The Role of the State in Economic Development

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In this chapter will seek to throw light on some keys issues from many scholars in the context of theory it related to this research. It is useful for situating the study for charting out what kind of theoretical implication the finding of this study are likely to offer. Therefore in this chapter we discuss the role of state in economic development and the competitiveness in the term of competitiveness in the world market by using revealed comparative advantage.

2.1. The Role of the State in Economic Development

The role of state in economic development is enormous not only as regulator but also in law enforcement, the provision of education, adequate infrastructure until on health. The achievement of all the government's role in economic development is depends on the readiness and the government itself. In East Asia has been stated that in the role of state has played in economic development in the region. This can be seen from the many studies about the success of the role of state in East Asia by many authors such as World Bank, 1993, Johnson, 1982, Wade and White, 1984, Amsden, 1989 and Castell, 1992.

In this session we will discuss about the perception of the role of state development in East Asia, with emphasis on the relationship between public policy and economics. There are 3 models of the state which we will discuss is the market led model, the state led business model and toward the state interdependence.

The Market Led-Model

Major institutional anchor market and East Asian development model is a symbol and development strategies, as already stated in the bank world. In a world development report 1987, the World Bank has been consistently to provide some insight straight from the neo classic from Alfred Marshall's point of view that emphasizes the positive effects of unlimited market in the optimal allocation of resources in order to support free trade and free market development model . In the policy, the World Bank gave some suggestions that the development of the country to adopt a more market development programs such as making links with international bodies like the International Monetary Fund. The story of East Asian development emphasizes the importance of market forces that have been written by Little, 1981, Balassa 1982 and balassa, 1988.

In view of the market-leading model, the role of the state has a limited function as a catalyst and corrector of market failure. According to Little (1981) said that export success in East Asia NIEs stresses because the positive effects of free trade conditions. In this era, the East Asian NIEs have been the transition to industrial capitalism, such as Korea, Taiwan and Hong Kong. In this case, the stability of government is essential to provide stable conditions for long-term business conditions and also the regulatory framework and infrastructure capacity too.

Balassa remarks in his study of the 'lessons' of East Asian development:

"The principal Contribution of government in the Far Eastern NIEs has been to create a modem infrastructure½¥ to provide a stable incentive system, and to ensure that government bureaucracy will help rather than hinder exports…More generally less use has been made of government regulation and bureaucratic controls in East Asia than elsewhere in the developing world. Finally½¥there have been fewer policy-imposed distortions in labor and capital markets, and greater reliance has been placed on private enterprise". (Balassa, 1988; .286-8)

Its opposite with Paul W. Kuznets views. Kuznets took a different view of the Balassa by comparing the diametric in Japan, Taiwan and South Korea and end with a diametrically different view of the state of the Balassa. Kuznets states, in three countries, "Government intervention, although limited by the need to keep exports competitive, had penetrated '(Kuznets, 1988; 36).

Latin America vs½¥East Asia: the secret of export-led growth

According to Balassa, (1988; 271-288) stated that the East Asian NIEs (including Hong Kong) have adopted the first phase of import-replacing industrialization (the primary local market and import of consumer products are replaced by labor-intensive local production) and is opposite with Latin America NIEs by adopting the second phase of import-substituting industrialization (local production as a producer of goods, capital-intensive import substitute).

Balassa (1988) said that export growth in East Asia NIEs which they recorded the highest GDP growth rates among developing countries. Factors influencing this are:

Export carried out in accordance with comparative advantage by contributing to the allocation of resources. This condition is an advantage of the new, improved efficiency based on the excellence of each industry and the country concerned. (Balassa, 1988; 280-1)

East Asia NIEs exports provide to overcome the limited domestic market with to maximalist use of resources and reap the benefits of large-scale production.

Import substitution and protection are often monopolies; export-oriented industrialization is more towards the competition with a change toward more modern technology in order to improve their position in world markets.

According to Balassa (1988; 268-8) that four determinants of economic performance of East Asian NIEs are beneficial are:

Stability of an incentive system.

History of East Asian countries shows that the system is to encourage exports by setting up incentives, eliminating administrative barriers' and create a favorable environment for exporters with a relatively stable condition. These conditions contrast with Latin America NIEs. Where East Asia NIES countries are more inclined to avoid any increases or fluctuations in exchange rates, and exporters can usually expect that the incentives they receive will be maintained in the period, while countries in Latin American NIEs with fluctuating exchange rates and wage increases in exports, so it is reduce the profitability of exporters.

Limited government intervention.

Countries in East Asia have implemented the administrative system is far more limited than in Latin America. This condition is meant by East Asian nations to create a positive environment for economic growth with free markets working.

Well function labor and capital markets.

The existence of the policy of East Asian countries has instituted in distortion imposed on labor and capital markets. Where labor markets are generally free in East Asia Niles is different with the regulation in Latin America NIEs. These conditions not only on the labor market but also more free capital markets in East Asia NIEs than in Latin America NIEs. Another factor is the interest rate in line with market prices to provide incentives for domestic savings and to prevent capital outflow, while in Latin America NIEs, artificially low interest rates affect currency values is considered too high to encourage overseas capital.

Dependence on private capital.

Comparing the existence of dependence of the private sector in East Asia NIEs is greater than in Latin America NIEs. In East Asia NIEs private companies to take an important role in making the necessary investments, and through the relationship of international competition to makes efficient and profitable. While in Latin America NIEs, the public companies tend to play a more important role than in the East Asian NIEs.

The State-led models

State led model is very opposite perspective with the neo classical. The story of the revised outlook from East Asia to the view of the market led to a state model of development led to the concept of state has been expressed by Johnson, 1987, Castell, 1992, as well as success in industrialization on late development in the context of state as the biggest agent in the transformation has been expressed by Gerscenkron, 1962.

According to Wade and White observe that:

"If we turn to Japan, South Korea½¥ and Taiwan, among the most dramatic and equitable Cases in the history of Capitalist development, industrialization has in each case been accompanied by aggressive government intervention. The authorities have acted to guide markets and moderate the competitive process in a way that neo classical economics says public officials cannot get right". (Wade and White, 1984; 1)

Other scholars such as Deyo said about proposed capacity model strategic, emphasizing the new industrialism East Asia:

"[the] state's commitment to economic expansion and, more important, its capacity to implement well-chosen development strategies differentiates these NIEs from other developing Countries better endowed in natural resources, scale of domestic markets, and other economic assets". (Deyo, 1987; 228)

According to the static view, Stephen W.K. Chiu and Tai-Lok Lui (1998; 144) said that state intervention is required for successful late industrialization. This is consistent with Gerschenkron perspective which said that the importance of strong state to overcome the lack of defects, and lack of smooth industrial markets. (Gerschenkron, 1962; Rueschemeyer and Evans, 1985).

By following Gerschenkron, Amsden (1989) stated that the industrialization of East Asia is characterized by 'Late' instead of 'Newly' of his (such as the economy in new industries). As a newcomer to East Asian companies must be able to compete with Western companies in terms of technology.

In other words, Wade, 1992 said that the magnitude of problems faced by latecomers from the developmental state is to offset the weakness that is often faced by companies in East Asia into International Competition and the transfer of its industrial structure to a more dynamic activity technology.

The capitalist developmental state

Speaking about development capitalism state directs us to the opinion of Johnson (1987) state that capitalism development does not attempt to replace the market mechanism and private decision, but neither does it abdicate to private profit-seeking Behaviors in the development process.

Johnson argued about capitalist development is the 'logic of the system comes from the interaction of two sub-systems, one public and directed to other development objectives and the private sector and aimed at maximizing profits' (Johnson, 1987; 141-2)

State of development, according to Johnson, 1987 concept 'have the following features:

"Elite Development produced and come to the fore because of a desire to exit the stagnation of dependence and backwardness, that really understand that they need to successfully market to maintain efficiency, motivate the people in the long term, and serves as a check on institutionalized corruption as they struggle against underdevelopment" (Johnson, 1987; 140).

Because not a socialist country, state development firm committed to private property and markets. The market system is very closely with the government to formulate a strategic industrial policy to promote development. While the development of elite state economic intervention not only on the market.

In the state bureaucracy, the pilot agencies (such as MITI in Japan) plays an important role in the formulation and implementation of strategic policy. The agency is given sufficient scope to take initiative and operate effectively, and manage the best people. Johnson showed that a good recruitment in the civil bureaucracy will give good results but also produces a sense of unity and common identity on the part of the elite bureaucracy.

Another story about how the state promotes late industrialization has been expressed by Amsden (1989) in which the Korean emphasis on subsidy policy for the revolution industry and disciplined in protecting the new industry grow. Subsidies have given because Korean Integration cannot fight with Japanese companies. Subsidies are given to entrepreneurs to build industry. Korea in the future so that eventually became the major industrialized countries. The discipline Policy, firmly Korean government made a rule that companies that have good performance was the company will be able to award a management and bad performance will get a penalty. This suggests that state intervention is in need when Korea in the industry lags

It is required in state bureaucracy that has been selected to get a bureaucracy meritocracy have capable and competent in running the government both in terms of policy and regulation.

According to Stephen W.K. Chiu and Tai-Lok Lui (1998; 147) bureaucratic autonomy was also guarded by the politicization of the major economic decisions, or what Johnson calls the separation between "reigning and ruling":

Otherwise, Johnson said that

"the politicians set broad goals, protect the technocratic bureaucracy from political pressures perform "safety valve" functions when the bureaucracy makes mistakes, and take the heat when corruption scandals are uncovered…the official bureaucracy does the actual planning, intervening′ and guiding of the economy". (Johnson, 1987; 152).

All this is a portrait of the importance of the relationship between state development, conglomerates private sector, banks and other institution in economic development. So the bureaucracy and public-private sector can work together in bringing a strong autonomous states that are not only able to formulate strategic development objectives, but also able to translate national goals into broad effective policy measures to promote late industrialization in East Asia.

Towards state-business interdependence?

According to Stephen W.K. Chiu and Tai-Lok Lui (1998, 149) stated that emphasizes state autonomy in making decisions and carrying capacity to dominate the market. In East Asia, the Gilbert and Howe said:

"We argue that state-cent red theorists disregard the interrelation½¥on of state and society; in viewing the state as an independent entity, they fail to see how it is related to the wider society. Further, they oversimplify & societal forces and ignore class conflict within and beyond the state. State and society are interdependent, and must be analyzed as such". (Gilbert and Howe, 1991; 205)

Author such as Weiss argued the 'governed interdependence theory', premised on the proposition that

"The ability of East Asian firms and industry more generally to adapt quickly to economic change is based on a system that socializes risk and thereby coordinates change across a broad array of organizations - both public and private". (Weiss,1995; 594).

On the other hand, Weiss argues not only about autonomy is emphasized in state-led model but also the attributes of institutional capacity for coordination with the appropriate type of relationship industrialized countries. Weiss said that

"in Korea, Taiwan and Japan, the complex matrix of institutions have been established between state institutions and the private sector such as policy networks provides an important mechanism to obtain information and to coordinate cooperation with the private sector with examples of MITI in Japan" (Weiss, 1995; 600).

This differs with the opinion Samuels in his study of Japan's energy policy (1987; 8) says that it is an iterative process of confidence among market participants and public officials, which works better where the patties are stable and negotiations where institutions compacts that ensure their survival. Samuels suggests that Japanese nationals wishing to pursue an energy policy that aims to maintain a stable private market rather than be used to compete or replace private entrepreneurship.

Another example, Okimoto debate about the close relationship of government business:

It has served as the main instrument for consensus building, the vehicle for information exchange and public-private communication. Close government business relations would be hard to imagine in its absence. Indeed the whole system of Consensus, on which Japan's political economy relies, would be hard to maintain without industrial policy as an integrative mechanism. (Okimoto, 1989; 231)

Also like Okimoto, Calder said about

"the financial industry in Japan and the formulation of the 'strategic capitalism' also emphasizes the public-private hybrid system, 'pushed ahead in the calculation of market-oriented private sector, but with the active involvement of the public sector to encourage public spiritedness and long-term vision "(Calder, 1993; 16).

Finally, Evans also highlighted the fact that states the successful development can not only be autonomous, they are also 'embedded in a concrete set of social ties that bind the state to society and provide institutionalized channels for continual negotiation and re-negotiation objectives and policies' (Evans , 1995; 12).


Competitiveness is the ability to compete in international term between industries not between countries (Krugman, 1996). In winning the competitiveness, the company has its own strategy, such as lower costs, improve product quality and looking for network marketing. However, sometimes the company still needs government support for companies already in several contexts proved to be an important component of the process of achieving competitiveness.

The essence of competitiveness strategy are: to improve in-company learning, skills development and technology efforts, to increase the supply of information, skills and technology from around the markets and institutions, and to coordinate collective learning processes that involve different companies in the same industry or in related industries (popularly known as 'clusters' such as, geographic or activity-wise, see Porter, 1990).

To win the competitiveness of companies occasionally develop their skills in the 'market' is different for example relating to physical infrastructure, human, financial, technology, capital, and the cluster effect. Competitiveness policy needs arise when one of the 'markets' fails to function efficiently. The experience of East Asian countries in achieving the victory proved that the policy required a coherent and carefully both from the government and the company itself.

In order for companies to succeed in international competition, then the measurement of competitiveness needs to be done. One method that can be used in measuring industrial competitiveness in the international area by looking at the competitiveness of industrial products is an international market. One method often used is the RCA (Revealed Comparative Advantage).

Revealed Comparative Advantage

Revealed comparative advantage index is used to calculate international competitiveness in terms of trade. The revealed comparative advantage (RCA) approach is pioneered by Balassa, (1965, 1977, 1979 and 1986. Many empirical studies on trade has been devoted to test the theory of comparative advantage which are widely used approach is a technique pioneered by Leontief (1953) more than half a century ago. By using the input-output tables, Trefler calculates net trade in services each of the factors of production for the group of economic trade. Comparing the flow with an abundance of factors by the state and allows to differences in tastes and productivity, he can find empirical support for both the theory of comparative advantage.

Balassa index(1965) of Revealed Comparative Advantage seems to provide a cure for this deficiency, since the normalization must enable comparisons over time and in industry. Balassa index is defined as the ratio of a country's share in world exports of a given industry divided by the share of overall world trade. Balassa index is still a valid measure of comparative advantage in industries throughout the country. It is also true by definition still reflects the relative export performance in countries, industries and time and thus still useful for analysis of the state.

There are a number of ways to check whether a country has a comparative advantage. One common method is to determine just how special of a country in the production both through building 'Balassa index'. This check is good proportion of manufactured or exported, or the numbers working in each industry, compared with other countries. The formula to measure a country's revealed comparative advantage (RCA) is given by: The formula to measure a country's revealed comparative advantage (RCA) is given by:

Formula measures Revealed Comparative Advantage (RCA without put into time element (Balassa 1965, 1977, 1979, 1986):

xij / xj

Index RCA = ------------

xiw / xw


Xij = value exports commodity i country j

Xj = total value exports country j

Xiw = value exports commodity i world

Xw = total value exports world

Formula measures Revealed Comparative Advantage (RCA with put into time element):

X i j t / X i w t

Index RCA = --------------------

X i j t-1 / X i w t-1


Xij = value exports commodity i country j

Xj = total value exports country j

Xiw = value exports commodity i world

Xw = total value exports world

X t = RCA in the year certain

X t-1 = RCA in the year previous

If RCAi > 1, it means has a comparative advantage in good i.

If RCAi < 1, it means has a comparative disadvantage in good i.