A short history of economic crises
by Michael G. Heller
Published in Social Science Files; April 8, 2025
DEVELOPMENTAL CRISES
Crises signal an internal or external threat to the sustainability of the social system. The short-term destructive effects of crisis can be undesirable, above all because the poorest members of society may be the most severely impacted. If social systems were more adaptively efficient to begin with, and if better knowledge were available to decision makers in the lead up to crisis, many crises could be anticipated and avoided.
It needs to be recognised, on the other hand, that a crisis presents the best opportunity for radically reforming a dysfunctional social system. By forcing a re-examination of institutions and policies, crises can compel societies to adapt to the external world. Most major turning points in social, cultural, political, and economic history involved a crisis in some form. If many people learn from crisis, and if its causes can be eliminated, a social system may be changed in crucial ways. The crisis and the society might then be viewed as evolutionary. If crises repeat regularly for the same or similar reasons, it would be reasonable to say that the crises are cyclical and that the society is stationary.
There are differences between policy reforms during crises and politics-as-usual. Absent a crisis, the stakes will be low, the consequences of failing to implement reforms will not be severe, and policymakers lean towards incremental or marginal change. During politics-as-usual decisions typically revolve on organisational issues, bureaucratic manoeuvring, and the slow process of building supporting coalitions. Policy elites may be preoccupied with maintaining patronage networks and satisfying interest groups. State agencies with a stake in the reforms often fight over goals relating to power, prestige, budgetary resources, careers, and personal rewards. During a crisis, policy elites come under pressure to reform with urgency. They are more innovative and take bigger risks. Major issues of legitimacy and social stability come to the fore. Reformers are more likely to undertake radical change. In fact, during politics-as-usual reformers sometimes manufacture a perception of crisis in order to get their policies onto the political agenda. In crisis situations policy elites can be expected to have more autonomy to set agendas. A sense of urgency means politicians and citizens are willing to grant policymakers quite wide-ranging powers and to insulate them from political pressure. In addition, crises may disorganise and weaken interest groups that would otherwise resist reforms.
The general point is that social systems adapt to the sensation of strain, and policy making is conditioned by awareness of strain. Actual or perceived crises generate the atmosphere and conditions for progressive policy innovations.
Behaviour in human societies differs from behaviour in animal societies or in physical systems, in that it not simply reacts to ‘disturbances’ but to interpretative and anticipative – correct or false – diagnoses of them. Real or supposed drifts and trends may count as much as or more than facts, threats as much as actions, indefinite threats more than specific ones, in creating the psychic environment in which the nation’s work has to be done.
I suggest a binary typology of development crises: (1) regressive cyclical crises will be called underdevelopment crises; (2) evolutionary crises will be called developmental crises. Both types of crisis were typical outcomes of the policy trajectories followed for much of the twentieth century in developing countries. A developmental crisis is potentially a progressive event in the transition to capitalism. An underdevelopment crisis is unproductive because it maintains the precapitalist equilibrium. This is not intended to be an exhaustive typology. The conceptual distinctions are not necessarily clear cut. Elements of both types of crisis can combine in individual countries, and they sometimes alternate in very quick succession. Underdevelopment and developmental crises may also combine with other types of crisis. For example, the Schumpeterian capitalist crises of the more advanced societies may act as an external environmental influence on the nature and timing of underdevelopment and developmental crises in precapitalist societies.
Development crises are the result of one or a combination of three policy orientations commonly adopted by developing countries that could be in transition to capitalism – populism, activism, or neoliberalism – (1) Economic populism is redistributive economic policy, with the purpose of winning short run political support from substantial sectors of the population; (2) Economic activism is dirigible state intervention to promote particular firms, industries, sectors, or activities, with nationalist objectives to the fore; (3) Economic neoliberalism is remedial macroeconomic stabilisation and correction of public finances forced upon policy regimes in the wake of populist or activist crises, and often has the further objective, with variable motives, of restoring or expanding market forces by means of privatisation and liberalisation. These three types can be distinguished from the capitalist model, which can combine neoliberal-style economic policy with parametric market regulation as one element of a logical succession of interlocking institutional policies designed to deepen and sustain the market-oriented economic pattern of an emerging open society.
These are simple concepts that help to identify the economic policy thrust of a political regime. Distinct tendencies separate the broad-brush categories from one another, although they may overlap in practice. Populism can incorporate features of activism, neoliberalism, and sometimes both. Similarly, other sub-types of political economy, such as corporatism or socialism, can be hard to differentiate from populism or activism. The populist-activist-neoliberal classification of the causes of development crises does not purport to capture all possible scenarios. Three examples will help to illustrate potential deviations from the ideal types.
Firstly, some forms of development crisis might not be determined primarily by the model of political economy. Although the recurrent crises of many African countries may seem to be conditioned by populism, activism, or neoliberalism in some measure, they often stem at root from tribal or communal infighting that infuses failed state-building projects, which in turn reflects problems of geography or social structure that long predate colonial rule. This makes them different from crises arising in political units where the formal authority over territory has been more or less consolidated for an extended period of time. On the other hand, tribal politics may be viewed as a proxy for interest group politics, in which case there is no reason to create a separate conceptual category to explain the resulting crisis.
Secondly, the present analysis excludes non-crisis situations of non-transitional closed societies that long exist in a fairly stable precapitalist authoritarian equilibrium. These societies perpetually weather the external shocks and grinding stasis of long-run underdevelopment characterised by primordial forms of impoverishment and low-level uncertainty and insecurity, without experiencing the dramatic oscillations occasioned by a structural disproportionality between economic and institutional change. Examples might include the neopatrimonial societies of Southeast Asia. The so-called ‘bureaucratic polities’ — such as Thailand or Indonesia — only experienced recurrent development crises after they had begun to pursue reformist paths of populism, activism, or neoliberalism under the banner of modernisation. An implication is that capitalist transition, and rapid development in general, is, at least in the early stages, an intensely disequilibriating process.
A third hybrid scenario is a slow moving equilibrium of capitalist evolution maintained by a judicious mix of populist, activist, neoliberal, and Weberian institutional policies. The legitimacy of the model depends on steady economic growth, with some populist policies to placate key groups. Activist policy is selectively applied by one or two relatively efficient enclaves of the state, either in commanding heights of the economy or in politically important commodity markets. Neoliberal trade opening, privatisation, and deregulation may at the same time be applied to less strategic swathes of the economy, exposing substantial populations to vigorous market competition in commerce and production. Meanwhile, institutional reforms may incrementally ratchet up improvements in the legal, administrative, and political subsystems through a creeping depersonalisation of state procedural norms. The model is moderate, but requires a high level of political control or political consensus, as well as management expertise at the centre and knowledgeable commitment to best practice development strategy. There are signs of this balanced approach in some countries. Present-day Indonesia or Uruguay come to mind. If the hybrid model can be sustained, crises may be minimised or at least be confined to the respective sectors where populist, activist, and neoliberal policy are applied. These countries stay out of the headline development news. Progress is not dramatic. The countries may be stable, but the model is no more developmental than any other.
The next step in the modelling is to disaggregate the ideal type crises and policy models. Because they are regressive and not transitional to capitalism, underdevelopment or populist crises are not relevant to the present study. They need to be briefly described in order to distinguish them conceptually from developmental crises. Characteristically underdevelopment crises occur in the downswing of a boom-bust economic cycle. The crisis is destructive without being creative. The cycle, which in policy terms is a recurrent alternating adjustment between populist and conservative regimes, is typically found in societies without institutionalised checks and balances where governments routinely manipulate policies to favour some interest groups over others. The unsustainable expansionary economic policy of a populist regime creates this crisis, which is commonly followed by a drastic stabilisation program that can worsen the effects of the crisis. Over several decades a country might swing uncontrollably between the extremes of populism > crisis > correction > populism.
Populism derives its political legitimacy from the emotions and rhetoric of nationalism, communitarian values, anti-capitalist ideologies, and extravagant promises of public spending targeted at citizen groups that see themselves as marginalised from the modernisation process and from the centres of political power. No populist government ever formulates a coherent program for long run economic development. Instead, economic policies are geared to the exigencies of political survival. An economic boom can be engineered through two or three years of expansionary, interventionist, and distributive policy. To pay for populist pump priming, income redistribution, and nationalist projects, government can spend its budget reserves, obtain foreign loans, siphon the surplus from resource sectors, and manipulate tariffs and exchange rates. Price controls, wage increases, and protections from competition contribute to worsening productivity in industry and agriculture. Loose monetary policy leads to high inflation. Populist regimes are characteristically profligate and beholden to vested interests. Discretionary economic policy, politicised bureaucracies, undisciplined budgetary management, and the lack of effective rule of law make these regimes especially prone to corruption.
In the wake of populist crisis, an orthodox and often repressive regime applies a stabilisation program, including controls on foreign borrowing, measures to restructure the economic system, strict credit and fiscal policies, retrenchment of the public sector, deregulation, and the emasculation of labour groups. Eventually, austerity and repression run up against resistance from the intended beneficiaries of the previous populist regime. The effects of crisis and post-crisis adjustments, which may include rising unemployment, hurt the poor and the middle classes most. The corrective regime initially enjoys quite broad public support, despite austerity measures and despite the suspension of political liberties. However, the initial thrust of reform evaporates as resurgent conflict and political de-legitimisation weaken the authoritarian government and divide it internally. Policy incoherence allows pressure to build for a return to expansionary policies. The gains of stabilisation are undone. Public expenditure returns to unsustainable levels, and the cycle repeats.
Capitalist transition cannot occur in societies where cyclical underdevelopment crises are the norm. Boom-bust crises were common in Latin America throughout the twentieth century. Archetypal populisms included socialist, clientelist, or corporatist regimes in Argentina (1946-55, 1973-76), Brazil (1946-64), Chile (1970-73), Mexico (1970-82), and Peru (1985-1990). In most cases, populism overlapped with activism. Sometimes, as in Peru in the 1990s, a ‘new populism’ overlapped with neoliberalism. In much of Latin America, the populist crisis-correction pattern is almost as common as changes in government. Whereas every generation views the crises of their time as uniquely disturbing, in reality the pattern has been quite constant over time.
The nineteenth century liberal statesman, Juan Bautista Alberdi, observed that the causes of Argentina’s economic crisis in 1876 were essentially the same as those of the crises of 1840, 1852, 1860, 1865, and 1870. Although all were manifested as bank crises, they were ‘not economic but rather political and social’. According to Alberdi, people did not understand that — as evidenced in the United States — wealth creation entails sacrifice, thrift, discipline, work, production, and commerce. Instead, borrowed money was used recklessly. Foreign loans were spent on luxuries or political patronage rather than on productive investment. Alberdi had a modern-sounding institutional explanation for these crises. Profligacy, corruption, and the dysfunctions of the credit system all ‘arise from the disorder of the institutions and from vested interests’.
It is well known that all crises explode at end of a period of great prosperity. That is not the reality, but rather the way it appears to be… What was taken for prosperity was profligacy, the squandering of capital investments in bad businesses and vain possessions… The sickness of crises is very difficult to cure… because it has its roots in the basic laws of the nation, in institutions that have been sacred for many years and, finally, in the beliefs or prejudices of the country itself. These laws, institutions, and traditions are what organise public and private debts in the dangerous forms that they now take.
Activist and neoliberal developmental crises, in contrast, need not be lost opportunities. They occur in the aftermath of a coherent economic program, when further progress in achieving economic objectives is prevented by institutional dysfunction. The cause of the crisis is a disproportionality or mismatch between economic policy and governance capacity. The economic policies begin to fail because the institutional mechanisms that would be required for them to succeed do not yet exist. In the case of socialist activist policies it is clear that the proportionally effective institutions could never exist. Crisis creates the pressure for a change in economic policy. Projects may be undertaken to construct better institutions. The problems that give rise to a developmental crisis are remediable, and the destructiveness of the crisis can be creative.
Activist and neoliberal policies can be effective in achieving medium term objectives. Each is unsustainable because the focus on economic reforms crowds out attention that should be given to commensurate reforms of the regulatory institutions. The state either manipulates economic activity (activism) or it loosens its control over economic activity (neoliberalism). Yet the state lacks legal, administrative, and political machinery either to control the economy or to prevent abuses occurring as an immediate consequence of the relaxation of economic controls. ‘Activist decay’ is the term I will use to describe the decline of state capacity as a result of the prolongation of statist economic policy, while ‘neoliberal myopia’ describes the institutional short-sightedness of liberalising economic regimes. Examples of each type will be examined in the following sections.
To sum up: In contrast to precapitalist non-transitional equilibrium routines, and in contrast to populist underdevelopment cycles, activist and neoliberal policies can be developmental and can promote capitalist transition. The conclusion that will be drawn, however, is that economic activism and neoliberalism are at best temporary solutions to the problems of development. The most favourable thing that can be said is that they are starting points or middle points in an unnecessarily long transition process. From a Weberian-Schumpeterian perspective there is a crisis-induced policy sequence for emulating advanced institutions rapidly and smoothly. The important lessons for the majority of developing countries lie in knowledge of the costs of not implementing change in a Weberian sequence. By definition, countries pursuing activist or neoliberal strategies have missed an opportunity for capitalist transition. Nevertheless, I if a country had to choose between them, neoliberal policy clearly has more affinity with capitalist institutional transformation than does activist policy.
ACTIVIST TRANSITIONS
This section criticises activist transitions on logical and empirical grounds. Activist economic policy is founded on a belief that strengthening state bureaucracies in order that they may fine-tune discretionary economic policy should generally take precedence over measures to build market freedom and rule of law in the economy. Typically, activist intervention involves state subsidies or directives and direct incentives to guide firms and economic sectors towards specified targets while monitoring their performance. Activist ideology can take different forms.
Where activism was successfully applied to industrial policy in East Asia it is sometimes explained as a pragmatic rationalist-technocratic approach with roots in recent colonial rule, in the threat of communism and related national security issues, or in a Confucian value system of collectivism, personal ties, conformity, egalitarianism, and consensual decision making. Whatever the reasons for it, the beginnings of economic activism in East Asia had something to do with a high social valuation of technical education and the prestige, meritocracy, authority, and discipline of state bureaucratic positions. In Latin America and parts of South Asia, activism has tended to be associated with dirigiste economics, or socialism and anti-imperialism.
State programs to shelter some firms from domestic or international competition have promoted advanced industrialisation in some countries when state administrative capacity was high, and when the cost of needed ‘knowledge-based assets’ far outweighed the price of labour or capital in sectors where national elites were unwilling to encourage or permit foreign direct investment. Moderate, selective, and flexible industrial policy can foster rapid economic growth for limited periods of time, for so long as – (a) honest and competent officials pursue a coherent export strategy concurrently with complementary social and educational policies; (b) domestic institutions, national values, and political attitudes facilitate effective state economic intervention; (c) patterns of world trade and economic regulation provide opportunities for newcomers to enter international markets. These conditions combined for a few fortunate and deserving East Asian countries in the 1970s and 1980s. By building up resources, capacity, and entrepreneurship in sectors that were exposed to global competition, activist policies gave a boost to capitalist transition.
Over time, however, it became evident that the well documented successes of industrial policy in East Asia could not endure. I have argued elsewhere that the underlying cause of Asia’s economic meltdown of 1997-1998 was a prolonged emphasis on activist policy and the failure to create the institutions to regulate modernising economies. Despite differences among the affected countries in terms of the intentionality, motive, and method of activist policy, and differences in levels of economic or political development or composition of economic activity, all the Asian crises of the late 1990s related in one way or another to the decay of state activism. Systematic discretionary intervention and the neglect of non-discretionary regulatory policy created vulnerability to sudden growth collapse, and were responsible for business inefficiency and government inflexibility. Industrial and financial policies encouraged a concentration of economic power in large often family-owned conglomerates that relied on privileged relationships with politicians and special treatment by state bureaucracies.
The most important instruments of state activism were credit and subsidy allocations that socialised the risks of leading private firms. State agencies assumed they could maintain discretionary efficiency while setting targets, monitoring performance, and penalising misallocations of credit. As economies grew larger and more complex, however, state subsidies created problems of moral hazard, standards of evaluation and compliance declined, and planning tasks multiplied exponentially. A purely technical aspect of the problem was the one identified by Karl Popper as ‘unplanned planning’. The unintended consequence of pervasive state planning is an endless spiral of new solutions that must be improvised to cope with unforeseen outcomes of state plans. In addition, interventions that were intended to impose discipline on private firms relied on an unreasonable expectation of perpetual probity and discipline on the part of officials. Repeated personalistic interactions between firms and officials created ‘embeddedness’ between them. As a result, states become gradually less autonomous and less catalytic.
Moreover, national firms were increasingly less compliant. Rapid economic expansion combined with state efforts to set performance standards created an enormous private demand for cheap credit that could escape government control. When Asian governments finally liberalised financial sectors in the late 1980s and early 1990s, it was evident that the focus on guiding firms and sectors had been pursued at the expense of stronger market regulatory policy. Toxic debt was tolerated for years before and after financial deregulation. Private enterprises had little experience of credit risk evaluation. Liberalisation occurred in an opaque business environment that denied officials and investors accurate information about the credit worthiness of firms or the exposure of banks. Poorly regulated markets were a blessing for uncompetitive firms, but created the incentives for speculation and crime. In the past, high-performing soft-authoritarian Asian states had sheltered from interest group pressures while using public monies and organisations to achieve industrialisation targets. By the 1990s, however, state activism had entered a period of decay. A combination of weak political institutions, personalised and discriminatory styles of policy making, and reluctance to enforce the law in private transactions, made it difficult to change course. State autonomy had become the source of market uncertainty, and lack of transparency in state decisions made it easier for private business groups to both influence and resist policy.
A general problem is that the more direct economic functions a government takes on, the more likely it is that dysfunctional collusion will develop among and between state agencies and private firms. Consultation about agreements for the allocation of subsidies, licences, and other assistance require intimate contact between enterprises and officials. During activist policy’s second round effort to monitor the performance of firms that had received subsidies and permissions, officials cannot avoid entanglement in their commitments to enterprises. Effective assessment of credit risk requires an impersonal approach and formal rules of negotiation. Two categories of institutional reforms had not been undertaken in the ‘miracle’ economies prior to the point at which activist decay began. At the macrolevel, Asian countries lacked: a universalistic legal system to reduce reliance on networks of informal trust; enforceable rules to lend transparency and predictability to economic activity; state procedural rules to eliminate particularism in government-business processes, and to increase the calculability of policy processes; and systems of free political representation to enable adequate parliamentary supervision of the agencies of public administration. At the microlevel, these countries lacked formal arms-length regulation and credible enforcement procedures in financial accounting and audits, corporate disclosure, competition policy, and regulations dealing with credit and stock markets. A recent book on the ‘nexus’ of law and economic development argues:
A surprisingly strong case can be made that the trigger for the Asian financial crisis was a series of institutional failings. These failings were particularly striking in the financial sector – poor corporate governance, directed and related lending, and absence of effective bankruptcy laws, as well as a perceived implicit government guarantee to banks and poor banking supervision facilitating ‘crony capitalism’ … [One] view of the Asian Tigers’ rapid growth followed by crisis is precisely that those countries achieved very rapid growth despite weak institutions so long as they were still at a relatively low level of economic development, but that they failed to invest their growing incomes in improvement of institutions and eventually the failure to do so led to the Asian financial crisis.
Without regulatory safeguards, and with access to easy credit, there were insufficient incentives for private firms to be honest, prudent, or competitive. Government-business relations may not have been corrupt or illegal, but concessions, contracts, and licences fostered the conditions for rent seeking and cronyism. There is ample evidence that Asian policymakers were aware of the risks posed by their pervasive and discriminatory style of economic governance. At times during the 1980s technocrats in Indonesia, Thailand, Malaysia, South Korea, and Japan timidly tried more orthodox measures to prise open the networks of civil servants, banks, and industrial monopolies, including limited trade and foreign investment liberalisation, privatisation, and the restructuring of conglomerates. Already, however, the interest groupings of state activism were deeply embedded.
Partly because of preexisting bureaucratic competencies, a number of East Asian countries could exploit their comparative advantages and favourable international conditions prior to 1997 while using activist policy to promote industrialisation and economic growth. Post-crisis, these same developmental state strengths combined with a surge of investment and imports in the United States at the turn of the century to facilitate East Asia’s timely adaptation and recovery. Ten years on from the Asian financial crisis, it is obvious that the region remains adaptively efficient relative to other parts of the developing world. The dynamism and discipline of East Asian state activism was again evident after 1998 as governments retreated from industrial policies that had involved heavy public subsidies, relaxed some restrictions on foreign investment, and improved accounting standards as well as bankruptcy and corporate governance procedures. The countries that were hardest hit by the Asian financial crisis rapidly accumulated foreign exchange reserves, reduced public debt, and achieved current account surpluses.
On the other hand, it has proved extremely difficult to reverse the patterns of economic governance established during decades of activism. Consensual business and politics continues to be a cover for monopoly privileges and insulation against reform. Measured against Weberian normative-procedural yardsticks of impersonal law, administration, and political representation, East Asian countries remain ‘precapitalist’ in institutional terms. The equilibrium of political profit making and regulatory closure has proved to be highly resilient. The international financial press regularly criticises the pace of structural and institutional reform in South Korea, Malaysia, Thailand, Indonesia, the Philippines, and Japan. Export performance has been impressive in some countries, but many East Asian economic sectors remain state-dominated or protected from competition and foreign investment. Government regulation and taxation often continue to be unpredictable, capital markets are relatively undeveloped, privatisation programs have generally stalled, corporate and public debts are still problematic, and many institutional reforms failed to materialise. A report by the Asian Development Bank in 2007 found that indicators of economic governance — accountability, political stability, government effectiveness, regulatory quality, the rule of law and control of corruption — show little improvement in East Asian countries since the crisis, and ‘on balance, suggest deterioration’.
Discussion of the causes and consequences of activist crises in the East Asian necessarily involves balancing evident failures against enormous successes. As I have defined it, an activist crisis is avoidable but can be developmental. Unlike cyclical underdevelopment crises, developmental crises in a few countries with preexisting institutional advantages – most notably, historically-endowed state administrative discipline and competence – can be evolutionary by avoiding regressive boom and bust cycles. Notwithstanding that their institutional development is lagging, high-performing Asian economies are pursuing premeditated, responsive, selective, and disciplined paths of convergence with advanced economies. There is reason to be confident that Asian tigers will work their way towards completing the indispensable institutional reforms.
However, it would be unrealistic to expect similar levels of activist state performance elsewhere. Most governments do not display equivalent organisational capacity, attitudes, or expertise. In the majority of societies, economic interventions of the kind undertaken in East Asia place unreasonable demands on the know-how and probity of public officials. Even in autonomous states with a highly disciplined bureaucracy, dirigiste policy eventually decays. Policy making in developing societies is especially susceptible to capture by economic groups. Yet few if any governments anywhere in the world have the competence, foresight, discretion, and nimbleness to discriminate systematically between competing claims for state economic protection, or the strength and discipline to sustain their relative autonomy from vested interests while doing so.
A point that must be emphasised again is that activist crises in East Asia were developmental and recovery was sustainable. These societies are not necessarily caught-up in an underdevelopment cycle of crises that repeat for the same or similar reasons. By comparison with developing countries in other parts of the world, and Latin America in particular, the more advanced East Asian countries have demonstrated that they can be cautiously strategic about the kinds of long run policies that this book identifies as necessary for a transition to capitalism. Overt and fixed ideological preferences on a left-right political spectrum have not played a strong role in policy decision making. East Asian elites generally seem able and willing to rebuild state institutions. The political conditions for quite effective state autonomy during institutional transitions have been maintained in this region for unusually long periods of time.
IN CRITICISM OF NEOACTIVISM
What can we learn about state activism as a model for capitalist transition? The key lesson seems to be that effective state activism demands extremely high preexisting levels of state administrative capacity. But even in countries that displayed that capacity, the mismatch between institutional forms and economic change was the eventual cause of activist crisis. The experiences of East Asia and Latin America suggest that crises resulted from inevitable declines in state bureaucratic capacity to manage inevitable increases in economic complexity. Moreover the effort governments invested in designing administrative mechanisms for the direct control of economic sectors displaced energy and resources that could have gone into constructing the institutions for a competitive market economy. Crises revealed that state agencies in charge of industrial policy had become inflexible and were resistant to market liberalisation. Non-state groups that benefited from opaque regulations and entitlements to subsidies became politically powerful and resisted reform.
A focus on engineering the growth of firms that will be globally competitive in terms of cost and quality of their products and processes tends to produce a corresponding neglect of tasks aimed at creating a level playing field for all firms. Sooner or later, the business sector must stand on its own feet. Yet, activist crises can damage an economy long before that point is reached. It is a characteristic of activist regimes that having reached the stage when it becomes extremely urgent to abandon the intrusive planning approach in favour of market deepening and parametric regulation, political and administrative agencies have lost the political autonomy and policy flexibility needed to make that change easily.
The situation in many developing countries today, even in those where state activism seemed to produce some spectacular successes, is not unlike the one described by Schumpeter 70 years ago.
… what we know from experience is not the working of capitalism as such, but of a distorted capitalism which is covered with the scars of past injuries inflicted on its organism… The very fundamentals of the industrial organisms of all nations have been politically shaped. Everywhere we find industries which would not exist at all but for protection, subsidies, and other political stimuli, and others which are overgrown or otherwise in an unhealthy state because of them… Such industries are assets of doubtful value, in any case a source of weakness and often the immediate cause of breakdowns or depressive symptoms. This type of economic waste and maladjustment may well be more important than any other.
Most of the developing countries that pursued an activist path in the last century have made slow progress towards impersonally regulated capitalism. The nature of activist tasks can impose impossible demands on state agencies from the outset. Or, after an initial period of successful intervention, agencies are less able to perform increasingly difficult and costly tasks. Either way, the institutional bottlenecks that produce crisis are manifested in a decline in the quality of state decision making. Regardless of the initial quality of policy leadership, or favourable cultural and external environments, within a decade or two dirigiste policy becomes counter-productive. The state becomes overconfident of its market control capacity and protective of its discretionary powers, and is slow to build up skills and resources that would prepare the ground for parametric economic regulation. Business comes to rely too heavily on government-backed guarantees, which itself creates a political constraint on change. There is little evidence anywhere of a successful unravelling of personalistic intra-state, inter-business, or state-business relationships after a long period of activist intervention.
Although activist ideology has moderated noticeably in the wake of the Asian financial crisis, it is still common to hear foundational principles of activism enunciated by progressive scholars and by international organisations that wield considerable influence in developing countries. Well-intentioned experts might today advise a South Asian or Latin American technocrat to attempt to replicate what technocrats once did in South Korea and Taiwan, or what they now do in China, but with many caveats. ‘Do get a move on’, they might say, ‘but be careful how you go about it, and heed of our lengthy list of dos and don’ts’. The experts run the strong risk that the people who receive their advice will not read between the lines and will not examine the fine detail. The eager technocrat who listens to the dirigiste industrial policy expert/scholar is likely to focus on the central message, ‘you can do it too’.
All this begs the question. What should happen in a fully developed country when a new supreme leader comes along who is not beholden to interest groups and yet is in ultimate command of a competent administrative state through which he may flexibly deploy economic policy instruments which in most other societies would be captured and distorted and become deeply-entrenched drags on development — a leader who deeply believes in the virtues of capitalism, the market and democracy and is uniquely positioned to employ unpredictable, unconventional and even fear-inducing methods to create disruption and upheaval as the means of changing an entire social, political and economic order of things and thereby gain or regain influence over territories?
Adapted from:
Michael G. Heller Capitalism, Institutions, and Economic Development, Routledge 2011
An Existential Crisis Outside Plato's Cave by Sami Gattoufi, 2020 Tunisia
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