Both state-led and market-led approaches to development present substantial difficulties in implementation and costs. However, for a country striving for economic development and a better position in the international economy in the long run, the state-led approach seems more advisable. Admittedly, the state-led approach does present more risks in many ways, but the prudent implementation of state-led policies presents a rapid, more stable, and effective way to qualitatively change the economic position of a country, marking the transition from a “developing” to a “middle-income” or to a “newly industrialized” state. The neoclassical or market-led approach to development promises efficient allocation of resources, but does not necessarily facilitate the required industrial “catching up” that many developing states must do to truly join the ranks of the developed world. By locating the unique element of the state-led approach that was crucial to the success of economies such as those of South Korea and Singapore, countries can better formulate policies to minimize costs and maximize the potential for successful state-led development.

When the state-led approach is advocated as the better policy for developing nations, the common objections are protests against “soft authoritarian” regimes that often accompany state-led development, inefficiencies created by state interference in the economy, and the too-close relationship that frequently develops between big business and state. For the most part, these objections are valid. Experiences of state-led development show that civil liberties such as the right to organize labor, to protest government policies, and sometimes even to execute regular changes of political power are curtailed for the sake of meeting production and development goals set by the government. Inefficiencies do occur in state-led development, as the primary economic goal becomes achieving industrial and technological capability and strength as quickly as possible and concerns about the potentially inefficient effects of state subsidies and tariffs become secondary. And as the series of scandals involving South Korean politicians bribed by chaebol executives demonstrated in the 1990s, no political body given such wide control over the economy can remain completely autonomous for long.

But how do these weaknesses of the state-led approach compare to those of the market-led? Although the supporters of the market-led approach champion it as a definite way to break the government’s hold on the economy, in many instances, widespread redistribution of industries and market shares do not occur. For example, in Russia, where President Boris Yeltsin attempted to implement neoclassical economic reforms in the early 1990s, most of the new economic “oligarchs” who emerged were the same government officials who profited from the old regime. Using their insider knowledge, they were able to buy the state’s monopolies in many industries for outrageously low sums in the midst of the simultaneous price liberalization and privatization that constituted the “shock therapy” policy. And while market-led approaches may eventually serve to establish a smaller and more autonomous government, the political, economic, and social chaos that often follows rapid liberalization and privatization undermines the ability of the state and of other institutions to provide the stability necessary for the functioning of a free market. Moreover, state-led development does not necessarily have to be implemented by a soft-authoritarian regime, although many examples of state-led policies have been. Other permutations are possible; for example, a nation may democratically choose a pro-state-led approach candidate. Additionally, as the crucial and unique element of the state-led approach is better understood, a dedicated group of bureaucratic elites may be sufficient for successful state-led development. Although free-market forces will almost guarantee a more efficient allocation of resources, the assumption that developing countries need more efficient allocation is debatable.

Developing Different Sectors

Although there are a few examples of agrarian countries in the ranks of the developed world, one of the major differences between “Third World” and “First World” countries continues to be industrial, and increasingly, technological capacity. Implementing free-market-led policies in a developing country makes it very unlikely that such capabilities will emerge. If high-tech and industrial sectors do develop within the country, it will most likely be in the hands of foreign companies that are attracted to the country’s minimalist economic policies and do not contribute to the country’s long-term economic strength. The greatest advantage of state-led development is that it allows the time, space, and resources for countries to develop a new set of industries in which they have a better comparative advantage in the international market. In the words of Robert Wade, Professor of Political Economy and Development at the London School of Economics and a well-known analyst of the East Asian development phenomena, “[Governed market] policies enabled the government to guide … market processes of resource allocation so as to produce different production and investment outcomes than would have occurred with either free market or simulated free market policies.” To direct this different outcome, the government first chooses certain sectors judged to be important in the international economy. Then it uses state capital resources, control over exports and imports, command over foreign exchange, and control of the financial system to create an environment favorable to the development of the chosen industrial sectors and to discourage the use of resources in other sectors.

Therefore, market-led and state-led approaches differ fundamentally on a crucial point: the market-led approach assumes that countries are assigned certain comparative advantages within which developing nations should work, while the state-led approach seeks to shape the comparative advantage that they have to use in the international economy. That is, while every country has a comparative advantage in trading with other countries, not all comparative advantages are created equal. State-led approaches try to develop the capacity for greater comparative advantage in the international market instead of just working within the comparative advantages it may currently possess, which may be cheap labor, mineral resources, or agricultural raw goods.

In other respects, the state-led approach seeks to apply the most useful elements of the free market in a controlled manner, while the proponents of the market-led approach advocate that developing nations “go straight for a Western-style market economy.” Proponents of the market-led approach overlook that while the market economy works well for industrialized Western economies, full exposure to the global market may terminate nascent industries in developing countries. In comparison, the moderated use of free-market forces through policy tools such as temporary tariffs against certain foreign goods and tight regulation of foreign investment allows budding domestic industries of state-led economies to benefit from these free-market forces while still being screened from their full strength. This type of state control over change affords a political, social, and macroeconomic stability that is often absent during rapid adoption of free-market policies.