Since the Reagan-Thatcher revolution in the mid eighties and up to the Global Financial Crisis in 2008-2009, economic policy has globally been dominated by neo-liberalism, both in the global North and in the global South. It means free and unregulated markets, free capital movements, free trade, minimal state intervention and an unprecedented concentration of economic power in a limited number of transnational companies, in short: neoliberal globalisation. However, the global financial crisis in 2008-2009 led many to doubt the wisdom of neo-liberalism, and hence to search for alternatives.
In the developed countries, what we could call a Neo-Keynesian policy has been presented as a centrum-left alternative to neo-liberalism: active use of public expenditure to stimulate demand, redistribution of incomes through the tax system, subsidies for “green investments”, and increased environmental regulation. However, this option has serious limitations as it can be seen just now both in the US (deficits and spiralling debt) and the EU (stagnation), which we shall come back to in a later article.
However, Neo-Keynesianism is not an option for developing countries where the problem is not lack of demand, but rather a lack of (competitive) production capacity. As the local industry is weak, most consumer goods are imported, and increased domestic demand will simply lead to inflation or a balance of payment crisis (or both).
An increasing number of developing countries are now looking to what we could call neo-developmentalism. The prefix ‘neo’ is because ‘developmentalism’ was widely practised in many developing countries in the fifties, sixties and seventies, but due to macro-economic unbalances and unsustainable external debt, it became unviable in most countries in the eighties, and they turned instead under the heavy hand of IMF & Co. to neo-liberalism.
Developmentalism is not a well-defined concept. It is related particularly to developing countries trying to catch up with the developed countries, and is thus historically a strategy to close the gap with these countries. It was originally coined by US economist (and at that time CIA consultant) Chalmer Johnson to describe the Japanese ‘economic miracle’ after World War II. It implies, among others, a strong state with an active industrial policy in an otherwise capitalist economy, where subsidies, tariffs, preferential credits and other measures are deliberately used to strengthen (or create) domestic industries, that are considered to be important for prosperity and for being able to compete in the world markets in the future. It is historically also accompanied by a relatively egalitarian policy to ensure popular backing. This is what Japan did in the post-war decades, the East Asian ‘tigers’ in the eighties and nineties and China during the last couple of decades. After its catastrophic love-affair with neo-liberalism in the nineties, Russia too has been following a developmentalist policy since 2014, and in particular since the start of 2022. Presently it is becoming increasingly popular in the global South too, not least in India, Indonesia, Vietnam, Brazil and Mexico. Some African countries are also toying with the idea, among these Ethiopia and Rwanda.
When Japan started to rebuild in the fifties, still under US occupation, the Ministry of Trade and Industry (MITI) insisted on developing the car industry. The American advisers were against, as it was contrary to neoclassical theory: They would never be able to compete with US and European producers, and should instead concentrate on the production of toys, textiles and garment, where they were supposed to have a comparative advantage. We now know how that ended: In the eighties Japan was already the world’s leading car producer. On the photo the low-cost Datsun Sunny, which became a symbol of the Japanese middle class in the 1960s.
Sometimes developmentalism is referred to as the ‘Japanese Model’, the ‘South-East Asian Model’ or more recently the ‘Chinese Model’, but this is not very helpful. While neoliberalism is a ‘one-size-fits-all’ model, and has been applied as such to developing countries by IMF and the World Bank with support from supposedly well-meaning developed countries as part of their development aid, developmentalism is a very specific, national policy which depends on the country’s endowment with natural resources, the qualifications of the labour force, the capacity of its universities, the capacity of its bureaucrats, the history of its productive sector, its institutions, and so on. In short, history matters. For this reason, even if there are many similarities, the experiences from Japan, East Asia and China are also quite different.
Developmentalism comes in many variants. To avoid misunderstandings, when I refer to developmentalism I am not referring to any specific ‘model’ (including that of the Brazilian economist Bresser-Pereira, who promotes are very particular variant), but more generally to an activist state in a capitalist economy, actively implementing industrial policies to change the economic structure and develop the country. As I see it, developmentalism is a very pragmatic policy, based mainly on common sense. As Deng Xiaoping stated it: ‘Crossing the river by feeling for the stones’, which means that it is to a high degree a trial and error process, not a preconceived blueprint.
In the sixties, the Government of South Korea under its dictator General Park Chung Hee decided that the country should have its own iron and steel industry. The country had no experience in steel making and it had to import both iron ore and coal, so according to neoclassical economic theory it was madness. With funding and technical assistance from Japan, the State-Owned “Pohang Iron and Steel Company” (POSCO) was set up. In 2015 it was the World’s 6th biggest steel manufacturer. It was privatised after the 1997 Asian crisis. Photo: Gwangyang Steelworks. Wikipedia
I wouldn’t call policies which just imply investments in infrastructure (roads, railways, electricity generation, water supply and so on) and a pro-business environment developmentalist. These are rather part of normal neoliberal policies, with infrastructure investments often concessioned to private investors. These policies, generally promoted by IMF, the World Bank & Co have not been particularly successful, neither in middle income countries, nor in poor countries. Nor would I call developmentalist a simple redistribution of the rent from the export of oil, gas and other natural resources in favour of the poor, as was the case for example in Lula’s first presidency in Brazil. Developmentalism as I understand it, is a deliberate intent to change the productive structure of a country. Infrastructure investments are a necessary part of it, and there is in most cases also an element of redistribution towards the poorer segments of the population. So we could say that these measures are necessary, but not sufficient to achieve changes in the structure of the economy.
Developmentalism has always been controversial: disliked by neoclassical and Keynesian economists because it interferes with market mechanisms and hence distorts the markets, and by many Marxists who consider a capitalist way to development a dead-end for different reasons. Even so, it attracts many countries as a pragmatic way to development.
Why is that?
Firstly, after the dissolution of the Soviet Union and the failure of neo-liberalism, there are few alternatives for developing countries.
Secondly, even if there is no simple ‘model’ that can be followed, it is too obvious that it has actually worked in several places. This is a very strong argument for it: ‘If the Japanese, the South Koreans and the Chinese can, why can’t we?’
Thirdly, even if many leftists reject it as it can easily lead to super-exploitation of workers in its initial stage, the few historic examples of jumping directly from a low level of development to socialisation of the means of production have not been very successful in generating economic growth in the longer run. This includes China and is the very reason for the political shift in that country back in the eighties. It also includes Cuba, where they are now looking for ways to find new, more pragmatic ways to develop the economy.
The early industrialisation in Europe and the US was marked by extreme exploitation, including child labour. Marx called it ‘ursprüngliche akkumulation’, as the profits accumulated by the industrialists permitted these to expand production (and generate more profits). Can developing countries develop without going to these extremes? Photo: Breaker boys sort coal in an anthracite coal breaker near South Pittston, Pennsylvania, 1911. Wikimedia commons.
Fourthly, one of the main challenges for development is how to finance the policy – what Marx called ‘ursprüngliche akkumulation’, or primitive accumulation. However, many developing countries actually have abundant natural resources and the rent from these could finance industrialisation without requiring excessive sacrifices from the majority of the population as the primitive accumulation did in Europe, the US, the Soviet Union and China. The main problem is political, as the governing classes see it as their birth right to appropriate these rents, but if this political challenge can be overcome, there is a possibility for development. Possibility, no guarantee, as we have seen in Venezuela where most of the rent was squandered away.
Many will say that this sounds good, but widespread corruption means there is little chance that it will actually work. Corruption is indeed a common problem in developing countries, poor as well as middle-income. Corruption is bad for economic development, but history shows that it doesn’t necessarily impede it. Corruption was widespread during the early industrial development in the US in the end of the nineteenth century, the socalled ’Gilded Age’, a period characterized by rapid economic growth, enormous riches for some and abject poverty for others. That is why Mark Twain called it ‘Gilded’: ‘What is the chief end of man?--to get rich. In what way?— dishonestly if we can; honestly if we must.’ For more recent experiences, look at the economic growth after WWII in Italy, Japan and South Korea, all countries with widespread corruption, or look at China and India today, a lot of corruption and at the same time break-neck economic growth.
So in my opinion there is actually a case for developmentalism in developing countries.
In the next article we will look at the political challenges it implies.
