Global Issues. Kristen A. Hite
corporations have financial resources larger than those of many nations.
Finally, the defenders of a state approach argue that there is little chance for many poor nations to achieve as fair a distribution of income as that achieved by Europe after it industrialized. This situation has evolved because controlling elites have repressive tools at their disposal (such as sophisticated police surveillance devices and powerful weapons) that the European elites did not have. This allows them to deal with pressures from the “have‐nots” in a way the Europeans never resorted to.
Critics of a state approach point to the breakup of the Soviet empire in Eastern Europe in the late 1980s, and to the collapse of communism in the former Soviet Union and the breakup of that country in the early 1990s, as support for their view that the state approach cannot efficiently produce wealth. In fact, it was the dissatisfaction of Eastern Europeans with their economic conditions that played a large role in their massive opposition to the existing communist governments and their eventual overthrow. Dissatisfaction with economic conditions also played a large role in the overthrow of the Soviet government, a startling rejection of the state approach by a people who had lived under it for 70 years.
Critics of the state approach also point to the suppression of individual liberties in the former Soviet Union, China, and other communist states as evidence that the socialist model for development has costs that many people are not willing to pay. In fact, most revolutions have huge costs, leading to much suffering and economic deterioration before any improvement in conditions is seen; even after improvements occur, oppressive political and social controls are used by leaders to maintain power.
Plate 2.4 The state approach to development struggles to survive the collapse of communist regimes in Europe, as can be seen in the posters of a Communist Party conference in Nepal
Source: Ab Abercrombie.
Some critics say that central planning has proven to be an inefficient allocator of resources wherever it has been followed. Without prices from the free market to indicate the real costs of goods and services, the central planners cannot make good decisions. And if efficient central planning has proven to be impossible in a country such as the former Soviet Union, it has proven to be even worse in nations where governmental administrative capability is weak. A final criticism of central planning is that it always leads to a large, inefficient governmental bureaucracy.
Even less invasive forms of state involvement in the economy tend to provoke similar criticisms. The state, lacking a profit motive or the threat of bankruptcy, is going to be less responsive to changes in economic conditions that may necessitate a change in policy. Further, that excessive government involvement in the economy means the state is “picking winners and losers,” a process that virtually invites corruption. And finally, that the state cannot become involved in the economy without making value choices that are better left to individual consumers.
Additionally, some argue that the state approach generates less wealth than the free market approach. Multinational corporations have created more wealth, especially in richer economies. They have brought new technologies; and they have helped the balance of payments problems of those nations by bringing in scarce capital and by helping develop export industries that earn much‐needed foreign exchange. These advantages help explain why multinational corporations are welcomed by many countries.
Finally, the critics of a state approach argue that political elites have used dependency theory, especially in Latin America where the theory is popular, to gain local political support among the bureaucracy, military, and the masses. To blame the industrial nations for their poverty frees them from taking responsibility for their own development and excuses their lack of progress. It also frees them from having to clean their own houses of governmental corruption and incompetence and stop following misguided economic development approaches. According to some critics, the newly industrializing countries have shown that when market principles are followed, economic progress can be made even by nations that have a dense population and few, if any, natural resources.
A Blended Approach
In practice, most countries blend state and market approaches to tailor them toward the political and economic priorities for a given country (or at least for those who hold much of the power). Friedrich List, a German political and economic theorist who began his career in 1817, posited (in contrast to those who push always for freer and more open trade) that in relatively underdeveloped economies, nascent industries may need state protection from foreign competitors in order to allow them to grow to the point where the country could truly exploit its competitive advantage in a given economic endeavor.44 Some have even credited Friedrich List with first proposing the concept now known as “human capital,”45 a concept often used by those who argue that states with less developed economies need to invest in their citizens, to ensure a healthy and educated workforce that can participate meaningfully in the economy.
Decentralized regulation: a catalyst fortechnological innovation?
In evaluating why the United States pioneered innovation in fracking technologies, Dan Merrill concluded that decentralized regulation was key to enabling innovation. In the article “Four Questions about Fracking,” Merrill considers how governance structures impact innovation:
Why does decentralized regulation promote innovation? The theory that explains this might go as follows. All regulators tend to be risk averse. If things go well, they get no credit. If things go badly, they get blamed. But the degree of risk aversion of regulators falls along a spectrum. Some are more risk averse than others. Where regulation is decentralized, a new technology like fracking can find at least one or two states where it is allowed to get going. This sets in motion a natural experiment. If the results are good, and the risks do not seem too great, then risk‐averse regulators in other states will give it the green light to go ahead there, too. If the results are not so good, or the risks seem too large, then the regulators in other states will throw up roadblocks to the new technology, and the experiment will wither away. In a more centralized regulatory environment, which tends to be the norm in other parts of the world, the experiment is less likely to get off the ground in the first place. This is because the median regulator is risk averse. And being the only regulatory game in town, the risk aversion of the median regulator is likely to translate into hostility to technological innovation.
Please see Chapter 9 later in this book for more discussions on the role of technology in development.
Source: Case Western Reserve Law Review, 63 (4) (2013) (internal citations omitted).
One relatively modern example of this blended approach is South Korea. From the 1960s through at least the 1980s, South Korean economic growth was predicated on massive government investment in its infrastructure and citizens, as well as heavy government intervention in the economy (through regulation, subsidies, and government‐granted monopolies) that allowed certain family‐controlled firms, such as Hyundai and Samsung, to become economic powerhouses that could drive the national economy.46 While South Korea has now adopted a much more market‐oriented approach, these nationally prioritized firms benefited directly from the state approach.
Trade and Global Economic Interdependence
After the killing in World War II ended in 1945, a number of world leaders asked, “What should be done to prevent a person like Adolf Hitler coming to power again?” One of the answers given was to prevent an