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THIS ARTICLE investigates recent attempts by the World
Bank1 to revise its commitment to neo-liberal ideas. The
concepts of market friendly intervention and good
governance are examined. Both concepts are rejected on the
basis of their continued commitment to a flawed neo-liberal
paradigm, which wrongly sees states as inherently inefficient
economic actors and reduces development to a simple process of
technical policy making. The paper therefore also contends that
the World Bank’s optimism concerning the prospects for
structural adjustment is misplaced, and some evidence is
considered to back up this claim. Finally, I briefly suggest an
alternative account, focusing on social structures within localities
and the relationship between national economies and the global
economy, which shows the continued relevance of state economic
intervention for sustained capitalist development.
These issues are discussed in four sections. First, the ‘classical’
neo-liberal approach to development is briefly reviewed, along
with the reasons why this view has been undermined. Second, the
revised neo-liberal view is outlined in some detail, and it is here
Neo liberalism revised? A criticalaccount of World Bank conceptsof good governance and marketfriendly intervention
by Ray Kiely
This article examines recent World Bank reports on the role of the statein the development process, with particular reference to the rise of theEast Asian NICs and the crisis of ‘governance’ in sub-SaharanAfrica. The concepts of market friendly intervention and goodgovernance are critically discussed, and are found to be inadequateas explanations for East Asian ‘success’ and African ‘failure’. Analternative explanation for the rise of the NICs is presented, whichdraws out some of the implications for the developing world.
that the ideas of market friendly intervention and good
governance are introduced. Section three critically discusses
these ideas, along with some consideration of their implications
for adjustment policies. Section four briefly outlines the basis for
an alternative approach to understanding the rise of the East
Asian newly industrialised countries (NICs)2 and I then conclude
by showing how this approach can be used to examine the
prospects for late developers in the current global context.
1. NEO-LIBERALISM AND DEVELOPMENT
The onset of the ‘debt crisis’ in 1982 led to a serious challenge to
‘orthodox’ development economics. Import-substituting nation-
states faced a heavy debt-burden as they replaced the import of
consumer goods by the import of capital goods, and state
protection to domestic industry led to inefficiency and
corruption. This scenario was in sharp contrast to the outward
looking, export-oriented policies of the East Asian newly
industrialising countries. Although these too suffered from
recession in the early 1980s, and South Korea was a large debtor
nation in 1982, recovery was rapid and Korea continually
managed to meet its interest repayments without the devastation
that was witnessed in much of Africa, Latin America, and the
Indian sub-continent.
It was in this context of unsuccessful import-substituting
countries, and successful export-oriented countries, that the
neo-liberal ‘counter-revolution’ (Toye 1987) in development
economics emerged. Neo-liberals argued that the NICs were
not ‘exceptions’ to the rule of a North-South divide, but they in
fact constituted a ‘model’ for the rest of the developing world to
follow. According to Tsiang and Wu (1985: 329), success ‘was
achieved not by economic tricks, but by sensible policies based
on sound neo-classical principles.’
Although some neo-liberals pay lip-service to the specificity
of East Asian culture, other writers clearly regard the East Asian
experience as something which can (or should) more or less be
replicated by the rest of the world (Fukuyama 1992: 100-08;
Berger and Tsaio 1987). It is for this reason that the neo-liberal
counter-revolution can be described as a new version of
modernisation theory—the ‘western model’ of Rostowian theory
is replaced by the ‘East Asian model’ of neo-liberal theory.
64 Capital & Class #64
Neo-liberals argue that the success of the East Asian NICs can
be attributed to three basic policies. These are:
(i) limited government intervention in the economy;
(ii) a low level of price distortion in the economy;
(iii)an outward oriented strategy of export promotion (Balassa
et al. 1986).
These principles formed the basis for structural adjustment
programmes in the developing world in the 1980s and 90s.3 In
practical terms, these policies include the removal of obstacles
such as state subsidies to industry, minimum wages and price
controls. Combined with a competitive exchange rate, prices
are said to reflect the laws of supply and demand, and so investors
and consumers can respond to the correct price signals, which in
turn facilitates high levels of economic growth. The World Bank
therefore places a premium on the close correlation between a low
level of price distortion and rapid economic development (World
Bank 1983: 60-3). Policies of limited government intervention in
the economy and an outward oriented trade strategy were said to
lead to a low level of price distortion, which thereby promotes
efficiency. Prices should be set by the ‘natural’ laws of supply and
demand, unhindered by the distorting effects of government
subsidies, minimum wages or price controls. In a study of the
performance of thirty-one developing economies in the 1970s
(World Bank 1983), it was claimed that those with low rates of
price distortion and an outward orientation to the world economy
tended to perform far more effectively than medium or high
distortion countries. The standard neo-liberal conclusion was
reached that ‘countries applying outward-oriented development
strategies had a superior performance in terms of export,
economic growth, and employment’ (Balassa 1981: 16).
This version of the neo-liberal perspective was undermined in
two ways. First, the evidence that there was a strong correlation
between low levels of price distortion and high economic growth
was challenged. As the Bank’s evidence itself makes clear, price
distortions can only explain about one-third of the differences in
growth rates between different countries (Jenkins 1992: 193),
while some of the classifications (such as free market Chile
having a high level of price distortion) are questionable. Perhaps
most importantly, the evidence itself does not confirm the
proposition that trade policy in itself is a major determinant of
The World Bank and development 65
economic growth. The relationship between price distortion,
outward orientation and economic growth may be the result of
a third factor, such as structural problems which slow down
economic growth (Jenkins 1992: 194). Thus, the strong inward-
orientation of many of the poorest economies in the world may
be a reflection, rather than a cause, of slow rates of economic
growth (Singer 1988).
Second, East Asian industrialisation processes had strongly
interventionist states. A wide body of literature has convincingly
challenged the crude neo-liberal argument that East Asia is
simply a model of development based on market forces. The
work of White (1988), Amsden (1989), and Rodan (1989), among
many others, has shown that state intervention was widespread.
After a period of import substitution industrialisation in the
1950s, South Korea moved to a policy of export promotion from
1961 onwards. However, this policy did not mean that import
substitution was abandoned as industries continued to be
subsidised, and the state planned industrial output through
institutions such as the Economic Planning Board and the
Ministry of Trade and Industry. Moreover, banking was
nationalised in 1961 and state control was thus used to target
specific industries through access to credit. In the 1970s heavy
industries such as iron and steel benefited from such preferential
treatment. The most successful firms in terms of meeting export
targets were also rewarded by the state by being granted access to
restricted imports, and were allowed to recover losses made on
the world market through sales in the lucrative protected domestic
market. In Taiwan the state’s control of credit led to a similar
policy, while in Singapore and Hong Kong the state has played a
key role in subsidising food and public housing and (in the case
of Singapore) in direct investment financed through the
compulsory insurance scheme known as the Central Provident
Fund (Rodan 1989; Schiffer 1991; Kiely 1997: ch.7).
2. THE REVISED NEO-LIBERAL MODEL
The concern of this section is to examine a more subtle version
of the neo-liberal argument, based on the notion that
interventions have been more market friendly in East Asia than
elsewhere, and that this explains the success of the former and
failure of the latter. This will be done through an examination of
66 Capital & Class #64
the notions of ‘market friendly intervention’ and ‘good
governance’ (World Bank 1989, 1991, 1993).
(i) Market friendly intervention
The basic contention of the World Bank’s report The East
Asian Miracle (1993: 5) is that the East Asian miracle economies
‘achieved high growth by getting the basics right.’ This statement
represents an important qualification to the older argument
(World Bank 1983: 60-3) that East Asian success was due to a
low level of price distortion in the economy—in other words,
high growth was a result of ‘getting prices right.’ The Bank
accepts that intervention did occur in the East Asian
economies—the 1993 Report lists a number of factors including
targeting industries, subsidies, protecting domestic import
substitutes, state banking, state-led R & D, export targets and
close consultation between public and private sector (World
Bank 1993: 5-6). However, the Report argues that these
interventions meet the criteria of market friendly, as opposed
to market distorting, intervention.4 In this development strategy,
‘the appropriate role of government is to ensure adequate
investments in people, provide a competitive climate for private
enterprise, keep the economy open to international trade, and
maintain a stable macroeconomy’ (World Bank 1993: 10).
Market friendly intervention can take one of three forms (World
Bank 1991: 5):
(i) States intervene reluctantly, preferring to ‘let markets
work.’
(ii) States apply checks and balances, subjecting interventions
‘to the discipline of international and domestic markets.’
(iii)States intervene openly, and are ‘subject to rules rather
than to official discretion.’
According to the World Bank, the interventions in East Asia
conformed to these basic principles. The key to the high growth
(and equitable development) can be found:
in fundamentally sound, market-oriented policies. Labor markets
were allowed to work. Financial markets, although subject to
more selective interventions to allocate credit, generally had low
distortions and limited subsidies compared with other developing
The World Bank and development 67
economies. Import substitution…was quickly accompanied by
the promotion of exports and duty-free admission of imports for
exporters. The result was limited differences between international
relative and domestic relative prices…Market forces and
competitive pressures guided resources into activities that were
consistent with comparative advantage and, in the case of labor-
intensive exports, laid the foundation for learning international
best practice and subsequent industrial upgrading (World Bank
1993: 325).
(ii) Good governance
The Bank has recognised that an excessive focus on economics is
one-sided, and that there is also a need to emphasise the
institutional context within which adjustment policies take place.
Adjusting countries need to conform to the notion of ‘good
governance’ (World Bank 1989, 1992). Although there has been
some reluctance to provide a comprehensive definition of this
concept, it appears to include an emphasis on political pluralism,
accountability and the rule of law (World Bank 1989: 60-1, 192).
The Bank has been cautious about arguing that these entail
democratisation, for fear of intervening in the political affairs of
sovereign countries.
Most important however, is that the Bank sees good
governance as a means to an end; it is ‘synonymous with sound
development management.’ (World Bank 1992: 1) Such
management requires ‘not just less government but better
government—government that concentrates its efforts less on
direct interventions and more on enabling others to be
productive.’ (World Bank 1989: 5) This argument, taken from
the Bank’s first work on the concept of good governance, repeats
the classical neo-liberal argument that state spending is
unproductive and that it crowds out the wealth creating activity
of rational, individual entrepreneurs. The role of the state is to
enable the private sector to lead economic activity—state activity,
in other words, should be market friendly. As Schmitz (1995: 69)
argues:
The key thing to ask of developing countries was not whether they
were democracies or autocracies…but whether they had the
governing will and wherewithal to create the ‘appropriate policy
framework’ required to achieve efficient markets and the
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successful implementation of donor and creditor-mandated
economic liberalization programs.
In this way, the good governance argument complements
the market friendly one. The East Asian miracle economies
were models of good governance as interventions in the
economy were either irrelevant or they cancelled each other out.
The rest of the developing world, particularly sub-Saharan
Africa and including eastern Europe, should learn from their
example. Good governance may refer to efficient civil servants,
the rule of law and so on, but the key point is that these
institutions allow limited government to operate. In a recent
report (World Bank 1994: 2, 10), the Bank was quite explicit
about this:
there is hope that Africa, like East Asia thirty years ago, will
move onto a faster development track. For that to happen, more
progress will be required in macroeconomic reform—to provide
a stable environment in which economic activity can
flourish…Good macroeconomic policies have paid off in East
Asia, and they will pay off in Africa.
Such policies are said to include less taxation of agriculture,
putting exporters first, liberalising imports, privatisation and
fiscal reform (World Bank 1994: 10-14).
So, to summarise: the earlier neo-liberal view (Balassa et al.
1986) that East Asian success was a product of sound policies of
limited government has been altered so that proper recognition
is given to the fact that the state was interventionist. The new view
accepts the reality of state intervention, but argues that this did
not fundamentally alter a policy of industrial development
through market forces. State regulations did not hinder the
development of an industrial structure that would have emerged
through market forces anyway. This argument is similar to that
proposed by Berger (1979: 64) who argued that ‘the crux of the
Korean example is that the active interventionist attitude of the
state has been aimed at applying moderate incentives which are
very close to the relative prices of products and factors that
would prevail in a situation of free trade…It is as though the
government were ‘simulating’ a free market.’ Such interventions
are contrasted with the distorting activities of states in much of
the developing world (World Bank 1993: 351). Good governance
The World Bank and development 69
includes a number of institutional factors, which are considered
important insofar as they will allow market friendly intervention
to occur.
3. ASSESSING THE REVISED MODEL
This section examines the revised neo-liberal model through an
assessment of (i) the idea of market friendly intervention; (ii) the
idea of good governance; (iii) the implications for structural
adjustment.
(i) Market friendly intervention
The main problem with the World Bank’s report is its tendency
to isolate specific examples of state intervention, and to then
show how these were counter-balanced by further interventions.
For example, in South Korea and Taiwan the potentially
damaging policy of import-substitution was said to be cancelled
out by policies of export promotion, with the result that a market-
conforming structure emerged despite the interventions (World
Bank 1993: 292-316). However, the effects of interventions
cannot be adequately assessed in this way, and the effect of any
particular state regulation must be analysed through its impact on
the economy as a whole. Thus for example, industrial policy
impacts on a country’s balance of payments through the spin-off
effects into other industries (Singh 1994: 17).
Furthermore, the Bank’s argument (1993: 316) rests on the
mistaken assumption that the textiles industry was not protected
by the state. In fact, despite the labour intensive nature of this
particular industry, it was heavily protected from foreign
competition. It was specifically promoted by the state from the
early 1960s, receiving preferential loans and tax and tariff
exemptions (Amsden 1989: 66-8). Therefore, the existence of a
large textiles industry ‘is not proof that industrial policy did not
work but in fact suggests that it worked really well, as this was one
of the most heavily promoted sectors.’ (Chang 1995: 214).
The argument that protectionism was largely irrelevant
because it was counter-balanced by the setting of export targets
is similarly problematic. This claim ignores how protectionism
alleviated potential balance of payments constraints and helped
to promote technical change and hence productivity growth
70 Capital & Class #64
through the linking of import controls to export targets (Singh
1994: 20).
Similarly, the World Bank recognises that South Korea and
Taiwan were restrictive in their policies towards direct foreign
investment, but argues that this was counteracted by a policy of
openness to foreign technology acquisition (World Bank 1993:
21). However, as Lall (1994: 651) argues:
There is no analysis in the study…of the effects of different
modes of technology import on the industrial development:
different forms of openness were perceived by these countries to
have different implications for the development of their own
innovative capabilities, and this formed a crucial element of
their industrial strategies.
In particular, in Korea and Taiwan the state policy of guiding
the market was achieved far more easily by a reliance on domestic
rather than foreign firms, and it facilitated the growth of
substantial Research and Development activities5 (Singh 1994:
21–2). These developments were clearly crucial to the ability of
Korea and Taiwan to ‘unpack’, utilise and build upon imported
technologies, and in the long run to become internationally
competitive and break into export markets (Lall 1994: 651). This
contrasts sharply with the alleged failures of import substituters
in Latin America (though not India) which was, in terms of its
open door policy to foreign investment, more ‘market friendly’
than Korea and Taiwan (Jenkins 1991: 50).
Some ‘market unfriendly’ technological upgradings, such as
Korea’s heavy and chemical industry (HCI) drive, are recognised
by the Bank. In this case however, the non-market conforming
interventions are criticised for their costs in terms of support for
inefficient and expensive industries (World Bank 1993: 309).
Closer empirical scrutiny of these costs shows that in fact the most
targeted heavy industries (chemicals and machinery) accounted
for a lower share of outstanding nonperforming loans than
outstanding total loans, and that 60 per cent of all nonperforming
loans were accounted for by the construction industry’s over-
investment in the Middle East (Amsden & Euh 1990). Further-
more, the drive can hardly be considered a disaster when one
considers that by the early 1980s, heavy industries accounted
for most of the country’s export earnings (Amsden 1994: 631). It
was in this period that the Korean economy was substantially
The World Bank and development 71
liberalised, but only the most wishful of neo-liberal thinkers
would attempt to argue that it was this process (which only
began in 1981) which led to the competitiveness of Korean heavy
industry. The liberalisation of trade did go hand in hand with the
expansion of heavy industries in the 1980s, but the causal factors
were those market unfriendly policies of state targeting and
technical upgrading in the 1970s. Moreover, the Korean state has
continued to protect high technology sectors that would otherwise
be undermined by foreign competition (Amsden 1993: 206-10).
These examples show the inadequacies of the World Bank
Report, and its stubborn refusal to make a bold move away from
the neo-liberal paradigm. The Report ‘is almost a textbook
example of neoclassicists visibly confused but too proud to admit
their failure—having been so quick to blame government for
economic failures in the past, they are now reluctant to admit a
positive role for government in a successful economy.’ (Kwon
1994: 635) Such confusion leads to faulty logic in places and a
number of contradictory claims. For example, the Bank (1993: 6)
argues that one cannot establish statistical causal relationships
between intervention and growth, as we cannot know what
would have happened in the absence of such an intervention.
However, this does not stop the Bank from using such a
methodology in order to try to establish a causal link between
growth and non-intervention (World Bank 1993: 325; Amsden
1994: 628). Thus, in arguing that industrial policy created a
market conforming industrial structure, the Report concludes that
industrial policy was ineffective. But as Amsden (1994: 629)
states:
As this test is formulated, industrial policy cannot win: if it fulfils
neo-classical expectations, it is ‘ineffective’; if it violates them, it
is inefficient.
One final, and most important, point must be made about the
market friendly approach. The basic argument is that
interventions were largely irrelevant in East Asia because they were
market conforming, and therefore ‘relative price distortions
were limited and indeed smaller than in most other developing
countries.’ (World Bank 1993: 351) Of course this assertion can
be subject to exactly the same criticisms as that of the price
distortion index in the 1983 World Development Report, discussed
above. But even leaving that aside, the evidence in the 1993
72 Capital & Class #64
Report can be used against the Bank’s own arguments. This is
because the Bank (1993: 301) recognises that the degree of high
outward orientation and low price distortion varies between the
Asian NICs—Hong Kong, Malaysia, Singapore, Indonesia and
Thailand have a low rate of price distortion, whereas Japan,
Korea, Taiwan and China do not do so well. In fact, these latter
countries actually rank below supposedly inefficient import-
substituting industrialisers such as Brazil, India, Mexico, Pakistan
and Venezuela. Interestingly, the Report only comments on the
variations within the Asian NICs, rather than the fact that the
Bank’s evidence on prices implies that Brazil and India are more
market friendly than Korea and Taiwan—even though the Report
is supposed to prove the opposite.
(ii) Good governance
Given that the Bank’s idea of market friendly intervention is
unconvincing, it is not surprising that the concept of good
governance is too. The link between the two ideas is that East
Asian miracle economies were models of market friendly
intervention and good governance. My arguments above however
suggest that these economies did not conform to the principles
of market friendly intervention—which itself is an inconsistent
concept—and so in this respect cannot be regarded as models of
good governance. As regards the source of the model (East Asia),
the Bank is mistaken, and so it follows that its applicability to other
parts of the world is seriously undermined.
However, the concept of good governance needs further
investigation in its own right. The idea that liberal democracy will
promote economic growth is itself problematic (Healey &
Robinson 1992: 94-112). Certainly in this respect the East Asian
economies, with their long tradition of authoritarian politics,
cannot be regarded as models. This does not mean that
authoritarianism is essential, but the long history of capitalist
development does not give much room for optimism.
The relationship between adjustment and the observance of
good human rights practices is similarly problematic. Certainly,
much of sub-Saharan Africa (and elsewhere) has seen an
improvement in human rights practices in the adjustment period.
But there can be no convincing claim that there is a causal
connection; in fact, as Engberg-Pedersen et al. (1996: 23) argue
‘the only clear link between adjustment and human rights issues
The World Bank and development 73
is that in some countries…organized opponents of adjustment
have had their human rights infringed.’
The underlying weakness of the concept of governance
however, relates to its excessively narrow view of politics. In
focusing on governance, the Bank has reduced the politics of
development to a purely technocratic issue.6 Wider social and
political interests are largely ignored, and so the need for better
governance linked to a ‘free enterprise’ economy is reduced to
rhetoric. There is no analysis of the vested interests, both within
and outside the state, which may win or lose from structural
adjustment. Moreover, the existence of such interests is a major
factor in assessing the likelihood of adjustment programmes
being implemented in the first place (Uvin 1994: 266). As Leftwich
(1993: 620) argues, development ‘is not simply a managerial
question, as the World Bank’s literature on governance asserts,
but a political one. For all processes of ‘development’ express
crucially the central core of politics: conflict, negotiation and
co-operation over the use, production and distribution of
resources.’
Thus, to return to the East Asian ‘model’. The World Bank
scenario of successful development in South Korea is based on the
belief that a rational bureaucracy allowed market forces to
operate, or at least only intervened in a market friendly way.
But such a scenario simply flies in the face of South Korean
history, which has included precisely the kind of political conflicts
which the Bank ignores. In the case of both South Korea and
Taiwan, radical land reforms were introduced by the state in
response to serious conflict (in the latter case on the Chinese
mainland) after the Second World War. These reforms laid the
basis: (i) for more equal income distributions compared to much
of the world; (ii) for a transfer of resources from countryside to
town without fully impoverishing the latter; and (iii) broke the
power of vested interests in the countryside, who may otherwise
have influenced the state. The issue of land reform, and its results
then, was one of politics and not governance.
The Bank’s limited approach to politics can be traced back to
its neo-liberal conception of the state. It is not surprising that neo-
liberals argue that state intervention in East Asia was largely
irrelevant, because the assumption that state intervention must be
inefficient is built into their theoretical system. At the heart of the
neo-liberal critique of the state is the contention that state officials
always act in a self-interested way. These officials are said to
74 Capital & Class #64
expand the activity of the state for their own good, rather than the
interest of society. Such a viewpoint represents a clear attempt by
neo-liberals to explain politics, as well as economics, by sole
reference to the self-interested, utility-maximising individual.
The best policy option is to secure the most effective context
for such behaviour to operate efficiently, and this is one in which
competitive market forces are allowed to flourish by a
‘nightwatchman state’ (Buchanan 1986).
Clearly, there are many examples of unproductive rent-
seeking activity throughout the world, but the neo-liberal
argument is far stronger than this. It is that the state acts in its own
interest irrespective of time and place (Toye 1991). Taken to its
logical conclusion, such a view provides no justification for any
state. As Evans (1995: 25) argues:
How does such a state arise out of individual maximizers? It is
hard to explain why, if office-holders are primarily interested in
individual rents, they do not all ‘free-lance’.
The Bank echoes these inconsistencies in its approach to
governance. The state is seen as the problem—it intervenes too
heavily. It is also seen as the solution—it must reform itself in
order to allow for wealth creating activity. But if states are purely
self-interested, then why should state officials carry out the
necessary reforms? Again, on its own terms, the arguments of the
Bank are full of inconsistencies.
(iii) The implications for structural adjustment
Assessing structural adjustment policies in practice is extremely
difficult. This is because there is considerable dispute over the
extent to which policies have been implemented. Critical analysis
of adjustment programmes has often presented them as simple
impositions by the World Bank or IMF onto supposedly
sovereign nation-states, when in fact they are the outcome of
complex negotiations between international institutions and
national governments (Harrigan et al. 1991). Nevertheless, there
is a certain ‘family resemblance’ between adjustment policies,
which often include exchange rate devaluations, the removal of
import quotas, increased export incentives, revisions in
agricultural pricing policies and reform of the national budget
(Toye 1994: 29).
The World Bank and development 75
But even if we accept the above qualification, there are further
difficulties, which relate to the reasons for the ‘successes’ and
‘failures’ in particular cases7 (Toye 1994). Despite these difficulties,
the World Bank (1994) has recently claimed that there is a strong
correlation between the strongest adjusting countries and
economic growth. However, this report suffers from precisely the
methodological weaknesses cited above; for instance, economic
growth may be caused by favourable increases in terms of trade
rather than specific economic policy. Moreover, even the Bank’s
own evidence suggests that there were as many policy differences
between the 6 ‘good’ policy performers and the 23 ‘others’
(Mosley et al. 1995; White 1996).
Gibbon’s (1996: 758) alternative methodology is to examine
‘adjustment situations’, which he defines as ‘a combination of
actually implemented adjustment policies with other novel
independent or semi-independent variables also of predominantly
exogenous origin.’ The causal role of adjustment policies may
themselves be secondary, but this can only be determined by
careful empirical analysis. In a long-term analysis of economic
trends in sub-Saharan Africa (Engberg-Pedersen et al. 1996), it
was found that adjustment situations had made little positive
difference to growth or poverty alleviation.
For example, using statistics collected by the Food and
Agricultural Organisation, it was found that growth rates in 37
adjusting African countries were not significantly different in
the adjustment years of 1986-93 than they had been in the
previous seven year period. Of the sampled countries, 24 per
cent had better growth rates, 22 per cent had the same, and 52 per
cent had worse rates (Engberg-Pedersen et al. 1996: 34). These
unimpressive results can be linked to the fallacious thinking of the
World Bank on agriculture, which argues that by simply freeing
producers from price controls production will soar (Schiff and
Valdes 1992). This assumes that producers can respond to price
rises in a similar way, therefore ignoring rural differentiation, and
ignores the all important role of infrastructure and transportation
in what are often remote settings.
Similarly, industry has shown no marked increase in output,
and no increase in investment (Engberg-Pedersen et al. 1996: 42).
Some industries are bound to suffer from devaluations as essential
imports become more expensive, and trade liberalisation can
have disastrous consequences through the encouragement of
cheaper imports. These comments apply even to Ghana, the
76 Capital & Class #64
African country that the World Bank upholds as a model of
successful adjustment policy. Ghana’s adjustment programme
since 1986 has included such market friendly policies as exchange
rate devaluations, the removal of many import controls,
privatisation and the liberalisation of foreign investment
regulations (African Development Bank 1994). Manufacturing
grew in the adjustment period, but this was largely because
imported inputs were made available to industries that had
suffered from excess capacity. As liberalisation spread and excess
capacity was used up, the exposure to foreign competition led to
a deceleration of industrial growth—from 5.6 per cent in 1988, to
2.6 per cent in 1991 and 1.1 per cent in 1992. Employment in
manufacturing has fallen from 78,000 in 1987 to 28,000 in 1993
(Lall 1995: 2025). Industrial survivors and new entrants are
largely in small enterprises making low income products for
localised markets, while success in attracting foreign investment
has been minimal.
Similarly, the World Bank’s hopes that the informal sector can
form the basis of a new, dynamic capitalist sector is misplaced. As
Gibbon (1996: 769) argues, ‘Contrary to some proponents of
adjustment, these constraints are not mainly of a regulative kind,
for they are also found in sectors which were never regulated.
Amongst the most important are the primitive technical level of
the operations, shortages of skilled labour, and continuous
competition for household and enterprise resources with other
household income-generating activities.’
The prospects for countries undergoing adjustment are not
good then. Indeed, even the Bank (1994: 153) admits that
investment rates have not increased in sub-Saharan Africa.
Similar criticisms could be made of adjustment experiences in
Eastern Europe (Gowan 1995) and Latin America (Weeks 1995).
4. CLASS, STATE AND GLOBAL ECONOMY IN LATE
CAPITALIST DEVELOPMENT
In this section I put forward an alternative explanation for the rise
of the East Asian NICs, and draw out some of the implications for
understanding the prospects for capitalist development in the rest
of the developing world. Most of my discussion will focus on
South Korea, not in order to present this country as a model
(neo-liberal or Keynesian) for others to follow, but in part to
The World Bank and development 77
emphasise the particularity of the South Korean experience.
However, at the same time I will also argue that there are specific
lessons to be learnt from this experience, as opposed to a general
model. In order to illustrate my alternative approach, I will
examine South Korea in relation to the world economy, and the
particular social structure within South Korean society.
It should be clear by now that the World Bank has a
particularly optimistic account of the relationship between
national economies and the global economy. The Bank remains
convinced of the neo-liberal view that there is no need for
protection to domestic producers because open competition on
the world market will benefit all countries—that is, countries
produce those goods in which they have a comparative advantage,
and they can only establish what these goods are through open
competition.8 But this view ignores the inequality inherent within
capital accumulation, ‘that there are formidable entry barriers for
developing countries attempting to move up the ladder of the
international division of labour—because of cumulative
causations in technical progress…imperfect domestic and
international financial markets…a lack of marketing skills and
infrastructure, and so on.’ (Chang 1995: 215).
It was precisely for these reasons that state intervention in
South Korea (and Taiwan) was market unfriendly. Indeed, the
South Korean state often deliberately ‘got prices wrong’. In the
1960s, many firms exported at a loss, including those in labour-
intensive sectors such as textiles (Amsden 1989: ch.6). Losses were
recovered through sales in the protected domestic market, but this
reward was only granted to the most successful exporters—
these sales were tied to performance standards set by the
government. Hamilton (1986: 83) claims that in fact the average
deviation of production prices from actual prices increased from
7.8 per cent in 1966 to 11.8 per cent in 1978.9 Such figures suggest
that state manipulation of prices was far from market friendly or
irrelevant, and in fact was vital to Korea’s export success. ‘Getting
prices wrong’ was therefore a major component of Korea’s (and
Taiwan’s) transition to successful NIC status. The neo-liberal
critique is narrowly concerned with the (static) ‘allocative
efficiency’ of getting prices right, and therefore lacks an account
of the dynamics of the process of changing comparative
advantage.10 As Amsden (1994: 629) points out: ‘it is quite
possible that if the Bank had determined East Asia’s overall
growth strategy, the outcome might have been a lot worse—
78 Capital & Class #64
rather than as good as or better than—what did happen.’ For
instance, the absence of capital controls may have led to massive
capital flight, and the absence of import controls may have led to
domestic industry being swallowed up by foreign competition. In
this situation Korea and Taiwan would still be exercising their
‘comparative advantages’ in primary products, and thereby
experiencing far lower rates of growth.
This suggests then, that contrary to the neo-liberal model, the
state played a leading and effective role in capitalist development
in South Korea. One possible implication that could be drawn is
that it therefore represents a different model of development,
based on rational state intervention. In other words, is there a
different model of good governance, one in which the state plays
an active role in the promotion of capitalism?
While such a scenario could potentially apply to certain
countries, it cannot be used as an a priori model, applied
independently of specific evidence. This is because such a model
begs the question of why some states have actively promoted
capitalist development, while others have hindered it. In a
comparison of East Asian and Latin American capitalisms,
Jenkins (1991: 200-01) makes this point clearly:
The question is not so much how to explain policy differences, but
rather how to account for differences in the effectiveness of
economic policy…(This) implies that the failures in Latin
America are not a consequence of incorrect policy choices, but
of the way in which the state’s lack of autonomy precluded
certain policies from being pursued.
Thus, it is not just a question of state policy per se (although
this is important), but of the social context in which particular
states operate. Both neo-liberalism and neo-Keynesianism reify
the state, measuring its policy effectiveness solely by reference to
the degree of intervention within the economy. An alternative
approach would be to recognise that both state and economy are
constituent parts of the social relations of production, and to
account for the development of capitalism on this basis (Brenner
1977; Kiely 1995).
In the cases of South Korea and Taiwan, a key factor was the
aforementioned land reforms implemented in the late 1940s
and early 1950s. In Taiwan, fearing a repeat of the peasant revolts
on the mainland (China), the nationalist Kuomintang introduced
The World Bank and development 79
a radical land reform. The result was that ‘almost overnight the
countryside in Taiwan ceased to be oppressed by a small class of
large landlords and became characterized by a large number of
owner-operators with extremely small holdings.’ (Amsden
1985: 85) Although reform in South Korea was not as far-
reaching, it also led to the defeat of a powerful landlord class.
These reforms acted as a kind of ‘punitive forced investment in
industry’ (Selden and Ka 1988: 115), by turning the former
landlords into peasants or workers through bankruptcy, or a
nascent capitalist class strongly supervised by the state.
Thus, the development of a particular relationship between the
state and civil society was conducive to rapid industrial capitalist
development in South Korea (see Seddon and Belton-Jones
1995). In other parts of the developing world the continuing
power of certain classes have hindered a similarly rapid
development of industrial capitalism. For example, the continued
power of unproductive landowning classes in parts of Latin
America and Asia has meant that capitalist development has
been far more uneven (de Janvry 1987; Hamilton 1987). Similarly,
the states in South Korea and Taiwan were able to discipline
capital far more effectively than in Latin America, and so switch
more effectively to an export-oriented development strategy
from the 1960s. This policy was reinforced by the organisational
weakness of labour in East Asia compared to Latin America
(Jenkins 1991: 208).
Clearly then, one reason that the optimism of adjustment
policies is misplaced is its belief that a dynamic capitalism can be
implemented without fundamental changes in the social relations
of production. In many parts of the periphery, the emergence of
a dynamic capitalism has been uneven or has hardly began, and
adjustment actually appears to hold back its further
development.11 In other words, adjustment policies can be seen
as a failed attempt to introduce a more dynamic capitalism onto
social relations which are not conducive to such development.12
In much of sub-Saharan Africa and Eastern Europe, adjustment
policies have reinforced the existence of unfree forms of labour
or merchant capital interests, which profit from the trade of
goods produced by ‘non-capitalist’ activity (Watts 1990; Raikes
1988: 47-8; Burawoy 1992). In such cases, there is little
compulsion for the owners of the means of production to rapidly
develop the productive forces and thereby promote high levels of
economic growth.
80 Capital & Class #64
5. CONCLUSION: FUTURE PROSPECTS FOR CAPITALIST
DEVELOPMENT IN THE PERIPHERY
The Bank’s recent literature on market friendly intervention
and good governance is unconvincing. It displays a continued
reluctance to recognise the key role of the state in capitalist
development, dismissing intervention as insignificant or irrelevant
and reducing governance to purely technical questions of policy-
making, such as ‘getting the basics right’. Although technical
policy making is an important factor in promoting economic
growth, in the case of the Bank’s interpretation it is far too
narrow and continues to focus one-sidedly on the question of
‘getting prices right’. This abstracts from the inequalities inherent
in capital accumulation and rigidly separates efficient ‘market
forces’ from inefficient ‘state intervention’. Every experience of
capitalist development has had a strong state, and the later the
capitalist development, the greater the need for strong state
‘intervention’ in the economy.13 States can of course be inefficient
and oppressive, in both socialist and capitalist contexts. However,
states are not necessarily inefficient. Markets, on the other hand,
are unequal, hierarchical and incapable of working without the
existence of states.
An alternative account recognises the centrality of the state to
capital accumulation, and in particular how late capitalist
developers rely on the state precisely because of the way that
markets work (see below). Socialists can learn some specific
lessons from the East Asian experience for countries undergoing
painful processes of adjustment in the developing world. In
particular they should criticise the continued dogma that states
hinder economic growth. In terms of technical policies, socialists
can and should draw on the work of structuralist reformers such
as Taylor (1993), who propose the development of alternative
adjustment policies on a case by case basis. The work of Sender
and Smith (1985) and Mosley and Weeks (1994) is particularly
valuable in that it attempts to provide alternative policies on the
basis of effective reality rather than wishful thinking (Sender
and Smith 1986). For example, Mosley and Weeks (1994) suggest
that, depending on specific circumstances, exchange rate
devaluations may be of some value in promoting exports, while
at the same time criticising the World Bank’s indiscriminate
proposals for liberalising trade and ending all protection to
domestic producers. This strategy is in marked contrast to the
The World Bank and development 81
ultra-left voluntarism of Cleaver (1989) who proposes nothing less
than the immediate closure of the International Monetary Fund
and the ending of development. Such a strategy says nothing
about the strength of class forces in the world today, nor the
immediate alternatives.
Having said that, socialists must recognise that there is no such
thing as technical policy in itself. All such policies will impact on
class forces in the developing world and they should in part be
considered on this basis. Moreover—and this is the main lesson
that can be drawn from the East Asian experience—capitalist
development is not a purely technical issue but is the outcome of
particular socio-political forces. In the long-term, this is what has
ultimately determined the path of capitalism in the region, and it
is the contingent outcome of class forces elsewhere that will
determine other paths of capitalist development. Capitalist
development thus rests on the development of a particular social
structure of accumulation (SSA). This refers to ‘the complex of
institutions which support the process of capital accumulation.
The central idea of the SSA approach is that a long period of
relatively rapid and stable economic expansion requires an
effective SSA’14 (Kotz et al. 1994: 1).
Finally, as dependency theory15 somewhat one-sidedly
reminds us, successful capitalist development rests on contingent
international factors too. The global economy comprises
hierarchies of production which in turn mean that the world
market is not the level playing field that neo-liberals imagine. Late
developers face enormous constraints, both in developing effective
producers that can compete with foreign capital in their domestic
economy, and in breaking into export markets and thereby
competing in the world economy. These barriers are not
completely insurmountable however, and the East Asian NICs
have enjoyed some considerable success on both fronts. Having
said that, their success rested on favourable world market factors
and the existence of a strong, effective state that disciplined
capital as well as labour. Neo-liberal dominance of international
trade, financial and development institutions hinders the
prospects for successful capitalist development in the current
period. On the other hand, a scenario of completely unregulated
global market forces is unlikely to be implemented and the world
economy does offer opportunities for late developers as well as
constraints. These opportunities include the prospect (with all the
contradictions these entail) of foreign investment, established
82 Capital & Class #64
overseas markets, and of acquiring advanced technology. The
prospect for successful late capitalist development thus appears
to rest on a policy of being ‘in and against the (world) market.’15
Successful late developers will be in the world market in that
they attempt to draw on its opportunities, but will be against it in
that the state will play a crucial role in removing its constraints.
This, rather than a spurious concept of market friendly
intervention, is the most important lesson that can be learnt
from the East Asian experience.
______________________________
1. In this article, I refer to the Bank as if it was a homogenous institution,completely restricted to neo-liberal ideas. This is an over-simplification, andthere are important points of empirical and theoretical disagreement.Moreover, the Left—particularly a Third World nationalist strand—isoften too quick to dismiss the works of the Bank, as Sender and Smith(1985) have pointed out. Nevertheless, neo-liberal ideas currently dominatethe institution.
2. The paper often refers to an East Asian experience when in fact developmenthas differed greatly between countries—Singapore for instance has reliedheavily on foreign capital, as opposed to South Korea. However, although therole of the state has varied, in no case does it conform to the neo-liberalapproach. This includes Hong Kong, which supposedly conforms mostclosely to the neo-liberal model, but in fact had a period of ‘hidden ISI’ asindustrial capital developed in China before 1949, and the state has activelysubsidised housing and food (Schiffer 1991).
3. Structural adjustment can be defined as a set of policies designed to promoteeconomic growth through the opening up of economies to ‘competitivemarket forces’. Stabilisation policies, more closely associated with the IMF,are designed to alleviate short-term balance of payments deficits throughcurrency devaluation and public spending cuts. In practice the two areoften hard to distinguish.
4. This view represents an important retreat from the neo-classical assumptionthat the costs of state intervention have typically been greater than thebenefits, and that imperfect markets are superior to imperfect planning (Lal1983: 106-7). As will become clear in the text however, the dogmatic andstubborn commitment to a variety of neo-liberal thinking has precluded theWorld Bank from going one step further, and accepting that stateinterventions can not only be neutral in their effects, but beneficial.
5. South Korea (1.9 per cent of GNP in 1988) and Taiwan (1.2 per cent) havefar greater levels of investment in Research and Development activitiesthan most of the more industrialised developing countries—for exampleArgentina (0.5 per cent in 1988), India (0.9 per cent in 1986) and Brazil (0.4per cent in 1985). This is lower than Japan (2.8 per cent in 1987) andGermany (2.8 per cent in 1987), but higher than Belgium (1.7 per cent in1987) and Italy (1.2 per cent in 1987). See Singh 1994: 22.
The World Bank and development 83
Notes
6. The issue of democracy provides a particularly telling example. Institutions
such as the Ministry of Overseas Development claim to be supportive of
democratisation in the developing world. However, such democracy is of a
particular kind—a simple means of choosing a government. The jurisdiction
of such elected governments would be seriously curtailed as ‘excessive’
democracy can lead to ‘too much government’ and hence ‘bad governance’
and ‘market unfriendly intervention’. Democracy thus becomes limited
and technocratic, rather than social and political (see Kiely 1995: 133-7;
Schmitz 1995).
7. The terms ‘successes’ and ‘failures’ refer to the Bank’s own criteria, which
is narrowly concerned with economic growth.
8. It should be noted however that the ‘advanced’ capitalist countries have often
selectively applied this policy. Indeed, South Korea and Taiwan benefited
from relatively open access to the US market in the 1960s and 70s, partly
because they were favoured allies in the Cold War. For similar reasons
they were also major recipients of US aid, especially in the 1950s. In the 1980s
and 90s, potential new Koreas and Taiwans have often faced far greater
protectionism from the First World, particularly in labour intensive sectors
such as clothing, where the developing world could have a comparative
advantage (Kiely 1994; 1997: ch.5).
9. These two figures refer to the degree to which relative prices deviated from
prices based on a supposed competitive free market equilibrium. These so-
called distortions are a product of the state interventions discussed in the
text—but unlike neo-liberal theory, they should be seen as a positive
contribution to capitalist development.
10. This point relates to a major problem in neo-liberal thought, which asserts
that getting prices right leads to static allocative efficiency. However,
advocates of this theory often go on to make the far stronger claim that such
efficiency unproblematically leads to development, without a convincing
demonstration that one leads to the other.
11. In this way, the Bank repeats the errors of ‘neo-Smithian Marxism’ which
argued that the origins of capitalism can be rooted in the extension of
trading relations rather than a change in the social relations of production
(see Hilton 1976; Brenner 1977).
12. My criticism here is of the Bank on its own terms. The question of alternatives
to capitalist development lie outside the scope of this article. I have dealt with
this issue in more detail in Kiely (1997: chs.4 & 10).
13. I am purposely using the language of neo-liberalism here. The idea of a
separate state ‘intervening’ in a separate economic sphere actually fetishises
both economics and politics, and in reality the two are inextricably linked
(Kiely 1995: ch.6). My use of language is therefore deliberately polemical,
designed to undermine the fallacies of neo-liberalism.
14. The approach in this article is not completely compatible with the SSA
approach however. SSA approaches can easily lead to functionalism. In
focusing on appropriate foundations for capital accumulation, the SSA
school can exaggerate the degree of integration of any SSA, and thereby
downplay the reality of conflict within all capitalist societies. In this way, an
84 Capital & Class #64
appropriate SSA can be regarded as an appropriate structure which functions
for the hegemony of capitalism, thereby ignoring the contradictions of any
social structure of accumulation and the role of exploited classes as makers
of their own history. My approach in this article suggests that SSAs are crucial
to the ‘success’ of capitalist development, as opposed to those technicist
policies advocated by the World Bank, but also that such structures are
contingent and based on historical processes as opposed to ahistorical
models.
15. For a critique of dependency theory see Kiely 1995: ch.3.
16. The idea of being ‘in and against’ capitalism is derived from the work
Conference of Socialist Economists on the state (CSE 1979; London to
Edinburgh Weekend Return Group 1980). It is based on the recognition that
important reforms (opportunities) can be gained from being in the capitalist
state, but that these are always compromised (constrained) by the dominance
of capitalist social relations and the role of the state in securing this
dominance, and so there is need to be simultaneously against the state.
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88 Capital & Class #64
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