Week 06 Economic Development

1. Week 06Economic Development • Why do some countries remain poor, while others have been able to achieve rapid economic growth? This is another “hot” question for political scientists!

2. Review: Dependency Theory • world economy - a rigid structure - systematically exploits & disadvantages “Third World” countries • international division of labor (IDL) - implanted by colonialism - Third W – specialize in low value-added agricultural/simple manufactured goods - First W – high value-added industrial goods

3. multi-national corporations (MNCs) agents of economic penetration & exploitation by foreign capital few positive contributions to local economy • Third World politicians & capitalists in cahoots with foreign capitalists to exploit local labor subservient puppets for foreign capitalists not autonomous and equal

4. Pessimistic Prognosis … There is only “development of underdevelopment” in the Third World! • 3rd W – mired in poverty 1st W – get richer & richer • sole blame • on unequal structure of world economy, imposed by colonialism Andre Gunder Frank

5. Death knell for dependency theory • phenomenal success of Asian NICs (= Newly Industrialized Countries) South Korea Taiwan Singapore Hong Kong • dependency theory –too deterministic & pessimistic Some “dependent” countries in Third World have become rich by overcoming the constraints imposed by IDL Third World countries are not doomed to fail!

6. Week 06 Economic Development • How have the Asian NICs achieved rapid economic growth? What explains the economic success of these late developers? (1) culturalexplanation – political culture Max Weber: relationship between culture (or religion) & economic growth (2) institutional(or statist) explanation (Chalmers Johnson) role played by the “developmental-authoritarian state”

7. (1) cultural explanation type of politics /economy • cultural context that shapes politics & economy • explains a broad collective-level phenomenon (e.g., type of politics) in terms of individual citizens’ cultural values & behavioral patterns individual values, beliefs, and norms at micro level patterns of individuals’ behavior type of politics & economy at collective level Patterns of behavior values beliefs norms

8. Max Weber’s Cultural Explanation of Economic Stagnation “politically oriented capitalism” Type of politics /economy I use my public power to enrich my family. poor economic growth pervasive rent-seeking (corruption) Patterns of behavior norms values beliefs Patrimonialism

9. Cultural Explanation of Economic Growth in Asian NICs • What kind of culture do these countries have in common? Confucianism • a complex system of thoughts developed from the teachings of ancient philosopher Confucius • moral virtues sincerity hard work honesty perseverance wisdom (high education) harmony What kind of values and beliefs do the people in the Asian NICs embrace?

10. Thanks to my teachings, Singapore has developed the way it has!. State of economy economic growth at national level • extension of Max Weber’s cultural explanation of capitalist growth in Europe to Asian NICs Patterns of behavior work hard & save money norms values beliefs hard work & thrift

11. Max Weber:The Protestant Ethic and the Spirit of Capitalism(1905) • Some countries of Europe – more developed than others concentrated in northern Europe e.g., England, Scotland, Scandinavia, Holland, Germany • developed = Protestant less developed (e.g., Spain) = Catholic • Not religious dogma against Catholics but a detached scholarly analysis This is not an accident. There is a cultural reason for it.

12. Weber:The Protestant Ethic and the Spirit of Capitalism Argument in brief: • a causal relationship between Protestant values/beliefs & capitalist growth Protestantism = cultural (or spiritual) driving force behind capitalist growth in northern Europe

13. Protestant Values & Beliefs • Calvinism (developed by John Calvin) • preach doctrine of predestination • Some human beings have been chosen by God for salvation (or success) and others for damnation (or failure) beforehand. • Our fate – whether we succeed or fail in life – has been predetermined • BUT … we do NOT know whether we have been chosen for salvation or damnation – Nobody knows

14. An eternal sense of uncertainty & anxiety for Protestants … Has God chosen me for salvation or not? Will I succeed in life? I want to know … But I can’t. I spend every minute of my waking time dealing with this anxiety … There is no end to this anxiety. • The “logical” or “rational” path to take … Why worry? If God has already chosen you for salvation, you should be saved, no matter what you do in life!

15. Not the case with Protestants …They take an “irrational” path I must be among the chosen for salvation. • more serious • They try to lessen anxiety & uncertainty by “believing” or “assuming” that they have been selected for salvation • seemingly “irrational” but “the ethos of Protestantism” Then I must lead a moral & hardworking life, so that I can demonstrate to God that I’m worthy of salvation. I can’t let him down for having chosen me for salvation.

16. Look for “small signs” of salvation by working hard I worked hard today, and I accomplished a lot. This is a smallsign that I’m really among the chosen for salvation. Otherwise, I wouldn’t have been able to accomplish so much. • Signs of small success and accomplishments in everyday lives I will work just as hard tomorrow again. If I can accomplish just as much, that would make me more confident that I’m among the chosen for salvation.

17. I worked so hard on that paper for PS1101E, but I got a C. Perhaps, I have been chosen for damnation ... If fail …? • try harder & harder until they succeed • have a positive mind and look ahead, instead of fretting about failures in the past Cf. • Michael Jordan: “I've failed over and over and over again in my life. And that is why I succeed.” Wait… It may be too early to despair. Perhaps, I didn’t work hard enough. Why don’t I work even harder for the exam? If I get a better grade, that is a sign that I’m among the elected for salvation.

18. Characteristic patterns of Protestants’ behavior A Protestant works hard to get nothing but “the irrational sense of having done his job well.” (1) self-discipline & hard work • compulsive workers, workaholics • devote all waking time to working “Time is money” • can’t stand not working (= sign of damnation) • work “for the sake of working” • work “as an end in itself” not as a means to an end e.g., drink beer Working hard is a source of spiritual satisfaction for Protestants.

19. I live to work. Hard work is all in a day’s work for me. I obtain happiness from working. • Inner convictions (= cultural values & beliefs) drive Protestants to work hard voluntarily as an end in itself • They work hard because they want to, NOT because they are forced to.

20. Behavioral patterns of Protestants (2) Ascetic & Frugal • stoic – refrain from hedonism e.g., drinking unnecessary shopping womanizing idle socializing • shun material luxury, frivolous self-indulgence, worldly pleasures, ostentatious living, etc. I’d rather work and save money than drink alcohol.

21. (Unexpected) Result? I have worked hard for many years. Before I knew it, I had saved $1 million! • high productivity • high savings (without realizing it) = accumulation of capital •  worthy investments buy new & better machines/tools found new businesses education for (grand)children • continue to work hard • more savings  more investments • richer and richer • positive self-perpetuating cycle If most people in a give country are like me, that country will be prosperous!

22. The Protestant ethos makes capitalism “tick” • Capitalism = an accumulation of capital generated from economically productive activities = exactly what Protestants are driven to achieve, if unknowingly • The Protestant ethos seems “irrational from a naïve point of view” (Weber) but is “definitely a leading principle of capitalism” = “spirit of capitalism” • Protestantism = cultural driving force behind capitalist growth in northern Europe

23. Catholics? • less disciplined & hardworking • less ascetic • more given to hedonism • work as a means to an end = to pursue worldly pleasures & material comfort • More money wasted on having frivolous fun “What’s wrong with buying beer with the money I have earned? What’s the point of working, if you don’t use the money?” • Caught in “a Catholic cycle of sin, repentance, atonement, release, followed by renewed sin”

24. Outcome for Catholics? • less money earned • less money saved for economically productive activities • The aggregate of all individual Catholics’ behavior = less impressive growth at the national level

25. Compare & Contrast Weber & Marx Both Germans, lived around same time But disagree on many things, e.g., on workers in capitalism Marx: 1818 –1883 lower middle class 1849 exile in London  extremely poor life  die in poverty Weber: 1864–1920 born into a wealthy politician’s family University professor

26. Difference(I) Weber’s idea of workers I get a sense of spiritual satisfaction from working. Working makes me happy. I work because I want to. I work as an end in itself.

27. Marx’s Views • All workers are forced to work hard like dogs • Workers don’t get any joy from working Capitalism is dehumanizing Working is a source of misery for workers • Workers work to get wages & survive Dehumanizing work is a means to an end (= sheer economic survival)

28. Difference(II) Weber: workers = ascetic & frugal • stoic – refrain from hedonism • shun material luxury, idle self-indulgence, worldly pleasures, ostentatious living, etc.  more & more savings I have worked for so many years. I didn’t know I had saved $1 million! I’d rather work than drink alcohol. Time is money.

29. Marx It is not a question of choice! • Workers cannot simply afford to enjoy worldly pleasures too poor too busy making both ends meet every day • No matter how thrifty they may be, they can’t save much money • Capitalists siphon off most of workers’ profits Before they know it, all their money is gone!

30. But one SIMILARITY… • Critical view of the modern capitalist state • Weber’s pessimistic conclusion: Initially, (Protestant) workers “wanted to work,” but now “we are forced to do so” by the state The modern bureaucratic capitalist state emerges & regulates our lives (Week 02)  Now today’s workers are coerced to work (in order to pay taxes to the state). If we don’t pay, we will be punished  Capitalism no longer has a spiritual basis. It has only a bureaucratic basis at present

31. = increasingly rigid & impersonal bureaucratization & regulation of society by modern capitalist state But we cannot escape from it But Marx & Weber disagree in the end … Weber: deplorable yet inevitable end result of capitalist development F. Fukuyama: agree with Weber The history has ended. For all its shortcomings, capitalism is better than any other economic ideology. Marx: “Overthrow it!” “Iron Cage”

32. Upshot & Application of Weber’s Cultural Explanation • At initial stage, there was cultural (or spiritual) underpinning of capitalist growth • Confucianism = Asia’s equivalent of Protestant ethics • Confucian values & beliefs (e.g., hard work, thrift)  economic growth in S. Korea, Taiwan, Singapore & HK  also in Japan  China & Vietnam, too (since 1990s)  also Chinese minority in Malaysia, Indonesia, Thailand • countries with non-Confucian cultures in Asia  less growth e.g., Philippines (Catholic), Thailand (Buddhist), Indonesia & Malaysia (Muslim)

33. Criticism of cultural explanation (I) • (sometimes) used to whip up (amateur) nationalism or Asian pride overcome a sense of inferiority used for political purposes • construct the spurious notion of singular “Asian identity” or uniformity - ignore cultural diversity & complexity - reduce Asian cultures to one – Confucianism - All Asians look alike & think alike Asian culture is not inferior to Western culture. We should be proud of our achievements!

34. Critique of cultural explanation (II) • based on unrealistic idealistic assumptions: • assumes a completely “free” market situation - Hard work will always pay off - All wise investments will pay off - There is a level economic playing field • assumes that people work & invest in a structuralvacuum & ignores preexisting structural barriers or constraints • Think of Mr. Lee Byung-chull, founder of Samsung, which embarked on automobile production in early 1970s • By then, the world auto market = dominated by US & Japanese companies = no level playing field Dependency theory has a point. The structural barrier was too formidable for Samsung to break at the time. How could Samsung penetrate the market? The cultural explanation ignores this constraint ...

35. Critique of cultural explanation (continued) • There is a structurallimit to how far the late developing countries can get, if they rely on hard work alone • Culture (alone) doesn’t explain the economic success of Asian NICs • Hard work must be complemented by institutions of the state • Cultural explanation ignores the institutionalcontext in which Asian NICs have grown

36. An Alternative Explanation for Asian NICs’ Economic Success • statist(or institutional) explanation a role played by the state in achieving rapid economic growth thedevelopmental authoritarian state = state that engineers rapid economic development within an authoritarian political framework • emerged in opposition to economic liberalism

37. Economic Liberalism date to Adam Smith in 18th c. • advocates laissez faire free market economy “let it be” • belief in “invisible hand” in free competitive market = optimistic faith in law of supply & demand ( has miraculous ability to solve all economic problems) • state’s role in economy: = minimalist, “hands-off” = impartial umpire a level playing field for everyone - advocated by US, IMF, WB - rejected by Asian NICs

38. On what grounds? • Laissez faire capitalism is an ideology used by the West to keep late developing countries down economically forever • If rely on free market, “late developers” can never catch up with “early developers” in the West Solution? • rely on power of the state • active and purposeful state intervention in economy = both necessary & desirable • The state must intervene in market to allocate scarce resources (e.g., bank loan, subsidy) for strategically important industries that produce high-value added goods

39. But … Active & purposeful state intervention in economy would be very difficult to achieve in a democracy … Why? This is the key to understanding the historical origin of the developmental authoritarian state!

40. limited state resources Low value-added agricultural/ simple manufactured goods Elected leader in democracy in LDC subsidy, tax breaks, bank loans, etc. I can’t help it. I must do this to develop our country’s economy quickly … High value-added industrial goods

41. State leader tries to plead and reason with neglected industries/companies I’m implementing this policy for the long-term prosperity of our nation. So, please understand! If you support my policy, everyone in our country will benefit in the long run! I have a good justification for my policy. • Would their employees understand???  opposition: “I won’t vote for you in the next election! If you want to get reelected, give a bank loan to our company, too.” Elected leader in democracy in LDC

42. Neglected sectors make irreconcilable demands on the state • social instability & chaos ensue - protests, strikes - lobbying via political parties, unions, interest groups, etc. •  forced to give up policy • In democracy, leaders must cater to as many vested interests as possible otherwise, not reelected difficult to achieve effective state intervention in economy State leaders are in a bind. What to do …??? I know what to do to develop our country’s economy, but I can’t do it because of opposition. My hands are tied.

43. Justification for Developmental Authoritarian State A leader must be strong in a late developing country! If democracy is a fetter, let’s do away with it! From a democratic wimp to an achievement-oriented strongman Democracy is a luxury forLDCs. We must sacrifice democracy for growth. Necessary & desirable change to achieve rapid economic growth • South Korea under Gen. Park Chung Hee (1961-79) • Taiwan under Chiang Kai Shek (1949-75) • Singapore under Lee Kuan Yew (1965-90)

44. Features of Developmental Authoritarian State (1) centralize decision-making power • limit, repress, neutralize, or depoliticize political opposition e.g. labor unions, parties, pressure groups • acquire state autonomy = ability of the state to formulate & implement policies without pressures or constraints from various groups & individuals in society (2) Make good use of state autonomy to target key companies/industries for rapid growth & to channel state resources

45. Isn’t the benefit dispensed by the developmental authoritarian state one kind of rent??

46. Politician in power Isn’t the benefit dispensed by the developmental authoritarian state a kind of rent? monopoly Out of business Microsoft Marcosoft • an excess value (above the market value), created unnaturally & unfairly by a non-market political act • A preferential economic benefit from power holders that is sought by, and is given to, companies or individual capitalists in order to artificially & unfairly manipulate the otherwise free market forces in their favor Profits soar Artificially created excess value Market value of a product

47. Difference (I) Developmental authoritarian state • awards rent on the basis of recipient companies’ strategic importance, efficiency & likelihood of success Politicians use their public power for long-term collective interests of the public, not for short-term personal gains a distinction between public & private • Criteria for dispensing rents – not personal ties

48. Difference (II) I will extend a generous loan to your company. But in return for this, you must sell 1 million cars in the US market next year. Or you won’t get any more loan. • The developmental authoritarian state attaches a condition • set high & strict performance criteria e.g., sales quota Recipient companies can’t slack off a strong incentive to strive for product innovation, cost efficiency, better sales strategy, etc. pay back by meeting the criteria (not kickback) Rents – not wasted on unproductive companies

49. Difference (III) RENT monopoly subsidy Information etc. Politician in power • generate revenues through rents & taxation  used on social welfare & education • achieve a fairer distribution of wealth • Source of legitimacy for developmental authoritarian state Taxes efficient companies

50. So … Developmental authoritarian states dispense rents to enrich the nation as a whole. • Rents – not always/necessarily bad, provided that the state makes sure that they are used efficiently • “Good” rents – engine of growth in Asian NICs In a society rife with patrimonialism, leaders dispense rents to enrich themselves, their families & their friends.