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«The Reprinting of Governing the Market: A Dinner Table Conversation ROBERT WADE* I am delighted by this I&S Issue Focus. The contributions read like ...»

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Issues & Studies© 40, no. 1 (March 2004): 103-134.

The Reprinting of Governing the Market:

A Dinner Table Conversation


I am delighted by this I&S Issue Focus. The contributions read like an

animated conversation over a good dinner. I appreciate their generosity of spirit—a

contrast to an academic environment where repetition, straw men, and nit-picking are

standard tools of the trade.

I am relieved that the commentators do not find the empirical material in the original Governing the Market inaccurate (with one important exception, Stephan Haggard’s point about Taiwanese corporatism). When I was writing the book I had a recurring image of myself as an ice-skater worried about the strength of the ice; I was only too aware that my base of knowledge of Taiwan and the comparator countries was pretty thin, not least because I neither had studied East Asian history nor spoke Chinese, Korean, or Japanese. I was buoyed up by knowing that the knowledge of those economists whose arguments I was critiquing was even thinner than mine. Not long after I arrived in Taiwan I met London School of Economics’ development economist Hla Myint, then writing eloquent articles about how Taiwan and South Korea succeeded because they liberalized markets. He was attending his third conference in as many trips to Taiwan, staying only for a few days each visit. When I asked him why he did not stay a bit longer, he answered with a smile that by staying longer, he would only get confused! As I wrote the book I consoled myself that I at least had the advantage of a several-month stint in Taiwan, following (some years before) months in South Korea and before that, India and Italy; I also had amassed plenty of experience doing interviews in diverse cultural settings. Later, in 1999, I walked down the street in Taipei with a fellow conferee, a celebrated American international economist. He had arrived the previous night and was leaving after his talk later the same day. He had been to Taiwan before, but he too only for a day or so.

ROBERT WADE is Professor of Political Economy at the London School of Economics. Earlier he taught at Brown, MIT, Princeton, UC-San Diego, and Sussex. He worked as an economist for the World Bank in 1984-88, and for the Office of Technology Assessment (U.S. Congress) in 1988-89.

He is a New Zealand and British citizen. He can be reached at R.Wade@lse.ac.uk.

My main interest has always been in development strategy as distinct from more descriptive or analytical issues of East Asian political economy per se. I have treated East Asian states as instances of successful catch-up, worthy of careful study precisely because their economic success has been so rare. Helpful is this regard is to think of a world income hierarchy as four classes defined by relative per capita GDP (in purchasing power parity terms): class 1 comprises the states with average incomes equal or above the poorest Western European/North American/Australasian state (i.e., Portugal); class 2, states with average incomes more than 2/3 that of the bottom of class 1; class 3, average incomes between 1/3 and 2/3; and class 4, average incomes less than 1/3. In the period 1960 to 2000 the rate of movement from one class to another was very low—the great majority of states did not move; class 2 (the contenders for class 1 position) shrank; almost all cases of movement were downwards; no state in class 4 at the beginning moved up; and no state that fell into class 4 during the period got out. There is one very recent and very important exception to the last point: China moved into class 3 within the past few years. 1 These are sobering results, particularly if one believes that the single most scandalous fact about the current period of world history is the huge gaps in the living conditions of people in different regions of the world, with grinding poverty and stunted lives the fate of over two billion people. These facts are, or should be, all the more sobering for those of neoliberal conviction, because there is no correlation between neoliberal policies and upward movement, or non-neoliberal policies and downward movement—unless one is prepared to follow some market fundamentalists and stretch “neoliberal” to the point of saying that China’s rise is the result of the country’s application of neoliberalism.

I wish to take up five questions raised by the commentators: (1) what is the difference between the “governing the market” (GTM) approach and the reigning neoliberal (or simply liberal) approach; (2) what is the theoretical basis of GTM; (3) how do we know whether GTM has worked better than a neoliberal approach; (4) how does the East Asian crisis of 1997-98 look from a GTM perspective; and (5) what is the implementability of GTM principles today and in the near future?

This is based on work by Branko Milanovic, Carnegie Endowment for International Peace, Washington, D.C., personal communication, June 2004.

What Distinguishes GTM from Neoliberalism?

Much of the debate about governing the market and the developmental state revolves around the criteria distinguishing this approach from a neoliberal development strategy and its corresponding state role. Is the core idea of GTM: (1) an array of industrial policies intended to provide (sectoral) directional thrust and to maintain some degree of national control over the process (always in the context of a competitive market economy based on private property); (2) very high levels of capital accumulation, supported by high levels of public and private savings (in the same capitalist context); or (3) something else (including an undervalued exchange rate, see below)? In addition, how do GTM conditions relate to the neoliberal conditions for fast growth? Are the neoliberal conditions—or a good many of them— necessary for the GTM conditions to work, or do the GTM conditions replace the neoliberal ones?

Could it be that the main effect of the elaborate array of industrial policies (e.g., the elaborate tax incentive scheme I reproduced in Appendix A of Governing the Market) was not to shift resource allocation but simply to signal to emerging capitalists that the government was behind them almost all the way? Perhaps the policies “worked” because they fired up businessmen’s animal spirits by holding up tangible examples of what they could strive for, which fed through into higher rates of capital accumulation. The fact that the liberalization was gradual, calibrated to the firing up of those animal spirits (and capabilities), ensured that a common outcome of fast liberalization did not occur; the emerging national capitalist class was neither wiped out nor encased by foreign capital.

The commentators are quite right to detect some unclarity about these matters in Governing the Market. My tactic in writing the book was to concede as much ground to the neoclassical arguments as possible, and to present them in a way that adherents of those arguments could sign on to (rather than—in the fashion of globalization champions of today2—as straw men, the easier to knock down). I was For example, Martin Wolf, Why Globalization Works: The Case for a Global Market Economy (New Haven, Conn.: Yale University Press, 2004). The book is a passionate appeal for the world to move to a “global market economy,” as though we do not already have a global market economy. Wolf and other liberals present themselves as a minority embattled by mighty “anti-globalization” forces that seek to fragment the world into national units. It is as though a soccer team that is leading by a score of 6 to 2 is trying to exhort itself to greater efforts with the claim that the score is actually the other way around. Wolf’s dichotomies (closed vs. open economy, anti-trade vs. pro-trade, protectionism vs. free trade, anti-globalization vs. pro-globalization, and autarky vs. global market economy) miss what differentiates East Asian development strategy from the neoliberal model. For example, Taiwan and saying that Taiwan (for one) did meet several important neoclassical development conditions—or as we might now say, Washington Consensus conditions. 3 The government did, for example, undertake trade liberalization beginning in the late 1950s and episodically thereafter without significant reversals. I also noted, however, that the neoclassical accounts stopped after describing the liberalization and concluded that it (and reduction of other “distortions”) was the major driver of successful development. These scholars did not draw attention to the relatively high levels of protection that remained, nor did they take note of the selective, strategic nature of that protection, such that it varied from one industry to another in a way related to the government’s larger industrial development strategy. All this was missing from the neoclassical accounts.

In order to see the differences between a GTM approach and a neoliberal approach, one must begin further back, with a basic point about the nature of capitalism. In competitive, arms-length markets, goods and services compete without reference to their conditions of production. Other things like quality being equal, the cheapest ones survive and “grow,” without regard to whether their cost is due to superior organization, superior technology, or more intense exploitation of labor and the environment. The cheapest ones also expand without regard to the implications of each consumer’s choice for the growth, the upgrading, and diversification of the domestic economy, or the implications for societal preferences being expressed through political rather than market mechanisms. The history of capitalism can be written as a history of attempts to place some politically-constructed limits on this logic of the competitive market.4 As Weiss and Thurbon note, the key distinction between a developmental and a neoliberal state hinges not only on whether the state should have a view about the future evolution of the economy, but also a commitment to upgrade technology in existing industries (and services), to promote industries identified as important to the economy’s future growth, and to retain a significant measure of national “ownership.” Korea had high levels of selective protection and fairly “normal” volumes of imports for their size and GDP; their protectionism was not “anti-trade.” See John Williamson, “The Washington Consensus and Beyond,” Economic and Political Weekly, April 12, 2003.

Manfred Bienefeld, “Globalization and Social Change,” in Globalization and Social Change, ed.

Johannes Schmidt and Jacques Hersh (London: Routledge, 2000), 46-66.

Yet there is an even more basic difference, one to do with the congruency between “economic” and “political” space. In the neoliberal approach, the aim is to give maximum scope for consumers untrammeled by national boundaries, and give maximum scope for the owners of capital to maximize their return on capital also untrammeled by national boundaries. The notion of economic and political congruency has little weight. In the GTM approach, the emphasis is on creating greater congruence between economic and political space by creating the means whereby societies can define and sustain some limits and provide some direction to the potentially overwhelming forces of competitive markets—mostly at the national level, but increasingly at the regional level too.

The measure of the difference is caught in statements from exponents of the neoliberal approach. Herbert Stein, chairman of the Council of Economic Advisors during the Reagan years, once famously declared: “If the most efficient way for the United States to get steel is to produce tapes of ‘Dallas’ and sell them to the Japanese, then producing tapes of ‘Dallas’ is our basic industry.”5 A senior U.K. Treasury official recently stated, in response to whether he thought it a problem that the U.K.

retail banking system may be on the way to being dominated by U.S. banks, “ownership is irrelevant. The customer doesn’t care who owns the bank. The customer cares about efficiency.”6 How Do We Know Whether “Governing the Market” Worked in East Asia?

In Governing the Market my concern was to bring the non-neoliberal, GTM facts into the light, and to make a prima facie case that they were “too important to ignore.” My case was based on (1) theoretical considerations (which I misdescribed as the theory of market failure, see below), and on more descriptive points about (2) the policies themselves, (3) the capacity of the economic bureaucracy, and (4) the larger political economy (which explained why the government might see a powerful U.S. Congress, House of Representatives, Industrial Competitiveness Act House Report 98-697, 98th Cong., 2d sess., April 24, 1984, 83.

At a colloqium with Ciao Koch-Weser, German Embassy, London, May 13, 2004.

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) phrase, a “prosperous neighborhood.”39 It is bringing to this Wen Jiabao’s ( multilateral role the conviction that developing nations are the main force both countering against hegemonism and safeguarding world peace. China is endorsing norms of the state taking a central role in industrial upgrading, and pressing for international regimes which make space for developing countries to do so. These efforts may well help other developing countries to follow the examples of China and Taiwan, two countries where governing the market remains strongly institutionalized but with new tools of industrial governance.

China’s internationalized business elite will eventually reach the key transition point of being able to move capital internationally (i.e., to cheaper labor sites and to advanced country markets). The question is what happens next. Will this elite embrace neoliberalism as the justification for reorganizing state policies around “competitive austerity,” so as to strengthen the internationalization of Chinese capital, enforce labor market “flexibility,” and restrict social policies? The history of colonial and comprador elites of the past suggests that the Chinese ruling class, too, will seek to reproduce neoliberalism in national capitalism—not only in China but in other developing countries as well. Perhaps, however, the government will see national advantage in staking a world leadership claim in development matters on the basis of a Beijing Consensus that departs significantly from neoliberalism.

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