Human Development Report 2013 - UNDP

BOX 3.2What is a developmental state? Need it be authoritarian?The recent literature on developmental states has grown out of the experiencesof the East Asian “miracle” economies: Japan before the SecondWorld War and Hong Kong, China (SAR), the Republic of Korea, Singaporeand Taiwan Province of China in the second half of the 20th century.Recently, China and Viet Nam (as well as Cambodia and Lao PDR) can beseen as developmental states. Common traits include promoting economicdevelopment by explicitly favouring certain sectors; commanding competentbureaucracies; placing robust, competent public institutions at the centre ofdevelopment strategies; clearly articulating social and economic goals; andderiving political legitimacy from their record in development.That some East Asian developmental states were not democracies hasprompted many to think that the developmental state model is also autocratic.But evidence of the relationship between authoritarianism and developmentis mixed. Democratic countries such as Japan and the UnitedStates have functioned as developmental states. After the Second WorldWar France initiated planning by the Planning Commission, with sectoralindustrial policy led by elite bureaucrats and the aggressive use of stateownedenterprises. Since the 1950s, the Scandinavian countries have alsoacted as a type of developmental state, where political legitimacy is derivedfrom the welfare state and full employment rather than from rapid growth.The Swedish state developed strategic sectors through public- private partnerships(iron and steel, railways, telegraphs and telephone, and hydroelectricpower). It also provided targeted protection to support the emergenceof heavy industries, promoting research and development. Its welfare policywas closely integrated with strategies to promote structural change towardshigh-productivity sectors.The United States has a long history of being a developmental state, goingback to the early days of the republic. Alexander Hamilton, the first UStreasury secretary, is widely considered the father and inventor of the infantindustry argument. Between 1830 and 1945, the United States had some ofthe highest trade barriers in the world. In the same period it invested heavily ininfrastructure (Pacific railways, Midwestern canals and agricultural infrastructure),higher education, and research and development. Even after the SecondWorld War, when the United States had attained industrial supremacy, anddespite the rise of market fundamentalism, the developmental state survived.Block (2008) argues that the state has focused on translating cutting- edgetechnological research into commercial use through cooperation among a networkof people with high levels of technological expertise situated in stateagencies, industries, universities and research institutions. Developmentalismhas lived in the shadows of US policy because acknowledging the state’s centralrole in promoting technological change is inconsistent with the claim thatthe private sector should be left alone to respond to market signals autonomously.Yet, although limited in scope due to a lack of legitimacy, unstablefunding and other limitations caused by its “hidden” nature, the US developmentalstate has been quite successful. In many sectors, the United States hasdeveloped international competitiveness through public funding for researchand development and through public procurement for defence (computers, aircraft,Internet) and health (drugs, genetic engineering).Source: Evans 2010; Chang 2010; Edigheji 2010; Block 2008.Another characteristic of developmentalstates is their pursuit of industrial policies toredress coordination problems and externalitiesby “managing” comparative advantage. 15For example, the state may foster industriesbelieved to have a latent comparative advantageor seek to elevate those that are stuck in staticcomparative advantage. As a result, severalindustries that benefited from tariff protectionsubsequently succeeded in world markets. 16Nonetheless, it can be difficult to attributethe success or failure of a particular industryto specific trade policies because governmentinterventions are guided by multiple motives,from revenue generation to protection of specialinterests.Evidence across industries from studies of thebenefits of industry protection is ambiguous.However, there is a distinction between thegeneral desirability of “soft” industrial policies,such as improving infrastructure and technologicaladoption, and “hard” industrial policies,such as direct taxes and subsidy interventionsfavouring specific industries, whose efficacydepends on country circumstances. There is noglobal prescription, though: what worked inEast Asia may not work in Latin America.• Japan. Japan has long acted as a developmentalstate. By the 1870s, it had a groupof “well-educated, patriotic businessmenand merchants and government that werefocused on economic modernization”. 17Many subsequent reforms created the infrastructureof a modern country, including aunified currency, railroads, public educationand banking laws. The government builtand operated state-owned plants in industriesranging from cotton to shipbuilding.It also encouraged domestic production byraising import tariffs on many industrialproducts. Since the end of the Second WorldWar, Japan has undergone a fundamentaltransformation from aid recipient to donor(box 3.3).• Republic of Korea. Between 1960 and 1980,the Republic of Korea had significantOne characteristic ofdevelopmental states istheir pursuit of industrialpolicies to redresscoordination problemsand externalities by“managing” comparativeadvantageChapter 3 Drivers of development transformation | 67