neo liberalism revised? a critical account of world bank ..._r.pdf · revised neo-liberal view is...

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THIS ARTICLE investigates recent attempts by the World

Bank1 to revise its commitment to neo-liberal ideas. The

concepts of market friendly intervention and good

governance are examined. Both concepts are rejected on the

basis of their continued commitment to a flawed neo-liberal

paradigm, which wrongly sees states as inherently inefficient

economic actors and reduces development to a simple process of

technical policy making. The paper therefore also contends that

the World Bank’s optimism concerning the prospects for

structural adjustment is misplaced, and some evidence is

considered to back up this claim. Finally, I briefly suggest an

alternative account, focusing on social structures within localities

and the relationship between national economies and the global

economy, which shows the continued relevance of state economic

intervention for sustained capitalist development.

These issues are discussed in four sections. First, the ‘classical’

neo-liberal approach to development is briefly reviewed, along

with the reasons why this view has been undermined. Second, the

revised neo-liberal view is outlined in some detail, and it is here

Neo liberalism revised? A criticalaccount of World Bank conceptsof good governance and marketfriendly intervention

by Ray Kiely

This article examines recent World Bank reports on the role of the statein the development process, with particular reference to the rise of theEast Asian NICs and the crisis of ‘governance’ in sub-SaharanAfrica. The concepts of market friendly intervention and goodgovernance are critically discussed, and are found to be inadequateas explanations for East Asian ‘success’ and African ‘failure’. Analternative explanation for the rise of the NICs is presented, whichdraws out some of the implications for the developing world.

that the ideas of market friendly intervention and good

governance are introduced. Section three critically discusses

these ideas, along with some consideration of their implications

for adjustment policies. Section four briefly outlines the basis for

an alternative approach to understanding the rise of the East

Asian newly industrialised countries (NICs)2 and I then conclude

by showing how this approach can be used to examine the

prospects for late developers in the current global context.

1. NEO-LIBERALISM AND DEVELOPMENT

The onset of the ‘debt crisis’ in 1982 led to a serious challenge to

‘orthodox’ development economics. Import-substituting nation-

states faced a heavy debt-burden as they replaced the import of

consumer goods by the import of capital goods, and state

protection to domestic industry led to inefficiency and

corruption. This scenario was in sharp contrast to the outward

looking, export-oriented policies of the East Asian newly

industrialising countries. Although these too suffered from

recession in the early 1980s, and South Korea was a large debtor

nation in 1982, recovery was rapid and Korea continually

managed to meet its interest repayments without the devastation

that was witnessed in much of Africa, Latin America, and the

Indian sub-continent.

It was in this context of unsuccessful import-substituting

countries, and successful export-oriented countries, that the

neo-liberal ‘counter-revolution’ (Toye 1987) in development

economics emerged. Neo-liberals argued that the NICs were

not ‘exceptions’ to the rule of a North-South divide, but they in

fact constituted a ‘model’ for the rest of the developing world to

follow. According to Tsiang and Wu (1985: 329), success ‘was

achieved not by economic tricks, but by sensible policies based

on sound neo-classical principles.’

Although some neo-liberals pay lip-service to the specificity

of East Asian culture, other writers clearly regard the East Asian

experience as something which can (or should) more or less be

replicated by the rest of the world (Fukuyama 1992: 100-08;

Berger and Tsaio 1987). It is for this reason that the neo-liberal

counter-revolution can be described as a new version of

modernisation theory—the ‘western model’ of Rostowian theory

is replaced by the ‘East Asian model’ of neo-liberal theory.

64 Capital & Class #64

Neo-liberals argue that the success of the East Asian NICs can

be attributed to three basic policies. These are:

(i) limited government intervention in the economy;

(ii) a low level of price distortion in the economy;

(iii)an outward oriented strategy of export promotion (Balassa

et al. 1986).

These principles formed the basis for structural adjustment

programmes in the developing world in the 1980s and 90s.3 In

practical terms, these policies include the removal of obstacles

such as state subsidies to industry, minimum wages and price

controls. Combined with a competitive exchange rate, prices

are said to reflect the laws of supply and demand, and so investors

and consumers can respond to the correct price signals, which in

turn facilitates high levels of economic growth. The World Bank

therefore places a premium on the close correlation between a low

level of price distortion and rapid economic development (World

Bank 1983: 60-3). Policies of limited government intervention in

the economy and an outward oriented trade strategy were said to

lead to a low level of price distortion, which thereby promotes

efficiency. Prices should be set by the ‘natural’ laws of supply and

demand, unhindered by the distorting effects of government

subsidies, minimum wages or price controls. In a study of the

performance of thirty-one developing economies in the 1970s

(World Bank 1983), it was claimed that those with low rates of

price distortion and an outward orientation to the world economy

tended to perform far more effectively than medium or high

distortion countries. The standard neo-liberal conclusion was

reached that ‘countries applying outward-oriented development

strategies had a superior performance in terms of export,

economic growth, and employment’ (Balassa 1981: 16).

This version of the neo-liberal perspective was undermined in

two ways. First, the evidence that there was a strong correlation

between low levels of price distortion and high economic growth

was challenged. As the Bank’s evidence itself makes clear, price

distortions can only explain about one-third of the differences in

growth rates between different countries (Jenkins 1992: 193),

while some of the classifications (such as free market Chile

having a high level of price distortion) are questionable. Perhaps

most importantly, the evidence itself does not confirm the

proposition that trade policy in itself is a major determinant of

The World Bank and development 65

economic growth. The relationship between price distortion,

outward orientation and economic growth may be the result of

a third factor, such as structural problems which slow down

economic growth (Jenkins 1992: 194). Thus, the strong inward-

orientation of many of the poorest economies in the world may

be a reflection, rather than a cause, of slow rates of economic

growth (Singer 1988).

Second, East Asian industrialisation processes had strongly

interventionist states. A wide body of literature has convincingly

challenged the crude neo-liberal argument that East Asia is

simply a model of development based on market forces. The

work of White (1988), Amsden (1989), and Rodan (1989), among

many others, has shown that state intervention was widespread.

After a period of import substitution industrialisation in the

1950s, South Korea moved to a policy of export promotion from

1961 onwards. However, this policy did not mean that import

substitution was abandoned as industries continued to be

subsidised, and the state planned industrial output through

institutions such as the Economic Planning Board and the

Ministry of Trade and Industry. Moreover, banking was

nationalised in 1961 and state control was thus used to target

specific industries through access to credit. In the 1970s heavy

industries such as iron and steel benefited from such preferential

treatment. The most successful firms in terms of meeting export

targets were also rewarded by the state by being granted access to

restricted imports, and were allowed to recover losses made on

the world market through sales in the lucrative protected domestic

market. In Taiwan the state’s control of credit led to a similar

policy, while in Singapore and Hong Kong the state has played a

key role in subsidising food and public housing and (in the case

of Singapore) in direct investment financed through the

compulsory insurance scheme known as the Central Provident

Fund (Rodan 1989; Schiffer 1991; Kiely 1997: ch.7).

2. THE REVISED NEO-LIBERAL MODEL

The concern of this section is to examine a more subtle version

of the neo-liberal argument, based on the notion that

interventions have been more market friendly in East Asia than

elsewhere, and that this explains the success of the former and

failure of the latter. This will be done through an examination of


the notions of ‘market friendly intervention’ and ‘good

governance’ (World Bank 1989, 1991, 1993).

(i) Market friendly intervention

The basic contention of the World Bank’s report The East

Asian Miracle (1993: 5) is that the East Asian miracle economies

‘achieved high growth by getting the basics right.’ This statement

represents an important qualification to the older argument

(World Bank 1983: 60-3) that East Asian success was due to a

low level of price distortion in the economy—in other words,

high growth was a result of ‘getting prices right.’ The Bank

accepts that intervention did occur in the East Asian

economies—the 1993 Report lists a number of factors including

targeting industries, subsidies, protecting domestic import

substitutes, state banking, state-led R & D, export targets and

close consultation between public and private sector (World

Bank 1993: 5-6). However, the Report argues that these

interventions meet the criteria of market friendly, as opposed

to market distorting, intervention.4 In this development strategy,

‘the appropriate role of government is to ensure adequate

investments in people, provide a competitive climate for private

enterprise, keep the economy open to international trade, and

maintain a stable macroeconomy’ (World Bank 1993: 10).

Market friendly intervention can take one of three forms (World

Bank 1991: 5):

(i) States intervene reluctantly, preferring to ‘let markets

work.’

(ii) States apply checks and balances, subjecting interventions

‘to the discipline of international and domestic markets.’

(iii)States intervene openly, and are ‘subject to rules rather

than to official discretion.’

According to the World Bank, the interventions in East Asia

conformed to these basic principles. The key to the high growth

(and equitable development) can be found:

in fundamentally sound, market-oriented policies. Labor markets

were allowed to work. Financial markets, although subject to

more selective interventions to allocate credit, generally had low

distortions and limited subsidies compared with other developing


economies. Import substitution…was quickly accompanied by

the promotion of exports and duty-free admission of imports for

exporters. The result was limited differences between international

relative and domestic relative prices…Market forces and

competitive pressures guided resources into activities that were

consistent with comparative advantage and, in the case of labor-

intensive exports, laid the foundation for learning international

best practice and subsequent industrial upgrading (World Bank

1993: 325).

(ii) Good governance

The Bank has recognised that an excessive focus on economics is

one-sided, and that there is also a need to emphasise the

institutional context within which adjustment policies take place.

Adjusting countries need to conform to the notion of ‘good

governance’ (World Bank 1989, 1992). Although there has been

some reluctance to provide a comprehensive definition of this

concept, it appears to include an emphasis on political pluralism,

accountability and the rule of law (World Bank 1989: 60-1, 192).

The Bank has been cautious about arguing that these entail

democratisation, for fear of intervening in the political affairs of

sovereign countries.

Most important however, is that the Bank sees good

governance as a means to an end; it is ‘synonymous with sound

development management.’ (World Bank 1992: 1) Such

management requires ‘not just less government but better

government—government that concentrates its efforts less on

direct interventions and more on enabling others to be

productive.’ (World Bank 1989: 5) This argument, taken from

the Bank’s first work on the concept of good governance, repeats

the classical neo-liberal argument that state spending is

unproductive and that it crowds out the wealth creating activity

of rational, individual entrepreneurs. The role of the state is to

enable the private sector to lead economic activity—state activity,

in other words, should be market friendly. As Schmitz (1995: 69)

argues:

The key thing to ask of developing countries was not whether they

were democracies or autocracies…but whether they had the

governing will and wherewithal to create the ‘appropriate policy

framework’ required to achieve efficient markets and the


successful implementation of donor and creditor-mandated

economic liberalization programs.

In this way, the good governance argument complements

the market friendly one. The East Asian miracle economies

were models of good governance as interventions in the

economy were either irrelevant or they cancelled each other out.

The rest of the developing world, particularly sub-Saharan

Africa and including eastern Europe, should learn from their

example. Good governance may refer to efficient civil servants,

the rule of law and so on, but the key point is that these

institutions allow limited government to operate. In a recent

report (World Bank 1994: 2, 10), the Bank was quite explicit

about this:

there is hope that Africa, like East Asia thirty years ago, will

move onto a faster development track. For that to happen, more

progress will be required in macroeconomic reform—to provide

a stable environment in which economic activity can

flourish…Good macroeconomic policies have paid off in East

Asia, and they will pay off in Africa.

Such policies are said to include less taxation of agriculture,

putting exporters first, liberalising imports, privatisation and

fiscal reform (World Bank 1994: 10-14).

So, to summarise: the earlier neo-liberal view (Balassa et al.

1986) that East Asian success was a product of sound policies of

limited government has been altered so that proper recognition

is given to the fact that the state was interventionist. The new view

accepts the reality of state intervention, but argues that this did

not fundamentally alter a policy of industrial development

through market forces. State regulations did not hinder the

development of an industrial structure that would have emerged

through market forces anyway. This argument is similar to that

proposed by Berger (1979: 64) who argued that ‘the crux of the

Korean example is that the active interventionist attitude of the

state has been aimed at applying moderate incentives which are

very close to the relative prices of products and factors that

would prevail in a situation of free trade…It is as though the

government were ‘simulating’ a free market.’ Such interventions

are contrasted with the distorting activities of states in much of

the developing world (World Bank 1993: 351). Good governance


includes a number of institutional factors, which are considered

important insofar as they will allow market friendly intervention

to occur.

3. ASSESSING THE REVISED MODEL

This section examines the revised neo-liberal model through an

assessment of (i) the idea of market friendly intervention; (ii) the

idea of good governance; (iii) the implications for structural

adjustment.

(i) Market friendly intervention

The main problem with the World Bank’s report is its tendency

to isolate specific examples of state intervention, and to then

show how these were counter-balanced by further interventions.

For example, in South Korea and Taiwan the potentially

damaging policy of import-substitution was said to be cancelled

out by policies of export promotion, with the result that a market-

conforming structure emerged despite the interventions (World

Bank 1993: 292-316). However, the effects of interventions

cannot be adequately assessed in this way, and the effect of any

particular state regulation must be analysed through its impact on

the economy as a whole. Thus for example, industrial policy

impacts on a country’s balance of payments through the spin-off

effects into other industries (Singh 1994: 17).

Furthermore, the Bank’s argument (1993: 316) rests on the

mistaken assumption that the textiles industry was not protected

by the state. In fact, despite the labour intensive nature of this

particular industry, it was heavily protected from foreign

competition. It was specifically promoted by the state from the

early 1960s, receiving preferential loans and tax and tariff

exemptions (Amsden 1989: 66-8). Therefore, the existence of a

large textiles industry ‘is not proof that industrial policy did not

work but in fact suggests that it worked really well, as this was one

of the most heavily promoted sectors.’ (Chang 1995: 214).

The argument that protectionism was largely irrelevant

because it was counter-balanced by the setting of export targets

is similarly problematic. This claim ignores how protectionism

alleviated potential balance of payments constraints and helped

to promote technical change and hence productivity growth


through the linking of import controls to export targets (Singh

1994: 20).

Similarly, the World Bank recognises that South Korea and

Taiwan were restrictive in their policies towards direct foreign

investment, but argues that this was counteracted by a policy of

openness to foreign technology acquisition (World Bank 1993:

21). However, as Lall (1994: 651) argues:

There is no analysis in the study…of the effects of different

modes of technology import on the industrial development:

different forms of openness were perceived by these countries to

have different implications for the development of their own

innovative capabilities, and this formed a crucial element of

their industrial strategies.

In particular, in Korea and Taiwan the state policy of guiding

the market was achieved far more easily by a reliance on domestic

rather than foreign firms, and it facilitated the growth of

substantial Research and Development activities5 (Singh 1994:

21–2). These developments were clearly crucial to the ability of

Korea and Taiwan to ‘unpack’, utilise and build upon imported

technologies, and in the long run to become internationally

competitive and break into export markets (Lall 1994: 651). This

contrasts sharply with the alleged failures of import substituters

in Latin America (though not India) which was, in terms of its

open door policy to foreign investment, more ‘market friendly’

than Korea and Taiwan (Jenkins 1991: 50).

Some ‘market unfriendly’ technological upgradings, such as

Korea’s heavy and chemical industry (HCI) drive, are recognised

by the Bank. In this case however, the non-market conforming

interventions are criticised for their costs in terms of support for

inefficient and expensive industries (World Bank 1993: 309).

Closer empirical scrutiny of these costs shows that in fact the most

targeted heavy industries (chemicals and machinery) accounted

for a lower share of outstanding nonperforming loans than

outstanding total loans, and that 60 per cent of all nonperforming

loans were accounted for by the construction industry’s over-

investment in the Middle East (Amsden & Euh 1990). Further-

more, the drive can hardly be considered a disaster when one

considers that by the early 1980s, heavy industries accounted

for most of the country’s export earnings (Amsden 1994: 631). It

was in this period that the Korean economy was substantially


liberalised, but only the most wishful of neo-liberal thinkers

would attempt to argue that it was this process (which only

began in 1981) which led to the competitiveness of Korean heavy

industry. The liberalisation of trade did go hand in hand with the

expansion of heavy industries in the 1980s, but the causal factors

were those market unfriendly policies of state targeting and

technical upgrading in the 1970s. Moreover, the Korean state has

continued to protect high technology sectors that would otherwise

be undermined by foreign competition (Amsden 1993: 206-10).

These examples show the inadequacies of the World Bank

Report, and its stubborn refusal to make a bold move away from

the neo-liberal paradigm. The Report ‘is almost a textbook

example of neoclassicists visibly confused but too proud to admit

their failure—having been so quick to blame government for

economic failures in the past, they are now reluctant to admit a

positive role for government in a successful economy.’ (Kwon

1994: 635) Such confusion leads to faulty logic in places and a

number of contradictory claims. For example, the Bank (1993: 6)

argues that one cannot establish statistical causal relationships

between intervention and growth, as we cannot know what

would have happened in the absence of such an intervention.

However, this does not stop the Bank from using such a

methodology in order to try to establish a causal link between

growth and non-intervention (World Bank 1993: 325; Amsden

1994: 628). Thus, in arguing that industrial policy created a

market conforming industrial structure, the Report concludes that

industrial policy was ineffective. But as Amsden (1994: 629)

states:

As this test is formulated, industrial policy cannot win: if it fulfils

neo-classical expectations, it is ‘ineffective’; if it violates them, it

is inefficient.

One final, and most important, point must be made about the

market friendly approach. The basic argument is that

interventions were largely irrelevant in East Asia because they were

market conforming, and therefore ‘relative price distortions

were limited and indeed smaller than in most other developing

countries.’ (World Bank 1993: 351) Of course this assertion can

be subject to exactly the same criticisms as that of the price

distortion index in the 1983 World Development Report, discussed

above. But even leaving that aside, the evidence in the 1993


Report can be used against the Bank’s own arguments. This is

because the Bank (1993: 301) recognises that the degree of high

outward orientation and low price distortion varies between the

Asian NICs—Hong Kong, Malaysia, Singapore, Indonesia and

Thailand have a low rate of price distortion, whereas Japan,

Korea, Taiwan and China do not do so well. In fact, these latter

countries actually rank below supposedly inefficient import-

substituting industrialisers such as Brazil, India, Mexico, Pakistan

and Venezuela. Interestingly, the Report only comments on the

variations within the Asian NICs, rather than the fact that the

Bank’s evidence on prices implies that Brazil and India are more

market friendly than Korea and Taiwan—even though the Report

is supposed to prove the opposite.

(ii) Good governance

Given that the Bank’s idea of market friendly intervention is

unconvincing, it is not surprising that the concept of good

governance is too. The link between the two ideas is that East

Asian miracle economies were models of market friendly

intervention and good governance. My arguments above however

suggest that these economies did not conform to the principles

of market friendly intervention—which itself is an inconsistent

concept—and so in this respect cannot be regarded as models of

good governance. As regards the source of the model (East Asia),

the Bank is mistaken, and so it follows that its applicability to other

parts of the world is seriously undermined.

However, the concept of good governance needs further

investigation in its own right. The idea that liberal democracy will

promote economic growth is itself problematic (Healey &

Robinson 1992: 94-112). Certainly in this respect the East Asian

economies, with their long tradition of authoritarian politics,

cannot be regarded as models. This does not mean that

authoritarianism is essential, but the long history of capitalist

development does not give much room for optimism.

The relationship between adjustment and the observance of

good human rights practices is similarly problematic. Certainly,

much of sub-Saharan Africa (and elsewhere) has seen an

improvement in human rights practices in the adjustment period.

But there can be no convincing claim that there is a causal

connection; in fact, as Engberg-Pedersen et al. (1996: 23) argue

‘the only clear link between adjustment and human rights issues


is that in some countries…organized opponents of adjustment

have had their human rights infringed.’

The underlying weakness of the concept of governance

however, relates to its excessively narrow view of politics. In

focusing on governance, the Bank has reduced the politics of

development to a purely technocratic issue.6 Wider social and

political interests are largely ignored, and so the need for better

governance linked to a ‘free enterprise’ economy is reduced to

rhetoric. There is no analysis of the vested interests, both within

and outside the state, which may win or lose from structural

adjustment. Moreover, the existence of such interests is a major

factor in assessing the likelihood of adjustment programmes

being implemented in the first place (Uvin 1994: 266). As Leftwich

(1993: 620) argues, development ‘is not simply a managerial

question, as the World Bank’s literature on governance asserts,

but a political one. For all processes of ‘development’ express

crucially the central core of politics: conflict, negotiation and

co-operation over the use, production and distribution of

resources.’

Thus, to return to the East Asian ‘model’. The World Bank

scenario of successful development in South Korea is based on the

belief that a rational bureaucracy allowed market forces to

operate, or at least only intervened in a market friendly way.

But such a scenario simply flies in the face of South Korean

history, which has included precisely the kind of political conflicts

which the Bank ignores. In the case of both South Korea and

Taiwan, radical land reforms were introduced by the state in

response to serious conflict (in the latter case on the Chinese

mainland) after the Second World War. These reforms laid the

basis: (i) for more equal income distributions compared to much

of the world; (ii) for a transfer of resources from countryside to

town without fully impoverishing the latter; and (iii) broke the

power of vested interests in the countryside, who may otherwise

have influenced the state. The issue of land reform, and its results

then, was one of politics and not governance.

The Bank’s limited approach to politics can be traced back to

its neo-liberal conception of the state. It is not surprising that neo-

liberals argue that state intervention in East Asia was largely

irrelevant, because the assumption that state intervention must be

inefficient is built into their theoretical system. At the heart of the

neo-liberal critique of the state is the contention that state officials

always act in a self-interested way. These officials are said to


expand the activity of the state for their own good, rather than the

interest of society. Such a viewpoint represents a clear attempt by

neo-liberals to explain politics, as well as economics, by sole

reference to the self-interested, utility-maximising individual.

The best policy option is to secure the most effective context

for such behaviour to operate efficiently, and this is one in which

competitive market forces are allowed to flourish by a

‘nightwatchman state’ (Buchanan 1986).

Clearly, there are many examples of unproductive rent-

seeking activity throughout the world, but the neo-liberal

argument is far stronger than this. It is that the state acts in its own

interest irrespective of time and place (Toye 1991). Taken to its

logical conclusion, such a view provides no justification for any

state. As Evans (1995: 25) argues:

How does such a state arise out of individual maximizers? It is

hard to explain why, if office-holders are primarily interested in

individual rents, they do not all ‘free-lance’.

The Bank echoes these inconsistencies in its approach to

governance. The state is seen as the problem—it intervenes too

heavily. It is also seen as the solution—it must reform itself in

order to allow for wealth creating activity. But if states are purely

self-interested, then why should state officials carry out the

necessary reforms? Again, on its own terms, the arguments of the

Bank are full of inconsistencies.

(iii) The implications for structural adjustment

Assessing structural adjustment policies in practice is extremely

difficult. This is because there is considerable dispute over the

extent to which policies have been implemented. Critical analysis

of adjustment programmes has often presented them as simple

impositions by the World Bank or IMF onto supposedly

sovereign nation-states, when in fact they are the outcome of

complex negotiations between international institutions and

national governments (Harrigan et al. 1991). Nevertheless, there

is a certain ‘family resemblance’ between adjustment policies,

which often include exchange rate devaluations, the removal of

import quotas, increased export incentives, revisions in

agricultural pricing policies and reform of the national budget

(Toye 1994: 29).


But even if we accept the above qualification, there are further

difficulties, which relate to the reasons for the ‘successes’ and

‘failures’ in particular cases7 (Toye 1994). Despite these difficulties,

the World Bank (1994) has recently claimed that there is a strong

correlation between the strongest adjusting countries and

economic growth. However, this report suffers from precisely the

methodological weaknesses cited above; for instance, economic

growth may be caused by favourable increases in terms of trade

rather than specific economic policy. Moreover, even the Bank’s

own evidence suggests that there were as many policy differences

between the 6 ‘good’ policy performers and the 23 ‘others’

(Mosley et al. 1995; White 1996).

Gibbon’s (1996: 758) alternative methodology is to examine

‘adjustment situations’, which he defines as ‘a combination of

actually implemented adjustment policies with other novel

independent or semi-independent variables also of predominantly

exogenous origin.’ The causal role of adjustment policies may

themselves be secondary, but this can only be determined by

careful empirical analysis. In a long-term analysis of economic

trends in sub-Saharan Africa (Engberg-Pedersen et al. 1996), it

was found that adjustment situations had made little positive

difference to growth or poverty alleviation.

For example, using statistics collected by the Food and

Agricultural Organisation, it was found that growth rates in 37

adjusting African countries were not significantly different in

the adjustment years of 1986-93 than they had been in the

previous seven year period. Of the sampled countries, 24 per

cent had better growth rates, 22 per cent had the same, and 52 per

cent had worse rates (Engberg-Pedersen et al. 1996: 34). These

unimpressive results can be linked to the fallacious thinking of the

World Bank on agriculture, which argues that by simply freeing

producers from price controls production will soar (Schiff and

Valdes 1992). This assumes that producers can respond to price

rises in a similar way, therefore ignoring rural differentiation, and

ignores the all important role of infrastructure and transportation

in what are often remote settings.

Similarly, industry has shown no marked increase in output,

and no increase in investment (Engberg-Pedersen et al. 1996: 42).

Some industries are bound to suffer from devaluations as essential

imports become more expensive, and trade liberalisation can

have disastrous consequences through the encouragement of

cheaper imports. These comments apply even to Ghana, the


African country that the World Bank upholds as a model of

successful adjustment policy. Ghana’s adjustment programme

since 1986 has included such market friendly policies as exchange

rate devaluations, the removal of many import controls,

privatisation and the liberalisation of foreign investment

regulations (African Development Bank 1994). Manufacturing

grew in the adjustment period, but this was largely because

imported inputs were made available to industries that had

suffered from excess capacity. As liberalisation spread and excess

capacity was used up, the exposure to foreign competition led to

a deceleration of industrial growth—from 5.6 per cent in 1988, to

2.6 per cent in 1991 and 1.1 per cent in 1992. Employment in

manufacturing has fallen from 78,000 in 1987 to 28,000 in 1993

(Lall 1995: 2025). Industrial survivors and new entrants are

largely in small enterprises making low income products for

localised markets, while success in attracting foreign investment

has been minimal.

Similarly, the World Bank’s hopes that the informal sector can

form the basis of a new, dynamic capitalist sector is misplaced. As

Gibbon (1996: 769) argues, ‘Contrary to some proponents of

adjustment, these constraints are not mainly of a regulative kind,

for they are also found in sectors which were never regulated.

Amongst the most important are the primitive technical level of

the operations, shortages of skilled labour, and continuous

competition for household and enterprise resources with other

household income-generating activities.’

The prospects for countries undergoing adjustment are not

good then. Indeed, even the Bank (1994: 153) admits that

investment rates have not increased in sub-Saharan Africa.

Similar criticisms could be made of adjustment experiences in

Eastern Europe (Gowan 1995) and Latin America (Weeks 1995).

4. CLASS, STATE AND GLOBAL ECONOMY IN LATE

CAPITALIST DEVELOPMENT

In this section I put forward an alternative explanation for the rise

of the East Asian NICs, and draw out some of the implications for

understanding the prospects for capitalist development in the rest

of the developing world. Most of my discussion will focus on

South Korea, not in order to present this country as a model

(neo-liberal or Keynesian) for others to follow, but in part to


emphasise the particularity of the South Korean experience.

However, at the same time I will also argue that there are specific

lessons to be learnt from this experience, as opposed to a general

model. In order to illustrate my alternative approach, I will

examine South Korea in relation to the world economy, and the

particular social structure within South Korean society.

It should be clear by now that the World Bank has a

particularly optimistic account of the relationship between

national economies and the global economy. The Bank remains

convinced of the neo-liberal view that there is no need for

protection to domestic producers because open competition on

the world market will benefit all countries—that is, countries

produce those goods in which they have a comparative advantage,

and they can only establish what these goods are through open

competition.8 But this view ignores the inequality inherent within

capital accumulation, ‘that there are formidable entry barriers for

developing countries attempting to move up the ladder of the

international division of labour—because of cumulative

causations in technical progress…imperfect domestic and

international financial markets…a lack of marketing skills and

infrastructure, and so on.’ (Chang 1995: 215).

It was precisely for these reasons that state intervention in

South Korea (and Taiwan) was market unfriendly. Indeed, the

South Korean state often deliberately ‘got prices wrong’. In the

1960s, many firms exported at a loss, including those in labour-

intensive sectors such as textiles (Amsden 1989: ch.6). Losses were

recovered through sales in the protected domestic market, but this

reward was only granted to the most successful exporters—

these sales were tied to performance standards set by the

government. Hamilton (1986: 83) claims that in fact the average

deviation of production prices from actual prices increased from

7.8 per cent in 1966 to 11.8 per cent in 1978.9 Such figures suggest

that state manipulation of prices was far from market friendly or

irrelevant, and in fact was vital to Korea’s export success. ‘Getting

prices wrong’ was therefore a major component of Korea’s (and

Taiwan’s) transition to successful NIC status. The neo-liberal

critique is narrowly concerned with the (static) ‘allocative

efficiency’ of getting prices right, and therefore lacks an account

of the dynamics of the process of changing comparative

advantage.10 As Amsden (1994: 629) points out: ‘it is quite

possible that if the Bank had determined East Asia’s overall

growth strategy, the outcome might have been a lot worse—


rather than as good as or better than—what did happen.’ For

instance, the absence of capital controls may have led to massive

capital flight, and the absence of import controls may have led to

domestic industry being swallowed up by foreign competition. In

this situation Korea and Taiwan would still be exercising their

‘comparative advantages’ in primary products, and thereby

experiencing far lower rates of growth.

This suggests then, that contrary to the neo-liberal model, the

state played a leading and effective role in capitalist development

in South Korea. One possible implication that could be drawn is

that it therefore represents a different model of development,

based on rational state intervention. In other words, is there a

different model of good governance, one in which the state plays

an active role in the promotion of capitalism?

While such a scenario could potentially apply to certain

countries, it cannot be used as an a priori model, applied

independently of specific evidence. This is because such a model

begs the question of why some states have actively promoted

capitalist development, while others have hindered it. In a

comparison of East Asian and Latin American capitalisms,

Jenkins (1991: 200-01) makes this point clearly:

The question is not so much how to explain policy differences, but

rather how to account for differences in the effectiveness of

economic policy…(This) implies that the failures in Latin

America are not a consequence of incorrect policy choices, but

of the way in which the state’s lack of autonomy precluded

certain policies from being pursued.

Thus, it is not just a question of state policy per se (although

this is important), but of the social context in which particular

states operate. Both neo-liberalism and neo-Keynesianism reify

the state, measuring its policy effectiveness solely by reference to

the degree of intervention within the economy. An alternative

approach would be to recognise that both state and economy are

constituent parts of the social relations of production, and to

account for the development of capitalism on this basis (Brenner

1977; Kiely 1995).

In the cases of South Korea and Taiwan, a key factor was the

aforementioned land reforms implemented in the late 1940s

and early 1950s. In Taiwan, fearing a repeat of the peasant revolts

on the mainland (China), the nationalist Kuomintang introduced


a radical land reform. The result was that ‘almost overnight the

countryside in Taiwan ceased to be oppressed by a small class of

large landlords and became characterized by a large number of

owner-operators with extremely small holdings.’ (Amsden

1985: 85) Although reform in South Korea was not as far-

reaching, it also led to the defeat of a powerful landlord class.

These reforms acted as a kind of ‘punitive forced investment in

industry’ (Selden and Ka 1988: 115), by turning the former

landlords into peasants or workers through bankruptcy, or a

nascent capitalist class strongly supervised by the state.

Thus, the development of a particular relationship between the

state and civil society was conducive to rapid industrial capitalist

development in South Korea (see Seddon and Belton-Jones

1995). In other parts of the developing world the continuing

power of certain classes have hindered a similarly rapid

development of industrial capitalism. For example, the continued

power of unproductive landowning classes in parts of Latin

America and Asia has meant that capitalist development has

been far more uneven (de Janvry 1987; Hamilton 1987). Similarly,

the states in South Korea and Taiwan were able to discipline

capital far more effectively than in Latin America, and so switch

more effectively to an export-oriented development strategy

from the 1960s. This policy was reinforced by the organisational

weakness of labour in East Asia compared to Latin America

(Jenkins 1991: 208).

Clearly then, one reason that the optimism of adjustment

policies is misplaced is its belief that a dynamic capitalism can be

implemented without fundamental changes in the social relations

of production. In many parts of the periphery, the emergence of

a dynamic capitalism has been uneven or has hardly began, and

adjustment actually appears to hold back its further

development.11 In other words, adjustment policies can be seen

as a failed attempt to introduce a more dynamic capitalism onto

social relations which are not conducive to such development.12

In much of sub-Saharan Africa and Eastern Europe, adjustment

policies have reinforced the existence of unfree forms of labour

or merchant capital interests, which profit from the trade of

goods produced by ‘non-capitalist’ activity (Watts 1990; Raikes

1988: 47-8; Burawoy 1992). In such cases, there is little

compulsion for the owners of the means of production to rapidly

develop the productive forces and thereby promote high levels of

economic growth.


5. CONCLUSION: FUTURE PROSPECTS FOR CAPITALIST

DEVELOPMENT IN THE PERIPHERY

The Bank’s recent literature on market friendly intervention

and good governance is unconvincing. It displays a continued

reluctance to recognise the key role of the state in capitalist

development, dismissing intervention as insignificant or irrelevant

and reducing governance to purely technical questions of policy-

making, such as ‘getting the basics right’. Although technical

policy making is an important factor in promoting economic

growth, in the case of the Bank’s interpretation it is far too

narrow and continues to focus one-sidedly on the question of

‘getting prices right’. This abstracts from the inequalities inherent

in capital accumulation and rigidly separates efficient ‘market

forces’ from inefficient ‘state intervention’. Every experience of

capitalist development has had a strong state, and the later the

capitalist development, the greater the need for strong state

‘intervention’ in the economy.13 States can of course be inefficient

and oppressive, in both socialist and capitalist contexts. However,

states are not necessarily inefficient. Markets, on the other hand,

are unequal, hierarchical and incapable of working without the

existence of states.

An alternative account recognises the centrality of the state to

capital accumulation, and in particular how late capitalist

developers rely on the state precisely because of the way that

markets work (see below). Socialists can learn some specific

lessons from the East Asian experience for countries undergoing

painful processes of adjustment in the developing world. In

particular they should criticise the continued dogma that states

hinder economic growth. In terms of technical policies, socialists

can and should draw on the work of structuralist reformers such

as Taylor (1993), who propose the development of alternative

adjustment policies on a case by case basis. The work of Sender

and Smith (1985) and Mosley and Weeks (1994) is particularly

valuable in that it attempts to provide alternative policies on the

basis of effective reality rather than wishful thinking (Sender

and Smith 1986). For example, Mosley and Weeks (1994) suggest

that, depending on specific circumstances, exchange rate

devaluations may be of some value in promoting exports, while

at the same time criticising the World Bank’s indiscriminate

proposals for liberalising trade and ending all protection to

domestic producers. This strategy is in marked contrast to the


ultra-left voluntarism of Cleaver (1989) who proposes nothing less

than the immediate closure of the International Monetary Fund

and the ending of development. Such a strategy says nothing

about the strength of class forces in the world today, nor the

immediate alternatives.

Having said that, socialists must recognise that there is no such

thing as technical policy in itself. All such policies will impact on

class forces in the developing world and they should in part be

considered on this basis. Moreover—and this is the main lesson

that can be drawn from the East Asian experience—capitalist

development is not a purely technical issue but is the outcome of

particular socio-political forces. In the long-term, this is what has

ultimately determined the path of capitalism in the region, and it

is the contingent outcome of class forces elsewhere that will

determine other paths of capitalist development. Capitalist

development thus rests on the development of a particular social

structure of accumulation (SSA). This refers to ‘the complex of

institutions which support the process of capital accumulation.

The central idea of the SSA approach is that a long period of

relatively rapid and stable economic expansion requires an

effective SSA’14 (Kotz et al. 1994: 1).

Finally, as dependency theory15 somewhat one-sidedly

reminds us, successful capitalist development rests on contingent

international factors too. The global economy comprises

hierarchies of production which in turn mean that the world

market is not the level playing field that neo-liberals imagine. Late

developers face enormous constraints, both in developing effective

producers that can compete with foreign capital in their domestic

economy, and in breaking into export markets and thereby

competing in the world economy. These barriers are not

completely insurmountable however, and the East Asian NICs

have enjoyed some considerable success on both fronts. Having

said that, their success rested on favourable world market factors

and the existence of a strong, effective state that disciplined

capital as well as labour. Neo-liberal dominance of international

trade, financial and development institutions hinders the

prospects for successful capitalist development in the current

period. On the other hand, a scenario of completely unregulated

global market forces is unlikely to be implemented and the world

economy does offer opportunities for late developers as well as

constraints. These opportunities include the prospect (with all the

contradictions these entail) of foreign investment, established


overseas markets, and of acquiring advanced technology. The

prospect for successful late capitalist development thus appears

to rest on a policy of being ‘in and against the (world) market.’15

Successful late developers will be in the world market in that

they attempt to draw on its opportunities, but will be against it in

that the state will play a crucial role in removing its constraints.

This, rather than a spurious concept of market friendly

intervention, is the most important lesson that can be learnt

from the East Asian experience.

______________________________

1. In this article, I refer to the Bank as if it was a homogenous institution,completely restricted to neo-liberal ideas. This is an over-simplification, andthere are important points of empirical and theoretical disagreement.Moreover, the Left—particularly a Third World nationalist strand—isoften too quick to dismiss the works of the Bank, as Sender and Smith(1985) have pointed out. Nevertheless, neo-liberal ideas currently dominatethe institution.

2. The paper often refers to an East Asian experience when in fact developmenthas differed greatly between countries—Singapore for instance has reliedheavily on foreign capital, as opposed to South Korea. However, although therole of the state has varied, in no case does it conform to the neo-liberalapproach. This includes Hong Kong, which supposedly conforms mostclosely to the neo-liberal model, but in fact had a period of ‘hidden ISI’ asindustrial capital developed in China before 1949, and the state has activelysubsidised housing and food (Schiffer 1991).

3. Structural adjustment can be defined as a set of policies designed to promoteeconomic growth through the opening up of economies to ‘competitivemarket forces’. Stabilisation policies, more closely associated with the IMF,are designed to alleviate short-term balance of payments deficits throughcurrency devaluation and public spending cuts. In practice the two areoften hard to distinguish.

4. This view represents an important retreat from the neo-classical assumptionthat the costs of state intervention have typically been greater than thebenefits, and that imperfect markets are superior to imperfect planning (Lal1983: 106-7). As will become clear in the text however, the dogmatic andstubborn commitment to a variety of neo-liberal thinking has precluded theWorld Bank from going one step further, and accepting that stateinterventions can not only be neutral in their effects, but beneficial.

5. South Korea (1.9 per cent of GNP in 1988) and Taiwan (1.2 per cent) havefar greater levels of investment in Research and Development activitiesthan most of the more industrialised developing countries—for exampleArgentina (0.5 per cent in 1988), India (0.9 per cent in 1986) and Brazil (0.4per cent in 1985). This is lower than Japan (2.8 per cent in 1987) andGermany (2.8 per cent in 1987), but higher than Belgium (1.7 per cent in1987) and Italy (1.2 per cent in 1987). See Singh 1994: 22.


Notes

6. The issue of democracy provides a particularly telling example. Institutions

such as the Ministry of Overseas Development claim to be supportive of

democratisation in the developing world. However, such democracy is of a

particular kind—a simple means of choosing a government. The jurisdiction

of such elected governments would be seriously curtailed as ‘excessive’

democracy can lead to ‘too much government’ and hence ‘bad governance’

and ‘market unfriendly intervention’. Democracy thus becomes limited

and technocratic, rather than social and political (see Kiely 1995: 133-7;

Schmitz 1995).

7. The terms ‘successes’ and ‘failures’ refer to the Bank’s own criteria, which

is narrowly concerned with economic growth.

8. It should be noted however that the ‘advanced’ capitalist countries have often

selectively applied this policy. Indeed, South Korea and Taiwan benefited

from relatively open access to the US market in the 1960s and 70s, partly

because they were favoured allies in the Cold War. For similar reasons

they were also major recipients of US aid, especially in the 1950s. In the 1980s

and 90s, potential new Koreas and Taiwans have often faced far greater

protectionism from the First World, particularly in labour intensive sectors

such as clothing, where the developing world could have a comparative

advantage (Kiely 1994; 1997: ch.5).

9. These two figures refer to the degree to which relative prices deviated from

prices based on a supposed competitive free market equilibrium. These so-

called distortions are a product of the state interventions discussed in the

text—but unlike neo-liberal theory, they should be seen as a positive

contribution to capitalist development.

10. This point relates to a major problem in neo-liberal thought, which asserts

that getting prices right leads to static allocative efficiency. However,

advocates of this theory often go on to make the far stronger claim that such

efficiency unproblematically leads to development, without a convincing

demonstration that one leads to the other.

11. In this way, the Bank repeats the errors of ‘neo-Smithian Marxism’ which

argued that the origins of capitalism can be rooted in the extension of

trading relations rather than a change in the social relations of production

(see Hilton 1976; Brenner 1977).

12. My criticism here is of the Bank on its own terms. The question of alternatives

to capitalist development lie outside the scope of this article. I have dealt with

this issue in more detail in Kiely (1997: chs.4 & 10).

13. I am purposely using the language of neo-liberalism here. The idea of a

separate state ‘intervening’ in a separate economic sphere actually fetishises

both economics and politics, and in reality the two are inextricably linked

(Kiely 1995: ch.6). My use of language is therefore deliberately polemical,

designed to undermine the fallacies of neo-liberalism.

14. The approach in this article is not completely compatible with the SSA

approach however. SSA approaches can easily lead to functionalism. In

focusing on appropriate foundations for capital accumulation, the SSA

school can exaggerate the degree of integration of any SSA, and thereby

downplay the reality of conflict within all capitalist societies. In this way, an


appropriate SSA can be regarded as an appropriate structure which functions

for the hegemony of capitalism, thereby ignoring the contradictions of any

social structure of accumulation and the role of exploited classes as makers

of their own history. My approach in this article suggests that SSAs are crucial

to the ‘success’ of capitalist development, as opposed to those technicist

policies advocated by the World Bank, but also that such structures are

contingent and based on historical processes as opposed to ahistorical

models.

15. For a critique of dependency theory see Kiely 1995: ch.3.

16. The idea of being ‘in and against’ capitalism is derived from the work

Conference of Socialist Economists on the state (CSE 1979; London to

Edinburgh Weekend Return Group 1980). It is based on the recognition that

important reforms (opportunities) can be gained from being in the capitalist

state, but that these are always compromised (constrained) by the dominance

of capitalist social relations and the role of the state in securing this

dominance, and so there is need to be simultaneously against the state.

______________________________

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