Written for Introduction to Comparative Politics final exam, Spring 2023.
Prompt
Economic growth is generally seen as a necessary ingredient for development. What challenges and opportunities did states in the developing world face in pursuing economic growth during the second half of the 20th century? How can we account for variation in whether they achieved growth and development?
How countries go from poor to rich is one of the most consequential topics in economics and political science research, yet one of the most challenging to describe with any unified theory. While economic growth is distinct from human development in terms of state output—the former involves income, GDP, and levels of industrialization, while the latter is measured by life expectancy, education, and standard of living—the two categories are well understood to be mutually reinforcing (Module 4, Class 13, Slide 9). Along with satisfactory performance in statistical measures of development, “developed” countries are associated with high state capacity and absence of internal political violence (Besley and Persson 2011, 1). Variations in economic development across countries are largely attributed to the level of state autonomy and political response to backlash; the main task of comparative research is analyzing their underlying political institutions. Based on cases from the second half of the 20th century, I argue that successful development is driven by small groups of development-oriented political elites, coupled with deliberate investment by the state into public goods provisions.
In the middle of the 20th century, countries pursuing economic growth faced both unfavorable terms of trade in the world economy, as well as both domestic and international political upheaval. Most began their economic histories as free traders in international markets, exporting raw goods and importing manufactured ones. However, beginning in the Great Depression, collapse of commodity export prices prompted an end to these liberal economic policies, and most states turned to a strategy of protectionism. For almost all of them, development became synonymous with industrialization.
Indeed, the shift from agrarian to industrial economies is central to most theories of economic development. Manufacturing, which provides increasing marginal returns on each labor unit and is relatively less constrained by ecological space, is considered exceptional in terms of its potential for increasing economic performance. In practice, countries attempting to industrialize ran into manufacturing-related market failures: small and poorly capitalized domestic firms struggled to achieve increasing returns to scale needed for actual growth (Module 4, Class 18, Slide 10). In the 1940s to 1950s, states in Latin America and some parts of Asia and Africa responded by implementing reforms aimed at protecting the emerging local industrial sector. Known collectively as import-substitution-industrialization (ISI), these protectionist policies included subsidies and tax breaks for domestic firms, as well as tariffs and quotas on foreign imports.
However, by the 1970s and 1980s, the ISI strategy was plagued by rent-seeking predatory states, which sought to accumulate economic resources by manipulating policy decisions at a detriment to the larger society (Module 4, Class 18, Slide 11). Many states also struggled to handle the “double movement,” or backlash from society due to industrialization-prompted economic inequality. As a solution, states shifted to a minimal intervention approach to development, culminating in the Washington Consensus, a list of policy reforms for reducing state intervention which became a condition for receiving development aid in the 1990s (Module 4, Class 18, Slide 11-14). By the end of the 20th century, there emerged a distinct collection of “developmental states” in East Asia—Hong Kong, Korea, Singapore, Japan, and Taiwan—which had consistently prioritized rapid, sustained economic growth in the previous decades, and were also actively implementing policies to shape economic markets toward that goal.
The East Asian developmental states shared an economic history with Latin America: industrialization, protectionism, and finally increased liberalism. However, their development outcomes differed remarkably. From 1970 to 2000, East Asian states saw nearly 5 percent annual growth in per capita GDP on average, while Latin American countries saw only 1.46 percent, which was barely above the world average of 1.43 percent (Module 4, Class 18, Slide 16). How, then, was East Asia able to promote economic growth when Latin America, the region which shared the most initial conditions, was not? The answer begins with their respective “political economies of development,” or between economic and political institutions.
Simply put, for political institutions and economic development, “good things go together.” Indeed, the origins of the modern state—here, I use the Weberian definition of “state” as an organization with “a monopoly on the legitimate use of force within a given territory”—are attributed to the need for bureaucratic structure to manage revenue extraction (Module 1, Class 2, Slide 4). For example, according to Tilly’s “bellicist theory,” European state-making in the 16th through 19th centuries depended on successful extraction of revenue from citizens in order to engage in war against external rival threats (Module 1, Class 2, Slide 7). In particular, capitalists and the private sector played crucial roles in both providing credit to governments, as well as collecting royal taxes, both of which funded armies for war-making (Tilly 1983, 132). When the king, lacking a regular tax system in the 17th century, began arbitrarily seizing assets and reneging on contracts with wealthy elites, he was quickly ousted and royal power was reduced. Only once wealthy elites saw credible commitment from their political institutions that their assets were protected, including parliamentary assent for economic interventions and a judicial system independent of the crown, did England see sustained economic development (Module 4, Class 17, Slides 11-12). The task of state-building gives states an endogenous incentive to promote economic growth and intervene in market failures, or inefficient distribution of goods and services in an otherwise free market. On the other hand, the feedback loop suggests that any explanations for a country’s economic development, or lack thereof, are inextricably linked to the nature of bureaucracy itself.
The primary outcomes of political institutions, state capacity and distribution of power in society, are key determinants of state effectiveness and, thus, development. Following Adam Smith’s classic prescription of “peace, easy taxes, and tolerable administration of justice,” Besley and Persson identify three “pillars of prosperity” that a state must have for successful economic growth: absence of internal conflict and political repression, fiscal capacity to raise revenue from broad tax bases; and legal capacity to maintain rule of law, such as property rights and enforcement of contracts, as well as implement economic policies (2011, 11). In contrast, countries in the “developing world”—a term which, crucially, describes a current situation of poor economic performance and living standards, and not an expected direction or process of development—are characterized by lack of rule of law and insufficient state effectiveness for practical economic policymaking (Besley and Persson 2011, 1). Besley and Persson’s particular model of state-building relies on game theoretic logic and is difficult to support with empirical cases. Further, this theory is not particularly enlightening from a comparative viewpoint; if institutions shape human interaction, they will clearly shape economic interactions. Nonetheless, all other theories about the political economy of development that I discuss in the rest of this essay are motivated by this premise: economic growth depends on a state’s capacity for policy consensus, including credible commitment from the state itself, and peaceful policy reform.
Equipped with this conceptual clarity, we can now assess the institutional differences that led to East Asia and Latin America’s different development trajectories. Early ISI, up until the 1960s, was focused on “light” manufacturing, the production of consumer goods like textiles, clothing, and processed foods, rather than “heavy” industry that would require larger amounts of capital and infrastructure. When it came time to pivot to heavy ISI, relatively decentralized Latin American states were vulnerable to capture by local political and economic interests, and political institutions were plagued by rent-seeking. Further, populist politicians were forced to yield to the “double movement” by urban workers demanding benefits, and thus unable to industrialize into more skilled manufacturing that would increase competitiveness on the global market. The result was economic collapse: between 1970 and 1990, annual growth rates dropped from over 6 percent to slightly above 1 percent, based on 10-year moving averages (Module 4, Class 19, Slide 4). In contrast, East Asian states had centralized political institutions which enjoyed comparatively high state autonomy, in part because Japanese colonial rule in the region had left a legacy of meritocratic recruitment. Authoritarian leaders in East Asia were not beholden to the urban working class via pluralism, and could therefore implement repressive policies to restrict unionization and collective mobilization; in the 1970s, 5 percent of the labor force in South Korea and 12 percent in Taiwan were unionized, compared with 20 percent in Brazil, 30 percent in Mexico, and 35 percent in Argentina (Module 4, Class 19, Slide 17-19). How these different regions dealt with the “double movement” points to a fundamental principle of the predatory state: the state’s extractive capacities are constrained by society’s bargaining power. That is, revenue extraction is a strategic exchange between the state and society where the private sector and working class can leverage labor, skills and knowledge, and capital in economic relations (Module 1, Class 4, Slides 8-9). High state autonomy in East Asia meant the labor force had less bargaining power; further, deliberate investment in public goods reduced incentives for the working classes to bargain in the first place. When the time came, development-oriented elites could depend on a cooperative skilled labor force to pivot to export-led industrialization (ELI), which entailed manufacturing goods for which the country had a comparative advantage. As a result of the success of East Asian developmental states, ELI and strategic, skilled manufacturing are often considered the best strategies for states to promote economic growth today. Thus, the prevailing argument for industrial and developmental variation in East Asia and Latin America is the differences across two factors: state autonomy from powerful organized interests to enact painful economic policies, and political response to economic upheaval.
Clearly, these factors correspond to the two components of our earlier premise: state autonomy in East Asia enabled the consistent growth-oriented policy characteristic of the “developmental state” label, while a strategic balance between political repression and investment in human development led to a peaceful resolution of the double movement. This implies that, while important observations of difference, state autonomy and political response to backlash do not offer a primary explanation for different trajectories of economic development. The natural next question is whether state autonomy and political response are outcomes of more fundamental institutional categories.
Underlying every political institution, of course, is a political regime—that is, a set of procedural norms which determine who accesses power, how power is accessed, and the ways in which power is exercised. Attempts have been made to explain economic development by regime type; unfortunately, these theories inherit the flaws of the original “transition paradigm” of democracy. Beginning in the mid-1970s, political change in seven different regions—Southern Europe, Latin America, East and South Asia, the former Soviet Union, sub-Saharan Africa, and the Middle East—could all be characterized by a trend away from authoritarian or dictatorial rule to more liberal institutions. In terms of the aforementioned procedural norms, many states saw a reduction in the core attributes of political control by military or economic elites, appointment to politics only from within these circles, and policymaking that only reflected elite interests (Module 2, Class 6, Slide 17). Especially encouraged by democratization in Southern Europe, Latin America, and some Asian countries, Western observers introduced the transition paradigm as a linear model for this so-called “third wave” of democracy (Carothers 2002, 5-6). This paradigm was based on a minimal, dichotomous definition of democracy: a democratic regime was one which met the full criteria of the democratic process, a checklist of features which enabled free and fair elections, and all other regimes were simply non-democratic (Module 2, Class 6, Slide 19). The “democracy-promotion community” took for granted that any country moving away from authoritarianism would indeed be in a transition to democracy; further, this transition would always occur as a step-wise process of breakthrough, national elections, and consolidation of new democratic institutions (Carothers 2002, 17). Literature from this time also emphasized human agency, such as the intentions of political elites, as the primary indicator of successful democratization without much consideration of existing economic and institutional legacies.
Two competing arguments for the effect of democracy on economic growth emerge from this transition paradigm logic. The conflict perspective asserts that democracy is fundamentally incompatible with sustainable long-term growth because incumbents are subject to distributional pressures, and will always prioritize satisfying short-term needs over investing in future development (Module 4, Class 16, Slide 15). As a corollary, the autonomy enjoyed by authoritarian regimes allows them to be more effective at imposing economic policies, particularly those that are painful in the short term. On the other hand, the compatibility perspective argues that the normative values associated with democracy—political equality, individual freedoms, justice—give subjects the predictability and security to be economically productive. Answers within the literature are inconclusive. A 1993 meta-analysis of existing research on regime type’s effect on growth was precisely divided: eight cases showed democracy had a positive impact, eight others showed the same for authoritarianism, while five cases showed no relationship (Module 4, Class 16, Slide 18). The lesson is clear: democratic and authoritarian regimes certainly follow different procedural norms for the essential ingredients of economic growth, policy consensus and policy reform. Yet nothing about the normative values in either regime type, or the more continuous typologies like “hybrid regimes” and “democracy with adjectives,” for that matter, guarantee the outputs of a political institution.
India, even before gaining formal independence from Britain in 1947, had decades of experience with quasi-democratic institutions, including a limited-franchise national legislature. When the failures of protectionism became clear to the business community and members of the political elite in the 1980s, India’s participatory political institutions struggled to adopt market-liberalizing reforms. Initial sweeping reform policies proposed by prime minister Rajiv Gandhi in 1985, which challenged “vested interests in every field,” were withdrawn after only a few years due to lack of support among political elites. Less than a decade later, Narasimha Rao, with a much smaller electoral mandate than Gandhi, tasked his executive ministers with building political coalitions by “educating” other elites about the need for economic reform and offering material incentives to key actors. At the same time, political elites advocating for reform had to “win over” the public by proposing reform and redistributive policies simultaneously. After the BJP party lost control of the government in 2004 due to mass discontent with reform proposals, incoming prime minister Manmohan Singh successfully passed policies which “collectively altered the spirit of the so-called Washington Consensus” after an emphatic promise to provide public goods for the masses. It was not until the turn of the 21st century that India’s economic performance, buoyed by the market-liberalizing practices that East Asian developmental states implemented decades earlier, began to exceed regional averages.
Although the conditions for delayed development in India—competitive pressures from other political actors, dissatisfied public—were democratic “problems,” Gerring et. al. argue that the solutions—coalition building through education and side payments—were uniquely democratic mechanisms (2011, 1742). While the authors use this to posit that, in general, economic reform is more likely under democratic regimes than authoritarian, I believe that India’s case offers more compelling evidence for the importance of institutional history and, perhaps most contrary to democratic values, a developmental political elite. Instead of relying on either coercive force or legitimacy to compel other elites, reform-minded politicians engaged in coalition building through strategic “soft power” interactions. This was only possible within India’s mature democratic system, where a tradition of electoral politics meant actors could accept losing political power without destabilize the underlying institutions. Further, elite strategizing was only successful when paired with an element of public performance: difficult policy reforms were understated or reframed to appeal to the masses, and leaders made vocal promises to invest in the public sector (Gerring et al. 2011, 1741). Thus, while peaceful reform was intrinsic to India’s democratic politics, developmental elites had to use calculating, even deceptive means to compensate for limited political autonomy. On the other hand, “the most populous non-transition case in the world,” the People’s Republic of China, saw exceptional economic growth in the second half of the 20th century. This was entirely due to the development of China’s private sector; while private firms were still illegal in 1977, by 2005, private businesses employed over 200 million people and accounted for 49.7 percent of the GDP (Tsai 2006, 117). China’s success would have been surprising to an observer in the 1970s, as Mao’s attempt at rural industrialization had led to devastating famine, and the Cultural Revolution resulted in social upheaval at unprecedented scales in the country of 1.43 billion. China has also been touted as the paradigmatic example of coevolution of weak institutions and markets for development. Tsai’s work highlights the role of “adaptive informal institutions” at the level of local bureaucracy and private firms in institutional change. According to Tsai, private entrepreneurs seeking to evade anti-capitalist policies and local political actors with similar interests had a cumulative effect in legitimizing the official reform policies being proposed by elites in Beijing (2006, 118). These informal institutions depended on challenges to development that were particular to reform-era China, such as conflicting mandates among different formal administrations and a decentralized bureaucratic structure. Ultimately, Tsai argues, the ostensibly socialist regime allowed private sector development not after outright backlash, as in previous cases of the double movement, but the quieter economic activity of individuals. I believe Tsai’s account does not place enough emphasis on the existing growth-promoting aspects of China’s political institutions, even before reform. First, the accommodating response of elites was only possible because they were certain reform would not threaten political or personal security, an outcome of Deng Xiaoping’s decision to not oust his predecessor with physical violence. Even before then, China’s poor income was distinct from its human development, which had been steadily improving from the 1950s to 1980s due to Maoist policies like granting of equal rights to women, attempts at rural education, and elimination of the rentier class. It is no coincidence, then, that China’s developmental success took off after reaching a much better standard of living. According to Acemoglu and Robinson, economic growth and technological change, accompanied by the “creative destruction” of old economic sectors, only come about when individuals have the incentive to innovate (2012, 83). Lack of incentive comes from instability in both political and personal life which, they argue, is an outcome of extractive political institutions that concentrate power in the hands of an elite few. While China’s case is a clear counterexample, the notion of incentive is still applicable; without some successful human development, capitalist entrepreneurs could have never existed in the first place, as seen in the Democratic Republic of Congo’s failure to industrialize. Finally, manufacturing and development in China only truly exploded after the start of Deng’s premiership in the 1980s, suggesting that economic growth still primarily depends on the actions of elites and formal institutions. The power dynamics of these elites, which involved total extermination of perceived opposition, was again an enduring practice of China’s political institutions.
As with India, both the obstacles to development in China and their solutions arose from attributes of the state’s particular political circumstances, making comparisons across regime types uninformative. However, we can attempt to isolate some similar features between both cases of successful development, as well as the other East Asian developmental states. Elite control over economic policymaking is expected under an authoritarian regime like China, where power is maintained by coercive force rather than mass appeal. However, even in democratic India, elite decisionmakers did not attempt to transparently legitimize painful reforms to opposing forces and an unsatisfied public; rather, successful reform was achieved with calculated advertising and monetary incentives. Further, elites were only willing to risk the instability of economic reform once their institutional position was deemed secure enough, or the loss of power not too devastating. Finally, elites had to make deliberate investments in human development, such as public goods provision, in order to support an innovative private sector and productive skilled labor force.
In summary, despite facing similar geopolitical and economic conditions in the second half of the 20th century, countries in the developing world experienced wide variations in economic growth due to the decisions of their political elites. In particular, elites in the East Asian “successes” were able to implement strategic policy interventions in market failures and eliminate rentier interests, while actively promoting human development measures to foster a healthy workforce. While these conditions are more practical than theoretically grounded, it is important to note that, given the relationship between economic growth and human development, the ultimate goal of explaining development is to reproduce it. Practical solutions are particularly salient for the practice of rich countries giving developmental aid to poor ones, which often leads to corruption and reduced local government accountability. To ensure sustainable economic growth, then, requires building stable institutions, eliminating extractive institutions and rentiers, and manufacturing supported by skill labor rather than export of natural resources. An eye to the successes of the previous century does offer some hope for developing countries today, even with new challenges like migration, ecological crises, and global economic stagnation: economic and political institutions evolve together, and nothing is set in stone.