States and Economic Development: What Role? What Risks?
Professor Mushtaq Khan, Professor of Economics, School of Oriental and African Studies, University of London
Chris Stevens, Research Fellow and Director of Programmes, International Economic Development Group, ODI
Verena Fritz, Research Fellow, ODI
Prof Khan began by setting out what he sees as the three phases of post colonial development policy:
- Post- war policy which saw a consensus of interventionism;
- 1980s focus on neo-liberal policies to cut back subsidies, reduce inflation and encourage market led growth;
- 1990s economic policy focus especially on market-led economic growth.
Prof Khan then went on to present figures on the correlation between growth and good governance (measured in terms of the property rights index). He said he felt these highlight his proposition that good governance is not the main vehicle for growth that it is widely believed to be. Through the figures he identified that there is no evidence to prove that good governance spurs growth: in fact, fast-growing (i.e. 'converging') and economically stagnating (i.e. 'diverging') developing countries have similar governance ratings. He also emphasised that historically OECD countries have not taken a route of 'good governance' as understood today in order to achieve their development. Rather, developing countries that are falling behind (diverging) first need to gather steam for an economic transformation before they can address governance reforms (and move towards being developed countries).
He continued by examining the difference in growth patterns among developing countries. He argued there are three types of growth strategies:
- Sustainable catching-up strategies where strategies of accelerated learning and catching up occur with effective political capacities of rent-management;
- Unsustainable catching-up strategies where strategies of accelerated learning and catching up occur without effective political capacities of rent-management;
- Market-led strategies where existing technical competences are used to integrate into global markets; which are likely to be successful only if a country already possesses niches of international competitiveness
From these strategies Prof Khan identified that successful growth strategies had been based on either sustainable catching-up or on market-driven growth utilising a country's comparative advantage.
Prof Khan then went on to describe important roles for the state that are not in accordance with the classic view of good governance:
- Management of non-market transfers is critical. He argued it is almost impossible for developing states to enforce property rights, and that it may in fact be counterproductive. The protection of property rights is costly (and consumes considerable resources in developed countries); and it may be counterproductive to protect property rights in situations where many assets are not yet used productively.
- The cost of political stabilization can be high and to finance these may require off-budget transactions (as fiscal systems play a more limited role in developing compared to developed countries); while a minimum amount of political stability is absolutely critical.
- Catching up requires learning-by-doing. This will see productivity levels rise and thus competitiveness in the international market.
He then raised the question as to why contestable property rights are the norm in developing countries. He asserted that non-market transfers become necessary due to the informal pre-capitalist economies being unable to produce surpluses to protect themselves. He challenged the typical view that non-market transfers have to be negative in the form of theft or seizure; arguing that non-market transfers can create emerging capitalists who aspire to use assets more productively. He did highlight, however, that unproductive groups capturing resources can have the opposite effect.
Prof Khan argued that it is important to make patron-client networks help to create a class that is structured and organised, creating politically-driven groups who build off-budget resources and create a capitalist accumulation.
He emphasised that not all catching-up strategies are successful and that the management of rents such as those generated by the subsidization of catching-up industries are important factors. He gave China as an example of a country where items have been sold for less than the production costs due to heavy subsidization. The subsidization is not indefinite but once an industry becomes productive, effective rent management leads to a situation of "benign" profit sharing with public officials; while in turn promoting continued productivity increases. Not all developing countries followed this path, however. Where effective rent-management is lacking, what emerges is what Khan calls a "malign" situation of rent-absorption by socially powerful actors who are inefficient and do not foster increases in productivity.
Prof Khan concluded by stressing that he was not opposed to good governance per se and agreed that it is desirable; but emphasised that recognising the importance of different structural, economic and social reforms are imperative.
Discussant Chris Stevens reacted to the points raised by Prof Khan by highlighting two key issues:
- That the modern world is continually moving forward and the continual change must be taken into account when setting objectives; and
- That there is a 'big country bias' and that small developing countries will be less favourably invested in, despite their quality of governance.
Stevens highlighted his belief that there should be no expectation that Africa will follow the same path as East Asia. He made an explicit point of agreeing with Prof Khan and highlighting the importance of rent capture and the links between government and industries. He emphasised the need to facilitate better links between government and industries to ensure productive rent capture.
The following points were covered in the discussion:
- The importance of governance: Prof Khan argued that it was important but it must be seen as a facilitator for development
- Models of developmental success: the view was that although there can never be specific blueprints for success, intermediate generalisations can generate broad ideas of how to react and possibly solve challenges
- Intervention for progressive rent transfers: strong state capacities are a precondition for effective rent management capacities. Taiwan highlights the importance of strong state capacities in development
- Donor engagement in volatile political arenas for development issues only: it is important to aid and support stability to ensure that long-term decisions are focused
- The importance of a bourgeoisie in a country's development
Based on his research and on his first-hand engagement with development challenges and processes, Professor Mushtaq Khan discussed the role of the state in economic development, and the potential and risks involved in pursuing more state-led policies.
For the past 20 years, donors have advised (and often pushed) governments of developing countries to reduce their direct engagement in the economy – to liberalize their markets, to privatize state owned enterprises and utility companies, and to focus the role of the state on policy development, regulation, and the provision of basic services.
In contrast to these principles, a number of emerging economies have been successful in stimulating development based on more state-interventionist models (of both capitalist and communist stripes). Moreover, in order to make poverty history and to achieve the MDGs, and also to develop the necessary infrastructure to provide clean water and to facilitate export-led growth, a re-expansion of the role of the state appears as an essential ingredient. However, as the history of many developing countries in the 1970s reminds us – when state-led development reached its zenith - interventionist policies harbour great risks, and can deteriorate into crippling degrees of rent-seeking.