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International Journal of Political Economy, vol. 37, no. 3, Fall 2008, pp. 5–26.© 2009 M.E. Sharpe, Inc. All rights reserved.ISSN 0891–1916/2009 $9.50 + 0.00.DOI 10.2753/IJP0891-1916370301

Jamee K. moudud and Karl Botchway

The Search for a New Developmental State

The world is very different from what it was twenty-five years ago. When the New Right rode triumphantly to power in the 1980s, it did so in the wake of the most serious worldwide economic crisis since the Great Depression to that point. The main argument that fueled the popularity of the New Right was that interventionist state policies in the quarter of a century after World War II were responsible for that crisis. Margaret Thatcher’s war cry was TINA (“There Is No Alternative”). However TINA is passé today, and much of Latin America has chosen left-leaning governments that have rejected free market policies. Today we stand at the beginning of another major worldwide crisis in which a large number of people confront the multipronged menace of unemployment, starva-tion, and environmental destruction. There is something of an irony here, because this crisis should not be happening given that neoliberalism has been the conventional wisdom for almost a quarter of a century.

Yet this current global economic crisis should not come as a surprise in view of the fact that the track record of neoliberalism has not been stellar. As Dani Rodrik (2002) observes:

Two decades of applying neoliberal economic policies to the developing world have yielded disappointing results. Latin America, the region that tried hardest to implement the “Washington Consensus” recipes—free

Jamee Moudud is an economics faculty member and chair of social sciences at Sarah Lawrence College, Bronxville, New York. Karl Botchway teaches politics in the Department of African American Studies, New York City College of Technology, City University of New York.

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trade, price deregulation, and privatization—has experienced low and volatile growth, with widening inequalities. Among the former socialist economies of Eastern Europe and the Soviet Union, few have caught up with real output levels that prevailed before 1990.

The dismal history of neoliberal economic policies has revived yet again questions about the role of the state in development. It is significant to note that a number of dissenting neoclassical authors such as Joseph Stiglitz, Dani Rodrik, and Paul Krugman can be added to the growing list of economists calling for state intervention. For these authors, however, such a policy proposal does not imply a rejection of the neoclassical paradigm. As Rodrik (2002) put it:

Critics of neoliberalism should not oppose mainstream economics—only its misuse. . . . Neoliberalism is to neoclassical economics as astrology is to astronomy. In both cases, it takes a lot of blind faith to go from one to the other.

We believe that Rodrik is too sanguine in his assessment of neoclas-sical theory. The rationale for interventionist policies in the neoclassical paradigm can be made only in the presence of what are called market imperfections or market failure. This, after all, was the traditional neo-classical rationale for state intervention in the immediate postwar period. However, our position in this paper is that the notion of imperfect markets is deeply problematic theoretically, empirically, and historically. As we will show, rooting state interventionist policies in this type of micro-foundation produces an internal contradiction that, ironically, can only be resolved by advocating laissez faire! We suggest that the rationale for state intervention has to be rooted in very different micro-foundations.

However, following the arguments of Anne Krueger and Lord Peter Bauer, opponents of state intervention will object that prior experience with this policy only empowered state bureaucracies more interested in corruption and rent-seeking behavior than in promoting economic de-velopment. We do not deny the fact that state bureaucracies have often behaved in this way or that statist development strategies have equally often been failures. However, because neoliberalism has itself been a failure,1 and given that statist development strategies have played a key role in all capitalist countries, sometimes with high levels of success (Chang 2002), we think that the neoliberal critique of statist policies is overly simplistic.

This paper confronts a central claim of neoliberalism, which is that

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state intervention breeds uncompetitive firms as well as corruption and inefficiency. We propose the need for a new developmental state but base our argument on the empirical fact that some developmental states have performed very well whereas others have failed. The goal of this paper is to show that the effectiveness of state policies is rooted in the dynamics of market competition and class power. We argue that a ma-jor reason why both the traditional import substitution industrialization (ISI) policies and the current neoliberal ones have more or less failed is because both strategies were based on very problematic assumptions about market competition. Neither policy paradigm adequately dealt with the competitiveness of domestic firms and farms and the ways in which state policies could enhance this competitiveness while judiciously investing in projects that could enhance long-run growth. We argue that a renewal of state interventionist strategies has to be based on a very dif-ferent theory of competition rooted in the tradition of classical political economy, especially Karl Marx and Sir Roy Harrod. Finally, we argue that the factors that make states more or less effective need to be identified to address the neoliberal view that all state intervention automatically leads to corruption.

The Global Economic Crisis

The global economic turmoil of the 1970s and 1980s constituted a water-shed event, which made neoliberalism the conventional wisdom in both developed and developing countries. Although attacks against the welfare state in the Organization for Economic Cooperation and Development (OECD) were met with varying degrees of success by opposition from labor and other social movements in the developing world, the Inter-national Monetary Fund’s (IMF) austerity programs in the developing world were strictly imposed and applied. This was the era of structural adjustment policies (SAPs) throughout the developing world.

In the case of Africa as well as other regions of the developing world, perhaps the worst indictment of SAPs was the absence of an explicit focus on poverty alleviation as a developmental objective.2 After all, as the leading African economists indicated, “one of the widely accepted fundamentals of development is the alleviation of poverty” (Mkandawire and Soludo 1999: 69). On the contrary, for the African variety of SAPs, in the name of economic growth, real incomes have been reduced by as much as 40 percent or more overnight. The prices of social services and basic

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staples have increased enormously beyond the pockets of most people and inflation rates have soared (Ake 1993). As Claude Ake points out, “these are the kinds of magnitudes of austerity that have earned the IMF the title of mad doctor. They break down social consensus, cause ethnic conflict, anxiety and deep despair, and sometimes premature death on a large scale among children” (p. 118).3 Perhaps Bade Onimode’s reflection sums it up best, when he indicates, “It has contributed to increasing mass poverty and the collapse of the real economy of production in various sectors across the region, and promoted deindustrialisation, rising infla-tion and the growing marginalization of Africa” (2004, p. 23).

Notwithstanding these distressing empirical issues, the IMF/World Bank view has consistently been that “market mechanisms” need to be brought back in with full vigor to solve the developing world’s economic problems. A corollary of this proposition is that much of the develop-ing world still finds itself marginalized because market forces have not been fully unleashed. But what exactly does the IMF/World Bank view mean when it refers to the “market”? As we discuss next, this is hardly an uncontroversial issue.

Competitive Markets: The Need for Realistic Micro-Foundations

The neoclassical model of perfect competition is central to neoliberal policies. In conventional wisdom, perfect competition is portrayed as the highest form of competition in which there are a large number of small, passive, price-taking firms. Intra-industry competition ensures that all firms within an industry sell at the same price, have identical production costs, and thus earn identical profit rates. Instantaneous capital flows across all industries ensure that the price of the representative firm in an industry settles at the minimum of its average total cost curve. This ensures the full utilization of production capacity and of labor.

In neoclassical theory, the existence of large firms, which are price-setters, implies a lessening of competition. Such firms are said to have market power that enables them to erect barriers to entry. Thus they can maintain high prices (relative to the minimum of the cost curve) and excess capacity.

In the past four decades, a parallel literature has developed. The logic of this literature suggests an analysis of competition that is at odds with mainstream competitive theory. McNulty (1967) showed that Adam

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Smith’s theory of competition bore no similarity to either perfect or oligopolistic competition, whereas Clifton (1977, 1983), Shaikh (1982), Semmler (1984), and Botwinick (1993) drew on Marx in their rejection of both perfect and imperfect competition. Moudud (2007, in press a, in press b) builds on Harrod’s (1952) paper in which the latter critiques the Robinson-Chamberlin model of monopolistic competition.

The critique of both perfect and imperfect competition has not been just theoretical. For example, Lee (1994) rebuts the claim that perfect competition prevailed in the nineteenth century by citing a number of historical studies that show the existence of price-setting behavior at the time of Adam Smith. (See also Semmler [1984] and Botwinick [1993] for a comprehensive review of the literature that raises serious questions about the view that “oligopolistic” industries have persistently higher profit rates).4 Clifton (1983) discusses the close parallels between Marx’s theory of price formation and the pricing strategy by General Motors. Finally Harrod’s (1952) revised model of price formation had as its basis the survey of British firms carried out by the Oxford Economists’ Research Group study (Andrews 1949; Hall and Hitch 1939).

Quite simply, the theme that unites this classical-Marx–Harrod theory of competition is that observed market behavior does not correspond to either the highly harmonious perfectly competitive model or any devia-tions from it. The essence of this rival perspective is that firms of all sizes engage actively in price—and cost—minimizing behavior as they seek to gain a strategically competitive advantage over rivals. We will therefore call this the theory of strategic business competition.

On the basis of the Oxford Economists’ Research Group study, Harrod (1952) in particular emphasized the fact that this was a life-and-death matter under conditions of Keynesian uncertainty when a high-priced busi-ness strategy could prove to be a suicidal one if low-priced new entrants (Andrews 1949) were to enter the market in some unforeseeable future.

Mr. Andrews has stressed the point that the “new entrant” may often, indeed usually, be an existing firm which is induced to take on a line of production hitherto new to it. Most firms produce a number of products. It is comparatively easy for an established firm, with its permanent cadre of management in existence, its buying and selling organisation and at-tachment of skilled and unskilled labour, to switch part of its organisation, which may only be a small part, to producing an article not before pro-duced by it, and to do so on a scale quite adequate to secure the necessary cheapness of production. (Harrod 1952: 144)

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This important observation by Andrews and Harrod suggests that with the growth of the modern large, multiproduct and multidivisional firm, the degree of market competitiveness has risen, a pointed emphasized by Semmler (1984) also in the context of a classical-Marxian approach. Furthermore, the greater availability of finance with capitalist develop-ment, including that obtained from the state, implies that large firms are far more vulnerable to attack from new entrants than standard oligopoly theory assumes.

Thus in the face of potential competitive threats under uncertainty, firms of all sizes would actively aim to minimize costs and prices in an attempt to keep at bay potential competitors. As Harrod (1952) argues, active price and cost minimization would lead to the attainment of a target rate of capacity utilization with approximately zero undesired or redundant capacity (Kurz 1992; Winston 1974). In the Harrod–Domar (Domar 1957; Harrod 1939) framework, the growth path thus established is called the warranted growth rate.

Authors in the Marxist tradition (Botwinick 1993; Semmler 1984; Shaikh 1982) observe that barriers to entry can also be barriers to exit, as a firm with large sunk costs may not be able to escape easily an industry in a downturn. Thus it may face the ignominy of earning below-average profit rates and be vulnerable to attack by new entrants.

Finally, these authors emphasize, with regard to intra-industry com-petition, that when faced with the introduction of a newer technology by some firm, those with older technologies are likely to hang onto them until they have depreciated completely. Furthermore, they may not have the finances to invest in the latest technology. In short, there will be no automatic or inherent tendency for technological convergence to take place within an industry. This issue of technological inequality becomes even more striking when the firms are located in countries at different levels of development. We return to this issue later.

The point is that the real-world competitive behavior of firms in the market, which is so far removed from the perfect competition model, is neither an imperfection nor a deviation from the latter. It is an ongoing competitive battle and is thus defined as

a process, not a state. It describes an antagonistic and destructive process, not an equilibrium fantasy. For competition among capitals, it describes a war. To extend the analogy a bit further, the movement of capital from one industry to another corresponds to the determination (site) of battle; the development and adoption of technology corresponds to the development

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and adoption of the weapons of war (the arms race); and the competition of one firm against another corresponds to the battle itself.

In all of this there can never be any guarantee for an individual unit of capital that it will earn any profit at all, let alone the social average rate of profit. This average rate is, after all, an average outcome of hundreds, of thousands of battles fought over varying terrain and with varying weapons. You pay your money and you take your chances. (Shaikh 1982: 77)

What are some of the concrete implications of this alternative model of competition? First, as Shaikh (2005) has discussed, those geographic regions in the world that have the most competitive firms with the high-est productivity will see their market shares expand because they will have the lowest unit costs and prices. They will run persistent trade surpluses relative to the less fortunate regions. Contrary to conventional trade theory, no automatic market mechanism will eliminate these trade imbalances.

Second, the ability of smaller firms with lower unit production costs to enter an industry and possibly expand their market shares at the expense of those of larger established firms is neither an impossibility (as oligopoly theory would suggest) nor an inevitability (as the perfect competition model would predict provided laissez faire prevails). Especially since the onset of neoliberal policies, many less developed country (LDC) firms have been out-competed internationally, but, on the other hand, there are also notable examples of stellar success stories. Consider, after all, how in the past few decades in many sectors such as autos, steel, and electronics LDC firms have gained a competitive edge over Western firms that dominated the markets in the 1950s and 1960s.

The crucial question is what determines success or failure for LDC firms? One crucial factor is the availability of finance. If provided on generous terms, finance can potentially make it possible for small firms to invest in new technologies. The state, either through direct public ownership of banks or via the central bank (Chang 2004; Epstein 2006), has historically played a very important role in channeling finance to budding industrial sectors to enhance their growth and competitiveness. On the other hand, such a policy option may be difficult if the finance involves foreign exchange to import capital equipment and foreign technical know-how.

For example, a country running persistent trade deficits with an ac-cumulated stock of foreign debt faces such a finance constraint. Note that neoclassical theory finesses over these real-world constraints by

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making money exogenous and assuming that the terms of trade will adjust to make trade imbalances, under perfect competition, temporary. In the absence of a financial theory of capital accumulation, neoclas-sical theory finds itself severely handicapped to deal with real-world development challenges.

Why could not the privatization of banks as well as global integration, coupled with “business-friendly” policies, stimulate the availability of fi-nance? The question is what is a “business-friendly” policy? As discussed further later, a firm as an organization requires time to grow to become competitive. These policies, which could lead to the development of a viable business sector, are generally opposed by the IMF.

Finance charges on bank loans are paid back from the stream of profit flows, and the profit flows themselves are determined by domestic and foreign sales. Because market demand itself is a function of consumer knowledge brought about by the establishment of sales and marketing networks, budding LDC firms are at an obvious disadvantage. Thus domestic and international banks are unlikely to channel credit into large-scale investment projects requiring possibly huge sunk costs with nonexistent markets. On the other hand, if some prior set of policies have led to the development of a viable domestic business sector, then foreign and domestic banks may be willing to channel credit to such firms, thereby generating a virtuous cycle of investment and technological change. We would argue that many Chinese and Indian high-tech firms find themselves precisely in this fortunate situation.

Third, firms in a developing country may be able to leapfrog ahead technologically not only if they obtain the finance to purchase new technologies but also if they have the time to learn, use, and adapt it for further innovations. This may require selective forms of protectionist policies as these firms develop the “muscles” to confront foreign well-established competitors. The point is that technological learning takes time and occurs over a historical trajectory rife with uncertainty. The issue is best summarized by Lazonick:

The learning process that is the essence of innovation cannot be done all alone or all at once (Penrose, 1957). Nor can it be done with any degree of certainty that what needs to learned will in fact be learned (techno-logical uncertainty) and that, even if it is learned, there will be sufficient demand for the product to generate returns (market uncertainty) or that competitors will not do it better (competitive uncertainty) (Freeman 1974). (2003: 24)

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It is precisely because of uncertainty that selective forms of protection would be required as well as the provisioning of key types of inputs by the state that other firms are unwilling or unable to produce. It these types of “business-friendly” policies that neoliberalism opposes.

Fourth, the stimulation of capital accumulation and competitiveness would entail the deepening of a country’s knowledge base. This requires the expansion of higher education, notably in the public sector, which may constitute a finance constraint if it is a poor country. The finance constraint will also affect the ability of a poor state to invest in research and develop-ment activities, which are central to private capital accumulation.

Fifth, those who are proponents of international openness confuse an important issue. Openness will certainly expose domestic producers to the pressures of international competition whereas a narrowly protectionist policy will shield them from best-practice techniques overseas leading to low-quality products. In this regard, the neoliberal critique of the old ISI strategy is correct. However, as argued previously, it does not follow that exposure to this foreign competitive pressure will automatically translate into the ability to leapfrog ahead technologically.

Note that in a neoclassical world, if perfect competition rules and there is no money, then presumably exposure to best-practice techniques will also lead to their instantaneous inward diffusion into the developing country.

Sixth, as the analytical perspectives of both Marx and Harrod suggest, the ability of a new and possibly smaller firm to break into a market dominated by larger and more powerful firms is neither an impossibility nor an inevitability under the reality of market competition. This insight is borne out by Bryce and Dyer’s (2007) article in the Harvard Business review in which they give examples of firms that often must devote huge amounts of resources to establish beachheads in new markets.5 Sometimes, provided their other divisions are profitable enough, multi-product and multidivisional firms are willing and able to tolerate losses for considerable periods as they seek to enter such markets. This vicious, competitive battle requires complicated ways of marshalling workers, technologies, and finance, as Lazonick (2003) discusses.

These fairly obvious facts about the reality of capitalist competition raise an important point: In the absence of policies designed to develop their competitiveness, no automatic market forces will enable firms and farms in developing countries to penetrate international markets however imbued with entrepreneurial energy their owners may be.

Thus as Amsden (1989), Chang (2004), and other heterodox econo-

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mists have emphasized, the institutional basis of a development strategy will determine, to a large extent, its success or failure.

On the other hand, a policy of openness per se pursued by a country is likely to tell us nothing about the likely impact of foreign competition on domestic firms unless we have information about their prior histories. If their institutional development has endowed them with sufficient “muscle,” because of strategically designed state policies and/or prior collaboration with foreign firms on generous domestic terms, then they are certainly likely to be able to withstand the pressures of international competition and grow. Lazonick’s (2004) description of the development of the Chinese IT sector, carefully nurtured by a wide range of direct and indirect state policies, should alert us to such an interesting possibility.

Seventh, given that real-world capitalist firms battle for market shares and need to evolve into complex institutions to survive, it is not clear what practical use neoclassical theory has. This, after all, is the theory in which not only is perfect competition the highest stage of capitalism, but Say’s law holds so that demand and profitability play no role in de-termining business investment decisions.

Eighth, in the general Keynesian perspective, in Harrod there is no automatic mechanism that will make the warranted growth rate equal the natural (or full employment) growth rate. This crucial difference from neoclassical growth models suggests that the state can play an impor-tant role in raising the warranted growth path and thus lower long-run unemployment. Along the lines proposed by Harrod (1973), it can be shown that such an outcome can be achieved via an increased aggregate tax rate-cum-public investment strategy (Moudud 2002; 2007, in press a, in press b; Roy and Weeks 2004; Sardoni and Palazzi 2000)such as investments in direct government production activities (state-owned enterprises).6 Public investments can by themselves raise the warranted growth rate and, if carefully done, may stimulate private investment, a nexus also recognized by the IMF (2004).7

However, state policymakers would need to exercise some discretion in their public investment projections. Depending on the structure of the economy, some public investments may “crowd in” private investment (Cypher and Dietz 2004), whereas others may have negative impacts. For example, a state-owned steel mill may stimulate “downstream” engineering industries. On the other hand, it could conceivably affect private steel-making firms adversely. As one of us concluded in a previ-ous article:

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The challenge for progressive policies in the context of capitalism is to figure out that grey area in which the degree of state intervention is “adequate” or “necessary” rather than “too much” from the standpoint of private capital. (Moudud 2006: 46)

This cautionary note merely states that economic development in the context of capitalism cannot ignore capitalist preferences. The state simply does not have the absolute autonomy to set the goals it wants, even if these are sought by the bulk of the society, if such goals clash against capitalist interests.

Much will depend on the capacity of the state managers to gauge these nuances of the economy. In this connection it should be pointed out that state capacity will also determine the ability of the state to raise the taxation revenue to finance such public expenditures8 as well as the willingness of the dominant classes to pay taxes. To a large extent this will depend on the degree of social consensus that is the basis of such a development strategy. It will also depend on the administrative and politi-cal capacity of the state, or the subordinate classes, to make the dominant classes pay taxes. Finally, these issues of state capacity will to a large extent be regulated by historical factors, in particular the encounter with colonialism as Kohli (2004) has emphasized.

Ninth, in our view it is problematic when neoclassical authors such as Rodrik (2004) or those in Krugman (1986) advocate state intervention in the presence of putative market imperfections. Because their theoretical framework has as its point of departure perfect competition, such authors are susceptible to the criticism that Bhagwati (1998) makes when he states that laissez faire is still the best policy once “suitable” public policies eliminate the market imperfections. In our view, from the neoclassical point of view, this is an internally consistent argument.

Furthermore, there is a deeper internal inconsistency to the types of statist industrial policies proposed by Rodrik (2004). Presumably the goal of these very sensible policies is to enable LDC firms to become internationally competitive and enter markets dominated by mostly OECD firms. However, from Rodrik’s standpoint, many of such markets are oligopolistic ones surrounded by entry barriers. That being the case, would it not be futile to attempt such policies in the presence of such market structures? Yet, if Rodrik is willing to concede that “oligopolistic industries” can become quite porous in the presence of suitably competi-tive new entrants (many of which may be much smaller firms), then he would also have to concede that the “market power” and hegemony of

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firms within such industries may not be sustainable over the longer term. This of course begs the question: Why use a theoretical framework that does not adequately capture the longer term dynamics of competition? In fact, one could argue that Rodrik’s industrial policies can be rationalized only on the basis of the theory of strategic business competition discussed previously. Thus our view is simply this: The perfect–imperfect competi-tion dichotomy, deeply rooted in neoclassical theory, is a false one, and one needs to break out of it to rationalize state intervention.

Finally, it is of interest to note that the Austrian school, inspired by Hayek and von Mises, also reject neoclassical models of competition and emphasize the centrality of uncertainty and price- and cost-cutting behavior (Kirzner 1997). However, this school is one of the foremost proponents of neoliberalism. But if this school emphasizes the need to ground capitalist competition in a more realistic way, how can it ignore the kinds of arguments made here? What about the job losses that would occur in the developing world?

Questioning the “Impossibility Thesis”

Proponents of neoliberalism would argue that increased state interven-tion would lead to an increase in corruption and inefficiency. For these authors, it is virtually impossible for the activist state to play a positive role in development planning. However, according to Transparency International’s 2007 Corruption Perceptions Index,countries with some of the most interventionist social welfare states are ranked among the top ten least corrupt countries.9 Interestingly, the United States ranks at number 20. This is not to suggest that there is some simple relationship between the degree of state intervention and corruption, as there are also interventionist states that are highly corrupt. However, this ranking does suggest that factors other than the degree of state intervention are behind the degree of effectiveness or corruption of a developmental state. In order to probe these determinants, though, we need to first be clear about what a developmental state is.

Thandika Mkandawire’s (1998) work provides nuanced understand-ing of such a state. He argues that the developmental state has two basic components: “one ideological, one structural”:

It is this ideological-structure nexus that distinguishes developmental states from other forms of States. It terms of ideology, such a state is essentially one whose ideological underpinning is “developmentalist” in

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that it conceives its “mission” as that of ensuring development, usually interpreted to mean high rates of accumulation and industrialization. (Mkandawire 1998: 3)

Such a state, Mkandawire observes, must establish its legitimacy principally by promoting a sustainable form of development by ensuring higher rates of economic growth and structural changes in its produc-tive system both domestically and globally. Ultimately, the test of this legitimacy lies in how development reduces poverty for the people and in generating human development in the sense of the United Nations Development Programme’s index on human development.

From our standpoint, for a developmental state to be effective, three con-ditions need to be satisfied. First, the state should be anchored sufficiently within society that it will not use its autonomy in a predatory manner. This anchoring will also allow it to gain the support and adhesion of key social actors. Adrian Leftwich (2000) provides some conceptual clarification for this operational definition. It is, for Leftwich, defined as

those states whose politics have concentrated sufficient power, autonomy, capacity and legitimacy at the center to shape, pursue and encourage the achievement of explicit developmental objectives, whether by establish-ing and promoting the conditions of economic growth (in the capitalist developmental states), by organizing it directly (in the ‘socialist’ variants), or by a varying combination of both. (2000: 155)

David Held (1989: ch. 5) argues that proponents of statist economic strategies need to take seriously the New Right’s critique that such policies may lead to top-down, authoritarian bureaucracies that wield enormous power over the citizenry. There are two issues here. First, the New Right’s call for radical decentralization and laissez faire assumes implicitly the validity of not only perfect competition but also, as Friedman (1962) discusses, the “pure” model of capitalism, which does not appear to have any firms and each representative agent is conceptualized as a sort of self-sufficient Robinson Crusoe. All the real-world inequalities of power within civil society are magically conjured away. In short, neoliberalism advocates the depoliticization of economic processes. Some of the prin-cipal forms of depoliticization are best achieved through a contraction of the state and the restrictions or limitations of civil society.10

Nonetheless, as Held (1989) argues, the Left needs to take seriously the issue of power concentration if it is advocating the need for a develop-mental state.11 As a solution, Held calls for the need to “re-form the state

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and civil society through two interdependent processes: the restructuring of state institutions and the expansion of autonomy in civil society” (p. 167). State institutions, as Held points out, must prevent

civil society from falling victim to new forms of inequality and tyranny. . . . a multiplicity of social spheres—including socially owned enter-prises, housing cooperatives, independent communications media and health centres (organized perhaps according to the principles of direct democracy)—must secure enhanced powers to check and control their own projects. That is to say, they must be protected by a legal framework which recognizes the right of their members to control the resources at their disposal, whether these are material or authoritative, without undue interference from state or political parties. (1989: 168)

How can this form of decentralization to be brought about? Heller’s (2001: 131–63) work provides some food for thought. He discusses the democratic empowerment of local government authorities in Kerala (India) and Porto Allegre (Brazil), which he argues have been quite similar and impressive. This democratic empowerment has entailed local participation in the creation of budgets, which itself has been brought about by a high degree of social mobilization.

Decentralization contributes to democratic deepening if and when it expands the scope and depth of citizen participation in public decision making. Expanding the depth means incorporating previously marginalized or disadvantaged groups into public politics. Expanding the scope means bringing a wider range of social and economic issues into the authoritative domain of politics (shifting the boundary from the market to the demos). Democratic decentralization in other words means redistributing power (the authority to make binding decisions about the allocation of public resources) both vertically (incorporating citizens) and horizontally (ex-panding the domain of collective decision making). Empowered local governments deepen democracy on both counts because they facilitate a better alignment of decision-making centers with local preferences and local sources of knowledge and information, and because it creates loci of participation that reduce the costs and unevenness of collective action. (Heller 2001: 140)

How can this kind of popular empowerment be brought about so that civil society has the confidence and ability to hold elected leaders’ pro-verbial feet to the fire? Although this is not an easy question, it seems that one important determinant is the degree and type of educational attain-ment of the majority of the population. An expansion of higher education

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that fosters critical thinking is crucial. For example, we would argue that the teaching of economics at the university or college level should make students confront a wider range of theoretical schools of thought (such as Marxian and Post-Keynesian economics) than is the case currently in both developed and developing countries.

Mamdani (2007) points out that in the pre-IMF period higher education was an elitist affair and public colleges and universities were subjected to political manipulation by whichever party was in power. Thus, in that period much of the population was kept away from participating effectively in the decision-making process. However, during the neoliberal era, as Mamdani notes, letting market forces determine the pursuit of higher education has led to a more narrow vocational skills development. This tendency has the effect of discouraging the development of a research-oriented education and may discourage students from investigating basic questions about society. One may ask, how can they effectively participate as citizens and question their leaders’ policies and actions? A further implication of low-ering the quality of higher education is that it contributes to a weakening of a country’s civil service, thereby adversely affecting its professional development and thus effective state formation.

Thus the effect of vocationalizing education has been to create good workers rather than critical-minded citizens. Such a citizenry lacks the intellectual tools to take apart the policies put in place by leaders. It is no surprise at all that what one might call the zone of autonomy of state authorities, surrounded by a semiliterate populace desperately working at multiple jobs to survive, allows the former to do what they want. Thus, we would argue, it is not the fact of state intervention but rather the ef-fective disempowerment of the majority coupled with lack of sufficient professional development of the civil service that can be used to explain corruption by state authorities.

Second, the expansion of social provisioning must be accompanied by increases in productivity and enhanced international competitiveness of value-added production.

The World Bank and IMF point out that industrial and agricultural developmental strategies were inefficient in the pre-IMF period. There is some truth to that. First, as mentioned previously, a narrow ISI policy based on protectionism and state subsidies is likely to yield poor results. In addition, many developing countries sought to keep food prices down artificially through subsidies without raising the productivity of agriculture or tying agricultural development to the development of the

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manufacturing sector, which would have eventually provided cheap inputs into the agricultural sector.

The problem is that under neoliberalism the policy framework has swung to the other extreme on the basis of very problematic micro-foundations. As Cypher and Dietz (2004) point out, many countries in the developing world, including those in East Asia, used ISI as part of their development strategy. The key difference is that in the case of East Asia, ISI was used to develop a domestic manufacturing base with the aim of penetrating global markets. That is, the ISI strategy was coupled with a policy of export-led industrialization, and the spur of international competition accelerated technological progress and industrialization. But, most other countries in Asia such as India and Pakistan or those in Latin America or Africa pursued a narrow ISI strategy. It is not surprising, therefore, that the pace of industrialization was much slower in these countries.

Third, a mixed-economy strategy cannot ignore the preferences of the capitalist class, which is a point emphasized by Chibber (2003, 2005). Chibber’s main point is that the South Korean capitalists accepted dis-ciplinary planning by the state because they saw in these policies ways to expand their international competitiveness and penetrate the global economy. By contrast, capitalist classes in India, Turkey, and Brazil pursued narrow ISI policies in which private firms were virtually guar-anteed home markets because of high protectionist barriers. Thus there was little incentive for such firms to innovate and climb the value-added ladder rapidly.

One consequence, as Chibber argues, was that a narrow ISI policy made domestic capitalists resistant to state pressures to channel invest-ment into certain areas. Because state formation is to some extent “en-dogenous” in the sense that a technologically dynamic economy calls forth more sophisticated forms of state intervention (e.g., investments in public infrastructure that satisfy the needs for private investment), it follows that relatively stagnant economies will also produce poorly de-veloped states. Chibber in fact goes a step further by arguing that in the case of India the capitalist class actively sought to sabotage disciplinary planning, thereby making state agencies such as the Planning Commis-sion relatively ineffectual. However, the Economic Planning Board in South Korea or the Ministry of Trade and Industry in Japan were highly cohesive and effective nodal agencies.12

It should be added here that in the event that the ruling classes for historical reasons find it profitable to accumulate wealth by investing

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in mining and cash crops, they will resist channeling their capital into manufacturing.13 The small domestic market and foreign markets domi-nated by international firms would not make this a profitable proposition. Thus, to the extent that the onus would fall on the state to invest directly in strategic manufacturing industries in order to “jump start” the indus-trialization process, much would depend on how much internal capacity the state has to pursue for such a challenging task. Not unsurprisingly, formerly decolonized states with no track record of pursuing develop-ment policies lacked this internal capacity.

Conclusion

To escape poverty and marginalization the developing world faces major internal and external challenges. With regard to external factors, the major constraint to the pursuit of a new development strategy is the power of the global financial system, including the IMF and World Bank, to which these countries are indebted. Almost a quarter of a century of neoliberalism has contributed to a weakening of both state capacity and the indigenous capacity for self-sustained industrialization.

Much noise has been made about “capacity” and “good governance” as the building blocks of a developmental state. Paradoxically, this noise is made by those whose policy pronouncements have stripped developing country states both fiscally and politically of any meaningful capacity. Van de Walle’s concluding section in his book on african Economies and the Politics of Permanent crisis captures this very well:

the reform process has motivated a progressive withdrawal of government from the key developmental functions they had espoused in an earlier era. All over Africa, the withdrawal from social services is patent, par-ticularly outside the capital. In the poorest countries of the region, donor and NGOs have increasingly replaced governments, which now provide a minor proportion of these services. Even in the richer countries, the state’s ability and willingness to service rural constituencies has atrophied. Paradoxically, many of the states in the region are both more centralized and bigger, and yet they appear to do less development work than they did before adjustment. (2001: 276)

Rebuilding or restructuring the state’s administrative capacity then becomes a paramount task or an essential prerequisite in constructing a developmental state.14

In our view, such a process of reconstruction and development is

22 IntErnatIonal Journal of PolItIcal Economy

virtually impossible for the smaller and more indebted countries unless a coalition of countries forges together, in cooperative manner, a develop-ment strategy. In this regard, the recent developments in Latin America are very encouraging. Because the key to any development strategy is the availability of finance, it is interesting to see that several of these countries have founded the Banco del Sur, a regional bank whose aim is to finance social and economic development. Although it remains to be seen how the smaller countries’ needs and rights will be protected under the umbrella of such agreements, we find such developments promising. We end on the note that a cooperative development strategy in the face of a global system that will not be friendly to it is implicitly based on the same rationale as the historical attempts by workers to unionize: If successful, it can protect individual workers from the harshness of market competi-tion, but, as is also true with regard to the labor movement, the success of such international cooperative agreements will ultimately depend on the ability of nation-states to transcend parochial national interests.

Notes

1. See Cypher and Dietz (2004), chapter 17, for a review of the empirical lit-erature on the IMF/World Bank programs.

2. The United Nations Economic Commission for Africa in its African Alter-native to the Structural Adjustment Programs indicates that “studies . . . have ac-knowledged the seriousness of the impact of the human conditions in Africa. There is mounting evidence that the stabilization and structural adjustment programmes are rending the fabric of the Africa society. Worse still, their severest impact is on the vulnerable groups in the society–children, women and the aged–who constitutes two third of the population” (2007: 24).

3. For a good discussion of specific country case studies of the social and politi-cal impact of SAPs, see Onimode (1989).

4. Both Semmler (1984) and Botwinick (1993) argue that if, following the clas-sical and Marxian view, interindustrial capital flows establishes roughly equal rates of profit, then industries with higher capital-output ratios will have higher profit margins. Let r = general rate of profit, P = mass of profits, and y = net output. Then r = P/K = (P/y)/(K/y). Thus roughly equal profit rates will necessarily imply that the most capital-intensive industries (those with high K/y ratios) will have high profit margins P/y. Thus the empirically observed correlation between capital-intensity and profit margins can be derived without recourse to the use of monopoly-power types of arguments.

5. Note that under oligopolistic competition, market power and barriers to entry would be sufficient to keep new entrants at bay whereas under perfect competition there would be no barriers. Thus neither neoclassical model of competition is con-sistent with Bryce and Dyer (2007).

6. Note that that the tax-cum-public investment policy was first proposed by

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Keynes in which the government would have both a current and capital budget and a surplus in the former, maintained by sufficiently high taxes, would finance public investments. See Brown-Collier and Collier (1995), Kregel (1993), and Smithin (1989).

7. See also Moudud (2006) for discussion of the public–private investment nexus literature.

8. Wray (1998) would disagree with the argument that government expenditures would need to be financed by taxation revenue because presumably the state can just print the money. We do not enter into this issue here. We are proposing that the additional public investments should not be accompanied by increases in budget deficits.

9. See www.infoplease.com/world/statistics/2007-transparency-international-corruption-perceptions.html.

10. For a good critique of this neoliberal position, see Chang (1999).11. It is in this regard that we find the writings of Adrian Leftwich (2008)

persuasive. In his work on the politics of development, he calls for an understanding of the “political processes which shape effective (or better still, development) states that are capable of establishing and maintaining the arrangements which deliver the benefits [of growth and social justice]” (p. 4).

12. A nodal agency is a state agency that coordinates the activities of the different ministries so as to ensure coherent national policies (Chibber 2003).

13. Even though both the developmental states of Africa and East Asia were dependent on external trade to drive their economies, the export composition of the Asian countries were more diversified and technologically intense, whereas most of the African countries relied almost exclusively on unprocessed primary commodity exports (United Nations Conference on Trade and Development 2007: 80).

14. In a viewpoint presentation, Mkandawire (2004) reminds readers that the inspiration for the idea that the lack of “good governance” is a hindrance to economic growth in Africa came from African scholars when the World Bank performed the then-unusual task of consulting and commissioning them to prepare background papers for its 1989 report. The current usage, he points out, differs significantly from that of the African scholars consulted. The general understanding within African intellectual circles of the challenge of development was that state and society relations needed to be established that were (a) developmental and permitted the management of the economy in a way “that maximizes economic growth, induces structural change and uses all available resources in a responsible and sustainable manner, (b) democratic and respectful of citizens’ rights, and (c) socially inclusive, providing all citizens with a decent living and full participation in national affairs.” Good governance should be judged by its ability to sustain this triad.

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