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The Power Playbook
Crafting industrial policies that match political dynamics
General Park Chung Hee didn’t take no for an answer. Not surprising perhaps for a man who seized power in South Korea through a military coup in 1961 and ruled until his assassination in 1979. In just one example, described by Andrew Green, Park “asked” the chaebol Daewoo to take over a debt-laden shipyard that was mostly still unbuilt. When Daewoo’s chairman, Kim Woo-choong, said no, Park simply waited until Kim was on an overseas trip and announced the takeover anyway. On returning to South Korea, Kim had to accept the takeover as an act of “national duty”.
We all know how successful South Korea’s industrial strategy was – and Park’s power to direct resources and enforce discipline was central to that success. The relationship between power structures and economic policy was underappreciated for decades. Cookie cutter policy prescriptions took no notice of how power was distributed within the countries they were imposed upon. That’s now changing – most recently with Stefan Dercon’s excellent book, Gambling on Development. Dercon stresses the importance of a ‘development bargain’, where a country’s elites agree to work towards economic growth.
But more heterodox economists have been writing about political power for decades. SOAS’s Mushtaq Khan, for example, has written extensively about policymaking under different ‘political settlements’ (essentially the prevailing balance of power in a country). He has shown that industrial policy can be effective under a range of political settlements. What matters is that the policy matches the settlement. Policies that have been wildly successful under one political settlement can be ruinous under another. Khan is right, but Dercon’s key insight is still important. Industrial policies can work in different circumstances, but there must be at least some political leaders who see them as a priority and truly want to them to succeed. Industrial development comes when political leaders are willing and able to enforce the right policies. Here are some examples that show why.
South Korea’s industrial policies were so successful in part because they suited the country’s power structure. As the GPI has discussed before, the country used a range of policies to boost heavy industries, including cheap loans, import restrictions and tax concessions. What most of these policies had in common was that they were provided ex-ante. The incentives came first, and the gains in productivity came after.
This strategy only worked so well because South Korea could discipline any firms who didn’t fulfil their side of the bargain. Khan describes South Korea as having strong centralised power and the ability to enforce conditions on large businesses. Export discipline can be hugely effective, but only if the firms truly believe that government aid will be taken away if they don’t work hard and increase exports. The threat of removal of incentives must be credible. As Daewoo’s poor Mr. Kim will tell you, Park had the power and determination to enforce his threats.
There are more examples of ex-ante incentives working in countries with centralised power structures. Ethiopia from around 2000 up until the late 2010s worked similarly. The garment sector enjoyed spectacular growth because the government provided ex-ante incentives conditional on increases in exports – and they effectively disciplined firms who failed to meet these conditions. The events in Ethiopia in recent years are a sad reminder how fragile these instances of success can be to political changes.
To see why ex-ante incentives won’t work everywhere, consider a country with a fragmented power structure, characterised by what Khan calls ‘patron-client’ politics. In this country, the ruling cadre at the centre of government relies on support from interest groups and political actors to stay in power. The fruits of industrial policy are thus distributed to the groups (the ‘clients’) on which the government (the ‘patron’) depends. This is not exactly conducive to rapid industrial development. And it gets worse. Suppose the firms receiving these concessions are content to keep cashing government checks without working to increase their productivity. Will government come along and enforce conditionality and remove support? No, because they rely either on the firms themselves for political support, or on the political actors protecting these firms. Cutting them off would require government to undermine its own power. So they don’t do it, and we get stagnant, uncompetitive firms on perpetual government life support.
History is full of examples of this process playing out. Pakistan and India in the 1960s and ‘70s pursued many policies similar in nature to those deployed in South Korea. But they were disastrous because their power structures were different. Like South Korea, 1960s Pakistan was ruled by a president who took power through a military coup. And the military president, Muhammad Ayub Khan, sought to use the power of the state to industrialise the economy. But unlike South Korea, Pakistan’s middle classes were relatively powerful at that time – and they demanded resources.
As the 1960s wore on and Ayub’s power base waned, his ability to prioritise economic concerns faded. As Khan points out, “a significant proportion of subsidies and licenses had to be allocated in response to political demands rather than on rational economic criteria”. A similar story of failure played out in India around the same time. Between 1965 and 1970, manufacturing grew by just 4.2% in India and 6.8% in Pakistan, compared to 20% in South Korea and 19.1% in Taiwan.
Does this mean industrial policies can only thrive in countries with centralised political power and strong discipline? No. They can still work under patron-client politics, but things get harder, and the specific policies need to change. Because enforcement is difficult, policies must offer incentives that only come after productivity growth. Rather than being ex-ante, they need to be ex-post.
What does this look like in practise? Most often it’s offering access to domestic markets to international leaders through partnerships with local firms. In these cases, the ex-post incentive is the profits available to these international firms from un-tapped markets. We’ve written about some examples of this in the past; Maruti-Suzuki in India, Desh-Daewoo in Bangladesh. In both these countries, where ex-ante failed, ex-post succeeded.
These examples show that industrial policy can thrive in different political settlements. But they also demonstrate the fact that a country must want to develop. Maruti-Suzuki succeeded in large part because the incentives were ex-post. But the project also enjoyed significant political backing. The grieving prime minister, Indira Gandhi, saw its success as crucial to her dead son’s legacy. In Ethiopia ex-ante incentives worked. But the political leadership also strongly backed the garment sector, with the prime minister himself making overseas visits to attract FDI.
And it goes both ways. Appropriate policies need political will, but political will also needs appropriate policies. Ayub largely shared Park’s determination to see his country develop, but his policies didn’t suit Pakistan’s politics.
One final point. Policy advice can never be generic. It must always be based on a deep appreciation of the prevailing political structures in the country in question. As we enter a new era of industrial policy, questions of politics and power must be front and centre.
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