How Important Is The Role Of The State In Development?

Abstract

This essay will consider the question of the importance of the state in development by arguing that the state has in almost all cases been of paramount importance in facilitating national development due to its authority, power and access to resources, among other benefits it confers, such as national cohesion. It provides a comparative analysis of different regions of the world and the efforts of their respective states in facilitating their development. It is the contention of this essay that in the past few decades the importance of the state in development has been unfairly disparaged by proponents of ideologies such as neoliberalism, globalisation, neomercantilism and the Washington Consensus. Analysis of both contemporary and historical case studies clearly shows that the state has been instrumental in facilitating development, often working closely with the private sector, and that state failure is one of the major reasons preventing nations from being able to develop economically.

Introduction

The twentieth century saw the rise and mass acceptance of the concept of the nation-state, a notion that originated from the 1648 Peace of Westphalia. Using the terms set out by Robert Cox (1981), the modern Western state has traditionally been defined as constituting material capabilities, ideas and institutions, which focus on the economy, nationhood and (democratic) government respectively. The limitations of this model in explaining methods of global governance are clear, as it describes mostly the Western mode of governance. While other countries have found success by eschewing this model and following their own paths to development, this essay will argue that the state continues to play an essential role in global development. A state is defined as the system of governance that administers a land polity or country. It will provide a counterargument to several modern viewpoints which have erroneously sought to diminish the historical and current importance of the state in development. Development is defined as the move away from an agrarian subsistence mode of life by establishing manufacturing or service industries in order to foster economic growth and an increased standard of living. It will argue that the state is of critical importance in administering the country that it presides over as state failure constitutes either weak states unable to uphold the rule of law or kleptocratic states in which most of a nation s wealth is siphoned off by its political and business elites, leaving the bulk of the population in dire poverty. It will then advance that the optimal model of development in the twentieth century was the East Asian developmental state, which saw the rapid industrialisation and economic rise of several nations in the region. While not applicable for all developing nations, it provides a pertinent example of the power that can be harnessed through an alliance of the state and private sector to achieve growth. The state s role in such a process is critical as no other body in society can ensure conformity in the same manner as the state, which holds a monopoly on violence and coercion, binds the nation together and has access to the resources and authority necessary to enact major change.

1.1 A reappraisal of neoliberal and neomercantile conceptions of the state

The state s role in development can be traced back to the thought of Max Weber (1947), who argued that the state has a monopoly over the legitimate use of coercion in a nation and can therefore enact desirable institutional innovation. The immediate post-war period saw a widespread rejection of laissez-faire economics in favour of state intervention, but after the post-war Golden Age of capitalism neoliberal economists criticised the role of the state. Neoliberals argue that while the existence of the state is essential for economic growth (North, 1981:20) its size and scope should be minimal, restricted largely, if not entirely, to protecting individual rights, persons and property, and enforcing voluntarily negotiated private contracts (Buchanan et al., 1980:9). Economic growth, equality and other financial concerns would all be seen to by the invisible hand of the market, an idea popularised by Adam Smith (1776:28). North went as far to argue that the state is the source of man-made decline (1981:20).

At a foundational level, market primacy espouses that state intervention in a sophisticated modern economy will fail due to lack of information and uncertainty economic planning is thus unfeasible when compared to the spontaneous market (Mises, 1929 Burton 1983). The default condition of a state which is not pruned back is in this neo-utilitarian view actively rent-seeking and allied with interests outside of the dynamism of the market (Evans, 1989:564). One of the most virulent critics of neoliberalism is Ha-Joon Chang who has sought in particular to challenge the market primacy assumption that underpins both neoliberalism and more recently neomercantilism which has since the 1990s become a dominant discourse in modern economic discussion. Kenneth Arrow (1971) argued that the state, as well as other non-market institutions, came about only after market failures became unbearable. Chang however has shown through historical analysis that the market was not an important, let alone the dominant, part of human economic life until the rise of capitalism and its emergence was almost always deliberately engineered by the state (2001:547). Current tendencies towards the market primacy assumption need to be carefully scrutinised. The state along with its multitude of powers and functions remains integral to the economies of countries around the world. Neoliberal recommendations such as free trade and free markets have to be underpinned by the state, which remains the prime institution among all others and the key engine behind development.

1.2 The continued importance of the state in spite of globalisation and the Washington Consensus

Scholars of globalisation nearly all agree that it erodes the power of states, according to Deanne Julius (1997:454). John Naisbitt argues that the nation-state is dead [ ] countries will become irrelevant and begin to fade away (Naisbitt 1994:43, 58). Others take a more moderate view: Susan Strange argues that the world market has outgrown the authority of the state and that it has become just one source of authority among several, with limited powers and resources (Strange 1996:190, 73). However, since its creation the system of the nation-state has ensured internal and external security, underpinned the legal system, funded welfare, created political structures and built the foundations of social and economic life. In the twentieth century, the role of the state actually expanded the state will persist because the need for it has grown and also because local resource pools and socioeconomic problems on which states are based are undiminished (Jones, 2000:268). Only the state, endowed with an independent judiciary, can respect human rights and provide justice, advance the good of the nation and protect the national interest. Bodies of global governance are not set on realizing one world government, but rather represent the interests of sovereign nation-states at an international level. Many critics of globalisation are not criticising it per se but rather the market fundamentalism of the Washington Consensus, an ill-advised one-size-fits-all programme for development which much of the developing world feels deprives it of making its own choices and even being forced to make choices that countries like the United States have rejected (Stiglitz, 2002:221-2).

One of the primary focuses of the Washington Consensus was a greater move towards democracy, particularly in the context of the collapse of the Soviet Union. However, the East Asian developmental states in particular have managed to successfully develop without the need for full implementation of democracy, often ruling with military backing and using state power to violently prevent strike action. According to Chang there is virtually no country (except probably Hong Kong) that has achieved the status of an industrialised country without at least some periods of heavy state involvement (2001:548). More recently, there has been a move towards New Institutional Economics which seeks to provide balance to theories of the state. Broadly, it is argued that markets themselves are institutions, that they do not exist in a vacuum but rather are regulated by the cultural and legal power of the state and that the structure of a society has a significant impact on both equality and economic performance. Most crucially, it offers a model in which the state can reprise a larger role in national development. The state is fundamental in enacting globalisation, an inevitable process which nonetheless is guided by the continuing power of the state in development, while national governments are incredibly important in providing a country-specific model of development, which may or may not draw on the Washington Consensus recommendations.

2 The role of the state in development and the impact of state failure

As this essay has already established, the role of the state is essential in providing justice, holding a monopoly over violence and enforcing property rights. In fact, these duties and responsibilities comprise the minimum remit for a state. While some economic historians have argued that development is impossible without the state (Bates, 2006:708 Wylde, 2017), others have contested this by arguing that other institutions are capable of assuming the roles of the state. Societies without strong cohesive states, like South Sudan, are able to achieve peace through families providing protection for their kinsmen fear of retaliation leads to personal security (Almond and Coleman, 1960). However, they fail to recognise the endemic poverty which is caused by this situation. Although these societies can achieve a degree of order, they will forgo development. As Adam Smith observed: Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government (Smith, 1776:7). Guido Tabellini highlights that there is a whole host of measures that governments could and should do: provide public goods, correct market failures, reduce inequalities in income and opportunities and stabilise excessive economic fluctuations. However, he argues that the real difference is made by the basic institutional and legal infrastructures that protect property rights, enforce the rule of law and prevent abuse by governments (Tabellini, 2005:283). It is the failure of the state to perform these critical duties, even at the most basic level, which can lead to economic backwardness.

Scholarship on Peru and Chile has shown that the scale of state intervention necessary to encourage development increases alongside the relative backwardness of the nation and demonstrates that more state entrepreneurship has a positive relationship to the development of markets (Moran, 1974 Becker, 1983). What the enduring presence of the state has shown is that it is the only body which has the power to manage both public and private institutions under it, which will lead to either successful development or inegalitarian kleptocracy. Quentin Skinner argued that the late twentieth century saw the emergence of a renewed state which was unequivocally the primary actor in society a distinct form of civil or political authority which is wholly autonomous, designed to regulate the affairs of the national community and brooks no rivals as a source of coercive power (Skinner, 1989:107). Far from rolling back the frontiers of the state, its centrality in society was in fact solidified in that era. The state is not just one institution among many others it is the core mechanism of national governance imbued with power and responsibility for national cohesion and progress.

With the increasing move away from the market primacy model, the state is implicated in the process of capital accumulation. Economic hardship is less easily explained as due to misfortune or market failure and thus the state becomes responsible for deprivation as well as oppression and thus more directly concerned with fostering growth (Evans, 1995:6). The bloated and corrupt centralised bureaucracies of neo-patrimonial African governments and Bangladesh s disproportionately large civil service are two contemporary examples of weak public sector organisations (Turner and Hulme, 1997:239). However, in countries such as South Korea, Japan, Taiwan and others they have ensured both national development and political stability. The state is essential in providing peace, justice, stability and often the means for development, including the sharing of risk needed for innovation, which has led many modern economists to conclude no state, no development (Bates, 2006). The state however must be concerned with the public good , national development for the sake of the benefits which it will confer on the people. Failure to do so will lead to state failure due to authoritarianism, corruption and kleptocracy.

2.1 State failure: Captured states, predatory states and the resource curse

The centrality of the state in development is shown clearly by the experiences of the two least developed regions of the world, Africa and Latin America. They are often governed by overly strong states which seek to enrich themselves at the expense of the people, kleptocracies in which the laws and whims of politicians and bureaucrats are as pervasive and powerful as those of the gods (Desai, 1991:3-4). Others are characterised by weak states which do not assume the role of the institution above all others but rather one among many. They are often vulnerable to strike action due to strong trade unionism which undermines the state s ability to implement policy. In general, state bureaucracy is often inflated beyond normal levels. The work of Ben Schneider has shown that in authoritarian Brazil the president appointed thousands of officials, compared to only dozens in Japan (Schneider, 1987:644). As in Latin America, the nation has remained dominated in large part by its landed rural elites 1.3 per cent of landowners hold 71.6 per cent of cultivated land (Todaro, 1997:305-8). The legacy of apartheid too has led to a similar situation in South Africa. Michael Todaro argued that unless low-productivity peasant agriculture can be transformed rapidly into higher-productivity farming in Latin America and Africa, the hundreds of millions of impoverished and increasingly landless rural dwellers face an even more precarious existence (Todaro, 1997:314). The main impediment to this is the state, which in many of these examples has been captured by the interests of the economic elites of society `the democratic governments of Brazil, India and South Africa have not dared tackle the land question head on: because of agreements which prevent them from doing so so as not to antagonise powerful landed interests and not to kill the goose which lays the golden egg of food production and agricultural export earnings (Leftwich, 2000:7). One of the flaws of the Washington Consensus is revealed here. Despite advocating democracy as a prerequisite for modern Western development, it fails to take into account that powerful vested interests can paralyze a drive for egalitarianism, societal change and thus development.

Another issue that affects the development of some nations is the resource curse . This originally was used to show the surprising disconnect between a country s natural resources and its economic growth but has recently acquired a political meaning. Economists such as Terry Karl have shown that resource booms lead to a transformation of political incentives (Karl, 1997). Provided with unprecedented opportunities to enrich themselves, public servants change from providers of services to beneficiaries of public revenues and use their power to access the private market. The state fails because it becomes a rentier state, a key criticism levelled by neoliberals, as it becomes primarily concerned with the consumption rather than generation of wealth (Chaudry, 1994). As a result, the non-resource economy stagnates due to both the extreme macroeconomic situation caused by the boom and the inefficient, corrupt public servants who abandon their role of securing property rights.

The most debilitating form of state failure is the predatory state. This is characterised by a breakdown or lack of bureaucratic structures of the state itself, often due to a lack of finances. When low on finances from a recession or crisis such as the oil price shocks of the 1970s or the 1982 Mexican default, some governments become predatory. Underpaid civil servants turn to corruption and soldiers mutiny or stage protests. When governments can no longer finance the state apparatus it will be swept from under them (Acemoglu and Robinson, 2001). In times of crisis personal ties are the only source of cohesion and individual maximisation takes precedence over pursuit of collective goals (Evans, 1995:12). States such as Zaire, Haiti and the Philippines have all been defined as non-developmental, subject to either mal-development or stagnation. Democratisation can also elicit predatory behaviour when authoritarian regimes face overthrow they become predatory and in response their opponents mobilise the people (Synder, 2000). The centrality of the state in development is made clear by the state failure and lack of development brought about by these examples. In order to develop, a state must move from a position where exploiting its citizenry to enrich itself is its modus operandi and instead bring about a situation in which internal security and the generation of national wealth is the primary business of government. The state is essential for development in that it must create an atmosphere in which private business can develop, distribute national resources and investment and be concerned with generating tax revenues from expenditure rather than seeking to profit from either rents or natural resources.

3 Optimal development: The state allied with the private sector

In order to achieve optimal development in the modern era, the most successful method is that of a developmental state in which the public and private sector and their interests are closely aligned to pursue economic modernisation. Douglass North wrote that if institutions are the rules of the game, organisations and their entrepreneurs are the players (North, 1994:361). The prime examples of this are the East Asian developmental states of South Korea, Japan and Taiwan in the post-war era before the 1990s crash. The ideal state to enact this role is one with the authority and ability to govern the market as opposed to dominate it (Wade, 1990). With this new perspective Robert Wade sought to argue that the developmental success of these nations was not due to headstrong government intervention but rather the synergy between the private sector and public administration. At the same time, state bureaucrats must have the resolve to promote national development, not advance the interests of private lobbyists, sometimes enacting unpopular or even harsh policies in the name of development (Wylde, 2017). An example is a ban on strike action striking in many developing countries, an activity regarded as an economic act in the OECD countries, is political and often met with harsh repression.

A recent Australian government report made clear the paramountcy of the state s role in providing good policy, strong institutions and ensuring that the private sector can thrive by providing it with opportunities to invest in. It concluded that: Government policy and legislative decisions determine to a large degree the scale and quality of economic growth and the private sector s role in it (DFFA, 2014:1). In developing countries, the private sector typically provides ninety per cent of jobs, but it can only function within the stable environment provided by the institutions of the state. One of the key services offered by the state is the pooling of risk, which improves allocative efficiency and allows businesses to take greater risks in order to expand. In addition, by providing an apparatus for conflict resolution the state is often able to provide a satisfactory conclusion to labour disputes between workers and management. In this arrangement of capital accumulation, the state is directly responsible for national economic performance and it is more difficult to blame issues on markets or other externalities. The state is also motivated to participate in innovative sectors and cut funding to those that are lagging behind. They are not only concerned with profit but generating the occupational and social structures associated with high-technology industry , a multidimensional conspiracy in favour of development (Gilpin, 1987:99). In this way the state itself becomes an entrepreneur, concerned with realizing its grand vision of national development.

3.1 The East Asian developmental state

The East Asian developmental states were some of the best examples of state and private sector working harmoniously with the goal of national development. Although Japan already had an existing industrial base, in the 1960s its income level was similar to those of Chile, Argentina and South Africa, with its president dismissed as a `transistor-radio salesman` (Chang, 2007:7). By the end of the century, Taiwan, Korea and Hong Kong together exported more manufactured goods than the whole of Latin America. The model was unique to that region of the world in that it combined corporate coherence underpinned by highly selective meritocratic recruitment and long-term career rewards which created autonomy. However, this was embedded in that it was underpinned by a concrete set of social ties that bound the state to society and provided institutionalised channels for negotiation of goals and policies (Evans, 1995:12). For Peter Evans it is this embedded autonomy that makes a state developmental. Ziya ni similarly argues that their success lay in bureaucratic autonomy and public-private cooperation largely engineered by the state elites themselves through the creation of a special set of institutions (1991:115).

One of the reasons for the success of these nations was that the state had a significant degree of power over society it was able to enact land reform without running into powerful agrarian interests like those of other countries. Their lack of natural resources also eased industrialisation as it seemed a pragmatic new area for economic growth. Labour was also weak closed shop workplaces were banned and minimum wage laws rare. The state was also prepared to resort to using force to disperse strikes. By rejecting the newfound Western prioritisation of the market and engaging in active market manipulation, these East Asian nations were able to enhance their economies Chang argues that had they opened themselves up to the international markets early on they would have remained third-rate industrial powers (Chang, 2007:3). Instead, by controlling foreign direct investment and capital flows they have been able to increase their national production, income per capita, and share of world trade. They have also all benefitted from their trade links with each other and most significantly with the United States. Unlike other Third World states, the East Asian developmental states were able to enact a development strategy with the support of business, without running into issues surrounding land ownership, strike action, corrupt rent-seeking nor neoliberal stagnation. The state was able to control foreign investment while promoting trade and the mass exportation of goods. This allowed for rapid economic growth, industrialisation and development over the course of three decades in societies dubbed miracles .

Conclusion

This essay has shown that the state s role in fostering development has remained of paramount importance. It has argued against the late twentieth century neoliberal and neomercantile conceptions of the state s relationship to the economy, providing a rebuttal of the market primacy assumption by showing that the state is in fact the principal agent in the economy and its competence and ability to enact change the most significant factor in determining development or lack thereof. It has also challenged the view of some academics writing on globalisation that the state is an archaic structure that will disappear, arguing instead that globalisation is instead predicated on international exchange between countries through both their governments and private sectors. It has also addressed some of the deficiencies of the Washington Consensus, advancing that state intervention has historically been crucial to development, whereas some of its other prescri ptions, such as democracy, have not been. It has discussed theories of the origins of states as providers of security, upholders of justice and protectors of property rights at a fundamental level and suggested that a society cannot function let alone develop without these fundamental duties. When working towards the public good and supporting private firms, optimal development can be achieved, in particular if the state is able to share risk through limited liability companies. The impact of state failure was also examined, with the main assertion being many developing countries have been held back by endemic corruption and an excessively large bureaucracy. Far from attempting to modernise the country, agents of the state instead decide to enrich themselves through rent-seeking, alliances with business interests and by personally profiting from natural resource sales. Finally, it highlighted that the most successful model has been that of the developmental state, in which the state works in conjunction with the private sector to facilitate development and economic growth. By working together, they are able to share risk, disperse strikes, pursue beneficial trade deals, limit foreign investment and enact land reform. This essay has determined that the state has had an important role in development both historically and in the contemporary world and has sought to challenge several increasingly dominant trends in the current development economics literature which seek to diminish its importance.