The Developmental State: Dead or Alive?

TLDR: This article argued that the erstwhile East Asian developmental states have indeed changed, but they have not transformed into neoliberal states, rather they have adapted and evolved, but still undertake market-steering,'societal mission' roles well beyond neoliberal limits.

Abstract: Before the 1980s, the mainstream Western prescription for developing countries to catch up with the West assigned the state a leading role in governing the market. In the 1980s, this shifted to a framework‐providing role in a largely deregulated and maximally open economy. Also in the 1980s, it became apparent that some East Asian capitalist economies were growing so fast that they would become ‘developed’ in the foreseeable future, marking them out as completely exceptional. Mainstream economists explained their success as the result of following the Western prescription, while other scholars attributed this rapid growth to ‘the developmental state’. This essay compares these two explanations of successful economic development, concluding in favour of the latter — with respect to the catch‐up decades. But what happened subsequently? Several scholars who accept the key role of the developmental state in the early period of fast industrialization in East Asia now argue that South Korea, Taiwan and Singapore have transformed from developmental to close‐to‐neoliberal states. This contribution argues that the erstwhile East Asian developmental states have indeed changed, but they have not transformed into neoliberal states. Rather they have adapted and evolved, but still undertake market‐steering, ‘societal mission’ roles well beyond neoliberal limits. The essay also suggests how other developing countries can learn lessons from their experience.

Full text

Wade Robert H.
The developmental state: dead of alive
Article (Accepted version)
(Refereed)
Original citation: Wade, Robert H. (2017) The developmental state: dead or
alive? Development and Change, 49 (2). pp. 518-546. ISSN 0012-155X
DOI: 10.1111/dech.12381
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Development and Change, Forum 2018, March 2018
Debate
The Developmental State: Dead or Alive?
Robert H. Wade
ABSTRACT
Before the 1980s, the mainstream Western prescription for developing countries to catch up
with the West involved the state taking a leading role in governing the market. In the 1980s,
this shifted to assigning the state a framework-providing role in a largely deregulated and
maximally open economy. Also in the 1980s, it became apparent that some East Asian
capitalist economies were growing so fast that they would become ‘developed’ in the
foreseeable future, marking them out as completely exceptional. Mainstream economists
explained their success as the result of following the Western prescription, while other
scholars attributed this rapid growth to ‘the developmental state’. This essay compares these
two explanations of successful economic development, concluding in favour of the latter —
with respect to the catch-up decades. But what happened subsequently? Several scholars who
accept the key role of the developmental state in the early period of fast industrialization in
East Asia now argue that South Korea, Taiwan and Singapore have transformed from
developmental to close-to-neoliberal states. This essay argues that the erstwhile East Asian
developmental states have indeed changed, but they have not transformed into neoliberal
states. Rather they have adapted and evolved, but still undertake market-steering, ‘societal
mission’ roles well beyond neoliberal limits. The essay also suggests how other developing
countries can learn lessons from their experience.
[first, unnumbered footnote]
The author would like to acknowledge the helpful comments of Servaas Storm, Elizabeth
Thurbon, Ana Celia Castro and Giuseppe Gabusi.

Debate: The Developmental State, Dead or Alive?
2
‘I beg your pardon, I never promised you a rose garden’ (popular song by Joe South)
THE ASCENT OF THE GLOBALIZATION MINDSET
Since the 1980s it has been commonplace to say that the grab bag of forces known as
‘globalization’ has curbed the ‘policy space’ of all states, to claim that there is really only one
broadly effective institutional and policy recipe for fast economic growth, known as the
Washington Consensus, which could equally be called the Western Consensus. The state
should provide — or ensure the private provision of — a range of public goods that are not in
the interests of private profit-seeking companies to provide on their own, which include
physical infrastructure, free markets, macroeconomic stability, and an institutional framework
for the rule of law. The state should not, except occasionally at the margins, try to steer
resource allocation, impart directional thrust. Whether in advanced or developing economies,
the allocation of resources should be left mostly to the interaction of consumers and private
producers.
The underlying justification for this is the claim that competition between private economic
agents is the only legitimate, reliably welfare-enhancing organizing principle for human
activity. It stimulates creative and entrepreneurial abilities, and yields an efficient allocation
of resources. State ‘intervention’ should be very limited because the societal costs —
including loss of the most prized value, individual liberty — are likely to be higher than the
societal gains, even where ‘market failures’ can be identified. The larger the scale, the better:
if competition is on a global scale, each country’s gain will be greater. Any form of
protection or subsidy is likely to be a drag on efficiency, like throwing rocks in your own
harbour.
The source of this sanctification of ‘the market’ was Friedrich Hayek, who experienced in
1936 what he described as a ‘sudden illumination’: ‘How can the combination of fragments
of knowledge existing in different minds bring about results which, if they were to be brought
about deliberately, would require a knowledge on the part of the directing mind which no

Debate: The Developmental State, Dead or Alive?
3
single person can possess?’ (quoted in Metcalf, 2017). Or as Mrs Thatcher used to say, ‘You
will always spend the pound in your pocket better than the state will’.
These statements reflect a mindset often called ‘neoliberal’. It prioritizes ‘exit’ over ‘loyalty’,
meaning ‘keep options open’, ‘minimize commitment’, so that resources can be quickly
moved to more profitable alternatives. Le Monde once called it ‘cette attitude tres Anglo-
Saxon — le “wait and see”’. Hayek used the word with positive connotations, as did his
followers, but by the 1980s those followers were describing themselves as neoclassicals or
just liberals, and ‘neoliberal’ came to be used mostly by critics. Here I use it in a more
analytical sense, to denote a certain cognitive and normative mindset.
Neoliberal ideas have become immensely powerful in shaping the content of institutional and
policy ‘reform’. The inter-state organizations directly concerned with economic development
in developing countries — the World Bank, International Monetary Fund (IMF), the
Development Assistance Committee (DAC) of the Organization for Economic Cooperation
and Development (OECD), most parts of the United Nation’s family of development-related
agencies, and several regional development banks — have all helped to boost the power of
neoliberal ideas since the 1980s (Krueger, 1990). So too have Western academic economists
and business leaders. Here are a few examples of the neoliberal mindset.
A New York Times journalist covering the World Economic Forum meeting in 2002 wrote
that business executives and government leaders in attendance believed that, ‘a nation that
opens its economy and keeps government’s role to a minimum invariably experiences more
rapid economic growth and rising incomes’ (Uchitelle, 2002). Percy Barnevik, whilst CEO of
the Swedish-Swiss multinational Asea Brown Boveri (ABB), said: ‘I would define
globalization as the freedom of my group to invest where and as long as it wishes, to produce
what it wishes, by buying and selling wherever it wishes … while putting up with as little
labor laws and social convention constraints as possible’ (quoted in Gelinas, 2003: 21).
Bernard Arnault, CEO of French luxury group LVMH and 10
th
richest person on earth in
2000, said: ‘Businesses, especially international ones, have ever greater resources, and in
Europe they have acquired the ability to compete with states …. Politicians’ real impact on
the economic life of a country is more and more limited. Fortunately’ (quoted in Halimi,
2013). In 1988, James Riedel, then professor of international economics at The Johns

Debate: The Developmental State, Dead or Alive?
4
Hopkins University, explained the exceptional development success of East Asian countries
thus:
The policy lessons that derive from the experiences of the East Asian countries are
simple and clear-cut, and for that reason are all too readily ignored or dismissed ….
[The lessons are that] neo-classical economic principles are alive and well, and
working particularly effectively in the East Asian countries. Once public goods are
provided for and the most obvious distortions corrected, markets seem to do the job of
allocating resources reasonably well, and certainly better than centralized decision-
making. That is evident in East Asia, and in most other parts of the developing and
industrial world, and is after all the main tenet of neo-classical economics. (Riedel
1988: 38, emphasis added; see further, Wade, 1992a).
A more subtle version of the argument appeared in the World Bank’s high-profile East Asian
Miracle book, published in 1993. It took eight ‘high-performing Asian economies’ as its
subject: Japan, the three first-generation newly industrialized economies of South Korea,
Taiwan and Singapore, and three second-generation Southeast Asian economies of Thailand,
Malaysia and Indonesia, plus Hong Kong. The book argued that the states had made
important contributions to the fast growth of these countries by ensuring ‘the fundamentals’:
low inflation and competitive exchange rates; human capital; effective and secure financial
systems; low price distortions; foreign technology; and low bias against agriculture. But
‘strategic’ interventions — promoting specific industries — ‘generally did not work’ (World
Bank, 1993: 354). The take-away message, said the World Bank, was: ‘openness to
international trade, based on largely neutral incentives, was the critical factor in East Asia’s
rapid growth’ (ibid.: 292, emphasis added).
The origin of the East Asian Miracle study lies in the criticisms made by top World Bank
officials of Japan’s aid programmes in Southeast Asia, in which targeted and subsidized
credit was an important component. The Japanese Ministry of Finance (MOF), which helped
to design and operate the credit programmes, took offence at the Bank’s claim that directed
credit only distorted financial markets (not least because MOF considered that its directed
credit programmes during the post-war decades in Japan had been its major contribution to
the ‘Japanese miracle’). MOF more or less forced the reluctant Bank to undertake a study of
Northeast and Southeast Asia, to identify the causes of the larger region’s relative success.
The Bank could not bat away Japan’s request, because Japan was by then the number two

Frequently asked questions

Q1. What are the contributions in "The developmental state: dead of alive" ?

In the 1980s, this shifted to assigning the state a framework-providing role in a largely deregulated and maximally open economy. Mainstream economists explained their success as the result of following the Western prescription, while other scholars attributed this rapid growth to ‘ the developmental state ’. The author would like to acknowledge the helpful comments of Servaas Storm, Elizabeth Thurbon, Ana Celia Castro and Giuseppe Gabusi. Since the 1980s it has been commonplace to say that the grab bag of forces known as ‘ globalization ’ has curbed the ‘ policy space ’ of all states, to claim that there is really only one broadly effective institutional and policy recipe for fast economic growth, known as the Washington Consensus, which could equally be called the Western Consensus. The state should provide — or ensure the private provision of — a range of public goods that are not in the interests of private profit-seeking companies to provide on their own, which include physical infrastructure, free markets, macroeconomic stability, and an institutional framework for the rule of law. The underlying justification for this is the claim that competition between private economic agents is the only legitimate, reliably welfare-enhancing organizing principle for human activity. Hayek used the word with positive connotations, as did his followers, but by the 1980s those followers were describing themselves as neoclassicals or just liberals, and ‘ neoliberal ’ came to be used mostly by critics. The Japanese Ministry of Finance ( MOF ), which helped to design and operate the credit programmes, took offence at the Bank ’ s claim that directed credit only distorted financial markets ( not least because MOF considered that its directed credit programmes during the post-war decades in Japan had been its major contribution to the ‘ Japanese miracle ’ ). MOF more or less forced the reluctant Bank to undertake a study of Northeast and Southeast Asia, to identify the causes of the larger region ’ s relative success. 5 shareholder at the Bank and MOF put US $ 1. 2 million on the table to finance the study. After the study was published, senior Bank officials informed the world that the Bank now understood sufficiently the causes of fast economic development in East and Southeast Asia, would not undertake more research on the question, and would concentrate on spreading the message about the importance of liberalizing markets and integrating into the world economy to governments elsewhere, in Latin America and especially in Africa. The Bank treated trade liberalization as the queen of policies, not just one among many, claiming that free trade policy would limit the amount of damage from other government interventions in the market ( World Bank, 1989 ). He tried to end the earlier banishment of the phrase ‘ industrial policy ’ from World Bank vocabulary, advancing the idea that some selective promotion of certain industries could be appropriate provided that the targeted industries were within the economy ’ s existing comparative advantage and their promotion was not a bold attempt to accelerate the upgrading of comparative advantage by creating a new set of higher valueadded industries ( or segments of regional production chains ). He approached several regional vice presidents within the World Bank with the idea that they might organize a few pilot projects. This ideology was already ascending in the West by the late 1970s, and projected into developing countries ( DCs ) over the 1980s ( Wade, 2003, 2015 ). A World Bank study ( 2013 ) identifies 101 countries as ‘ middle-income ’ in 1960, of which only 13 had reached ‘ high-income ’ almost 50 years later, by 2008. Until 2010, Taiwan held the world record at 32 years ( 1962–94 ), followed by South Korea at 29 years ( 1962–91 ). The authors now have a sizable body of literature about the developmental state in East Asia ( a phrase coined by Chalmers Johnson in his 1982 study of Japan ’ s rise ; see also Haggard, forthcoming 4 This article keeps Hong Kong to one side, because it was a British colony for 150 years from 1841 to 1997, except for the Japanese war-time occupation. In contrast, the developmental state model ( inferred from the East Asian cases ) assumes at the political level an elite consensus on the following: 1. High priority given to achieving high and sustained economic growth rates, so as to catch up with developed countries ‘ quickly ’ ( within a few decades ) ; 2. Very high rates of investment to GDP so as to achieve rapid movement of the production structure into higher productivity activities ; 3. The need for the state to coordinate the catch-up strategy and promote some sectors and functions ahead of others, whether through public enterprises or through steering private actors into sectors they would otherwise not enter ; 4. The need for the state to curb the growth of consumption by the urban labour force and farmers, so as to free up more resources for investment ; 5. The need for the state to strenuously promote exports, so that the high investment can be profitable despite restrained growth of consumption at home ; but at the same time, state industrial policy must target the feasible replacement of imports and concentrate Debate: The Developmental State, Dead or Alive ? In the East Asian cases, the content of the optimal production structure to be aimed at was influenced by popular metaphors of economic development, like descending a river, or flying in a V-shaped formation of geese. The neoliberal model emphasizes the need for checks and balances between the various government ministries concerned with economic policy, so at central government level authority is horizontally decentralized, with no focal point to ensure cooperation between ministries in line with an economy-wide investment strategy. This means that the state and its officials have a close working relationship with capitalists, but also the capacity to discipline capitalists and capital. They have the autonomy needed to formulate and implement a strategic vision for the economy ’ s future growth and to discipline the owners and managers of capital in line with that vision ; while they also maintain close enough relationships with these owners and managers of capital to get information feedback and corporate buy-in to the national project. The authors can sum up by recalling the key initiating conditions of the East Asian developmental state: low average income, few natural resources, acute shortage of capital, and an elite consensus around the idea of catch-up, which required very high rates of investment and reinvestment driven by the aim of diversifying production ( not specializing ) in the direction of the higher-tech industries of Japan and the West. Building industrial science and technology institutes, networked into private firms, starting in Japan in the 1950s and followed by Taiwan and Korea in the 1960s. In Taiwan, for example, it was understood ( as of the early 1980s ) that a family could own and rent out three or four apartments without attracting close inspection by the tax authorities, whereas a family clearly investing in rental properties would not be spared ; meanwhile, a family building up businesses, especially ones oriented to exports, would be treated with more latitude, exports being a focal point of government– business relations more generally. Remember that the national development project entailed not just policies on money supply, exchange rate, export subsidies, import protection and tax exemptions, which could be decided by small groups of insulated technocrats, but also policies on health, education, training and transport, which needed far-flung bureaucracies and impacted directly on people ’ s lives across the whole society. How was discipline maintained over the interventions, in line with a national development project, as distinct from feeding the support mechanisms ( such as patronage networks ) to keep a particular group in power regardless of cost to the national development project ? In pre-democratic Taiwan, for example, every industry with more than 6 Wade ( 1982 ) gives a detailed account of the Korean bureaucracy at work in the capillaries of the state system ; Wade ( 1985 ) examines India ’ s bureaucracy and its corruption system ; Wade ( 1992b ) gives a Korea–India comparison of bureaucratic organization. The highly controlled incorporation of citizens into the structure and ethos of state power and the national development project helped to generate ‘ social capital ’ and fervent nationalism over decades, helped by the looming presence of North Korea and mainland China ( Wade, 1982 ). The latter entails considerable liberalization of markets, which puts a strain on existing political settlements or ‘ division of spoils ’ — strains to be contained by top-down control via state, law and Communist Party, to the point where all religions must regard the Communist Party as their highest authority. Their governments are often based on control of natural resource enclaves, supported by multinational corporations and Western governments ; in such cases the idea of a national development project is likely to remain in the realm of rhetoric. Here I limit the discussion to two points: observed investment/GDP ratios ; and a recent study of the effects of South Korea ’ s Heavy and Chemical Industries drive. The following figures illustrate that the goal was amply achieved. The essay also suggests how other developing countries can learn lessons from their experience. ( Riedel 1988: 38, emphasis added ; see further, Wade, 1992a ). The final section suggests some lessons that other developing countries might learn from the experience of these three states. As suggested earlier, most economists and the main Western-controlled multilateral development organizations ( including the World Bank, the IMF, the OECD and its Development Centre ), focused on liberalization of markets, including trade in goods and services, investment and finance — including opening to the international economy. In 1999 the governor of Taiwan ’ s central bank was horrified to learn that Taiwan ’ s team negotiating WTO membership was promising to give up capital controls ; his response was to recruit staff with PhDs in financial engineering to build up covert controls deep within the bowels of the central bank ( personal communication, 1999 ). The Philippines and other parts of Southeast Asia were integrated into the regional economy as exporters of cheap commodities to the industrializing economies further north. The evidence for non7 A further contextual point: between 1980 and 2015, the share of fixed investment in global GDP fell from about 20 per cent to under 16 per cent ( UNCTAD, 2016 ). 

Q2. What is the role of the East Asian case in the development of the economy?

The East Asian cases retain the capacity — in terms of mindset (ideas and commitment) and in terms of bureaucracy — for the state to impart directional thrust in parts of the economy, well beyond neoliberal principles, while leaving most of the rest untargeted. 

Q3. What is the common form of financing in Taiwan?

Taiwan’s still mostly state-owned banks lend mostly to consumers, and firms invest with equity and bond financing or retained earnings. 

Q4. How many economists were sympathetic to Lin’s arguments?

Lin himself admits that during his time as Chief Economist, less than 10 per cent of World Bank economists were sympathetic to his arguments (personal communication, 2010)1 

Q5. How did the ratio of gross domestic investment to GDP in Korea rise?

Korea’s jumped from 10 per cent in 1960 to 36 per cent in the late 1970s, at the height of the Heavy and Chemical Industries drive; then it fell slightly, before rising to 39 per cent between 1991 and 1996. 

Q6. How many countries were identified as ‘middle-income’ in 1960?

A World Bank study (2013) identifies 101 countries as ‘middle-income’ in 1960, of which only 13 had reached ‘high-income’ almost 50 years later, by 2008. 

Q7. What are the effects of dollar appreciation on the economy?

Dollar appreciation (as during 1981–85, 1995–2002, 2008–09, 2012–15, when the data set ends) is associated with a fall in commodity prices, a fall in DCs’ GDP growth, and a rise in the number of DCs experiencing external crises (due to large foreign currency debt and sharp exchange rate depreciations) 

Q8. What is the role of the developmental state in the development of the world?

The developmental state, on the other hand, uses its powers to push production into sectors and products with increasing returns and external economies, keeping a large measure of ownership in national hands and looking all the time for opportunities to replace sophisticated imports with domestic production (in priority sectors). 

Q9. What was the key initiating conditions of the East Asian development state?

The authors can sum up by recalling the key initiating conditions of the East Asian developmental state: low average income, few natural resources, acute shortage of capital, and an elite consensus around the idea of catch-up, which required very high rates of investment and reinvestment driven by the aim of diversifying production (not specializing) in the direction of the higher-tech industries of Japan and the West. 

Q10. How much did the rate of profit increase in Korea?

In Korea, on the other hand, overall investment to GDP even increased through the 1980s and early 1990s, from around 31 per cent in 1976–80, to 35 per cent in 1986–90, and 31 per cent in 1998–2014; but the high rates of investment went with very high capital to output ratios, so the rate of profit was very low until the 2000s. 

Q11. What was the formula for a successful repression of dissidents?

All three states combined vigorous ‘socialization’ in patriotism and loyalty to the government with effective repression of dissidents. 

Q12. What was the main reason for Lin’s decision to close the Competitive Industries Program?

And in the operations complex, the newly appointed Senior Director most relevant to continuing the Competitive Industries Program closed it down on grounds that ‘she understands industrial policy only as the failed import-substitution policies implemented in Latin America in the 1960s’ (personal communication, July 2014). 

Q13. How many countries have grown at more than 6 per cent a year?

Apart from mega China and mini Taiwan (off China’s coast), no national economy has grown at more than 6 per cent a year for 30 years or more. 

Q14. What is the need for the state to coordinate the catch-up strategy?

The need for the state to coordinate the catch-up strategy and promote some sectorsand functions ahead of others, whether through public enterprises or through steering private actors into sectors they would otherwise not enter;4. 

Q15. Who was the first Chief Economist from a non-G7 country?

He was Chinese, with a PhD in Economics from the University of Chicago, and the first ever Chief Economist from a non-G7 country (most have been American or British). 

Q16. What is the list of countries that are not considered non-Western?

Even extending the boundaries of ‘non-Western’, ‘country’ and ‘developed’, the list is less than 10 — including Japan, Russia, Taiwan, South Korea, Hong Kong, Singapore and Israel.