Why the State Matters

By Christian Parenti, Jacobin, October 30, 2015

The developmental state has come under fire from both left and right. Neoliberals see the state as a rent-seeking, corrupt, inefficient, market-distorting parasite. Some on the Left reject the very concept of “development” as normalizing and teleological, fixated on economic growth at the expense of the environment and human rights.

These are often valid points. Yet development — by which I mean economic transformation and technological change — and the developmental state have much to offer.

The ultimate problem our planet faces today is anthropogenic climate change, a problem created by one version of “development.” But the contradiction of development is that it produces both problems and solutions. The climate crisis demands “mitigation” (getting off fossil fuels) and “adaptation” (preparing for changes like rising sea levels and mass migration). Contradictory as it may seem, both require not less development but more and different forms of it.  And, if history is any guide, it will have to be the state that forces capital to act.

The actual history of development reveals a pattern: the state does much to facilitate capitalist development; capitalist states can act autonomously and discipline capital, and foster large-scale and rapid technological change — indeed, they’ve been the driving force in this regard — but this only happens when the state’s elite personnel, the politicians and top officialdom, feel threatened.

Below is a sketch of the comparative history of developmentalism. The examples are not meant as templates to emulate. Rather, in the tradition of state-theorizing scholars like Alice Amsden, Sven Beckert, Walden Bellow, Ha-Joon Chang, Peter Evans, Mariana Mazzucato, Frances Fox-Piven, Theda Stockpol, Charles Tilly, and Margret Weir, this history illustrates the central fact that for capital there is no before, after, or outside of the state.

For the Left to successfully meet the impending ecological crisis of climate change it must understand and address state power.

Early Developmentalism

The historical triumph of the bourgeois mode of production is simultaneously the story of the bourgeoisie’s political triumph and co-evolution with the modern state. During Europe’s transition from feudalism to capitalism, from the sixteenth century through eighteenth century, absolutist states used legal power to grow their nascent capitalist sectors so as to fund needed military investments and catch up with the first capitalist power — England.

Early French industrialization, for example, relied heavily on the state.  Jean-Baptiste Colbert, Minister of Finance to Louis XIV, used state investment, protectionism, subsidies, and artificial monopolies to spur manufacturing in seventeenth-century France.

But the story of developmentalism as a theory really begins with the early American republic and the economic guidance of Alexander Hamilton. As the country’s first treasury secretary, Hamilton faced the monumental task of creating a national economy out of thirteen largely independent and stagnant sub-units. Fearing social collapse, civil war, and even re-conquest by Britain, Hamilton presented a plan for economic survival in his Report On Manufactures, presented to Congress in 1791.

Hamilton’s Report advocated a robustly interventionist role for government, using tariffs on imported manufactured goods, but easy importation of necessary raw materials; international recruitment of skilled labor; government support for “new inventions and discoveries at home” and for the acquisition of foreign technology; government investment in infrastructure, or “internal improvements”; a partially government-owned national bank and national credit system with federal debt as its bedrock; and, subsidies and support for innovation including legal protection for intellectual property rights for inventors.

After Hamilton’s death, Henry Clay and the political economist Henry Carey continued to champion his ideas, by then known as the American System.  During the late 1820s German economist Fredrich List absorbed these ideas while living in Pennsylvania. Back in Germany, List and his fellow members of the German Historical School of Economics refined and elaborated Hamiltonian defensive developmentalism into the more generalizable National System. Hamilton’s “infant manufactures” now became List’s theory of “infant industries.”

Imitating Enemies in Germany

The Industrial Revolution in Britain only strengthened its imperial dominance. By the early nineteenth century rivals such as Germany were falling behind. To correct this, the governments of Germany’s many small independent states offered financing, management, and subsidies; established firms, created producer cooperatives, and made extensive public investments in transportation.

German unification, emerging from Prussia’s victory over France in 1871, kicked this decentralized developmentalism into high gear. With more than thirty small states federated under the strong leadership of Chancellor Otto Von Bismarck a whole new level of state support for industry became available. The 1873 global economic crisis made such intervention essential, and the advocates of free trade were sidelined.

In 1879, Germany imposed heavy protective tariffs, began nationalizing its railroads, forced the consolidation of small firms into larger companies, and pushed the cartelization of whole industries.  That last policy was supported by German social democrats, who viewed cartelization as a step towards a planned and fully socialized economy.

The overall result was significant growth in railroads, steel, petrochemicals, and weapons. By 1913, Germany had the largest chemical industry, and the second largest rail system and steel industry in the world. Like Hamilton’s agenda, Germany’s industrial statecraft was fundamentally defensive. The threat abroad was Britain; at home it was socialism; to be strong Germany had to be wealthy. Orchestrating the necessary industrial leap forward was simply too much for the fragmented capitalist class. The guidance of government was essential.

Autarky Ends in Japan

Around the same time, a similar process of defensively imitating rivals to catch up with them began in Japan. In 1854, Commodore Perry of the US Navy sailed in to Tokyo harbor and demanded that Japan open its economy to American merchants. Next came Britain, France, Russia, and Holland. When Japan resisted, combined Western fleets defeated and disarmed its forces.

The deepening crises led to revolution. In 1868, the self-secluding Tokugawa Shogunate was overthrown by an alliance of modernizing interests that used restoration of the Meiji imperial line as their traditionalist political cover. With national defense as motivation they began a crash program of top-down, society-wide modernization.

This meant mandatory secularization and Westernization of education and dress; dissolution of feudal privileges; and creation of a constitutional democracy. The government imposed land reform, which helped break the political power of conservative agrarian elites and facilitated a capitalist innovation of agriculture, which boosted production.

Most importantly the new government began the process of state-led industrialization. The goal was summed up in the phrase fukoku kyohei or “wealthy country, strong military.” To jump-start the necessary economic growth, Japanese officials were sent to study in the West while some three thousand European and American managers, scientists, engineers, economists, and military experts were recruited to work in Japan on limited contracts.

The government created a powerful ministry of industry to drive and coordinate the economic transformation with planning and a robust program of nationalization and public works: numerous mines were partially or completely taken over by the state, while the ministry built government-owned railroads, shipyards, iron, steel, glass, cement, and textile factories. Ministry agents acquired and copied cutting-edge technology, like the telephone.

As local engineering and management expertise increased, imported equipment and know-how were steadily replaced with homegrown replacements in a pattern that would become known as import-substitution industrialization (ISI).

Turkey and Iran

Capitalist development propelled European imperialism and colonization further into new regions; Africa, the Middle East, and Asia were increasingly threatened. States at the frontier of imperial reach realized that for military reasons alone they would have to modernize — imitating the technologically advanced economies of the West. One of the most significant examples of this, because it served as a model for many regional neighbors, was Mustafa Kemal Atatürk’s Turkey.

At the end of World War I, the remnants of the Ottoman Empire lay ruined and partially occupied by foreign militaries. Kemal’s method of reorganization was tremendous violence directed against occupying European forces but also against non-Turkish civilian populations like Greeks and Kurds, and the Armenians who suffered genocidal ethnic cleansing.

Starting in the mid 1920s, Kemal launched Turkey on the path of statist defensive development; his government nationalized the French-owned tobacco monopoly, set up sugar mills, and invested in railways and other infrastructure, but also encouraged private enterprise. Agriculture began to modernize and production returned to pre-war levels while industry and services grew at more than 9 percent per year through most of the 1920s.

The depression significantly deepened the state’s economic role. In 1931 Ataturk’s party adopted what it called etatism, meaning a state-guided mixed economy described as a path between capitalism and socialism. Private enterprise would remain fundamental, but the state declared its right to shape, and drive the economy towards industrialization with five-year plans, technology acquisition, protective tariffs, state-owned industries and infrastructure. (As late as the 1990s, state-owned firms still accounted for about 40 percent of the value produced by the Turkish manufacturing sector.)

After World War II industry grew robustly, going from a mere 12 percent of economic activity to 25 percent of GDP. Strong sectors included: food processing, petroleum, textiles, iron and steel. Between 1923 and 1985, economic growth averaged a respectable 6 percent a year.

Iran took direct inspiration from Turkey: Reza Shah Pahlavi, who rose from humble origins through an elite modernizing military unit of “Cossacks” also followed Atatürk. In his first five years, Reza Shah built a rail network connecting inland cities to each other and to ports, thus stimulating production trade and consumption. By 1941 railroads traversed much of Iran.

Government financial incentives, funded by modest taxes on the British-controlled oil industry, facilitated the construction of modern manufacturing plants. Iran’s own ministry of industry (similar to Japan) used government-sanctioned monopolies, low-interest loans, and direct investment in plants and equipment to bring forth a manufacturing base.

In 1925 a mere 20 industrial factories existed in Iran. By 1941 there were 346 modern factories, including textile mills, sugar refineries, match factories, chemical plants, glassworks, tobacco, and tea processing.

Like many developmentalists the first shah was motivated by fear. In his case it was fear of communism and fear of total domination by his erstwhile economic overlords, the British. He was a ruthless, violent opponent of the Left and restive ethnic minorities. Like too many developmentalists he fixated on industry and the urban sector, to the detriment of the rural population. But his state launched Iran’s industrialization and important social gains followed.

The Depression

The economic crisis of the Great Depression and the collapse of international trade brought capitalism to its knees. As a result governments all over the world turned in desperation to interventionist state economic action through regulation, forced cartelization, price controls, and an expansion of deficit-funded public works.

The Great Depression forced the United States back to its Hamiltonian roots and then some. In fact, Italian dictator Benito Mussolini, who prior to the Great Depression was not particularly statist in his economic policies, called Franklin Delano Roosevelt’s New Deal “boldly… interventionist in the field of economics.”

However, the ultimate statist project of the interwar years was the Red developmentalism of the Bolshevik Revolution. The backdrop to every capitalist state’s economic interventions was the indirect but mortal threat of the Soviet example and the movements it inspired across the world. The Bolsheviks showed that under a strong state even a deeply backward, sprawling, agrarian economy could march towards the electric lights and blast furnaces of modernity.

The USSR’s mere existence, despite its many faults, suggested that global capitalism could be replaced and popular movements — many of them communist — propelled capitalist political elites towards social-democratic reform in core economies and toward growth-oriented development in peripheral and semi-peripheral economies.

Corporatism in Mexico

From 1920 until the mid 1980s, the Mexican economy, like so many others, developed along state-led corporatist lines. The post-revolutionary government set an agenda of import-substitution industrialization, economic modernization, and capitalist development that pivoted on the world’s first technically “socialist” constitution.

Article 27 of that 1917 document read: “In the Nation is vested the direct ownership of all natural resources.” Massive land reform liberated much of the peasantry from debt peonage. By 1940 almost 23 percent of all land was collectively owned in the ejido system, up from a mere 1.6 percent at the end of the revolution. By 1960 ejidos worked almost half of all cultivated land.

On the industrial front, Mexican capitalists were allowed to form monopolies and cartels, but these were tightly regulated. The state supported business with subsidies, tariffs, and regulations designed to blunt the most ravaging effects of unbridled inter-firm competition and to protect Mexican companies from foreign rivals. In turn capitalists were expected to cooperate with official trade unions.

Mexican corporatism deepened significantly during the depression. President Lazaro Cárdenas accelerated land reforms and nationalized large parts of basic industry. By 1938, Cárdenas had taken over the previously private and foreign-owned railroads and, crucially, the oil industry. Eventually, the Mexican government would own hundreds of firms involved in everything from fish processing to banking.

Meanwhile, trade unions won legal rights, although organized labor’s more radical elements were marginalized. Union agitation and collective bargaining increased wages, which in turn spurred consumption and the growth of internal markets. Those developments had the effect of encouraging more productive investment, creating further employment, consumption, and ultimately profits.

The Brazilian Case

Latin America’s largest economy, Brazil, also owes its industrial might to a deliberate state-led launch. It began with the rise of Getúlio Vargas, a nationalist, populist, anticommunist who came to power in a bloodless coup after losing a contested election in 1930. Varga sought to turn Brazil’s semi-feudal, agrarian, export-oriented economy into a more technologically advanced, urbanized, industrial economy with a robust internal market. Part of this involved checking the power of agrarian elites.

Following classic Hamiltonian-style import-substitution industrialization Vargas created government-directed industrial syndicates, imposed protective tariffs of 39 percent, devalued the currency (thus discouraging imports and encouraging exports); and began the familiar pattern of five-year plans that sought to build up basic heavy industry. The government offered long-term low interest loans, created government-supervised industries, and even owned major industrial firms, such as the national steel company, hydroelectric company, and automobile manufacturer.

In the five years between 1933 and 1938, Brazil’s industrial production increased by 40 percent. To quell dissent and expand the internal market Vargas guaranteed minimum wages. Dissatisfied with the pace at which foreign companies were developing Brazil’s energy resources, Vargas created the state petroleum company Petrobras in 1953.

Vargas was in no way a leftist. He violently repressed the communists who were strong and agitating, censored writers, and barred dark-skinned youth from the best military academies. Unlike Mexico’s more progressive corporatism, Vargas’s Estado Novo did not include badly needed land reform. Ultimately, the countryside, particularly in the arid northeast, stagnated and industrial prosperity remained concentrated in the south.

Discipline and Rewards in South Korea

Korean industrialization was badly damaged by World War II and the Korean War but economic growth in the late forties and fifties was not too bad, at more than 5 percent a year. But the economy was fundamentally dependent on US aid.

Development switched into high gear and moved in a more independent direction after a coup d’état in May 1961, which eventually resulted in Park Chung Hee leading a large military junta. Park had been trained in Japan and his style of state-led industrialization was modeled on Meiji Japan.

For his opening act, Park drastically devalued the currency in 1961 and 1964, making South Korean exports cheaper and more competitive on foreign markets. He removed taxes and restrictions on imported raw materials and intermediate goods necessary for production and directly subsidized some firms.

Existing industries like textiles, apparel, and electronics immediately revived. Park quickly nationalized all banks, and took control of all other forms of institutional credit, even foreign borrowing. With total control of finance, Park bent Korea’s burgeoning capitalist class to his will.

Imitating Japan’s ministry of industry, Park set up the Economic Planning Board staffed with competent and committed bureaucrats who designed and executed detailed five-year plans. The board was the state’s economic command center, setting production and export targets, and directing cheap long-term credit to firms that successfully met their targets.

Firms that failed to do so had a harder time. Dysfunctional companies had their credit severely restricted and when they collapsed their equipment, contracts, and talent were parceled out like industrial carrion to successful and hungry competitors.

To increase investment, the state imposed severe capital controls. Anyone found illegally moving large amounts of money out of Korea was punished with a minimum sentence of ten years in prison — the maximum sentence was the death penalty. South Korean capitalists were free to get rich, but they had to do so in accordance with the state’s plan.

Strategic new industries — electronics, shipbuilding, and automobiles — were especially supported while foreign direct investment was cautiously limited. When Korean firms were ready for international competition, the government worked with them to build export markets. Successful exporters were rewarded with reduction of corporate and private income taxes, business tax exemptions, and accelerated depreciation allowances. A staunch anti-communist in a Cold War frontline state, Park’s plans received generous US financing and access to US markets.

Between 1965 and 1978, the size of the South Korean economy increased by a staggering 500 percent. From these arrangements grew the mighty business conglomerates known as the chaebol.  In all of this, the average Korean’s standard of living rose dramatically because of the intense, often-dangerous violent struggle of its radical students and industrial trade unions.

The Global City State

Singapore’s story is similar. Founded in 1819 as an outpost of the British East India Company, Singapore’s economy was all about trade and trans-continental shipment. British decolonization announced in 1968 after two decades of anti-colonial agitation changed all that. The threat in the case of Singapore was pressure from the Left, ethnic divisions, and most of all the apparent unviability of a city-state with almost no natural resources.

Under the leadership of a former labor lawyer and fourth-generation Chinese Singaporean, Lee Kuan Yew, the country began an astoundingly rapid state-led industrialization.

Like Japan and South Korea before it, Singapore set up a central economic ministry, the economic development board, which became increasingly powerful over time. Labor intensive export-oriented industries were supported with generous tax breaks and protective tariffs.

To mobilize investment capital, the state imposed forced savings plans on both employers and employees. Foreign direct investment was welcomed, particularly if the firms brought with them advanced technology and had already established export markets. To build an internal market and quiet the robust communist-infused trade union left, Singapore established a comprehensive welfare state.

During the 1960s and ’70s, Singapore’s yearly growth rates were never below 5 percent and often as high as 15 percent. Labor-intensive electronics assembly was steadily replaced by skilled, higher value-added sectors like computers, petroleum refining, and petrochemicals. By the 1980s, Singapore had become the third-largest petroleum refiner in the world, the second-largest producer of oil rigs, and a major center for oil rig and tanker maintenance.

Green Developmentalism?

The point of this brief survey is not to suggest that these developmental states — often ruled by thuggish authoritarians — offer a model. Nor is it to suggest that a return to these types of developmental models would be positive. Beyond often producing low-quality, uncompetitive goods, ISI regimes had internal limitations.

Rather, the point is that the actual history of capitalist development is almost always the history of state-guided development. To reform capitalism and or move beyond it, the Left needs to place the state front and center in its strategic considerations. Appeals to corporate social responsibility, attempts to shame capital into reform, strategies that declare politics “broken” and seek to circumvent the state, or escapist hyper-localism — all hallmarks of American environmentalism — are fundamentally unrealistic.

The unacknowledged centrality of the state to the functioning of capitalism is especially relevant today, with a devastating climate crisis already upon us in the form of desertification, powerful storms, ocean acidification, melting glaciers, incrementally rising sea levels, and mass migrations. The crisis requires immediate action on a truly massive scale.

Step one is “mitigation” — getting off fossil fuels. That means euthanizing the fossil fuel industry, destroying the most powerful corporations that have ever existed or forcing their rapid transformation into clean energy companies. Only states have the power to compel such a transition.

But for the state to act, political elites must be targeted by movements, made to feel threatened enough to exercise the state’s relative autonomy to capital’s short-term prerogatives. Local initiatives, moral suasion, rational appeals — none of these will suffice.

We need movements that, at least for now, seek to use state power to force capital into new patterns of investment and technological development. Thankfully, the US climate movement is increasingly doing that, for example, by targeting the federal government’s fossil-fuel leasing on public lands, but much more is needed.

Mitigation is not just about the suppression of fossil fuel technology. Even if we consume far less energy, mitigation will require a gargantuan project of clean energy-based re-development. What institutions could initiate, guide, and direct such a process and do so in the near term? States. But government will only discipline capital if threatened. And for that we need strong, smart, aggressive movements that will pressure states to act.

Source: https://www.jacobinmag.com/2015/10/developmentalism-neoliberalism-climate-change-hamilton/