Selina Ahmed

The economic role of the state has managed to hold the attention of scholars for over the two centuries. For the discussion of the relevance of the state to economic development i will refer to the east Asian NICs, mainly focusing on South Korea and Taiwan. The state occupies a central place in regards to the economic development of East Asian NICs. The recent effort at "bringing the state back in" has given rise to a number of conflicting definitions of the term . These are : the state as government ("by which is meant the collective set of personnel who occupy positions of decisional authority in the policy"), the state as "public bureaucracy or administrative apparatus as a coherent totality" and as an institutionalised legal order, the state as ruling class and the state as normative order ( Bringing the state back in, 1985). Which ever way one defines the state, if one examines the economic success of Taiwan and South Korea it is evident that the state played a major role. However, the extent of state intervention regarding economic development is still debated. The two main strands of thought of East Asian economic success are the "self-adjusting market" ( takes neo-classical free market view) and the "governed market" view, these will be further discussed.

Within the space of thirty years, Taiwan and South Korea have reached far up the economic hierarchy of nations as to become competitive in a range of capital-intensive and high-technology industries. Taiwan moved from the world’s sixty-fourth biggest exporter in 1962 to eleventh in 1986 , South Korea from 101st in 1962 to fourteenth in 1986 ( World Bank Atlas data). This export performance occurred at the same time they were undergoing the most “compressed” transformation from light to heavy industries . Their ratio of value added in light industries over heavy industries fell from 4 to 1 in fifteen years, compared to twenty-five years in Japan and fifty years in the United Kingdom ( Watanabe, 1985). South Korea may become the first new producer in two decades to break into the oligopolized world car industry, and it is one of the world’s three main fabricators of large capacity (VLSI) memory chips. Taiwan is a leading source of computers, computer peripherals, and add-ons; it is up with the world leaders in semi-conductor design; and it has become one of the biggest sources of car replacement parts. Several other industries in both countries are very competitive internationally, including steel and machine tools. Taiwan, South Korea and pre-1970 Japan, three of the most successful cases of economic development on record ( until recent crises in Korea) and in all three cases the government played a crucial role in building up the competitiveness of the domestic economy. One must look at what the government did to pursue these objectives for example what policies they used, what institutional arrangements they fostered in both public and private sectors. It is also essential to look at the extent to which state intervention led or followed the market. Selective industrial policy that follows the market simply assists private firms in a given industry to do what they would in any case do in response to price signals. A selective industrial policy that leads the market involves: government initiatives about what product and technologies should be encouraged; public resources or influence over private resources to carry through these initiatives, and a larger before-the fact plan or strategy.

One popular interpretation of East Asian success holds that, it is due to the vigour of private entrepreneurs operating in relatively open economies. Openness and governmental restraint have allowed prices to reflect real, as distinct from policy -induced, scarcities, and these prices have led entrepreneurs to overcome the limitation of small market by exporting manufactures at competitive prices. By contrast countries adopting in ward looking strategies based on the domestic market have stagnated because of limited economies of scale and regulation needed to support the inward-looking strategy choked the initiative of private business people. This has been termed by Wade as “self-adjusting market” theory of capitalist East Asian success. This theory recognises that strong government action was necessary to eliminate earlier import- substitution policies. But once the dials were correctly set in favour of a more neutral set of incentives, the role of government has been limited largely to improving the infrastructure of the market system and preventing a shift in the dials due to "politics." The very openness of the economy and the smallness of the public sector kept the state firmly in its place. There are many literature supporting one or another variant of this interpretation. The World Bank's World Development Report 1987 classifies South Korea as a "strongly outward oriented" economy' meaning that it had a relatively neutral set of policy incentives ( neutral as between export sale and domestic market sale, and neutral as between different industries). The neo-liberal interpretation also supports some of the variants of this interpretation. They argue that the east Asian were more successful than others in terms of lone-run growth because, in essence, they stuck more firmly to the prescription for short-run efficient resource allocation derived from the theorems of neo-classical economics, which sees out oriented trade regime as key development policy. In neo-liberal view growth is a natural or inherent property of capitalist economies. They also stress that getting the price right necessary and sufficient condition for maximising the rate of growth ( getting in the sense letting the price find their right level, and "right" in the sense of the relative prices established in freely operating domestic and international market.) Government have an important role in providing "public goods," such as physical infrastructure, law enforcement, macroeconomic stability etc. But beyond that they should not go , except in those rare cases of market failure . East Asian government have stayed within these limits, hence they were more successful.

However the other conflicting view holds that the role of the state has gone well beyond the limits of the self-adjusting market theory. Those who hold this view do not deny the importance of markets and private property and do not imply that the government’s role comes to Soviet or Cuban-style central planning. The argument is rather that East Asian governments have been active players in the market, able to influence the use of the public and private resources in line with a vision of how the industrial structure of the country should be evolving. They can be seen as both as Wade suggests the rule maker and the first player in a multistage game, whose moves influences the credible options of the other players. It is further argued that government intervention of this type have in fact been able to improve upon the results of self-adjusting markets. Hence not only the macro policies of East Asian governments been important, but so has intervention at the sectoral, product and even firm level. This could be called the "governed market" or the "developmental state" theory of East Asian success. Alice Amsden takes similar view to this to explain the economic success of South Korea. She argues that the Korean state has acted as entrepreneur, banker and shaper of the industrial structure. It has deliberately distorted the price structure by way of among other things, subsidies, protection, price controls, and restriction on incoming and the outgoing movements of finance and direct investment. By means of these distortions, it has generated an industrial structure different from what unguided entrepreneurs would have produced on their own. The actions of the Korean states have been complemented by those of large, diversified business groups that have come to occupy a dominant position in the economy so much so that the combined sales of top ten rose from 15% of GNP in 1974 to 67% in 1984 ( Amesden). With firms of this size and level of diversification high proportion of transactions are in interfirm, less subject to the discipline of the market than to the discipline of marginal hierarchies. The state not only actively promoted the growth of the business groups, it also disciplines their use of subsidies and other supports, rewarding those who use subsidies well with further help and withdrawing support from those who do not. These factors suggest an economy in which government and firms depart quite substantially from the neo-classical model of a successful industrializer. However there is a striking fact about Korean experience consistent with neo-classial precepts: whereas the government restricted and channelled competition in the domestic market, it also strongly encouraged firms to export, thereby subjecting them to intense competition in foreign markets. Success in export markets came to be the main criterion of good use of subsidies.

Robert Wades makes a comparison between Taiwan and South Korea. He argued that when the Taiwan government has wanted to give a big push to some sector it has often relied on direct state involvement, either through existing public enterprises, in the case of capital intensive and standardised production, or through sate research organisations, in the cases of new high - technology sectors. It attempts to pressure private firms more indirectly than Korea, via import controls, domestic content requirements, entry restrictions, and tax incentive and it is more hesitant to force mergers and divisions of labour. The Korean government have used direct and indirect pressure on the big conglomerates( which it helped to create) by means not only of import controls, entry restrictions, but also through large amount of concessional credit and other subsidies and direct instruction backed by the ability to cut off credit and foreign exchange ( Chu, 1987). Wade also suggest that Taiwan's public enterprises have been the equivalent of Korea's chaebols, with the very important qualification that they are much smaller in size and less multisectoral. He states that the differences in overall style can be seen in the differences between Taiwan's ERSO and Korea's KIET (or ETRI). Both played leadership role in the mastery of semiconductor and computer technologies and both have been publicly owned. But ERSO is bigger, gets more of its revenue from government grants and less form industry contracts, and lacks KIET's elaborate consultative arrangements with industry. And whereas ETRI has moved to what could be described as a "big follower ship" role, ERSO in a "big leadership" role. Wade also suggests several reason for the differences in the instruments of leadership, they relate on the Taiwan side , (1) the absence of very large Korean and Japanese style firms and business groups, (2) a tenacious suspicion of big Chinese capitalists among Taiwan's industrial policy makers for most of the post-war period and (3) the ethnic tension between the mainlander-dominated government and the native Taiwanese business sector. As a result, there has been greater conflict of interest between the state and the private sector. Wade also states that over time there has been a decline in the role of government in Taiwan but government still intervenes in a leadership role to push the international competitiveness of industries. Although Taiwan's large segment of small scale firms been little affected by government intervention, but they are linked to and often get assistance from upstream suppliers, hence their performance cannot be isolated from that of a large scale segment.

Stephen Haggard takes a different approach regarding the East Asian success and the Latin American failure. "The crucial difference between the East Asian and Latin American NICs", he says, " is the difference between industrialisation through exports and import substitution". For the "success of the East Asian NICs rested not only on certain discrete policies but on the particular political and institutional context that allowed the NICs to adopt those policies in the first place". Conversely, the relative failure of the Latin American NICs was due to a political and institutional context that strongly inclined the government to adopt and maintain policies of secondary import substitution, despite the slower growth and income-unequalizing effects of those policies.

However none of the interpretation discussed above take into account the impact of the world system. When Korea and Taiwan began their rapid rise up early to mid 1960's several circumstances came together in the world economy that facilitated the NICs phenomenon. First, transport costs and trade barriers in core market ( North America and North Western Europe) were trembling. Second, competition intensified within the U.S. market, especially with the entry of Japanese manufactures. Third, the accumulation of higher skills in the core work force made "unskilled" labour scarcer and therefore more expensive, which enhanced the comparative advantage of lower-income countries with a less-skilled labour force and demand for imports produced by such labour. All those factors prompt U.S. buyers to search out low-cost suppliers. Latin American's natural resource supported an exchange rate and wage rate too high to compete in world manufacturing markets against countries at similar income levels but without natural resources. Korea and Taiwan benefited, as they had no natural resources, labour was their main resource, hence more emphasis was put on education and empowerment of the labour force. They were also blessed by geopolitics, located near communist Asia. They took great importance in U.S. eyes, which reinforced U.S. concern for their growth, thereby translated into massive aid, good access to the biggest, richest market in the world and U.S. tolerance of their import barriers and state support of U.S. companies wishing to invest there. However these opportunities could have easily been misused but in Korea and Taiwan the existence of a state apparatus that was both authoritarian in relation to its subjects and disciplined within itself, and that used its power to pursue the goals of military strength and national economic wealth.