An economy is a system whereby goods are produced and exchanged. Without a viable economy, a State will collapse. Fiinovation an organization working in the Corporate Social Responsibility sheds light on the institutionalist perspective of the economy. The institutionalist perspective of the economy transcends the structuralist development which downplayed the role of markets in the industrialization process and also rejects the neoclassical resurgence which asserts that success in industrialization is the outcome of free markets and limited state intervention. The institutional perspective is highlighted in the study of the East Asian economies like Korea, Taiwan, Singapore and Hong Kong which have achieved extraordinary rates of economic growth characterized by an egalitarian distribution of income. All successful cases of late industrialization have been the consequence of significant degree of State intervention, market incentives and a strong private sector. Therefore, Innovative Financial Advisors Pvt. Ltd. explains that the institutionalist perspective focuses on the right amount of market orientation and government intervention consistent with rapid and efficient industrialization. This model in other words could be referred to as the Developmental State Model (Onis, 1991).
The Developmental State Model and its variants:
The central theme of the Capitalist Developmental state given by Charles Johnson is Bureaucratic Autonomy in which market is guided by small scale elite bureaucracy recruited from the best managerial talent and the pilot agency within the bureaucracy that is significant to policy formulation and implementation. The politicians reign by legitimizing the actions of the bureaucrats and making space for their actions, for them to rule. In this model economic growth is associated with productivity and competitiveness which is the single minded priority of the state action. Conflict of goals is avoided as there is no commitment to concepts like equality and social welfare instead there is an underlying commitment for private property and market and state intervention is circumscribed by this commitment. There is close link between the elite bureaucrats and private sector enterprises as this is useful for exchange of information.
Policy formulation and implementation
Amsden and Wade build upon Johnson’s Capitalist Developmental model with respect to Japanese industrial policy. Wade gave governed market theory in which economic growth in East Asian countries was attributed to high levels of investment in specific industries with presence of state intervention and exposure of many industries to international competition in foreign markets. This strategic industrial policy involved adequate state intervention and specific political, institutional and organizational arrangements associated with state apparatus and private business as well as their interaction. Amsden talks about South Korea which has a guided market where market rationality is constrained by industrial priorities which is rapid industrialization with profit maximization on the basis of current comparative advantage. The government has tamed domestic and international forces by subsidizing selective industries on the basis of high income elasticities in the worlds markets, potential for technological growth and labour productivity growth. These industries are put in the market for competition. The economic growth is characterized by long term rationality investment and long term risks by the investors.
The state intervention has ensured price distortions resulting in greater investment in strategic sectors and avoiding monopoly. The government provides subsidies to these specific sectors and expects performance in return. It rewards the good ones and penalizes the poor however it refrains from bailing out firms unlike the policy of certain Western European countries. Restrictions are imposed in capital account encouraging capital accumulation rather than rent seeking, central banks have gathered utmost importance, technology has been acquired by investing in foreign licenses and technical assistance, foreign direct investment in terms of capital flow or technology has been limited, the state has invested in education and human capital formulation yet the concept of welfare state is absent. The Korean Developmental State model is based on support and discipline. Support in terms of the incentives given by the state in terms of the restrictions imposed by the state to avoid monopoly.
Innovative Financial Advisors Pvt. Ltd. – The developmental state model, hence, involves Bureaucratic autonomy and Private-Public sector cooperation which allows the state to formulate universal national goals which gets converted into policy formulation. In Latin America, the bureaucracy is said to be authoritarian leading to exploitative powerful groups working for private interests. In Taiwan, however, the bureaucratic autonomy exists but the Private-Public cooperation does not. The bureaucracy in East Asian countries includes the best managerial talent with similar mindsets. The accountability of the bureaucracy is ensured by the small bureaucracy, confined pilot agencies within the bureaucracy like MITI in Japan, EPB in Korea, responsible for implementation of policies to selected sectors of the economy, unusual division of labour within the state, military and bureaucrats- the executive keeps a check on the bureaucrats and the contribution certain elements within the civil society like the student protests in Korea. The Private- Public Sector cooperation has been ensured by the state as state provides the private sectors with incentives.