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Like most Chinese cities, the eastern
city of Hangzhou has seen rapid
growth and a spreading urbanization
as China has industrialized.
CONTEMPORARY ECONOMICS
Industrial policy
and incentivesThe East Asian developmental
states gave preferential
treatment to firms in favored
sectors while creating
incentives for performance.
They did this by requiring
enterprises to meet
performance criteria, partly
through contests in which
firms competed for prizes.
Typically, the criterion
for winning was successful
exports. The prize was credit
lines or access to foreign
exchange. In South Korea and
Taiwan, for instance, firms
had to show proof that they
had won an export order. Only
then did they receive their
prize. South Korea launched
competitions in which private
firms bid for large projects
in new industries such as
shipbuilding. Successful firms
received protection from the
international market for a
time. Performance criteria
involved firms becoming
internationally competitive
by a certain deadline. Failing
firms were punished.The South Korean steel
industry was a big success of
the developmental state. By 2011,
South Korea was the sixth largest
steel producer in the world.bureaucracy needed to hold
detailed information about all
potential investments, and to
maintain effective relationships
with industrial managers.
US economist Peter Evans has
called these markers of successful
developmental states “embedded
autonomy.” Only when this is in
place is there a chance for a state
to “get prices wrong” without
being co-opted by vested interests.
Embedded autonomy is not easy
to create, and its absence may be
a factor behind the poor outcomes
of state intervention in other
developing regions.
The rise of China
With the East Asian financial crisis
of the 1990s the developmental
state model was again called into
question. Many sensed that the
institutions that had fostered rapid
industrial growth after World War
II had lost their potency by the late
20th century. On the other hand
the spectacular rise of China
has resurrected the idea of the
developmental state, or at the very
least of policies and institutions
that produce rapid economic
transformation while deviating
from the prescriptions of standard,
classical economics.
China began a series of reforms
of its communist system in the
late 1970s. It created its own brand
of developmental state, which
resembled the Asian Tigers, and
had an authoritarian government
that was responsible for promoting
the private sector and exports.
Agriculture was de-collectivized,
and state-owned industries
were given more autonomy and
subjected to greater competition.
These reforms helped unleash
a vast expansion of private
economic activity, without the
introduction of Western-style
property rights.
Alternative incentives emerged
from China’s unique institutions:
for example, from the “Household
Responsibility System,” whereby
local managers are held responsible
for an enterprise’s profits and
losses, without the need for private
property ownership. The results
have been dramatic. While China
remains poor relative to Western
Europe, its rapid growth took 170
million people out of poverty during
the 1990s, accounting for three-
quarters of the poverty reduction
in developing regions.
The histories of China and
the Asian Tigers show that there
is no unique path to development.
The way that their states
intervened in the economy was
very different from anything that
took place in Europe when it was
developing. However, it seems that
all development models, even
successful ones, eventually run
into constraints. The benefits of
the development state petered out
in the Asian Tigers in the 1990s—
institutions that had worked in one
decade began to fail in the next.
One day the Chinese state, too,
may lose its potency. It may have
to reinvent itself if its spectacular
rise is to continue. ■