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The role of the “developmental state” Essay

‘The role of the “developmental state” in the post-war period has been exaggerated.’ In what ways and in which circumstances has government contributed to national economic success?

While each country strives for the economic success of their nation, the approach and system that they use vary. Some countries like China support the idea of strong government intervention in the economy while others prefer the free market system namely US. The role of the state also comes in different forms and degrees. The variation arises because of the difference in history, tradition, culture and political system. This in return, affects the business system. However, since the last decades the role of state has been in a state of flux. The latter, is believed to be as a result the rapid increase in globalisation and demand for more flexibility to adapt with the vagaries in the external environment. Does this mean that the government contribution to the national competitiveness is in decline?

Albeit, the trend is moving more towards capitalism, the role of the state is still prominent especially after the 2008 economic crisis. However, the state’s presence manifests itself differently in different countries because the capitalism itself varies in types. Whilst US follow the liberal capitalism, Germany followed the social market capitalism. In both types the government only play secondary role especially in the former. On the other hand, in the East Asian countries like Japan the state plays a more central role because they follow the developmental capitalism; but the public ownership of assets is very minimal. Then, there is the authoritarian capitalism followed by Russia and China before the reform. Here the government is still in control although there is increasingly open market capitalist system.

All businesses around the world, irrelevant under which system they operate are somehow affected by the state. This is because the latter, possess the regulatory tools that manage national economies such as fiscal and monetary policies. It also regulates the financial activities in view that finance is central to the operation of the economy. Government is also the main body that provide for both physical infrastructure like road communication and airports and human infrastructure that is educated workforce that facilitate production and trade. Equally important is the protection that it gives to the domestic industries by imposing tariffs and non-tariff barriers.

The government has also played vital role in the developmental state. Japan is the case in point Dore (1986). Here, the economic role was very different from that of the western. There was high consensus between interest groups characterised by its strong culture of familism. Due to no natural resources and poor physical endowment and agricultural base; Japan had to rely heavily on manufacturing. This is where state comes in to guide the operation to ensure that the growth of the economy is fulfilled. The key government institution was the ministry of international trade and industry which changed to ministry for economy trade and industry in 2001. They worked closely with the ministry of finance which until 1960 exerted great control on forex, foreign investment and import of technology. It also act as market substitute to allow nascent industries to grow. This brought rapid economic growth and by 1992 34.6% of workforce was in the secondary industry and 59% in tertiary sector.

Aside from the developmental state, the government also hold its place in the early developed countries like US. The difference here is the fact that the philosophy is against government intervention in private sector. Compared to Japan, therefore, it plays a more regulatory role, where it controls the money supply through interest rate and government spending and tax. The principal goal is to create a good investment climate for private sector to flourish. Its main role was in the defence and aerospace industry where it made a sheer size of purchase. It also subsidise the agricultural sector to assure food security. As per World Bank (2008) US contribute nearly 75% of $US towards agricultural support in OECD countries. This is after EU which contributes 90%. This is similar to Japan mad Korea which protected their rice industry.

However, the US philosophy towards state intervention changed in 2008 after the crisis. The government was left with no choice but to rescue certain firms in the financial sector and others especially the automobile industry. It is worth to note, that both US and European countries had to spend huge amount in funds to save this industry. The US and 3 EU member countries namely France, UK and Germany implemented the “cash for clinkers scheme” where consumers receive a lump sum to trade in their old car for new one. This was necessary due to the collapse in consumer demand for cars. Christler, Ford and GM sought for $25 billion financial aid to avoid bankruptcy. In 2009 Obama also introduced the ‘buy back initiative’.

In relation to the above it can be argued that despite the move towards market liberalisation; which started in the 1980s the state has never really managed to stay out of the picture. This is substantiated by the OECD data 2004nto 2007 where the average government spending as a share of GDP was as high as 43.6%. Eleven EU member countries were even spending the above average rate. It is interesting to note that as per the analysis Japan a developmental state was below the average. This average rate increased in 2009 to become 46% of GDP in view that all governments had to intervene during the deep economic crisis in 2008. So has the government role really declined in the past decade?

I opine, that the role has not decline but rather shifted or in a way modernised with time to suit or adapt with the current situation. The challenges being presented in the economic environment requires that businesses become more flexible, responsive and innovative. This is the way forward, to gain competitive advantage and consequently lead to economic growth.

For example, China realised in 1979 that by tight central planning and bureaucracy was not sufficient enough to lead to economic growth. Deng Xiaoping realised that by opening up the economy, and shift from a system where government run the whole show to one where market forces is allowed a major role in the economy. This reform came after the economic recession. Thus, this reform came in the aftermath of the recession because there was a necessity to adapt to certain changes so as to move forward.

In that same vein, the economic environment has moved to another level since the last two decades. Today, internationalisation and globalisation are two key words in the business literature. As such, the government has to adjust to the changes that come with the changes. For example, each individual country can no longer afford to play solitary role when deciding on protectionism policies such as tariffs and non-tariff barriers to trade. This is because businesses are being conducted across borders and thus, every party has to come on mutual agreement.

As such while the state still has the power to regulate and monitor such policies, it as to do it in collaboration with other supranational bodies like world trade organisation, European Union, North American Free Trade Agreement. These are all bodies that allow trade to flow smoothly, they allow access to larger market, increase sale, more jobs and faster economic growth. WTO has over 100 members and EU 27 members this allow synergy because as the saying goes ‘unity is strength’. Strength is what is needed to survive in the face of aggressive competition. However, in such situation weak count

However, this does not mean that protectionism is no longer being practice. Indeed, but only in specific sectors most commonly those in food sector and in situation where the goods forms part of the country’s heritage and needs to be protected. For example, India in 2009 recorded an increase of protectionism in the agricultural sector after imposing anti-dumping duties on agriculture products and removing the temporary tariff reduction on palm oil.

Protectionism has also been effective in protecting infant or sunrise industries from competition. This allows them the chance to develop, grow and become globally competitive. For example, Japan protected its infant industries until they get the wings to be set free and fly. This was done through enacting high tariff, subsidies, restricting foreign investment. Japan and Korea adopted protectionist policies towards the rise industry. Today Japan has grown to be the third largest economy. As per Business Recorder February (2013) it is being now praised by WTO for avoiding protectionism amid the financial crisis 2008 and earthquake in 2011.

Aside from protectionism, state is very active in the provision of education and training although there exists privatisation in the same filed. Germany is one country that is reputed for its research and development base. This is so because of the education and technical training system put in place by the government. This results into highly skilled and educated workers that can conduct research and development in the chemical and pharmaceutical the two main traditional industries in Germany. This results in the production of high value-added output and export which raise the standard of living and subsequently the economic growth. This is compared to Britain which does not invest in world class training and has consequently experienced decline in industrialisation.

Following the above, research and development plus technology policies has become important for innovation. According to J. Schumpeter technology and innovation is at the heart of economic growth. The state influences the same through its political, legal and educational institution. It establishes patents to protect the technology from piracy. Innovation is vital in the efficiency and effectiveness of according to Porter’s generic strategy leads to competitive advantage. The latter, is important for the growth and survival of industry.

For example, while ford automobile industry focused on mass production and assembly line in the year 1910 and became successful with its model T, Toyota build up on that and invented the lean production or just in time method in the 1930s. However, the problem was that the Japanese market was smaller than the American’s so it could not make do with the mass production and high inventory. So they had to produce according to demand. This cut the cost of stockholding therefore brings higher efficiency in production. Instead of producing only one model it manufactured various model to suit different customer needs. This is a source of competitive advantage.

In case of Japan such success in the automobile industry owes a lot to its government which assist in the transfer of technology. According to Gershenkron the father of late developmental state the state is the most important institution and the driver of industrialisation. For example, in Korea in the 1970s the state acknowledged that the automobile industry was a priority and needed protection. It gave Hyundai enormous advantages and made it the largest producer in its industry.

Such action was not appreciated by countries like US during the same period because of its free market system. However, since the past 5 years the situation has turn around. We have witnessed a situation where the early industrialised countries have been pleading for rescue, whilst the late developers like china and Japan are moving towards the market economy.

The neo-mercantalist has even blame the free market orientation for the fall back of US behind Japan in economic competition. As a result they promoted an American equivalent of MITI to subsidise, coordinate and promote American high-tech industry in the global market.

This brings us to the conclusion that, state direct state intervention is in decline in the traditional developmental state. Nevertheless, it is undeniable that it is in the increase in countries like US which initially banned such action. I my opinion, the table has turn around but the role of the state is here to stay, on the guard for protection and rescue whenever the need arise.

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