L4 - the role of the state Flashcards
institutions (review)
- inclusive economic institutions (rules) incentivize investment
- property rights, universal education
- most countries already have these as formal/written rules - but their enforcement and credibility depend on political institutions
- some forms of democracy
- some forms of authoritarianism
- some bc not all democracies perform well and bc not all authoritarians perform poorly, some promote investment => regime doesn’t explain enough - perhaps we need to look closer
- not at the overall regime
- but at the specific role of the state in the economy
- and the state’s relationship with society
definition - the state
= the monopoly of the legitimate use of force
(aka the monopoly on violence)
- territorial control
- centralized authority
- sovereignty
government + bureaucracy
state -> lower internal rates of violence bc police/military deters and punishes it
- disarming citizens
- licensing arms
- punishing violence and ‘private war’
- (no longer groups that fight each other??)
no state = stateless societies = high violence (no one enforces and makes rules), no judiciary, no one to get in the way to stop violent behavior = high chance of death
centralized state
centralized is essential for development
- maintaining peace
- enforcing institutional rules
- delivering public services (e.g. education, healthcare)
no peace, institutional rules and public services without centralized states
where do centralized states come from?
- Tilly: war makes the state and the states make war = fighting groups had to pay for standing army (bc they can’t sustain themselves with farming bc they are fighting) -> taxation
- an extortion racket: give us money and we will protect you = pay us or we will stop protecting you -> state grows and grows more powerful
!this is how it went in Europe (consolidation centralized state), it was diff in other places
- Somalia: stateless society, government only controls fragment of the countries territory = no monopoly of violence, other groups are contesting the government, you can’t provide public goods everywhere bc you will be attacked
- same story for Haiti -> violence, rape, theft. Domican Republic (neighbor) lot more developed, this is not geography, it is the lack of a centralized state that makes the difference
stateless society bad places for development
the state and development
How can international community best promote development in stateless societies? (like Somalia or Haiti)
how do we give the state the power help itself?
- bottom-up IGO involvement costly bc it is really violent there + will probably not fix anything on the big scale = against law?
- let them keep fighting = one will eventually be stronger, longterm it may centralize (like Europe)
!this will be centuries/decades of violence: the way that we know is not a good way - Haiti: sent in Kenyan police to try and restore order
what we are doing =
impose peace from the outside: substitute national state power with international state power
- Haiti: Kenyan police
- Somalia: UN peacekeeping mission
challenge =
- Kenyan police doesn’t know the language + doesn’t have incentive to put themselves in danger (it is not their state)
- UN peacekeeping: freeze the conflict like never happened in Europe: now it is a bunch of people who don’t like each other in government
attempts to surpress conflicts = very diff than how the state developed in europe
the state - how might conflict contribute to long-run development?
if it allows one faction to dominate and build a centralized state
- this is the history of Europe
!it is not the history of Africa:
- artificial, arbitrary borders lumping together multiple (sometimes hostile) groups
- conflicts frozen without a dominant winner by colonial powers and the UN
-> new untested model where there are no centralized state that has developed in the same way as Europe did
(Latin America sort of middle ground between Europe and Africa dev. state)
the predatory state
the state is the problem:
- extractive economic institutions
- captured by private, elite interests
- corruption, patronage
‘the state lacks autonomy from political pressures’ (Evans): bureaucrats are doing their job for their personal benefit (political and economic gain), they are not removed from their own gain (they need to be autonomous of it)
PATRIMONIAL PREDATORY STATE
- power centralized around a single ‘big man’
- personal relations and violence
- self-enrichment
BLOATED PREDATORY STATE
(initially good intent, but state grew too large)
- patronage recruitment enlarged bureaucracies
- public salaries >private salaries
- e.g. Latin America: the state got too big + bureaucrats couldn’t be controlled anymore, started to work for themselves
- being a bureaucrat is really lucrative: state is growing + people are paying to become bureaucrats - extracting resources from the rural poor
- e.g. Kenya’s monopsony (single buyer) coffee purchases at low prices: coffee could only be sold to the government for the gov to make profit - subsidies/import substitution allowed inefficient industries to survive
- many firms became inefficient, needed subsidies to survive, because closing them would lead to job loss, they were kept open -> extractive for the rest of the population
the neoliberal state - definition: neoliberalism
= the idea that free markets and a small non-interventionist state promote development
(free markets are better than the state)
- logical reaction to the predatory state: the state is the problem -> shrink the state
- the solution = insulating the state from political influence: smaller state, ‘getting the prices right’ (bureaucrats don’t do this: you need the international market)
- minimalist interpretation of INCLUSIVE ECONOMIC INSTITUTIONS (state should do as little as possible to generate incentives for investment, step back and investment will happen)
- replace the state with market: market is efficient, not corrupt -> development
the neoliberal state
- the Washington consensus/structural adjustment
what does the neoliberal state do (differently) =
structural adjustment / Washington Consensus (bc US-based IMF and WB)
- Fiscal discipline: spend less, have lower deficits, don’t increase debt
- Market interest rates: market should determine interest rates
- Market exchange rates: exchange rates should be determined by the market
- Commercial liberalization: less rules on who can purchase what, do what career etc.
- Liberalizing FDI: will boost investment
- Deregulation: don’t make everyone buy a license for everything, that is just a way to corrupt
- Tax reform
- Privatization of state enterprises: they are inevitably corrupt, inefficient, they are a burden on the population
- Protecting property rights
- Subsidies only for public goods: some public goods the state has to do bc markets don’t really work for them (healthcare, education)
!in practice 1 went above 10 -> cut subsidies
oil shocks and debt crises provided the opportunity to impose the Washington Consensus through conditionalities: developing countries ran out of cash and needed to turn to the IMF and WB for loans (got conditionalities with it)
centralized states - the point
centralized state important for development
developing states don’t have it -> will hold back development (bc weak taxation, protection investment etc.)
Washington consensus failed
1980s: lost decade for development (for Latin America, Africa and most of Asia)
extremely negative social consequences
- primary education enrollment dropped + education spending fell + stunted growth in children increased (nutrition went down)
median growth 1980s: 0%
political and social stress it caused + eco problems it failed to solve
e.g. Cochabamba (Boliva): 1990s and early 2000s WB and IMF still pushing for Washington Consensus ->
- poor water supply -> required to privatize -> international companies took over from market perspective, invest to improve the supply
- price rises (to pay for new investment)
- protests
- eventually the gov took over control again
- continued poor water supply
what went wrong with the neoliberal state? - why did it fail to promote development
warning sign for the future: revise if something doesn’t work, be humble
- FREE MARKETS WERE NOT ENOUGH to support investment (Khan)
- absence of the state is not the market
- risk for private investment were simply too great (low wages but lower productivity)
- protecting property rights is expensive - small states LACKED CAPACITY (Stiglitz)
- to make markets work, e.g. regulating competition, coordinating investments
- to deliver public goods
- to protect citizens from the transnational costs - A PREDATORY STATE CAN’T SHRINK ITSELF
- privatization generated new interests and rent-seeking
- “they could steal today much of what would have been skimmed off by future politicians” - IMF and WB pursued neoliberalism IDEOLOGICALLY
- as an end, not as means to development
- social consequences were overlooked - maintaining political support for reform is NECESSARY
- not an afterthought
- Cochabamba (Boliva) example of this
- we have to anticipate the political sustainability, the consequences
definition the developmental state
= a state where markets are coordinated and guided by an active, interventionist, disciplined, state
the state is the solution
!!it is not socialism
an active interventionist state
- economic institutions still inclusive: property rights protected, markets engine of growth
- state more active in promoting investment and delivering public services
- maximalist interpretation of inclusive economic institutions
- east asia suggests this is possible without democracy
developmental state - growth enhancing governance
Policies combine an ‘active’ state with a ‘disciplined’ state
- Temporary subsidies to growing sectors (land, credit, foreign exchange)
- Conditional Import-substitution
firms had to be competitive, had incentive to innovate - Coordinating investments and technology transfer
normal story:
inclusive political institutions -> growth OR growth-enhancing governance -> growth -> inclusive political institutions
growth enhancing government: you need to start with growth, then you can finance institutional improvements -> need the state
e.g. Taiwan’s textile entrustment scheme - early subsidies and protection were removed once the industry became internationally competitive
(unlike e.g. Pakistan where subsidies were maintained regardless of performance)
typical characteristics of the developmental state
wooclap, might need to rewatch to be sure
- bureaucrats stop subsidies to slow-growing firms (key element of discipline)
- bureaucrats regularly hold private meetings with the country’s wealthiest industrialists
- 50/50: firms that lobby for policy benefits are accommodated (depends if it is corruption or lobbying)
- the elite all went to the same school/university (they knew each other, had a network)
the developmental state - the dilemma
a large active state is needed to promote
BUT large active states are vulnerable to capture
- easy relapse into rent-seeking and the predatory state
so we still need AUTONOMY FROM POLITICAL PRESSURES
- rational, Weberian bureaucracy
- meritocracy in recruitment, promotion
- impartial rule-based procedures
- bureaucrats can’t be your friends they have to be professionals, pass competitive exams, not partisan biased = TECHNOCRATS
can make good policy bc their jobs were not at risk
e.g. Economic Planning Board in South Korea
e.g. Indian Administrative Service?
did not turn out like South Korea: what went wrong? meritocracy does not seem to be enough
- bureaucrats didn’t understand the private sector: had no connection to it
- businesses had no way of coordinating their investments
- the ‘License Raj’
- opening a new business required authorizations from ~80 agencies
what did South Korea have that India hadn’t?
embeddedness: connection between bureaucrats and the private sector, the people
inducing investments also requires understanding and minimizing private risks:
- state needs to be embedded in society
- source of information
- means of coordinating investments (I’m not gonna make a steel mill if I don’t have a shipyard and vice versa -> bureaucrats coordinate so that both invest)
networks and links to the private sector
- Gakubatsu (Japan): network of alumni from the same uni
- Amakudurai (Japan) - the revolving door from civil service to the private sector
- industrial associations corporatism
!too much “embededness” generates corruption, clientelism, rent-seeking
e.g. Brazil in the 1990s:
- politicians convinced bureaucrats to overcharge for ambulances
- public funds diverted for vote-buying
- public jobs promised to supporters
a balance of embedded autonomy is needed
what political conditions generate states with ‘embedded autonomy’?
you need autonomy (meritocracy) and embeddedness (connection to private sector)
- A history of Weberian bureaucracy and indigenous state-building (since 788 in South Korea)
- Autonomy - Disempowerment of large landowners (eg. by the Second World War in Japan land reform took away power from the old elite)
- Autonomy - A dominant, cohesive, elite (KMT in Taiwan, 1961 coup in South Korea, LDP in Japan)
- Embededness
- predictability, security -> more likely to invest - External threats that align elite interests with development (eg. Taiwan, South Korea)
- Incentivizing Investment
We don’t just need specific institutional rules
- Authoritarianism or Democracy can produce Embedded Autonomy
- Japan and Botswana - were democratic but dominant-party systems
We need a specific political relationship between bureaucrats, politicians and the private sector
- Lacking in Latin America and Sub-Saharan Africa
conclusion?
rules can be empty and meaningless if they are not backed by power and enforcement
does not come from specific regime
comes from specific relationship between different actors
which developing countries have the right conditions today to become developmental states?
Rwanda
- quickly growing (e.g. volkswagen assemblance factory)
- poverty declining lot faster than its neighbours
- life expectancy has exceeded its neighbors
- history of Weberian bureaucracy and indigenous state-building: state has been empire until colonial period
- disempowerement of large landowners: genocide led to fall out old elite
- dominant, cohesive, elite : military elite that helped stop the genocide
- external threats that align elite interests with development Rwanda feels threatened by Hutu groups of Republic of Congo (DRC)
conclusion
what is the state?
- a monopoly on the use of force
the predatory state
- extractive economic institutions, generated by patrimonialism OR a bloated state
the neoliberal state
- less state, more market was not enough to induce private investment
the developmental state
- active, disciplined state that can’t reduce risks and encourage learning
- requires a balance of ‘autonomy’ from and ‘embeddedness’ in society
- most likely with a cohesive elite, experienced bureaucracy, land reform and external threats
