From Developmental State to What?
: study on change of developmental state
Kangkook Lee
I. Introduction
Since the 80s, so-called ‘neoliberalism’ has dominated economic theories and polices
and the state intervention has retreated from every realms of economy. Privatization,
deregulation, and liberalization in finance and trade are in fashion all over the world,
including developing countries. Development economics is no exception and major
argument is the role of the state should be reduced for economic development. Behind
this argument, the theory of ‘state failure’ because of rent-seeking and self-interested
government lies in, leading to the pessimism about the state. Interestingly enough, the
reality of economic development was opposite to this orthodox neoclassical creed.
While many market-oriented reforms in developing countries in the 80s turned out to be
a failure, the East Asian countries like Korea and Taiwan achieved miraculous
economic development based on strong state intervention like industrial policy and
financial control. Even though neoclassicals still stick to the free market explanation
(Ballassa, 1988), this reality called on many theorists to consider the positive and
important role of the state in the name of ‘developmental state’ theory (Amsden, 1989;
Wade, 1990; Leftwitch, 1995)
However, the East Asian crisis in 1997 seems to make this miracle just a mirage, and
many believe the crisis is mostly due to excessive state intervention and crony
capitalism. Accordingly, the IMF imposed harsh restructuring policies on these
countries. But the Asian crisis is more related to the underregulation of the state, which
surely stemmed from the weakening of capability and autonomy of the developmental
state itself (Chang, 1998a; Lee, 1998). Though the developmental state was successful
achieving rapid economic development, private business got stronger enough against
the government demanding more deregulation along with the growth and globalization
process.
1
This paper examines the argument of developmental state and its change, focusing on
the change of the government-business relationship and globalization. The first section
will survey the theory of developmental state for economic development including
recent arguments and their limits. Next, we will explore sources of its change and
consider future role of the state for economic development. In particular, the
comparison between Korea and Taiwan will show how the demise of the developmental
state happens and what proper role should be played by the state.
II. ‘Developmental State’ and Economic Development
1. Developmental state for economic development
In the 50s and 60s, the import substitution strategy in Latin American countries
failed, while the East Asian countries succeeded in economic development with export
promotion strategy. Accordingly, neoclassicals argued the government intervention is
detrimental for economic growth and minimal state intervention ‘getting the prices
right’ is best policy, based on neoclassical political economy of the state. However, this
theory has serious internal problems (Rao, 1995) and the history itself counterargued the
pessimism about the state. In the 80s, market-oriented reform with structural adjustment
policy recommended by the World Bank and IMF worsened the economy of developing
countries, whereas the East Asian countries continued to grow.
New extensive studies on the East Asian countries emerged since the 80s, starting
with Johnson’s path-breaking work, ‘MITI and the Japanese miracle’ (Johnson, 1982;
Amsden, 1989; Wade, 1990). Many theorists shed lights on the positive role of the state
for development, underscoring strong government intervention like industrial policy,
financial control and management of trade and capital flows.1 These studies originated
from ‘institutionalist approach’ on the state (Evans et al., 1985) and probed historical
and institutional conditions for success of government intervention like character of the
state itself and several factors related to it.
This position is summarized as ‘developmental state theory’ to emphasize the strong
government intervention was essential in economic development (Leftwich, 1995;
Ahrens, 1998). According to them, first of all, the state in East Asia had strong
1
The important role of the state for economic development, in so-called late industrialization, was already
recognized by Gerschenkron long time ago (Gerschenkron 1966). It is really interesting that he argued the
strong role of the state tends to taper out along with the growth of private sector, talking about Russia.
2
autonomy from other social groups like landlords, capitalists, and workers. This is
because there was no strong interest group due to radical land reform and so on, thus the
state was never captured by private interests and government officials are insulated from
society in their decision making. Second, the capability of the government was so high
because they had a long bureaucratic tradition, coupled with several institutional
reforms, which led to the strong administrative capacity. In addition, the principle of
shared growth and external threat were also thought to be helpful to good governance
and implementation of policy for development (Campos and Root, 1996; Vartiainen,
1995).
Based on these several conditions, the countries in this region promoted specific
industry or firms, controlling finance in the grip of the government. The government
adopted huge policy credit with preferential interest rates and other support like tax in
line with industrial policy, in order to promote private investment and thus economic
development (Cho and Kim, 1994). In this process, strong and autonomous government
could discipline the business, exchanging subsidy for economic performance of the firm
in this process (Amsden, 1992; Wade, 1995). The government also cooperated closely
with private business in the form of several formal committees and informal connection.
This mechanism minimized unproductive rent-seeking activity, and generated a
productive rent to encourage private business to invest more and operate more
efficiently. Externally, developmental state made a great effort to manage the trade and
capital flow for the purpose of national development. Even if the trade regime in these
countries is called so open, the developmental state protected domestic industry in
several ways (Singh, 1994). And capital flows were strongly controlled by the
government with capital controls, incorporated into the government financial control in
line with industrial policy (Nembhard, 1996). In foreign direct investment there were so
many regulations like usage of domestic economic factors and limit to ownership of
domestic industry by foreigners, and all cross border financial flows were controlled
and managed by the government, allocated into specific industry. The developmental
state pursued a ‘selective and strategic integration’ into the world economy. That is,
strong and proper government intervention based on specific character of the state was
key to the economic ‘miracle’. It should be noticed the intervention did not replaced the
whole market but built specific institutions compounding the state ‘and’ the market
mechanism.
3
These arguments are much more realistic than the neoclassical explanation and
properly indicate the important role of the state for economic development.2 However,
they might go far to take the position of narrow ‘state centric view’, ignoring important
role of society to limit the state and interaction between the state and society, conformed
mutually (Migdal et al., 1994). Also, they seem to consider the East Asian government
as internally unified and cohesive, which is different from real experience (Moon and
Prasad, 1998). Most of all, the developmental state itself cannot help but change along
with the change of the economy, which is not analyzed enough.
2. Development of developmental state theory
Recently, developmental state theorists present more developed argument, especially
focusing on the importance of relationship between the government and business. And
so-called new institutional economics recognizes the essential role of institutions like
state for economic development to provides a bit sophisticated theory for developmental
state.
Many theorists now pay more attention to the important and specific relationship
between the state and society including government-business relationship in
developmental state. Their study shows that the government was not only autonomous
from social groups but also closely tied with them, which provides the government a
real capability to manage the economy. So-called ‘embedded autonomy, or ‘governed
interdependence’ emphasizes this feature of developmental state, showing mutually
beneficial
interdependence of state and society (Evans, 1995; Weiss and Hobson,
1995). Especially, we can find very cooperative relationship between the government
and business, while the government still repressed landlord and workers, in the East
Asian countries. The developmental state and private capital exchanged financial
support and economic performance each other and close cooperation between them
helped to share information. For business, this collaboration with the government
provided a good condition for further investment. Also, this embeddedness of the state
in the society was an essential source of strong capacity of the state, which led to
successful government intervention.
Even the World Bank study so-called ‘East Asian Miracle’ acknowledged that there was strong
government intervention in the East Asian countries but still they are quite skeptical about the
effectiveness of selective industrial policy. But their argument about TFP analysis and industrial policy
has serious problems as many theorists already argued (Fishlow et al., 1994; Felix,1994)
4
2
Meanwhile, the importance of institutions to complement and overcome imperfect
market is now widely acknowledged in economics.3 According to new institutional
economics, the market always suffers from serious failure due to transaction costs and
incomplete information, so that proper institutions are essential to solve coordination
problem and attain economic efficiency. In particular, this problem is more serious in
developing countries like in capital market and the government should play an
important role for economic development such as a financial restraint and industrial
policy (Lin and Nugent, 1995, Harris et al., 1995). Actually, this line of argument
includes rather diverse positions. So-called ‘market-enhancing’ approach of the
government intervention underscores the role of the government to facilitate the
development of private-sector institutions and overcome market failures. To them, state
intervention can ‘enhance’ the operation of the market by helping to solve coordination
problems (Aoki et al., 1997; Stiglitz, 1996). Whereas, ‘new institutionalist theory of
state intervention’ emphasizes that neither the market, nor the state, nor any other
economic institution is perfect as a coordination mechanism because of transaction
costs. In this perspective the state may resolve the coordination problems at a lower cost
in certain cases (Chang, 1994). The former theory is based on neoclassical premise that
market comes always first, while the latter is closer to developmental state theory.
In addition, some theorists apply Williamson’s theory about hierarchy to the
developmental state. They argue that a kind of quasi-internal organization was
constructed, constituted by the government and large enterprises in which there were
hierarchical relationships and a set of implicit contracts (Lee, 1992). The government
allocated financial resources into in this QIO that performed the role of internal capital
market efficiently.4
These arguments provide rich ideas in understanding developmental state better, to
some extent. First, institutions not only complement the market but also themselves can
be a mechanism of economic coordination, different from neoclassical idea.5 And the
institutions in developmental state should be understood as a broad organizational
structure in the whole level of economy. Here, the role of the state is crucial in that it
3
Institutions are mostly understood as the rules of the game of a society composed of the formal rules and
the informal constraints and the enforcement characteristics of each (North, 1997).
4
The government and large private enterprises could share the information through various channels, to
reduce transaction costs. For this organization to operate efficiently, an outward-oriented development
strategy is important, since competition in the world market is necessary to ensure the efficiency and
economic growth.
5
Here, we may well consider much broader ‘institutional economics’. It pursues analyses of the social
forces that condition and channel the formation of markets; the institutions that constitute and operate
through markets; the economy as a system encompassing more than the market and undergoing systemic
evolution. Namely, this approach is more interested in the problems of power in institution and the change
5
can construct specific institutions and determine the path of development, given its
ability to enact or enforce the rules of the game. Thus, we should understand
developmental state as a broad developmental regime that consists of several agents like
the government and other social groups (Pempel, 1999). Second, the relationship
between the agents is the most essential in efficient operation of institution and should
be studied. It means power relationship between the government and business makes a
significant impact on the efficiency of institutions in developmental state. Only when
there is a proper relationship of discipline and coordination as well, developmental state
can achieve economic success, as many theorists show in the case of the East Asian
countries.
However, in spite of a progress these arguments made, there is still a long way to
go. Most of all, all of theories about the developmental state don’t explore enough, the
change of developmental state or regime itself. In terms of institutions, they are never
static but evolve and change over time. In developing countries, economic development
itself makes the effectiveness of developmental regime less and less since the statesociety relationship itself changes, as well as the economy gets more and more complex.
Thus, we see a dynamic interaction between the institutions and economic development.
And there can be a situation when former institutions can no longer operate well due to
the change of economy and power relationship, called ‘institutional degeneration’(Lee,
1998). This situation demands a reformulation of institutions, which also depends on the
politics and power relationship (Bates, 1995).
And yet, there is still no such a good explanation about the origin and change of
institutions in institutional economics, and developmental state theory also lacks the
study about evolution of developmental state.6 As the economy develops it seems
obvious the role of the government diminishes as market gets more and more complete
and the government faces limit to information and capacity to manage the economy,
which leads to any ‘liberalization’. But behind this apparent change, the more important
change in power relationship lies in. This is what we aim at studying in following
chapters, we will examine some sources of change of developmental state like a change
of government-business relationship along with development and globalization and its
effect on developmental state.
of institution (Samuels, 1995).
6
According to new institutional theorists, a change of transaction costs resulting from a change of
external factor prices or technology can lead to a demand for institutional change. But even in this
situation there must be collective action or effort of the state for institutional change, usually blocked by
various factors (Lin and Nugent, 1995; Nabli and Nugent, 1989). We should consider the importance of
power relationships, agents’ dependence on old institutions in institutional change, and complex historical
6
III. Change of Developmental State
1. Change of state-society relation
If the operation of developmental state impinges much on the specific relationship
between the state and society, first of all we should examine the change of the statesociety relationship, which can lead to the change of developmental state.
Among others, the relationship between the government and business is essential for
developmental state and this relationship is likely to change along with economic
development (Seddon and Belton-Jones, 1995; Haggard, 1998). In the East Asian
countries, private business relied on the government especially about finance to a great
extent because the government controlled financial system strongly in the state-led
financial system. The government dominated the commanding height of finance to
encourage private investment with great financial support through policy credit and it
was successful. But as the economy grows, the financial control of the government gets
weaker and weaker due to reduction of directed credit with financial liberalization and
the growth of financial sector less controlled by the government like stock market and
nonblank institutions. This change naturally brings out a change in financing of the
firms and indeed, the share of finance controlled by the government decreased in the
East Asian countries (Woo, 1991; Lee, 1998). As the dependence of businesses on the
government in finance weakens, they demand more and more deregulation from the
government based on their economic power. Also, the domestic business can borrow
foreign capital without government guarantee, thanks to upgrade their credibility due to
economic development.
In addition to finance, technological dependence of the private business on the
government diminishes along with the development. In the early period of economic
growth, the government usually establishes public institutions to develop technology,
with cooperation with private firms. But the growth of business can provide enough
capacity to develop its own technology independently from the government (Hahm and
Plein, 1998). And alliance with transnational capital about technology strengthens this
autonomy of the firms (Evans, 1998a). In this regard, the autonomy of the business is
apt to increase against the government to capture the former developmental state, while
conditions to explain institutional inertia (Grabowski, 1989; Matthews, 1986).
7
the autonomy and power of the government diminishes, especially resulting from the
private business’ financial autonomy.
In this process, industrial structure may be important to determine the extent to
which the autonomy of the government is encroached. If the economy is made up of
several big businesses then their power against the government would be stronger than
the case that there are so many small and medium business. The financial power of big
business that may own and dominate even financial sector, will make the government
more weakened since the government should depend on the business about economic
performance. Even if the government tries to regulate their economic power the
regulation measures based on financial control is not effective due to the reduction of
financial control and changed financial system
Besides, the government cannot repress workers any longer. Workers have been
repressed by the autocratic government in developmental state for a long time, but as
the economic growth brings out democratization their power tends to get stronger with
development of labor union organization (Jeong, 1997). This process increases workers’
voice and the government would have hard time suppressing them for development. The
democratization itself strongly limits the government intervention itself because the
intervention is usually thought as autocracy in many cases. This broad change means a
position of the state is much weaker, so that it cannot discipline social groups any
longer.
2. Globalization and its effect
As well as this change, recent trend of globalization is an important factor in the
change of developmental state because it limits the capacity of the government to
manage the national economy. After the 70s, trade and especially capital flow around
the world increased so much that now this reality imposes serious constraint on the
national governments. Neoliberal policies like privatization, deregulation and
liberalization in trade and finance have been adopted in most developing countries
along with globalization.
First of all, globalization, especially in finance, makes it much harder for the
government to implement independent monetary policy and exchange rate policy since
there is a threat of capital flight and speculative attack (Panic, 1998; Macwan and Tabb
eds., 1989). Most developing countries kept strong capital controls in the past, but
capital account liberalization after the 80s worsened this problem seriously. This policy
8
aggravates the economic instability due to the inherent problems in international
financial market like herd behavior, threatening national economies. Besides, countries
may compete each other to induce foreign capital in taxation leading to ‘race to the
bottom’, which will reduce the base of tax and public expenditure in developing
countries (Crotty et al., 1995; Rao, 2000). This way, the trend of globalization snatches
the macroeconomic autonomy away from the government. In addition, competitive
export promotion strategy by many developing countries and rapid development of late
developing countries like China with foreign investment worsen international
competition among developing countries. Thus, cut-throat global competition along
with globalization makes the prospective of development based on export darker when
there is no increase of world aggregate demand.
The globalization also prompts developing countries to reduce the government
intervention further. Neoclassical argue that reduction of the role of the state in the
economy and complete integration into the global economy is the best policy for
economic development, which naturally supports every liberalization measures in trade
and finance (Sachs and Warner, 1995; Dornbush, 1998).7 The policy recommendation
from the international organizations like the IMF and World Bank keenly pursues this
orientation. In particular, the harsh restructuring policy imposed by the IMF on the East
Asian countries after the crisis, including opening all the capital market repealed
external policy tools of former developmental state.
In reality, a new international economic order under the WTO gives off more
pressure to developing countries to open their economies. For example, TRIMs (Trade
Related Investment Measures) or TRIPs (Trade related intellectual property) would
significantly limit the government measures like subsidy related to trade. Though there
has been little development in MAI (Multilateral Agreement on Investment) due to
strong conflict among countries, effort of bilateral agreement on investment is still
going on between developed and developing countries. This agreement usually
stipulates almost all of regulation should be scraped for capital flows including portfolio
capital. As we already mentioned, the East Asian developmental states controlled and
managed trade and capital flow, performing ‘selective and strategic integration’ into the
7
Even though neoclassicals predict a rosy future of globalization, it just leads to more inequality and
conflict among countries and social groups. Especially, increase of international trade and capital flows
and tends to worsen workers’ power (Crotty et al, 1995). And globalization seems to worsen divergence
between countries because international capital flow centralizes on a few developing countries
(UNCTAD, 1997).
9
world economy.8 But these policies seem to be no longer easy nowadays with the
globalization and the change of world economic order (Akyuz et al., 1998).
Meanwhile, it should be noticed that globalization affects the power relationship
itself, among the government, domestic and international capital. With globalization,
domestic capital can bypass the government as they can borrow capital from
international financial market more easily, which further weakens the power of the
government. And as they can transfer their production abroad and make an alliance with
international capital, their power against the government grows more. International
capital including industrial and financial capital also obviously becomes more dominant
over the national government when capital controls are gone. This effect of
globalization leads to more demand for financial liberalization, which again strengthens
globalization trend.
In sum, globalization plays an important role to limit the several policies of
developmental state and it is neoliberal policies that substitute former developmental
policies in developing countries. This change makes it no longer possible for former
developmental states to continue former external policies, which generates a ‘demise of
developmental state’, and harder and harder for many developing countries to adopt
these policies. The globalization appears to keep the state at bay, making developmental
state more neoliberal.
3. What role for state in globalization era?
Concerning the globalization and the role of the state, some argue that globalization
trend is so strong that there would be reduced or no role of the state (Ohmae, 1990),
while others emphasize the positive role of the state in response to globalization arguing
globalization is hyperbolized (Wade, 1996; Hirst and Thompson, 1996). Even if it is
true that the role of state is getting limited as already examined, the role of the state will
maintain. Most of all, private capital has always no choice but to depend on the state for
the mere operation of market itself and management of money and labor power.
Furthermore, the new and proper role of the state to promote long term development
and manage the conflict would be more important (Chang and Rowthorn eds., 1995;
8
Surely, the second generation NICs in the South East Asia took more open stance to foreign investment
than Korea or Taiwan. However the ratio of foreign direct investment is not that high except for Malaysia,
if we don’t consider Hong Kong and Singapore (Akyuz et al., 1998). They made some efforts of strategic
integration, which shows not unconditional but proper openness is helpful for economic development
(Singh, 1995).
10
Rowthorn and Kozul-Wright eds., 1998). The strong efforts of the government to induce
international capital and capitalize on its technology and management skill
domestically, to enhance infrastructure, and to stimulate innovation and productivity,
are emphasized more and more. The education and technology policy would be a new
realm of the strong role of the state, in the name of the ‘Schumpeterian Workfare State’
fit for post-fordism, compared to the ‘Keynesian Welfare State’ (Jessop, 1993).9 Also
the distributional effect of the globlazation makes it necessary for the government to
address conflict resulting from the rapid economic change (Rodrik, 1997).
Most of all, the financial glolbalizatoin calls on the government to struggle to
regulate volatile international capital flows, establishing strong and sound monitoring
system over financial institutions. Most economists at least agree on the importance of
proper domestic regulation system over financial sector, though different in the extent.
The Asian crisis obviously shows how much important the proper job of the state
taming international financial flows, and after the Asian crisis, the argument to restrain
international short-term capital like with Tobin tax has gained momentum (Rajan,
1999). In this regard, developing countries must be so careful to open their financial
market and maintain proper capital controls. Beyond this regulation over capital flow,
the government should keep on performing continuous reform in order to establish good
domestic institutions to discipline the public as well as private sector. Namely, it must
establish the system to monitor investment decision in private sector and reform
dissipated government expenditure. Actually, the East Asian countries just adopted
domestic deregulation and financial opening without a reform of domestic economy in
the 90s, even if there were structural problems. Of course it has much to do with the
strong power of capitalist against the government, but it ended up with the serious crisis
(Chang, 1998; Jomo, 1998; Robison, 1998).
Thus, more effective and capable state and effort to manage the process of global
integration are requested in the globalization era, not neoliberal states to deregulate
everything. The globalization and the change of world economy doesn’t need just
reduction of the role of the state but proper response of the state (Weiss, 1997; World
Bank, 1997).
Even in the pressure of a new international economic order, there is possibility for
developing countries to adopt developmental external policies. Import quota is still
possible under the closure for balance of payment for developing countries of the
Of course there is an argument about if neoliberalism would be a possibl ‘mode of regulation’ for postfordism. Many are worried that it is just lacuna of regulation and would not be institutionalized mode of
regulation in the world economy (Peck and Tickel, 1995; Yaghmaian, 1998).
11
9
GATT, and tariff can be used, too. Despite the pressure to reduce subsidy, developing
countries can still support domestic industry and subsidy for scientific research,
agriculture, and regional development is not prohibited (UNCTAD, 1996).10 Besides,
the countries can implement several policies in an attempt to promote investment and
information like tax subsidy, support for research and development and so on.
In this respect, the role of the state is still important in globalization era in spite of
limits. The late developing countries must adopt practical developmental policies in this
new situation and former developmental states also should reformulate their positive
role continuously in response to a new change of the economy. Surely, the extent to
which the government can play this role is associated with the power relationship that is
already affected by the globalization itself. Late developing countries must exert to
construct the proper relationship with their business and to develop capacity of the
government. Even though historical and institutional conditions are hard to be
replicated, this effort is very essential for developmental policies. As far as former
developmental states are concerned, it is likely that their developmental state cannot
help changing but this change will also depend on the change of government-business
relationship and the effort of the state to manage the economy. The former
developmental state may as well make a tie with workers or civil groups to recover its
developmental role, against domestic and international capital.11
IV. A tale of two countries: Korea vs. Taiwan
Korea and Taiwan are a role model of developmental state as many theorists argued.
Both of the countries have much in common about the character of developmental
regime and similar policies for economic development. The autonomy and capacity of
the government was strong in both of the countries and there was specific governmentbusiness relationship including discipline and cooperation. They share the industrial
policy, financial control, and management over trade and capital inflows, though a little
different in the extent, based on these conditions of developmental state (Amsden, 1989;
10
Poor countries with GDP per capita under $1000 are excluded from the reduction of subsidy and other
countries have only to reduce subsidy in 8 years. Meanwhile, specific subsidy can be sued only when it
does hardm to industries in other countries.
11
Some argue that developmental state should reformulate itself in response to the change of the statesociety relationship and a kind of democratic developmental state is requested (Evans, 1995). Kerala state
in India or corporatist states like Austria and Netherlands in Europe is presented as a future model of
developmental state. For this future, most of all, growth of power of workers and people to check the
dominance of capital would be very important.
12
Wade, 1990). Also since the 80s, both of the countries implemented liberalization
policy for trade and finance sooner or later.
But while the Korean economy plunged into the serious financial crisis in 1997, the
Taiwanese economy succeeded in avoiding the crisis, different from other East Asian
countries. In order to explain this difference, we should explore the divergent path of
Korea and Taiwan, for which we should focus on the difference in government-business
relationship and effort to manage global integration.12 Actually, the government lost its
autonomy and capacity, leading to a ‘demise of developmental state’ and failed in
addressing the problem of global integration process in Korea, whereas the Taiwanese
government maintained its proper role. Now we turn to compare two countries show
how the developmental state changed and what to do post-development period.
In spite of similarity of developmental state in Korea and Taiwan, there was a sharp
difference between them, which led to the different path. First of all, industrial structure
was quite different and so was the change of government-business relationship. While
the strategy of the government was to encourage big business with huge financial
support in Korea, the government intended to develop small and medium sized firms
and big firms were mostly owned by the government or strong political party in Taiwan.
It is sure that the Taiwanese government was worried about growth of power of
business because elites in the government were mostly from mainland China but private
business was owned by businessman in island Taiwan. Accordingly, heavy and
chemical industries like steel and auto were more developed in Korean than Taiwan.
But the stronger power of big business against the government in Korea led to more
fundamental change of the government-business relationship.
In Korea, after the late 80s, the financial system changed so much that the
government lost its power to control finance and thus affect investment of the
business.13 It is mostly due to growth of capital market and financial institutions less
controlled by the government and owned by big business itself. Also the big business
started to borrow foreign capital without government guarantee from the mid 80s only
to get more financial autonomy from the government. Based on this power, big business
12
Besides these differences, the financial system was also a little different between two countries. In
general, the financial system was more strongly controlled by the government in Korea than Taiwan and
financial liberalization and opening came earlier in Taiwan than Korea (Patrick and Park, 1994). This
difference in development of financial market may be added to as a reason for the difference of industrial
structure.
13
Along with this change of power relationship, the government itself adopted the neoliberal ideology
that the role of the state should be reduced in the 90s, especially in a new government after 1993.
Moreover, the conflict within the government like between central bank and ministry of finance and
economy went serious in the 90s. That is, the government lost its internal cohesion and capacity as well as
autonomy, which contributed to demise of developmental state importantly (Moon and Rhyu, 2000).
13
demanded more freedom in investment decision and financial liberalization, which
came true in the 90s (Lee et al, 2000). The government tried to regulate big business but
to no avail, because the powerful chaebols dominated all the economy and financial
sector, centralizing most loans to themselves.14 In the mid 90s, they promoted excessive
investment mostly with foreign short-term capital that flowed into Korea after the
financial market opening. However, the profit rate was so low that it just sowed a seed
of the crisis. The government could no more perform the former role of investment
coordination among chaebols and failed in radical reform of the industrial and financial
sector (Lee, 1998; Chang et al., 1998). While, the Taiwanese government seemed to
keep their autonomy from business even if the relationship was not free from conflicts
because firms in Taiwan were not that big compared to Korea (Chiu, 1994). Small and
medium companies in Taiwan didn’t have so strong power as big business in Korea,
even if their financing structure also has changed along with financial liberalization.
Thus the demand of private capitalist was not that powerful. Of course, in this process,
the continuing dominance of Kuomintang even in the 90s was also helpful in part, while
in Korea after democratization in the late 80s, the new government policy was really
politicized.15
Secondly, the effort of the government to mange the process of global integration
was quite different. The Korean government just promoted careless financial and capital
account liberalization, especially deregulation of foreign short-term borrowing without
any good monitoring system. This policy was surely a product of several interests
including domestic big business, international capital and the government itself to get
the membership of the OECD. However, the government totally failed in managing
dangerous foreign capital flows and regulatory system was so bad (Ubide and Balino,
1999), which led to skyrocketing foreign short-term debt and finally the crisis when
foreign investors turned their back to Korea.. But the Taiwanese government cared
about the volatile foreign capital flow so much that their regulatory system over
financial sector was better than that in Korea (Weiss, 1999). This wise policy of the
government as well as huge foreign reserve based on long-time trade surplus was
important to avoid the crisis. That is, the Taiwanese government performed an essential
14
Conflicts and strategic action between them did not appeared until the 1970s when the government’s
control over finance and business was so storing but started to appear in reorganization program in heavy
and chemical industries and state-led bail-out program in the 1980s and grew serious more and more in
various regulations on chaebols (Rhee, 1994). Some argue that the relationship between them changed
from dominance to symbiosis or the autonomy of the government still sustained (Lee, 1997; Kim, 1988).
But after the late 1980s the government regulation over chaebols mostly failed and the relationship
changed to conflicts and chaebols’ predominance especially after 1993.
15
However, some researcher reports that economic policies have been recently politicized even in Taiwan
14
role of managing the economy in response to globalization but the Korean government
failed in this.
The experience of Korea and Taiwan clearly shows how the developmental state
changes differently, which mostly stems from difference of the government-business
relationship and the proper effort of the government. Only if the government does a
proper role continuously, to manage the economy along with the change of the
economy, further development is possible. After the crisis, the Korean state is changing
further away from developmental state with the IMF restructuring policy and it would
hardly play a developmental role.16 However, this change will depend on the politics or
power relationship too, which is why the reformulation of power relationship among the
government, domestic and international capital and workers is so essential for the
future.
V. Concluding Remarks
The so-called, ‘East Asian miracle’ was mostly thanks to the positive effort of the
developmental states to promote economic growth. They had strong autonomy and
capacity to manage the economy properly, for which the relationship between the
specific state and society was an essential factor. However, as history shows, the
developmental state itself changes over time as the economy grows and especially the
power relationship between the government and business changes. Along with this
change, the government is likely to lose its strong autonomy from the business and
powerful business demands more liberalization to limit the role of the state further.
Moreover, recent trend of globalization put more pressure on the state and gives hard
time for it to intervene into the economy. This change might lead to a demise of
developmental state and surely makes it never easy for late developing countries to
follow the policies of developmental state.
However, considering the essential role of the state for economic development, the
developing countries should exert to manage the economy as developmental state in the
East Asia did, with all globalization. For former developmental countries, it’s crucial to
reformulate themselves making a new and proper state-society relationship and to
along with the growth of large enterprises and democratization (Kuo, 1998).
16
The IMF restructuring policy imposed on Korea consists of macroeconomic restrictive policy and
microeconomic restructuring policy. The latter includes drastic capital market opening, radical trade
liberalization and especially labor market flexibilization, which repealed most of policy tools of
developmental state in particular about external policy, and has weakened workers’ power significantly.
15
manage the process of global integration. The different experience of Korea and Taiwan
in post-development period shows that what proper role the state should play and how
important it is. Demise of developmental state due to the change of the governmentbusiness relationship and no effort to manage globalization integration process in Korea
led to the crisis while the government seemed to still play a proper role in Taiwan.
Considering the importance of power relationship for developmental state and its
change, what we need is a new politics of developmental state to reformulate itself for
the future.
16
<References>
Ahrens, Joachim. 1998. Economic development, the State, and the Importance of
Governance in East Asia. Economic Systems 22(1).
Akyuz, Ylimaz. 1996. Taming International Finance. in Michie, Jonathan and Smith,
John Grieve. 1995. Managing the Global Economy. Oxford University Press.
_____, Chang Ha-Joon and Kozul-Wright, Richard. 1998. New Perspectives on East
Asian Development. Journal of Development Studies 34(6).
Amsden, A. 1989. Asia’s Next Giant: South Korea and Late Industrialization. New
York: Oxford University Press.
_____. 1992. A Theory of Government Intervention in Late Industrialization. In
Putterman, Louis and Rueschemeyer, eds., State and Market in Development: Synergy
or Rivalry?. Dietrich. Lynne Rienner Publishers.
_____. 1994. Why Isn’t the Whole World Experimenting with the East Asian Model
to Development?: Review of The East Asian Miracle. World Development 22(4).
Aoki, Masahiko, Hyung-Ki Kim and Okuno-Fujiwara, Masahiro eds. 1997. The Role
of Government in East Asian Economic Development. Oxford University Press.
_____. Beyond the East Asian Miracle: Introducing the Market-Enhancing View. In
Aoki, Masahiko, Hyung-Ki Kim and Okuno-Fujiwara, Masahiro eds., The Role of
Government in East Asian Economic Development. Oxford University Press.
Balino, Tomas J. T. and Ubide, Angel. 1999. The Korean Financial Crisis of 1997 –
A strategy of Financial Sector Reform. IMF Working Paper.
Ballassa, Bela. 1988. The Lessons of East Asian Development: An Overview.
Economic Development and Cultural Change
Bates, Robert, H. 1995. Social Dillemas and Rational Individuals: An Assesment of
the New Institutional Institutionalism. In Harris, John, and Hunter, Janet, and Colin M.
Lewis. Eds., The New Institutional Economics and Third World Development.
Routledge
Berger, Suzanne and Dore, Ronald, eds. 1996. National Diversity and Global
Capitalism. Cornell University Press.
Bina, Cyrus. and Yaghmaian, Behzad. 1991. Post war Global Accumulation and the
Transnationalization of Capital. Economy and Society 43.
Boyer, Robert. eds. 1996. States against Markets: The Limits of Globalization. New
York. Routledge.
17
Chan, Steve, Clark, Cal and Lam, Danny. eds. 1998. Beyond the Developmental
State. Macmillan.
Campos, Jose Edgardo and Root, Hilton L. 1996. The Key to the Asian Miracle:
Making Shared Growth Credible. Washington, D.C.: The Brookings Institution.
Chang Ha-joon. 1994. The Political Economy of Industrial Policy. St. Martin’s Press
_____. 1998a. Korea: The Misunderstood Crisis, World Development 26(8).
_____. 1998b. Transnational Corporations and Strategic Industrial Policy. in KozulWright, Richard and Rowthorn, Robert. eds., 1998. Transnational Corporations and the
Global Economy. UNU/WIDER.
_____, Park Hong-jae, and You Chul gyue. 1998. Interpreting the Korean Crisis:
financial liberalisation, industrial policy, and corporate governance, Cambridge Journal
of Economics 22(6)
Chiu, Yun-han. 1994. The Realignment of Business-Government Relations and
Regime Transition in Taiwan. in MacIntyre, Andrew ed. Business and Government in
Industrializing Asia. Allen & Unwin.
Cho Yoon Je. and Kim Joon Kyung. 1994. Credit Policies and the Industrialization
of Korea. World Bank Discussion Paper, 286. World Bank.
Crotty, James. 1998. Korean economic and political crisis. mimeo.
_____ and Epstein, Gerald. 1996. In Defence of Capital Controls. Socialist Register.
_____, Epstein, Gerald, and Kelly, Patricia. 1995. Multinational Corporations,
Capital Mobility and the Global Neo-Liberal Regime: Effects on Northern Workers and
on Growth Prospects in the Developing World. mimeo.
Dornbusch, R. 1998. Capital Controls: An Idea Whose Time is Past, in Fischer
Fischer, S. et al. Should the IMF Pursue Capital-Account Convertibility?, Essays in
International Finance, No.207, Department of Economics Princeton University.
Evans, Peter. B. 1995. Embedded Autonomy: States and Industrial Transformation.
Pricneton Unviersity Press.
_____. 1998a. Transnational Corporations and Third World States: From the Old
Internationalization to the New. in Kozul-Wright, Richard and Rowthorn, Robert. eds.,
1998. Transnational Corporations and the Global Economy. UNU/WIDER.
_____. 1998b. Transferable Lessons? Re-examining the Institutional Prerequisites of
East Asian Economic Policies. Journal of Developmental Studies.
_____ et. al, eds. 1985. Bringing State Back In. Cambridge University Press.
Felix, David. 1994. Industrial Development in East Asia : What are the Lessons for
Latin America? UNCTAD Review. 1994
18
Fishlow, Albert et al., eds. 1994. Miracle or Design? Lessons from the East Asian
Experience. Washington. ODC.
Gerschenkron, Alexander. 1966. Economic Backwardness in Historical Perspective.
Belknap Press.
Grabowski, Richard. 1988. The Theory of Induced Institutional Innovation: A
Critique. World Development 16(3).
Haggard, Stephen M. 1998. Business, politics and policy in East and Southeast Asia.
in Rowen, Henry S. 1998. Behind East Asian Growth : The Political and Social
Foundations of Prosperity. Routledge.
Ham Sung Deuk, and Plein, L. Christopher. 1998. Changing Parameters of State
Power: Presidential Leadership for Technological Development in Korea. in Chan,
Steve, Clark, Cal and Lam, Danny. eds. Beyond the Developmental State. Macmillan.
Harris, John, and Hunter, Janet, and Colin M. Lewis. 1995. The New Institutional
Economics and Third World Development. Routledge.
Hirst, Paul and Thompson, Graham. 1996. The Globalization in Question: The
International Economy and the Possibilities of Governance. Cambridge. Polity Press.
Patrick, Hugh T., and Park Yung Chul. eds.1994. The Financial Development of
Japan, Korea, and Taiwan: Growth, Repression, and Liberalization.
Jeong Seongjin. 1997. The Social Structure of Accumulation in South Korea:
Upgrading or Crumbling?. Review of Radical Political Economics 29(4).
Jessop, Bob. 1993. Toward a Schumpeterian Workfare State? Studies in Political
Economy.
Johnson, Chalmers. 1982. MITI and the Japanese Miracle: The Growth of Industrial
Policy 1925-1975. Stanford University Press.
Jomo, K. S. 1998. Financial Liberalization, Crises, and Malaysian Policy Responses.
World Development 26(8).
Kim Eun-mee. 1988. From Dominance to Symbiosis: State and Chaebol in Korea.
Pacific Foucs, III(2).
Kozul-Wright, Richard. 1995. Transnational Corporations and the Nation State. in
Michie, Jonathan and Smith, John Grieve. 1995. Managing the Global Economy.
Oxford University Press.
_____, and Rowthorn, Robert. eds., 1998. Transnational Corporations and the
Global Economy. UNU/WIDER.
Kuo, Cheng-tian. 1998. Private Governance in Taiwan. Chan, Steve, Clark, Cal and
Lam, Danny. eds. Beyond the Developmental State. Macmillan.
19
Lal, Sanjaya. 1994. The East Asian Miracle Study: Does the Bell Rang Too for
Industrial Strategy?. World Development 22(4).
Lee, C. H. 1992. The Governement Financial System, and Large Private Enterprise in
the Economic Development of South Korea. World Development 20(2).
_____, and Haggard, Stephan. 1995. Financial Systems and Economic Policy.
Cornell University Press.
_____, Lee Keun, and Lee Kangkook. 2000. Linking Chaebols Linking Chaebols,
Financial Liberalization, and Crisis in Korea: Transformation of the Quasi-Internal
Organization. Mimeo.
Lee Kang-kook. 1998. The Change of Financial Sytsem and Developmental State in
Korea. paper presented at WIDER.
Lee Yeon-ho. 1997. The State, Society and Big Business in South Korea. Routledge.
Leftwich, Adrian. 1995. Bringing Politics Back In: Toward a Model of the
Developmental State. The Journal of Development Studies 31(3).
Lin, Justin Yifu and Nugent, J.B. 1995. Institutions and Economic Development. In
Behrman, J. Srinivasn, T.N. The Handbook of Development Economic. Vol. 3A.
MacEwan, Arthur and Tabb, William K. 1989. Instability and Change in the World
Economy. Monthly Review Press.
MacIntyre, Andrew ed. Business and Government in Industrializing Asia. Allen &
Unwin.
Matthews, R. C. 1986. The Economics of Institutions and the Sources of Growth.
Economic Journal 96.
Migdal, Joel S., Kohli, Atul and Shue, Vivienne., eds. 1994. State Power and Social
Forces: Domination and transformation in the Third World. Cambridge University
Press.
Moon Chung-In and Prasad, Rashemi. 1998. Networks, Politics, and Institutions. in
Chan, Steve, Clark, Cal and Lam, Danny. Beyond the Developmental State. Macmillan.
_____ and Rhyu Sang-young. 2000. The State, Structural Rigidity, And the End of
Asian Capitalism; A Comparative Study of Japan and South Korea. mimeo.
Nabli, M.K. and Nugent, J.B. 1989. The New Institutional Economics and Its
Applicability to Development. World Development 17(9).
Nembhard, J. G. 1996. Capital Control, Financial Regulation and Industrial Policy
in South Korea and Brazil. Westport. CT: Praeger Publishers.
North, D.C. 1997. The Process of Economic Change. WIDER working paper. No.
128
20
Ohmae, K. 1990. The Borderless World. New York.
Panic, Mica. 1998. Transnational Corporations and the Nation State. in KozulWright, Richard and Rowthorn, Robert. eds., 1998. Transnational Corporations and the
Global Economy. UNU/WIDER.
Peck and Tickel. 1995. Social Regulation after post-fordism, Economy and Society
August.
Pempel, T. J. 1999. The Developmental Regime in a Chaning World Economy. in
Woo-Cummings, Meredith, ed. The Developmental State. Cornell University Press.
Rajan, R. S. 1999. Sand in the Wheels of International Finance: Reivisiting the
Debate in Light of the East Asian Mayhem. Mimeo
Rodrik, Dani. 1997. Has Globalization gone too far?. Institute for International
Economics. Washington, DC.
_____. 1998. Globalisation, Social Conflict and Economic Growth. The World
Economy, 21(2)
Rao, Mohan. J. 1995. The Market for the State: Rules, Discretion, Rent-seeking and
Corruption. Working Paper 1995-3. Department of Economics, UMASS.
_____. 2000. Globalization and the Fiscal Autonomy of the State. Political Economy
Workshop. Department of Economics, UMASS.
Rhee Jong-Chan. 1994. The State and Industry in South Korea: The limits of the
authoritarian state. Routledge.
Rodrik, Dani. 1997a. Has Globalization gone too far?. Institute for International
Economics. Washington, DC.
_____. 1998. Globalisation, Social Conflict and Economic Growth. The World
Economy, 21(2)
Robison, Richard and Rosser, Andrew. 1998. Contesting Reform: Indonesia's New
Order and the IMF, World Development, 26(8).
Rowen, Henry S. 1998. Behind East Asian Growth : The Political and Social
Foundations of Prosperity. Routledge.
Rowthorn, Robert and Ha-joon Chang. Eds. 1995. The Role of the State in Economic
Change. Clarendon Press.
Samuels, Warren. J. 1995. The present state of institutional economic. Cambridge
Journal of Economics, 19.
Seddon, David and Belton-Jones, Tim. 1995. The Political Determinants of
Economic Flexiblity, with Special Reference to the East Asian NICs. In Killick, Tony.
Ed. 1995. The Flexible Economy. Routledge.
21
Singh, Ajit.. 1994. Openness and the Market Friendly Approach to Development:
Learning the Right Lessons from Development Experience. World Development 22(12).
_____. 1995. The causes of economic development in East Asia. UNCTAD Review.
Stiglitz, Joseph E. 1996. Some Lessons from the East Asian Miracle. The World
Bank Research Observer 11(2).
_____. 1998. Redefining the Role of the State: What should it do? How should it do
it? And How should these decisions be made? Paper presented at Tenth Anniversary of
MITI Research Institute.
Toye, John. 1995. The New Institutional Economics and Its Implications for
Development Theory. In Harris, John, and Hunter, Janet, and Colin M. Lewis. Eds., The
New Institutional Economics and Third World Development. Routledge.
UNCTAD. 1996. Trade and Development Report. United Nations.
_____. 1997. Trade and Development Report. United Nations.
Vartiainen, Juhana. 1995. The State and Structural Change: What can be Learnt from
the Successful Late Industrializers? in Rowthorn, Robert and Ha-joon Chang. Eds.
1995. The Role of the State in Economic Change. Clarendon Press.
Wade, Robert. 1990. Governing the Market: Economic Theory and the Role of
Government in East Asian Industrialization. Princeton: Princeton University.
_____. 1996. Globalization and Its Limits. Berger, Suzanne and Dore, Ronald, eds.
National Diversity and Global Capitalism. Cornell University Press.
Weiss, Linda . 1997. Globalization and the Myth of the Powerless State. New Left
Review 225.
_____. 1998. The Myth of the Powerless State: Governing the Economy in a Global
Era. Polity Press.
_____. 1999. Managed Openness. New Left Review 239.
_____ and Hobson, John M. 1995. States and Economic Development. Polity Press.
World Bank. 1993. The East Asian Miracle: Economic Growth and Public Policy.
New York: Oxford University Press.
_____. 1997. World Development Report: The State in a Changing World. New
York: Oxford University Press.
Woo Jung-en. 1991. Race to the Swift. New York: Columbia University Press.
Woo-Cummings, Meredith, ed. 1999. The Developmental State. Cornell University
Press.
Yaghmaian, Behzad. 1998. Globalization and the State: The Political Economy of
Global Accumulation and Its Emerging Mode of Regulation. Science and Society 62(2)
22
23