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The Political Economy of the Rise and Decline of Developmental States

Carlos Aguiar de Medeiros••••

Abstract

Based on a classical political economy, on Latin American structuralism and on

Gramscian perspective about the state this paper argues that national economic

strategies are formed by particular interactions between institutions and economic

structures and evolve according to social conflicts in a non neutral international

environment. This idea is explored to interpret the rise of the developmental state in

some national development strategies experienced by peripheral countries during the

highest convergence period of the Golden Age and its crisis and redefinitions during the

greatest divergence phase and neoliberal reforms of the last two decades of last century.

Some new efforts to launch new development strategies in the last decade are

considered.

Introduction

The diffusion of industries to several peripheral countries after the Second War

and the great divergence between them since the eighties has sparked wide debate on

economic development. Interpretations based on neoclassical and on institutional

economics (with different degrees of proximity to neoclassical economics)1 are the

major field of historical explanations. Despite the wide differences they have on the

determinants of economic growth, they share a common perspective about three basic

aspects: The first is the supposition that strategies of development are built by a set of

government policies and by institutions that model private behaviors (of course they

disagree on what policies and institutions promote economic development); the second

assumes a "methodological nationalism”2 in which individual countries growth

performance are explained by domestic factors. The third is the corollary of the two

above perceptions and says that the state as a major inductor of positive change (in

• Associate Professor at IE, UFRJ, and CNPQ’s grantee. 1. For a recent classification of the institutionalist approach, see Fine (2005) 2 For an original reference to this expression, see Gore (1996), see also Medeiros (1997)

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resource allocation as in the heterodox reasoning, or in creation of market institutions as

in orthodox thought) is responsible for success or failure of growth strategy. For the

mainstream school wrong policies taken by populist state plays the dominant role,

wrong policies taken by liberal or neoliberal states plays this role by heterodox. For

both a meritocratic Weberian state is central to the successful strategies of development

(to avoid cases rent-seeking according to neoclassical authors; to discipline large firms

according to the institutionalists)3.

Stemming from a methodological perspective based on classical political

economy, on Latin American structuralism and on Gramscian perspective about the

state4, this paper takes a critical stance concerning these three basic aspects. At first it

considers that modern explanations about developmental states and the role of

institutions neglects the different challenges and circumstances created by initial

conditions and how different economic and social structures influences institutions (a

bias opposed to ECLAC’s classical structuralism that neglected the autonomous role of

institutions). The major challenge to explain development strategies is to articulate the

two dimensions5. Secondly, it assumes the proposition according to which the

international environment is not identical for developing nations and is influenced by

the hegemonic state’s economic and political action, creating different development

opportunities for them. Finally, it considers that the state cannot be viewed as an agent

above interests, apart from social classes and relations with other states, but rather, as a

central institution where the dominant class or some of its sectors leads a coalition of

power and builds a hegemonic project compatible with a particular accumulation

strategy.

Besides this introduction this paper has three main sections. In the next two

sections there is an attempt to illustrate some of these issues from an analysis of national

patterns of industrialization and development strategies experienced by peripheral

countries both during the highest convergence period and the greatest divergence phase.

The third and last section explores some new attempts to rebuild a “neo-developmental

state”. 3 Skocpol (1985) is an essential reference for the Weberian approach. 4 This tradition has a large influence in some contemporaneous analysis of globalization like Jessop (2002), Morton (2007) and broad perspectives on capitalist state and institutions like the social structure of accumulation theory (SSA), Mc Donough, Reich and Kotz (2010) . 5 By development strategy we follow Gereffi (1990): “Development strategies can be defined as sets of government policies that shape a country’s relationship to the global economy and that affect the domestic allocation of resources among industries and major social groups” Gereffi (1990:23)

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National Development Strategies in the Golden Age of Post-War. The

Formation of Developmental States (DS) 6.

The partial and limited diffusion of industrialization in the postwar period

(especially, among industries and activities closer to the innovative businesses such as

capital goods sector) was a consequence of national strategies led by development-

oriented states specifically geared to reproduce — in backward economies — modern

industry and its infrastructure as the main engine of economic growth.

Under U.S. hegemony and under the geopolitical of the cold war, national

development was basically an accumulation strategy and a hegemonic project of

industrial national capital coordinated by national states favoring the formation of large

industrial companies and their markets. National developmental strategies were

followed in several countries and took different routes according to the size of the

economy, the natural resource base, income distribution, geopolitical insertion (i.e.,

associated with higher or lower degree of ambition and political and military

autonomy), the political power underlying that strategy and the unequal opportunities

created by more developed countries. How successful those strategies were depended on

the combination of those internal and external circumstances7.

At distinct levels of success a few countries (in Latin America, especially Brazil

and Mexico, in Asia, the Asian Tigers - especially Korea and Taiwan - the

Southwestern Asian countries, India and China) followed a path somehow similar to

6 The internationally consecrated formulation about the Developmental State is Johnson’s (1982). It discusses the post-war Japanese state, having as a central focus the coordination of new industries investments coordinated by the state through selective intervention. Studies done by Amsden (1989), Chang (2006) about Korea and Wade (1990) follow this approach. The emphasis is put on the state power to discipline big business. What makes these studies essentially “state-centric” is the absence of hypotheses on why companies accept the tasks and act according to the direction of the state. Kohli (2005) identifies as developmental states a kind of cohesive capitalist state formed in countries like Korea or Taiwan very different of others social formations as Brazil or Mexico where a fragmented a multiclass state was formed. Here we consider as developmental state a state geared to change the economic status quo favoring the construction of new productive industrial capacity through state companies, public banks and coordination mechanisms. In this sense Brazil and Mexico and even Argentina that never built an encompassing and powerful developmental state – a cohesive capitalist state as put by Kohli (2005) had during the post war a state motivated by a strategic rationality to promote industrialization. But we consider that the success of this strategy depends less on design and more how they are implemented and this depends on internal interests, conditioned upon economic structures and the action of the hegemonic state. 7 For a discussion of articulations between internal and external dimensions, see Medeiros and Serrano (1997)

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what industrialized countries had experienced to restructure during the post-war period.

An attempt was made to transplant the key industries typical of the American

manufacture pattern - metal mechanics, automobiles and chemicals - and their

consumption patterns - centered on consumption durable goods financed by credit.

These industries, along with urbanization and its services and infrastructure created in

agrarian economies what Hirschman (1958) defined as a new "multidimensional

conspiracy for development" as its expansion would generate a chain of effects on

productive sectors and technological improvements that would engender economic

development. As Prebisch (1949) remarked, the typical Keynesian post-war policies on

the periphery would require structural change so as to offset the external constraints,

and building new capital stock in the industrial sector would be the basis for a policy

directed to high growth and unemployment reduction.

Between 1950 and 1980, the steady increase in per capita income in those

countries — higher than the world average rate and U.S. rate, the country leader8— was

chiefly due to the increased pace of the industrial output growth and the transfer of

surplus labor in agriculture to urban activities led by industry and services. In countries

where this shift was greater, as in Korea or Brazil, the growth rate was higher, and in

countries where it was less intense, as in India, the rate of growth of income per capita

and per employed person was lower9.

Despite the diversity of initial conditions within those countries, they faced the

challenges caused by large technological gap in relation to industrialized countries, the

narrowness of domestic markets, the problems of coordination and financing of

complementary blocks of investments in new sectors and restrictions on balance of

payments10.

Similarly to what happened in Western Europe in the postwar period, the

influence of industrial success in the Soviet Union gave major political legitimacy to the

long-term planning; thus, the Government planning boards became pilot agencies with a

major influence on economic policy. But the national strategies of industrialization were

8 Although generalized this reduction was very unbalanced amongst countries and regions according to the initial levels of development (greater in Latin-American countries, smaller in Asian countries), product and population growth rates. 9 The discussion between industrial product growth rate and GDP growth rate was analytically studied by Kaldor (1996) and is widely renowned in unorthodox development literature 10 The analysis of questions regarding the implementation of modern industries in farm-based societies was the main focus of the study on “the pioneers of development economy” such as Rosestein Rodan, Nurkse, Lewis, Hirschman, Furtado and Prebisch, inducing a new meaning to development economy. A new work among the classic collection is the recently reedited Agarwala and Singh (2010).

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not distinguished only by planning. In those most successful countries such as Brazil

and Korea (and later in China, since Deng Xiaoping’s reforms), strategies were the

result of industrial action over the allocation of investment. In some countries like

Korea, Taiwan or Mexico the state has directly controlled the “commanding heights” of

the financial sector (Haggard, Lee, Maxfield, 1993). Besides finance, in many countries

industrial inducement was directly exerted through the formation of major blocks of

state enterprises operating in strategic industrial activities and infrastructure11.

Thus, regardless the higher or lower share of exports in the composition of

industries’ final demand, the late industrialization of the 20th century was led by the

states. The conventional distinction between a strategy based on import substitution

industrialization (ISI) associated with the state leadership in countries like Brazil and

Mexico, and an export-oriented industrialization (EOI) associated with a pro-market

strategy that would have prevailed in Korea, Taiwan or Thailand does not resist, in fact,

to the historical evidence on industrialization pursued in those countries12. All strategies

originally included import substitution processes and selective opening and put greater

or lesser emphasis on industrial exports according to different sets of factors. An

essential part of national development strategies was the macroeconomic regime in

which the exchange rate, fiscal and monetary policy were subordinated to the objectives

of industrial development (Haggard, Maxfield, 1993). Until the 1970s, the external

financing was scarce and the constraint on foreign currency imposed strict control on

foreign exchange, control of imports, encouraged exports and policies that proved to be

a strategic element to the national development-oriented routes.

However, in spite of common strategies, the countries that started their industrial

diversification processes in the post-war period followed different patterns and their

states had different capacity to induce structural change. Two aspects stand out from

pattern differences: the levels of income distribution associated with the

industrialization process of (inequality in Latin America was much higher than in Asia),

and the share of industrial exports in countries' total exports (much higher in Asia).

Besides these structural dimensions, one important difference was the role played by

foreign capital larger in Argentina, Brazil or Mexico than in Korea, Taiwan or India.

11 Not only in China and India that had an independent and particular position during the cold war but even in peripheral countries like Brazil and Argentina arms production and pacific nuclear technology were developed as part of security and development strategy. 12 State intervention is a phenomenon that has been common across the development experience, in the successful cases as well as the failures. “States (…) thus differ not so much in their orientation toward the economy (…) but in their capacity to bring about the desired results” (Chibber, 2003: p. 6).

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Considering the State’s power to induce the economy one may observe that although the

common base was a coalition between the military, technocratic planners, and the

private manufacture sector13 this coalition was stronger in Korea or Taiwan than in

other countries14. In these countries a “cohesive capitalist” state (Kohli, 2004) was built

by dislodging the landed owners and with strong support of US in their strategy of

communist contention in Asia. It was also influenced by Japanese’ institutions and

business strategy developed after the war. The development state outside Asia was more

“fragmented and multiclass” and the industrial sector had to compromise some

economic policies with powerful land owners.

Different Patterns

Unlike Western European countries, industrialization in peripheral countries led

by developmental states was not accompanied by social democratic coalitions aiming at

the distribution of income and full employment15. However, despite the fact that the

goals for greater equity were subordinated to the goals for growth and industrialization,

income distribution was quite uneven according to the different social coalitions

supported in the state. The social coalitions, i.e., the economic interests prevailing in the

hegemonic project16 of national developmental age, and the pattern of income

distribution were essentially influenced by the way the land property and the

modernization of agricultural production evolved. In countries where the productivity in

food production17 was lower, the lower was the peasant’s income and the heavier was

13 Despite the great differences in the role played by these different groups in the state. 14 Here is interesting to follow Jessop (2002) in his definition of economic domination considering two dimensions. “The first is internal to the economy and concerns the power of one or another fraction of capital …to impose its immediate interests on other fractions, regardless of their wishes and/or at their expense. Such domination can derive directly from the position of the relevant fraction (cartel, firm) in the overall circuit of capital in a specific economic conjuncture and/or indirectly from the use of some form of extra-economic coercion (including the exercise of state power”. “The second dimension of economic domination………refers to the capacity of capital in general, a given fraction of capital, or particular capitals to steer the evolution of other institutional orders in line with the demands of capital accumulation..” op. cit. p 29) 15 During this same period and among industrialized countries was build a very different state. Bob Jessop (2002) denominated it as “Keynesian National Welfare State” as a new hegemonic project based on the search of full employment and social integration based on the expansion of internal market as a central base for productive accumulation scales. 16 What is meant here as hegemonic project is the solidarity of interests that transcend private and corporate economic interests in a given hegemonic policy. See Morton, 2007. 17 The distinction developed by Lewis (1977) and Furtado (1969) between tropical agriculture and that of a temperate climate is essential for the understanding of distinct starting points of the “primary-exporter” model and for the different levels of heterogeneity of social and economic structures.

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the weight of the traditional oligarchy on political power — such as in Brazil, India or

Indonesia the sate was more “fragmented and multiclass” — and the industrialization

took place accompanied by extensive social marginalization and exclusion of rural

masses (and growing suburban areas) of modern consumption, leading to large income

concentration. In countries where land reforms and simultaneous modernization of

agriculture took place (as in Korea and Taiwan, that like Japan made deep changes in

ownership relations, with the United States’ support and encouragement), internal

structural heterogeneity18 and social polarization was less intense, and the state was

more cohesive around the interests of industrial capitals19.

Similarly, export performance followed a distinct path.

In Asia, the import substitution was quickly followed (as early as in the 1960s) by

industrial exports (mainly textiles and clothing in the early stages), generating a greater

trade diversification and consequent positive effect on the balance of payments. In Latin

America, the diversification of exports happened much more slowly and less intensively

(and even so, only in some countries, notably in Brazil this occurred in late 1960s).

Several hypotheses explain this discrepancy. Hypotheses that follow a neoclassical

approach and those closer to predominant institutional analyses emphasize the different

strategies adopted and the prevailing interests. Excessive protectionism, the urban and

anti-rural bias of developmental coalitions20, or the pessimism about the Latin

America’s possibility to export industrial products21 would have prevailed in the region

in contrast to the clearly exporting-oriented strategies of Asian countries (explained by

orthodox perspective as a result of less protectionism, or by the heterodox viewpoints as

a consequence of solid industrial policies).

What distinguishes these approaches is the lack of connection between strategies,

institutions and economic structure. Using an argument similar to that employed by

Diamand (1986) in the case of Argentina, by Mahon (1992) and more recently by

18 A classical study is made by Anibal Pinto (1973) on the great structural heterogeneity of Latin America. Here we consider internal structural heterogeneity the productivity gap between food production and industrial goods and by external productivity or unbalanced economic structure the productivity gap between primary export sector and industry. See ahead. 19 In Argentina land concentration came together with high productivity in food production generating a unequal but rich economy for Latin American standards. The political power of the agrarian class in Argentina had by its turn a strong influence on state policies during de developmental years. In Mexico land reform had little influence on income distribution because the best lands remained concentrate in few hands and the lack of public investment collaborate to keep productivity in a very low level. 20 A good synthesis was made by Fishlow (1991). 21 Explicitly underlined in the 1953 CEPAL document. For discussion see Pazos (1984)

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Bresser-Pereira (2010), here we claim that among countries with highly competitive

export industries based on natural resources such as those of Latin America, there came

to be an external heterogeneity or an "imbalance in the production structure" between

the productivity of the primary export sector and that of the industrial sector. This

imbalance led to the formation of an uncompetitive exchange rate for the industry

contributing for the specialization of the export sector. Industrial policies favored

domestic industry through preferential exchange rates and tariffs, but they were not as

competitive as it was in Asia for industrial exports. The interests involved in this

strategy clearly were much more solid than were those generated by such a different

economic structure as the one that prevailed in the most dynamic Asian countries22.

In Latin America, the high share of exports based natural resources exacerbate a

distributive conflict between primary exporters, industrial sector, non tradable support

activities and the working class on the exchange rate. This was particular intense in

Argentina due to its bigger external heterogeneity and higher labor militancy.

Thus, the higher cohesiveness around manufacture exports (and industrial interests)

was not simply matter of institutions but an outcome from the economic structure.

In Asia, for a small group of countries like Korea, Taiwan that had during the

1960s a lower level of industrialization than Argentina Brazil or Mexico, and certainly

city-states like Hong Kong and Singapore, the scarcity of natural resources made the

export of industrial products the obligatory path toward industrialization, whether due to

the low size of the domestic market (as in the case of Taiwan and the city-states) or, as

in the case of all the others, due to the need to finance their import capacity23. Poor

natural resources basis was favorable to a more balanced economic structure, making it

possible to establish a real exchange rate more favorable to industry. Secondly, because

of the political situation resulting from the Cold War, these countries relied on heavy

U.S. support during the initial provision of external funding and of a preferential market

for their exports.

Thus, the Asian industrial strategies did not distinguish themselves for having

adopted policies and instruments very different from those used in Brazil or Mexico24.

22 The above argument does not mean that in Latin America a permanent and overall appreciated real exchange rate prevailed (Sachs, ) after midi sixties many countries adopted exchange rate devaluation policies. What here is stressing is that the absolute level of exchange rate was not competitive for the manufacture sector due to the higher productivity of the commodity export sector (Diamand, Bresser) 23 In Medeiros and Serrano (2001), the role of exports in growth trajectories according to their distinct productive structures is discussed. 24 One may consider that the creation of maquiladora (in-bond) in Mexico occurred in 1965 as in Taiwan

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The State was not more or less interventionist in the induction, coordination and

subsidization of private investment25; however, due to dissimilar structural and

geopolitical circumstances, this policy has yielded different macroeconomic and social

results.

In these countries, the composition and transformation of the export structure

generated a larger and more diversified sector of industrial tradables and a stable

exchange rate. The dominance of industrial sector (led by coalition of big business and

the State) over other fractions of capital was much more secure than in other developing

nations. The main conflict between industrial capitalist and working class was

suppressed politically by an authoritarian State but economically the evolution of real

wage was sustained by a simultaneous rise in food and industry productivities.

This fact26 had important consequence for the easier way that Asian countries

reacted to the debt crisis of 1980, but it had already manifested itself with the pattern of

indebted growth followed by Brazil, Mexico and Korea in the 1970s27.28

During the seventies, despite the dollar over borrowing that was spread in

periphery (India is an exception), the differences within Latin America Countries and

within Asian countries were very sharp in contrast with the situation that took place

after the 1980s marked by a regional clustering. After the first oil shock and during all

the 1970s Argentina with a fragile balance of payment position and strong working

class had high rate of inflation exacerbating its structural dilemma; Mexico interrupted a

cycle of “stabilizing development” and pressed by the political turmoil of the late

sixties, initiated a distributive strategy in a unstable path until the discovery of new

reserves of oil and huge accumulation of external debt. Brazil and Korea had a different

strategy and used the availability of cheap money to launch an industrial plan aimed to

import substitution in heavy industry and chemicals.

25 “It is by now well known that the favorite neoclassical showcase of South Korea is not predominantly one of market liberalism but of aggressive and judiciously selective state intervention. The Korean state has heavily used the illiberal compliance mechanisms of selective command and administrative discretion, restricting imports for industrial promotion, disciplining the private sector through control over domestic credit, foreign exchange and underwriting of foreign borrowing, and public enterprise leading the ways in many areas” Bardhan (1988:62). 26 Chibber (2003) develops the implications of this characteristic on the greater ability of the exporting Asian States to discipline large corporations to comply with industrial policy orientation. 27 Although the ratio of debt to GDP was not very different in Korea and Brazil, the ratio of debt service to export that captures better the country external solvency was much lower in Korea. See Singh and 28 External debt grew extraordinarily in the 1970s under the pressure of the bankers – Medeiros, 2008a, Pazos, Fislow

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Between 1950 and 1980, developmental states that made domestic

industrialization their main strategy for national development also took form in

Indonesia and India. Five-year plans, a high percentage of state companies in strategic

sectors of heavy industry and infrastructure, strict protection of the internal market and

import substitution were the core of this strategy. In India, its neutral position in the

Cold War and the influence of Soviet planning led to the formation of an autonomous

military strategy with significant impacts on the priority of heavy industry. In both

countries, these strategies led to performance quite distinct from that of the Southeast

Asian countries and structurally more similar to that of Latin America. With an

underdeveloped agricultural system, a vast majority of the population engaged in the

struggle for survival, little intra-sectoral mobility and an insubstantial industry of

handcrafted consumer goods, Indian developmentalism resulted in modest growth rates

and income concentration (given the vast rural poverty), yet it has managed to

internalize important segments of modern industry and its infrastructure. In Indonesia,

where there was a predominance of primary exports, high income concentration based

on the differences between rural areas and cities also occurred.

Table 1 summarizes the different patterns.

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Table 1 Developmental State and Patterns of Growth

1950-1980

Countries Structural Heterogeinity. Tradable and domestic sector

Macroeconomic Policy

Level of Intervention and Economic domination

Developmental Strategy

State Power Class Conflicts

Median East Asian Countries (Korea and Taiwan)

Poor natural resources and low external heterogeneity. High productivity in food, low internal heterogeneity, low income concentration and low poverty

Pro-growth strategy based on credit, low interest rate, competitive exchange rate trough foreign capital control and wage control

Productive Sector. Industrial class led by domestic private groups as a dominant economic class. State Owned Enterprise in heavy industry

Import substitution and early diversified export promotion through subsidies, tariffs, domestic credit and selective opening. FDI control

Cohesive State. Expropriation of landed class political power, subordination of class struggle to the developmental state through political dictatorship backed by US

Large Asian Countries (India, Indonesia)

Rich natural resources and high external heterogeneity. Low productivity in food, high internal heterogeneity, high income concentration and high poverty

Pro-growth strategy based on credit, public spending, low interest rate, low exchange rate trough foreign capital control and wage control

Productive Sector. Multiclass alliances between industrial sector with land and export sector as the dominant economic bloc. State Owned Enterprise in heavy industry

Import substitution and low export diversification. Subsidies, tariffs, domestic credit and selective opening. Capital control

Fragmented state. Preservation of landed class political power and subordination of class struggle by dictatorship (in case of Indonesia) or liberal policies (India)

Median Latin American Countries (Argentina and Chile)

Rich natural resources and high external heterogeneity. High productivity in food, low internal heterogeneity, low poverty

Pro-growth strategy based on credit, public spending, low interest rate, low exchange rate trough foreign capital control and wage control

Productive sector. Multiclass alliances between industrial sector with land and export sector as the dominant economic bloc. State Owned Enterprise in heavy industry

Import substitution, low export diversification. Subsidies, tariffs, domestic credit and selective opening. Capital control

Fragmented state. Preservation of landed class political power and subordination of class struggle by dictatorship (during the seventies)

Large Latin America Countries (Brazil and Mexico)

Rich natural resources and high external heterogeneity. Low productivity in food, high internal heterogeneity, high income concentration and high poverty

Pro-growth strategy based on credit, public spending, low interest rate, low exchange rate trough foreign capital control and wage control

Productive sector. Multiclass alliances between industrial sector with land and export sector as the dominant economic bloc. State Owned Enterprise in heavy industry

Import substitution and diversified export promotion Subsidies, tariffs, domestic credit and selective opening. Capital control

Fragmented State. Preservation of landed class political power and subordination of class struggle by dictatorship (in case of Brazil (from 1964 on) or more liberal policies (Mexico)

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Neoliberalism and the Crisis of the Developmental Nation States

The Reagan-Thatcher offensive against the National Keynesian State in the

central nations, the external-debt crisis at the periphery and the collapse of the USSR in

1991, at a time at which a new technological revolution based on information and

telecommunication was rising, led to significant changes in the international division of

labor. Under unrestrained competition finance and productive internationalization

greatly enlarged29.

The “Washington-Wall Street complex”30 (and its leadership over the World Bank

and the International Monetary Fund) established itself as the center of political power

and of the ideology not only of globalized American capital but also of globalized

capital in general. Despite its rhetoric concerning a minimal state and market efficiency

the establishment of neo-liberalism as a doctrine led to a new strategy of accumulation

and a new hegemonic project widening the dominance of capital in general and finance

capital in particular over other fractions and interests31. These transformations were

triggered through a widespread attack on the unions and on welfare state32. It also

corresponded to a new U.S. trade offensive to open the hitherto regulate internal market

of the new industrialized exporting nations33.

Among the industrialized nations, the large corporations, exposed to intense

international competition, sought greater autonomy from the state, the workers and the

chain of domestic suppliers, simultaneously demanding greater state support for the

globalization process of production and finance in new spatial and regional

29 “The breakdown of communism eliminated a competing model, which had obliged most Western leaders to respect some kind of equilibrium between the worlds of capital and labour. In addition, the crisis and fall of the Soviet Union gave way to rapid impoverishment of the countries of the former socialist bloc and to disarray in most of the Third World. The end of the Eastern bloc and the rapid liberalization of certain parts of the Chinese economy, in the early 1990s, further consolidated the globalization of neoliberalism”. (2007:29) 30 Wade and Veneroso (1998). 31 Jessop (2002), in his analysis of the state that emerges from crises of Keynes and the Welfare State, denominates a “Schumpeterian competitive state” a “state that aims to secure economic growth within its borders and/or to secure competitive advantages for capitals based in its borders, even where they operate abroad, by promoting the economic and extra economic conditions that are currently deemed vital for success in competition with economic actors that and spaces located in other states.” (p. 96). 32 For discussions on these formulations see Serrano (2004) and Glyn (2006). 33 The liberating pressure was particularly strengthened in the environment of the WTO in the Uruguay Round started in the 1980s.

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arrangements. Transplanting labor intensive activities to peripheral countries was

intense remaking the international division of labor.

During the eighties and nineties a low and asymmetrical growth took place within

industrialized countries. Despite some national regularities observed in all countries -

McDonough, Reich and Kotz (2010) named these changes liberal social structure of

accumulation to distinguish them from regulated SSA that prevailed before- the

“devolution” of Keynesian National Welfare State was very differentiate among

industrial countries according to the severity of external pressures and the resistance of

working class and State social institutions.

Among the recently industrialized and semi-industrialized nations, the impacts of

these transformations were greater in light of the lesser productive diversification and

greater dependence of its industries on state regulation of the financial system and the

domestic market.

Although taken in different circumstances and with different intensity, the end of

the developmental state had a similarity with the end of the Keynesian Welfare

National State in industrial countries. If this was associated with the end of the

subordination of monetary and fiscal policy to full employment, the end of

developmental state was associated to end of the subordination of fiscal and monetary

policy to industrial development.

Similarly as it was happened with national Keynesianism, development strategies

based on industry and on the nation as the prevailing scale of accumulation were

abandoned in many countries and a new hegemonic project led by the economic

domination of cosmopolitan capital was established.

Despite the differences observed in time and space, the discontinuity in

development strategy involved two major forces: financial openness and big business

revulsion against the developmental state34.

34 “ In CEE the restructuring of market–state relations has been the most sweeping. While the economic changes were more profound than anywhere else – moving from a socialist model to neoliberal capitalism – they also were implemented faster. Within less than a decade (the 1990s) the transition was a fact, and the region had opened up to global private capital. Most of the former socialist countries in Europe have decisively distanced themselves from the ex-Soviet Union and have been linking up to the European Union, either as new members (Hungary, Poland, Slovenia, Slovakia, the Czech Republic, Estonia, Latvia and Lithuania) or as candidate members (Bulgaria, Romania and Croatia)”.( Jilberto; Hogenboorn, 2007: 30)

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Financial opening played an important role for the crisis and discontinuity of

national developmental strategies (in both industrialized and, mainly, semi-

industrialized nations) insofar as it exposed the economies to volatile capital inflows

and dissolved the role of domestic credit as a mechanism for coordinating investments.

The developmental coalitions supporting state intervention was supplanted by a “more

orthodox and internationalist policy factions and pushes toward liberalizing reforms”

(Haggard, Maxfield, p. 325). It was in the wake of the exchange-rate crises that WC

structural reforms were massively introduced35. The institutional position of the Central

Bank (with an exclusive focus on price stability) was strongly enlarged due to

international constraints that followed the external crisis and the role played by

manufacture interests and its institutions was diminished.

As a corollary to these macroeconomic and institutions change there was a split –

to the extent to which, and under the conditions in which the nations opened their

economies – between the interests of the large corporations and the national industrial

strategies that were the basis of national development36. Cultivated and promoted by

their developmental nation-states domestic business, challenged or partially removed

from their markets, began to seek for new opportunities and strategies for accumulation,

especially through the formation of joint ventures with multinational corporations and

through majority interests or participation in the business of privatizations. Such

opportunities demanded new State functions and policies and a new power scheme and

strategy of accumulation37.

Thus, the U.S.-led pressure throughout the 1990s in favor of liberalization,

deregulation and privatization found widespread internal support among the dollar-

based cosmopolitan financial groups and big business in general. The large

corporations’ rebellion against developmental states occurred everywhere38. It was

generally accompanied by public opinion that identified industrial policies – such as

those implemented by countries like Brazil, Korea or Indonesia – with political

authoritarianism, with “crony capitalism” and, in the case of Brazil, with income

35 For a discussion on the debt processes and their impact on macroeconomic regimes, see Medeiros (2008a) 36 As observed earlier the discipline of big business and the State influence on investment decision was the essential characteristic of developmental states. 37 In Medeiros (2009) privatization as a form of organizing “big business” is discussed. 38 “in Korea, the giant conglomerates (the chaebols) have aggressively campaigned during the 1990s to convince the population that the government should abandon its industrial policy and financial regulation” Chang, 2006:253.

15

concentration. The social cohesion and political legitimacy of industry-based

accumulation strategies and, consequently, the hegemony of this project were

profoundly shaken39.

But this general trend was far from being homogenous and a great divergence

took place.

In Latin America and in some East European countries, the debt crisis of the

eighties was intense bringing about high inflation rate and deep recession. This caused a

structural crisis in prevailing State led growth and created new coalitions of internal and

external interests – remaking the bloc of finance and primary export that ruled LA in the

XIX century- around the agenda of reforms of the Washington Consensus that spread

all over the region in the nineties. (Medeiros, 2008a)

In Asia, the external shock of the eighties was not so disruptive. In large countries

as China or India, the debt ratio was too low to make any substantial negative impact

(Hughes and Singh, 1991). In East and on South-East countries, thanks to better

solvency ratios, the surge of Japanese investments and the clustering of production

chains in the region (Medeiros, 1997) and the majority of the economies (more or less

open) had high growth preserving the bulk of institutions developed earlier. This

clustering of success and collapses in space and time is the major evidence of the limits

of the “methodological nationalism” (Ocampo, Parra, 2007, Medeiros, 1997). Only in

the nineties but mainly after the 1997 crisis – circumscribed to the countries that opened

their capital accounts (in Thailand, Indonesia, Philippines and South Korea)- occurred a

strong offensive against the developmental institutions.

Thus, like happened in industrialized countries, there were different national

answers to liberalization process. In Latin America countries liberalization was taken

in a radical U-turn as a “rebound effect” (Hirschmann, 1982, Palma, 2010) from a very

weak national position; in Korea and other Asian countries liberalization was taken later

39 Fine (2005) examines the different interpretations about the crisis of the developmentalist state, from what he calls the “political school” (Johnson, 1982), to the “economic school,” (the main institutional authors such as Chang, Amsden, or Stiglitz and Rodrik). For the former, the developmental state was a singular historical construction that lost its functionality with the success of development. For the latter authors, the State crisis it derived from the financial opening and the lack of adaptation of institutions to the new environment; for others, such as Chang, the financial opening destroyed the basic mechanism of investments coordination. For Wade (1998) the crisis was the result of American pressure on Asian institutions. Here we assume some of aspects mentioned in these approaches, but considers them under a different light in respect to the relationship between the state and capital, emphasizing the change in interest of large economic groups and their strategic alliances.

16

and from a trajectory of high growth. Other Asian countries like China, Taiwan or India

did not dismantle the main developmental institutions. Political and structural reasons

contributing for this different route.

Thus, the degree and impact of these changes on national developmental

strategies essentially depended on the extension and circumstances of the external crisis,

the resistance of the previous economic and political coalition to the new challenges and

the capacity for structural transformation of the economies. The production structure,

the existence of distinct regional dynamics and the power and political cohesion of the

nation-states were the main vectors for a strong differentiation occurred between Asian

and Latin American Countries.

Different Paths

Throughout the 1990s, it was possible to identify various reactions to the

liberalization and technological pressures. One common response to the new challenges

was the pursuit of an “integrationist” strategy (Amsden, 2001), or as put by Lall (2000)

“a passive strategy dependent on foreign direct investment (FDI)”. This was based on

two pillars: on micro side this strategy was built by the formation of new private

alliances and re-specialization in activities with absolute cost advantages (whether in

industrial commodity chains, as in Mexico, or in natural resources, as in most South

American countries and in Russia, throughout the 1990s)40..

On macro side this strategy centers on exports and on external financing and investment

as the main growth machine. The demise of developmental state’s institutions and the

reconstitution of new state around these new activities and social classes was the main

political challenge.

In Mexico, the liberalization

process initiated after the 1982 default in external debt and bank nationalization

accelerated in the beginning of the nineties moving towards the NAFTA agreement

established in 1994. Led by small group of technopols41 a victorious coalition formed

40 “Within the context of the above-mentioned structural heterogeneity, LA has developed two types of successful “modern-sector” regional oligopolies: those involved in large scale capital intensive commodity production for exports, and those that have mastered the technique of organizing low-value-added labour intensive production chains- sometimes for exports (most agricultural products) and sometimes in services(eg. retail)” Palma (2010:33) 41 The Chilean “Chicago boys” during the Pinochet Government were the first technopols group to lead a radical economic change in the continent, in 1985 Jeffrey Sachs led a radical reform in Bolivia during the

17

by large Mexican groups mainly in non tradable sector, and American multinational

companies, inaugurated a growth strategy based on exports of labor intensive industrial

activities in a “shallow” trade specialization42. This export model enlarged the Mexican

dependency to US markets and investments and promoted the rise of domestic

conglomerates43. For this last endeavor the State has a protagonist role in privatizations

deals and massive finance support.

In South America, cosmopolitan

big business’s rebellion against the developmental state started during the late seventies

and the eighties as a consequence of the external crisis and hyperinflation that occurred

in many countries. It corresponded to the expansion of the power and influence of the

traditional exporters, banks, supporting non tradable activities and industrial groups in

association with foreign capital. In Argentina, during the eighties the external debt

resulted in huge wealth transferences from state to big business44. Started in 1989, the

Losada presidency, Pedro Aspe Phd from Harvard became finance Minister in Mexico, Alejandro Foxley future ministry in Chile, Domingo Cavallo as well from Harvard became the most powerful technopol in Argentina. They were all connected with Lawrence Summers, Jeffrey Sachs, Rudiger Dornbusch, Stanley Fisher and martin Feldstein that form a elite group in US Treasury and in IMF. Contrary to the old technocrats they had to be good politicians. Daniel Yergin (1998) has a point when he argues that WC was developed in Latin America by Latin Americans 42 In Mexico, “After s period of rising state intervention in credit markets, which culminated with the bank nationalization in 1982, Mexico move dramatically away from heterodox financial policies. As happened during earlier periods of international trouble in Mexican history, the efforts by both President de la Madrid and President Salinas to regain credibility with international investors and creditors strengthened the hand of economic liberals within bureaucracy. The government initiated the reprivatization of the banks, reduced preferential credit distributed through public development banks and trust funds by half in 1987, and reduced reserve requirements and freed interest rates in 1989” (Haggard, Maxfield, 1993: 321) 43 “While, for most Mexicans and much of the economy, the 1980s were a lost decade, for Mexican economic groups it was the time of a miraculous centralisation. The nationalisation of the Mexican banking sector in 1982 resulted in former bankers creating new financial groups that invested in non-bank activities, including stock markets and insurance companies. The stock markets in fact turned into a parallel banking system, and a new group of giant firms emerged: los bolsistas3 with, among others, Carlos Slim”Jilberto, A. and Hogenboom, B (2007) pg 143 “ . He has made his fortune in the aftermath of the crisis of 1982 and his corporate activities currently range from telecom to finance, and from electronics to trade. After privatization he became the owner of a controlling share of Teléfonos de México (Telmex) with partners Southwestern Bell and Telecom France. In 2001, Slim started to expand his corporate dominance beyond Mexico, particularly through América Móvil, a giant and fast growing company in cellular phones. Slim’s career is the ultimate example of the current regional power of Mexican conglomerates, illustrating their economic concentration and transnationalisation since the 1980s. Moreover, the expansion of Slim’s conglomerate points at the use of good relations with politicians and state officials, and also shows how, for such large corporations, financial crises can be treated as opportunities rather than threats”. Pg 137 44 “The subsidizing of large economic groups and foreign capital during the 1980s by transferring their debt to the state also happened with the capitalization of this debt via the redemption of foreign debt in the process of privatization, when it was exchanged for net worth pertaining to the public

18

Structural Adjustment Programme and massive privatization supported by Washington

institutions and Argentinean elite generated a premature deindustrialization and

denationalization but simultaneously a large centralization of capital took place headed

by commodity exporters and finance.

As a big country in Brazil, the

alliance that backed the State was led by manufacture industry (including a high

participation of foreign companies) but included domestic construction firms (and

support activities in non tradable sectors) and domestic banks that achieved a strong

position in the seventies. Important segments of manufacture sector early contested the

State leadership. But it was the 1980’ external crisis, high inflation and the irruption of

an autonomous labor struggle that undermine this coalition. With a more diversified

industry that partially resisted the process of trade and financial opening, some

important public enterprises (including a big development bank) were preserved from

the massive privatization and denationalization of midi nineties45. The

“desenvolvimentistas” – the technocratic, intellectuals and industrial leaders that led the

old economic strategy- were not completely dislodged from the State as happened in

Mexico or Argentina. But likely all countries in the continent the winners from these

liberal transformations were foreign investors and the big business in finance sector46

and in production of commodities47.

services. In Argentina this ‘capitalization of foreign debt’ was devised in 1985, though initially it was not associated with privatizations but with the transfer of private debt to the state, which had not been done before when the exchange insurance regime was applied. Added to this were other subsidizing schemes of large companies, such as state overvaluation of purchases of goods and services, and other mechanisms. It is estimated that total state transfers to the more concentrated capital amounted to $105 billion in the period 1981–9, a magnitude similar to the total yearly gross national product (GNP) of Argentina. The main beneficiaries of these regimes were economic groups or conglomerates such as Pérez-Companc, Techint, Siemens and FIAT” (pg 174) 45 This resistance was only partial. Along the nineties there was a disarticulation of some productive chains and the abandon of some innovation intensive activities creating a kind of “regressive specialization” (Coutinho, 1997) although some modern capital goods manufactures more integrated with mineral and raw material resources were preserved. 46 The power of private banks in Brazil has a long history. During the sixties commercial banks were forbidden to compete on interest bearing demand deposit accounts allowing a great inflation bonus. This can be understood as a political exchange in face of an active state intervention on credit allocation trough state banks. But until the eighties the influence was lower then what became later. The state owned Banco do Brazil that had an unlimited overdraft privileges (“movement account”) and with the support of industrialist acted as a countervailing force against monetarist policies usually hold by Central Bank. A big change occurred in 1986 when under a coalition of interests formed by Brazilians private banks, the Central Bank, the World Bank and foreign banks this privilege was extinguished (Armijo, 1993). In the eighties the financial sector earned a large inflation bonus from demand deposits – that paid no interest- investing funds in high-yielding treasury bonds. As observed by Armijo (1993) in many developing countries the Brazilian Central Bank could have “raised bank’s reserves requirements and obligatory holdings of government debt. Instead, increasingly attractive interest rates were needed to induce banks to

19

Led by the bureaucracies close

to Washington institutions (the technopols in the central bank, the finance ministry,

etc.), liberal reforms removed industry and its bureaucracies (planning ministry, labor

ministry, intermediary government agencies, etc.) from the “commanding heights” of

the conomy.

In Russia and East Europe, the crisis of socialism was also accompanied by a

“rebellion” of the elites – the “revolution from above” as Kotz and Weir (1998) stated it

–, particularly of the executives of the large corporations. A violent, primitive capital

accumulation was established involving the new sectors and private economic groups

that prospered by the transition to capitalism (agriculture, oil and natural gas). In the

East European nations that attracted German capital, a new specialization process in

labor-intensive industrial activities was initiated, and foreign financing was resumed,

affirming, here also, the “integrationist” way.

An essential feature of this strategy was a macroeconomic regime based on

monetary stability, cut in public expenditures (mainly investment) and financial

openness. This led to substantial valorization of the real exchange rate and high interest

rate. The power of financial sector in these countries enlarged not only because its

assets grew faster in the decade but because its main interest – higher interest rate and

low rate of inflation- has predominate on economic policy. Due to high levels of

external debt and growing influence of IMF on domestic policies, this finance

domination was expressed in orthodox Central Banks that assumed in these countries

the “commanding heights” of the economy.

Some of these changes and the demise of the developmental state also occurred in

Korea in the beginning of the nineties48 and in many Asian countries after 1997-8

hold treasury bills” (p.282). After this decade not only the interest rate set by Central Bank has been much higher than the rate observed in other countries, but the spread is incomparable high as well. There is no agreement about this last feature but one may observe that contrary of what happened in Argentina or Mexico, the financial sector in Brazil was not denationalized and the big domestic banks prospered as the main dealer of Brazilian internal debt. 47 “During the 1990s, Brazil’s industrial elite withdrew without much conflict from areas attractive to international investors: industrialised food production and distribution, supermarket chains and automobile spare parts in the beginning of the decade and, later, telecommunications, advanced services and financial institutions. The industrial elite has either migrated to the tertiary sector or retreated from business altogether, investing their capital in the financial market, pension funds or real estate. Other possibilities were ‘support activities’ such as the building sector, packaging industry, car sales concessionaires, activities related to business and law consulting, business promotion, educational and cultural events, administrative and honorific positions in the ‘third sector’ (NGOs) and the administration of real estate”. (Rocco, 2007:208) 48 The dissolution of the powerful Economic Planning Board into the Ministry of Finance and Economy was the milestone of the new State.

20

external crisis hit. Throughout the 1990s, several Asian nations followed a mix strategy

based on industrial inducements and on IDE and exports integrate in commodity chains

in a flying geese model. Korea under American pressures opened its financial system

eliminating the role hitherto exerted by Government on credit and investment. Big

chaebols decided that the government intervention was a hindrance to new economic

opportunities. Other less developed countries in Southeast Asia follow a similar liberal

road.

The national development strategy was not fully changed in China, and India

(both with military power and autonomous geopolitical presence) and Taiwan or

Singapore that followed a path of greater autonomy or of greater resistance, preserving

the national developmental strategy and its hegemonic project in a new context.

Although relinquishing some previous economic regulation mechanisms, the

developmental state in dynamic East Asian countries survived.

In the case of China, this route – “independent” according to Amsden’s (2001)

classification– was based upon greater resistance to abandoning the national

industrialization strategy, maintaining or introducing superficial changes in the control

of financial flows, investments and associations with foreign capital. The preservation

of large public corporations, the maintenance of internal credit state control and the

maintenance of economic planning and macroeconomic coordination centered on the

defense of a competitive real exchange rate progressed strategically, favoring industrial

capital prevailed. As a form of restructuring resulting from external pressure and

technological changes, this path was based on selective, negotiated policies of trade

liberalization, on support of the corporate globalization process and, above all, on the

pursuit of inclusion of innovative and proprietary activities in the closest production

chain through ample public investments in science and innovation aimed to industrial

up grade.

India followed an intermediary regime. It introduced comprehensive trade reforms

and liberalized private business to rebuilt new internationalization strategy but

preserved the controls on financial flows and kept the State rule on industrial policy.

This path was taken by various countries preserving the bulk of industrial policy and a

positive articulation between national industry and exports subordinating finance to this

goal.

21

National Development Strategies in the beginning of New Millennium. A

Neo-Developmental State?

In the beginning of the new millennium great changes occurred in world

economy. Higher international growth, substantial rise on commodities prices, lower

rate of interest and a continuous expansion of industrial commodities chains mainly

located in Asia were the main facts. The rise of China as a great trade power was in the

center of these changes. These circumstances brought about better and more diffused

economic opportunities for many peripheral countries. Even for less competitive Latin

American countries, the rise in commodities prices allowed a simultaneous and rare

situation of economic growth with positive current balance and sharp contraction of

external debt. (Ocampo, 2007). The 2008 financial crisis brought about a great recession

in industrialized countries (a effect that still continues) but did not change some of these

new and structural circumstances for less industrialized countries. In this context many

countries introduced Keynesian expansionist measures against the hitherto predominant

orthodox opinion. Politically the once strong IMF, World Bank, WTO and other global

organizations and their free trade ideologies lost credibility and influence in face of the

wave of crisis that hit the countries that followed their main prescription. Nationalism,

regionalism and national strategic alliances gained more legitimacy.

In face of these circumstances, three different strategies were taken by developing

countries. Two of them were not very different from the route took in the nineties. The

first, a “passive and integrationist” strategy as the one taken by Mexico and some East

European countries in the nineties was a mere continuation and gained more support

despite its weak results49. The second, a “neo-developmental” strategy taken by China,

Taiwan, Singapore or even India explored the new opportunities to up grade their

industrial structure including new policies without radical change in their previous

mechanisms of industrial and finance regulation. The macro policies (public spending,

rate of interest, exchange rate) are subordinate to industrial change aimed to reduce the

technological gap.

49 In Mexico, the insurgence of radical rural-based movements did not alter the fundamental social coalition and development model based on a passive strategy dependent on FDI and on the American market built along the nineties. The same conditions prevailed during the last years generating in consequence low and export dependent growth, high emigration and continuous deterioration of state institutions. In East Europe, the road taken by many countries in order to access to European Union increase as well a passive and FDI dependent strategy.

22

The novelty was the third way, the road taken by some countries after the demise

of their developmental state and after one decade of liberal reforms. This third route was

taken by several natural resource export countries (like Argentina or Venezuela) or

countries with a more diversified but unbalanced industrial sector (like Russia or

Brazil). Despite their economic, political and ideological diversity these countries have

been following a more pragmatic economic policy. A higher and more diversified

economic growth and social progress led by internal markets and higher wages have

been achieved in these countries without direct or strong efforts to change their pattern

of trade specialization. Due to its emphasis put on economic development through

horizontal Keynesian policies without direct or discretionary State intervention to

promote industrial change, we may call it a “neo-Keynesian” route.

Let’s explore the making and the limits of these strategies.

As has been here argued, institutions and mechanisms for coordinating production

were created to solve the problems of industrialization according to the specificity of

production sectors, their entrenched political interests and technological stages50.

Although the institutions required for coordinating and transplanting industrial sectors

in agrarian economies (the post-war challenge) are different from those required for

industrial up-grading (the present challenge), they continue to be necessary, as the Asian

experience indicates. As Lall (2000) observed, commercial policies, credit and subsidy

policies, infrastructural development, skill development, technological incentive, and

the attraction and delimitation of FDI continue to be the instruments of industrial

policy-making. In fact, industrial policies (not only horizontal, but also vertical ones)

are necessary both to the creation of the incentives of the innovation process in activities

involving rapid transformations in the international economy and to the construction of

a new infrastructure.

Thus the emergence of new challenges to the strategies of industrialization and

development resulting from new information and telecommunications technologies

(ITT) and from the formation of global and regional production chains placed new

demands on national industrial policies. The construction of a new transport and

communications infrastructure, the dissemination of new technologies and the pursuit of

50 Such change in the coordination agent has uneven effects over sectors. As Hollinsgworth and Boyer (1997) observed, “Industries that are generally coordinated by markets-irrespective of the level- are securities, banking, textiles, apparel, shoes, and hotels, while industries coordinated by corporate hierarchies are highly capital intensive ones, such as chemicals, bauxite, oil, aircraft, and automobiles” (p. 31).

23

specialization in specific production segments became part of the ordinary agenda of

national projects of industrial up-grading. This “neo-developmental” strategy is less

centered on the internal market as the prevailing scale of accumulation51, and the

processes of productive regionalization and internationalization of “national champions”

strongly expanded the horizons of firms’ investments. The strategy of buying

established technology and of adaptation based on process innovations such as the one

that typically distinguished Japan and Korea was challenged by modularized production

and new strategies based on greater proximity to proprietary activities and activities

related to product innovation. In China as well as Korea or Taiwan, a “second phase of

catching-up” (Chang, 2006), based on innovation and the construction of proprietary

national technologies, would be the basic challenge of industrial up-grading.

Based on these new challenges, a “neo development strategy” was developed, in

the countries that knew how (or were able) to resist external and internal pressures

adopted, aiming at continuing the “catch-up” strategy.

In Asia, this new strategy was mainly followed by China that strongly combined

public investment in infra-structure- the main inducer of overall growth productivity –

with a selective industrial policy in ITT technologies in an expansionist

macroeconomics. This includes a low rate of interest, an anti-cyclical fiscal policy and

the maintenance of a competitive rate of exchange. The subordination of finance and

enterprises to the development goals defined by State was achieved trough the

maintenance of political centralization, solid institutions and by the leadership state

enterprises in the “commanding heights” of the economy52. In India, with a much more

fragmented society some of old regulations instruments were also preserved favoring a

less ambitious but nevertheless active industrial policy.

As we have been observing along this paper, a strategy is not only the outcome of

State decision but its coherence is social and structural conditioned. In Korea after the

liberal reforms implemented in the midst of an ample IMF financing adjustment, the

previous industrial policies and institutions were dismantled. But the extraordinary

expansion of exports (partially induced by the Chinese expansion) that followed the

1997 crisis permitted substantial reduction in sovereign debt and less interference of

51 This is not to say that this strategy is led by exports, in case of China and India internal markets are still the main demand source for capital accumulation, but in both countries exports are much larger than they were in the past. 52 One peculiar fact of the State leadership is that only in the last years a Chinese capitalist class emerged with some autonomy from the State exercising a moderate influence on Communist Party.

24

IMF. In this new situation some big chaebols rebuilt with the Korean state a new

coalition heading in the direction of widespread industrial modernization based on

innovation. A new strategy toward the internationalization of median industrial

enterprises followed this path. Thus, due to a developed and homogeneous structure and

pragmatic economic policy, institutional change in Korea did not interrupt its high road.

In a more interventionist Malaysia something similar happened. A neo-developmental

strategy is being taking without or “beyond the developmental state.” (Ben Fine, 2005).

A neo-developmental strategy as we described has today a focus less centered on

productive sector than it happened in the past and is more centered on innovation

processes in new technologies through several policies and instruments. But essentially

what makes this state developmental is not only the general goal to change the pattern

of comparative advantages but the availability of instruments to implement it53.

In South America a spectacular rise in the price of commodities (between 2002

and 2008) permitted these countries to obtain higher growth rates, sharp contraction in

external debt and accumulation of reserves. After the evident failure of neoliberal

strategies based on Washington Consensus reforms, a more pragmatic macroeconomic

policy took place. Simultaneously, various nationalist movements spread from

Patagonia to Andes countries (Venezuela and Bolivia, being also highly critical to

market and liberal institutions supported by US) as a backlash from the radical liberal

experiments of the 1990s. These movements created regional policies and agreements

like ALBA (Bolivarian Alliance of America) and UNASUL (South American Nations

Union) with alternatives goals to the initiatives of free trade led by US.

In Russia a similar situation occurred reverting the tragic 1990s’ decade enabling

the new Government to construct significant sovereign reserves54. Countries as diverse

as Argentina, Brazil or Russia could achieve a higher growth pushed by the internal

markets now released from the external constraints that blocked them along the nineties.

And this occurred essentially without changing the pattern of the economic growth.

Thus, various countries began constructing new development strategies situated

between neo-developmental strategy based on “a second catching-up phase” and a 53 And this as we argued along this paper is conditioned by economic structure, the geopolitical position of the country and political coalitions between states and social classes. 54 With the end of the socialism and radical liberalism of the 1990s, Russia resumed national developmentalism strategy based, however, on natural resources. Thanks to its geopolitical position and greater state control over oil and natural gas exports, transfers to other sectors of the economy increased substantially; however, they did not result in greater export diversification. “Old-fashioned” policies, that is, policies based on direct state intervention, have been thriving not only, and above all, in the industrial exports of the “military industrial complex,” but also in the aeronautics field.

25

passive and integrationist strategy. This third way, a “neo-Keynesian” tries to keep

distance on the one hand, from the previous strategy of national development and, on

the other, from the pro finance and liberal macroeconomic policy advocated by the

Bretton Woods institutions.

Without the particular conditions that support a “high road” that we observed in

some Asian countries the State in this third way has less power to induce structural

change. The economic and social cohesiveness for this is missing.

In fact, for different structural and political reasons in major Latin American

Countries or East Europe the major private economic groups that in the past were the

main benefiters of industrial policy are nowadays much more associate to international

commodity chains in asymmetrical regional agreements and in non tradable activities

(in case of Mexico or East European countries that took the integrationist strategy) or

was fragmented did not survive the radical process of liberalization (in case of

Argentina) or have dislocated to sectors based on natural resources and its support

activities in services and construction (Brazil or Russia). Of course in these countries

there are large segments of national manufacture industry not connected to global chains

that have resisted and survived. Nowadays they are exposed to a strong competition

from China and need a more active industrial policy but these interests are diffused and

less powerful to exert a leadership in economic policy and to build a political support

for a comprehensive industrial policy. On the other hand, the opportunities to expand

investments in natural resources have great enlarged.

Our final considerations in this paper seek to identify the scope and limits of this

way in countries that, throughout the history of development mentioned here, are

characterized today by a large (and growing) share of natural resources in their exports,

poor infra-structure and high social polarization.

What were the main reasons for the slowdown in the economic growth in these

countries in the past decades that were temporarily circumvent by the recent trends?

Although each national case has its particular history the synthesis made by Moreno-

Brid and Ros (2009) about the Mexican case (that had a slow growth in the last decade

as well) seems to be quite accurate for a large sample of countries:

“…our argument is that the proximate of Mexico’s slow growth determinant since the early 1980 is a reduced investment rate, and four factors are constraining investment: the low level of public investment (particularly in the area of infrastructure), an appreciated real exchange rate for most of the period since 1990, the dismantling of industrial policy during the reform period, and the lack of bank finance” (p.242)

26

Thus, a comprehensive industrial policy aside (that identifies the neo-

developmental state), the main constraints and consequently major challenges to enlarge

the development horizons are the low level of public investment55, a competitive

exchange rate and the lack of bank finance. Indisputably this last factor is less general

than the others, being more important in Mexico and Argentina than it is in Brazil.

The relevance of a competitive exchange rate and of the decline of public

investment are nevertheless an undisputable reasons for low growth’s explanations in

these countries unless along non orthodox approach. In an important way they are

connected: there is a strong relationship between the contraction of public investment

observed in all these countries in the nineties and the growth of interest payment

spending56; the maintenance of a high rate of interest push this increase on debt

spending (and consequently the contraction of public investment) and is the basis for the

valorization of exchange rate. But although they have this important connection, we can

consider two different strategies of the growth according to the emphasis attributed to

the exchange rate and on public investment. We can unfold the “neo-Keynesian”57

strategy in two roads: one, a “new developmental” strategy considers a more

competitive industry sector as the main goal and a competitive exchange rate its major

instrument58; the other a “social democratic” has the enlargement of internal market as

its main goal and public investment its main instrument59. Table 2 summarizes the

different strategies.

Let’s explore some structural dimensions of these challenges.

As aforementioned, one important dilemma in countries like Argentina, Brazil

and now Russia, is the “structural imbalance” between the productivity of the primary

export sector and the productivity of all domestic manufacture sector60. Such imbalance

leads to a relatively uncompetitive exchange rate for industry. As shown during the

nineties for all these countries (and nowadays in Brazil) this industrial “wrong price” is

55 Even in the zenith of developmental states. Countries like Brazil or Mexico achieved a low level of infrastructure (electrical energy, telecommunications, transport and clean water access) in per capita terms. Although there was some progress in telecommunications stimulated by privatization investments, in all other areas this level stagnate widening the gap with Asia and other countries. See Palma (2010). 56 For Latin American countries see Martiner and Troben (2003) 57 The main aspect is the predominance of macro and indirect incentives. Different from the “neo-developmental state” the state has fewer instruments and more goals to fulfill. 58 In Brazil, a basic formulation of this “new developmental” strategy is discussed in Bresser- Pereira (2010). 59 These “productive” and “distributive” strategies are not necessarily incompatible and do not correspond to any clear national case but they signalize different priorities, economic interests and strategies that are roughly in place in South America as government priorities and policies. 60 In México this unbalance is between export industry (in the processing area) and the others sectors

27

higher when set by an autonomous finance motive made by an interest rate on the public

debt above the world average.

Why could Asia preserve a competitive rate of exchange while the tendency in

others countries here considered was so different? The first reason in not so different

from the one observed during the post war. In poorer natural resources countries the

maintenance of a devaluated currency unifies production and exports interests thus

Table 2 New Developmental Strategies in New Millennium

Integrationist Neo-Developmental Keynesian, new

developmental Keynesian, social-democratic

Accumulation strategy

Centered on exports trough a better resource allocation given by comparative advantage and internationalization of domestic capital

Simultaneous expansion of external and internal markets; technological catch-up and industrial up grade, internationalization of domestic capital

Higher economic growth through diversification of exports as the predominant goal.

Higher economic growth through integration and expansion of domestic markets and support to internationalization of main domestic groups

Main Policies, Instruments

Orthodox macroeconomics, Attraction of IDE

Comprehensive, industrial policy, expansive macroeconomics, intervention in exchange market, public investment in new infrastructure

Intervention in exchange market and in tax system to achieve a competitive exchange rate, balance budget.

Expansion of public investment and credit favoring the export sector, infrastructure and social sector

Ideology and Political coalitions

Neoliberal modernization and poverty reduction. Big business in export sector and in modern services, financial sector as the dominant economic bloc.

National development trough technological “catch-up”. Renewed old developmental coalition centered on manufacture sector and led by State with a greater influence of private groups

National development through competitive industrial sector. Non traditional manufacture business as the dominant economic bloc. Alliances with middle classes

National and social development based on mass consumption. Big business in infrastructure, banks and export sector as the dominant economic bloc, alliances with middle and popular sector.

Dilemmas Low growth, high dependency on external market, low social support and State fragmentation

Growing complexity and challenges in high technology, enlargement of new goals and political dispersion.

Trade off between exchange rate and real wage, low price elasticity in high tech sectors, low political support by other social groups and opposition from finance interests

Trade off between wage rate and manufacture exports, unsecure external position, opposition from finance interests

preserving the social and economic coalition focused on the exchange rate policy as part

of the industrial policy.

For richer natural resources countries, the reality is different insofar as the

“wrong price” for industry can be “right” for exporters of commodities and

28

countervailing exchange rate (through taxes) policies encounters greater opposition.

Additionally, the greater income polarization in these countries increases support for a

high exchange rate, which is functional for raising the real salary while keeping

inflation under control. Due to its positive impact on inflation strategies, targeting an

exchange rate favorable to industry face greater political obstacles led by the

community of financial interests that see the stability of prices – and the inflation target

regime- the main protection of their assets. Industrialists suffer the loss of external

competitiveness, yet may be benefited (as in Brazil nowadays) by its positive impact on

expansion of domestic demand.

The second reason is the effect of China on Asian industrial producers and on

producers of raw material and food. In fact, a competitive national rate of exchange

does not depend exclusively on the rate between a particular exporter country and their

main consumers but on its value in relation to their competitors in those markets. Thus,

the Chinese maintenance of a low but stable exchange rate after the 1997 Asian crisis

when all affected countries strongly devaluated, created an important price reference for

Asian countries (a floor for some countries a ceiling to others) set competitive exchange

rates. China’s influence on prices and consequently in terms of trade had a different

effect for raw material producers contributing for the valorization of exchange rate.

In Latin America, Argentina is the only country that after the strong exchange rate

devaluation after the 1999-2000’ crisis kept a competitive rate of exchange until the end

of the present decade. This was achieved through a tax on exports rents and capital

controls. Politically these measures were supported by “Keynesian coalition” created

from the shambles of the neoliberal project that ruled the country on the nineties given a

larger State autonomy. Economic growth was high and was led by internal markets.

Although increasing from lower rates the expansion of public investment was important

for this growth. This exchange rate had a positive impact on balance of trade avoiding

growth external constraints. But besides the China’ effects on terms of trade, the

appreciated Brazilian rate of exchange was important – since MERCOSUR Brazil is by

far the principal partner of Argentina- for this competitive overall real effective

exchange rate61. Thus without the combination of China (enlarging its exports) and

Brazil (decreasing its imports) effects Argentina hardly could sustain a high growth

61 As considered by ECLAC a country’s overall real effective exchange rate index is calculated by weighting its real bilateral exchange rate indices with each of its trading partners by each partner’s share in the country’s total trade flows in terms of exports and imports

29

pushed by internal markets without change its unbalanced structure. The same historical

dilemma is being in place.

In Brazil, different of what happened in Argentina, and despite some positive

political initiatives and income policies (minimum wages increases and pro-poor

income transferences) that were enlarged since the beginning of this decade, the

Government (led by Worker Party) practiced a recessive economic police until the midi

of the decade62. With extremely high interest rate the exchange rate achieved high

values. Despite this, the surge of Chinese demand for food and raw material pulled

Brazilian exports sanctioning the “regressive specialization” initiated in the nineties.

But two main structural changes occurred. The internal heterogeneity declined due to

large modernization of food production and the linkages of primary exports and internal

markets strongly enlarged by the incorporation of the countryside lands as the main

geographic export area. Non tradable activities like transport, construction, packaging

industry, telecommunication, support activities, etc strongly prospered and formed

important economic groups63.

A “Keynesian coalition” led by “desenvolvimentistas” group (that enlarged its

influence in the second half of decade) achieved greater power in the wake of the

international crisis of 2008. With a lower rate of interest (although situated in a very

high plateau) this new policies include strong efforts to increase public investments,

housing finance, credit expansion (led by public banks), enlargement of pensions and

transferences to the poor. This coalition enlarged the old alliance of finance, state and

construction with the primary exporters but included new social sectors. So far has

avoided changing the exchange rate regime used by Central Bank as the main policy

against inflation. The initiatives taken in industrial policy have been weak and the most

effective industrial policy has been related to the support the internationalization of the

national groups in commodity production.

In Russia, that like Brazil has a large and diversified domestic manufacture

sector, the rebirth of nationalism was associated with new economic conditions created

by the high prices of oil and gas. Thanks to its geopolitical position and greater state

control over the natural resources income transfers and investments to other sectors of

the economy increased substantially enlarging the internal market; however, due to the

62 Brazil has followed a tight inflation target regime, a police that in Latin America adopted as well by Chile, Colômbia, México and Peru. 63 The incorporation of new lands always cause an extension of internal markets exerting a demand on industrial capacity and infrastructure service.

30

lack of effective industrial policies and to an appreciated exchange rate these

transferences did no result in greater export diversification.

In many small Latin America countries, the industrialization of natural resources

as an alternative industrial strategy has been in discussion. The broad idea is that due to

the high technological gap created by new technologies and their localization in Asian

countries small Latin America countries do not have the conditions to attract and

develop modern industry that could change their position on international division of

labor. Nevertheless there are some possibilities to add more value to their production.

The idea is introduce more intensively general purpose technology (basically ITT and

biotechnology) and adapt it to the processing of natural resources widening the demands

for R&D and skilled labor. (ECLAC, 2008)

This discussion also occurs in Brazil instigated by the recent discover of oil in

deep waters (Pre-Salt) and the protagonist rule played by PETROBRAS, a state owned

company. This high tech and capital-intensive oil extraction has important linkages for

Brazilian industry, but hardly this demand policy could substantially up grade its

manufacture sector unless a comprehensive industrial policy enlarges this opportunity.

Thus, the limits of a “new Keynesian” strategies of growth can be considered.

The “new-developmental” strategy aims to achieve a higher demand for manufacture

export in order neutralize the unbalanced economic structure. The main target is a

competitive exchange rate and the main instrument is a lower rate of interest. This new-

developmental strategy tries to achieve a more diversified economic structure and

economic dynamic led by manufacture investments and exports. This strategy is

addressed to correct by macro intervention a structural problem and assumes a high

substitution effect exerted by real exchange rate on manufacture sector. The state’s rule

is to organize the manufacture sector through pro- export macro policies. The most

difficult and contradictory aspect of this strategy is the defense of a balanced budget in

order to open space to cut interest rate and achieve a exchange rate real devaluation64.

Given the contractive effect of exchange rate devaluation on real wages accompanied by

fiscal adjustment, the positive effect on growth depends on strong effect on export

demand. Thus, the conflicts with the working class can increase with a negative impact

on its political support. A lower interest rate can open space to public investment but

this expansion can be moderate by fiscal targets. But as far as the direction of infra

64 As in Bresser (2010)

31

structure investment is led by business interests on export sector, there is large

opportunities to attract private investment in non tradable sector. This strategy has in

addiction a nationalist ideology that colludes with orthodox wisdom and vested interests

of finance community centered on price stabilization. Thus the making of the social and

political coalition for this strategy is a real challenge.

The second strategy is also based on Keynesian policies but the emphasis is put

on lower interest rate and enlarging public investment. The broad strategy is to enlarge

the opportunities created by the export of primary commodities and resource based

manufacturing and expands public investment in infrastructure and social sector.

Although a competitive exchange rate is necessary for the manufacture sector as put by

the other route, its effect on real wage is considered as a negative factor for growth. In

this route the State aim to organizes business –mainly in export sector, finance,

construction, services, retailing, and real estate, etc- given priority to internal markets

(reestablishing a renewed connection as in case of Brazil between exports and internal

markets) but includes wider goals and a wider social and political coalition. It tries to

involve larger actors that were absent from the old developmental state, and from new

developmental strategy as well. The opposition from the orthodox wisdom and from

finance community is larger because the direction of public spending is less induced by

private interests and consequently relies more on state budget.

The most difficult challenge of this route is to achieve a productive structure

efficient enough to guarantee higher wages. Thus, a more inclusive pattern of

development based on higher social cohesion depends not only on achieve a political

consensus on social priorities but there is a necessity to induce public investment to

directions that contributes to increase the productivity of the goods and services

consumed by workers. Nowadays the labor consumption pattern includes not only food

and housing but modern technologies and services. But although this investment can

contribute for a sustainable increase in real salary in tradable sectors without sacrificing

external competitiveness, this strategy is very difficult to fulfill its main goals without a

more diversified tools towards a blend of import substitution and export promotion.

Here, again, the making of the social and political coalition for this strategy is a real

challenge.

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