In the 20th century, a select cast of East Asian governments completely redefined the international economic order. It was the era of the Newly Industrialized Country (NIC), where a few highly interventionist states enacted rapid industrial transformation and ascended from the global periphery to the core of high-income, developed countries. All countries sit somewhere in the international division of labour (IDOL). This means that a nation’s dominant industries generally produce goods around one point in the value chain; This could be near the bottom such as raw mineral products, or near the top such as high-tech semiconductor chips. Where a country sits in the international division of labour depends on a complex evolution of relationships: between state and society, capital and entrepreneurship, and local firms and market prices. In the postcolonial world, these relationships are largely defined by the colonial institutions left behind after independence.
But how does a country change this? How did the NICs “catch up”? An incredible body of literature known as “developmental state theory” has evolved to explain this phenomenon. The one persistent obstacle faced by scholars in this space, however, has been reckoning with autocracies. Why did some of the most striking examples of rapid industrial transformation come under authoritarian rule, such as in Japan, South Korea, and Taiwan? Some scholars have engaged this correlation head on, while many have outright dismissed autocracy as a cause for development. I argue that while nothing about democracy determines industrial development, the conditions under which it will start are quite different in the autocratic setting.
How Industrial Development Begins
Industrialization is a completely different game today than it was when the steam engine ushered in the British Industrial Revolution in the 18th century. Where initially it was largely private enterprise that spurred industrial growth, the modern era prescribes a leading role for the governments of the Global South. This is because the government is able to face up to competition from large multinational corporations in a way private domestic companies cannot. In a situation where domestic firms are not yet technologically advanced enough to produce competitively priced exports, the government is the only actor that can distort these market prices using strategic production subsidies. For this reason, the government must take an interventionist role in the modern industrial transformation of developing states.
But how does the state take this role? Aren’t government-run entities and public bureaucracies prone to inefficiencies? Yes, they certainly are. The lack of profit motivation often causes public organizations to fail. It turns out that the key factor that helped developing nations industrialize in the 20th century was the founding of one or several bureaucratically led institutions that spearheaded the planning and execution of industrialization. Autocratic leaders in East Asia were willing to yield some of their executive power to state institutions led by an army of efficient bureaucrats, trained to coordinate the complete reconstruction of the domestic economy. In democratic settings, particularly across Latin America, this happened far less often or at least to a lesser extent. However, one particular state stands out. The Chilean Congress started entrusting serious strategic authority to a state institution known as the Production Development Corporation (CORFO) in the early 20th century, and the organization’s work has been a large reason why the nation has been so economically successful since. Why did leaders in some countries choose to create developmental institutions, while others operated as corrupt rent-seekers?
The Conditions for Industrialization under Autocracy: South Korea
After leading a military coup in 1961, Park Chung-Hee (PCH) took power in South Korea. Unlike most dictators, PCH was able to transform and lift his nation’s economy into the ranks of the Western world. How did he do this?
I argue that PCH, and authoritarian rulers in general, will only see to the economic betterment of their nation when posed with a set of three conditions. First, the state must be facing a national security concern of grand proportions. Second, the state must be resource-poor. Third, within the societal ranks of the state, there must be an elite class of sufficient size. The first two components of this argument have already been synthesized by economists and political scientists before me. It is argued that because of a serious national security concern, leaders are fearful of their country being invaded and therefore need to boost their economy to fund defence spending. Since they lack natural resources, they can’t easily sell exports to fund defence. Accordingly, they realize that they must economically transform the state and export more complicated manufactured goods in order to accumulate wealth.
I add to this argument that the final thing these states needed was an elite class of highly educated professionals. These individuals were crucial because without them, the ranks of the public bureaucracies could not have been filled. In South Korea, an army of 40,000 civilian bureaucrats had been built up during the years of Japanese colonialism, and shortly after, during the post-war American occupation, Seoul National University was founded. This prestigious university became a new ground for training and recruiting bureaucrats who would later be the key instruments of the PCH administration.
The Conditions for Industrialization under Democracy: Chile
In democratic Chile, the conditions for late-industrial transformation were completely different. Instead of resource scarcity, resource wealth played a key role in propelling economic growth. Contrary to the logic of the resource curse, natural resources can actually provide economic stability before truly transformative industrial deepening. This is important because creating strong state institutions in the democratic setting is reliant on political stability, and without economic stability there can be no political stability.
Political stability is incredibly important for democratic institution building because political actors in unstable circumstances will not have sufficient trust or will to work together. Only in periods of relative political stability will a parliament or congress be capable of constructing autonomous, apolitical bureaucratic institutions that can drive the interventionist industrial state. This then lends itself to the final condition, namely the existence of a body of elite, educated professionals able to run these bureaucratic institutions.
When these two conditions combine in the democratic setting, we will see the foundation of economic planning institutions like the Chilean CORFO. The bill that authorized CORFO’s inauguration was passed after a period of lengthy and heated debate in congress resulted in a compromise to create the apolitical government agency. This deliberative political setting was only possible thanks to the country’s economic stability, which itself resulted from the country’s strong recovery from the Great Depression thanks to its wealth in mineral resources. This short-term primary product exporting phase was thus transformed into more meaningful long-term industrial development.
While this theoretical piece only briefly details two cases, they seem to permit more general conclusions about the rest of the developing world. In contemporary North Korea, early 20th century China, and Pol Pot’s Kampuchea, the combination of grand national security threats and resource scarcity were not sufficient conditions to spur industrial development because revolutionaries had killed all the educated professionals. In Argentina, a weaker primary resource endowment lent itself to perpetual economic instability throughout the early 20th century, which inhibited the political stability necessary to build strong state institutions. This has led to a cyclical unravelling as inflation further destabilized the economy beginning in the second half of the 20th century and continues to the present. This theory naturally begs the next question: what can states do to mimic these circumstances necessary for industrial transformation?
Photo: Image via Flickr (InSapphoWeTrust)