9780230 231023 20 Ch19italy-s3-mhe-prod.s3-website-eu-west-1.amazonaws.com/OLCS... · P olitical economy is traditionally defined as the study of the causes of the wealth of nations

Political economy is traditionally defined as the study of the causes ofthe wealth of nations. Specifically, the subject examines the policiesgovernments follow in search of increased affluence for the countries

they rule. In combining politics and economics, the topic is by nature inter-disciplinary. As with other policy areas, the approach is also practical,responding to problems arising in the real world. The question is not just‘why?’ but also ‘what is to be done?’ – about recessions, depressions, massunemployment, inflation and financial crises.

As Weingast and Wittman write (2008, p. 3), ‘over its long lifetime, thephrase “political economy” has had many different meanings’. Politicaleconomy can also refer to Marxist analysis of the impact of economic orga-nization on politics; to studies of the impact of the economy on governmentpopularity; and to all attempts to apply the methods of economic analysis topolitics. Here, however, we treat political economy as an area of study ratherthan an approach, focusing on the subject’s original concern with govern-ment policies for enhancing economic performance.

As background, we begin by introducing the core ideas of three key polit-ical economists: Adam Smith, John Maynard Keynes and Milton Friedman.We then inject a comparative dimension, examining the varied forms takenby capitalism in contemporary liberal democracies. After examiningwhether these differences between liberal democracies are declining, weconclude by discussing the distinctive political economies of authoritarianregimes and illiberal democracies.

FoundationsIn this section, we review the work of three central figures in the develop-ment of political economy. Smith, Keynes and Friedman analysed economicproblems but with a clear eye for both politics and policy. Their ideas haveexerted considerable influence, but we will show also how they emerged inresponse to the conditions and challenges of their time. In this way, we willsee both the relevance of ideas to politics and the importance of politicalcircumstances as a forcing-house of ideas.

Chapter 19

Political economy

Foundations 387

Varieties of capitalism 390

Convergence? 397

The political economies 398of authoritarian states

The political economies 403of illiberal democracies

Learning resources 405

The phrase political economy comes from seventeenth-century Francewhen it referred to the financial management of the royal household. Today,the term refers to policy issues arising in the area where politics meets eco-nomics, with a particular focus on improving economic performance.

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Manuale di Scienza Politica - Rod Hague, Martin Harrop © 2011, McGraw-Hill

Adam Smith

The Scottish economist Adam Smith developedpolitical economy as a field of study in the eigh-teenth century. He used the term to describe what isnow called economics, proposing two objects for thesubject: first, to enable the people to supply a plen-tiful revenue for themselves and, second, to endowthe state with sufficient revenue to provide publicservices (Smith, 1776).

The emergence of political economy in Smith’stime reflected the rise of the state, thus linking thesubject to the broader discipline of politics. Thecentral point here is that as the idea of a modernstate began to develop, so too did the desire tounderstand how wealth was created for society atlarge, rather than just for a reigning monarch. Thisshift in approach reflected the growth of a commer-cial society in which a country’s assets were comingto be measured by broader and more sophisticatedtests than the mere accumulation of gold in theroyal treasury.

The old mercantilist philosophy – that rulersshould accumulate capital by ensuring a positivebalance of trade with other countries – was givingway to a more dynamic philosophy in which tradebetween countries, and commerce within them,

were judged to be mutually rewarding. Developingand integrating a range of ideas already in circula-tion, Smith provided a powerful justification for thisnew commercial and liberal (but not yet democ-ratic) society.

Specifically, he explained how the invisible handof the market produces an efficient use of resourcesoverall, even though individual producers and con-sumers act only in their own interests. Rather thanregarding self-interested economic behaviour asignoble, and selfishly neglectful of the public good,Smith judged that our interests as consumers arebest served when the ‘butcher, the brewer and thebaker’ also act in their own interests (Box 19.1).

High profits in a given sector encourage newentrants until profitability declines; conversely, lowprofits encourage the less efficient providers todepart. Provided the market is genuinely competi-tive, the outcome is a system that allocates funds toprojects earning the highest return – an outcomethat no planning agency in communist states wasever able to match.

As Gordon Brown (UK prime minister, 2007– )points out, Smith’s position is more balanced andsophisticated than his contemporary image as aruthless advocate of the free market suggests

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BOX 19.1

Key thinkers in political economy

Core prescription Illustrative quotation

Adam Smith Rely on the market’s invisible ‘It is not from the benevolence of the butcher, the (1723–90) hand to allocate resources to brewer, or the baker that we expect our dinner, but

the areas where they will from their regard to their self-interest’ (1776, p. 22)secure the highest return

John Maynard Keynes When demand is deficient, ‘If the Treasury were to fill old bottles with bank (1883–1946) counter unemployment by notes, bury them at suitable depths in disused coal

boosting public spending mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again . . . there need be no more unemployment’(1936, p. 379)

Milton Friedman To bring inflation under ‘Inflation is always and everywhere a monetary (1912–2006) control, restrict growth in phenomenon’ (1970, p. 16)

the money supply

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(McLean, 2006). Smith was, for example, well awareof our capacity for empathy – our ability to placeourselves in the position of others – and regardedthis natural human sympathy as the basis of socialorganization.

More specifically, Smith was fully aware of thedanger of business cartels. He wrote that ‘people ofthe same trade seldom meet together, even for mer-riment and diversion, but the conversation ends in aconspiracy against the public in some contrivance toraise prices’ (1776, p. 232). He recognized the needto regulate against such sharp practices. In contem-porary terms, ‘Adam Smith’s invisible hand of thefree market utterly depends on the mailed fist of thesovereign state’ (Jackson, 2007, p. 311).

Smith also saw a role for government in providinga public infrastructure, such as transport, whichbusinesses needed to prosper. He also valued educa-tion as a means through which individuals canacquire a measure of enlightenment. For AdamSmith, as for Gordon Brown and Barack Obama, themarket was a means for fulfilling deeper goals; it wasnot an end in itself.

John Maynard Keynes

While Smith’s analysis still provides the theoreticalbasis for contemporary market economies, the cir-cumstances of the twentieth century did require gov-ernments to attend to two major concerns: the rise ofunemployment in the 1930s and of inflation in the1970s. The first of these brought about an expandedrole for government; the second, a reduction. Theresolution of these issues extended the toolkit avail-able to policy-makers and requires attention fromstudents of politics as well as economics.

The English economist John Maynard Keynesoffered a remedy for the problem of unemployment,at least in the drastic form it took in the depressionof the 1930s. During this period, unemploymentrates exceeded 25 per cent in some countries, farhigher than during the recession of 2008/09.

The classical solution to the problem of recessionhad been to reduce wages so that employers wouldhave more incentive to hire. At some low rate of pay,it was supposed, the labour market would clear. ButKeynes recognized that lowering wages will, in theaggregate, reduce demand for the goods and servicesthat employers provide. In this way, economiesbecome trapped in a depression, locked into an

unacceptable equilibrium of mass unemployment,deficient demand, excessive saving and inadequateinvestment.

In such conditions, Keynes advised, governmentsshould prime the pump of recovery by increasingpublic spending. Through a multiplier effect, thisinjection of resources will circulate through theeconomy, gradually rebuilding confidence, demand,investment, employment and finally the revenuesflowing into the government’s own coffers. It is thismultiplier effect, and the overall view of theeconomy it reflects, that distinguishes Keynes’sthinking from mere make-work schemes.

The emphasis on governments’ ability to manageaggregate demand promised a solution to what wasstill seen as capitalism’s great weakness, at least com-pared to planned economies: the fluctuations of thebusiness cycle. Indeed, Shonfield (1969, p. 64) sug-gested that ‘control over the business cycle, whichowes so much to Keynes’s work, is probably thesingle most important factor in establishing thedynamic and prosperous capitalism of the post-warera’. Keynes seemed to have civilized the market, firstdemonstrating its superiority over totalitarian alter-natives and then laying the foundations for post-warrecovery. This was an achievement of the first order,and one that demonstrates the political significanceof economic ideas (Hall, 1989).

Like Smith, Keynes never made a fetish of themarket, fearing the ‘empire of greed’. He even wrotethat ‘we are capable of shutting off the sun and thestars because they do not pay a dividend’ (quoted inSkidelsky, 2009, p. 146). For Keynes, the funda-mental objective was a diverse but harmonioussociety in which a balanced economy provides suffi-cient resources for individuals to live the good life.As Skidelsky (2009, p. 135) writes:

Keynes was not a socialist, but nor was he an uncrit-ical admirer of capitalism. He saw it as a necessarystage to get societies from poverty to abundance,after which its usefulness would disappear . . . Hewanted to preserve capitalism from its wreckers onboth the extreme right and the extreme left. Thisaim underpinned his politics of the middle way . . .Capitalism was evolving new forms ofpublic–private partnership which blurred the tradi-tional separation of state and market and weakenedthe emphasis on maximising profit.

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Milton Friedman

Eventually, however, the Keynesian revolutionappeared to have run its course. By the dismal decadeof the 1970s, a new tangle of political and economicproblems had emerged: inflation (reaching doubledigits in the USA), government budget deficits, highrates of personal taxation, declining productivitygrowth and powerful trade unions.

Keynes’s formula seemed to have limited rele-vance to this new era of economic stagnation combined with inflation. Indeed, Keynes’s legacyhad, in a way, become part of the problem. Thevery achievement of full employment hadenhanced the bargaining power of trade unions,contributing to a cycle of price and wage increases.Viner’s 1936 review of Keynes’s work seemed tohave been vindicated: ‘in a world organized inaccordance with Keynes’ specifications, therewould be a constant race between the printingpress and the business agents of the trade unions,with the problem of unemployment largely solvedif the printing press could maintain a constantlead’ (quoted in deLong, 1995). Governments werenow expected to deliver high employment, andleaders such as Richard Nixon gave it priority, evenat the cost of inflation.

The logjam needed to be freed. Just as Keynes hadsuggested policies to resolve the unemploymentproblem, so a new guru – the American economistMilton Friedman – offered a remedy for the inflationof the 1970s. His solution lay in returning monetarypolicy to centre stage. In a contribution comparablein its impact to that of Keynes, Friedman (1970, p.16) argued that ‘inflation is always and everywhere amonetary phenomenon’, in which ‘substantialchanges in prices are almost always the result ofchanges in the nominal supply of money’. As withother commodities, when money is plentiful, itsvalue will go down (reflected in inflation, whichmeans a given amount of money will buy less). Butwhen money is tight, its value will stay high(reflected in stable prices).

So Freidman’s solution to excessive inflation wasclear and decisive. Restrict growth in the moneysupply and pay the short-term price of increasedunemployment. In the long term, economicactivity will recover in response to the stable andpredictable environment which sound money provides.

Just as Keynes’s deficit financing had advanced thecause of the left, so Friedman’s monetarism gave anequivalent fillip to the right-wing administrations ofRonald Reagan and Margaret Thatcher. Like Keynesbefore him, Friedman’s work modified the frame-work of economic policy-making, reinstating theimportance of the money supply.

But where Keynes sought short-run solutions,Friedman’s concern was with the long run.Friedman lacked Keynes’s belief in the ability ofpolicy-makers to fine-tune the economy; instead,he advocated a cautious, steady approach to themoney supply. Where Keynes instinctively felt thatpolicy-makers could improve market perfor-mance, Friedman was suspicious of political med-dling; in that sense, his emphasis on sound moneyreflected a return to Adam Smith’s belief in thewisdom of the market. Keynes was naturally sym-pathetic to government intervention; Friedmanwas not.

Many liberal democracies do now give theircentral banks responsibility for achieving a targetlevel or range for inflation. For instance, the ReserveBank in Australia is charged with securing an annualinflation rate of between 2 and 3 per cent, onaverage, over the economic cycle. These goals areachieved through manipulation of interest rates,rather than through what proved to be the exces-sively deflationary device of direct control over thesupply of money.

Delegating the execution of monetary manipula-tion to appointed officials reduces the risk of mone-tary manipulation by governing parties moreconcerned with the political short run than the eco-nomic long run. The outcome is a reduction indirect government control but a further incrementto predictability, giving additional confidence toinvestors. In other words, elected politicians havebeen put in their place, with sound results (Clark,2005).

Varieties of capitalismWe can now use our discussion of the foundingfathers to examine the political economies of con-temporary liberal democracies, noting in particularthe need to extend the discussion beyond the Anglo-American tradition established by these three

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leading figures. This task requires a comparison ofliberal market economies as in the USA with coordi-nated market economies as in Germany (Box 19.2).In addition, we will introduce the idea of the devel-opmental state associated with several Asian coun-tries, notably Japan in its high growth phase after1945.

As with other aspects of comparative politics, thestudy of political economy reveals important con-trasts between countries. Just as democracy meansdifferent things in the USA and Germany, so toodoes the conception of what is entailed by a marketeconomy. A market is not just an abstract idea;rather, it is itself an institution influenced by theculture and politics of the country in which it oper-ates. The contrasts here show how economic policy

is shaped by national traditions and also providepotential opportunities for countries to learn fromeach other.

Hall and Soskice (2001) developed a broad butvaluable contrast between liberal market economiesand coordinated market economies (Box 19.2). It isworth relating this distinction to the thinkers wehave just considered. Broadly, the liberal versioncorresponds to Adam Smith’s construct of a freemarket as closely as can be expected from anysystem operating over 300 years later in an era ofextensive regulation and active government. MiltonFriedman, too, would align himself with the liberalform. Maynard Keynes, however, is a different case.Without seeking to put words in the master’smouth, his interest in a middle way, a balanced


BOX 19.2

Varieties of capitalism: liberal and coordinated market economies

Liberal market economy Coordinated market economy

Basis of relationships Mainly formal market Discussion within collaborative networks,between firms contracts often industry-based, is more significant

Cross-shareholding Rare Commonbetween firms

Source of capital for Mainly shareholders and private Banks and other companies more importantinvestment equity

Priority of firms Shorter-term profitability and Long-term profitability, stability and market responding to market changes share are more important

Hiring and firing staff More flexible Less flexible

Strength of trade unions Low Highand employer organizations

Leading sector Market-led but service sector Manufacturing is regarded as a core sectormore important

Archetypal case United States Germany

Note: Coordinated economies are also described as organized market economies, social market economies or, with particular ref-

erence to Germany, Rhineland capitalism.

Source: Adapted from Hall and Soskice (2001).

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economy and a harmonious society would surelyhave encouraged him to examine with interest theidea of a coordinated market economy.

Liberal market economies

We begin with the liberal version. Here contractualmarket relationships are the business norm, whetherfor selling products and services, employing labouror raising finance. Competing firms operate in aflexible labour market, seeking to enhance prof-itability in order to satisfy the demands of theirshareholders for a return. The government and thejudiciary aim to ensure that contracts are enforcedand disputes resolved, but their function is to

umpire and to provide an impartial framework ofregulation, rather than to play. Industry associationsand trade unions seek to advise, but not to direct,their members. So economic actors, whether largecorporations or individual employees, retain consid-erable autonomy, a feature which creates the poten-tial for rapid, market-led restructuring whenneeded.

This liberal model is exemplified by the UnitedStates but it is also now found in other English-speaking countries, notably Australia, Britain,Canada and New Zealand. Note, however, that themovement of these latter countries in a liberal direc-tion since the 1980s confirms that states do not

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➧ TIMELINE

FINANCIAL CRISIS IN THE USA,2008–09

2008 16 March JP Morgan Chase agrees to acquire Bear Stearns and accepts a $29 billion governmentloan.

7 September The government takes over Fannie Mae and Freddie Mac, government-sponsoredenterprises which support the mortgage market.

14 September Bank of America acquires Merrill Lynch.

15 September Lehman Brothers files for bankruptcy – the largest in the country’s history.

17 September The government effectively nationalizes AIG, the country’s largest insurance company.

18 September Ben Bernanke, chairman of the Federal Reserve, tells members of Congress, ‘if we don’tdo this [support the financial sector], we may not have an economy on Monday’.

25 September President Bush tells Congressional leaders, ‘if money isn’t loosened up, this suckercould go down’. The government places Washington Mutual (WaMu) into receivership– the largest bank failure in the country’s history.

29 September Dow Jones Industrial Average declines 778 points, its largest ever daily fall in points.

3 October President Bush signs the Emergency Economic Stabilization Act, creating a govern-ment facility to purchase up to $700bn of troubled assets from financial institutions.

16 December Federal Funds interest rate reduced to 0.0–0.25 per cent.

2009 17 February President Obama signs the American Recovery and Reinvestment Act, authorizing$787bn in tax cuts, increased welfare benefits and additional government spending.

2 July US unemployment reaches 9.5 per cent, the highest for 26 years.

7 August President Obama tells journalists, ‘today we’re pointed in the right direction . . . Whilewe’ve rescued our economy from catastrophe, we’ve also begun to build a new founda-tion for growth’.

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necessarily occupy a permanent position in relationto these models.

Consider the American exemplar. In the USA,shareholder capitalism predominates: the share-holders own the firm and expect a continuing returnon their investment (though, in practice, managersoften gain sufficient control to secure a generousshare of the profits). Expanding firms do not hesi-tate to take on additional labour, secure in the

knowledge that staff can be laid off should condi-tions worsen. Employees are mobile and willing tomove for a better job. Hostile takeovers and corpo-rate bankruptcies are interpreted as a signal fromAdam Smith’s invisible hand: they form ‘the peren-nial gale of creative destruction’ which Schumpeter(1943, p. 84) regarded as capitalism’s essentialstrength. Failing companies may well declare them-selves bankrupt but the managers can simply startanother business.

Coordinated market economies

Unlike liberal market economies, the politicaleconomies of most Continental European countriesdisplay a less aggressive character. Here business


In shareholder capitalism, those who own thecompany seek to maximize the financial return ontheir investment and are willing to replace managerswho fail to achieve this goal. This form is found inliberal market economies such as the USA.

Students of political economy must paydue attention to the financial crisis of2008–09. During this period, the col-lapse of a financial bubble caused byill-judged, opaque investments bybanks in loans to American home-owners created enormous stresses inthe world’s financial system, stimu-lating a deep global recession and amassive response by governments.What does this crisis reveal about therelationship between governments andfinancial institutions?

Politically, the crisis strengthened theauthority of national governments,including central banks.Domestically, the state’s role as lenderof last resort was strikingly demon-strated while the state’s success incontaining the financial crisis con-firmed its continuing relevance. Thisachievement gave political rulers theauthority to proceed with re-regu-lating the financial sector. In short,the balance between political andeconomic power seemed, at firstglance, to have shifted back towardsthe former.

From an international perspective,too, it is significant that it wasnational governments rather thaninternational organizations that ledthe response. Coordination betweengovernments, and between centralbanks, was significant. But interna-tional financial institutions such asthe International Monetary Fund,and indeed the European Union,were secondary players.

But in two respects the state’s posi-tion was weakened rather thanstrengthened. First, governmentsdamaged their own long-term finan-cial position by supporting troubledbanks and, in Keynesian fashion,funding spending to counter therecession. The sums involved herewere gigantic. By July 2009, theAmerican government had spent $4.7trillion on bailouts of banks andinsurance companies – more thanone and a half times the value ofGermany’s gross domestic product(Kuhnhenn, 2009).

Second, government willingness tobail out the largest investment banksdemonstrated the embedded positionof these firms in the financial system.When a bank becomes too big orinterconnected to fail, it sends amessage to government and its ownstaff: we keep our profits in the goodtimes but the government will pay forlosses when times are bad. Banks arethereby encouraged to take greaterrisks and it remains to be seen howfar this danger can be offset by tighterregulation. Adam Smith would surelyhave judged that too big to fail issimply too big.

Note, finally, that the origins of thecrisis lay in the liberal marketeconomy of the USA (see Timeline).Coordinated market economies,while far from unaffected, sufferedless reputational damage.

Further reading: Gamble (2009), Tett(2009b).

SPOTLIGHT

Financial crisis

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relationships are less impersonal and contractual butmore long-term and even familial. A business ismore likely to raise funds from its bank than throughthe impersonal stock market; employees, once hired,are more likely to be retained through hard times.

In the model coordinated market economy, theprivate sector is seen less as an independent sphereof activity and more as an arena subject to controlby social and political forces, including the govern-ment. In many such countries, these forces haveincluded not just a strong socialist party but also aninfluential Catholic church; neither institution hasfavoured the free play of the market. In societies his-torically divided by class, religion and ideology, eco-nomic competition has been subject to politicalcontrol in order to deliver social stability. Socialcohesion and solidarity are core values. The marketoperates in a constrained way, reflecting a shareddesire to prevent Smith’s invisible hand frombecoming a visible fist.

Who exactly provides the coordination? Theactors vary by country, but include industrial associ-ations in Germany, the dominant Social DemocraticParty in Sweden and the state itself in France (Boyer,1997). So coordination is not always a state-ledactivity; it can be led instead by powerful economicinterests or by leading parties.

In a coordinated economy, leading firms belong toinfluential industry-wide associations that provide aforum for exchanging information. Companies holdshares in each other, forming a strong interlockingstructure. Managers derive authority from their pro-fessional standing, not merely from the companythey work for; in particular, engineers are accordedhigh status. The employment relationship is con-ceived as long term, giving employees a greater com-mitment to the business but also reducing thecapacity for radical change. The state helps withcoordination and the courts are prepared to inter-vene to ensure economic actors abide by broadlyaccepted standards, including civil law codes.

This coordinated or partnership model is exempli-fied by Germany but is also found in otherEuropean economies such as Austria, Belgium,Denmark, Finland, the Netherlands and Sweden.One indicator of a coordinated approach is thatwage negotiations for specific types of job take placeat national or sectoral level rather than within thefirm (Box 19.3). At national level, a broad pact

covering wages, prices and benefits may be agreedbetween the government and peak associations rep-resenting capital and labour. At sectoral level, theunion covering an industry such as engineering maynegotiate a package with an employers’ federationwhose members include all major engineering firms.

Let us look at the German exemplar. The coordi-nation here is formally structured, creating engi-neered capitalism for an engineering economy.Stakeholder capitalism rather than shareholdercapitalism predominates. Companies recognizeobligations to a wide variety of stakeholders,including trade unions, banks, industrial associa-tions, other companies, the local community and alllevels of government. Many of these interests, fur-thermore, are represented on supervisory boards(Box 19.4). Wage inequalities are contained at alower level than in the Anglo-American world.

Reflecting Germany’s guild traditions, coordi-nating bodies such as trade associations are particu-larly important in specific industrial sectors. Thisfeature has enabled post-war governments to remainin the background, avoiding comparisons with theinterventionist Nazi era. Within manufacturing, thefocus is on enhancing existing strengths rather thanbuilding new ones. Stakeholders such as tradeunions and even creditors are naturally risk averse;

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In stakeholder capitalism, companies acknowl-edge – and often incorporate into their deliberations– a wide range of interests, including employees,trade unions, the local community and the govern-ment. This form is found in coordinated marketeconomies such as Germany.

BOX 19.3

Main level of wage negotiations inselected European countries

National level Sectoral level Company level

Belgium Austria HungaryFinland Germany PolandIreland Netherlands United Kingdom

Source: Adapted from Avdagic and Crouch (2006, Table

11.2).

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they do not gain as much as shareholders from suc-cessful new initiatives. Restructuring operates in aslower and more negotiated manner, with greateremphasis on fashioning a long-term solution accept-able to all partners. In Germany, bankruptcies andtakeovers are regarded negatively, as a sign of pastcoordination failures. A firm in difficulty is morelikely to be absorbed into a larger enterprise than tobe closed down.

A coordinated economy is the industrial equiva-lent of the consensus politics which is found in mostcountries with this economic form. The representa-tion of stakeholders within corporate governanceparallels the power-sharing found in coalition gov-ernments. In both economic and political spheres,this support for balanced, negotiated, consensualgovernance reflects similar influences. Theseinclude: the fear of instability induced by Europe’sviolent past; the desire to reconcile what were oncedivisive cleavages of class and religion; and, in coun-tries where Catholicism is strong, the Church’s dis-trust of a market society of sovereign individuals.The similarities in economic and political organiza-tion resulting from this shared history shows thevalue of comparing the sectors and consideringthem as part of a single political economy.

One way of illustrating the difference betweenliberal and coordinated market economies is by con-trasting their approach to private equity firms.These are companies that use financial resources tobuy other firms with the intention of improvingtheir performance and then selling them on, often inshort order. Liberal market economies recognize thenecessity for private equity. Like sharks in the seaand vultures over the ground, such companiescleanse the environment because of their ability toscent blood from a distance. Their role can be con-troversial but is broadly accepted as necessary.

In a coordinated market economy, attitudes toprivate equity are less welcoming. Private equity isjudged to be a threat to national planning, industriallogic and long-term development. Coordinatedeconomies prefer real engineering to financial engi-neering. In Germany, for example, FranzMüntefering, chairman of the SPD, comparedprivate equity firms to locusts in a much-quotedspeech in 2005: ‘they remain anonymous, they haveno face and descend like a swarm of locusts on acompany, devour it and then fly on’ (Koepk, 2005).

Müntefering’s comments received substantialsupport from Germany’s elite. Chancellor Schrödersaid, ‘I would have put it differently but basicallyexpressed the same thing’. Other leaders promised to‘fight against antisocial market capitalism’, suggestedthat ‘competition and social responsibility are notmutually exclusive’ and bemoaned ‘a neoliberal zeit-geist that measures every last aspect of our lives onlyby economic standards’ (Koepk, 2005). Similar criti-cisms followed about the American origins of theglobal financial crisis (see Timeline).

Coordination within the economy does bringseveral potential economic advantages, offering adegree of stability and long-term planning forindustrial economies needing to protect a legacy ofpast investment. In addition:

➧ Broadening the sphere of coordination fromthe individual firm to the industrial sectorencourages investment both in training and inresearch and development. In liberaleconomies, by contrast, many firms free-ride bypoaching staff and research produced by theircompetitors, leading to under-investment inthese areas. So sectoral investment yields a col-lective benefit.


BOX 19.4

Members of Volkswagen’sSupervisory Board, 2009

➧ Ferdinand Piëch, Chair;➧ Prime Minister and Economics Minister, State of

Lower Saxony;➧ Chair, Volkswagen Management Association;➧ Three directors of Porsche AG;➧ Five senior executives and directors from other

German companies;➧ Five chairs of Volkswagen Works Councils;➧ Member of the executive committee, IG Metall

(metalworkers’ union);➧ Chair, International Metalworkers’ Foundation.

Note: Under the German format of codetermination, the

supervisory board appoints and monitors the normal man-

aging board as well as approving important decisions.

Source: Volkswagen AG (2009).

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➧ Organizing such features as pensions andmedical insurance at the level of the sector,rather than the company, allows for a poolingof risk. If companies form a single pensionsscheme for all employees in their sector, indi-vidual workers will not lose their employer-funded pensions and medical insurance shouldtheir firm go bankrupt.

➧ Many coordinated economies operate undercodified legal frameworks imposing detailedrules covering commercial practice. InGermany, Article 242 of the Civil Code estab-lishes a norm of ‘good faith’ which the courtsapply to business disputes. The existence ofsuch commercial codes reduces legal costs. Inliberal economies, notably the USA, contractingparties can insert any conditions they wish intoan agreement. The result is more expensivedeals – and more time in court.

The developmental state

We turn now away from the Western world andtowards another variety of capitalism: the develop-mental state. This term is used to describe the insti-tutional foundations of the rapid economic growthachieved by many countries in East Asia in the post-war era. Such a regime takes the form of a highlycoordinated market economy, in which the state’slegitimacy derives from economic success as muchas popular election.

In a sense, the developmental state is a coordi-nated economy for an industrializing country, albeitwith a more influential role for key politicians andbureaucrats and a more passive role for the popula-tion. The state’s role in this configuration takes usaway from Smith’s pure free market and suggeststhat the government’s role in a developing economyis more central, and certainly different from, itsposition in a developed economy.

We introduce the idea of the developmental statein the context of Japan. However, we should notethat comparable strategies have been followed by

South Korea (which did not democratize until the1990s) and, to a lesser extent, by illiberal democra-cies such as Malaysia.

Chalmers Johnson developed the notion of thedevelopmental state as a variety of capitalism inJapan: Who Governs? The Rise of the DevelopmentalState (1995). He suggested that after the Cold Warthe evident contrasts between Japanese andAmerican capitalism no longer needed to be deniedin the interests of anti-communist unity. Rather, thedistinctive characteristics of Japan’s politicaleconomy could be freely expressed.

According to Johnson, the state played an impor-tant coordinating role in Japan’s post-war develop-ment. The bureaucracy targeted export-orientedmanufacturing industries such as cameras andmotorcycles. Close links between high-ranking gov-ernment officials and senior managers in privatefirms sustained a powerful, cohesive elite capable ofcontaining popular pressures on the government forgreater consumption. The Liberal Democrats domi-nated the political landscape, effectively forestallingany radical opposition from gaining power throughelections (see p. 352). Within industry, collaborativeresearch at sectoral level provided a resource for themajor firms. An undervalued currency encouragedexports while high tariffs and other trade barriersdeterred imports.

Compared to the West, wages and benefits werelow but distributed more equally; job security washigh, with large firms providing secure employmentin exchange for life-long loyalty. Profits were rein-vested rather than paid out to shareholders. Efficientproduction rather than profitability, and investmentrather than domestic consumption, were judged thekeys for catching up. Johnson (1995, p. 68) summa-rized the central features of Japan’s developmentalstate as ‘a strong state, industrial policy, producereconomics and managerial autonomy’.

At the very least, this governed market, as Wade(1990) called it, proved to be consistent with higheconomic growth for almost 30 years after the war,allowing Johnson (1995, p. 68) to declare that ‘Asiancapitalism seems destined to lie at the centre of whateconomists will teach their students in the nextcentury’. Fifteen years on, we might think thatJohnson got the region right, even if he should haveemphasized China rather than Japan.

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The developmental state leads a society to rapidindustrialization by combining a powerful bureau-cracy, which formulates national economic targets,with private ownership of the means of production.The main examples are East Asian states such asJapan and Korea in the post-war decades.

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Convergence?Our discussion so far has drawn attention to con-trasts within the political economies of modernstates. To what extent, though, are these differencesreceding as coordinated market economies face thechallenge of international competition and develop-mental states adjust to the more market-ledapproach associated with developed status? Is theconvergence thesis correct in maintaining thatadvanced economies are coalescing around theAmerican model of a liberal market economy?

Certainly, the image of a global economy over-whelming historical differences in national capi-talisms gained ground in the 1990s. Strange (1997,p. 183) offers a crisp account of this global perspec-tive:

Given that the seeds of capitalism grew to maturityin very different gardens, would the forces of globalstructural change allow national differences topersist indefinitely? Or, alternatively, would thecommon logic of integrated world markets formore and more goods and services slowly butsurely modify the old differences and bring nationalversions of capitalism ever closer to a commonpattern? My bet was, and is, on the latter.

When we look at the recent standing of coordi-nated market economies, in particular, we can cer-tainly find support for Strange’s position. Thecoordinated model has come under significantstress. As in other liberal democracies, feweremployees now belong to trade unions, and feweremployers to trade associations, rendering more dif-ficult the coordination required in a coordinatedeconomy (Martin and Thelen, 2007). Germany isthe world’s largest exporter after China but overseascompanies have become reluctant to invest in thecountry, citing over-regulation, high labour costsand an inflexible labour market. In 2003, Padgett (p.142) judged that ‘the capacity of the German model

for reconciling economic efficiency with traditionalvalues may have reached its limits’. Three years later,Angela Merkel, the new Christian Democratic chan-cellor, agreed: ‘we need change. We must keep whathas proven its worth but change what burdens us’.

Equally, developmental states have been losingdistinctiveness. Japan entered a decade of deflationin the 1990s and the Asian region as a whole experi-enced a massive financial convulsion in 1997. Onereading of these difficulties is that policies aidingindustrialization become counter-productive oncedevelopment is achieved. Collaboration betweenfirms and government departments, which onceseemed highly constructive, begins to appear assecretive collusion. The Japanese notion of excessivecompetition was perhaps permissible in thebuilding-up phase but seemed less appropriate oncethe economy had matured. Generally, develop-mental states can only place production beforeprofit for so long. Banks must eventually go bank-rupt if too many of their loans remain unpaid.

On this account, then, the crisis of the develop-mental state resembles the earlier crisis of the com-munist state: each hits the barrier of ‘so far but nofurther’. In Weiss’s incisive summary (1998, p. 65),‘by being developmentally effective, the state endsup digging its own grave’. The implication is thatthere is one formula for catch-up but another –more liberal than coordinated or developmental –for keep-up.

However, the advocates of varieties of capitalismare unpersuaded that convergence is taking place.Hall and Thelen (2008) rightly remind us thatchange does not equal convergence. Coordinatedeconomies might be evolving, rather than con-verging, on the liberal model: ‘in Germany, forexample, the reforms made in a number of realms,including industrial relations, vocational trainingand social policy, do not signal a shift to the Anglo-Saxon model so much as they point to the develop-ment of new forms of coordination’. Other observerssuggest that increasing foreign ownership ofGerman firms encourages a more liberal approachwithout, however, dismantling the old mechanismof coordination (Milne, 2009). Furthermore, theorigins of the financial crisis of 2008/09 in theUnited States undoubtedly dented the reputation ofthe liberal model. Suddenly, it became a model toavoid rather than one on which to converge.


The convergence thesis maintains that all devel-oped economies are adopting a common format. Theproposition is that a more global environment isforcing a liberal, pro-market response from eachnational economy.

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Similarly, the distinctiveness of developmentalstates has declined but not dissolved. For Japan,Matsuura et al. (2004, p. 151) comment that ‘muchof the Japanese employment system remains intactfor current workers’ and that ‘new institutionalarrangements are emerging only slowly’. Change inSouth Korea has followed a comparable pattern: anevolution of the developmental state without con-vergence on the Anglo-American model of a liberalmarket economy. Despite democratization in the1990s, Korea’s political economy remains distinctive,leading Weiss (2004, p. 167) to postulate ‘a moremature form of developmentalism: one that is nowless propelled to catch up than by an emphasis onpolicies and institutions aimed at managing eco-nomic openness’.

So although Strange’s convergence wager may yetcome good, it does seem rather speculative. Prudencedictates that we avoid placing all our money on thesuperiority of one system of political economy. Weneed to reserve judgement over whether liberalmarket economies will out-perform over the longrun and in all circumstances. As Perraton and Clift(2004a, p. 202) point out, ‘economic performancetypically depends on the period of comparisonchosen: different economies have appeared to be topdog at different times which in itself should indicatethat there is no one superior model’.

The political economies ofauthoritarian statesLiberal democracy and a market economy may forma natural pair but what type of government is bestsuited to a developing country? The question isclearly important. If authoritarian rule can bedefended as an effective foundation for economicdevelopment, we will have a powerful critique ofdemocracy’s claims to be universally the best formof rule. After all, we would nearly all prefer to eatunder a dictator than to starve in a democracy. Inaddition, we could reasonably anticipate thatdemocracy is unlikely to consolidate in poor coun-tries over the long term if the cost is slower eco-nomic development.

Reasons can certainly be found for supposing thatauthoritarian rule can facilitate development.

Industrialization requires massive investment ininfrastructure such as transport, communicationsand education; initially, these can only be funded bythe state. Even Adam Smith acknowledged the needfor government to ensure provision of these collec-tive goods.

In addition, authoritarian rulers can generate thesurplus for investment by resisting short-term, elec-toral pressures for immediate consumption. Simplyput, they can kick-start development because theycan ignore the squeals of those whose consumptionis initially limited.

Bearing such factors in mind, Huntington andNelson (1976, p. 23) concluded that ‘political partic-ipation must be held down, at least temporarily, inorder to promote economic development’. Growthfirst, democracy later.

Overall, these theoretical claims are rarely reflectedin empirical reality. A few non-democratic regimesinitiate economic development but the majority donot. Many traditional rulers, such as the ruling fami-lies in the Middle East, continue to resist moderniza-tion. Other dictators, for example Nigeria’s military‘lootocrats’, set back economic development bydecades through gross mismanagement.

Thus, a statistical study by Przeworski et al. (2000,p. 271) concluded that there is no ‘cruel choice’ to bemade between democracy and development: ‘we didnot find a shred of evidence that democracy need besacrificed on the altar of development’. Theseauthors also found that, even in those cases whereauthoritarian regimes did achieve growth, thisincrease depended more on expanding the labourforce to achieve growth. Democracies, by contrast,made more productive use of their inputs.

In the twenty-first century, furthermore, global-ization has given developing countries access toprivate capital through multinational corporationsand overseas banks. To access these resources, devel-oping countries must convince lenders that theireconomy is market-friendly and that their politicsare tolerably democratic. If leaders can succeed here,they need not extract as much capital from theirown populations as authoritarian modernizers didin the last century.

In any event, studying the political economies ofnon-democratic regimes quickly confirms theimportance of distinguishing between differenttypes of authoritarian government. We will review

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the communist experience, and its legacy for con-temporary states such as China and Vietnam, beforeturning to non-communist authoritarian regimes.

Communist states

Many communist states developed a commandeconomy without precedent in history; each oneformulated clearer national goals and targets thanany democracy. The result was an often decisive andgenerally ruthless commitment to a single goal,notably industrialization.

Economically, this philosophy of the big push wasnot an unmitigated disaster. Notably in the USSR, itdid prove successful at building the foundations ofindustrial development, albeit at a horrifying humanprice. Stalin’s drive to industrialize Russia so as toprotect it from attacks from the West transformed asociety of peasants into a world industrial powerwithin a generation. But the command economywas monstrously inefficient. The big push was adeliberately blinkered approach which ignoredoverall efficiency in order to achieve a specific target.

The underlying weakness was the absence of aprice mechanism allowing a comparison of com-peting uses of capital. Physical allocation ofresources by the planners of the command economywas no match for the signals provided by a market.This inherent weakness of any such grandiose plan-ning was spotted long ago by Adam Smith. He notedthe folly of the ‘man of system who seems to thinkhe can arrange the different members of a greatsociety with as much ease as the hand arranges thedifferent pieces upon a chessboard’ (quoted inDeane, 1989, p. 69).

An anecdote illustrates the point. When Sovietleader Nikita Khrushchev first visited the UnitedStates, he was so impressed with the supermarketsthat he asked his hosts: ‘who is responsible for thesupply of bread to New York City? I want to meetthis brilliant man’. Khrushchev was a man of systemwho could not imagine that loaves could be suppliedby Adam Smith’s invisible hand rather than a singlecommissar.

Where, then, does the collapse of the commandeconomy leave the remaining communist states,principally China and Vietnam? In both countries,rulers have certainly reduced the importance ofcentral planning, yet they have only created someconditions of a market economy. Massive, and mas-sively inefficient, state-owned enterprises stillpervade the economy, soaking up labour andserving as an indirect welfare state. The expansionof the non-state sector has certainly stimulatedcontinued growth, unleashing vibrant entrepre-neurial activity. Yet party contacts still determineaccess to economic opportunities. To most eyes,internal as well as external, the system is inherentlycorrupt; it is certainly technically inefficient in thatpolitical criteria distort economic decisions, leadingto huge misallocations of capital. The marketdecides – except when the party decides that itshouldn’t. Business proceeds in accordance withrules – except when politics dictates that the rulesare to be overridden (Clarke, 2007). These errorsmust eventually unwind, with damaging conse-quences for state-owned banks with enormous baddebts.

This idiosyncratic model is still delivering growthin what remain, for the most part, poor countries.As long as economic growth continues, nominallycommunist rulers may succeed in resolving thepolitical tensions induced by corruption andincreasing inequality. Even so, over the long term,economic growth will itself surely deliver a demandfor more fundamental political reforms.

Other authoritarian states

Some non-communist authoritarian regimes havealso initiated economic development. Examplesinclude modernizing military regimes such as thatof Gamal Abdel Nasser (president of Egypt,1956–70) and Asian developmental states such asSouth Korea in its predemocratic phase. Echoing thecommunist experience, the explanation for thesesuccesses rests with the potential capacity of non-democratic rulers to resist short-term pressures forimmediate consumption, thereby generatingresources for long-term industrialization.

Crucially, however, such cases are the exception. Inthis century as well as the last, non-communistauthoritarian rule typically creates economic stagna-tion, leading to North’s much-quoted comment


In a communist command economy, also called acentrally planned economy, the national governmentset quotas for state-owned production units and allo-cated resources to them. The bureaucracy thenimplemented the plan.

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Form of government ■ a federal and presidential republicwith 23 states.

Legislature ■ the 167 members of the National Assembly areelected for a five-year term. An opposition boycott of the2005 election meant that no opposition deputies wereelected.

Executive ■ the president, directly elected for a six-year term,heads both the state and the government and chooses themembers of the Council of Ministers. Term limits wereremoved by a constitutional amendment in 2009.

Constitution and judiciary ■ the constitution dates from1999, with amendments approved in 2009. The judiciary isheaded by the Supreme Tribunal of Justice whose membersare elected by the National Assembly for a 12-year term.Considerable political intervention.

Electoral system ■ Mixed member proportional. Voting islegally required but abstention is common.

Party system ■ President Hugo Chávez’s party is the UnitedSocialist Party of Venezuela (PSUV), formed in 2006 by amerger of existing parties supporting the president. Two tra-ditional and important parties are Democratic Action (AD),a left-of-centre but not a class-based organization, and theSocial Christian Party (Committee for Free Elections,COPEI), a Christian Democratic party offering a right-of-centre approach.

Note: For meaning and sources of scales and indexes, see p. xv. In allcases a score and rank of 1 is ‘best’.

When Columbus arrived on thenorthern shores of Latin America in1498, he was so impressed by the localbuildings, constructed elegantly on stilts,that he was reminded of Venice –hence Venezuela. Today, a visitor toCaracas, the country’s capital city, con-fronts a modern if dilapidated city sur-rounded by ever-expanding barrios(shanty towns) climbing almost verti-cally on the ravines around.

This contrast expresses the fundamentalfact about Venezuela and many othercountries on the continent: inequality. Ina country rated as upper-middleincome, over 40 per cent of the popula-tion live in poverty. The rich possessconsiderable wealth, displayed throughEuropean cars, manicured suburbs,gated communities and private planes.

Yet private affluence coexists with publicsqualor. Crime is endemic in most ofthis highly urban country, includingCaracas. McCaughan (2004, p. 2)reports that ‘the capital is literally fallingapart as thieves filch metal from metroelevators, remove street lamps, dis-mantle apartment intercoms, steal elec-tricity cables and even pickaxe cementbarriers separating car lanes’. The pointis not just the coexistence of povertyand crime but the simmering, andhighly politicized, resentment con-necting the two.

As part of Gran Colombia, full indepen-dence from Spain was achieved in1819, with Venezuela becoming anautonomous country in 1830. ‘The lib-erator’ Simón Bolívar was the hero ofthis movement. Aspiring to create a

Latin American federation which wouldentrench individual rights, Bolívar’s revo-lutionary spirit and unfinished projectare still frequently invoked by LatinAmerica’s left.

For the first half of the twentiethcentury, Venezuela was governed bymilitary, civilian or mixed dictatorships:some brutal, some modernizing, someboth. In 1958, however, democracy of asort was established and has continuedever since. The 1958 Pact of Punto Fijowas an agreement between the twomajor parties to marginalize otherparties and to keep divisive issues offthe agenda. This cartel was corrupt andinefficient, and became more so, even-tually enabling Hugo Chávez to launchhis own ‘Bolivarian revolution’.

Population (annual growth rate): 26.8m (+1.5%)

World Bank income group: upper middle

Political Rights score: ❹Civil Liberties score: ❹Human development index (rank/out of): 74/177

Freedom of the press index (rank/out of): 164/195

Perceived transparency index (rank/out of): 158/180

Further reading: Guevara (2005), McCaughan (2004).

COUNTRY PROFILE

VENEZUELAILLIBERALDEMOCRACY

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Oil was discovered in Venezuela in 1914and has proved to be the dominatingfeature of the country’s economy. In2008, the country’s oil reservesremained the seventh largest in theworld. Petroleum generates a third ofVenezuela’s gross domestic product andabout 80 per cent of its exports. Thecountry is one of the USA’s leading sup-pliers. The oil industry was nationalizedin 1976 and now directly provides mostgovernment revenue. How, then, hasthis vital resource impinged on theregime of Hugo Chávez?

Oil rents sustained the Punto Fijocartel, enabling the colluding parties toshare out the receipts throughpatronage. But the oil curse was also atwork. The economy became increas-ingly unbalanced and inefficient, fluctu-ating with the oil price. It was againstthis background that Hugo Chávez, aformer paratrooper, won the presiden-tial election of 1998. He promised aBolivarian revolution to bring socialjustice and clean government to thebarrios: ‘this is a different Venezuela,where the wretched of the earth knowthey can free themselves from their past.And this is a different Latin America’.The Chavistas cheered him on, espe-cially but not only from the barrios.

Despite middle-class opposition, andmany political twists and turns,Chávez has continued in power,winning a new term in 2006. A charis-matic and intensely political figure, thepresident has retained considerablepopular support while also marginal-izing opposition through decisive andsometimes authoritarian influenceover the economy, the military, themedia and the justice system. He hassustained, but cannot institutionalize,his personalist illiberal democracy.

Chávez has proved to be as dependenton oil as the preceding regime. He hasused the government’s generous rev-enues to establish expensive misiones(social programmes) that have helpedto reduce poverty. But easy money has

led to an indifference to more funda-mental economic reforms: corruption,inflation and inefficiency are endemic.Chávez has created grass-roots organi-zations that bypass rather than consol-idate state institutions.

Rather like a boxer who cannot fightwithout an opponent, Chávez dependson his wealthy enemies on the right tosustain his own political momentum.His regime is corrupt but this very factenables him to rail against corruption.Eventually, his remarkable revolu-

tionary energy will surely exhaust asociety more concerned with eco-nomic growth than firebrand politics.In the long run, Chávez’s instinctiveleft-wing populism will be revealed asa symptom of, not a solution to, thedeep-seated inequalities of his countryand continent. And oil will be shownonce more to be a hindrance, not ahelp, to balanced economic and polit-ical development.

Further reading: Gott (2005),McCoy and Myers (2006)

SPOTLIGHT

Petro-populism in Venezuela

Caracas

➧ TIMELINE

HUGO CHÁVEZ 1954 Born in Sabaneta, Venezuela.

1971 Enrols in the Academy of Military Sciences.

1975 Graduates from the Academy.

1982 Establishes a left-wing cell in the army.

1992 Leads a failed coup.

1994 Released from prison (where he studied Simón Bolívar).

1998 Elected president.

1999 Referendum ratifies new constitution.

2000 Re-elected president. Authorized by the assembly to legislate by decree for one year.

2001 National strike against decree laws.

2002 Removed from power by coup but returns two days laterafter street protests.

2004 Wins recall vote. Announces alliance with Cuba.

2006 Wins all seats in the National Assembly after oppositionboycott. Re-elected president. Announces ‘socialism forthe twenty-first century’.

2007 Defeated in a referendum to amend constitution(including abolition of term limits).

2009 Term limits abolished after another referendum.

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(1981, p. 20): ‘the existence of the state is essential toeconomic growth; the state, however, is the source ofman-made economic decline’.

Why does the typical authoritarian regime notengender sustained and substantial economicgrowth? The answer often lies in the political insecu-rities of the leaders. Frequently, their key task is toplay off domestic political forces against each otherto ensure their continuation in office, an art devel-oped to its highest level by the cautious but shrewdruling families of the Middle East. When expensivepatronage becomes the main political game,coherent economic development is bypassed. Thepublic sector often becomes bloated, with poorlypaid employees engaging in rent-seeking to enrichthemselves at the expense of business. A firm’ssuccess, and its tax burden, depends on its politicalcontacts more than its business strengths. Economicsand politics comprise a single arena, as in Europeanmonarchies before the era of commerce, resulting ininefficient use of capital. Alternatively, the ruler mayjust want to enrich himself, his family and his ethnicgroup by taking resources out of the economy andoften out of the country.

Leaving aside the characteristic economic distor-tions of authoritarian regimes, the resource curseprovides an additional aspect of under-performancein those dictatorships endowed with plentifulnatural resources. Remarkably, far from out-per-forming other developing countries, countries richin resources such as oil fall behind in economicgrowth (Sachs and Warner, 1995b). Certainly, mostMiddle Eastern countries such as Saudi Arabia have

escaped from low-income status. Even so, their gen-erous endowment has acted as a brake on, ratherthan a stimulus to, sustained growth.

Why is it, then, that an abundance of naturalresources seems to reduce economic growth? Thefactors involved are again political. One answer, ofparticular relevance to sub-Saharan Africa, is thatsuch resources comprise a honeypot which encour-ages internal conflict as local warlords compete forcontrol of mineral-rich enclaves in areas remotefrom the capital. The geographical concentration of these commodities intensifies conflict betweenresource-rich and resource-poor regions andgroups, especially in the context of economiesoffering few other opportunities to acquire wealth.

However, the idea of the rentier state is an expla-nation with more widespread applicability, particu-larly in the Middle East. Rentier states obtain mostof their revenue from exporting a natural resource,usually through licensing private, and often Western,contractors to secure the extraction. In economicterms, the rent-seeking government obtains anincome from owning an asset to which it adds littlevalue. For example, agricultural commodities maybe exported raw, with processing elsewhere. In thecontemporary world, the purest rentier states areMiddle Eastern monarchies with oil and gas reserves(Figure 19.1).

The authoritarian rulers of these rentier statesreceive a direct income from overseas, reducing their

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The resource curse refers to low economic growthin countries with an abundance of natural commodi-ties such as oil, gas and scarce minerals.

A rentier state is a regime whose main funding isbased on rent-seeking. These states obtain the bulkof their revenues from exporting such resources asoil and gas without adding value to these commodi-ties (for rent-seeking, see p. 381).

Figure 19.1 Rentier states: governments with the highest share of natural resource revenues in theirincome

100% 90% 80% 70% 60% 50%

QatarVenezuela

BahrainBotswana

AngolaNigeria

SaudiArabia

OmanUAEKuwait

Source: Adapted from Herb (2005, p. 299).

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need to raise taxes. And without taxation, pressuresfor representation are reduced. A portion of theresource rent can be distributed to the population ashandouts or through providing jobs in a swollenpublic sector, thus buying popular acquiescence to anon-democratic regime.

For the future, we can certainly imagine a world inwhich intensifying conflict over a diminishingsupply of natural resources takes place betweenresource-poor democracies and resource-richauthoritarian regimes. The Iraq invasion of 2003, forexample, is sometimes interpreted in these terms. Inthis way, the resource curse may come to affect thoseliving in liberal democracies as well as the inhabi-tants of those countries directly subject to it.

The political economies ofilliberal democraciesIn illiberal democracies, the operation of theeconomy is usually market-based but remainssubject to political override. This intervention maytake the form of a developmental regime, as inAsian countries such as Malaysia and Singapore.More often, the rulers of an illiberal democracyadopt an inconsistent approach, intervening incommercial decisions when political interests are atstake and using the economy as a means of buyingor rewarding loyalty. Thus the operation of themarket becomes more arbitrary and less efficientthan in liberal democracies where a network ofinstitutions, developed over generations, provides amore stable and credible framework for the conductof business.

At the same time, economic intervention by therulers of illiberal democracies is more limited thanin authoritarian (especially communist) states. It isoften restricted to politically sensitive areas. After all,in an illiberal democracy in which re-election is per-mitted, a president must face the voters at electiontime. This task is more palatable when living stan-dards are growing. The ruler’s claim to extensiveauthority is based on the proposition, ‘only I candeliver’. In other words, an illiberal democracycreates a stronger alignment than does an authori-tarian state between the interests of ruler and ruled.

In addition to these domestic considerations,astute leaders realize the value of a functioningmarket economy in attracting foreign investmentand in ensuring their credibility with internationalorganizations such as the International MonetaryFund. An illiberal democracy can create a politicalinterest in a strong economic performance. As a dis-cussion of Russia under Putin will show, in low- ormiddle-income countries an illiberal democracywith effective leadership can deliver economicgrowth.

After Vladimir Putin became president in 2000,economic policy became more orthodox thanduring the initial post-communist period underBoris Yeltsin. Putin modernized business law,improved tax collection, reduced inflation,increased foreign investment, ran a governmentbudget surplus and generally provided a morestable environment within which the economy grewat an annual average of 6.7 per cent between 2000and 2006 (Wagstyl, 2006, p. 2). At the very least,Putin provided a framework within which theeconomy could prosper from buoyant commodityprices. Even though many Russians still have littlesympathy for the subtleties of a market economy,Putin’s record was such that he was judged to be agood tsar.

But the president was also an intensely politicalfigure. Given the population’s desire for strong lead-ership and the potential threat from wealthy busi-nessmen, it was just as well that Putin’s political skillswere so finely honed. Just as he improved the envi-ronment for routine business transactions, so too didhe extend the Kremlin’s control over the crucial oilsector. It is this combination of policies – encour-aging the market where possible but overriding itwhen politically necessary – which characterizes eco-nomic management in illiberal democracies.

In 2003, for example, Putin launched a bruisingattack on Mikhail Khodorkovsky, head of thecountry’s largest oil company, Yukos.Khodorkovsky’s business ambitions for his companythreatened the government’s command of theenergy sector, while his political ambitions were alsoa concern to Putin. The businessman was jailed forfraud and later transferred to a Siberian penalcolony located in a radioactive zone. Yukos was dis-membered and taken over by the state. As Rutland(2005, p. 199) writes, ‘the arrest of Russia’s richest


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man and the near destruction of its largest and mostsuccessful private company grabbed the attention ofWestern observers, who feared that Russia wasturning its back on the market economy’. In an

illiberal democracy, just as in a fully authoritarianstate, power and wealth are closely linked and indus-trialists must therefore learn to avoid oversteppingthe mark.

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Next step Hall and Soskice (2001) is an informed and influential collection on the varietiesof capitalist organization in established democracies.

Further reading Perraton and Clift (2004b) and Hancké et al. (2008) are also useful on varieties ofcapitalism. On the history of political economy, Heilbroner (1953) remains anoutstanding account; see also Deane (1989) and Polanyi (1957). Hall (1989) is acomparative study of Keynes’s impact. Friedman’s monetarist outlook can befound in Friedman (1991); see Friedman (1962) for his underlying political per-spective. Gamble (2009) examines the financial crisis of 2008/09. Johnson (1995)is the classic work on the developmental state; see Sachs and Warner (1995b) forthe resource curse. Rutland (2005) reviews the Russian economy under Putin.Weingast and Wittman (2006) is an extensive handbook on political economy.

Internet sources Glossary of Political Economy Terms by Paul M. Johnson, Auburn UniversityA helpful glossaryhttp://www.auburn.edu/~johnspm/gloss/

International Forum on Globalization Examines the ‘restructuring of global politics and economics’http://www.ifg.org/index.htm

Martin Wolf, Financial TimesInfluential and accessible columns by a leading commentatorhttp://www.ft.com/comment/columnists/martinwolf

World BankAn informative site on developmental policyhttp://www.worldbank.org

LearningResourcesLearning Resources for Chapter 19

Visit the Companion Website to

‘click and go’

www.palgrave.com/politics/hague


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9780230 231023 20 Ch19italy-s3-mhe-prod.s3-website-eu-west-1.amazonaws.com/OLCS... · P olitical economy is traditionally defined as the study of the causes of the wealth of nations