Rethinking the Developmental State

Rethinking the Developmental State
Ha-Joon Chang
Faculty of Economics AND
Centre of Development Studies
University of Cambridge
Why bother? I
• If we define the developmental state narrowly
(a state that derives political legitimacy from
its record in economic development, which it
tries to achieve mainly by means of selective
industrial policy, as seen in East Asia between
the 1950s and the 1980s), there is no point in
continuing this talk
– Jordan is not Japan, South Africa is not South
Korea – End of story.
Why bother? II
• Ultimately, all experiences are unique and you cannot
really learn straightforward lessons from anyone else,
but there are still reasons to look at other experiences
– Other experiences shake us out of our usual assumptions about how
things work and what is possible (‘The Singapore problem’ - Reality is
often stranger than fiction.)
– Learning from other experiences, however ‘different’ they are, has been
an essential element in any development strategy.
• However, if we define the developmental state
broadly as a state that deliberately change the
structure of the economy in order to accelerate
economic development, examples abound (at least
three varieties – ‘Classic’, Scandinavian, and
Models of Developmental State I
• ‘Classic’ cases (Not just the East Asian countries,
but also France and Austria after WWII)
– Political hegemony by nationalistic, interventionist
Right (LDP in Japan, various military dictatorships
in Korea, Kuomintang in Taiwan, PAP in Singapore,
Gaullists in France)
– Planning/coordination by a ‘pilot’ agency (MITI in
Japan, EPB in Korea, IDB in Taiwan, Planning
Commission in France)
– Sectoral industrial policy
Models of Developmental State II
• Scandinavia
– Selective industrial policy and state promotion of
– Welfare state and labour market policies
• The welfare state reduced worker resistance to
structural changes,
• ‘Active labour market policy’ (provision of retraining and job search help) promoted reallocation of workers
• Sweden’s ‘solidaristic wage’ policy (equal
wages for same workers in different industries)
pushed out low-productivity sectors
Models of Developmental State III
– Before WWII, the home of developmentalism, if not
developmental state
• The ‘infant industry’ argument was invented by Alexander
Hamilton, the first finance minister of the USA
• The most protectionist country in the world most of the time
between the 1830s and WWII
– After WWII, the ‘hidden’ developmental state
• Between 1950-1990, the US federal government financed between
47% and 65% of national R&D spending, as against 20% in Japan
and Korea and 30% in Europe.
• R&D and public procurement for high-tech industries (computer
and the internet by the Pentagon, semiconductor by the Navy,
aircraft by the Air Forces, drugs and genetic engineering by the
National Institutes of Health)
• The US military as the most successful SOE in human history?
What kind of industrial policy?
• There is an increasing recognition that
industrial policy, if not necessarily a full-blown
developmental state, is necessary (even Mexico
• However, there is still a reluctance to adopt
‘developmentalist’ industrial policy, because
the prevailing view is that industrial policy
should be:
– in line with the country’s comparative
– export-oriented, rather than protectionist
– general (horizontal) rather than targeted
(vertical, sectoral)
Comparative Advantage? I
• In the short run, free trade may be good (in
most cases), as it allows countries to exploit
their comparative advantages and use their
resources most efficiently.
• However, in the medium term, saying that
free trade may be good is not the same as
saying that that ‘freer trade’ (or trade
liberalisation) is better.
– Limited malleability of productive resources
(infrastructure, physical capital, skills) means that
sudden and large-scale trade liberaliation can have
high economic costs, not to speak of social costs.
Comparative Advantage? II
• In the long run, you can – and should – defy your
comparative advantage and deliberately change your
underlying productive capabilities.
– No ‘natural’ reason why the Japanese should be good at
making cars or the Koreans should be good at making steel.
• After all, many of ‘comparative advantage’ activities
are the results of someone else’s industrial policy
– Coffee in Asia and Latin America (originally from Ethiopia
through the Arab world, brought by the Dutch and the
– Rubber in Malaysia (stolen from Brazil by the British)
– Tea in India and Kenya (stolen from China by the British)
– Cocoa in Africa (originally from Mexico, brought by the
British and the French)
Need to be export-oriented? I
• Export success is absolutely necessary for economic
– Economic development requires importing better
technologies, which requires foreign exchanges
• But, this is not to say that developing countries
should have free trade.
• Export success often requires significant industrial
policy even for comparative advantage-conforming
industries, as export markets have high fixed costs of
– supports for R&D and export marketing in agriculture in
the Netherlands and Denmark in the past (late 19th-early
20th century) and Chile since the 1970s.
– state export marketing agencies in Japan (JETRO) and
Korea (KOTRA) crucial in manufacturing export success
Need to be export-oriented? II
• Continuous success in export requires continuous
promotion of comparative advantage-defying infant
industries and the rejuvenation of ‘senile’ industries,
both of which require industrial policy
– “There are no condemned sectors; there are only outmoded
technologies.” (Pierre Dreyfus, French Minister of Industry, 1981-2)
South Korea
–‘50s: tungsten, fish, seaweed (based on ‘natural’ comparative advantage)
–‘60s – early ‘70s: wigs, T-shirts, shoes (attraction of labour-intensive
FDI); textile, transistor radios, plywood (support for local export-oriented
–mid-’70s to ’80s: basic steel, bulk ships, TV, PCs, cheap cars (ISI
through ‘Heavy and Chemical Industrialisation’)
–‘90s to today: expensive ships, semiconductors, mobile phones, tablets,
expensive cars (support for R&D)
Only horizontal industrial policy?
• The distinction between horizontal (nontargeted) industrial policy (e.g., R&D support,
infrastructure, education) and vertical
(targeted) industrial policy is false.
– In the real world, every policy choice you make,
however “general” it may look, has
discriminatory effects that amount to targeting
• R&D: some sectors do more R&D than others;
R&D funding is usually for specific
• Education: no such thing as “general” engineer
• Infrastructure: no infrastructure that can be
moved around and remoulded
Only correct for market failures?
• Sounds sensible, but it is not always a useful
• This is because different economic theories
have different expectations on what ideal
markets can do, and therefore what you see as
market failures depends on your economic
– In a dynamic economy with a lot of innovations,
there will be a lot of monopolies.
– Neoclassical economists would consider this a
situation of ‘market failure’, but Joseph
Schumpeter would have argued that this is a case
of ‘market success’.
Many different ways to ‘do’ a developmental state I
• Countries have used very diverse forms of industrial
• Even within East Asia, quite a lot of differences
– Japan : strong ‘pilot agency’ (MITI), close collaboration
with large local private sector firms (virtually no SOE in
manufacturing), highly regulated banking, virtual ban on
TNCs, promotion of SMEs
– Korea: Similar to Japan, but even more planned than
Japan (planning ministry, the EPB, controlled even budget),
some SOEs (e.g., POSCO) but mainly reliant on private
conglomerates (chaebols), less hostile to TNCs than Japan,
banks all state-owned until the mid-1980s, SMEs neglected
– Taiwan: friendlier towards TNCs, far more reliance on
SOEs (still produces 16% of GDP), SMEs promoted;
banks state-owned most of the time (as in Korea)
– Singapore: heavy reliance on TNCs and SOEs (produces
over 20% of GDP)
Many different ways to ‘do’ a developmental state II
• While having a powerful pilot planning agency
(EPB, Korea or CGP, France) is useful,
industrial policy can also be pursued by:
– a line ministry (MITI, Japan)
– a coordinating committee (IDB, Taiwan;
EDB, Singapore)
– sectoral agencies (NASA, ARPA or NIHs of
the US)
– SOEs (Singapore, Taiwan, France, Finland,
Austria, Norway)
Many different ways to ‘do’ a developmental state III
• Need for government agencies for special
– Public R&D institutes (Fraunhofer, Germany; NIH,
US; EMBRAPA, Brazil; KAIST, Korea; ETRI,
Korea; CORFO, Chile)
– Public ‘extension service’ (or consulting) agencies
for SMEs (IDB, Taiwan) or farmers (US, Japan)
– Export marketing agencies (JETRO, Japan;
ProChile, Chile; agricultural marketing board,
Denmark in the early 20th century)
Many different ways to ‘do’ a developmental state IV
• Need to have continuous dialogue with private sector
– Forums for dialogue with the private sector (Tripartite
commissions in the Scandinavian countries, deliberation
councils in Japan and Korea)
– Business associations (general or industry-specific) can
impose standards (especially regarding quality) and
monitor policy compliance of their members
• Public-private partnerships
– Fraunhofer (Germany): public R&D institute but provides
contract research and skills training for private sector firms
– Fundacion Chile (Chile): public-private sector joint venture
supporting innovation (critical in the development of the
salmon export industry)
Many different ways to ‘do’ a developmental state V
• Need to have long-term-oriented public sector
financial institutions and/or encourage private sector
banks to engage in long-term financing through
government policy (‘directed credit programmes’)
– State-owned universal banks (France, Korea, Taiwan,
– State-owned development banks/investment banks (KfW in
Germany, JDB in Japan, KDB in Korea, BNDES in Brazil)
– State-owned special-purpose banks (SMEs, agriculture,
– State-owned venture capital (SITRA and Tekes, Finland)
– Public R&D funding (especially important in the US, but in
many European countries too)
– ‘Directed credit programmes’ administered by private
sector banks (Japan)
Political Economy Questions I
• Successful industrial policy requires right “political”
conditions – leadership commitment to development,
the coherence of the state machinery, and the state
ability to discipline the recipients of its supports.
– Few countries have such conditions.
• But in the real world, successful countries are the ones
that have managed to find “good enough” solutions
to their political economy problems and went on to
implement policies
– Many of the ‘Classic’ cases (France, Korea, Taiwan)
– Partial successes of the past (Brazil and Mexico ‘30s-’70s;
Pakistan as Korea’s ‘teacher’ in the ‘50s-’60s)
– Today’s burgeoning cases (Ethiopia, Rwanda, Ecuador,
Political Economy Questions II
• In order to improve the political conditions, we need
to move away from the unrealistic ‘one-size-fits-all’
governance reform agenda and think concretely about
issues like:
– (i) how effective political visions can be formed and
deployed to inspire various individuals and groups to act in
a concerted manner
– (ii) how to build nations and communities out of groups
that may have very long history of hostility and mistrust
– (iii) how to work out social pacts and build lasting
coalitions behind them
– (iv) how to minimise socially harmful lobbying while
maximising the flows of information between the state and
the private sector
Bureaucratic Capabilities I
• “Industrial policy is particularly difficult and thus
requires exceptionally capable bureaucrats.”
• But, there is no basis for the assumption that
industrial policy is more difficult than other policies.
• Industrial policy does not require sophisticated
knowledge of economics, as often believed.
– The industrial policy-makers of East Asia were not
economists (lawyers in Japan and Korea, engineers in
Taiwan and China today), and what little economics they
knew was usually the “wrong” kind – Marx, the German
Historical School, Schumpeter.
• High-quality bureaucracies are not as impossible to
build as people think.
– France, Korea and Taiwan in the post-WWII period
Bureaucratic Capabilities II
• There is also “learning-by-doing” in policy.
– Without trying out “difficult” policies, capabilities
cannot be improved.
• The fact that something is “difficult” cannot be
a reason not to recommend it.
– After all, developing countries are routinely told to
adopt “best practice” or “global standard”
institutions used by the richest countries, when
many of them clearly do not have the capabilities
to effectively run such institutions.
Concluding Reflection: Isn’t this all too risky?
• A country – or a company or even an individual –
will never develop if it only does things that are not
risky (“If you are not failing, you are not trying
hard enough.”)
• Indeed, businessmen succeed exactly by doing things
that everyone else thinks will not work – that is called
entrepreneurship – so we should think the same
when it comes to the state.
• While it is very important to be realistic and
pragmatic in terms of how you reach your goals, you
need to be set ambitious goals (Japan-LA car

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