State vis-à-vis development: state intervention when and for what?

By Araya Kebede Araya*

State vis-à-vis development: state intervention when and for what?

“….. [N]umerous studies have shown how the Korean state acted in a number of developmental ways to provide public goods and nurture investment.” David Kang

Guiding Questions

To develop the following essay on the role of state in development, I have set and attempted some guiding questions like - when is state intervention justifiable from development perspective? What can a state do to sustain a development? Can a mere state intervention guarantee development? Or other factors can deter or facilitate it?

Neo-liberal beliefs, developing economies, rich-poor gap

It is true that the dominant development model nowadays is based on neo-liberal theory, of course, with some notable exceptions like China which follows socialism with Chinese characters that promotes ‘socialist free market’ as the Chinese put it. In many developing countries, however, the realization of the notion of sustainable development (and, arguably, development at large) has come under challenge due to the emergence of neo-liberal regimes and their pro-market policies.

Generally speaking, none or less-state intervention in developing economies necessarily entails reducing social actions which in turn means increasing the gap between rich and poor people. Although a free-market led economy can remedy the gap via social welfare methods, the latter cannot bring long-term solution. So, I think, it is better to devise another approach that can help avoid the long lasting gap between the rich and the poor. Could it be better for state to intervene to prevent from the onset a gap rather than rushing late to reduce or possibly avoid it? (More on this score, page 4 - new section)

How about for the overall development of a country other than just narrowing gap between the halves and have-nots? In the East Asia development model, history witnesses that state intervention matters. The cases of China and other Asian Tigers strongly imply that a path to development alternate to free market is possible. Even miraculous developments have been registered adhering to seemingly disastrous, totally unacceptable, unthinkable and risky behaviors towards the macro-economy.

Dangerous tackle but NO RED CARD! – The durable and stable mutual hostage, Korea

Let’s see if David Kang’s research (Bad Loans to Good Friends) can provide us with an exceptionally unusual but quite interesting explanation. What happened in S. Korea is a systematic distribution of wealth with small number of very rich, powerful companies and a coherent state. The government controls the key source of financing – the banks while encouraging big companies to flourish. The government did not directly involve in trade and investment areas (though some officials had shares in companies). Nor does it directly snatch money from the rich and distribute it to the needy. The government gives huge amount of loans to the big companies, which in turn are required to give money back to the government (which it uses to buy votes) under the guise of contribution for humanitarian purposes and taxes.

Put it in other ways, the government needed capital to build infrastructure, current budget, for its campaign for re-election as a party, etc. However, tax and other income were not enough. So the government gets the required money from the companies which are more than ‘happy’ to contribute as their action will be rewarded by means of more bank loans. The opposite happens if they refuse to contribute some. So, it was like scratch my back I will scratch yours – corruption and rent-seeking. At normal circumstances, such activities do not benefit the public. In Korea, however, the macro-economy was beneficiary as the companies’ money was flowing and finally used for investment though the corrupt and free-seekers have also benefited a lot. Important intervening facilitating factors like lower transaction costs, less information scarcity, and personal relationships as the regimes and institutions in force were not functioning as required.

Many ordinary people, at best, were also a beneficiary as they could sell their votes for money which enables them to participate in the economic activities of the country.  We can see money working from the top up to down the people. Those all happens due to state intervention in the economy most notably via controlling the bank sector and offering excess loan to the companies. However, this does not imply that all state controlled economies were following similar routes and were successful. David Kang’s analysis in his another scholarly article (Transaction cost and crony capitalism in Asia) on what happened in Philippines and Indonesia shows the other way round is also possible depending on some other factors other than the economy being state controlled. Therefore, it is the unusual state of “mutual hostage” between the government and businessmen, with all its problems, that helped modern Korea found itself in the basket of relatively developed countries.  No one can deny that corruption and cronyism are inherently defective, harmful to the common and against development. The case of Korea is quite exceptional, where other internal and external elements have contributed to the scenario. Under normal conditions, corruption and cronyism are evils, crimes that should be avoided although fostering economic growth requires much more than limiting the cronyism variable and eliminating corruption – the dangerous tackles that eventually should result in red card. Let alone red card, the state along with its acts were hailed as developmental one.

Other developmental state’s actions

Does state intervention of another form – direct involvement - help develop a developing country esp. in narrowing the gap between the rich and the poor? The case of China, which still (but dramatically decreasing) suffers from the gap between the poor and the rich – the urban and the rural - tells us that state intervention should stay for a relatively long period enough to narrow the gap. It requires much work by the government, though. By the time a country has a majority middle income earning population; it is possible for the state to make a slow and systematic withdrawal from trade and investment activities and focus on its traditional activities and play a regulatory role as the economy, afterwards,  can sustain or keep the required path without harming anybody, ceteris paribus.  

State on sustainable development

How about state intervention for sustainable development? State intervention is also needed for sustainable development, in its strict sense, in both developed and developing countries, alike, seen from the perspective of environmental protection. In this case the state need not necessarily involve in trade and investment. But it can play a major role in striking the balance between development and environmental protection. Some (see, M. Shamsul Haque, The Fate of Sustainable Development…..) opine that a developing country cannot achieve a sustainable development while adhering to neoliberal policies. However, for a developed country the government, besides to its traditional functions like defense, must only follow a regulatory role to the economy. This limited role is not enough for a just developing nation. The government should involve in the trade and investment so as to get enough income (in addition to tax and duties) so that it can quickly build the basic infrastructure the country needs for development. May be after this stage, the government can lift its hands away from the regular activities of trade and investment. It’s even advisable to encourage more private investments with stringent regulatory oversight from the government. But, by no means is absolute control of the economy by the government acceptable. Developmental state does not necessarily mean so. It is rather situated on the other end of the two worst extremes – free vs. controlled economy. 

Ultimate consequences – committing suicide while being killed!

Should a government forgo development for sustainable development? Should a government intervene to strike a balance in such deadlocks? Can one carry for sustainable development before development? Should it carry about environment at the expense of development? If underdevelopment is finally going to kill one, can any one have anymore incentives to carry about the environment? Which one comes first – development or environmental protection? This deadlock can unlikely be resolved unless a developing nation can have other means of developments other than the way the developed ones’ follow under the expense of environment. Alternative technologies are proposed. However, the inaccessible and sophisticated technology’s price is beyond the reach of the poor world. Sadly enough, it is also the developing nation which is main recipient of the hazards caused due to environment deterioration regardless of who caused it. The developed countries have a mechanism of dealing with it. The poor – with no money and tech - do not. So, provided the alternative solution cannot help; in either ways the developing will suffer: if they care for the environment, they will remain poor; if they want to develop at the expense of the environment like the Europeans do, the situation will be worse as they are adding to the problem. The sum is the industrialized and the industrializing world alike will also keep polluting the climate to a great extent with the net result of committing suicide – while being killed - by the poor.  

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Araya Kebede Araya, LL B., MA, LL. M (PROLAW)

Lecturer in Law, Mekelle University, College of Law and Governance

Ethiopia, Mekelle - Adi Haqi Campus

Cell phone: +39 3896872473 (Rome, Italy), +251 923 771883 (Ethiopia)

E-mail: araya57k@gmail.com, aaraya@luc.edu

Blog: http://lawfordevelopment.blogspot.com/

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