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American Economic Association

Symposium on the State and Economic Development Author(s): Pranab Bardhan Reviewed work(s): Source: The Journal of Economic Perspectives, Vol. 4, No. 3 (Summer, 1990), pp. 3-7 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/1942925 . Accessed: 14/06/2012 11:24
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4, Journal of Economic Perspectives- Volume Number3-Summer 1990-Pages 3-7

Symposium on the State and Economic Development

Pranab Bardhan

he role of the state in economic development is one of the oldest topics

in economics, yet controversies rage with similar passion and camps are divided on lines today broadly similar to the early writings. However, the experience of nearly four decades of state activism in the developing countries gives us some fresh perspective in looking at some of the old issues. The literature in development economics has now turned full circle from the unquestioning dirigism of the early 1950s to the gory neoclassical accounts in recent years of the failures and disasters of regulatory, interventionist states. The four papers in this symposium, in spite of the different views of their authors, go beyond much of the existing literature in refusing to pose the question as a simple choice between the market mechanism and state intervention. Larry Westphal and Albert Fishlow evaluate the South Korean and the Latin American experience, respectively, in their essential complexity. Mrinal Datta-Chaudhuri draws upon a comparative study of the Indian and East Asian cases to bring out the contradictions and complementaries in the relationship between the state and the economy. Anne Krueger's paper reflects on how the comparative advantages and disadvantages of state action flow from its organizational and incentive characteristics. The traditional development literature emphasized market failure in signalling investment allocation and the importance of economies of coordination that aggregate planning can achieve. In this literature the state was often left floating in some behavioral and organizational vacuum, making it easy to be used for a blanket endorsement of indiscriminate state intervention, the ad* Pranab Bardhan is Professor of Economics, University of California, Berkeley, California.

Journial of Economic Perspectives

verse effects of which for both economic growth and income distribution are now painfully obvious in many countries. The neoclassical political economy literature which grew partly in reaction to this drew pointed attention to how the regulatory state spawned an enormous waste of resources in rent-seeking activities, over and above the standard economic losses due to misallocation effects of policy-induced distortions and the macroeconomic impotence of
anticipated policies.

The recent literature on imperfect information is more agnostic in its implications for the role of the state. On one hand, the traditional neoclassical models ignore that under imperfect information the market equilibrium is in general not Pareto efficient; that not all relevant information is, or can be, incorporated in prices; and that decentralized market mechanisms under private information may not handle well some problems of coordination and urgent decisions (as in crisis or emergency situations) which could be more readily solved by central direction. On the other hand, many of the information problems are no less acute for the planning and regulatory authorities than for the private sector. In addition, there is a growing recognition of the importance of externalities in the area of information processing, learning and acquisition of technological capability which belong to the core of the development process. In developed countries some of these externalities are internalized in non-market institutions like large corporations, some of which are larger in size than the whole economy of many developing countries. In East Asia the activist state, going much beyond the prescribed neutral policy regime of neoclassical economists, has played a catalytic role in promoting this crucial learning process and offsetting these externalities, in addition to being a surrogate for missing capital markets, as emphasized in the papers by Westphal and DattaChaudhuri. The situation, of course, varies from one political and historical context to another: the government, as Krueger points out, may lack the requisite capacity or coherence for appropriate action, or short-run fiscal pressures may have diminished the macroeconomic room for maneuver, as in Fishlow's description of the Latin American state. But clearly the neoclassical litany about getting the prices right is not adequate; in actual instances the outcome will depend on the organizational structures and institutions. Similarly, the earlier plea of development economists for investment planning was not enough, because one has to grapple with the issues of micro-management of the invested capital and the organizational and incentive aspects of facilitating the learning process. In much of the neoclassical literature the emphasis is on the extent of state intervention; mostly, of course, on the harmful effects of that intervention. As a matter of fact, almost all states in developing countries, successful or otherwise, are interventionist, and the important question is not really about the extent but the quality of that intervention. We need to understand why the quality of intervention is so different in the different states, even when those states

Pranab Bardhati

command similar instruments of intervention and sometimes display similar extents.of intervention; why the institutional coherence of the executive varies so much; why its ability to pursue collective goals even with roughly similar policy instruments is different. The neoclassical rentier state or the predatory state may be applicable to Mobutu's Zaire, where everything including the highest public offices is up for sale. Similar stories may be told of the Philippines under Marcos, Haiti under the Duvaliers, Nicaragua under Somoza, and so on. But it is certainly a very incomplete theory in the context of many other states which have some institutional coherence in the pursuit of collective goals. The rent-seeking literature is better at explaining failures (of course, after the fact) than success stories, particularly of state-led industrialization, and there have been some dramatic cases of the latter in the history of last 100 years or more, starting with the classic case of Meiji Japan. I think both traditional Marxist and neoclassical theories of political economy often err in taking the state merely as an arena of group competition, rather than including the state itself as a strategic actor in a game of mixed conflict and cooperation with the interest groups and social classes. When the state elite is an autonomous actor, it is simply not enough to characterize it as venal or "klepto-patrimonial," as is automatically presumed in the neoclassical literature. Beyond the obvious motives of self-aggrandizement of the leadership, there sometimes exist developmental coalitions deriving political legitimacy from what can be called the nation's collective aspirations. What seems to be important in these cases in making a difference in outcomes toward a developmental state is the extent of centralization of general decision-making, coupled with its flexibility in dealing with changes in technical and market conditions (the speed with which goals and policies can be renegotiated often depending on dense organizational networks between public officials and private entrepreneurs as in Japan or Korea or the tightly-knit party organization in the case of Taiwan); how much operational space the economic technocrats get in their design and implementation of policy; how important meritocratic recruitment and predictable longterm career paths are in the organization of the bureaucracy; and how much leeway the state has in restructuring its relationships with labor, business and the rural sector. It is not so much a matter, as is sometimes simple-mindedly put, of authoritarianism versus democracy. Once developmental goals are centrally involved in the issues of legitimacy of the regime, I think it is not so much authoritarianism per se which makes a difference, but the extent of insulation (or "relative autonomy") that the decision-makers can organize against the ravages of short-run pork-barrel politics. Authoritarianism is neither necessary nor sufficient for this insulation. The difficult political challenge, as Fishlow points out, is to construct a durable coalition of modernizing interests under freer and wider participation. The durability of the coalition largely depends on its sensitivity to distributional issues (the static allocation efficiency issues usually emphasized in the neoclassical literature are often perceived to be

Journal of Economic Perspectives

secondary in importance in this context) and its ability to resolve conflicts and make compromises in an open political process. There is no context-free or institutionally neutral way to resolve the obvious tension between the necessary insulation of the policy elite and the demands of an open polity in the interests of stability and legitimacy. What has worked in the corporatist model of Sweden or Japan (the relative social homogeneity in both countries making political aggregation easier) may not be replicable elsewhere. One important aspect of the quality of state intervention that the recent East Asian success stories highlight is something that the critics of neoclassical theory, in their eagerness to emphasize the highly interventionist nature of the East Asian state, often overlook: as Datta-Chaudhuri and Westphal point out, the intervention schemes have worked closely with the market, and the state's alertness in using the signals emanating from world markets to judge dynamic efficiency has helped keep firms on their toes and prevent infant industries from turning into inefficient geriatric protection lobbies. However convinced one may be of the pervasiveness of market failures in developing countries, one must recognize the vital disciplining function of competition in encouraging quick learning and cost and quality consciousness. It is, of course, a paradox of liberalism that one often needs a strong state (far from the minimalist state of classical liberalism) to ensure the operation of dynamic competition. While most economists, even in socialist countries, now agree on the virtues of the threat of entry and the fear of exit in reducing wasteful use of social resources, it remains an unresolved issue in the current debates on market socialism how far private ownership is necessary in bringing this about. While some socialist economists believe that it is possible to devise institutional mechanisms through which one can harden Kornai's "soft budget constraint" without giving up public ownership, others believe that there are what Krueger calls "systematic and inherent features of government" which make it nearly impossible. The other aspect of the quality of intervention that matters a great deal is the selectivity of intervention (in terms of strategic sectors, products and processes in the different stages of early industrialization). Such selectivity in targeting, as opposed to indiscriminate and blanket controls and regulations, saves on scarce administrative skills and makes it easier to pinpoint social costs of policies and adjust them in response to changing technical and market conditions. The sharp contrast between Korean and Indian state intervention described by Datta-Chaudhuri is an illuminating case in point. Most general theories of the state do not even attempt to understand or explain the change of regimes: how it becomes possible for some regimes to negotiate the inevitable political hurdles in the process of shifting from one policy regime to another, or how with the same venality of agents (or conflicts of class interests) new coalitions emerge to reorient policy directions. Clearly, historical-conjunctural (including international) factors and path-depenldent processes are important here and it is difficult to fit them into an easily generalizable theoretical pattern.

Syrnposiumon the State and Economic Development

Finally, much of the discussion is confined to polar opposites of private market and centralized bureaucracy. There may be many local small-group cooperative institutions which may avoid some of the "failures" of the two poles and satisfactorily reconcile problems of equity and efficiency. The state-centered large-scale industrialization and urbanization models have been challenged in recent years by advocates of decentralized development, who are more concerned about the dispossessing and uprooting effects on local community life and ecological balance. There is, however, some difficulty in resolving the tension here between the informational efficiency of decentralized mechanisms of development and the need for intervention by supra-local agencies to counteract the fact that small groups often find it difficult to bear the brunt of locally covariate risks and that local organizations are prone to easy capture by special interest groups.

Bardhan, Pranab, "Alternative Approaches to Development Economics." In Chenery, H.B., and T.N. Srinivasan, eds., Handbook of DevelopmentEconomics, Vol. 1. Amsterdam: Elsevier Science Publishers, 1988. Bardhan, Pranab, TrhePolitical Economy of Developmentin India. Oxford: Basil Blackwell, 1984. Evans, P. B., "Predatory, Developmental atid O(ther Apparatuses: A Comparative Analysis of tlle hllird World State," unpublished, 1989. Findlay, R., "TIhe New Political Economy: Its Explanatory Power as Related to LDCs," Colurnbia University Department of Economics Working Paper, August 1989. Srinivasan, T. N., "Neoclassical Political Economy, tlle State and Ecoi:nomic Development," A.sian DevelopmeintReviewX,1985, 3:2, 38-58. Stiglitz, Joseph E., "Markets and Development," NBER Working I'aper-, Mav 1989.