State-Led Economic Development Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

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State-led economic development is an institutional approach to development emerging from cold war–era debates about how poor countries can achieve economic development. Drawn largely from the experiences of successful developing countries in Asia, state-led development is now a more coherently defined approach that late-developing countries draw on as they navigate the post–cold war era of economic globalization. Situated between the theoretical assumptions of laissez-faire economics and centrally planned command economics, the concept of state-led economic development begins with the claim that effective state institutions and deliberate policy interventions can contribute to a country’s capitalist-based development by guiding markets to achieve particular economic goals. Two assumptions under pin the philosophical justification of this claim: first, on one end of the economic spectrum is a basic mistrust of self-regulating free markets to achieve developmental goals; second, on the other end of the spectrum is a conviction that states are incapable of efficiently allocating production through a centrally planned mechanism and must rely on market incentives.

For proponents of state-led strategies, economic development (as distinguished from economic growth) is viewed as the expansion of the economy to increase the aggregate welfare of society and improve the standard of living of a country’s population. State intervention in capitalist markets through deliberate planning and responses to market changes—or what political scientist Atul Kohli (2004) refers to as a state’s “market-reinforcing behavior”—is therefore the central concern of a state-led approach to overall economic development. State led economic development is thus more than Keynesian-style macroeconomic management. It includes a measured role by the state to develop industrial policy and regulate trade and investment for the economic benefit of domestic firms and producers. Close ties between government and big business are a crucial feature of such state-led strategies, as is the close management of labor politics by the state.

In Theory And Practice

The ideas of Alexander Hamilton and nineteenth-century German philosopher Frederich List are considered early influences on theories of state-led economic development. The post–World War II rise in the liberal international trading system among industrialized countries, which viewed that state intervention is inimical to market-based development, and the rise of neo-Marxist dependency theory across the developing world, along with its emphasis on class influences rather than state autonomy, led to a decline in scholarly interest in the study of state-led economic development until the emergence of Asian economies in the 1970s and 1980s. Theorists have since used analytical approaches from comparative political economy, historical institutionalism, and statist (i.e., state theoretical) approaches to advance literature on the subject.

In practice, state-led economic development is most closely associated with the successful economic development of Japan and the newly industrialized countries of Asia, including post-1979 China, where state leaders have employed gradualism in transitioning from central planning to state-led markets. It is also correctly associated with the experiences—and more mixed results—of other developing countries such as Brazil, Mexico, and India, where attempts have been made under conditions of less state autonomy. Many development failures in the resource-based countries of sub-Saharan Africa are also attributed to bungled attempts of state-led economic development. Among economically advanced countries, forms of state-led economic development have evolved somewhat organically as social partnerships between state, business, and labor grew to define the political economy of European welfare states such as France, Sweden, and more recently Ireland. Japan’s economic downturn in the 1990s and the 1997 Asian Economic Crisis dampened enthusiasm for state-led development strategies, but mixed economies still prevail globally. Multilateral provisions established by the World Trade Organization in the 1990s now inhibit the use of certain policies associated with state-led strategies, however. In particular, the agreements on Trade-Related Investment Measures and the General Agreement on Trade in Services target specific practices states have used to favor domestic producers over foreign interests.

State intervention in the economy, involving close ties with big business, creates political hazards. In some cases, institutions and policies have been fashioned to benefit state elites at the expense of other groups and overall development. Where state autonomy is especially weak, or where economies are based heavily on natural resources, state-led approaches often succumb to rent-seeking, patrimonialism, and predatory behavior. Even in economically successful Asian countries, a consequence of state-led economic development has been ongoing revelations about high-level corruption among state officials collaborating with private-sector cronies. Politically destabilizing public corruption scandals involving presidents, prime ministers, and major political parties punctuate the recent political history of South Korea, Taiwan, Indonesia, and Thailand, for example.

Institutional Determinants Of Success

With respect to the state, theorists of state-led development do not view the state as a unitary actor but rather as a set of institutions embedded in history, culture, and various context specific influences. In observing the multiple contexts in which state-led development strategies are attempted, scholars vary in identifying the specific factors that push leaders to pursue a state-led approach. Some scholars, including Kohli, argue deeper historical factors, colonial experience, and cultural context influence the trajectories of states, whereas others, such as Stephan Haggard, identify more proximate factors, the “critical historical junctures” such as domestic economic crises and international economic shocks, as the key stimuli inducing a “politically motivated choice” by leaders to shift toward greater state intervention in the economy (Haggard 1990, 3–4).

Greater consensus exists among scholars on the significance of institutional arrangements in determining the success of state-led development strategies once they are adopted. Among the range of approaches taken by states, some form of indicative planning generally characterizes state-led involvement in markets. State authorities, intending to complement market forces and influence both the macroeconomic and the microeconomic environments, use indicative planning to facilitate more rational decision making among leaders of the private and public sectors in the pursuit of agreed-on national goals. The success of state-led economic development thus hinges on how the politics of a state is organized and how state power is used, or in other words, on the patterns of state authority that influence the economic context within which private economic decisions are made.

State planning, however, is not enough to determine successful development. In a multiauthored study dedicated to the question of successful development strategies titled In Search of Prosperity: Analytic Narratives on Economic Growth (2003), Dani Rodrik and colleagues demonstrate how the type and quality of institutions also influence the success of state-led development. The foundations of long-term growth, according to the study, are tied to how well economic incentives are aligned with social costs and benefits, a state’s bureaucratic capacity, the quality of its regulatory structures, property rights enforcement, law and order, and conflict management. The study’s findings also emphasize how “good institutions” must enable social and political stability, be “highly specific to a country’s circumstances,” and deliberately generate market-oriented incentives for current and future investors (Rodrik 2003, 10). Thus, the quality of institutions, not simply their creation or presence, influences the success of state-led economic development strategies in the long term.

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