Due to variety of reasons including moral, economic and political ones, economic development has been a prominent matter of interest in political science as well as economics. An essential connection between economic development and political science stems from the question of state’s role in the economic development of any country.  Practitioners and academics advocated different answers to this question ranging from complete socialist state control of economy to “laissez faire” market economics. State involvement in economic development has produced total collapses as well as success stories. Thus, it’s the degree and the means of state interference in economic development that should be studied. Although states should be involved in the development efforts, they should only be encouraging beneficial economic practices and supporting growth friendly sectors or sub-sectors, aiming at an import oriented market economy. As the country develops, the state should intervene subtly to ensure that increase in average income is mirrored in decreasing poverty, in human development and in sustainable practices.

Specifically after the fall of the communist bloc, free market economics with minimal state control has been seen as the only accepted school of thought regarding development. This view has some good points in their criticism of the state intervention. The fundamental distrust in the state intervention comes from the theoretical lack of bureaucratic incentives. “Government planners”, conservative British economist P. T. Bauer believes, “would invariably make the wrong choices because they had nothing to lose”[i]. In contrast, the private entrepreneurs, risking their own capital, make more examination before they decide on their investments, thus, channeling the economy in a good direction. Nevertheless, this assumption about the private entrepreneurs has its own flaws. If a third party is affected by the investment or transactions of the investment, the private initiative will be less likely to consider these externalities. Another criticism of the state role is the idea that “government control of the economy tends to create a “rent seeking” society”[ii]. These rent seeking societies influence the state policies in order to benefit themselves in expense of public goals, becoming a disadvantage of the state involvement. Therefore, any state that wants to intervene in the economic development should take caution against rent-seeking behavior beforehand. Extended state role in development is a risky business, but these risks may be reduced by good policy choices.

The recipe for development is not the elimination of state control but rather a state control that incentivizes growth oriented economics. Classical economists may mention the previous points about the flaws of government planning, but effective and limited government involvement helped many developing economies. One of the most successful countries in development, Japan, has used significant degree of planning, duties of which were:

“first, to identify and choose the industries to be developed; second, to identify and choose best means of rapidly developing the chosen industries; and; third, supervise competition in the designated strategic sectors in order to guarantee their economic health and effectiveness” [iii]

In this Japanese model described by Chalmers Johnson, the government serves as a guide to the free market economy, in which private incentive still has the larger role.  This model can be applied to different developing countries, because they can choose different sectors, different means of support and different mechanisms of supervision with regard to their existing conditions. The sector that needs guidance first may be agriculture in most underdeveloped countries because “it is all impossible to enjoy an urban economy with a high standard of living unless that economy is based on high-productivity agriculture”.[iv] This initial emphasis on agricultural reform can prevent food shortages in the developing countries, as it can close the income gap by increasing the income available to peasantry. The Success of Japan can be imitated after the initial conditions, such as sufficient agricultural production, are ensured by government guidance.

The state involvement in development efforts should be aimed at an export oriented free market economy. Export industries are good for development for variety of reasons. First, exports, when they outweigh the value of imports, create a trade surplus which increases national capital for investment. Second, as Anne O. Krueger Argues, “in an outward oriented economy, efficient activities can expand well beyond that point [size of domestic market]”[v]. Size of the existing market is limited in developing countries, so any industry that largely depends on the domestic demand will not be able to reach economies of scale. Thus, the government should lead those industries to expand to world markets by incentivizing exports. In Taiwan, this attitude of the government created “an export culture” because “firms sought to export partly just to build up credit in their future dealings with the government”[vi]. Taiwanese example also shows that encouraging the industries to produce high ad valorem goods instead of low margin goods is beneficial. This may be achieved by government subsidies on research and development or on high technology industries. According to Isbister, the underdeveloped countries should supply their own research and development because many technologies of the developed world are not compatible. Here, the duty of education reforms is on government since “Third World countries are increasingly facing up the need for technical education and applied research”[vii].  The governments in the developing and under developed world have a big responsibility of channeling the economic activity into economic growth friendly ways.
In addition to its inability to lead the economy in the ways stated above, a laissez faire market structure can not ensure income equality, human development and sustainability, all there of which are essential factors of development. Despite its unprecedented national income, the United States has a significantly larger GINI index of income inequality than countries like Sweden, Germany and Canada[viii] where the state involvement is high. If the institutions model development of the Third World after the US model, the income of elite may increase, whereas the poverty in lower income groups may remain the same. Furthermore, if we define the development by the human development index of the UNDP, a high GNP is not sufficient without health and education. China, a developing country with large amount of state involvement, “does poorly under the GNP test but quite well on the human development index”[ix]. Here government uses economy’s resources effficiently for human development purposes. Chalmers Johnson supports this argument by claiming that, when there is government-private cooperation, state can afford greater degrees of “social goal-setting and influence over private decisions than under self-control”[x]. Government can use this social goal setting ability to reach higher human development as well as higher sustainability. Many investors think in shorter terms, whereas the states should think about multiple generations that will use the same resources; some degree of state involvement is, therefore, indispensible in sustainable development. The well organized benevolent state’s guidance can make economy more suitable for social and environmental development.

The state role in development has been largely ignored since the beginning of 1990s.  The World Bank, under the Brady plan, reduced the debt payments of the Third World if they reduced the government control on the markets. Nevertheless, the government involvement in development can be highly beneficial if it is well managed. The state can guide the development by incentivizing the sectors that will help the growth most, in order to ultimately create an economy that exports high ad valorem goods. The state also needs to complement the free market in achieving social development such as education, health, poverty reduction and sustainability. The government intervention helps the developing countries as long as means and degree of the intervention is well calculated.

Word Count: 1259

Bibliography

Isbister, John. 1993. “Economic Development.” In Promises Not Kept: the Betrayal of Social Change in the Third World. Kumarian Press

Johnson, Chalmers. 1982. MITI and Japanese Miracle: the Growth of Industrial Policy, 1925-75. Stanford University Press

Krueger, Anne O. 1990. “Import Substitution Versus Export Promotion.” Finance and Development 22(2)

Wade , Robert. 1993. “Managing Trade: Taiwan and South Korea as Challenges to Economics and Political Science.” Comperative Politics 25(2)

[i] Isbister 1993: 164

[ii] Isbister 1993: 165

[iii] Johnson 1982: 315

[iv] Isbister 1993: 168

[v] Krueger 1985: 22

[vi] Wade 1993: 157

[vii] Isbister 1993: 174

[viii] Lecture Presentation, Week 9 Day 1

[ix] Isbister 1993: 154

[x] Johnson 1982: 311