Finally, Someone Starts Talking About the Developmental State

BusinessWeek just wrote a short piece on the rise of state capitalism, and how governments are not completely naive when it comes to generating innovative industries. The article gives several examples of countries that have successfully developed companies, including Brazil with Embraer and Singapore with several of its research companies. What's exciting about this story is that the free-market capitalism press is beginning to write about state capitalism without the vitriol seen in the past few decades.

Honestly, we are starting to see the small cracks in the so-called "Washington Consensus" that has dominated development approaches for the past three decades. That Consensus entails privatization of state-owned properties, deregulation, and policy reforms like taxes to spur investment and create a stronger free-market environment for growth. The problem with the Washington Consensus, of course, is that it has been an unmitigated failure in pretty much any country in which it has been applied to.

State capitalism, development states, and other names all refer to one approach to development: namely, the use of government as a coordinating force in the economy. Poor countries that wish to grow are stymied by the "all-or-nothing" problem (my term for it) -- how do you build multiple companies and sectors of the economy in synchronicity without strong private investment (since no money exists to invest)? The free market is great at coordination in relatively developed markets today, where innovation and creative destruction build new industries to replace old ones. It is less useful in countries that have few industries and need long-term development on the order of decades. There is little private capital that will support that investment horizon.

State capitalism is the theoretical approach that the Asian tigers and Japan embraced to develop throughout the latter half of the 20th century. Lesser known is that the strategies used by these countries were also used by the United States throughout the 19th century (you can read more about it from Kicking Away The Ladder by Ha-Joon Chang. What the United States and the world financial institutions like the World Bank are beginning to finally realize is that the free market is not some sort of panacea to economic problems.

In fact, I will go further and say that the criticism of the Washington Consensus, whether it comes from democracy advocates like William Easterly or Dambisa Moyo or from state capitalists like Ha-joon Chang, is one of the most important changes in modern human history. Considering the importance of these debates to the lives of billions of the world's poorest people, the fact that we are finally confronting the failures of the past is very exciting.

I would note that part of this change has been the recent success of China. Some call state capitalism the "Beijing Consensus," although I feel that ignores too many other successful countries that have used this formula before. One of the reasons that state capitalism is getting a fair hearing is simply because China is investing a lot in African nations, often ignoring the policies of the World Bank in the process. Money talks. But the good news is that we now have several policies to choose from, and the competition between "Washington" and "Beijing" can only be seen as a good thing for humans.