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The Concept and Evolution of the Developmental State

Article  in  International Journal of Political Economy · September 2008

DOI: 10.2753/IJP0891-1916370302 · Source: RePEc

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International Journal of Political Economy, vol. 37, no. 3, Fall 2008, pp. 27–53.
© 2009 M.E. Sharpe, Inc. All rights reserved.
ISSN 0891–1916/2009 $9.50 + 0.00.
DOI 10.2753/IJP0891-1916370302

Esteban Pérez Caldentey

The Concept and Evolution of the

Developmental State

The developmental state is associated with the leading role played by the
government in promoting industrialization in Japan and East Asia in the
post–World War II era. Their respective governments pursued a series of
policies, including tariff protection, subsidies, and other types of controls
aimed at developing selected productive sectors of economic activity.
Fundamental to the design of the developmental state for these countries
was the creation of an alliance between politics and the economy, which
materialized in the establishment of a specialized bureaucratic apparatus
that had ample powers and coordinated the developmental efforts, at least
in their initial stages.
The developmental state and its associated policies are not unique to
Japan or East Asia. A similar type of model, albeit a more restrictive one,
was also followed in Latin America during the period that lasted from the
end of World War II to the beginning of the 1960s and, in some cases,
the 1970s. During this time, the state intervened in a number of areas and
indeed made use of fiscal, exchange rate, monetary, and sectoral policies
to promote the industrialization of Latin America.
Neither are developmental state policies a feature limited to the twen-
tieth century. European countries used the same policies throughout the
seventeenth and eighteenth centuries and the United States during the

Esteban Pérez Caldentey is an Economic Affairs Officer at the Economic

Commission for Latin America and the Caribbean (ECLAC) in Santiago, Chile.
The opinions here expressed are the author’s and might not coincide with those of
ECLAC.

  27
28 international journal of political economy

nineteenth century. Moreover, other regions such as Latin America did

very much the same thing in the second half of the nineteenth century.
The available historical record suggests in fact that the developmental
state and its associated policies are a recurrent feature of government
policy during different historical times, under different circumstances,
and in different geographical locations.
Notwithstanding the recognized successes of the developmental state,
the Latin America debt crisis of the 1980s, the spread of globalization,
and the East Asian financial crisis in 1997, jointly with the overarching
ideological powers of the Washington Consensus, have severely called
into question its usefulness. As things stand, the developmental state
has been overtaken by a state preoccupied with macroeconomic stabil-
ity, property rights, and contract enforcement and partial intervention in
education, health, and pensions.

A General Characterization of the Developmental State

The term developmental state refers to a state that intervenes and guides
the direction and pace of economic development. The developmental state
is mainly associated with the type of economic policies followed by East
Asian governments in the second half of the twentieth century and, in
particular, with the post World War II Japanese economic model.1
Central to the developmental effort in the case of Japan was the cre-
ation of the Ministry of Trade and Industry (MITI) in 1949. Initially it
coordinated the “Policy Concerning Industrial Rationalization,” which
sought to counteract the deflationary regulations of the Supreme Com-
mander of the Allied Powers. The MITI was also given the power to
negotiate the price and conditions for the import of technology through
the approval of the Foreign Capital Law.
In 1952, the MITI gained further preponderance as it took effective
control of the rights to import merchandise and of the foreign exchange
budget. The effective control of imports led the government to adopt a
system of import control for the protection of domestic industry. For its
part, the control of the foreign exchange budget allowed it to stimulate
and foster export growth.
The MITI also widened and cheapened the access to credit facilities
through the establishment of the Japan Development Bank. The Japan
Development Bank pursued a credit policy to develop key domestic in-
 fall 2008  29

dustries (energy and metal production). This policy was complemented

by a very generous lending policy involving both the Bank of Japan and
commercial banks. This fostered vertical and horizontal concentration
of firms producing the keiretsu, an industrial conglomerate reminiscent
of the earlier zaibatsu (Coates 2000).
The example of MITI was followed by other “late industrializing”
countries such as South Korea. Following the end of the Korean War
(1950–53), the South Korean government pursued a government-led,
export-oriented policy. Following the example of Japan’s MITI, it cre-
ated the Ministry of Commerce and Industry through the adoption of the
first five-year plan (1962–66). Through the ministry of commerce and,
in particular, the recently created Economic Planning Board, the elected
government adopted an exchange rate policy that combined periodic
devaluations and export subsidies to make the exchange rate competitive
for local producers.2
The management of the exchange rate regime was accompanied by
the control of credit policies and financial resources. Toward this end, the
government nationalized the major banks of the country, which allowed it
to supply cheap credit to targeted industries. Finally the manipulation of
interest rates was used to induce firms to change production techniques.
As in the case of Japan, the adoption of developmental policies fostered
the concentration of industry.
Developmental state policies were not conceived as rigid ones. Rather
they adapted over time to fit changing circumstances. Between 1950 and
1960, the state intervened to engineer and monitor the industrial catch-up
process of Japan. In the 1960s and 1970s, the developmental guidance
became more indicative and turned to the creation of export industries,
the production of consumer durables, and the creation of technologically
sophisticated consumer products. Finally, in the 1980s, the MITI turned its
attention to the development of high-growth technology industries. At this
developmental stage, the MITI turned to tax incentives and public–private
sector collaboration. At the same time it had to deal with industries that
were “structurally depressed” such as textiles, sugar refining, cardboard,
chemicals, steel, and others (Coates 2000: 213–23).
In the case of South Korea, the first two five-year Economic Devel-
opment Plans centered on the establishment, identification, and perfect-
ing of state instruments and on self-reliance. The third plan (1971–75)
focused on the “dynamic development of the rural economy, a dramatic
30 international journal of political economy

and sustained increase in exports and the establishment of heavy and

chemical industries” (Lie 1998: 52). At this stage the focus of the Korean
developmental state turned to corporate growth through the establishment
of chaebols (family-owned conglomerates) that ended up controlling a
significant share of the economy of South Korea. Later on during the
1990s, the development of a high technological industry captured the
attention of the government.
This brief sketch of government intervention in two source cases, Japan
and South Korea, highlights some of the key features underpinning the
notion of the developmental state.3
First, the developmental state was conceived as an interventionist state.
Second, this did no imply that it made heavy use of public ownership.
Rather, the developmental state tried to achieve its goals through a set of
instruments such as tax credits, breaks, subsidies, import controls, export
promotion, and targeted and direct financial and credit policies instru-
ments that belong to the realm of industrial, trade, and financial policy.
Third, the degree and type of government intervention varies over time
in scope and content. It can depend on different factors, such as external/
internal circumstances, and on the life cycle of the industry the state is
trying to develop. For example, in the 1960s Japan adopted a more open
economy stance; it reduced its tariff and looked toward administrative
guidance instruments to pursue its “developmental policies.” In the
same vein, Okimoto (1989) goes further, arguing for a time pattern state
intervention. He argues that state intervention in Japan was much more
pronounced at the early and later stages in the life cycle of the products.
State intervention was needed at the early stages to develop the product
and the later stages to scrap the declining industries.
Fourth, the developmental state requires the existence of a bureaucratic
apparatus to implement the planned process of development. More to the
point, as in the case of Japan’s MITI or South Korea’s Economic Plan-
ning Board, the developmental state requires a pilot agency to oversee
and guide the developmental process. In turn, the existence of such a
bureaucratic apparatus requires a “meritocratic bureaucracy” capable
of formulating policy and possessing the required freedom and lack
of interference to apply it; or, as Johnson said, the developmental state
requires that the “politicians reign and that the bureaucrats rule” (1982:
p. 316).
Finally, the developmental state requires the active participation and
response of the private sector to state intervention.
 fall 2008  31

The Developmental State in the Early History of Currently

Developed Countries

Initially, the developmental state was viewed as a type of development

strategy followed by the late industrializing countries to catch up with
more developed ones. As stated by Coates, “in economies seeking to
make up for lost ground on already existing capitalists powers, it was
quite common to find that the state itself led the industrialization drive,
that is, it took on developmental functions” (2000, p. 62). However, as
it has been shown more recently by Ha-Joon Chang (2002, 2008) and
Ormrod (2003), the developmental state and its associated policies was
also present in the early development history of currently industrialized
economies.
According to Chang (2002, 2008), at an earlier stage in their history,
currently industrialized economies used a combination of interventionist
industrial, trade, and technology policies to foster the development of
their own incipient industries and stimulate a catch-up processes. These
strategies involved the active use of subsidies, tariffs, infant industries,
and other protectionist measures such as distribution of monopoly rights.
In addition, these strategies contemplated the development of national
capacities through research, development, education, training, stimulus to
foreign technology acquisition, and public–private cooperation practices.
These strategies are summarized in Table 1 for a few selected European
nations (Britain, the United States, Germany, and France).
As can be seen from Table 1, Britain used the most comprehensive
and varied set of instruments to promote its industrialization and world
predominance. Of the European nations considered here, Britain was
also the country that adopted a protectionist policy for the longest period
(235 years).
In the United States, the developmental state at this stage was much
more limited in scope and functioned basically through the enactment of
tariff laws to protect determinate infant industries. Tariffs were reduced
on an industry when the industry in question had become firmly estab-
lished and independent of duties for its financing. The cotton industry is
a case in point (see Table 1).4
For their part, France and Germany used a host of instruments to stimu-
late industrial development, but their implementation spanned a shorter
period of time (thirty-two and seventy-three years in the cases of France
and Germany, respectively) than that of Britain or the United States.
Table 1
Selected Developmental Policies of Britain, United States, Germany, and France

Country Period Policy Instrument

Britain Henry VII (1485–1509) Import substitution International missions, import of skilled labor,
industrialization. import duties, export bans on raw wool.

Elizabeth I (1558–1603) Build naval supremacy. The Navigation Act (1651) was revised in 1660 and
expanded in 1662, 1663, 1670, and 1673. It initially
No monarch (1649–60) prevented the Dutch from participating in carry-
ing trade to English ports. Later on, it ensured that
Charles II (1660–85) English ports were the origin of exports of all goods
James II; interregnum (1685–88) to English colonies.1
32 international journal of political economy

William III and Mary Stuart (1689–1702) Protect the domestic The Wool Act (1699) limited wool production in
wool and cotton industry Ireland. It forbade the export of wool yarn or wool
cloth from any American colony either overseas or
from intercolonial trade. It also banned imports on
Indian products.
 Permanent withdrawal of the Merchants Adventur-
ers’ corporate monopoly (1689).

Banned imports of cotton products. From 1700 on,

applied subsidies, tariff rebates, selective prohibi-
tion of imports and exports to linen, canvas, and
sailcloth.
George I (1714–27) Maintain the Hanoverian Overall trade tariffs increased by four-fold between
dynasty. 1690 and 1704.
Promote manufacturing
industries through the Reduced import duties on raw materials; increased
reform of the mercantile tariff rebates on imported raw materials for export
system (1721) manufactures; abolished export duties; increased
duties on imported manufactures; extended export
subsidies to include goods other than wool (silk,
gunpowder); introduced regulation to control the
quality of manufactured products.

George II (1727–60) Manchester Act (1736).

United 1789 The tariff act of 1789 was Adopted the first tariff with rates ranging from 5
States “protective in intention percent to 15 percent (8.5% average).2
and spirit” (Taussig 1910:
8)
Adopted a tariff with a 25 percent rate on most
This tariff responded to textiles and 30 percent on most manufactured
1816 the need to service the goods. In 1818, it was decided that the 25 percent
war debt duty rate should remain in force until 1826 and not
decline to 20 percent in 1819 as originally planned.
(Taussig 1910: 11, 14).
fall 2008  33

(continued)
Table 1 (continued)

Country Period Policy Instrument

1824 Protect domestic Extended protection to goods manufactured from

industry wool, iron, hemp, lead, and glass. The cotton
industry was not protected at this stage because it
was “firmly established and almost independent of
support by duties” (Taussig 1910: 47).
1828 Protect domestic Tariff on abominations. Significantly increased
industry duties on most raw materials including hemp, flax,
and wool. The Tariff Act of 1829 changed tariffs
from an ad valorem system to an ad valorem-spe-
cific duty system. (Taussig 1910: 57).
1832 Protect domestic Established duties on imported cotton and woolen
industry goods, iron, and other goods. It applied low or no
duties on articles produced in the United States
(silk, tea, and coffee). The average rate was 33 per-
34 international journal of political economy

cent. The tariff rate was to be gradually reduced to

20 percent by 1842 and rapidly thereafter to reach
a uniform 20 percent tariff rate.
Germany Frederick William (1713–1940) Protect and promote Tariff protection, monopoly grants, subsidies, capi-
Frederick the Great (1740–86) new domestic industries tal investments, import of skilled labor.
France Louis XIV (1683–1715) Protect and promote do- Direct encouragement through subsidies and tariffs
mestic industry of several industries. Established a broad scheme
of standards in existing industries. A proposal was
made to reinstate a system of industrial supervision
with a new formulation of standards and a corps
of inspectors directly responsible to the national
government.3

Sources: Chang (2002), Nye (1991), Omrod (2003), Usher (1934).

Notes:
1
According to Ormrod, the Navigation Act “forbade the importation of plantation commodities of Asia, Africa and America except in ships
owned by Englishmen. European goods could be brought into England and English possessions only in ships belonging to Englishmen, to
people of the country where the cargo was produced, or to people of the country receiving first shipment” (2003: 120).
2
According to Taussig (1910), the 5 percent was applied on all goods and the higher rates on luxury items. The 15 percent rate was applied
on carriages.
3
Regarding the corps of inspector, Usher writes: “Under Colbert there had been only fifteen resident inspectors of manufactures. At the
death of Louis XIV, there were thirty-eight, and by 1754 the number had increased to sixty-four. Besides these officials there were some
traveling inspectors and a number of special inspectors for particular industries such as mines, soap, and paper” (1934: 239).
fall 2008  35
36 international journal of political economy

Even during this earlier period, developmental policies were not con-
cerned purely with tariff policies, subsidies, and other controls but were
also aimed at increasing countries’ capacities to compete through techno-
logical innovation, flexible labor policies, and the promotion of education.
For example, the English economist Malachy Postlethwayt (see Johnson
1937) attributed a central role to education and proposed the creation
of a Mercantile Academy (1750) for the training of merchants, farmers,
and manufacturers. A mercantile academy would ensure higher levels of
productivity through improvements in work methods and the adoption of
the newer available technologies (Johnson 1937). Similarly, the French
secretary of state under Louis XIV, Jean-Baptiste Colbert, promoted the
creation of a corps of inspectors for French manufacturing (see Table 1).

The Developmental State in Other Developing Regions:

A Case Study of Latin America

In the same way that the developmental state is not a creation of the
twentieth century, it is not unique to the history of Japan, East Asia,
Europe, or the United States. It is also a recurrent feature of the history
of other developing regions such as Latin America.
One of the immediate consequences of the independence of Latin
American countries (1808–25) was their integration within the interna-
tional trade system.5 Their integration into the world economy, depen-
dence on a narrow commodity base, and limited domestic market meant
that Latin American countries were highly dependent on their external
sector for their development. In turn, this meant that the external sec-
tor not only played the leading sector role as the linchpin of economic
growth but also provided the basis for government revenue. In short,
paraphrasing Topik (1984), the external sector was the “life blood of
Latin America.” Hence, during this period, at the same time that Latin
American countries’ increased their external openness, they increased
tariffs on imports and also imposed taxes on exports. Given the particu-
lar historical circumstances, outward-oriented policies coexisted with a
higher tax burden on the external sector.6
The increase in tariffs was most notable between 1865 and 1890.
Available data shows that, with a few exceptions, Latin American ex-
hibited some of the highest tariff rates among developed and developing
economies.7 As shown in Table 2, for the period 1870–99, European
countries had an average tariff rate of 8.8 percent whereas Latin American
 fall 2008  37

Table 2
Average Tariffs for Selected Regions and Countries, 1870–1913

Country 1870–1899 (%) 1900–1913 (%)

North America 22.4 21.0

  Canada 17.8 19.4
  United States 26.9 22.7
Europe 8.8 8.8
  Denmark 10.9 6.6
  France 7.8 8.7
  Germany 7.2 7.7
  Italy 9.0 11.4
  Norway 11.3 12.0
  Sweden 10.6 9.5
  United Kingdom 5.0 5.4
Latin America 26.8 29.1
  Argentina 26.1 23.4
  Brazil 34.5 40.0
  Chile 19.4 18.3
  Colombia 33.5 47.4
  Cuba 22.5 25.6
  Mexico 16.6 21.9
  Peru 32.4 23.2
  Uruguay 29.7 33.3

Source: O’Rourke (2000).

countries had an average tariff rate that was roughly three times higher
(26.8 percent).
At this stage of their development, although tariffs were partly used
as a tool to develop the potential of the domestic industry, they served
mainly for raising government revenue to pay for war conflicts. These
were ultimately aimed at building and consolidating the different nation-
states from the divisions that took place following independence.8
According to Centeno (1997), following independence, Latin Ameri-
can countries experienced twenty-six armed conflicts by 1865 and sixteen
between 1865 and 1899.9 During the periods between independence and
1865 and between 1865 and 1899, military and financial expenditures
represented a significant share of government expenditure.10
Latin American countries, with a few exceptions, adopted more con-
38 international journal of political economy

sciously oriented developmental policies toward the end of the nineteenth

century when governments were relieved of the burden of financing war
efforts and could devote their efforts to the development of their respec-
tive countries.11 In some cases, these policies remained in force during
World War I.
The main areas of government intervention included the building of in-
frastructure such as transport roads and railways; the protection of export
sectors and specific products and industries; the spread of colonization;
and the promotion of skilled labor immigration. The main instruments
of government developmental policies included, among others, import
and export taxes, tariff exemptions, subsidies, subsidized immigration,
and cheap credit.
Brazil, Chile, Colombia, Mexico, and Peru provide cases in point
whereby these state public policies or developmental policies were ac-
tively used in the latter half of the nineteenth century (see Table 3).
In addition to the increase in tariffs, Brazil’s public policies included
labor and immigration policies such as the payment of immigrants’ trans-
portation cost to Brazil after the abolition of slavery (1888).12 According
to Baer, “the public subsidization of immigration was, for the short-run,
a reasonable effective substitution for investment in education as a means
of building up the quality of human resources in the economy” (2008, p.
303). As with other Latin American economies, the government was ac-
tively involved in the construction of the national railway. Furthermore, it
promoted and carried out import substitution policies for the production of
investment goods through import duties, tariff exemptions, and government
guaranteed earnings; imposed quantity controls; and intervened to improve
the terms of trade for coffee (see Baer 2008; Leff 1972; Topik 1984).
In the case of Chile, the beginning of state developmental policies can
be traced back to the presidency of José Manuel Balmaceda (1886–91).
Balmaceda promoted a protectionist policy, attempted to nationalize the
nitrate industry, which became the main source of government revenue
until the end of World War I, and used government revenue for a public
works program and education infrastructure.13
Later attempts at developmental policies were not as comprehensive,
mainly because, until 1891, the Chilean political and economic organi-
zation was based on two pillars: a constitution that gave ample powers
to the president and the fact that the state through its mining revenues
had an “independent base of political and economic power” (see Tapia-
Videla 1977: 457).
 fall 2008  39

Table 3
Summary of Selected Public Policy Measures in Latin America in the
Second Half of the Nineteenth Century

Country Period Policy/area Instrument

Brazil 1888–99 Transport (railroad) Subsidies

Guaranteed rates of return

Immigration and Subsidies

colonization
Government guaranteed
Protection of major earnings
export sectors
Import tariff exemptions for
capital equipment

Quantity controls

Chile 1886–91 Protection and promotion Tariff increases

of domestic industry Public work programs
Promotion of education

1897 External trade Tariff increase on a wide range

of imported products

Tariff reduction on imports of

raw materials and machinery

Establishment of specific import

duties on products competing
with local industry
Colombia 1850–80 Transport (railroad) Subsidies
1880– Protection and promotion Protectionist tariff policy
of domestic industry Monopoly privileges
Mexico 1877–80 Transport (railroad) Railroad construction
1884– Protection and promotion Subsidies
1911 of domestic industry Selective tariff policies
Creation of the first national
bank
Peru 1849–70 Infrastructure Public works
Education Increase in public expenditures
Health on education
Increase in public expenditures
on health
40 international journal of political economy

In 1897, Chile reformed its tariff code, which consisted of increasing

duty rates on a wide range of finished products and lowering rates on
raw materials and machinery, thereby increasing effective protection.
At the same time, through the use of subsidies, the government targeted
the development of specific products (see Collier and Sater 1998: 149).
These types of policies were further pursued during World War I. In
1916, its congress raised tariffs on imported products from 50 percent to
80 percent, and, in the case of some specific products (i.e., marmalade),
tariff rates reached 250 percent.
During the liberal period (1850–80) in Colombia, the government
began to participate in railroad building and transportation development.
During this time and in particular during the last decade of this period,
it used subsidies to build railroads and other means of transportation
and financed these public works by increasing tariffs and through the
imposition of other types of duties (see Horna 1982). The period that
began in 1880 (the regeneration period) witnessed active government
involvement in the development of infrastructure and the promotion of
local industry protection through tariffs and monopoly privileges (see
Reinhardt 1986).
In the case of Mexico, the developmental state took shape during the re-
gime of Porfirio Diaz, known as the Porfiriato (1876–80 and 1884–1911).
During this time, as in the cases of Argentina, Brazil, and Colombia,
the Mexican government took an active part in the construction of the
railway system as a way to ingrate the domestic market. The govern-
ment awarded concessions and financial incentives to private railway
companies and deepened its involvement by taking partial ownership of
railway companies. The government was also actively involved in the
development of ports and other infrastructure.
Furthermore, as was the case for other countries discussed above, the
government promoted industrialization and the diversification of the
economy through a mix of strategic tariff use to ensure positive rates of
effective protection and targeted subsidies to specific firms. Finally, the
government created Mexico’s First National Bank (Banamex) in 1884
(see Moreno and Ros in press).
Last, during the Guano Age in Peru (1840–79), the government
increased by eightfold, and its composition included public works,
education, and health. This represents as stated by Berry “the first steps
toward using the public purse as an instrument for fomenting economic
development” (1990, p. 38).
 fall 2008  41

The developmental policies applied by Latin American countries were

very similar to those used by European nations and the United States in
their early development. However, for the most part, the Latin American
developmental policies were not as effective and in no case were able to
transform substantially the economies.
In some cases, developmental policies were limited in their scope. In
the case of Mexico, Moreno and Ros argue that “the role of the state,
besides ensuring social peace and participating in infrastructure projects,
was to guarantee the best conditions for private investment without in-
tervening directly in the productive sphere” (in press, p. 56).
In other cases, developmental policies were unbalanced. In the case of
Chile, Collier and Sater (1998) argue that state intervention toward the
end of the nineteenth century stimulated the production of agricultural
products, capital goods, and raw materials but had barely any visible
economic effect on the manufacturing of finished goods industries.
It is often argued that the developmental effort relied mainly on the
external sector, which proved insufficient in providing both the required
level of finance and the protection to develop domestic industries. In
this sense, the developmental history in Latin America and Europe are
markedly different. Available historical statistics show that whereas
during the developmental period, in the case of Latin America, customs
accounted for over 50 percent, in most cases, of total government revenue
(see Table 4); in Europe, the importance of customs taxes was much
less. In particular, in Britain custom taxes accounted for 21 percent of
total revenue whereas internal taxes accounted for 46 percent of the total
(Mitchell 1998a).
The revenue provided by export taxes was not necessarily stable,
as the taxes depended on the performance of a very narrow set (one or
two in most cases) of exported commodities and on the fluctuations in
terms of trade. In addition, export taxes did not encourage the develop-
ment of exports or their revenue-collecting potential. Moreover, due to
the composition of imports, import taxes could simply not generate the
required revenue for developmental purposes. Most imports provided a
very narrow tax base, as they were mostly necessities.
A second stage of the developmental state took place following the
Great Depression until the 1960s. This period, which is traditionally
termed a period of import substitution and has been justly renamed the
period of “state-led industrialization,” is characterized by the promotion
of growth through domestic industrialization.14
42 international journal of political economy

Table 4
Customs as a Percentage of Government Revenue in Selected Latin
America Countries, 1865–99

Country 1865 1870 1879 1890 1899

Argentina 92 94 72 NA 54
Brazil 76 70 69 NA 54
Chile 23 34 25 65 70
Colombia 21 NA 62 NA NA
Ecuador 50 73 49 80 NA
Mexico NA 53 36 NA NA
Paraguay NA NA NA NA NA
Peru 74 75 85 NA 57
Uruguay NA NA NA 55 49
Venezuela 74 NA 75 76 67
Sources: Centeno (1997) and Mitchell (1998a).
Note: NA = not available.

During this time—especially beginning in the 1940s—the problem

of industrialization and development was seen as dependent on achiev-
ing a sufficient rate of capital accumulation.15 The process of capital
accumulation would lead to development by the absorption of excess
labor into the more productive sectors and by raising overall productivity
(Lewis 1954; Rosenstein-Rodan 1943). Also, a rapid process of capital
accumulation would allow the populations of developing countries to
break away from the “vicious circle of poverty” or the “poverty trap”
(Nelson 1956; Nurske 1953).
This general framework implied on the one hand that development
could not be attained without a significant effort in the accumulation of
capital. On the other hand, the framework presupposed that the existing
“automatic forces” would keep the economic system entrenched in a low
level of development. Industrialization was not to be left to market but
rather the product of government intervention.16 In fact, the state was
called on to take a leading role in the industrialization process. In Latin
America, the conceptual justification was provided by Raúl Prébisch and
the Economic Commission for Latin America and the Caribbean.
Notwithstanding the development and important influence of this
early thinking, in the case of Latin America, industrialization was a fact
before it became a policy and a policy before it became a theory (Love
1994: 395).
 fall 2008  43

The state played a leading role in many spheres of economic activity,

especially during the “classic phase” of state-led industrialization that
lasted from the end of World War II to the beginning of the 1960s and
in some economies the beginning of the 1970s.17 During this period, the
state used a variety of instruments to promote industrialization.
The state used its public authority to control the major natural resource
based industries (i.e., the “crown jewels”). It undertook the development
of nontraditional industries through fiscal, monetary, and commercial
means. These included a variety of subsidies such as fiscal transfers and
tax exemptions. These instruments also utilized selective tariff policy with
the aim of increasing effective protection. Finally, the state established
national or development banks to channel credit under very favorable
circumstances that included low or fixed rates of interest to targeted sec-
tors. In a later stage, as the concerns for domestic industrialization gave
way in part to those related to the promotion of exports, this strategy
accommodated the instruments thus far used to that end (see Ocampo
2004).
Table 5 provides a summary of state intervention policies for Chile.
Chile is generally highlighted as a success regarding free market ori-
ented policies. In fact, the foundations for growth and development in
key sectors such as agriculture and forestry are the product of “classic”
developmental policies, which included the creation of a public govern-
ment body, the Corporación de Fomento, created to oversee and manage
the developmental efforts in some areas.

Current Conceptions of the Developmental State: Latin

America and East Asia

The concept of the developmental state came under question with the
debt crisis in the 1980s in Latin America, the economic stagnation of the
1990s in Japan, and the 1997 financial crisis in East Asia. It is interesting
to note that in Latin America and East Asia, the debt crisis of the 1980s
and the financial crisis of 1997 registered the sharpest drops in output
experienced by both regions (see Figure 1).
In Latin America, government intervention began to be associated with
high rates of inflation, an impending macroeconomic disequilibria, and
inefficient and wasteful government policies. This negative view of gov-
ernment and government intervention was at the heart of the Washington
Consensus viewpoints and policies that have dominated the landscape
44 international journal of political economy

Table 5
Selected Developmental State Policies in Chile in Key Areas During and
After the State-Led Industrialization Period

Sector Period Policies

Agriculture 1962–65 Fruit Plan managed by CORFO and designed to in-

crease exports by 12 percent between 1965 and 1980.
Required major public expenditures for research,
technical assistance, credit, and building modern
infrastructure.
1965–73 Expropriation of 43 percent of all agricultural land.
1973–90 Further division of land plots.
Forestry 1965–73 Planting of trees; creation of industrial infrastructure;
financing provided by the government agency CORFO.
The establishment of five-year pacts for the development
of the Chilean forest (to guide rural development, promote
employment, and improve forest management).
1974–86 Granting of public subsidies to increase forest areas.
Source: Collins and Lear (1995).

of Latin American economic policy since the 1990s. The Washington

Consensus prescriptions summarized in the mantra “stabilize, privatize,
and liberalize” have little, if any, role other than contract enforcement
and property rights delimitation for the government (see Rodrik 2006).
In the case of East Asia, the 1997 crisis led to a questioning and re-
consideration of the East Asian Miracle and the role of the state in the
industrialization process. The point was succinctly made by Krugman:
“the biggest lesson form Asia’s troubles is not about economics, it is
about government. When Asian economies delivered nothing but good
news, it was possible to convince yourself that the alleged planners of
these knew what they were doing. Now the truth is revealed, they do not
have a clue” (1997).
Initially, at the beginning of the 1990s, the East Asian model began to
be questioned on the grounds that its growth performance was attributed
to factor accumulation and wasteful investment rather than total factor
productivity. These economies also benefited from rising labor force
participation. Their reliance on factor accumulation to grow meant that
their economies would soon experience the consequences of diminishing
marginal returns on growth (see Crafts 1999; Krugman 1994).
The 1997 crisis questioned further the Asian development model as
 fall 2008  45

6%

4%

2%

0%

-2%

-4% 1997 crisis

Debt crisis
-6%
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
East Asia and the Pacific Latin America and the Caribbean

Figure 1. Latin America, the Caribbean, East Asia, and the Pacific: Cycle
of GDP per capita growth, 1970–2006, Hodrick-Prescott Method

a central component of the developmental state model, especially the

alliance between politics and the economy and more precisely to the ef-
fectiveness of the alliance between state and business. Indeed, the crisis
was blamed on poor regulatory procedures and lack of transparency made
possible by the institutional framework of the developmental state.
As Beeson stated,
Not only were such relationships routinely disparaged as forms of “crony
capitalism,” and synonymous with corruption and inefficiency, but they
were seen as incompatible with the sort of dynamic competitive pressures
associated with “globalisation.” In short, the sort of business structures,
political practices and social relations that had been formerly been seen as
sources of competitive advantage in countries like Japan, were now seen
as self serving obstacles to necessary change. (1999: 5)
Moreover, the social consequences of the 1997 crisis further exposed
weaknesses in the East Asian model of the developmental state. As
pointed out by Kwon (2007), the developmental model had been built
under the assumption of full employment. Its institutionality provided
minimum support for the unemployed and governments facing significant
difficulties with the unemployment problem (see Table 6).
Some of these criticisms promoted by the institutions of the develop-
mental state, in particular those dealing with the so-called crony capitalism,
are partly misguided. For example, South Korea adopted at the beginning
of the 1990s a seven-year Development Plan for High-Tech Industry as
Table 6
Rate of Unemployment and GDP per Capita Growth in Japan and East Asia, 1995–2006

    1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Country Variable                        

Hong Kong  Unemployment, total 3.2 2.8 2.2 4.6 6.2 4.9 5.1 7.3 7.9 6.8 5.6 NA
(% of total labor force)
GDP per capita growth
(annual %) 1.9 –0.2 4.2 –5.8 2.4 9.2 –0.2 1.5 2.6 8.1 6.7 6.1
Indonesia  Unemployment, total NA 4.4 NA 5.5 6.3 6.1 8.1 9.1 9.5 9.9 10.3 10.3
(% of total labor force)
46 international journal of political economy

GDP per capita growth 6.9 6.2 3.3 –14.3 –0.5 3.5 2.3 3.1 3.4 3.6 4.3 4.3
(annual %)
Japan  Unemployment, total 3.2 3.4 3.4 4.1 4.7 4.8 5.0 5.4 5.2 4.7 4.4 NA
(% of total labor force)
GDP per capita growth 1.6 2.5 1.3 –2.3 –0.3 2.7 0.0 0.0 1.2 2.7 1.9 2.2
(annual %)
South Unemployment, total 2.1 2.0 2.6 7.0 6.3 4.4 4.0 3.3 3.6 3.7 3.7 NA
Korea  (% of total labor force)
GDP per capita growth 7.6 6.0 3.7 –7.5 8.7 7.6 3.1 6.4 2.6 4.2 3.7 4.7
(annual %)
Malaysia  Unemployment, total 3.1 2.5 2.5 3.2 3.4 3.0 3.5 3.5 3.6 3.5 NA NA
(% of total labor force)
GDP per capita growth 7.1 7.2 4.6 –9.6 3.6 6.4 –1.8 2.1 3.7 4.8 3.1 4.0
(annual %)
Philippines  Unemployment, total 8.4 7.4 7.9 9.6 9.2 10.1 9.8 10.2 10.2 10.9 7.4 NA
(% of total labor force)
GDP per capita growth 2.4 3.6 3.0 –2.6 1.3 3.8 –0.4 2.3 2.8 4.2 2.8 3.4
(annual %)
Singapore  Unemployment, total 2.7 3.0 2.4 3.2 4.6 NA 3.4 5.2 5.4 5.3 4.2 NA
(% of total labor force)
GDP per capita growth 4.9 3.5 4.8 –4.7 6.3 8.2 –5.0 3.2 2.9 7.5 4.1 4.5
(annual %)
Thailand  Unemployment, total 1.1 1.1 0.9 3.4 3.0 2.4 2.6 1.8 1.5 1.5 1.3 NA
(% of total labor force)
GDP per capita growth 8.0 4.7 –2.5 –11.5 3.4 3.8 1.3 4.5 6.4 5.5 3.8 4.3
(annual %)
Vietnam  Unemployment, total NA 1.9 2.9 2.3 2.3 2.3 2.8 2.1 2.3 2.1 NA NA
(% of total labor force)
GDP per capita growth 7.6 7.4 6.5 4.3 3.4 6.6 5.5 5.7 5.8 6.3 7.0 6.9
(annual %)

Source: World Bank (2008).

Note: NA = not available.
fall 2008  47
48 international journal of political economy

part of a broader economic agenda in an effort to make the economy

more competitive. This entailed pursuing deregulation, privatization, and
liberalization initiatives. As part of these, the ministry of finance lost its
role in the allocation of credit and financial supervision, which caused a
significant weakness in the established regulation mechanisms.
Not all East Asian countries reacted in the same way to the 1997 crisis.
However, the $95 billion bail-out offered by the International Monetary
Fund was not free of the usual attached conditionality that implied a
less interventionist state and a much broader participation of the private
sector in economic affairs and activity. For example, in the spirit of the
Washington Consensus, South Korea pledged efforts to promote struc-
tural reform, capital account and trade, and financial liberalization and
privatization (IMF 1998).
In the case of Latin America, Washington Consensus type policies
succeeded in reducing inflation and bringing government finances under
tight control. However, they failed to deliver on a fundamental objective,
namely economic growth. The rate of growth of GDP per capita in Latin
America stagnated in the 1990s and was far below that reached during
the state-led industrialization era (2.8 percent and 1.4 percent in 1960–79
and 1991–2001, respectively).
A deceleration in the per capita rate of growth was also observed in East
Asian economies. Prior to the financial crisis, from 1960 to 1996, rate of
growth of East Asian economies averaged 5.5 percent. During the period
that began two years after the crisis (1999) until current available data
will permit (2006), the average growth rate dropped to 3.6 percent.18
In spite of the failure of free market policies of the Washington Con-
sensus type policies to bring about growth and of the current general-
ized belief that “nobody really believes in the Washington Consensus
anymore” World Bank (2008: 974), these policies did produce a radical
change in the way government intervention and participation in the
economy is conceived. Government intervention is currently justified
due to a shortcoming of a market outcome. In turn, market outcome
shortcomings arise out of a failure of the market to produce an efficient
and/or equitable outcome (Wolf 1993: 19). There are three such possible
situations: (a) the existence of a natural monopoly, (b) the existence of
externalities, and (c) informational asymmetries.19
Among these, the last situation has captured the attention of policy
makers and guides most government interventions known today as
“public policies.” These include mainly two areas of intervention: (a) the
 fall 2008  49

enforcement of rules and order, contracts, and property rights; and (b)
the provision (partly) of education, health care, and pensions. Whereas
the first area provides the framework for the economic interaction among
agents according to free market principles, the second area of intervention
is aimed at reducing poverty levels and improving welfare.
Notwithstanding its merits, this new approach pays little attention to
the nexus between growth and welfare improvement. More precisely, it
often ignores a fact clearly highlighted by the developmental policies fol-
lowed in Japan, East Asia, Europe, the United States, and Latin America,
namely that growth is a precondition for the improvement of welfare.

Notes

1. The standard reference on the developmental thesis of Japan is Johnson

(1982). See also Coates (2000).
2. The Ministry of Planning promoted industrial exports. The planning board
became the main institution through which the government implemented its growth-
oriented policies.
3. A similar story with a few variants can be told in the case of Taiwan. As in
the case of South Korea, Taiwan aimed to build an economy with vertically inte-
grated industries. The Taiwanese government’s goal was to control the composition
of investment to establish a flexible and integrated production structure. Taiwan,
in part due to the size of its economy, did not attempt to foster the development
of large conglomerates but rather focused on small and medium-sized enterprises.
See Kwon (2007).
4. Although the intellectual origins of the infant industry argument are generally
traced to Alexander Hamilton Friedrich List and John Stuart Mill, these strategies
originated in the seventeenth century. According to Panagopoulos (1957), Hamilton
used on some of his important publications the Dictionary of Trade and Commerce
by Malachy Postlethwayt (ca. 1707–67), an economist journalist and publicist. In
this sense, Panagopoulos states: “In his ‘Report on Manufactures’ communicated to
the House of Representatives on December 5, 1791, Hamilton copied almost word
fro word the entire page on glass from his Pay Book, which in turn had been copied
from the entry Glass of the Dictionary” (p. 321).
5. The treaty had the effect of “duplicating in Brazil ‘those special privileges
which Britain had long enjoyed in her trade with Portugal’” (Bagchi 1982: 63).
6. Baer (2008: 23) maintains that import duties and export taxes had no pro-
tectionist intent.
7. The increase in tariffs in the latter half of the nineteenth century is a fact noted
by several scholars on the subject (for Brazil see, e.g., Leff 1969: 478). The fact that
Latin American tariffs rates were higher than those of Europe, North America, and
other has been brought into the discussion by Williamson and his associates. See
Collins, O’Rourke, and Williamson (1999), Galvarriato and Williamson (2008) and
Williamson (2003, 2004).
8. As stated by Prados de la Escosura:
50 international journal of political economy

The fragmentation of the initial national divisions took place soon after independence.
Central America separated from Mexico by 1823, and the Central American Federa-
tion only survived until 1839 and led to the creation of five new countries in 1839
(El Salvador, Costa Rica, Honduras, Nicaragua and Guatemala). By 1830, Colombia
comprising Venezuela, Colombia, Panam and Ecuador, broke up into three countries,
Venezuela, New Granada (present-day Colombia and Panama en Ecuador). The
Peru-Bolivia union (New Republics in 1824 and 1825 respectively) created in 1836,
collapsed in 1839. Mexico lost half its territory by 1847. The Viceroyalty of the River
Plate became three separate countries: Uruguay (independent in 1828) and Paraguay
and Argentina. (2005: 5).
9. Among the most important intraregional conflicts are the Triple Alliance
War, which involved Argentina, Brazil, Paraguay, and Uruguay. The war lasted
for sixty-three months (by comparison, the American Civil War lasted forty-two
months) and had a significant and, on some countries, devastating cost. In Paraguay,
the proportion of casualties to the population was 15 percent to 20 percent. The War
of the Pacific (1879–84) also involved Chile, Peru, and Bolivia. Finally, Peru was
involved in an extraregional conflict with Spain known as the War of the Guano
(1865–66). See also Thies (2005)
10. For the former period, the share of government revenue spent on the military
averaged 92 percent, 79 percent, 63 percent, 65 percent, 83 percent, 72 percent, and
70 percent in the cases of Argentina, Brazil, Chile, Ecuador, Mexico, Paraguay,
Peru, and Venezuela, respectively. For the latter period, the share of government
revenue spent on the military averaged 65 percent, 66 percent, 64 percent, 46
percent, 66 percent, 60 percent, 32 percent, and 65 percent for Argentina, Brazil,
Chile, Ecuador, Mexico, Peru, Uruguay, and Venezuela, respectively.
11. In comparison to 1865–1900, from 1900 to the Great Depression years,
Latin American governments were faced with very few conflicts. Aside from the
American invasion of Cuba, Dominican Republic, and Nicaragua, and the Mexican
Revolution years, the period from 1865 to 1900 was marked by peace. According
to Bagchi, Chile followed a protectionist policy in the early half of the nineteenth
century to develop its domestic industry. The government further encouraged the
development of shipping by a “system of differential import duties on goods carried
on Chilean ships” (1982: 60). See Topik (1984) for the change in the composition
of government expenditures for Brazil following the War of the Triple Alliance.
12. Nonslave immigration increased from 47,890 during 1880 to 1889 to
118,170 during 1890 to 1899 settling at 66,651 at the turn of the century. See
Leff (1969: 494) and Baer (2008: 23). According to Topik (1984: 459), by 1889,
public expenditure to attract immigrants was more than twice that of public health,
hospitals, and sanitation improvements.
13. Balmaceda’s viewpoints were similar to those of Hamilton. According to
Pregger-Roman, “In 1883, as Minister of Foreign Affairs and Colonization, Balmaceda
read a report commissioned by the Ministry of the interior that called for the protection
and stimulation of Chilean industry in the face of foreign competition. . . . In 1886,
he indicated that he favored both industrial development and protectionism” (1983:
52). From 1870 to 1890, Chile experienced a significant expansion in export and
economic growth in great part due to the incorporation of nitrate territories after the
War of the Pacific (Remmer 1977). See also Tapia-Videla (1977).
14. The expression “state-led industrialization” was coined by Ocampo (2004).
15. The connection between development and growth and development and
 fall 2008  51

industrialization was entrenched in the thought of early development theorists. In

this regard, it is interesting to note that Arthur Lewis’s The Theory of Economic
Growth first published in 1955 was really about development and not about what
economists currently understand as “growth theory.”
16. See Arndt (1987: 57), Meier (2005: 61–67), and Nurske (1953: 10). From my
point of view, the issue of government taking a leading role in the industrialization
process followed from the logic of the framework adopted. Arndt (1987) attributes
it to “ideology.”
17. As pointed out by Ocampo (2004), Prébisch and the Economic Commission
for Latin America and the Caribbean had a specific development theory. However,
its arguments for industrialization were more of a theory of capital accumulation.
In this sense, the arguments turned out to be similar to other early development
economists cited above.
18. The average growth rates were obtained on the basis of World Bank (2008)
for Indonesia, Malaysia, Philippines, South Korea, and Thailand.
19. In a neoclassical world of the consensus variety, there is in principle no role
for government intervention. A fully free market economy guarantees an efficient
allocation of resources—one in which resources are allocated according to their
different relative degrees of scarcity.

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