There could be two types of states in terms of economic development; one is development- friendly state (DFS) and the other is development-unfriendly state (DUFS). DFS must be able to implement appropriate economic policies for economic development. Pre-requisites for DFS include 1) knowing appropriate theories and policies for economic development and 2) ability to mobilize political support for necessary economic policies among general public as well as politicians, which in turn requires the state to keep a majority of population embodied with development-friendly ideology consistent with appropriate economic policies. It is because in the 21st century, democracy is developed to the extent that most of economic institutions and policies are determined or strongly influenced by the majority party’s ideology. Any state that does not meet those two conditions would be classified as a DUFS.
In sum, DFS should be able to disseminate the right ideology suitable for economic development according to appropriate theories of economic development. This means that ideology, which so far has been treated as an exogenous variable in mainstream economics, becomes endogenized as a choice variable. In addition, the theory of economic development which has been in disarray for several decades should be reformulated to provide correct guides to judge which ideology is development-friendly.
2. A New Theory and Policies of Economic Development: Economic Discrimination(ED) Paradigm.
The so-called Washington Consensus on economic development policy derived from new institutional economics, neo-liberalism and mainstream neoclassical growth theory suggests that the market supported by the institutions of PPR (private property rights) and economic freedom is the most important instrument for economic development, and therefore, the laissez-faire, free market policy will take care of economic development under the stable macroeconomic environment while the roles of government as well as corporation are not fully appreciated. Such mainstream consensus seems insufficient to explain diverse developmental experiences in the history. In fact, I think, we are now left with no theory of economic development.
One can suggest an alternative to the mainstream consensus, based on careful readings and consolidation of condensed as well as extended world development experiences as follows[1];
First, the function of markets needs to be redefined. Markets in the real world, different from the perfectly competitive markets in the textbook, discriminate economic agents according to their economic achievements and direct resources and wealth to the successful agents, and thereby create economic inequalities and motivate them to work harder. In this sense, the market can be interpreted as exercising industrial policies (IP) everyday by picking better performers and providing more resources to them. This economic discrimination(ED) and motivation function is in fact the essential role of markets that make them an important institution for economic development. In this view, any mechanism strengthening the market’s discrimination function and thereby providing motivation by helping acknowledging differences in economic outcomes will necessarily help promote economic development. Seen from this perspective, PPR system and economic freedom, in fact, are effective means for creating economic differences and inequalities and as a result motivating economic agents to work harder, and therefore, should be good for economic development. In this regard, the capitalist market economy with unfettered PPR and economic freedom may have more chances to grow. But this is not the end of the story as will be seen in the following.
Second, development is a cultural evolutionary process of free-replication of or free-riding on others’ success knowhow, thereby the mass of people becomes successful. Markets, however, cannot handle such free-riding problem successfully especially if they are faced with heavy positive transaction costs. Economic leaders that serve as sources of success knowhow therefore tend to disappear from the market. Markets alone are not very good at producing the critical mass of economically successful role models to lead the transformation process. This may be called market failure of ED and motivation, a new kind of market failure different from the textbook case.
Here, the introduction of a secure PPR system may help improve the market’s power of discrimination but not enough to solve the free-riding problem since knowhow of success is intrinsically so difficult to be identified that it may become prohibitively costly to fully assign and enforce PPR for it. So, market economy is destined to be trapped in the developmental failure despite the spread of the capitalist market economy.
Third, the natural solution to developmental failure is the private firm as an organization based on the command-control mechanism which can therefore avoid transaction costs (or save information costs) and solve the market failure by internalizing knowhow-free-riding activities. Especially, the modern corporation has been the strong supplement to the market in the capitalist economy. However, the successful corporations are destined to be subject to the free-riding on their success-know by the followers and therefore, the market fails to produce such successful corporations on a large scale. In this context, modern developmental-friendly state (DFS) as public organization has also been the important supplement to the market by promoting the growth of corporation. Here, we find the positive role for the government as well as corporation for economic development.
Fourth, now, IP (industrial policy) can be re-interpreted as an ED and motivation mechanism as successfully demonstrated especially in Japan, Korea and China differently from the failed cases. Note that the role of government for economic development should supplement and reinforce the market’s ED function, i.e. the market-led IP by helping those individuals and corporations who help themselves rather than going against or disregarding them. IP should pick the market winners ex post, after the market outcome, rather than pick the winners ex ante, before the market outcome.
Seen from this perspective, Japanese and Korean industrial policies were successful precisely because both were implemented in an economically highly discriminatory manner so as to re-enforce the market discrimination and motivation function. That is, IP always helped those corporations that helped themselves, based on their market performances. T and therefore, should not be called “industrial policy” but discriminatory “corporate promotion policy,” which could help correct the market and developmental failure.
This feature of successful government policies is not confined only to the cases of successful IP, and is generally applicable to most cases of economic policies. Successful economic policies turn out to be economically discriminatory while failed policies are egalitarian. This is diametrically opposite to the popular egalitarian government intervention argument that the government should intervene against market outcomes in order to correct the economic imbalances created by the market economy.
Fifth, the most important development-friendly ideology such as “can-do spirit” or “self-help spirit” can be embodied into the peoples’ way of thinking only by the economically discriminatory policy regime on top of education and/or propaganda. Especially, Korea’s “can-do spirit” turns out to have been created by the repeated application of government’s discriminatory economic policies helping only those who help themselves such as Saemaul (new village) movement, export-promotion policies and IP for HCI drive.
Finally, let me consolidate the arguments. Discriminatory economic institutions embodying the principle of treating economic differences differently, i.e. ED paradigm and respecting the ideology of helping those who help themselves are good for development, while egalitarian institutions that treat economic differences equally especially by disregarding economic excellence will hinder economic prosperity. Markets cum PPR system and economic freedom may be good for the survival or moderate growth of the economy, but they need to be supplemented by economic discrimination by the government and private organizations if there could be any chances for real economic take-off and catch-up in the development game. I have been arguing that ED is a necessary condition for economic development, while economic egalitarianism is a sufficient condition for economic stagnation.
In fact, “ED and motivation by the market as well as government and corporation is a necessary condition for economic development” is the key message of condensed development experiences of Japan, Korea and China as well as extended Western development experiences.
3. Development-friendly Ideology and Political Economy of DFS vs. DUFS
According to the ED paradigm, the ideology allowing economic differences and inequalities as a natural outcome of the development and at least not regarding them as contradiction of capitalist economy as far as the majority becomes improved materially will tend to be development-friendly, while the opposite ideology favoring strong economic equalities such as equal economic outcomes will become development-unfriendly.
The two wheels of the Democracy Cart are liberty and equality. The issue with liberty is that it seems easily subdued by egalitarian ethos especially in modern-day democracies that have emphasized “equal rights.” Central to ideal democracy, for example, is the “one man one vote” mechanism, which provides an easy environment for egalitarian ethos to thrive. However, such egalitarianism has tended to permeate into all aspects of life, being translated into “equal opportunity” in economic capability rather than before the law, “equal outcome”, etc. This adversely affects economic development, because economic development is based on ED.
According to the ED paradigm, one can classify political economy regime into 4 different combinations of political order and economic order as shown in Table 1; A+C=market democracy, A+D=social democracy, B+C=developmental state and B+D=totalitarian regime. Here, it can easily be seen that A+C and B+C are development-friendly because they are adopting ED economic policies while A+D and B+D are development-unfriendly because they are under economically egalitarian regime. Therefore, seen from this perspective, as far as economic development is concerned, political order being democratic or authoritarian is not crucial while choice of economic order becomes very crucial. Even politically authoritarian states can be development-friendly if they are economically discriminatory by adopting ED policies. On the other hand, even liberal democracies can lead to economic stagnation if they become economically egalitarian.
With this framework of political economy regime, one can consistently explain diverse experiences of economic development as shown in Figure 1.
4. How to Create Development-Friendly Ideology and State
Condensed development experiences of Korea, Japan, and China imply that repeated application of economic institutions and policies based on ED principle will help change peoples’ ideology toward being development-friendly. Conditions for this are: 1) ED leadership is required who understands ED principle and changes the nation’s political ideology into the one consistent with ED principle. 2) Some firewall must be built between economic policy making and politics in order to minimize the egalitarian populism. Examples of such ED leadership who once succeeded in changing the nation’s ideology towards DFS are as follows: leadership in Meiji Japan, Park Chung-Hee in Korea, Lee Kwan-yew in Singapore, Deng Xiao ping in China, Thatcher in England, Lula da Silva in Brazil, Manmohan Singh in India, Mahathir in Malaysia and maybe Reagan in USA, to name a few as can be confirmed in Figure 1.
5. Economic Development Needs an Economic Theory of Ideology.
Economic science has been lacking an economic theory of ideology and degenerated as providing technical advices to achieve national agenda set by the political philosophy. As a result, it became a subsidiary science to political science. This has been the main reason for the egalitarian economic policy regime to widely spread out to the global economies in the name of helping everybody equally regardless of their economic efforts and achievements and thereby causing most of global economies to degenerate towards stagnation for several decades. Now it seems most of the globe is covered with the DUFS while the DFS becomes a dying species. Economic science should provide a theory to discriminate political ideologies based on their economic development implication and help prevent unfounded political ideologies from producing development-unfriendly institutions and thereby harming the dynamism of the global economy. This note is an attempt to contribute to such an effort.
References
Jwa, S-H. (2012a), A New paradigm of development economics, (in Korean), Seoul: Yulgok.
-----------(2012b), A Philosophical Basis for Economic Development, (in Korean), Seoul: Seoul National University Press.
----------(2012b), “Towards a general theory of economic development: Taking northeast Asian development experiences seriously”, working paper.
Jwa, S-H. and Y. Yoon (2004a), ‘Political Institutions and Economic Development: A Study in Economic Discrimination and Political Philosophy’, Seoul Journal of Economics, 17 (3) Fall: 275-307.
Jwa, S-H. and Y. Yoon (2004b), ‘A New Look at Development Economics through Korea’s Experience: The Paradox of Economic Development’, Paper presented at the 2004 KDI-KAEA Conference, Seoul.
Jwa, S-H. and Y. Yoon(2011), "Economic development and institutions", in Institutional Economics and National Competitiveness (edited by Young B. Choi), London, Routledge and Kegan Paul Ltd.
