investment between 1971 and 1977 and 40 per cent of a much higher total after
- Growth doubled from an average of 3 per cent between 1970 and 1977
to nearly 6 per cent between 1977 and 1985. This was led by a huge surge in
investment, from 14–16 per cent of GDP before 1978 to 33.7 per cent in 1980
(Bruton, 1992).
From the free market to the state–business alliance
Although Keynes doubted the ability of the market to ensure a stable level of
investment, he did argue that the market was good at allocating investment
between different sectors. Entrepreneurs, he considered, would be adept at
investing in growing more oranges if selling them was more profitable than
selling apples. Keynes was writing about developed countries. An alternative
and more realistic view for developing countries is that state intervention is
needed not only to stabilize investment, but also to ensure that it is directed
towards those sectors crucial to long-run growth and development. One inter-
pretation of this role is a state–business alliance, whereby the state promotes
investment through policies that enhance the profitability of existing busi-
nesses. There is a clear difference between such a strategy and free-market
liberalization. Pro-market reforms aim to ease the entry of new businesses and
encourage competition between existing businesses,new entrants and foreign
imports. As a result, they are likely to reduce the profitability of the former.
Governments have acted to increase profitability in various ways. The
increase in growth in India around 1980 has been ascribed by some to the state
adopting a pro-business strategy that resulted in higher profits and investment.
The pro-business policies included withdrawing constraints on existing busi-
nesses to expand or enter new areas of production,liberalizing access to credit,
tax relief for big business, undermining the strength of trade unions, and main-
taining an expansionary fiscal policy (Rodrik and Subramanian, 2004; Kohli,
2006). In South Korea and Taiwan during the 1960s and 1970s the state
brutally suppressed trade union organization, to prevent profits being diverted
to higher wages. In South Korea (Amsden, 1989:152) and Taiwan (Wade,
1990:185) in industry generally, and in Malaysian banks (Koy-Fay and Jomo,
2000),price controls prevented firms competing with one another on the basis
of price, thus undermining profitability. In Singapore the government used its
monopoly control over public utilities to raise the prices of water, energy and
telephones to boost the profitability of public enterprises and so raise resources
for public investment (Huff, 1999).
The other main element of a state–business alliance is to ensure that profits
are used to boost productive investment, to expand output and exports. There
would be no investment if profits were used to increase executive salaries or
returned to shareholders as dividends. During the early stages of industrializa-
tion there is a need for the state to co-ordinate complementary investments
(Rosenstein-Rodan, 1943; Scitovsky, 1954) so that interdependent investment
projects are implemented at the same time. A simple example is that of a steel
Domestic and Foreign Direct Investment 73