The Developmental State:A Case Of China

1. The Developmental State:A Case Of China Dr. Miao Wu

2. o utline 01 02 Introduction: Asian Miracle The developmental state:a brief literature 03 04 03. From central planning to developmental state in China The developmental state in China 05 06 The end of developmental state? The debate with the China’s model

3. 01.Introduction:the Asian Miracle The rapid growth in East Asian economies after World War II has become an eye-catching focus in academic for a long time. Some of the best prospects for economic growth in the last few decades have been found in East and Southeast Asia. Japan, South Korea, Singapore,  India, Thailand,  Taiwan,  Vietnam,  Malaysia,  Philippines, and Indonesia are developing at high to moderate levels. Thailand, for example, has grown at double-digit rates most years since the early 1980s.

4. The extraordinary growth enjoyed over the last several decades by many East Asian countries has amounted to nothing less than an economic miracle. Employing unorthodox policies, Hong Kong, Indonesia, Japan, Malaysia, the Republic of Korea, Singapore, Taiwan, and Thailand have all produced dramatic results with far-reaching improvements in human welfare and income distribution, leading many to ask whether a similar achievement can be duplicated elsewhere. Written for the nonspecialist, this World Bank Policy Research Report--the first in an important new series--discusses in detail the means by which these high-performing Asian economies (HPAEs) realized their staggering success between 1965 and 1990. Examining how these countries stabilized their economies with sound development programs that led to fast growth, the book also shows how they shared the new prosperity by making income distribution more equitable. The book makes clear how the HPAEs promoted rapid capital accumulation by making banks more reliable and encouraging high levels of domestic savings, while universal primary schooling and better primary and secondary education quickly increased their skilled labor forces. Also included are illustrative examples of productive agricultural programs, modest tax policies, the modification of price distortions, foreign technology and investment, and the cooperation of government and private enterprise. Exposing to a broad audience the revolutionary process that transformed East Asia into the collection of economic juggernauts that it is today, this provocative World Bank report offers wisdom for today's up-and-coming markets, highlighting the policies that will make a difference as well as those that, despite their effectiveness in the Orient, could prove disastrous elsewhere.

5. GDP per person annual average % change,1965-96

6. China and other major developing economies by GDP per capita at purchasing-power parity, 1990–2013. The rapid economic growth of China (blue) is readily apparent

7. GDP per person at purchasing-power partity

8. Change of Real GDP per person in Asian star coutry

9. Times of GDP expansion between 1950 with 1999 in15 economies

10. It is important to note that in most of these Asian countries, it is not just that the rich are getting richer, but the poor are becoming less poor. For example, poverty has dropped dramatically in Thailand. Research in the 1960s showed that 60 percent of the people in Thailand lived below a poverty level estimated with cost of basic necessities. By 2004, however, similar estimates showed that poverty there was around 13 to 15 percent. Thailand has been shown by some World Bank figures to have had the best record for reducing poverty per increase in GNP of any nation in the world.

11. Trend of Calorie consumption

13. A considerable amount of literature has attempted to interpret the rousing phenomenon. However, no consensus about the nature and causes of the remarkable development has been reached, and explanations are contentious. But no one can deny that all successful cases discussed are associated with state intervention to a significant degree.

14. Political scientists are fond of ‘typologies’. Political systems are of this or that kind, and one way to explain individual systems is to determine which type they belong to. One such category is ‘the developmental state’. This is a type of state that has been seen to evolve in East Asia in the latter part of the last century when the ‘tigers’ displayed remarkable development.

15. 02.The developmental state:a brief literature 2.1 the origin of developmental state 2.2 The characteristics of the developmental state 2.3 the dichotomy within the DSP(developmental state paradigm) 2.4 why is the developmental state 2.5 The spread of the concept of developmental state

16. 2.1 the origin of developmental state The first person to seriously conceptualize the developmental state was Chalmers Johnson. Johnson defined the developmental state as a state that is focused on economic development and takes necessary policy measures to accomplish that objective. He argued that Japan's economic development had much to do with far-sighted intervention by bureaucrats, particularly those in the Ministry of International Trade and Industry (MITI). He wrote in his book MITI and the Japanese Miracle: In states that were late to industrialize, the state itself led the industrialization drive, that is, it took on developmental functions. These two differing orientations toward private economic activities, the regulatory orientation and the developmental orientation, produced two different kinds of business-government relationships. The United States is a good example of a state in which the regulatory orientation predominates, whereas Japan is a good example of a state in which the developmental orientation predominates.

17. The description of the “pilot agency”–The Ministry of International Trade and Industry (MITI)—in Johnson’s book provides a good starting point to understand the characteristics of developmental state. As an institution supervising the enforcement of “industrial rationalization” and “industrial structure policy”, MITI was endued with the legitimacy and authority to regulate and decide Japan’s provision and administration of new capital. Given such a strong power, the MITI is described by Johnson “the greatest concentration of brainpower in Japan”.

18. Definition: Developmental state, or hard state, is a term used by international political economy scholars to refer to the phenomenon of state-led macroeconomic planning in East Asia in the late twentieth century. In this model of capitalism (sometimes referred to as state development capitalism), the state has more independent, or autonomous, political power, as well as more control over the economy. A developmental state is characterized by having strong state intervention, as well as extensive regulation and planning. The term has subsequently been used to describe countries outside East Asia which satisfy the criteria of a developmental state. 

19. It is believed that, historically, developmental state existed in Bismarck’s Prussia and in Japan during the Meiji era. The governments of those states followed a state designed developmental path and until now have been favoring a state interventionism over a liberal open market, be it in the form of East Asian fast developer or of what later became the continental-European model of a capitalist welfare state. It is, however, the research on East Asia which eventually prompted the theory’s formulation and allowed for it to be implemented in the scholarly debates and literature.

20. 2.2 The characteristics of the developmental state

21. 2.2.1The developmental state is of strong ambition to develop it has a political and policy elite committed to economic growth and transformation, with the power, authority and legitimacy to promote a developmental agenda. Often motivated by strong nationalist sentiments, such elites strive to modernize their countries, raise economic living standards and bridge the technological gap. Economic growth is the top priority of the national interest.

22. 2.2.2 Embedded autonomy “Embedded autonomy”which connects bureaucracies and the surrounding social structure intensely is the key to the effectiveness of developmental state. Close relationships are established between elite bureaucracy and private sectors. Business and industry is under the state’s guidance. Though the state does not replace private ownerships directly, it intervenes and instructs private sectors according to national strategies. complementing such a development-focused elite is a competent, authoritative state administration, particularly in the economic sphere, with the technical and managerial capacity to guide and steer economic and social development, such as MITI (the Ministry of International Trade and Industry) in Japan or the Economic Planning Board in South Korea. Both the political and policy elite and state institutions in general are relatively autonomous from particular vested interests, allowing them to stand above the demands of specific social groups, whether defined by class, ethnicity or region, to shape policy for a broader, national interest.

24. 2.2.3 The developmental state has a strong and active central government developmental states tend to have weak civil societies, poor civil and political rights records and repressive political regimes — although Adrian Leftwich has opened this up for debate by drawing a distinction between democratic developmental states such as Botswana, Malaysia and Singapore, and non-democratic developmental states, such as China, South Korea (1960–87) and Taiwan (up till the mid-1980s). “Pilot agency” plays a crucial role within technocratic policy bureaucracies. Policy instruments are formulated by a small group of qualified elites in economic policy bureaucracy.The authors identify three components to state capacity: 1) fiscal capacity (administrative infrastructure for raising taxes with a broad base, such as income tax as distinct from tax on concentrated resource rents); 2) legal capacity (support for property rights and limits on private and public predation); 3) capacity to make productive infrastructure investments (roads, power systems, etc.).

26. 2.2.4 the achieved outcomes The economic policy bureaucracy is consisting in a political network which offers sufficient space in initiative-taking and effective operation. developmental states are defined not only by their normative agendas, their political and institutional structures, and state–society relations, but also by their achieved outcomes. Developmental states deliver rapid economic growth as well as general well-being, measured in terms of social indicators such as literacy, health status, life expectancy and per capita income. Taking the Human Development Index as a broader measure of achievement than merely economic growth, the performance of developmental states is striking. Contrary to neo-liberal assertions that the benefits of growth will eventually trickle down to the poor, developmental states demonstrate a capacity to combine economic growth with a good dose of redistribution.

27. 2.3 the dichotomy within the DSP The original developmental state paradigm (DSP) used inductive study of cases perceived as successful, especially the East Asian tigers, to posit a model of state-directed development emphasizing the autonomy of the state to pursue policies correcting for market imperfections typical of developing countries. Many of the works build on the dichotomy within the DSP of economic and political approaches. Economic approaches tended to focus on the policies chosen to correct for market failures, mostly trade protection and promotion, stimulating investment, and directing finance. Political approaches tended to focus on the bureaucratic insulation from but close communication with powerful interests, “embedded autonomy.” The approaches combined to build a powerful statement on the requirements of late industrialization, “what policies are to be adopted and what allows them to be adopted” .

28. 2.4 The spread of the concept of developmental state As a pioneer in this scope, Johnson is followed by many scholars. The developmental state model has become one of the main stream explanations. However, within the framework, arguments on specific questions still exist. For example, is the developmental state fostered by particular culture and history, what is the territory range for developmental state, can the developmental sate experience in East Asia be transferred, and so on. What’s more, because of the pre-assumption of state intervention, the developmental state model to some extent is regarded as a causal theory contributing the rapid economic growth to dynamic state actions, which may not always be true, but at least partially the fact. With further evolvement of the theory, coverage of the developmental state is expanded beyond the primary core regions. Many scholars are trying to apply this model in analyzing various countries elsewhere, for instance, India, Latin American, and even France.

29. Whilst the concept of the developmental state was advanced initially to distinguish different routes to and models of capitalist development, White extended it to describe a particular type of state socialist development. The key features of the socialist developmental state are the virtual elimination of private industrial capital, all-pervasive controls over the economy, and a state that, at least initially, represents the interests of a revolutionary coalition. Given the centrality of the capitalist economy to the definition of the developmental state, it can be convincingly argued that pre-reform China and other state socialist regimes do not by definition belong. By capturing the term, however, scholars such as White were endeavouring to demonstrate, in an ideologically-charged political and intellectual environment, that there were alternatives both to the neo-liberal capitalist path and non-developmental, predatory state formations such as Zaire under Mobutu or Haiti under the Duvaliers.

30. 03. From central planning to developmental state in China 3.1 the background of developmental state 3.2 China's gradualism reform 3.3 stages of reform in China

31. 3.1 the background of developmental state China's leadership under central planning gave high priority to rapid industrialization. Indeed. industrial production grew in real terms by 10.5 per cent per annum over the period from 1952 t0 1978. On the other hand, real GDP per capita increased annually by only 3.0 per cent. Worse still, the real consumption per capita of rural households - representing over 80 per cent of the population - rose on average by only l.4 per cent per annum between 1952 and 1978. and people had suffered from the traumas of the Great Famine and the Cultural Revolution during the intervening period. China had neither the firmity of purpose nor the policies to be a developmental state under central planning. Politics, and not economics was in command.

32. 3.2 China's gradualism reform The road from central planning to developmental state had to overcome three initial obstacles: weakness of leadership, bureaucratic inertia and vested interests. China embarked on gradual, step-by-step economic reform. with one reform leading to another. It was governed by two criteria: it had to be efficiency enhancing and it had to be interest compatible.

33. This process can be illustrated by the early rural reforms. The new goal of economic growth effectively increased peasant power: peasant cooperation was now necessary. This was not organised power but individual atomized behaviour. Spontaneous experiments were permitted in a couple of provinces by reform-minded governors, and the reforms were permitted, and later encouraged, to spread. Peasants were attracted to household production because it offered higher incomes, security, and independence. The rural reforms were that rare economic event, a 'Pareto improvement', benefiting almost all rural people. The privatisation and marketisation of rural China was a process of cumulative causation. When one aspect of economic life was reformed, gains in efficiency were impeded unless other aspects of economic life were allowed to follow. New institutions - local markets for credit, labor, land use, and manufactured goods - emerged.

34. One of the benefits of gradualism was that policymakers could learn from experiments and experience and could find ways of overcoming vested interests. For instance, the early introduction of the dual-track pricing system had the virtue of avoiding opposition from planners and managers and yet harnessing the market for enterprise and improved resource allocation. The growth of the non-state sector drew resources away from SOEs. Not only did the non-state managers themselves have stronger profit incentives but also their competition strengthened the incentives of SOE managers.

35. 3.3 stages of reform in China Naughton (2008) distinguishes two distinct political periods: In the first (1978-93), power at the top was fragmented. There were too many veto players who could protect their constituencies, so making reform difficult. This was the period of 'reform without losers': policy had to follow a narrow and unopposed path. At the end of the first period, SOEs and urban workers remained protected and were largely untouched by economic reform. By the start of the second period (from 1993 onwards), many of the revolutionary elders had died off. The success of incremental reforms had enabled the reform leadership to consolidate their power. Policymaking could become more decisive, and reform-related costs could be imposed on some of the losing groups. Moreover, the emerging mid-1990s crisis facing the SOEs and government revenue and threatening to stop rapid economic growth forced bolder action upon the leadership.

36. A broad process of comprehensive reform was initiated. It was necessary to tackle several problems together, for instance the SOEs, urban workers, social security, migration, housing, government revenue, the foreign exchange rate, and trade. The absence of any one of these reforms had the potential to make some of the others ineffective. The reforms were assisted by a feedback loop: the more rapid growth of output and government revenue made it easier for the state to compensate the losers. Underlying, and driving, this process of economic reform was a strengthening commitment of the leadership to the pursuit of economic growth. Rapid growth was achieved partly because the initial conditions were favourable: huge economic inefficiencies could be eliminated through market reform. In addition, it was achieved partly because of the powerful incentives that were built into the system of governance.

37. 04.Mechanism of developmental state in China 4.1 Development is the absolute truth 4.2 The Systemic Arrangements 4.3 Strengthening bureaucratic capacity after Mao 4.4 The Policies 4.5 Fiscal (tax) subsidies have also played an important role 4.6Fiscal decentralization 4.7 Company Law of 1994 4.8 Reputational incentives

38. 4.1Economic nationalism and “development is the absolute truth” Levi-Faur distinguished three main economic ideologies, namely, economic socialism, economic liberalism and economic nationalism. It is believed that as a result of post-socialist transformation, China has replaced economic socialism with economic nationalism, as opposed to economic liberalism preferred by many European post-socialist states. Moreover, China’s economic nationalism has shown distinctive features of the DS model. By utilising a nationalistic rhetoric, the state has gained the capacity to mobilise the nation behind the common goals. This way it has also justified the extraordinary measures it has taken to protect the domestic market. Economic nationalism is visible in prohibitive procurement practices demanding local content, in discriminatory use of labor and competition laws aimed at targeting foreign entities, in arbitrary decisions related to economic activities, guided by ambiguous regulations of local and state authorities. It influences economic reforms and the establishment of the economic system.

39. When commencing reforms, Chinese authorities instantly rejected the ideas of radicalism later framed within the Washington Consensus. The alternative was the gradual path. Nevertheless, this is hardly a gradual pace of reforms, which indicates the affinity of the Chinese development trajectory with the DS model. Rather, it is the reform selectivity, focused on maintaining a tight grip over economic freedom in certain sectors of the national economy, partly via access barriers and investment limitations and on establishing a strong domestic business base through market distortive mechanisms.

40. In particular, it is important to emphasise China’s style of business sector transformation. China has focused on state-supervised strengthening of its domestic business base and state-controlled restructuring of companies, rather than broad privatisation and allowing companies to go bankrupt. By selective opening up, it shielded its business sector from foreign competition. It was a choice dictated by the DS logic, as it would allow for the business sector to be retained in domestic hands.

41. Moreover, the reform focused on creating economic bureaucracy with an influential pilot agency to preside over economic modernisation. The powers of China’s National Development and Reform Commission (NDRC) equal almost those of the Korean Economic Planning Board (EPB) and far exceed those of the Japanese Ministry of International Trade and Industry (MITI). Both MITI and EPB are considered the paramount development agencies during the high growth periods. Recently, a new coordinating body has been created to supervise the design and implementation of reforms, which strengthens the role of the state leadership at its highest level .

42. 4.2 The Political System Arrangements China chose to retain extensive planning powers and capabilities. The Chinese political elite saw central planning not only as compensating for economic liberalisation, but also as the DS-style “plan rational” to guide development. Consequently, China did not relinquish extensive state interventionism. Instead, it has searched for new means and instruments of intervention and control in the new market conditions.Finally, as far as political reforms are concerned, in political reformulation without liberalisation, China chose to keep a type of authoritarianism.

43. Maintaining an authoritarian state has been aimed at creating a strong and capable state, according to the widely held view that authoritarianism is better suited for fast development in a developing country. The authorities have attempted to strengthen their power and control over the society and the business sector , as illustrated by forging links with and influencing newly emerging social structures, which are the result of systemic changes. These links are intended to maintain a DS-style uneven relationship with other state actors, for example, through the policy of suppressing the labour force, common in the DS historical cases. At the same time, although the authoritarian regime is believed to be relatively insulated, it has strived for embeddedness through a social dialogue to create some form of Evans’ embedded autonomy. It is gradually extending negotiation and consultation channels to the society and business, for example, via rural democracy, public soliciting of new laws, and an increased consideration of public opinion communicated through the internet.

46. Figure 3. Political Structure in practice in details

47. 4.3 Strengthening bureaucratic capacity after Mao Modernization of the state bureaucracy has been the government’s priority throughout the reform period. The decade-long tumultuous upheaval of Mao’s Cultural Revolution had demoralized and crippled China’s state apparatus. At the outset of market-oriented reforms the leaders realized that modernization of the bureaucracy was essential to effectively implement their ambitious new policies. As a result of the administrative reforms carried out in the 1980s, local government regulations and procedural guidelines have gotten more and more precise and transparent. This has increased the predictability of bureaucratic decisions and reduced uncertainty of economic planning.

48. In parallel, administrative reforms in the 1980s introduced strict retirement ages for government officials and a one-time buy-out strategy to retire old veterans as a means to push out Maoist bureaucrats who were impeding progress in market-oriented economic reforms. Reformers also sought to build a modernized bureaucracy by implementing merit-based entrance exams and promotion schemes. A high turnover in bureaucratic personnel reduces the risk of bureaucratic inertia and commitment to the old planning mentality of state socialism . Moreover, merit-based appraisal of government officials and performance-based incentive schemes reinforce incentives in the bureaucracy to improve local economic development.

49. 4.4 The Policies During the post-socialist transformation, industrial policy was not abandoned, as in the case of many post-socialist economies, but it came to resemble the activities of Japan and Korea during their high growth developmental periods. China’s industrial policy has been characterised by all the features of the East Asian industrial policy. Import-substitution industrialisation (ISI), in China’s case a legacy of state-command economy, was supplemented by export-orientated industrialisation (EOI) in the post-socialist era, and subsequently tuned into the DS pattern of gradual change in the industrial targeting from labour-intensive to capital- and technology-intensive sectors. However, at the beginning of transformation, labour-intensive light industry became the focus, despite the socialist heritage of having a more developed capital intensive heavy and chemical industry. In order to increase the technology intensity of its export-orientated production, China began the policy of the rapid development of its R&D base, as well as extensive importation of technologies by all means available; purchasing, swapping access to its domestic market for high-tech transfer, demanding it by using regulations and formal and informal pressure from international investors and foreign business partners, often violating intellectual property rights (IPR).

50. As in other East Asian developmental states, the formulation and implementation of industrial policy is a central pillar of the state’s development strategy. The first so-called industrial policy (chanye zhengce) guidelines were implemented in 1989, when the government perceived that the old planning apparatus was no longer appropriate to steer economic—particularly industrial development—priorities in China’s liberalized market environment. Since then, the government has frequently revised and reformulated industrial priorities in an effort to single out future winners and losers in the ongoing structural transformation of the economy. Common instruments such as market entry regulation, taxation, and loan decisions are part of the state’s tool-kit to influence the direction of structural transformation .