5th October 2017
The underlying political settlement within countries too often provides political elites with insufficient incentives to enact the institutional reforms needed for further growth and structural transformation
The original developmental states of East Asia had one unifying economic characteristic: they witnessed almost uninterrupted rapid economic growth for well over four decades. This is very different from what we have observed for other developing countries, where economic growth has been boom and bust, defined by a rapid growth acceleration followed by a deceleration that at times was quite prolonged. With the exception of China, no other country has observed rapid sustained growth in the past few decades.
Why have we seen so few examples of countries with developmental state properties when it comes to economic growth? Is it due to the lack of political and economic space for nation-states in low and middle income countries to chart their own independent path to industrialisation and structural transformation in the current liberal economic order, where the forces of globalisation are too strong to be kept at bay? Or are there other explanations for the lack of examples of successful developmental states in the Global South today?
To answer this question, take three countries in South East Asia – Indonesia, Malaysia and Thailand. All were star economic performers from the 1960s to the 1990s and looked for some time to emulate the growth success of the old developmental states. These countries also had extensive state intervention and a pro-growth ideology within the ruling coalition, which were characteristics of the old developmental states. They also had authoritarian political regimes for long periods of time: again, a property of the old developmental states.
However, after the Asian financial crisis of 1996, economic growth plummeted in these countries and never recovered to its pre-crisis level, even 20 years or more since the onset of the crisis. These countries are now going through prolonged growth decelerations and it looks very unlikely that they will reach high-income status for some time to come, an outcome which was taken for granted in the early 1990s before the financial crisis hit.
What, then, explains the inability of Indonesia, Malaysia and Thailand to become economic success-stories of the type exemplified by Hong Kong, South Korea, Singapore and Taiwan? The answer to this question lies in politics, or what we can call the political settlement: that is, the balance of power between elite groups in the society.
Let’s look at Indonesia first. The state intervention of the Suharto regime in the years of positive Indonesian growth did not resemble the more strategic industrial policies witnessed in Korea, Singapore and Taiwan, but was followed principally to increase the business clients of the state. ‘Politico-business’ oligarchies held political power and had authority over the ‘strategic gate-keeping institutions of the state’, ensuring that they maintained control over the allocation of rents. The underlying political settlement in Indonesia, wherein the state was harnessed to the unconstrained interest of a privileged group of oligarchies, explains both the nature of the financial crisis in the late 1990s, with its widespread bankruptcies and debt defaults among these oligarchs, and the stagnation in economic growth in the post-crisis period.
A similar story can be observed in Malaysia and Thailand. Both countries had rapid economic growth from the 1960s to the mid-1990s, under authoritarian political systems for the most part (although there were frequent bouts of multi-party elections, interspersed with military coups, in Thailand from 1973). This growth strategy was underpinned by a relatively open economic environment for the export-oriented manufacturing sector, where multinationals mostly dominated. At the same time, political elites had close collusive relationships with domestic capitalists in non-tradeable sectors, such as utilities and finance, and import-competing sectors, such as cement.
The collusive relationship was an outcome of the political settlement in the two countries. In Malaysia, it reflected the need for political stability (after the devastating ethnic riots in 1969) by providing rents to the Bumiputera (Malay) capitalists and thus represented a means of countering the power of the Chinese capitalist class. In Thailand, it existed in sectors such as timber, rice-milling, property, retail and pharmaceuticals, where the establishment, particularly the palace (through its investment arm, the Crown Property Bureau), developed substantial interests during the years 1957 to 1973, when Field Marshal Sarit Thanarat was in power.
The consequence, in the case of Malaysia, was the failure of the state to foster a globally competitive domestic capitalist class as, unlike in South Korea, subsidies provided to Malay entrepreneurs did not have performance requirements. With the increasing vulnerability of the ruling coalition since the 1980s, there was ever more recourse to doling out public-sector jobs to politically influential individuals, resulting in revolving-door patronage appointments. As a consequence, the competence and autonomy of the technocracy – which are essential ingredients of a successful developmental state, as Bishop and Payne noted in the opening post of this series – were gradually eroded over time.
While the old developmental states could move steadily up the technology ladder as their labour-intensive industries became uncompetitive with increases in wages, the Malaysian state lacked the enforcement capacities to discipline politically connected firms in ‘high rent’ sectors and adopt the effective industrial policies that were needed for further upgrading of technological capabilities.
Thailand’s story is somewhat different, as a globally competitive auto sector has developed since the 1990s and linkages have been forged between multinational car manufacturers and predominantly Sino-Thai suppliers through local content policies initially devised in the 1980s. Unlike in Malaysia, where ethno-political considerations prevented the ruling coalition from promoting Chinese-owned firms, Thailand’s political settlement allowed – indeed, even encouraged – politicians to nurture Sino-Thai capitalists, both as a means of stimulating growth and as a source of personal enrichment. Nevertheless, the collusive relationship between the ruling political elite and economic elites in ‘high-rent’ sectors such as construction and cement became increasingly patronage-based, and detrimental to growth over time.
In sum, what is the most important lesson we can learn from the inability of Indonesia, Malaysia and Thailand to follow the path of the old developmental states? It is surely that a successful developmental state is only possible when the political settlement allows the possibility of ruling elites to have the enforcement capacities to discipline politically connected firms and follow effective industrial policies that are needed further to upgrade technological capabilities. The problem is that for many developing countries, such as Indonesia, Malaysia and Thailand, as we have seen, the underlying political settlement has provided political elites with little incentive to enact the institutional reforms needed for further growth and structural transformation.
At the end of the day, this is the main reason why we have seen so few developmental states emerge within the developing world.
This piece was first published by Sheffield Political Economy Research Institute – SPERI.