From Developmental State to What?: study on change of developmental state

Kangkook Lee

I. Introduction

Since the 80s, so-called ‘neoliberalism’ has dominated economic theories and polices and the state intervention has retreated from every realms of economy. Privatization, deregulation, and liberalization in finance and trade are in fashion all over the world, including developing countries. Development economics is no exception and major argument is the role of the state should be reduced for economic development. Behind this argument, the theory of ‘state failure’ because of rent-seeking and self-interested government lies in, leading to the pessimism about the state. Interestingly enough, the reality of economic development was opposite to this orthodox neoclassical creed. While many market-oriented reforms in developing countries in the 80s turned out to be a failure, the East Asian countries like Korea and Taiwan achieved miraculous economic development based on strong state intervention like industrial policy and financial control. Even though neoclassicals still stick to the free market explanation (Ballassa, 1988), this reality called on many theorists to consider the positive and important role of the state in the name of ‘developmental state’ theory (Amsden, 1989; Wade, 1990; Leftwitch, 1995)

However, the East Asian crisis in 1997 seems to make this miracle just a mirage, and many believe the crisis is mostly due to excessive state intervention and crony capitalism. Accordingly, the IMF imposed harsh restructuring policies on these countries. But the Asian crisis is more related to the underregulation of the state, which surely

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stemmed from the weakening of capability and autonomy of the developmental state itself (Chang, 1998a; Lee, 1998). Though the developmental state was successful achieving rapid economic development, private business got stronger enough against the government demanding more deregulation along with the growth and globalization process.

This paper examines the argument of developmental state and its change, focusing on the change of the government-business relationship and globalization. The first section will survey the theory of developmental state for economic development including recent arguments and their limits. Next, we will explore sources of its change and

consider future role of the state for economic development. In particular, the

comparison between Korea and Taiwan will show how the demise of the developmental

state happens and what proper role should be played by the state.

II. ‘Developmental State’ and Economic Development

1. Developmental state for economic development

In the 50s and 60s, the import substitution strategy in Latin American countries

failed, while the East Asian countries succeeded in economic development with export

promotion strategy. Accordingly, neoclassicals argued the government intervention is

detrimental for economic growth and minimal state intervention ‘getting the prices

right’ is best policy, based on neoclassical political economy of the state. However, this

theory has serious internal problems (Rao, 1995) and the history itself counterargued the

pessimism about the state. In the 80s, market-oriented reform with structural adjustment

policy recommended by the World Bank and IMF worsened the economy of developing

countries, whereas the East Asian countries continued to grow.

New extensive studies on the East Asian countries emerged since the 80s, starting

with Johnson’s path-breaking work, ‘MITI and the Japanese miracle’ (Johnson, 1982;

Amsden, 1989; Wade, 1990). Many theorists shed lights on the positive role of the state

for development, underscoring strong government intervention like industrial policy,

financial control and management of trade and capital flows.1 These studies originated 1 The important role of the state for economic development, in so-called late industrialization, was already recognized by Gerschenkron long time ago (Gerschenkron 1966). It is really interesting that he argued the

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from ‘institutionalist approach’ on the state (Evans et al., 1985) and probed historical

and institutional conditions for success of government intervention like character of the

state itself and several factors related to it.

This position is summarized as ‘developmental state theory’ to emphasize the strong

government intervention was essential in economic development (Leftwich, 1995;

Ahrens, 1998). According to them, first of all, the state in East Asia had strong

autonomy from other social groups like landlords, capitalists, and workers. This is

because there was no strong interest group due to radical land reform and so on, thus the

state was never captured by private interests and government officials are insulated from

society in their decision making. Second, the capability of the government was so high

because they had a long bureaucratic tradition, coupled with several institutional

reforms, which led to the strong administrative capacity. In addition, the principle of

shared growth and external threat were also thought to be helpful to good governance

and implementation of policy for development (Campos and Root, 1996; Vartiainen,

1995).

Based on these several conditions, the countries in this region promoted specific

industry or firms, controlling finance in the grip of the government. The government

adopted huge policy credit with preferential interest rates and other support like tax in

line with industrial policy, in order to promote private investment and thus economic

development (Cho and Kim, 1994). In this process, strong and autonomous government

could discipline the business, exchanging subsidy for economic performance of the firm

in this process (Amsden, 1992; Wade, 1995). The government also cooperated closely

with private business in the form of several formal committees and informal connection.

This mechanism minimized unproductive rent-seeking activity, and generated a

productive rent to encourage private business to invest more and operate more

efficiently. Externally, developmental state made a great effort to manage the trade and

capital flow for the purpose of national development. Even if the trade regime in these

countries is called so open, the developmental state protected domestic industry in

several ways (Singh, 1994). And capital flows were strongly controlled by the

government with capital controls, incorporated into the government financial control in

line with industrial policy (Nembhard, 1996). In foreign direct investment there were so

many regulations like usage of domestic economic factors and limit to ownership of

domestic industry by foreigners, and all cross border financial flows were controlled

and managed by the government, allocated into specific industry. The developmental

strong role of the state tends to taper out along with the growth of private sector, talking about Russia.3

state pursued a ‘selective and strategic integration’ into the world economy. That is,

strong and proper government intervention based on specific character of the state was

key to the economic ‘miracle’. It should be noticed the intervention did not replaced the

whole market but built specific institutions compounding the state ‘and’ the market

mechanism.

These arguments are much more realistic than the neoclassical explanation and

properly indicate the important role of the state for economic development.2 However,

they might go far to take the position of narrow ‘state centric view’, ignoring important

role of society to limit the state and interaction between the state and society, conformed

mutually (Migdal et al., 1994). Also, they seem to consider the East Asian government

as internally unified and cohesive, which is different from real experience (Moon and

Prasad, 1998). Most of all, the developmental state itself cannot help but change along

with the change of the economy, which is not analyzed enough.

2. Development of developmental state theory

Recently, developmental state theorists present more developed argument, especially

focusing on the importance of relationship between the government and business. And

so-called new institutional economics recognizes the essential role of institutions like

state for economic development to provides a bit sophisticated theory for developmental

state.

Many theorists now pay more attention to the important and specific relationship

between the state and society including government-business relationship in

developmental state. Their study shows that the government was not only autonomous

from social groups but also closely tied with them, which provides the government a

real capability to manage the economy. So-called ‘embedded autonomy, or ‘governed

interdependence’ emphasizes this feature of developmental state, showing mutually

beneficial interdependence of state and society (Evans, 1995; Weiss and Hobson,

1995). Especially, we can find very cooperative relationship between the government

and business, while the government still repressed landlord and workers, in the East

Asian countries. The developmental state and private capital exchanged financial

support and economic performance each other and close cooperation between them

helped to share information. For business, this collaboration with the government 2 Even the World Bank study so-called ‘East Asian Miracle’ acknowledged that there was strong government intervention in the East Asian countries but still they are quite skeptical about the effectiveness of selective industrial policy. But their argument about TFP analysis and industrial policy has serious problems as many theorists already argued (Fishlow et al., 1994; Felix,1994)

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provided a good condition for further investment. Also, this embeddedness of the state

in the society was an essential source of strong capacity of the state, which led to

successful government intervention.

Meanwhile, the importance of institutions to complement and overcome imperfect

market is now widely acknowledged in economics.3 According to new institutional

economics, the market always suffers from serious failure due to transaction costs and

incomplete information, so that proper institutions are essential to solve coordination

problem and attain economic efficiency. In particular, this problem is more serious in

developing countries like in capital market and the government should play an

important role for economic development such as a financial restraint and industrial

policy (Lin and Nugent, 1995, Harris et al., 1995). Actually, this line of argument

includes rather diverse positions. So-called ‘market-enhancing’ approach of the

government intervention underscores the role of the government to facilitate the

development of private-sector institutions and overcome market failures. To them, state

intervention can ‘enhance’ the operation of the market by helping to solve coordination

problems (Aoki et al., 1997; Stiglitz, 1996). Whereas, ‘new institutionalist theory of

state intervention’ emphasizes that neither the market, nor the state, nor any other

economic institution is perfect as a coordination mechanism because of transaction

costs. In this perspective the state may resolve the coordination problems at a lower cost

in certain cases (Chang, 1994). The former theory is based on neoclassical premise that

market comes always first, while the latter is closer to developmental state theory.

In addition, some theorists apply Williamson’s theory about hierarchy to the

developmental state. They argue that a kind of quasi-internal organization was

constructed, constituted by the government and large enterprises in which there were

hierarchical relationships and a set of implicit contracts (Lee, 1992). The government

allocated financial resources into in this QIO that performed the role of internal capital

market efficiently.4

These arguments provide rich ideas in understanding developmental state better, to

some extent. First, institutions not only complement the market but also themselves can

be a mechanism of economic coordination, different from neoclassical idea.5 And the

3 Institutions are mostly understood as the rules of the game of a society composed of the formal rules and the informal constraints and the enforcement characteristics of each (North, 1997).4 The government and large private enterprises could share the information through various channels, to reduce transaction costs. For this organization to operate efficiently, an outward-oriented development strategy is important, since competition in the world market is necessary to ensure the efficiency and economic growth.5 Here, we may well consider much broader ‘institutional economics’. It pursues analyses of the social forces that condition and channel the formation of markets; the institutions that constitute and operate through markets; the economy as a system encompassing more than the market and undergoing systemic

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institutions in developmental state should be understood as a broad organizational

structure in the whole level of economy. Here, the role of the state is crucial in that it

can construct specific institutions and determine the path of development, given its

ability to enact or enforce the rules of the game. Thus, we should understand

developmental state as a broad developmental regime that consists of several agents like

the government and other social groups (Pempel, 1999). Second, the relationship

between the agents is the most essential in efficient operation of institution and should

be studied. It means power relationship between the government and business makes a

significant impact on the efficiency of institutions in developmental state. Only when

there is a proper relationship of discipline and coordination as well, developmental state

can achieve economic success, as many theorists show in the case of the East Asian

countries.

However, in spite of a progress these arguments made, there is still a long way to

go. Most of all, all of theories about the developmental state don’t explore enough, the

change of developmental state or regime itself. In terms of institutions, they are never

static but evolve and change over time. In developing countries, economic development

itself makes the effectiveness of developmental regime less and less since the state-

society relationship itself changes, as well as the economy gets more and more complex.

Thus, we see a dynamic interaction between the institutions and economic development.

And there can be a situation when former institutions can no longer operate well due to

the change of economy and power relationship, called ‘institutional degeneration’(Lee,

1998). This situation demands a reformulation of institutions, which also depends on the

politics and power relationship (Bates, 1995).

And yet, there is still no such a good explanation about the origin and change of

institutions in institutional economics, and developmental state theory also lacks the

study about evolution of developmental state.6 As the economy develops it seems

obvious the role of the government diminishes as market gets more and more complete

and the government faces limit to information and capacity to manage the economy,

which leads to any ‘liberalization’. But behind this apparent change, the more important

change in power relationship lies in. This is what we aim at studying in following

evolution. Namely, this approach is more interested in the problems of power in institution and the change of institution (Samuels, 1995).6 According to new institutional theorists, a change of transaction costs resulting from a change of external factor prices or technology can lead to a demand for institutional change. But even in this situation there must be collective action or effort of the state for institutional change, usually blocked by various factors (Lin and Nugent, 1995; Nabli and Nugent, 1989). We should consider the importance of power relationships, agents’ dependence on old institutions in institutional change, and complex historical conditions to explain institutional inertia (Grabowski, 1989; Matthews, 1986).

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chapters, we will examine some sources of change of developmental state like a change

of government-business relationship along with development and globalization and its

effect on developmental state.

III. Change of Developmental State

1. Change of state-society relation

If the operation of developmental state impinges much on the specific relationship

between the state and society, first of all we should examine the change of the state-

society relationship, which can lead to the change of developmental state.

Among others, the relationship between the government and business is essential for

developmental state and this relationship is likely to change along with economic

development (Seddon and Belton-Jones, 1995; Haggard, 1998). In the East Asian

countries, private business relied on the government especially about finance to a great

extent because the government controlled financial system strongly in the state-led

financial system. The government dominated the commanding height of finance to

encourage private investment with great financial support through policy credit and it

was successful. But as the economy grows, the financial control of the government gets

weaker and weaker due to reduction of directed credit with financial liberalization and

the growth of financial sector less controlled by the government like stock market and

nonblank institutions. This change naturally brings out a change in financing of the

firms and indeed, the share of finance controlled by the government decreased in the

East Asian countries (Woo, 1991; Lee, 1998). As the dependence of businesses on the

government in finance weakens, they demand more and more deregulation from the

government based on their economic power. Also, the domestic business can borrow

foreign capital without government guarantee, thanks to upgrade their credibility due to

economic development.

In addition to finance, technological dependence of the private business on the

government diminishes along with the development. In the early period of economic

growth, the government usually establishes public institutions to develop technology,

with cooperation with private firms. But the growth of business can provide enough

capacity to develop its own technology independently from the government (Hahm and

Plein, 1998). And alliance with transnational capital about technology strengthens this

autonomy of the firms (Evans, 1998a). In this regard, the autonomy of the business is

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apt to increase against the government to capture the former developmental state, while

the autonomy and power of the government diminishes, especially resulting from the

private business’ financial autonomy.

In this process, industrial structure may be important to determine the extent to

which the autonomy of the government is encroached. If the economy is made up of

several big businesses then their power against the government would be stronger than

the case that there are so many small and medium business. The financial power of big

business that may own and dominate even financial sector, will make the government

more weakened since the government should depend on the business about economic

performance. Even if the government tries to regulate their economic power the

regulation measures based on financial control is not effective due to the reduction of

financial control and changed financial system

Besides, the government cannot repress workers any longer. Workers have been

repressed by the autocratic government in developmental state for a long time, but as

the economic growth brings out democratization their power tends to get stronger with

development of labor union organization (Jeong, 1997). This process increases workers’

voice and the government would have hard time suppressing them for development. The

democratization itself strongly limits the government intervention itself because the

intervention is usually thought as autocracy in many cases. This broad change means a

position of the state is much weaker, so that it cannot discipline social groups any

longer.

2. Globalization and its effect

As well as this change, recent trend of globalization is an important factor in the

change of developmental state because it limits the capacity of the government to

manage the national economy. After the 70s, trade and especially capital flow around

the world increased so much that now this reality imposes serious constraint on the

national governments. Neoliberal policies like privatization, deregulation and

liberalization in trade and finance have been adopted in most developing countries along

with globalization.

First of all, globalization, especially in finance, makes it much harder for the

government to implement independent monetary policy and exchange rate policy since

there is a threat of capital flight and speculative attack (Panic, 1998; Macwan and Tabb

eds., 1989). Most developing countries kept strong capital controls in the past, but

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capital account liberalization after the 80s worsened this problem seriously. This policy

aggravates the economic instability due to the inherent problems in international

financial market like herd behavior, threatening national economies. Besides, countries

may compete each other to induce foreign capital in taxation leading to ‘race to the

bottom’, which will reduce the base of tax and public expenditure in developing

countries (Crotty et al., 1995; Rao, 2000). This way, the trend of globalization snatches

the macroeconomic autonomy away from the government. In addition, competitive

export promotion strategy by many developing countries and rapid development of late

developing countries like China with foreign investment worsen international

competition among developing countries. Thus, cut-throat global competition along

with globalization makes the prospective of development based on export darker when

there is no increase of world aggregate demand.

The globalization also prompts developing countries to reduce the government

intervention further. Neoclassical argue that reduction of the role of the state in the

economy and complete integration into the global economy is the best policy for

economic development, which naturally supports every liberalization measures in trade

and finance (Sachs and Warner, 1995; Dornbush, 1998).7 The policy recommendation

from the international organizations like the IMF and World Bank keenly pursues this

orientation. In particular, the harsh restructuring policy imposed by the IMF on the East

Asian countries after the crisis, including opening all the capital market repealed

external policy tools of former developmental state.

In reality, a new international economic order under the WTO gives off more

pressure to developing countries to open their economies. For example, TRIMs (Trade

Related Investment Measures) or TRIPs (Trade related intellectual property) would

significantly limit the government measures like subsidy related to trade. Though there

has been little development in MAI (Multilateral Agreement on Investment) due to

strong conflict among countries, effort of bilateral agreement on investment is still

going on between developed and developing countries. This agreement usually

stipulates almost all of regulation should be scraped for capital flows including portfolio

capital. As we already mentioned, the East Asian developmental states controlled and

managed trade and capital flow, performing ‘selective and strategic integration’ into the

7 Even though neoclassicals predict a rosy future of globalization, it just leads to more inequality and conflict among countries and social groups. Especially, increase of international trade and capital flows and tends to worsen workers’ power (Crotty et al, 1995). And globalization seems to worsen divergence between countries because international capital flow centralizes on a few developing countries (UNCTAD, 1997).

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world economy.8 But these policies seem to be no longer easy nowadays with the

globalization and the change of world economic order (Akyuz et al., 1998).

Meanwhile, it should be noticed that globalization affects the power relationship

itself, among the government, domestic and international capital. With globalization,

domestic capital can bypass the government as they can borrow capital from

international financial market more easily, which further weakens the power of the

government. And as they can transfer their production abroad and make an alliance with

international capital, their power against the government grows more. International

capital including industrial and financial capital also obviously becomes more dominant

over the national government when capital controls are gone. This effect of

globalization leads to more demand for financial liberalization, which again strengthens

globalization trend.

In sum, globalization plays an important role to limit the several policies of

developmental state and it is neoliberal policies that substitute former developmental

policies in developing countries. This change makes it no longer possible for former

developmental states to continue former external policies, which generates a ‘demise of

developmental state’, and harder and harder for many developing countries to adopt

these policies. The globalization appears to keep the state at bay, making developmental

state more neoliberal.

3. What role for state in globalization era?

Concerning the globalization and the role of the state, some argue that globalization

trend is so strong that there would be reduced or no role of the state (Ohmae, 1990),

while others emphasize the positive role of the state in response to globalization arguing

globalization is hyperbolized (Wade, 1996; Hirst and Thompson, 1996). Even if it is

true that the role of state is getting limited as already examined, the role of the state will

maintain. Most of all, private capital has always no choice but to depend on the state for

the mere operation of market itself and management of money and labor power.

Furthermore, the new and proper role of the state to promote long term development

and manage the conflict would be more important (Chang and Rowthorn eds.,

8 Surely, the second generation NICs in the South East Asia took more open stance to foreign investment than Korea or Taiwan. However the ratio of foreign direct investment is not that high except for Malaysia, if we don’t consider Hong Kong and Singapore (Akyuz et al., 1998). They made some efforts of strategic integration, which shows not unconditional but proper openness is helpful for economic development (Singh, 1995).

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1995; Rowthorn and Kozul-Wright eds., 1998). The strong efforts of the government to induce international capital and capitalize on its technology and management skill domestically, to enhance infrastructure, and to stimulate innovation and productivity, are emphasized more and more. The education and technology policy would be

a new realm of the strong role of the state, in the name of the ‘Schumpeterian Workfare

State’ fit for post-fordism, compared to the ‘Keynesian Welfare State’ (Jessop, 1993).9

Also the distributional effect of the globlazation makes it necessary for the government

to address conflict resulting from the rapid economic change (Rodrik, 1997).

Most of all, the financial glolbalizatoin calls on the government to struggle to

regulate volatile international capital flows, establishing strong and sound monitoring

system over financial institutions. Most economists at least agree on the importance of

proper domestic regulation system over financial sector, though different in the extent.

The Asian crisis obviously shows how much important the proper job of the state

taming international financial flows, and after the Asian crisis, the argument to restrain

international short-term capital like with Tobin tax has gained momentum (Rajan,

1999). In this regard, developing countries must be so careful to open their financial

market and maintain proper capital controls. Beyond this regulation over capital flow,

the government should keep on performing continuous reform in order to establish good

domestic institutions to discipline the public as well as private sector. Namely, it must

establish the system to monitor investment decision in private sector and reform

dissipated government expenditure. Actually, the East Asian countries just adopted

domestic deregulation and financial opening without a reform of domestic economy in

the 90s, even if there were structural problems. Of course it has much to do with the

strong power of capitalist against the government, but it ended up with the serious crisis

(Chang, 1998; Jomo, 1998; Robison, 1998).

Thus, more effective and capable state and effort to manage the process of global

integration are requested in the globalization era, not neoliberal states to deregulate

everything. The globalization and the change of world economy doesn’t need just

reduction of the role of the state but proper response of the state (Weiss, 1997; World Bank, 1997).

Even in the pressure of a new international economic order, there is possibility for

developing countries to adopt developmental external policies. Import quota is still

9 Of course there is an argument about if neoliberalism would be a possibl ‘mode of regulation’ for post-fordism. Many are worried that it is just lacuna of regulation and would not be institutionalized mode of regulation in the world economy (Peck and Tickel, 1995; Yaghmaian, 1998).

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possible under the closure for balance of payment for developing countries of the

GATT, and tariff can be used, too. Despite the pressure to reduce subsidy, developing

countries can still support domestic industry and subsidy for scientific research,

agriculture, and regional development is not prohibited (UNCTAD, 1996).10 Besides,

the countries can implement several policies in an attempt to promote investment and

information like tax subsidy, support for research and development and so on.

In this respect, the role of the state is still important in globalization era in spite of

limits. The late developing countries must adopt practical developmental policies in this

new situation and former developmental states also should reformulate their positive

role continuously in response to a new change of the economy. Surely, the extent to

which the government can play this role is associated with the power relationship that is

already affected by the globalization itself. Late developing countries must exert to

construct the proper relationship with their business and to develop capacity of the

government. Even though historical and institutional conditions are hard to be

replicated, this effort is very essential for developmental policies. As far as former

developmental states are concerned, it is likely that their developmental state cannot

help changing but this change will also depend on the change of government-business

relationship and the effort of the state to manage the economy. The former

developmental state may as well make a tie with workers or civil groups to recover its

developmental role, against domestic and international capital.11

IV. A tale of two countries: Korea vs. Taiwan

Korea and Taiwan are a role model of developmental state as many theorists argued.

Both of the countries have much in common about the character of developmental

regime and similar policies for economic development. The autonomy and capacity of

the government was strong in both of the countries and there was specific government-

business relationship including discipline and cooperation. They share the industrial

policy, financial control, and management over trade and capital inflows, though a little

different in the extent, based on these conditions of developmental state (Amsden, 1989;

10 Poor countries with GDP per capita under $1000 are excluded from the reduction of subsidy and other countries have only to reduce subsidy in 8 years. Meanwhile, specific subsidy can be sued only when it does hardm to industries in other countries.11 Some argue that developmental state should reformulate itself in response to the change of the state-society relationship and a kind of democratic developmental state is requested (Evans, 1995). Kerala state in India or corporatist states like Austria and Netherlands in Europe is presented as a future model of developmental state. For this future, most of all, growth of power of workers and people to check the dominance of capital would be very important.

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Wade, 1990). Also since the 80s, both of the countries implemented liberalization

policy for trade and finance sooner or later.

But while the Korean economy plunged into the serious financial crisis in 1997, the

Taiwanese economy succeeded in avoiding the crisis, different from other East Asian

countries. In order to explain this difference, we should explore the divergent path of

Korea and Taiwan, for which we should focus on the difference in government-business

relationship and effort to manage global integration.12 Actually, the government lost its

autonomy and capacity, leading to a ‘demise of developmental state’ and failed in

addressing the problem of global integration process in Korea, whereas the Taiwanese

government maintained its proper role. Now we turn to compare two countries show

how the developmental state changed and what to do post-development period.

In spite of similarity of developmental state in Korea and Taiwan, there was a sharp

difference between them, which led to the different path. First of all, industrial structure

was quite different and so was the change of government-business relationship. While

the strategy of the government was to encourage big business with huge financial

support in Korea, the government intended to develop small and medium sized firms

and big firms were mostly owned by the government or strong political party in Taiwan.

It is sure that the Taiwanese government was worried about growth of power of

business because elites in the government were mostly from mainland China but private

business was owned by businessman in island Taiwan. Accordingly, heavy and

chemical industries like steel and auto were more developed in Korean than Taiwan.

But the stronger power of big business against the government in Korea led to more

fundamental change of the government-business relationship.

In Korea, after the late 80s, the financial system changed so much that the

government lost its power to control finance and thus affect investment of the

business.13 It is mostly due to growth of capital market and financial institutions less

controlled by the government and owned by big business itself. Also the big business

started to borrow foreign capital without government guarantee from the mid 80s only

to get more financial autonomy from the government. Based on this power, big business

12 Besides these differences, the financial system was also a little different between two countries. In general, the financial system was more strongly controlled by the government in Korea than Taiwan and financial liberalization and opening came earlier in Taiwan than Korea (Patrick and Park, 1994). This difference in development of financial market may be added to as a reason for the difference of industrial structure.13 Along with this change of power relationship, the government itself adopted the neoliberal ideology that the role of the state should be reduced in the 90s, especially in a new government after 1993. Moreover, the conflict within the government like between central bank and ministry of finance and economy went serious in the 90s. That is, the government lost its internal cohesion and capacity as well as autonomy, which contributed to demise of developmental state importantly (Moon and Rhyu, 2000).

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demanded more freedom in investment decision and financial liberalization, which

came true in the 90s (Lee et al, 2000). The government tried to regulate big business but

to no avail, because the powerful chaebols dominated all the economy and financial

sector, centralizing most loans to themselves.14 In the mid 90s, they promoted excessive

investment mostly with foreign short-term capital that flowed into Korea after the

financial market opening. However, the profit rate was so low that it just sowed a seed

of the crisis. The government could no more perform the former role of investment

coordination among chaebols and failed in radical reform of the industrial and financial

sector (Lee, 1998; Chang et al., 1998). While, the Taiwanese government seemed to

keep their autonomy from business even if the relationship was not free from conflicts

because firms in Taiwan were not that big compared to Korea (Chiu, 1994). Small and

medium companies in Taiwan didn’t have so strong power as big business in Korea,

even if their financing structure also has changed along with financial liberalization.

Thus the demand of private capitalist was not that powerful. Of course, in this process,

the continuing dominance of Kuomintang even in the 90s was also helpful in part, while

in Korea after democratization in the late 80s, the new government policy was really

politicized.15

Secondly, the effort of the government to mange the process of global integration

was quite different. The Korean government just promoted careless financial and capital

account liberalization, especially deregulation of foreign short-term borrowing without

any good monitoring system. This policy was surely a product of several interests

including domestic big business, international capital and the government itself to get

the membership of the OECD. However, the government totally failed in managing

dangerous foreign capital flows and regulatory system was so bad (Ubide and Balino,

1999), which led to skyrocketing foreign short-term debt and finally the crisis when

foreign investors turned their back to Korea.. But the Taiwanese government cared

about the volatile foreign capital flow so much that their regulatory system over

financial sector was better than that in Korea (Weiss, 1999). This wise policy of the

government as well as huge foreign reserve based on long-time trade surplus was

important to avoid the crisis. That is, the Taiwanese government performed an essential

14 Conflicts and strategic action between them did not appeared until the 1970s when the government’s control over finance and business was so storing but started to appear in reorganization program in heavy and chemical industries and state-led bail-out program in the 1980s and grew serious more and more in various regulations on chaebols (Rhee, 1994). Some argue that the relationship between them changed from dominance to symbiosis or the autonomy of the government still sustained (Lee, 1997; Kim, 1988). But after the late 1980s the government regulation over chaebols mostly failed and the relationship changed to conflicts and chaebols’ predominance especially after 1993.15 However, some researcher reports that economic policies have been recently politicized even in Taiwan along with the growth of large enterprises and democratization (Kuo, 1998).

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role of managing the economy in response to globalization but the Korean government

failed in this.

The experience of Korea and Taiwan clearly shows how the developmental state

changes differently, which mostly stems from difference of the government-business

relationship and the proper effort of the government. Only if the government does a

proper role continuously, to manage the economy along with the change of the

economy, further development is possible. After the crisis, the Korean state is changing

further away from developmental state with the IMF restructuring policy and it would

hardly play a developmental role.16 However, this change will depend on the politics or

power relationship too, which is why the reformulation of power relationship among the

government, domestic and international capital and workers is so essential for the

future.

V. Concluding Remarks

The so-called, ‘East Asian miracle’ was mostly thanks to the positive effort of the

developmental states to promote economic growth. They had strong autonomy and

capacity to manage the economy properly, for which the relationship between the

specific state and society was an essential factor. However, as history shows, the

developmental state itself changes over time as the economy grows and especially the

power relationship between the government and business changes. Along with this

change, the government is likely to lose its strong autonomy from the business and

powerful business demands more liberalization to limit the role of the state further.

Moreover, recent trend of globalization put more pressure on the state and gives hard

time for it to intervene into the economy. This change might lead to a demise of

developmental state and surely makes it never easy for late developing countries to

follow the policies of developmental state.

However, considering the essential role of the state for economic development, the

developing countries should exert to manage the economy as developmental state in the

East Asia did, with all globalization. For former developmental countries, it’s crucial to

reformulate themselves making a new and proper state-society relationship and to

manage the process of global integration. The different experience of Korea and Taiwan 16 The IMF restructuring policy imposed on Korea consists of macroeconomic restrictive policy and microeconomic restructuring policy. The latter includes drastic capital market opening, radical trade liberalization and especially labor market flexibilization, which repealed most of policy tools of developmental state in particular about external policy, and has weakened workers’ power significantly.

15

in post-development period shows that what proper role the state should play and how

important it is. Demise of developmental state due to the change of the government-

business relationship and no effort to manage globalization integration process in Korea

led to the crisis while the government seemed to still play a proper role in Taiwan.

Considering the importance of power relationship for developmental state and its

change, what we need is a new politics of developmental state to reformulate itself for

the future.

16

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