Elly Twineyo Kamugisha, author and public policy analyst December 2019

The emergence of the power of Neo-liberalism and the tendency to view the role of the state in a narrow focus has ruled the world mainly since late 1970s. They assert that the government should mainly tax business and individuals – but play no role in the private sector. They forget that in most developing countries, there exists market failure all the time. Robert Wade (1990) writing in Governing the Markets1 that Asian advanced countries such as Taiwan grew under a ‘hard state’ role. Wade shows that in Taiwan, public investment was equal to around a half of the national investment. Let us look at Singapore which has been viewed as one where its leaders seldom picked winners. There is a big role of the state in the mobilization of public savings. From a public savings perspective, however, Singapore’s massive public savings of 18.5 percent of GDP suggests a powerful promotional stance, in which the state single-handedly created a pool of total savings larger than most nations can create through both public and private savings2.

Look at South Korea which claimed that it was a free market economy when it grew rapidly. Let us look that the country before the Asian economic crisis of 199/8. Population growth rate were low around at 2.16 per annum between 1950 -73 at 1.25 per annum from 1973 to 19983. Between 1950 and 1998, the absolute number of the population increased from 20.8 million to 46.4 million. This is an increase of 25.6 million in 48 years. By 1950 it has a total GDP of US$16 million and it had reached US$56.4 million in 1998. This is an increase of US$ 40.4 in 48 years. By 1996, it was the 12th largest economy in the world and had become a member of the OECD (the first of the Asian tigers to be admitted). Specifically, its annual average growth rate of GNP was about 10 per cent between 1965 and 1980. Let us observe that if we exclude the OPEC members and the command economies (centrally planned economies), it had the fifth highest growth rate of real GNP in the 1960s and in the 1970s, and for some part of the 1980s4. Amsden (1989:9) quotes that in 1986 the Fortune list of the top 500 private non-oil companies included 10 from South Korea and only 10 from the rest of all the developing countries combined. We note that this spectacular growth came at some cost of the highly exploited class. We also observe that along the growth path, mostly the working class in never well remunerated. The poor remuneration changes with a period of time last at time more than decades. The trade unions begin to demand for the right compensation.

The credit for its current prosperity goes to General Park Chung-he who in 1961 led a military coup which established a strong state intervention in the economy oriented to the goal of rapid industrialization. He is credited with Miracle of the Han River symbolizing the miracle of industrialization and development. His rule–lasting 18 years until his assassination by his head of intelligence in 1979 was a key growth and development period of South Korea. It was during this period that it graduated from the third to the ‘advanced’ economies. Throughout Park’s period,

1Wade, R., (1990): Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton, N.J: Princeton University Press
2 Krieckhaus, J., (2004): “In Praise of the State”, Issues & Studies 40, no. 1:46-60.
3 Maddison Angus, The World Economy: A Millennial Perspective, OECD (2001: 218)

4 See Sung YK, (1990:5), “The Economic Development of the Republic of South Korea 1965-1981” in Lau, L., (ed.), Models of Development: A Comparative Study of Economic Growth in South Korea and Taiwan. San Francisco, CA: ICS Press

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the 1980s and 1990s, the Korean state was the engine that was powering industrialization and economic growth. According to Rodrik (1994:61) after President Park took over in a military coup on 16 May 1961, the scope of export subsidization was greatly enlarged. The subsidy on export credits was increased and exporters were exempted from the commodity tax and the business activity tax5.

What did the Park regime do to boost industrialization and growth?

The state undertook the following during this period:

1. i)  It allocated resources for investment, undertook price controls, and regulated capital movements; most especially for offshore investments. Because of the legislation that had been passed in the 1960s, there was control of cash outflow. Any unauthorized overseas transfer of US$ 1 million or more was handed a minimum sentence of 10 years in prison and a maximum death sentence6.
2. ii)  The state shared risk and undertook and overwrote research and development especially in the development of the electronics industries. It is also was critically present supporting the semiconductor industry.
3. iii)  The state supported planning via the Economic Planning Board (EPB). The EPB was given unprecedented powers with regard to planning for the economy. So in a nutshell there was national (state) planning common to the command economies of the East. The CEO of the EPB was elevated to the rank of Deputy Prime Minister a rank that made this position second in the government hierarchy. Park regime nationalized the banking system (5 months after his coup). It should be mentioned that by 1970, the state controlled exactly 96.4 per cent of the country’s total financial assets.

General Park’s assassination was followed by another military coup led by Chun Doo-hwan. However, Chun’s own chosen successor Roh Tae-woo, started a political reform process that led to the consolidation of pluralistic democracy after 1992.

Overall in addition to import protection, export promotion measures were also used to further industrial development for South Korea. These included subsidized credit, tax breaks, export processing zones, bonded manufacturing warehouses, duty drawbacks, privatization of customs administration and direct export subsidies (UN 2013: 128)7.

Let’s look at Taiwan: This is another Asian economy that grew rapidly. According to Lau (2002)8, Taiwan began its industrialization drive after Hong Kong and before South Korea as a result of rising wage rates in Japan, and subsequently Hong Kong, and quota restrictions imposed by the U.S. and subsequently Europe on textile exports. It started with a high population density and with unfavourable resource endowment. It does not have the resources endowment that

5 Rodrik, D., (1994), “Getting interventions right: how South Korea and Taiwan grew rich”, NBER Working Papers No. 4964
6 This law was still important and feared into the 1980s – even though the state began to lose its ability to control capital to the same degree as before. See Amsden, A., (1989:17), “ Asia’s Next Giant: South Korea and Late Industrialization”, New York: oxford University Press

7 UN (2013: 128), Human Development Report 2013: The Rise of the South: Human Progress in a Diverse World
8Lau, L-J, (2002), “Taiwan as a Model for Economic Development”. Source: http://www.stanford.edu/~ljlau/Presentations/Presentations/021004.PDF (accessed on 12/14/13)

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almost all the undeveloped Africa has. In the last century, its real GNP per capita has grown approximately US$ 6 billion to over and above US$ 300 billion; and from slightly more than US$700 to almost US$13,000 (in 2000 prices), achieving rates of growth of more than 8 percent and 6 percent per annum respectively9. It was not affected by the East Asian currency crisis of 1997/8 because of its large foreign exchange reserves and a low external debt.

Taiwan pioneered some important economic policies by any developing country during its growth. The most important policies for this book include land reform, promotion of family planning, export–oriented industrialization, and reliance on the private sector to ultimately stimulate growth. Land reform issues are intricate and often cause brawls but Taiwan was able to reform land systems because it was partly implemented by reformers who themselves did not own any land and did not want any land for themselves. The Joint Commission for Rural Reconstruction (JCRR) played an important role in the land reform in this country.

In Africa, efforts at land reforms have failed because the most interested parties are those allegedly instituting the land reforms.

The World Bank now agrees that the countries of East Asia intervened in their economies (it was not always free market economy)10. With the break-out of the 2007/08 global financial crisis, the world got to understand that problems of market failure are not restricted to the developing countries but also the developed one.

Using examples of Japan, Republic of Korea, and Indonesia, the UN report (2013) shows that in these countries the state was involved in the market and business to promote growth. This is what the report says of these countries. Japan government built and operated state-owned plants in industries ranging from cotton to shipbuilding. It also encouraged domestic production by raising import tariffs on many industrial products11. Republic of Korea After 1961, the government achieved a position of dominance over its business class through a series of reforms, including measures that increased the institutional coherence of the state, such as the creation of the Economic Planning Board, but centred on control over finance12.For Indonesia, from the mid- 1970s, supported by revenues from newfound oil wealth, Indonesia complemented import- substituting industrialization with a major thrust in agriculture and rural development (report presents also the transformative potential of strategic investments in agriculture)13. The report also looks at India and Brazil where originally pursued similar approaches to agriculture, industrialization and growth. The report states that “Rather than merely being market-friendly, these states have been development-friendly”14.

9Lau, L-J, (2002), “Taiwan as a Model for Economic Development”. Source: http://www.stanford.edu/~ljlau/Presentations/Presentations/021004.PDF (accessed on 12/14/13)
10 The World Bank (1993:9). The East Asian Miracle: Economic Growth and Public Policy. Oxford: Oxford University Press

11 See UN HDR (2013: 66), Human Development Report 2013:The Rise of the South: Human Progress in a Diverse World
12 See UN HDR (2013: 67), Human Development Report 2013:The Rise of the South: Human Progress in a Diverse World

13 See UN HDR (2013: 67), Human Development Report 2013:The Rise of the South: Human Progress in a Diverse World
14 See UN HDR (2013:68), Human Development Report 2013:The Rise of the South: Human Progress in a Diverse World

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Government investment and support to industries

While we should not argue for government omnibus support to investors, we note that in countries suffering chronic investment funds and with high bank interest rates, there may be need to support a key investment that is important to the economy not just the regime in power. This addresses the market failure in obtaining cheap loans for investment. We also confirm that the EU not only supports some investors but subsidies the domestic famers and gives export subsidies under Common Agricultural Policy (CAP). So this will not be unique. Cited in Twineyo- Kamugisha (2012:100), competitiveness guru, Michael Porter asserts that providing direct subsidies to firms has been a prominent tool used by governments to attempt to influence factor cost and otherwise shape the competitive advantage of nations. We should note that subsidized capital, subsidized exports, and direct grants are employed by nearly every nation in one industry or another during their period of growth. South Korea, like Japan, progressed to the investment- driven stage through a system whereby government borrowed and channeled scarce capital, at subsidized rates, to selected industries15. We state that UK supported its industries during its industrial revolution. It has been observed that different British governments undertook economic and industrial policies which included protectionism (as was observed by Daniel Defoe 1728, Adam Smith, 1776, and recently by Ha Joon Chang in his writings). According to Daniel Defoe (in “A Plan of English Commerce” 1728)16, The Tudor monarchs, especially Henry VII and Elizabeth I, used protectionism, subsidies, distribution of monopoly rights, government-sponsored industrial espionage, and others policies England’s woollen manufacturing industries; and this sector was Europe’s high-tech industry during this period. These same policies were pursued by the Government of Prime Minister Walpole after 1721. Walpole’s legislation of 1721 was essentially intended to protect British manufacturing industry sector from foreign competition, subsidize them, encourage export, and this led the government to raise tariffs on imports of manufactured goods while tariffs on raw materials used in manufacturing were either lowered or even dropped completely. We note that these are very similar to the policies that were used with success during the Asian ‘miracle’ by miracle economies of Japan, South Korea, and Taiwan after the Second World War17 These protectionist policies remained in place until the mid-19th century18.

15 Twineyo-Kamugisha (2012:100). Why Africa Fails. Cape Town: Tafelberg.
16 Daniel Defoe was the author of the very popular Robinson Crusoe (1719) on a desert island and Moll Flanders (1722). He also wrote an economics book, A Plan of English Commerce (1728). He was a businessman (importing woollen products, wine, hosiery, and tobacco) before writing books. His character in Robinson Crusoe dealt in slaves. He had a varied career having been a businessman and worked as writer/novelist, tax collector collecting window tax which was a property tax paid according to a house’s number of windows, political commentator, a spy, and later an economist.
17 Failure to study economic history of industrial revolution of England has often led most researchers to write that these policies, such as duty drawback (government pays back the tax that has been paid by a company for the imported inputs used in producing a product for export) and imposition of export product quality standards by government (had been invented by Japanese policy makers in the 1950s when they were invented and implemented earlier by the British. See Chang, H-J., (2007), Bad Samaritans, Bloomsbury Press.
18 For example, in addition to the protectionist policies, Britain imposed bans on some exports from its colonies, such as cotton textiles (calicoes) from India that competed with its own products in the British home market and abroad. These products were then superior to the British ones.

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Duty drawback: a practice where government pays back the tax that has been paid by a company for the imported inputs used in producing a product for export
Imposition of export product quality standards by government: a practice where government sets the minimum standards for export products and penalises exporters who do not meet them. The main purpose of this policy and practice is prevent sub-standard export products from denting the image of the exporting country.

Adam Smith (1776) that Britain employed protectionist policies to protect domestic industries and maintain their market in the colonies and at home. Adam Smith identifies protection of domestic industries as the reasons Britain prohibited some grain and other imports of sugar and salt.

“If the whole surplus produce of America in grain of all sorts, in salt provisions and in fish, had been put into the enumeration, and thereby forced into the market of Great Britain, it would have interfered too much with the produce of the industry of our own people. It was probably not so much from any regard to the interest of America as from a jealousy of this interference that those important commodities have not only been kept out of the enumeration, but that the importation into Great Britain of all grain, except rice, and of salt provisions, has, in the ordinary state of the law, been prohibited” (Adam Smith, 1776, The Wealth of Nations)

Role of the state in developed countries after 2008 global financial crisis

The state in USA and UK began to bail out private companies to avoid the collapse of these economies. Amidst some murmurs from the citizens, the president of USA ordered the state bailout AIG (one of America’s biggest insurers) at initially US$ 85 billion, and US$ 182 billion in total19. Some experts blame government for having failed to keep a keen eye of the firms. That government failed on its role of regulation. This said, what emerges is that the government came in to protect AIG20in order to avoid its collapse and posing a danger to the financial system. According to this report21, Obama administration is not unique in supporting key companies. The Bush administration also supported key auto companies. The Bush Administration extended short- term loans to GM and Chrysler to keep the companies afloat. Amid the worst financial crisis since the Great Depression, credit markets were frozen and alternative sources of financing dried up, forcing GM and Chrysler to either seek government support or face near certain liquidations. In

19“The Financial Crisis: Five Years Later”, Executive Office of the President September 2013, Report was prepared by the National Economic Council, the President’s Council of Economic Advisers, the Domestic Policy Council, and the Office of Management and Budget. (Available at http://www.whitehouse.gov/sites/default/files/docs/20130915-financial-crisis-five-years-later.pdf (accessed on 01/01/14))

20“The Financial Crisis: Five Years Later”, Executive Office of the President September 2013, Report was prepared by the National Economic Council, the President’s Council of Economic Advisers, the Domestic Policy Council, and the Office of Management and Budget.(Available at http://www.whitehouse.gov/sites/default/files/docs/20130915-financial-crisis-five-years-later.pdf (accessed on 01/01/14))

21“The Financial Crisis: Five Years Later”, Executive Office of the President September 2013, Report was prepared by the National Economic Council, the President’s Council of Economic Advisers, the Domestic Policy Council, and the Office of Management and Budget.(Available at http://www.whitehouse.gov/sites/default/files/docs/20130915-financial-crisis-five-years-later.pdf (accessed on 01/01/14))

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response, the Bush Administration extended short-term bridge loans to GM and Chrysler but left open key decisions on how to address the crisis, in part to preserve flexibility for the incoming Administration. The collapse of GM and Chrysler would have had a cascading effect through the American economy. Similar to other parts of our economy, the American automotive industry has grown increasingly interconnected22. The collapse of GM and Chrysler could have caused the failure of other auto companies as well. In fact, observers estimated that the bankruptcy of GM and Chrysler could have resulted in 1 million jobs lost23.

This did not happen only in the US. The British government also supported key financial companies. Britain’s government offered banks like Royal Bank of Scotland, Barclays and HSBC Holdings up to £50 billion, or $87 billion, to shore up their capital in exchange for preference shares24. In fact this bailout money made the government an investor; what Margaret Thatcher has minimized with liberalization and divestiture of state enterprises in 1990. As the then Prime Minister Gordon Brown said “Our plan is to buy shares in the banks themselves and therefore we will have a stake in the banks. We are not simply giving money.”25 It will also provide a guarantee of about £250 billion to help banks refinance debt and the Bank of England will double the amount it lends to banks under the special liquidity scheme to £200 billion26.

We see that all economies come into the operations of the market to stabilize the economy to avoid macroeconomic instability that affects growth of economies.

22“The Financial Crisis: Five Years Later”, Executive Office of the President September 2013, Report was prepared by the National Economic Council, the President’s Council of Economic Advisers, the Domestic Policy Council, and the Office of Management and Budget.(Available at http://www.whitehouse.gov/sites/default/files/docs/20130915-financial-crisis-five-years-later.pdf (accessed on 01/01/14))

23“The Financial Crisis: Five Years Later”, Executive Office of the President September 2013, Report was prepared by the National Economic Council, the President’s Council of Economic Advisers, the Domestic Policy Council, and the Office of Management and Budget.(Available at http://www.whitehouse.gov/sites/default/files/docs/20130915-financial-crisis-five-years-later.pdf (accessed on 01/01/14)) 24http://www.nytimes.com/2008/10/09/business/worldbusiness/09britain.html?_r=0

01/01/14) 25http://www.nytimes.com/2008/10/09/business/worldbusiness/09britain.html?_r=0 01/01/14) 26http://www.nytimes.com/2008/10/09/business/worldbusiness/09britain.html?_r=0 01/01/14)

(accessed on (accessed on (accessed on

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References:

“The Financial Crisis: Five Years Later”, Executive Office of the President September 2013, Report was prepared by the National Economic Council, the President’s Council of Economic Advisers, the Domestic Policy Council, and the Office of Management and Budget. (Available at http://www.whitehouse.gov/sites/default/files/docs/20130915-financial-crisis-five-years- later.pdf (accessed on 01/01/14))

The World Bank (1993): The East Asian Miracle: Economic Growth and Public Policy. Oxford: Oxford University Press

Lau, L-J, (2002), “Taiwan as a Model for Economic Development”. Source: http://www.stanford.edu/~ljlau/Presentations/Presentations/021004.PDF (accessed on 12/14/13)

Amsden, A., (1989). Asia’s Next Giant: South Korea and Late Industrialization. New York: Oxford University Press

Baran, P., (1957), “The Political Economy of Growth”, monthly Review Press, New York

Chang, H-J., (1999), “The Economic Theory of the Developmental State”, in Woo-Cummings, M., (ed.), The Developmental State, Cornell University Press, Ithaca and London.

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Krieckhaus, J., (2004): “In Praise of the State”, Issues & Studies 40, no. 1:46-60. Maddison Angus: The World Economy: A Millennial Perspective, OECD (2001: 218)

Rodrik, D., (1994), “Getting interventions right: how South Korea and Taiwan grew rich”, NBER Working Papers No. 4964

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Sung, YK., (1990), “The Economic Development of the Republic of South Korea 1965-1981” in Lau, L., (ed.), Models of Development: A Comparative Study of Economic Growth in South Korea and Taiwan. San Francisco, CA: ICS Press

Stiglitz, J., (2012): The Price of Inequality. W.W. Norton & Co., Inc.

Edsall, T.B., (2012), “Separate and Unequal: The Price of Inequality by Joseph E. Stiglitz” source:http://www.nytimes.com/2012/08/05/books/review/the-price-of-inequality-by-joseph-e- stiglitz.html?_r=0 ( accessed on 12/8/13))

Tussie, D., and Marcelo Saguier, M,(2011), “The Sweep of Asymmetric Trade Negotiations: Overview”, Region, Regionness and Regionalism in Latin America: Towards a new synthesis; Serie Working Paper 130, Abril 2010 (To be published in Bilal, S., de Lombaerde, P., and Tussie (eds.), The Sweep of Asymmetric Trade Negotiations: Problems, Processes and Prospects. Ashgate 2011

Wade, R., (1990): Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton, N.J: Princeton University Press

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