Comparing Trajectories

To illustrate the comparative benefits of the state-led over the market-led approach, South Korea and Chile may be compared as two respectively prototypical countries. In 1970s, South Korea was beginning the implementation of its state-led development policies, while Chile was pursuing its radically free market agenda under dictator Augusto Pinochet. Comparatively, the two ranked close in terms of economic and political development, with Chile probably slightly better off in terms of economic capacity. In 2002, thirty years later, South Korea’s gross domestic product per capita (GDP) was nearly double that of Chile (US$19,400 vs. US$10,000) and Chile had a poverty rate about five times higher than that of South Korea (21 percent vs. 4 percent). More significantly, South Korea’s current technological and industrial capacity is many times greater than Chile’s, which actually experienced de-industrialization under the free-market-led policies.

This dramatic difference between the two countries arose from South Korea’s ability to improve its comparative advantage in the world market by building industries in sectors that were not necessarily comparatively advantageous at the time of development. State support allowed these new industries in steel, automobiles, and electronics to develop and strengthen. In contrast, when Chile entered the free international market in the 1960s, market forces pushed the economy to play to its current comparative advantage, which at that point in Chile’s development lay mostly in raw agricultural goods. At least a part of Chile’s de-industrialization was due to the inability of existing industries to compete with the influx of foreign products and the inability of new industries to emerge because of a lack of protection during their vulnerable emergent stages. If South Korea had pursued radically free-market policies in the 1970s, it is highly unlikely that it would be ranked as a newly industrialized country today. Lacking the abundance of natural resources of Chile, South Korea would have probably depended on trading in the international economy its cheap labor and some light manufacturing goods, the two being their primary areas of comparative advantage in the immediate post-Korean War years.

Caveats Against the State-Led Approach

Despite the great potential economic benefits of the state-led approach, there are several important notes to be made. First, the state-led approach should be always thought of as the means to a competitive national economy that can eventually operate in the free international market, and never as an end to itself. The state-led model is contingent on an autonomous and relatively uncorrupt state and often sacrifices efficiency for capacity. As any government with prolonged ties to economic interests will become corrupt, state-led policies should always be applied with an eye towards the time when the umbilical cord between industry and state will be cut. In addition, as Princeton economist Paul Krugman points out, growth not only depends on increased input, but also on growth of efficiency. Ultimately, free market forces need to be used in order to discipline government, ensure efficiency by firms, and allow smaller domestic competition to emerge. This eventual transfer into a free market economy leads into the next disclaimer on the outcome of state-led developmental policies, which is that although it has historically produced spectacular rates of growth in countries that have adopted effective state-led policies, growth rates in these nations are bound to slow down.

As Krugman observes, most of the rapid growth experienced by the “East Asian tigers” is due to incredible amounts of capital and labor mobilization; these resources can no longer be increased in volume to reproduce the spectacular rates of initial growth. However, contrary to Krugman’s assertion that the success of the East Asian state-led model is a “myth,” the state-led approach to development has real substantial benefits if pursued with the recommendations that Wade makes in his article “Governing the Market.” With a coherent and well-researched plan for heavy sectoral investment, a dedicated and professional bureaucratic elite, selective use of protectionism and international competition, and a gradual loosening of ties between state and fully developed and competitive industries, developing states can make that all-important transition from the “Third World.” Even a slowing of growth rates in these state-led economies from double-digit to single-digit figures would not discredit the value of the state-led model. Regardless of any potential future economic slowdown, these countries now rank with Western Europe and the United States in terms of economic development and are highly unlikely to be considered part of the developing world again. They have made the “jump” from the developing to the developed world that often proves so elusive.

Assessing Applicability

In terms of the applicability of the state-led model to other parts of the developing world, some circumstantial elements that contributed to the success of the East Asian economies would be very difficult to reproduce. One significant circumstantial element was the strategic position of South Korea and Taiwan during the Cold War that gave access to massive US funding for economic investments. The other was the rapid expansion of the global economy during the 1960s and 1970s. In addition, as previously mentioned, the success of the state-led model is contingent on an autonomous and relatively uncorrupt state. Since state corruption is a rampant problem in most of the developing world, such as in Africa, Southeast Asia, Latin America, and the former Soviet Union, the prospects of a successful state-led development in these areas seem somewhat dim. However, if the need for industrialization can be formed into a political issue, state-led development may still take place. The accountability that comes with democratic systems may supplement the initial absence of integrity in the state economic bureaucracy. With the resurgence of market-oriented development models in the 1980s and 1990s, many of these developing countries are being aggressively pushed and advised by international organizations to open up to the international economy and to enact free-market policies immediately. What the leaders of these countries and their advisors fail to recognize is that directly entering the free market forces developing countries to play solely to the comparative advantages they have at the time of entrance into the free market, which may only add up to be cheap labor or natural resources. Consequently, after opening up their markets to foreign competitors, these countries never have the opportunity to develop their own new industrial capacities, a key criterion for becoming a “developed” country.