State and the economy

State-directed Development: Political Power and Industrialisation in the Global Periphery by Atul Kohli, Cambridge University Press (first South Asian edition), 2005; pages 478, Rs.425.

ONE of the enduring myths about globalisation is that it makes nation-states irrelevant. At a popular level, the ascendance of the private sector accompanied by the "withdrawal" of the state is taken to imply that state intervention is no longer possible nor desirable. Nothing could be farther from the truth. States pursuing neo-liberal agendas are, in fact, as strongly interventionist as those that allegedly pursue the logic of a command economy. If anything, the pretence of states being neutral arbiters among social classes is being shed rapidly as governments jump on to the neo-liberal bandwagon. Atul Kohli, Professor of International Affairs at Princeton University, examines the role states in the developing world (the periphery) have played in industrialisation. It is a comparative analysis of "states as economic actor(s) in developing societies".

Why have some states been more successful than others in promoting industrialisation? What elements in the states' relationship with competing classes (labour and business, for instance) enabled some states to promote industrialisation successfully, which some others could not? This book, Kohli remarks in the introduction, is "about patterns of state construction and patterns of state intervention aimed at promoting industrialisation". A "historical orientation" is provided because these states acquired their "core character" long before they started to intervene in order to promote development. In particular, the colonial tradition left a deep impact.

The choice of states is based on Kohli's typology, depending on how the authority of the state is organised and used in the developing world. Nigeria is slotted as a neo-patrimonial state because "despite the facade of a modern state, public officeholders tend to treat public resources as their personal patrimony". The cohesive-capitalist states such as South Korea are at the opposite end of the spectrum. These are characterised by "cohesive politics, that is, by centralised and purposive authority structures that often penetrate deep into society". These states, in their pursuit of economic growth, which is equated with national security, have developed "close alliances" with dominant social groups, particularly the capitalist class. "An important corollary of this political arrangement," observes Kohli, "is a tight control on labour." These states are essentially authoritarian because they rest on a narrow social alliance.

Kohli points out that both the "cohesive-capitalist" states in the study, South Korea and Brazil, which were under the control of military dictatorships for long periods, share organisational and class characteristics of the fascist states in inter-War Europe and Japan. The Indian state, according to Kohli, is a fragmented multi-class state. Unlike neo-patrimonial states, these states are "real and modern". They "command authority" and leaders are generally accountable for policies and performance. However, unlike in cohesive states, the authority of fragmented states rests on a "broader class alliance". This results in their inability to "define their goals as narrowly or pursue them as effectively as cohesive-capitalist states". They also tend to be "middling performers" because they have to accommodate competing class interests.

The study makes a comparative analysis of state intervention in four "large and significant" countries - Nigeria, South Korea, India and Brazil. Kohli explains that the choice of these countries was deliberate, in order to explain the variation in the efficacy of state intervention in varied contexts. The book is structured in four parts, each focussing on one country.

This work is important because it places the role of the state at the centre of discussion on modern capitalism and industrialisation. In the process it rescues the debate from the ahistorical and apolitical perspectives that are on offer. The Korean case best illustrates this. For a long time, until recently, South Korea was the poster boy for the neo-liberals. Institutions such as the World Bank attributed its success to the neo-liberal policies that it pursued, by letting markets work unfettered. This perception is now discredited. It is accepted that South Korea's success is, in large measure, owing to the strong intervention of the South Korean state, for other historical reasons (in particular, the land reforms after the Second World War and the crucial role that the country played as a U.S. ally during the Cold War).

Although Kohli's study is confined to the period until the early 1990s, which is when neo-liberalism took on a strident note, he locates himself firmly in the "statist" tradition, albeit by not "adopting an aggressive anti-market position". In particular, he rebuts the claim that "outward orientation" and increased competition results in higher rates of economic growth. He denies the laissez faire claim that state intervention, by nature, stunts growth. Instead, he points out that "late-late-industrialisation has always commenced under conditions of protection. As for the laissez faire claim, there is stunning lack of evidence for the proposition that less government facilitates more rapid industrialisation". The evidence suggests that state intervention aimed at "boosting investor profitability is strongly associated with rapid industrialisation".

Kohli points out that "statist scholars" have demonstrated quite convincingly that state intervention played a crucial role in the East Asian "miracle". A vast body of literature now exists, which has "carefully documented" how exactly this success was possible. The use of a wide range of instruments available at the command of the state made this possible. Tariffs control and funnelling of credit in directions deemed "desirable", subsidies, promotion of technology, bureaucratic cooperation with the private sector and oversight were some of the instruments that the states in the region (particularly South Korea and Taiwan) used in the cause of industrial promotion. Kohli points out that "embedded autonomy" played a crucial role in the success of economies such as South Korea. Such states, while cooperating closely with private business, also insulated their bureaucratic elites from the corrupting influence of private interests.

There is no doubt that South Korea is one of the greatest success stories of the 20th century. Kohli's study offers a contrast to the glib assertion that neo-liberal policies played a crucial role in the success story. Instead, he weaves together a number of strands to illustrate a much more complex picture of what laid the basis for the success. The brutal Japanese enslavement of Korea between 1905 to 1945 had a "deeply architectonic" impact, especially in comparison to European colonialism. The Japanese replaced the "ineffective agrarian bureaucracy" with "a highly authoritarian, penetrating organisation, capable of controlling and transforming Korean society. Japan influenced and shaped Korea's productive capacity, made possible by the colonial power's alliance with dominant classes in Korea. In fact, Korea was integrated into the Japanese imperial project. In different phases, depending on Japan's imperial agenda, Korean agricultural and industrial capacities were enhanced significantly. After the First World War, Japan exported capital to Korea and relaxed the restrictions on its ability to produce manufactured products. Japanese colonialism, though extremely brutal, was single-minded in its resolve to integrate Korea as part of its war machine. For instance, he observes that it "invested heavily" in infrastructure, resulting in Korean roads and railways being among the "finest that any developing country inherited from its colonial past". There were also "significant investments" in primary education.

The state under Japanese rule played an important role in shaping the Korean state after the Second World War, even after it came under the influence of the U.S. Indeed, one Korea observer pointed out that the country's businessmen were increasingly drawn into the policy-making process of the colonial establishment; what they lost in terms of "autonomy", they made up "magnificently" in "corporate profits". After the War, most of the manufacturing plants came under the control of the U.S. military. These were turned over to private interests at "rock-bottom prices".

The land reforms initiated after the War also resulted in the elimination of large landowners as a political force. These laid the basis for Korea's spectacular growth during the military regime of Park Chung Hee (1961-1979). The manufacturing sector grew at an annual rate of 15 per cent during this period. The regime's "prolonged contact" with Japan enabled it to attract capital and technology. Park Chung Hee created a strong economic bureaucracy, underlining the importance of planning. Kohli points out that the state-business relationship was clearly dominated by the state. The state played an important role in increasing the concentration of business in a few companies, the chaebols. Moreover, the Park Chung Hee regime forced businesses "into a number of top-down business associations that were assigned, in turn, to various ministries, thus enhancing government's capacity to regulate and monitor".

Unlike South Korea, the fragmented multi-class state in India resulted in a much more sluggish economic performance. While the broad-based social base of the Indian state yielded political dividends, particularly because it enhanced the quality of its democracy, it also led to the state paying less attention to the economic agenda. Kohli argues that the Indian state failed to deliver on the economic front because of its inability to "guide social and economic change". The Indian state's effort to "reconcile the political preferences of both the Left and the Right in the context of a fragmented state" failed. It promoted neither "radical redistribution" nor "capitalism-led economic growth".

Why is a relatively more vibrant democracy like the one in India unable to promote development? This is a question that remains unanswered in Kohli's work. Why was the Indian state unable to act decisively by settling the contradictory positions of the different social classes? There is an enduring body of literature in the Indian Left which has addressed this issue. It has pointed out, for instance, that the Indian capitalist class' inability to deliver a body blow to large and extensive interests in land resulted in the promise of land reforms remaining stillborn. This is not merely a matter of delivering justice or being good to the poor; it also ensured that the Indian market for manufactured goods remained mired in a demand constraint. Meanwhile, under pressure from international capital, the state is alienating the poorer classes.