Dissecting the Developmental State

It’s one of the grand ironies of economics that developmental economics, the branch of economics formulated to determine what policies lead to economic growth and a general rise in social conditions in poor countries, tends to be dominated by Marxist-leaning scholars who advocate central planning, protectionism, and vindictiveness in the place of sound trade policy.

South Africa is purportedly a developmental state. It’s a poor country that takes creative (at least, for some) routes to achieve prosperity. Its policymakers are profoundly influenced by developmental economists from the 20th century. And even during Apartheid, economic policy in this country was definitely what one would deem developmental.

But after decades of tried and failed developmental economics, it’s finally time to step back, analyse what happened and perhaps even consider something else entirely.

But What is a Developmental State?

A developmental state is, simply, a government that intentionally seeks to grow its society from an underdeveloped economic position to a developed one. In essence, the poor seeking to become rich. Or, at least better off. It’s an admirable goal. But like many government goals, they seek to achieve it with the wrong tools. And more often than not, tools that make the problem far worse.

For some reason (which is probably due to the general problem of central-planning obsessed economists in places of power), the school of developmental economics became dominated by a cocktail of bad ideas. Like how policymakers in the 1930s became jealous by the fake success of communism and fascism, many Cold War era economists wanted to reconcile the central planning of the Soviet Union with the capitalism of the West in order to uplift poor countries.

What they got was a mish-mash of terrible ideas that relegated a generation of countries to huge deficits, social strife, and a bloated bureaucracy – which many still have to deal with today.

There are far too many countries which dabbled in and still are dabbling in developmental economics for this article to analyse them all. Instead, I will be analysing the concepts on a general level with examples on the ground.

Protectionism and the Infamous Import Substitution

One of the most popular policy prescriptions by developmental economists have been those around protectionism. This fundamentally took its form in a policy called import substitution. The policy is simple: Block the imports of manufactured goods from other countries to encourage local production instead.

The policy became increasingly popular in Latin America after its inception in the 1950s by Argentine economist, Raúl Prebisch. It caught on. Brazil embraced it, seeking a state-led industrialisation policy. South Africa even dabbled with it, seeking to find coal-based alternatives to oil (but this was also probably due to national security concerns and ideology rather than simply an effort to industrialise). Even Japan embraced it, at first, seeking to restrict imports of chemicals and steel so they could improve their own budding hard industries.

Import substitution was founded in a desire for economic self-sufficiency, but also that of jealously and vindictiveness. It didn’t recognise the quid pro quo inherent in trade. Rather than see trade as pleasing two parties, they saw it as a zero-sum game. A zero-sum game that the “global north” was winning, and that the “global south” was being shafted in. This is a trade policy that many countries, especially in Africa, still embrace today. Trade is war according to their worldview, not a means to gain what one needs in exchange for what someone else needs. Instead of cooperation, they see it as conspiracy.

There is competition in trade, no doubt. But it’s even less than that of a sports match – which very few people have a problem with. Trade, in reality, is the most efficient manner of getting the goods we need and want while getting rid of the stuff we don’t need or have too much of. It creates a best of both worlds, while creating gainful employment for countless people.

But protectionists don’t see it that way. They see trade as a foreign threat, and in their nationalistic worldview, locals should always get priority. Even if that means other locals have to suffer. Because when you stop buying foreign goods at affordable prices, you may be helping one local factory, but you are also denying your citizens access to goods they need and want at affordable prices.

Free markets are efficient because they allow us to see the economic reality. With proper price mechanisms and access to competition, businesses rise and fall on their own virtues. And more than that, they’re sustainable.

If a business requires protection from foreign competition, they grow up soft. And when they grow up soft, they will never achieve the level of production needed to actually be worth the protection.

In Japan, the central planning board (the Ministry of International Trade and Industry) opted for a policy of prioritising the production of steel and chemicals, while sabotaging and keeping down the industries of consumer electronics and motorcars (which they perceived as frivolous). We can see today which industries failed and succeeded. Steel and chemicals fell. And Japanese cars and electronics are now household names. Japan opted for an unrealistic growth path, but the power of economic reality was so strong that even under state sabotage, the industries that were going to realistically flourish still did. The private sector succeeded in spite of state intervention, not because of it.

Import substitution and protectionism led to weak economies that had to rely on state subsidies and heavy debt just to get off the ground. Combined with planned economies, it was a death sentence for the Latin American economies which embraced it and continues to be a death sentence for the African economies obsessed with continuing it.

Growth for Growth’s Sake

Economists are obsessed with quantitative data. Not that quantitative data is all bad. It’s important to have numbers. They tell a lot in a short manner. And there are many important indicators within quantitative data that help to understand an economy – especially at a glance. But you cannot understand an economy through its numbers alone. You need a qualitative picture to understand the reality.

GDP is one of the most popular indicators for economists, especially developmental economists. Simply, it measures the total sum of economic output in a country. GDP per capita adjusts it, simply by dividing the sum up by the population.

The problem with this indicator is that it’s too simple. It doesn’t tell us how the money is made, if the output is sustainable, who is getting the money, and how. For a developmental state, which has to deal with manners of production and a poor population, it’s a very deceptive indicator.

An oil-producing country could look extremely rich, until you visit it and find all the homeless people. Nazi Germany and the USSR looked very productive, until you saw that all its output was funnelled into unsustainable military production.

In South Africa, Eskom during the 20th century had dirt-cheap electricity prices. The developmental state at the time thought this was a swell thing, leading to huge economic growth. But it was unsustainable. The growth wasn’t real, as it was built on false premises – cheap electricity funded by debt. When the debt and bad management caught up with the parastatal, we were left with a huge contraction as our overgrown economy had to hit reality – fast.

But this is the problem with developmental economics – especially in South Africa. It focuses on mere numbers. There is no care for where growth goes, how money is spent, and how the wealth is invested. It only cares about a few arbitrary variables going up.

To Amartya Sen’s (a famous developmental economist) credit, he did develop a system of measuring the success of development which was far more human and useful than mere GDP.

Jobs!

There’s a story about Milton Friedman that he once visited China and was observing the digging of a canal. He was shocked to find that the workers were using shovels, instead of the available digging machines and tractors. He asked the government bureaucrat why this was the case, as the use of machines would have made the job far easier.

The bureaucrat replied: “You don’t understand. This is a jobs programme.”

To which Milton responded, “Oh, I thought you were trying to build a canal. If it’s jobs you want, you should give these workers spoons, not shovels!”

There is an obsession in South Africa and the developmental state that we have to create jobs. Every year, the President promises an arbitrary sum of jobs. But if they could truly create X jobs, why then is X so small? If the government had the power to create jobs, as they claim they do, why not promise jobs for everyone?

Simply: they can’t.

Jobs, at least sustainable employment, aren’t just things you create to fulfil a government quota. They’re positions in an economy with the aim of creating value. The goal of a developmental state should never be the creation of jobs. It should be to allow and augment the creation of value. Jobs will follow as they are needed to create said value.

Sprinting Before Thou Can Crawl: Education and Healthcare for the Masses!

Africa is full of white elephant projects that are unneeded and grossly expensive. There’s an envy that African governments, especially, have for older and richer countries. But instead of working hard through the steps of development to get there, they’d rather skip to the end.

African political leaders don’t want to build capital over generations and create decent infrastructure to aid a free market protected by the rule of law and sound governance. They want to build mammoth hydroelectric dams, and fun free education and healthcare. To be fair, these are all prescriptions being given by ignorant economists from rich economies. But economists are often ignorant of economics.

What economic history reveals to us is how the Northern European states got rich. They aren’t successful because of free education, healthcare, and large infrastructural projects. They have those things because they were already successful. They built up capital and institutional knowledge and skills over generations – and utilised it to then eventually build the things they wanted.

Developmental states must identify what they are actually capable of. Stop chasing big dreams before you can even tie your shoelaces.

Debunking the Developmental State Success Stories

When someone critiques the developmental states of Latin America and Africa, many developmental economists and planned economists will cite the Asian developmental states as a rebuttal.

It’s true that the Asian developmental states (including but not limited to the Four Asian Tigers of Singapore, Taiwan, South Korea, and Hong Kong) did have economic planning boards and authoritarian policies as a part of their growth strategy. But these strategies were by no means socialistic or reflective of what most developmental economists were promoting.

In Japan, as we have mentioned, the vibrant and strong private sector flourished despite ill-advised government policy. And even then, Japan’s dabbling in planning has led to its recent economic problems. Even if a bad growth strategy works for a bit, it will eventually fail.

Similar to Japan, South Korea had a vibrant private sector led by traditional corporate entities called chaebol (the Japanese version would be zaibatsu). These corporate structures provided a much-needed, strong private sector entity to drive economic growth and direct economic activity in a decentralised fashion. The South Korean model for development was supporting these corporations and creating a desirable environment for them to function.

Singapore and Hong Kong are no surprise. While they had planning boards in name, in practice they were and are some of the freest economies on the planet, relying on the decentralised nature of free markets.

What Actually Worked?

If we analyse the developmental states that worked, we find things that the socialist developmental economists would hate. And while I don’t necessarily endorse these strategies, it is quite telling how different the strategies that worked are from the prescriptions of the central planners.

1) Trade Unions Were Restricted or Banned

In Singapore, trade unions were functionally banned. In South Korea, the state’s tight relations with chaebol led to worker rights and unions becoming heavily restricted.

In South Africa, COSATU and other trade unions are de facto and legally members of the government. They dominate electoral politics and lead trade and developmental policy.

South Korea and Singapore are two of the world’s largest economies. South Africa is an authoritarian, borderline socialist dump.

Trade unions do serve an important purpose and are entirely compatible with a free market provided they don’t enjoy government protection. They can be legitimate places to allow workers to improve their lots. But when institutionalised at a grand scale, and given political clout, they become hand breaks to meaningful development. Functionally, mafias. They hamstring attempts to get rid of unemployment, as that would drive down the wages of their members, and drive forward archaic ideologies that stifle prosperity.

Countries that restricted trade unions and kept them small or non-existent notably grew far faster than countries dominated by trade unions.

Trade unions are privileges for richer economies. When desperate, they are luxuries that stifle development.

2) Communism Was Shunned

Communism was and still is banned in Singapore. South Korea was and still is in conflict with its communist neighbour (which by drawing a comparison with the two is very telling for which economic system works). Of all the countries in Latin America, Chile is by far the most prosperous – even if one can admit that the manner in which communism was fought there was atrocious.

Communism is a disgusting, outdated ideology. It is anti-human and anti-prosperity. Allowing it to dominate our politics has hamstrung South Africa’s possibilities for success. Developing countries that banned it or restricted its proliferation tended to do better than those that embraced its ideas.

Suppressing socialism and communism is no doubt authoritarian, but there are libertarian arguments to be made for it. And it definitely has evidence of working on a practical level.

3) They Focused On What They Were Good At

Comparative advantage, a term coined by David Ricardo, has some flaws, but as a simple principle it makes sense. Do what you’re good at. Buy goods and services from people who can do it better than you.

The developmental states that succeeded focused on what they could do better than anyone else. They didn’t play with the isolationist idea of self-sufficiency. Singapore specialises in financial services because they know they can do well at it. They don’t waste time with food self-sufficiency because they know they will always have the finances to purchase the food they need.

Japan’s forays into steel and chemicals failed because they were trying to develop industries that worked in the US and Europe, despite not having the endowments needed to succeed. Instead, they performed better at producing consumer electronics and cars because they had the endowments to perform well at that.

The Asian Tigers also leveraged their sound institutions, taking advantage of historical corporations rather than chasing them away.

South Africa tries to build factories and compete with China. Instead, we should focus on buying cheap goods from Asia, cheap food from Europe, and using the savings to subsidise a nature-tourism industry, backed up by commodities when the market is good.

4) They Used Reason

The developmental states that succeeded were not passionate. They weren’t emotional. They weren’t driven by fanatical ideologies. They didn’t want to make communism or socialism work. They wanted to make the country work. So, they embraced sound policies, experimented, and stuck with what worked.

Planning isn’t bad. State-led, central planning is bad. Asian planners realised this, and their state-strategy was to decentralise planning to corporations and individuals. Where state planning was used, it wasn’t in the form of direct economic intervention. It was done to eliminate threats to the economy and help protect their commercial interests.

And above all that, the Asian Tigers embraced free markets and commerce. They identified what the world wanted and sold it.

That’s how you win.

Reclaim Developmental Economics

The Asian Tigers are a thing of the past. They are no longer developing countries and now have the plights of sophisticated and aging economies to deal with.

South Africa is an underdeveloped country, like most of Africa. We have a long way to go, and a developmental state with sound developmental economics may help us. But we must not be led by the planned economists with their unaffordable welfare states and stratifying regulations.

No. The solution to South Africa’s development issues is a free market, restricted labour unions, and throwing communist ideas where they belong: in the garbage can of history.

Only when we embrace sound economic policies that put the private sector and prosperity first will our developmental state finally mean something.

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