Government Success in Development

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7 Dec 2010
Government Success in Development: The Case of East Asia
o What generates industrialization and economic growth? (This is a
how question)
o Why does it happen in some places and not in anothers? (Why
question; why here and not there?)
o In this class, were focused on the market and the structure
o Either the market operates independently or the state intervenes
and produces development
o First, we focused on the market
The Market
o The Market: “Human beings have a natural propensity to truck and
barter Adam Smith
o If people are free, a market will develop more or less spontaneously
(industrialization, industrial revolution in Britain) this is that gets
told about the IR in Britain; once agricultural revolution has laid the
groundwork, IR takes off
o The Profit Motive - the incentive to make a profit
Development is driven by private entrepreneurs and investors
who are in turn driven by the profit motive
The profit motive and the propensity to truck and barter
these are characteristics of human nature and human nature
itself when given a free reign will produce the market and will
in turn produce development
What is the mechanism through which the market works?
o The Unseen Hand the law of supply and demand
Supply will rise and fall to meet demand
Youll never have too much or too little because supply will
always follow demand; whatever the demand is, the supply
will rise or fall to meet it
It’s demand that drives the market; it’s the market itself
people buying things; supply follows demand; this is what
regulates production (equilibrium)
Recall, Heilbroner people from outer space coming to the
world and trying to explain to them how the market works;
this relates to that story the mechanism that dictates how
much of something will be produced; it’s dictated by what the
market will bear
IR in Britain history with the whole idea of development;
the whole origin that this is how the world works and this is
what modernization involves
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The IR is a starting point for thinking about development and
the place of development in the modern world
It’s also a case of industrialization being generated by the
market alone
At the same time, it’s important to temper that faith in the
market not to overstate the degree to which the market is
independent of state intervention
Even in the IR in Britain, the state also intervenes to sustain
markets to create basic laws to reduce transaction costs
o State Intervention
To secure private property the state produces the
o This doesnt just happen spontaneously; the state
creates private property out of what had been common
To secure intellectual property patent system
o Inventions; people invest in inventions and spend
money and become inventors and then produce venture
capital for inventors
o This is because Britain has a patent system; inventions
can make money for people; other countries in Europe
dont come up with a patent system as early as Britain
To ensure a supply of capital physically, this is a bank
o The bank of England; short-term and long-term capital
o IR was financed; its primarily financed privately but by
people who are able to take out loans from banks
o Nevertheless, in the story of Britain (it’s important to keep in mind
that it’s an example of the market playing the predominant role),
there is state intervention the state intervention is fairly minimal
o The state does not have its own goals necessarily; it doesnt have a
development agenda; it creates the minimal conditions that allowed
the market to develop
Structural Approach (State-Led Development)
o Today, were going to look at the structural approach a
completely different way of thinking about how development comes
o From a structural perspective, development comes about as a result
of decisions that the state makes
o Theres nothing natural about exchange for profit, selling your
labor, treating land and knowledge as alienable
o The market itself is often a result of government intervention, often
from a result of violent opposition from the people
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o The state has to produce the market the logic of truck and barter;
the profit motive and it often does so from violent opposition
from citizens
o Consistent government intervention regulation, financial controls,
interest rate manipulation, exchange rate manipulation, bail-outs
o This is a long-standing debate governments try to deal with
financial collapse
o Bailout; Bankruptcy on Wall Street should the state have
intervened to prevent a complete meltdown or should the market
have resolved it itself?
o Whether the market is or should be free of state regulation and
intervention these became especially salient questions at this
point when were having a global financial crisis; theres an
economic melt-down in the world
Global Financial Crisis
o During the bailout, differences over this question are basically
ideological and normative not really empirical or scientific
o Parties on the right believed that the market is rational
(conservatives, republicans)
o Parties on the left markets ought to be guided, regulated,
tempered by a state (liberals, democrats); people on the left think
that market should be guided by a state that has in mind the
public interest rather than allowed to regulate themselves
dictated by the so-called profit motive; the profit motive is not a
good way to run the economic system
o At any rate, this issue of structure vs. market is not some
historical question that only matters to issues of how countries
develop its central to the field of economics; how much autonomy
does the market actually have? Does it really run on its own based
on the unseen hand and the magical workings of supply and
demand or is there actually a great deal of government intervention
that goes into it?
o Normative question what should it be? How should the market be
Structural Approach
o Chinas “Great Leap Forward”
o German industrialization under Bismarck
o Soviet Five-Year Plans
o Japanese MITI and plan-rational economy
o Singapore and other newly-industrialized countries (NICs); ex.
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