via targeted policies (incentives, subsidies,
tariffs, policies towards labour markets, technology, etc.). This period was followed by
a period that witnessed the progressive dominance of the neoclassical paradigm, which
in development economics conveyed several fallacies that still are at the core of
standard theories in the 2000s, in particular considering that there is a single cause to
growth (Adelman, 2001). Adelman underscores that there are many causes of growth or
stagnation, and that there is no single criterion to evaluate development performance:
development is a nonlinear and path-dependent process, which involves shifting
interactions, and thus changes in policies and institutions over time.
Government as the prime mover, as the problem, as a provider of incentives and
correcting market failures: three sharply different phases
Adelman (2000b) thus distinguishes three phases in the thinking about the role of the
state after WWII. In the first phase (1940-1979), the government has been viewed as a
necessary prime mover: it must play an entrepreneurial role, it is a social welfare-guided
arbiter among conflicting interests, it is needed to correct coordination failures in
interdependent investments in industry and move the economy out of the low-level
equilibrium trap. The intellectual roots of these views are the classical economists and
their followers after the WWII: Arthur Lewis, Paul Rosenstein-Rodan, Ragnar Nurske,
Hans Singer, Raul Prebisch, among others. In particular, Rosenstein-Rodan (1943)
highlighted the importance of spillover effects, the possibility of coordination failures in
developing countries and of poverty traps. These concepts may justify government
intervention. They have come back at the forefront in modern development theory
(Hoff, 2000).
These theorists of the WWII period viewed growth as a process that requires systemic
reallocation of production factors from a low-productivity sector (traditional) to a highproductivity sector, mostly industrial, with increasing returns. In contrast with the
neoclassical framework that prevailed later, these theories considered that the
reallocation of resources is hampered by technological and institutional rigidities - a
view that is underlined both by classical and structuralist approaches. Here
industrialisation is not driven by technical progress, and the fostering of demand cannot
be left to the private sector alone: industrialisation had to be planned by the state. These
arguments have underlain the concept of ‘big push’.
This is confirmed by history (Adelman, 2000b). Government investment in
infrastructure, human capital and industry has been historically essential to
development, as have been trade policies and the promotion of technological dynamism.
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The appropriate types of government included autonomy from pressures of elites,
capacity and credibility - required for long term economic growth -, and adequate statecivil society relationships. For Adelman, opposing states and market is a recent notion,
and historically, a key function of the state was to create well-functioning markets, i.e.
providing the legal framework, standards, credit, infrastructure, and if necessary, being
temporarily an entrepreneur of last resort.
The second phase (1979 to about 1996) is the phase of ‘government as a problem’ (not
the solution), with governments urged to remove price distortions, and the phase of the
pre-eminence of the neoclassical paradigm. It witnessed major changes regarding the
role of the state in development economics, in particular, in the 1980s, a marginalisation
of Keynesianism’s impact on economic thought and policy-making of the 1930s-1940s.
Government intervention was seen as ineffective (Toye, 1987). The state was viewed as
predatory, inducing rent-seeking and corruption, and should be limited, as advocated by,
e.g., Deepak Lal or Bela Balassa. For these economists, the anti-export bias of trade
controls was the main cause of the balance of payments constraints on economic
growth, and the ‘right system of incentives’ (i.e. governmental measures affecting the
allocation of resources) was the most neutral in terms of discrimination among
economic activities or foreign and domestic markets. Policy goals should be confined to
‘getting prices right’; government intervention is here unnecessary. The marketisation
of goods, including public goods, makes development cost-effective and efficient
(Adelman, 2001). In the field of foreign trade, neoclassical theorists are against
controls: trade liberalisation is viewed as enough for triggering export-led economic
growth, and international trade can be a substitute for low aggregate domestic demand.
For example, controls over foreign trade such as international commodity agreements
have to be removed. Official aid (government to government) is here said to maintain
unproductive bureaucracies and crowd-out private sector investors: it is therefore
appropriate to ‘exchange aid for policy reform’.
From the 1980s onwards, this paradigm constituted the basis for the reform programmes
of the International Financial Institutions (IFIs), the IMF and the World Bank. These
reforms were synthesised in what has been coined as the ‘Washington consensus’
(Williamson, 1990), which recommended a list of 10 reforms: fiscal discipline;
reordering public expenditure priorities; tax reform; liberalising interest rates;
competitive exchange rates; trade liberalisation; liberalisation of inward foreign direct
investment; privatisation; deregulation; and property rights.
A third phase occurred in the 1990s, which witnessed a more balanced view of the state,
following, among many factors, the failure of the implementation of the previous
programmes in Latin America and in Sub-Saharan Africa (SSA), which questioned the
underlying conception of the minimal state. Government action was again viewed as
critical for triggering growth, and markets and states as complementary: markets may be
inefficient in presence of externalities (e.g., leading to oligopolies); states may be
inefficient in terms of allocation of resources, but they may be better than markets in
addressing externalities and correcting coordination failures that stem from the
existence of externalities, economies of scale and problems of collective action.
This has led to a conception of the role of the state coined as the ‘Post-Washington
consensus’ (Stiglitz, 1997), which became influential within the World Bank in the late
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1990s, Joseph Stiglitz being Chief Economist: the state was ‘rehabilitated’. A flagship
publication expressing these views has been the World Bank World Development
Report 1997 on the state in developing countries. In this theoretical approach, the state
has a privileged role to play regarding the development of infrastructure - educational,
technological, financial, physical, environmental, and social. For Stiglitz, the
government has six key roles: promoting education, promoting technology, supporting
the financial sector, investing in infrastructure, preventing environmental degradation,
creating and maintaining a social safety net. For Stiglitz, market failures (such as
information asymmetries or missing markets) are larger in developing countries, and
capacities of government to correct them are weaker.
These views were in line with the conceptions of the IMF regarding the ‘appropriate’
role of the state and public sector – which, in addition, are constrained by its legal
mandate of monitoring the macro-financial aggregates of its member countries,
especially fiscal balances, therefore public expenditures and the size of public sectors.
Many reforms of the civil service were therefore implemented in the 1980s and 1990s in
developing countries. The ‘first generation’ of reforms of the civil service promoted by
the IMF in the 1980s was focused on macroeconomic stabilisation and the control of
fiscal aggregates (public spending). The failure of these reforms in several developing
countries led the IMF to recommend in the 1990s a ‘second generation of reforms’ of
the civil service (Tanzi, 2000). This ‘second generation’ of reforms was inspired by the
same theories of information asymmetries and incentives mentioned above, together
with theories of New Public Management, which, e.g., advocated the rewarding of civil
servants on merit. Since the late 1990s, for the IMF, reforms must be focused on ‘rules’,
‘institutions’ and a ‘high-quality public sector’.
The limitations of the theories of a role of the state confined to ‘core functions’
However, several limitations are common to the ‘Washington Consensus’ and the ‘PostWashington Consensus’. The latter approach, as summarised in the World Development
Report 1997 on the “role of the state”, entails several problems, as it ignores the weight
of history and politics, and the unique and ‘path dependent’ processes that underlie state
formation and the microeconomic expectations of economic agents, in particular civil
servants. The specificity of states and public institutions in regard to other institutions
remain under-addressed (Sindzingre, 1998). In the ‘Post-Washington Consensus’, the
functions of the state remain likewise limited. These core functions consist in providing
macroeconomic stability to economic agents, providing regulation and improving
regulatory policy: the state has a role to play as it provides incentives. The state may
increase consumer orientation, monitor and reward performance, extend the scope of
competition and privatising.
In particular, both approaches under-theorise the nature of the state, especially the
intrinsic political dimension of state formation and the power relationships, especially
violence, which are at its core. For Tilly (1985), it is coercive exploitation that has
underlain the creation of European states: war (or piracy, banditry) “makes states”;
mercantile capitalism and state-making reinforced each other, pushed by the quest for
an expansion of power and economies of scale, and state formation is based on tributes
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and protection rents (e.g. on merchants), the main activities of a state being war-making,
extraction, state-making, and protection.
In addition, several theoretical studies supported a conception of the optimal functions
and size of the governments that contrasts with the ‘Post-Washington consensus’, and
demonstrated the economic benefits of ‘big government’ and the necessary role of the
state. As shown by Rodrik (1998a), social conflicts and their management – whether
successful or not – play a key role in transmitting the effects of external shocks on to
economic performance. Here, governments have a key role in providing social
insurance, and this role creates a complementarity between states and markets (Rodrik,
1997). Moreover, in the context of globalisation, Rodrik has also underscored that more
open countries have bigger governments (Rodrik, 1998b).
Similarly, using a sample of more than a hundred countries over the period 1970-1995,
Garrett (2001) shows that high levels of trade are associated with high levels of
government spending. However, for Garrett, this correlation does not confirm the
compensation hypothesis that increasing globalization in recent years has prompted
governments to expand the public economy. On the contrary, the fact that countries in
which trade has expanded more quickly have experienced slower growth in public
spending suggests that the efficiency constraints imposed by trade growth outweigh the
political pressures for compensation that trade generates. On the other hand, Garrett
underscores that capital mobility does not seem to have a significant impact on
government spending. These theses were supported by the empirical evidence provided
by the spectacular growth of Asian ‘developmental states’ from the 1960s onwards.
The views on the minimal state, however, have remained resilient, beyond the
theoretical arguments and empirical evidence of successes of different public policies as
well as their failures after the 1980s, when they inspired the stabilisation and adjustment
programmes in most developing countries. As highlighted by Paul Krugman2, they
constitute an “anti-government ideology that dominates much U.S. political discussion,
low taxes and a weak social safety net are essential to prosperity”. The huge bailouts
backed by the state implemented by the US government in 2009 in order to cope with
the 2008-2009 financial crisis suggest the possibility of a shift of the paradigm towards
a fourth phase.
The emergence of the concept of ‘state failure’ in the academic and policymakers
literature
In the 2000s, some states in developing countries have been analysed as ‘failed’ states,
both in development economics and in the donors’ literature, within academia and the
IFIs. These ‘failures’ of states in developing countries have been assessed ex post: states
have been viewed as ‘failed’ not in the 1960s or the 1970s, when they were enjoying
high growth rates, thanks among other determinants, to external causes - high
commodity prices -, but after the occurrence of the fiscal crises, again due to external
factors, i.e. the drop in the commodities prices and terms of trade the in the late 1970searly 1980s. These assessments of ‘state failures’ therefore resulted from the
2
The Comeback Continent, New York Times, 11 January 2008.
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conjunction of several factors: objective economic facts (external shocks) and
theoretical evolutions within development economics, especially changes in the
conceptions of the ingredients of development, e.g. the efficiency of market forces.
These changes have been reinforced by studies in political science and political
economy on the state from the early-1980s onwards. Poor economic performance in
developing countries has been increasingly explained by neopatrimonialism, predatory
regimes, cronyism, nepotism, patronage, clientelism, kleptocracy, etc. Several
economists after WWII also explained economic stagnation in developing countries by
specific features of the state and political processes. Gunnar Myrdal thus elaborated the
concept of ‘soft’ states and analysed their recurrence in developing countries (Myrdal,
1968), ‘soft states’ being political regimes that are “unwilling but not unable” to engage
in long-term growth-enhancing policies, e.g., forced savings.
Since the 2000s, the concept of ‘state failure’ has been pervasive in development
economics and IFIs policy documents - ‘failed states’, ‘fragile states’, ‘collapsed’ states
became the basis of policies for all donors, examples being Somalia or Zimbabwe3.
Economic failure is explained by state failure, which is explained by characteristics of
the state itself. The state is here the culprit - its ‘bloated’, ‘rentier’, ‘predatory’
bureaucracies -, a perspective that has been supported by the expansion after the 1970s
of the theories of rent-seeking, public choice and rational choice. For the public choice
theories, the state is mostly a bureaucracy where the only goal of individuals is to
protect their interests before and against the interests of citizens. There are therefore
very few functions which the state would be the only entity able to fulfil and that would
justify its existence (Krueger, 1974; Bates, 1988).
Similarly, many economies in the developing world are now analysed as ‘extractive
economies’, i.e. a nexus of political regimes and economies based on extraction. These
theories underscore the ‘predatory’ character of some states. Governments here do not
rely on educated personnel, skills and human capital, but on the extraction of natural
resources. They have no interests in economic development, and no incentives for
fostering growth. Other theories elaborated the concept of ‘warlord economies’ that
shape states affected by recurrent civil wars (Reno, 1998). The economic effects of
predatory states may be serious, and these governments may be viewed as ‘antidevelopmental’ and based on pure predation (Acemoglu and Robinson, 2006).
In development economics in the 1990s, theories of the ‘political economy of policy
reform’ thus emphasised the endogenous character of public policies to economic and
political contexts, in attempts of explaining the persistence of governments’ ‘bad
policies’ in developing countries. Acemoglu and Robinson (2006) demonstrate the
endogeneity of political and economic institutions that lead to stagnation: political
attitudes are determined by economic incentives; the form of political and economic
institutions results from conflict between groups that have diverging interests (the
‘elites’ and the ‘citizens’). These ‘bad’ policies do not appear to be associated with a
given type of political regime, rely on redistributive transfers that do not aim at being
efficient, and are locked in balances and status quo in the distribution of the political
and economic power that elites want to maintain at any cost. Governments are
3
See Failing states on the brink, 24 June 2008, The Economist.
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characterised by their inability to commit credibly. This inability to commit appears to
be here a key determinant of the influence of public institutions and government
behaviour on growth, as it refers to a government’s credibility. It is among the key
findings of the 2004 Nobel Prizes Finn Kydland and Edward Prescott, who precisely
defined credibility as this incapacity for a government to credibly commit. Acemoglu
thus argues that the inherent problem of governments’ credibility is that there is no
meta-level above government that has the coercive capacity to enforce government
policies and promises.
Other theories in the 1980s disagreed with these views of failures being those of states
in developing countries. They argued that ‘failures’ were firstly the failures of reforms
rather than those of states, e.g., failures of the reforms’ design, fallacies of the
underlying theories and failure of the IFI stabilisation and structural adjustment
programmes to adjust to the developing countries’ market structure. In these views, the
IFI programmes of the 1970s and the 1980s have intensified economic instabilities and
the microeconomic uncertainties that characterise low-income countries over the
historical ‘longue durée’. Moreover, in the second decade of adjustment in the 1990s,
the persistence of fiscal imbalances and hence the dependence on IFI lending have
induced in developing countries a massive intrusion of donors within government
decision-making and a multiplication of policy conditionalities. In addition, the
requirement by the IFIs of the simultaneous implementation of economic reform and
political reform appeared to have been detrimental to economic performance, with no
clear economic benefit of the democratisations of the 1990s. The relationships between
IFIs and governments have been described as a ‘ritual dance’ (Kahler, 1992), with
endless conditionalities and hence resistance to reforms, and a ‘game’ subject to
permanent negotiations, which has been coined as the ‘politics of non-reform’, or
‘politics of permanent crisis’ (Van de Walle, 2001).
In the 1990s, theories of ‘state failure’ emphasised the impact of geographical and
structural characteristics: states have been explained via, e.g., initial conditions and
endogenous outcomes of geography and demography. ‘State failure’ is here its
incapacity to provide public goods, e.g., law and order, contract enforcement or
infrastructure. As shown by Herbst (2000), SSA is constrained by low demographic
densities, which prevent the construction of state authority in a context of scattered
populations. With abundant land, precolonial states were not determined by competition
over land, power was not territorial, and exit options were always possible: states were
therefore built through loyalties, shaped by the costs of expanding power and focused
on centres rather than on boundaries. After independence, boundaries were set by the
colonial powers, and political leaders were early affected by challengers and instability.
Moreover, Herbst underscores that these problems were compounded by those of land
tenure. The emphasis on initial conditions and the endogeneity between the state and
institutions, e.g. inequality, in relation with geography is at the core of several analyses
of development paths, e.g. the divergence between North and South America (Sokoloff
and Engerman, 2000).
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2. The relationships between state intervention and growth: the
evidence from Asian ‘developmental’ states
The concept of the ‘developmental state’ and the crucial role of public policies in
East Asia
Rodrik (1997) underscores that is impossible to understand the East Asian growth
“miracle” without acknowledging the role that government policy played in stimulating
private investment. The so-called ‘developmental states’ of East Asia have shown that
states that are capable of intervening effectively in an economy. This intervention,
however, does not mean that states would ‘own’ the economy, e.g. via nationalisation of
the country’s wealth. It does not mean either that states heavily tax the economy and
productive activities, income and wealth, or implement wide redistribution of these
revenues, like, e.g., European welfare states, especially under the form of universal
social protection.
The concept of ‘developmental states’ is a seminal concept, which has been elaborated
for explaining growth in East Asia late industrialisers - Japan, Korea and Taiwan (and
later, Hong Kong and Singapore), despite the diversity of their industrial structures –
e.g., small firms in Japan and Taiwan vs. large conglomerates in Korea (Johnson, 1982;
White, 1988; Amsden, 1989; Wade, 1990; Sindzingre, 2004a for a review). Through an
original mode of intervention, this concept confirmed the key role that was allocated to
the state in development by theories after WWII), exploring the conditions and
appropriate policies for taking off and sustained growth at early stages of development e.g. by Rosenstein-Rodan (1943) who emphasised the existence of spillovers, the
importance of coordination for growth, the possibility of low equilibria and poverty
traps (Hoff, 2000; Bardhan and Udry, 1999).
A key lesson of developmental states is that growth may be an outcome of ‘heterodox’
policies and state intervention in the economy – and today the debate has extended to
China and its public policies. Although government’s intervention varied from country
to country, common features were active and targeted industrial policies, the creation of
‘distortions’, targeted taxation, trade protection, limitation of foreign shareholding,
incentives for the banking sector and firm financing, training in technology, an
emphasis on education, a technically competent bureaucracy, the capacity to build
coalitions and cooperation among the various agents of an economy. They grounded
their industrialisation on learning processes in order to industrialise and climb the
technology ladder, as ‘entrepreneurial’ states (Wade, 2000). From the 1960s to 1980s
there was a sharp increase in the contribution of manufacture to growth: in Korea from
14 to 30%; in Taiwan, industrialisation was driven by small and medium enterprises and
moved from labour-intensive exports to high technology exports from the 1980s.
A key issue is that state intervention and active industrial policies were oriented towards
export performance, based on a model of growth based on export-led growth, but
always conditional to growth: growth was a key aim. Developmental states have used
heterodox economic policies, and even political rent-seeking - for the Korean chaebols
(the large conglomerates) or the Japanese zaibatsu and keiretsu - but these public
policies were tuned to sanctions provided by international markets, i.e. export
performance: i.e., market-preserving regarding external markets, but market
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‘distortions’ at the domestic level. Growth of South Korea, for example, has been
supported by state intervention that has not been market-preserving at the domestic
level – such as, e.g., heavy intervention in tariffs and subsidies (e.g. subsidised interest
rates). State-created rents were an instrument for industrial development, through a
limited number of conglomerates (chaebols). Export led growth has been a model
grounded on autonomy, even if Asian states are based on the model of export-led
growth and strongly dependent the situation of the rest of the world: their growth stems
from domestic autonomous policy decisions. Industrialisation strategies were
characterised by long-term flexibility while relying on short-term, rigid, regulatory
measures aimed at encouraging the strengthening of institutions: ‘flexible rigidities’ as
coined by Dore (1986) for Japan.
Developmental states questioned the neoclassical paradigm, that economic development
is achieved through competition and liberalisation. The model of the developmental
state is a challenge to the assumptions of neoclassical economics, e.g. market efficiency
and minimal role of the state. Developmental states showed that ‘statism’ is not
inherently rent-seeking. Developmental states were built on an economic
complementarity between the state and the private sector, via credibility and reputationbuilding – credible state and policies, and virtuous cycles where growth and successful
export-oriented strategies reinforce government credibility and thus investment. Once
the state has achieved development, state intervention consists of directive policies,
rather than directly investing in the economy (Huff et al., 2001). For Amsden (1997),
production is a concept that has been neglected by the neoclassical literature in
analysing the state’s role in economic development, and ‘market failures’ caused by
state intervention are less relevant when the focus is on production and not on exchange.
In addition, developmental states highlight the role of state intervention in financing
industrialisation through the policy-based mobilisation of agricultural savings
(Teranishi, 1997), in contrast with SSA and Latin America. The pattern and degree of
intersectoral transfers of agricultural savings to industry has a profound influence on the
process of industrialisation through their effects on political and macroeconomic
stability. Teranishi shows that there were few differences between SSA, East Asia and
Latin America in terms of taxation of agriculture, but there were large differences in
terms of infrastructure investment in agriculture – more than policy-based resource
shifts from agriculture. Developmental states showed that growth is a successful shift
from agriculture to industry that is achieved via state intervention, and they gained
credibility due to agricultural development and the increasing of the size of domestic
markets. As revealed by Thorbecke and Wan (2004), East Asian governments showed
that the major mechanisms for obtaining the resources needed for industrialisation were
intersectoral transfers from agriculture: the agricultural sector would generate a surplus
that finances industrialisation. Another crucial mechanism is the spread of primary
education throughout rural areas: hence the processes have consisted of the
development of non-farm activities, then migration, then labour-intensive industry, then
outward-orientation and industrial policies.
Indeed, education and training, particularly within the civil service, were pivotal
strategies, together with the minimal use of foreign expatriates and the expansion of
infrastructures, policies being oriented not only towards education, but also equality
(Bourguignon et al., 1998 on the example of Taiwan). Inequality has been reduced not
12
via large redistributive transfers stemming from high levels of taxation and revenue
extraction, but via policies such as land reform and promotion of primary education that
redistributed assets and reallocated factors: in Korea, e.g., these policies took the form
of the introduction of high-yielding varieties in the agricultural sector, the promotion of
upward mobility and the building of middle classes via education (World Bank 2004;
Kim 2006).
Some original features: taxation, social protection, political objectives
The ‘developmental states’ (Korea, Japan, Taiwan) were characterised by the absence of
natural resources. Auty (2001) has suggested a relationship between the presence of
natural resources and lack of growth or corruption, while the absence of natural
resources fostered growth and modern ‘Weberian’ types of states and bureaucracy.
Another key point is that public policies were policies providing incentives, and not
aimed at ‘owning’ the economy, e.g. via large taxation, spending and redistribution, or
nationalisation, or recycling the country’s wealth. Developmental states did not rely on
high levels of tax collection and massive redistribution and transfers. As shown by
Knowles and Garces-Ozanne (2003), state intervention cannot be assimilated to
government spending in Asian states: it mostly took the forms of instructions regarding
what to produce as well as economic and political incentives – subsidies, changes in
resource allocation, relative prices, etc.
Developmental states were not welfare states, European style. The state did not provide
social security of the kind set up in European welfare states. Many functions that are
achieved by the state in welfare states, e.g. social protection, were achieved by the
private sector and households. Social protection relied on networks, and an important
feature is that these networks were aimed at being productive and generating wealth and
profit (Sindzingre, 2005). Social security was provided by a combination of state
institutions, markets and family structures - the missing links between the first two - that
also function as production units and safety nets (Gough, 2000a). The coalescence
between the family structures and public institutions of developmental states has been
described as a ‘productivist’ welfare regime in which social policies are subordinate to
economic growth objectives and policies (Gough, 2000b).
The concept of the developmental state has explained growth performances of East
Asian countries as resulting simultaneously from a specific combination of economic,
political and institutional structures, which takes place in a given space and time.
Developmental states show the importance of historical trajectories, of the existence of
a strong state and a government having a clear conception of economic development.
This is more than a trade strategy: they are the expression of a long-term dynamic
perspective in managing industrial transition. Developmental states demonstrated that
ingredients of growth cannot be considered in isolation: alone, each feature of Asian
developmental states did not automatically lead a country to growth. E.g., the
coordination between public and private agents can amount to mere collusion in some
contexts and a condition for development in others (Shafaeddin, 2005).
Politics played a crucial role in the shaping of developmental states: growth was
instrumental for building political legitimacy. At the time of the catching-up, from the
13
1960s onwards, rulers were not democratic (as in South Korea). Public policies were
built around long-term relations between political power and the private sector, e.g.,
banks and public and private firms – Dunning’s (1997) ‘alliance capitalism’.
Simultaneously, developmental states have given priority to the autonomy of the
technocracy vis-à-vis political power. Public policies had not only the objectives of
enhancing the functioning of markets, but also creating suitable political conditions. In
Korea for example, the policies that led to growth have been explained as firstly a result
of political considerations that largely relied on exchanges of bribes between state and
business and ‘money politics’ (Kang, 2002): corruption remains pervasive (‘crony
capitalism’), but it is contained as the rulers pursue the objective of growth: growth is in
their interests as it provides them with political legitimacy. Similarly, governments
pursued social policies and built up social welfare programmes for domestic political
motives, i.e. the desire of governments to strengthen their weak legitimacy, as in the
case of Korea (Kwon, 1999). Social policies were based on “productivism, selective
social investment and authoritarianism” and subordinated to the simultaneously
economic and political objective of growth (Kwon, 2005). Likewise, the more
inequality was reduced, the more governments’ policies could be legitimated
(Sindzingre, 2009b).
The critique of the model of the developmental state by the international financial
institutions and the East Asian financial crisis
The IFIs did not agree with the idea that these features that would build a concept of a
‘developmental state’ were the factors of growth of East Asian countries, as their
policies diverged from the reforms that the IFIs recommended to developing countries
in the 1980s and 1990s, e.g. liberalisation, privatisation, and the underlying paradigm
that liberalisation will be conducive to growth. The World Bank launched in 1993 a
report explaining its own version of the factors of growth in East Asia, ‘The East Asian
Miracle’. Preceding the World Bank World Development Report 1997 rehabilitating the
role of the state, this report reinterpreted economic policies and growth in
developmental states as outcomes of ‘market friendly’ state intervention. In this view,
government intervention is useful when it corrects market failures: it can make some
people better off (by correcting the market failure) without making anyone worse off.
Japan, which could be considered as an example of a developmental state, disagreed
with some views of the report, which has been criticised as being biased in order to
confirm the positive effects of reforms inspired by the neoclassical paradigm, i.e. the
minimising of state intervention and liberalisation. As shown by Amsden (1994), the
World Bank attributed the East Asian ‘miracle’ to high saving and investment rates,
expenditures on education, and exports: however, the latter were anchored in microinstitutions that exhibit pervasive state intervention. For Amsden, East Asia created
competitiveness by subsidising learning (Lall, 1994), and the market failures that affect
industrial development were addressed by the industrial policies of Japan or South
Korea.
In 1997-98, East Asia was destabilised by the ‘Asian financial crisis’, which started in
Thailand in July 1997, then affected the whole of East Asia. The Asian crisis affected
developmental states, when under the pressure of the IMF they reduced state
14
intervention and relative protection through targeted subsidies and exonerations: e.g., in
South Korea, when it liberalised its financial sector in the years before the crisis. Korea
and Taiwan implemented some liberalisation in the 1980s when they suffered from
declining exports, increased debt burden and an increasing current account deficit. As
underscored by Weisbrot (2007), the Asian crisis showed the dangers of sudden
speculative reversals of international capital flows, which precipitated the crisis, and the
problem of ‘contagion’ and herd behaviour of investors, which resulted from IMFrecommended capital account liberalisation. The IMF reacted to the crisis by
prescribing even more trade and financial liberalisation, failing to act as a lender of last
resort, although it was most needed.
For the IFIs, the Asian crisis refuted the existence of a ‘developmental state’. After the
Asian crisis in 1997, the original modes of alliance characterising developmental states,
e.g. in South Korea, between the banks and the chaebols were presented by the IFIs as
examples of ‘bad’ corporate governance and corruption. The Asian crisis was said to be
an outcome of the weaknesses of the ‘developmental state’ model. Capital controls and
targeted protection were causes of inefficiency: e.g. limitation of foreign ownership in
the banking sector, and capital controls were feeding cronyism and corruption (Johnson
and Mitton, 2001 on cronyism in Malaysia). In contrast, it has also been argued that
heterodox policies and capital controls have been efficient, and even more than financial
openness: capital controls helped some Asian countries to get out of the crisis rapidly
(Kaplan and Rodrik, 2001), such as in Malaysia.
China: a growth driven by government as well as trade and industrial policies
The nature of government and role of state intervention in the growth of China is the
matter of an abundant literature, and many lessons for other developing countries can be
drawn from China’s spectacular growth since the 1980s. When China started its reforms
in 1979, it demonstrated the success of heterodox and developmental policies and
institutions. As shown by Aglietta (2009), Chinese reforms have been based on 3 key
principles: the economy must produce wealth and in a efficient way (“catching up with
the West”); the state must secure substantial property rights; the state must produce
public goods and be the engine of a endogenous type of growth. Another commonality
with earlier developmental states is that this model of growth exhibits an intrinsic
political dimension, with the Party controlling the political system. For Aglietta, this
model of reform has been based on a simultaneous transformation of economic
structures and state institutions, relying on gradualism (i.e., not a ‘shock therapy’ as was
applied in, e.g., Russia after the collapse of the Soviet Union), which has been
supported by the continuity of the political leadership and hence a long-term view of
reforms, as well as pragmatic trial and error. Aglietta, however, notes that export-led
growth entails problems, especially a distorted price structure, as fiscal exonerations are
artificial incentives to external trade, which is also a problem of the industrial policies
implemented by the Asian developmental states.
However, what is common to ‘developmental states’ and China is government
intervention, with the government having a commitment to preserving market
incentives. As highlighted by Weingast et al. (1995), China's success relied on types of
political reforms that provided credible commitment to markets and were based on
15
institutionalised decentralisation. The latter has fostered competition in product markets,
but also among local governments for labour and foreign capital, which in turn
encouraged local government learning with new forms of enterprises and regulation; it
has provided incentives for local governments to promote local prosperity and protected
local governments and their enterprises from political intrusion by the central
government.
Similarly, for Qian (2002), China has grown despite the absence of institutions such as
an independent judiciary and private property rights, although institutional economics
views them as positively correlated with growth. China’s reforms consisted in
institutional changes concerning markets, firms and the government, which built
‘transitional institutions’. The success of these institutions, for Qian, relied on their
capacity to achieve simultaneously two objectives: the improvement of economic
efficiency via the provision of incentives and competition, and reforms that were
compatible with the interests of those in power. China elaborated an original pattern of
firms: the Township-Village Enterprises (TVEs) were associated with non-conventional
ownership forms, based on the local government control of firms, in contrast with
private or national government control. Qian emphasises that the model of growth
adopted by China succeeded because institutional development fitted into the initial
conditions and was compatible with the interests of the ruling groups. This may be
compared with Botswana, where, in contrast with many SSA countries, imported
institutions were consistent with the political interests of the people in power. China’s
growth highlights the context-specificity of economic and political outcomes, which
may not come out in cross-country regressions, and the success of ‘heterodox’ public
policies.
In addition, China’s growth and heterodox public policies in the 1980s and 1990s were
associated with a sharp reduction in poverty rates: - 1.9% point per year over 19812004, vs. 0.1% in SSA, despite negative aspects, e.g., the rise in inequality. This is
acknowledged by the World Bank: for Ravallion (2008) as well, China’s growth and
poverty reduction may be explained by the improvement of productivity in agriculture
and a strong state and civil service.
3. Contrasting with state capacity in Sub-Saharan Africa: different
constraints and the mixed effects of reforms
Some features appear to be common to developmental states and Sub-Saharan African
states, e.g., in the phase before the catching-up, limited capacities, especially
redistributive ones, low tax/GDP ratios and a model differing from that of European
welfare states, as well as a strong dependence on global demand and foreign direct
investment - hence the volatility of investors perception -, and the overlapping of
private and public interests. While it has been argued that developmental states were
developmental because they had no natural resources (Auty, 2001), the second wave of
high-growth Asian countries have relied on natural resources and their rents in the case
of South-East Asia. Behind these commonalities, however, there are striking
differences.
16
The problems of state formation after independence
An important difference of SSA states with East Asian states at the time of their
catching-up (in the 1960s) is the problem of state formation they were confronted with
at the time of their independence (also in the 1960s). In phase with the prevailing
paradigm in development economics at that time, the post-independence period was the
period of the ‘big push’, i.e. government-promoted investment programmes in domestic
infrastructure and inter-related industrial investments, and active government
intervention.
A crucial problem for state formation in SSA, which had an important impact on its
countries’ economic trajectories, is the political instability that followed the period of
independence. Posner and Young (2007), emphasising the negative impact of political
instability, showed that nearly 3/4 of the African leaders who left power in the 1960s
and 1970s did so through a coup, violent overthrow, or assassination – the good news
being that in the 1980s, this dropped to below 70%, and by the 1990s it was surpassed
by the share of those who peacefully left power. SSA leaders were 2 to 3 times more
likely than other leaders in the world to leave power by violent means in the 1960s,
1970s, and 1980s, a period that was followed by an increasing institutionalisation of
political power.
Another constraint is that after independence, the post-colonial state has been
confronted with problems of state-building. The latter has been achieved via the state
being a main owner of national assets and the main employer. Public employment has
progressively represented the largest part of total non-agricultural employment: in some
countries, 70% at the end of the 1970s. Governments became the first employers in the
formal sector and progressively, the ‘employers of last resort’. In the context of the
weakness of local private firms at the time of independence, especially in the industrial
sector, public enterprises were created in all economic sectors – industrial, financial and
so on, e.g., development banks. Public marketing boards were created as interfaces
between producers and international markets, as well as mechanisms of redistribution
and indirect taxation. Post-colonial state-building has also been faced with centrifugal
forces (ethnic, territorial, political parties), and the necessity to build key infrastructures
– e.g., ports, roads -, for which governments had to borrow, while being obliged to
focus also on social objectives, and projects with social objectives are likely to have a
low profitability’.
An important issue, which highlights clear differences between developmental states in
East Asia and SSA countries, refers to the relations between the private sector – local
and foreign – and the state. Broadly, the ‘alliance capitalism’ of Asian developmental
states has contrasted with a relative antagonism between rulers and private
entrepreneurs in SSA, though the models obviously differed across SSA countries: the
private sector has often been a creation of political rulers, as, e.g., Côte d’Ivoire, with
private entrepreneurs being ‘clients’ of political rulers. Private wealth accumulation has
often been perceived as a threat by rulers, or may have developed both via and outside
state patronage (as, e.g., in Ghana) (Sindzingre, 1996).
17
Ravallion (2008) also underscores that SSA has been confronted with constraints that
were absent in China: SSA countries tend to have higher inequality, higher dependency
rates and lower population density. As shown by Herbst (2000), relative land abundance
reduces inter-country conflict: in Europe it built strong states, but in SSA colonial
partitions did not foster cohesive states. In addition, high density stimulates
technological innovation, and low population density also makes it more expensive to
supply basic infrastructure, such as roads.
The question remains as to whether developmental states would have been possible in
other developing countries, e.g. in low-income countries. Some SSA states exhibited
similar ingredients, but rulers have been absorbed by the politics of nation-building
(Mkandawire, 2001). Botswana is often quoted as an example of a successful state
(Acemoglu et al., 2001), though the political and economic determinants of this success
do not appear entirely comparable with those underlying the taking-off of South Korea
or Taiwan. For Robinson and Parsons (2006), for example, Botswana became a legalrational state because political elites attempted to defensively modernise in order to
maintain their independence, and their investment in the most important economic
activity, ranching, has been a strong incentive to promote rational state institutions.
Constraints on state capacity differentiating African states
developmental states: savings and investment
and Asian
The persistence throughout the 20th century of the model of the ‘small open colonial
economy’ (Hopkins, 1973), i.e. the import of manufactures and the export of primary
commodities is a key characteristic of SSA countries. Most SSA countries were
agricultural, but contrary to East Asia, they failed to promote industrialisation on the
basis of farm production. In the industrial sector, the import-substitution process did not
lead to the development of manufacturing exports, and SSA countries remained plagued
by the lack of diversification (UNCTAD, 1998). In SSA, the real resources available to
government remained constrained by the growth of export earnings and mainly
restricted to trade taxes, which are subject to the instability of international markets.
The limitations of this model, which fully revealed SSA’s external vulnerability,
became apparent with the decline in commodity prices and SSA terms of trade, as well
as the external shocks in commodities prices of the 1970s (1973, 1979, 1986) and the
debt crisis (1982). Fiscal and current account imbalances increased, as well as public
debt. SSA is an example of an important causal mechanism of growth or stagnation, of
virtuous or vicious circles - ‘poverty traps’- that are caused by investment and savings.
The latter indeed constitute a crucial factor of the difference between the trajectories of
Asian developmental states and SSA countries.
Akyüz and Gore (2001) revealed that SSA states received significant investment after
independence, but could not sustain it and trigger a virtuous growth circle, failing to
achieve a complementary increase of savings and exports Investment in Asia rose from
the 1960s to the 1980s (from 10-15% of GDP to 30-40%), while it declined in SSA,
being over the period 1990-97 at 17% of the investment levels of the 1960s. Akyüz and
Gore emphasise that as SSA, Asia also depended on capital inflows and investment
depended on foreign saving: but in Asia, investment was accompanied by a faster
18
increase in domestic savings, while in SSA, savings lagged behind investment, with
investment increasingly dependent on external resources. This is shown by UNCTAD
(2007) (see figures and table in annex). Similarly, exports rose faster than GDP in Asia,
not in SSA. In SSA, the IFI adjustment programmes of the 1980s did not prevent the
investment slump and failed to establish a sustained accumulation process linking
investment with savings and exports.
A key constraint on state capacity and public policies in Sub-Saharan Africa: the
resilience of commodity-based market structures
Commodity markets and prices are subject to two key problems. Firstly, as showed by
Maizels (1984; 1987; 1994) in line with the theories of Raul Prebisch and Hans Singer,
the decline of commodities’ prices relative to those of manufactures is a challenge for
countries depending on primary commodities for their export revenues. Secondly,
commodity markets and prices are intrinsically unstable. Maizels revealed the
theoretical reasons for the deterioration of the commodity terms of trade over the longrun: the low price-and-income-elasticities of demand for commodities as compared with
manufactures; the technological superiority of developed countries and the economic
power of their transnational corporations, which allow these countries to capture the
profits in trade with developing countries; and the asymmetrical impact of labour union
power in developed countries and labour surplus in developing countries on the division
of the benefits of increased productivity.
At the time of their independence most SSA states were confronted with heavy
economic constraints, the most important of which being the constraint of the market
structure that was built over the 19th and 20th century by colonial trade, based on the
production and the export of commodities to colonising countries, together with limited
industrial sectors and a large agricultural subsistence sector, and therefore an excessive
reliance on natural resources. This was the case at the time of colonisation and is still
the case today – Hopkins’s perennial ‘small open economy’ model.
According to the World Bank World Development Indicators (2004, 2007), in 2005,
food represented 15% of the value of merchandise exports; agricultural raw materials,
5%; fuels, 36%; ores and metals, 10%; manufactures, 33%. This IMF estimates that oil
represents around 50% of SSA exports. The resilience until the 21st century of the
colonial structure of production and trade, the dependence on primary commodities for
their exports, and the lack of structural transformation are indeed key characteristics of
SSA states. The longevity of this market structure is considered as a root cause of their
economic stagnation, their weak developmental dimension and the lack of commitment
of rulers to development.
Commodity dependence is a problem is it is often associated with export concentration:
countries are excessively dependent on very few commodities for their exports, and
hence the instability of their prices cannot be mitigated by other exports as would be the
case in more diversified economies. UNCTAD (2008a) shows that more than half (78)
of all developing countries rely on 4 commodities for 50% of their exports earnings;
31% rely on 4 commodities for more than 75% of their export earnings. UNCTAD
defines the dependency rate as the average share of the 4 main commodity exports value
19
as of total exports value for the period 2003–2005: if the dependency rate is above 50%,
it implies that more than 50% of national earnings from exports come from the 4
commodities. Such countries are highly vulnerable to commodity market fluctuations.
The highest dependent countries with a dependency rate above 80% are West African
countries and Western Asian countries, because of their exports of petroleum.
Apparent commonalities, but differences in fact: taxation and political economy
A trait that could be common to the developmental model in its early phase of the
growth process and SSA states is that state capacity, as represented by its capacity to
extract, invest and redistribute national wealth, was limited, far more than European
welfare states where this recycling sometimes amounts to half of the GDP: they relied
on levels of taxation that were limited. A low share of public revenues in the GDP, the
‘tax ratio’, characterises developing countries, with government spending increasing
with per capita income – this association being coined the ‘Wagner Law’.
The ratio of revenue to GDP (including non-tax revenues) in the low- and middleincome countries in the East Asia-Pacific region averaged 12% in 1990 and 11% in
2003, which is close to that of low-income countries (14 and 12%) (World Bank World
Development Indicators 2004, 2005); it was 17% in South Korea in 1980 and 1990, and
23% in 2004 (World development Indicators 1998, 2004, 2006). In low-income
countries the tax ratio (tax revenue/GDP) was around 15% in the period 1997-2001 and
rose by only 0.5 points in the past decade. According to Gupta et al. (2005) and the IMF
(2005a, b), in SSA, tax revenues represented 16.3% of GDP in the early 1990s and
15.9% in the early 2000s (Sindzingre, 2007).
The colonial structure of trade and commodity dependence that characterised SSA has
been associated to a taxation model, which is very vulnerable to the vagaries of the
international environment and external shocks and hence very prone to fiscal
imbalances. Commodity prices are in essence volatile, and this created serious
constraints on the capacity of states to intervene in the economy. A crucial problem of
state formation in SSA after independence was therefore its fiscal capacity, i.e.
redistribution capacities.
The commodity dependence and distorted structure of exports entail an excessive
dependence of revenues on a very limited number of commodities (see graph in annex).
This is particularly the case as, in many low-income countries, revenues depend on
trade taxes or the taxation on the extraction of natural resources. As these governments
have a limited capacity of tax collection, they rely much more on ‘easy to collect’ taxes
(e.g., tariffs, royalties on extraction activities) to ‘hard to collect’ taxes (VAT, income
tax) (Aizenman and Jinjarak, 2006), in contrast with East Asian states that achieved an
industrial exports-led growth. Therefore, the intrinsic volatility of these commodity
prices implies for states the volatility and unpredictability of their earnings. As
underscored by UNCTAD (2003), government revenues in SSA countries depend
heavily on taxes levied on exports and imports: fiscal earnings are thus highly
vulnerable to changes in the value of export earnings (UNCTAD, 2003). This makes the
management of fiscal deficits and debt extremely difficult and destabilises the building
of state capacity (Sindzingre, 2009a). Moreover, since the 1980s, global trade
20
liberalisation and competition to attract foreign investment intensified the pressure for
lowering taxes (trade taxes and taxes on corporate profits, World BankPriceWaterhouseCoopers, 2008). State capacity is however necessary to enhance tax
collection and achieve tax systems that rely on more stable earnings (e.g., on VAT):
there are the ingredients of a vicious circle and a poverty trap – commodities unstable
earnings, hence weak state capacity, hence easy-to-collect taxes on trade and
commodities, hence unstable earnings.
In addition, behind the apparent commonality of limited levels of revenues and
spending, taxation in SSA was grounded on political economies that differed from those
of developmental states, and were often based on predation and rent extraction. States
have been authoritarian in SSA since their independence, which could constitute a
commonality with East Asian states, which are often deemed as authoritarian (e.g.,
Korea at the time of economic take-off, Singapore, or China). The type of
authoritarianism prevailing in SSA, however, exhibited a different content. The time
horizon of rulers – long-term or short-term - differed. Many regimes that stabilised after
independence - often characterised by the desire of rulers to stay in power at any cost
and single party regimes - can be even coined as genuinely anti-developmental
(Robinson, 1996). As famously shown by Olson (1993), historical dynamics coupled
with economic and political environments made it so that many SSA rulers were of the
short-time type (predation rather than growth; rents rather than developmental taxes),
which contrasts with Asian states. Also, redistributive policies and conflicts
consolidated very inegalitarian institutions.
Corruption could be a commonality, as it is pervasive in both regions. As in Asia, in
SSA the state was providing little social security or welfare, which may foster the
reliance of individuals on patronage and corruption. However, in SSA, in contrast with
other parts of the world, political and economic environments have been characterised
by uncertainty (Berry, 1993), which, combined with the lack of social security, has
incited individuals to invest in social networks where debts and obligations provide
social protection: this has fuelled corruptive behaviour, e.g., in the civil service, but in
contrast with Asia, these networks of obligations were often not grounded on profitable
and productive activities (Sindzingre, 2002; 2004b; 2005). All these factors have
fostered the formation of poverty traps in SSA.
Education in SSA has not been a key government objective and value as in Asia, and
IFI stabilisation and adjustment programmes of the 1980s eroded education systems
already plagued by limited resources and low public investment. Moreover, educated
people often obtained a job after independence in the civil service, but the economic
recession of the 1980s coupled with the IFI reforms contracted formal labour markets
both in the public and the private sector, while public wages were frozen. The industrial
private formal sector was not competitive vis-à-vis other developing countries, and in
the 1980s, the already limited industries and industrial employment were severely
challenged by trade openness reforms. Many educated people worked in the so-called
informal sector or were driven to emigrate. This diminished the value of education, and
therefore the prospects for an efficient bureaucracy, though Asian developmental states
revealed its pivotal role in the efficiency of public policies and growth.
21
The negative effects of external intervention and aid dependence on state capacity
These many constraints weighing on the capacity of SSA governments were not relaxed
or improved by the external financial support provided by the IFIs after the 1980s, when
the decline in the terms of trade in the 1980s induced unsustainable deficits, because
many of these constraints – at least the economic ones - were structural, e.g. commodity
dependence. The IFIs prescribed reforms aiming at minimising state intervention and
liberalising economies. The success of reform programmes over the 1980s and 1990s
has been mixed. In many countries, state capacity has been heavily constrained at the
economic level by commodity-based market structures and at the political level by the
fact the state was recent, destabilised by social fragmentation, secessions and struggles
for legitimacy. In the 1980s, the IFIs civil service reforms, as well as privatisation,
weakened this already weak capacity.
In non-oil low-income countries, together with level of revenues that were both low and
volatile, this combination of factors resulted in maintaining the dependence vis-à-vis
IFIs financing - what the IMF coined as the ‘prolonged users’, i.e. countries in need of
IFI external assistance over decades- and in some countries, an excessive dependence
on external bilateral aid. For example, comparing 1991–95 with 1970–75, for lowincome countries on average, aid as a share of GDP increased from 6% to almost 15%,
while private capital inflows (including FDI) fell from 2% to 1% of GDP (Morrissey,
2004).
External aid often had a negative impact and aggravated the existing constraints. It is
highly unpredictable and volatile, therefore not helping to build sustainable state
capacity and committed civil services, as well as supporting long-term public policies
(Bulir and Hamann, 2008). Aid has often over-burdened civil services and contributed
to their fragmentation, although the latter had a limited capacity (Easterly, 2003; 2006).
Aid dependence may also undermine institutional development and state institutions, it
erodes public revenue and the legitimacy of its collection and destabilises the
relationship between state and citizens: as shown by Moss et al. (2006), states which
raise a substantial proportion of their revenues from aid are less accountable, under less
pressure to maintain legitimacy, less likely to invest in effective public institutions.
These factors contributed to the lack of structural transformation in SSA, i.e. the
transformation of economies towards a model of growth that would free SSA aiddependent countries from external assistance and put them on a growth path based on
domestic autonomous policies, such as in Asian developmental states and today China.
Indeed, the maintenance of this dependence on aid over the ‘longue durée’ has been
avoided by developmental states (Korea, Taiwan) at the time of their take-off. As
underscored by Bräutigam (2000), Taiwan received high levels of aid from the United
States, amounting to more than 18% of GNP between 1953 and 1963. This aid,
however, lasted a short period of time, and due to a different geopolitical paradigm, aid
financed infrastructure and institutions that enabled Taiwan to increase production and
exports and enhanced its institutional capacity, thus reducing its need for aid.
This is why for UNCTAD (2007) SSA countries must increase and diversify their
domestic financial resources in order to reduce dependence on foreign aid, as well as
channelling these resources to productive investments. UNCTAD suggests the model of
Asian developmental states’ policies as the best way for SSA states to trigger a virtuous
22
circle of savings, investment and growth. With multilateral liberalisation and WTO
membership, however, developing countries today do not enjoy the room for manoeuvre
and the ‘policy space’ that were possible for Asian countries in the 1970s and 1980s.
The ‘policy space’, or ‘development space’, is shrinking (Wade, 2003).
Conclusion
The paper has thus presented the evolution of the thinking regarding the role of the state
in development economics and revealed that before the paradigm that prevailed from
the 1980s until the 2000s, which viewed ‘big government’ as a cause of economic
failure, the main theorists of development in the mid-20th century considered that the
state was the major agent of growth in developing countries and the key engine of the
taking-off process. The paper has then presented the main features of a model that has
demonstrated positive relationships between state intervention and growth, i.e. the
growth path that has been achieved by the Asian ‘developmental’ states since the 1960s
onwards. The spectacular growth rates enjoyed by East Asian countries show that active
public policies have a positive impact on growth: they consisted in industrial policies,
including policies regarding taxation and trade, which were linked to other broader
policies, e.g. regarding the structural transformation from an agriculture-based economy
to an industrial one, and to social protection and education.
These models of state intervention and public policies have finally been contrasted with
those that have characterised many low-income countries, via the example of SubSaharan African countries after independence in the 1960s. The paper has argued that
there may be apparent commonalities. Many dimensions of the state and policy choices,
however, sharply differed in SSA from those in East Asia. The paper has emphasized
the crucial role of different environments in SSA - differences in economic initial
conditions, market structures – especially commodity dependence -, political regimes
and external aid. They all strongly shaped state formation, state capacity, civil services,
the specific impact and efficiency of public policies. These many dimensions and the
way they combined with each other explain the mixed results of state intervention on
growth in Sub-Saharan Africa and the striking contrast with its outcomes in East Asia.
Therefore, contrary to the current conventional theories in development economics, a
key conclusion is that it is not state intervention per se that has a detrimental effect on
growth – which is confirmed by the generalised rescue plans provided by all developed
economies’ governments during the financial crisis of 2008-09, despite their claim of
the pre-eminence of the market. Certain features of a state, the legacy of its formation,
combining with certain historical, economic and political conditions, may induce a
negative impact; other features, of other states, which have combined with different
historical, economic, political environments, have had a positive impact on economic
growth.
23
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ANNEXES
Gross domestic savings in Sub-Saharan Africa, 1960–2005 (per cent of GDP)
Source: UNCTAD (2007), figure 1.
28
Gross domestic savings by developing regions, 1960–2004 (per cent of GDP)
Source: UNCTAD (2007), figure 2.
Gross national savings, gross domestic investment and exports in the Asian NIEs
and Africa, 1971–2005 (per cent of GDP)
Source: World Bank, World Development Indicators, online, May 2007. a 1960 only; b Including Singapore, which
became independent in 1963, having enjoyed self-government between 1955 and 1963; c Gross domestic investment
for sub-Saharan Africa (excluding South Africa); * Akyüz et al. (1998) from UNCTAD database.
Source: UNCTAD (2007), table 3.
29
Commodity revenues to total revenue, 2008 (ratio, in percent of total revenue)
Source: International Monetary Fund (2009).
Commodity dependence by geographical region, 1995–1998 and 2003–2006
(number of countries for which exports of commodities account for more than 50% of
total exports)
Source: UNCTAD (2008b), table 2.4.