State Directed Development

The dominant thinking of the Cold War era was to spread capitalism around the globe. The dominant philosophy of the times being that government was not the solution, but the problem. In its attempt to assist countries develop, the International Monetary Fund implemented policies that forced developing countries to  adopt a neo-liberal approach of economic development. The neo-liberal approach attempts to: reduce the size of government, limit the power of organized labor, open up markets, and stabilize and globalize currency. The thought process was that governments misappropriate resources, and use economic power to further their own goals instead of long term economic development. Atul Kohli in his book State Directed Development argues that there is no evidence that countries with smaller government authorities are more able to develop and industrialize. His argument is that the main factor is the efficacy of the state and state planning that determines the success of economic growth among late-late developers. 

Kohli argues that there are three ideal types of economic regimes in development economics. He uses the term ideal not to mean most beneficial but he means historic patterns of how “state authority is organized and used in the developing world”. At one end he finds the cohesive-capitalist state, at the other the neopatrimonial state. These two extremes will be the models we use in this discussion. Kohli argues that a neopatrimonial state is one where the separation of private and public realms is either weak or nonexistent. His argument is that in developing states with large amounts of political instability where the realms of the private domain and the public domain are blurred, there is an incentive for those in power to use their limited and unstable tenure as a mechanism for rapid wealth accumulation. This is an example of poor governance.

 Good governance is an important factor in discussing economic development. Verena Fritz and Alina Rocha Menocal argue in their article Developmental States in the New Millennium: Concepts and Challenges for a New Aid Agenda that “The emphasis has shifted from determining the ‘right’ role for the state… to questions about commitment and capacity”. In other words, the global community shifted from focusing on procedure, to focusing on economic outcomes. This shift is in line with calls from economist Amartya Sen in his book Development as Freedom that the problem with libertarian economics is that it is procedure based instead of outcome based. Of the various outcomes, Kohli argues that the states that have had the best outcomes have been the cohesive-capitalist states. Kohli argues that the state that illustrates both cohesion of power, and capitalistic institutions will be the most successful. 

The first element of cohesiveness is a discussion of the nature of the government. Kohli says that these states are “characterized by cohesive politics, that is, by centralized and purposive authority structures that often penetrate deep into the society”. Kohli argues that the states that have developed rapidly in the past fifty years are those with governments that forge bonds with the nations major economic groups and co-opt their resources into the goals of the state, and maintain a strict control over labor. Kohli argues that it is this state capacity to co-opt and control multiple levels of the economy that allows it do direct it in a manner far more apt to industrialization than the free market could. He attests that “for better or for worse, these states have also proved to be the most successful agents of deliberate state-led industrialization in peripheral countries”. 

Development of Freedom

From the impressive mind of Mr. Sam Pagano - 

Recently I have come across Amartya Sen’s book Development of Freedom  which marked a turning point in the thinking of how we measure economic development.

Sen's main argument is that it is not enough to simply measure the results of economic development programs in terms of Gross National Product increases, because those increases only identify the health of the national economy as a whole. Because of this rubric, economic development policy is designed to increase Gross National Product. Sen argues that perhaps this methodology is not indicative of true economic development. 

Sen attests that GNP is only one element of economic development, and is a poor indicator of economic development on a micro level. He proposes that instead of looking at the overall health of a nations economy it is instead more important to understand economic development as an increase in the individuals capacity to participate in the market place. Developing nations generally have extremely weak states that cannot fulfill their economic goals and for the most part have extreme economic disparity. Further, GNP would not reflect political corruption in resource rich nations in Latin America that leads to massive wealth saturation in the already elite. While the state might have an influx of capital, that economic capacity will not always extend to the citizen. In neo-patrimonial states, the public and private spheres become one, where the government seeks to maximize individual gains at the expense of the populace. It is this line of reasoning that led Sen to believe that development should be measured by how much programs increase not the state's capacity to participate in the global economy, but the citizens economic facility to compete in the marketplace.

Developing nations already have massive disparity among the lower class and economic elite. Often times economic aid largely benefits those already with economic capacity. Sen argues that economic development should not be focused just on increasing the pre-existing market within a state, but also the individual ability of the citizens to participate in that market, what Sen calls agency. This agency, Sen uses to describe the individuals capability to participate in making their own goals; their capacity to pursue them without significant social, political, economic barriers; and the ability to choose what to do with the fruits of their labors as freedom. Conversely he labels those obstacles, put in place by social, political, and economic actors, as unfreedoms.

Sen argues that political, economic, and cultural freedom are intrinsically linked, each supporting and allowing the other to continue. He also notes that his finding suggest that because of these connections "sustainable agency emerges as a major engine of development".  He goes on to note that "the freedom to enter markets can itself be a significant contribution to development, quite aside from what market conditions may or may not do to promote economic growth or contribution". 

Sen is not arguing that market conditions and state economic policies should not be considered when evaluating the level or success of economic development programs, rather that by understanding the nature between "incomes and achievements, between commodities and capabilities, between our economic wealth and our ability to live as we would like". He draws the line of reasoning to the observation that we do not generate wealth for the sake of wealth, but because wealth allows us to do those things that we would like. If social, political or economic barriers exist that prohibit the accumulation and use of wealth by the individual, what good is the development of an economy designed to partake in that forbidden exchange?

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