Is the Russian economy really a mystery?

As many developing countries are now turning to ‘developmentalism’ to close the gap to the developed countries, it is worth looking at what lessons can be learned from history regarding the failures and successes of the developmentalist state. One of the main hurdles for developmentalism is political: is it possible to create a strong political coalition and institutions that will back this policy for a prolonged period? Neoliberalism is simple to implement: just abolish regulations and restrictions and let the international market take over. There will for a period (which can be quite protracted) be protests from people losing their jobs and social benefits, factories closing and so on, so a heavy hand may be necessary in the beginning (as in England under Margareth Thatcher, Chile under Augusto Pinochet and Argentina presently under Javier Milei), but later the market wonderfully takes over the job of disciplining people and state violence is only necessary now and then, when (often spontaneous) popular dissatisfaction explodes (as in Chile in 2019). It leads to increased inequality, but it seldom leads to economic development. However, that is another story. Neoliberalism may need a heavy hand, at least initially, as the late UK PM Margaret Thatcher and Chilean Dictator Augusto Pinochet have shown us, but at some point the markets take over installing discipline among the social forces and repression is after that only necessary now and then. Thatcher called Pinochet a “true friend”. On the photo is Margaret Thatcher with Pinochet and his wife, Lucía Hiriart. in London in 2013. Photo: EPA/Ian Jones. Developmentalism is much more complicated. As it implies economic planning and protection or subsidies for selected industries and as it aims at full employment and some sort of egalitarian policy, economic conflicts tend to become political conflicts. A developmentalist state is therefore almost constantly under pressure from conflicting interest groups, which cannot be solved just by referring to the necessity of the international markets. Governance and the quality of the bureaucracy is therefore much more requiring, and if they are not up to the job, the policy fails. Historically there are many cases of both successes and failures. In a developmentalist state, economics and politics are closely related and mutually supportive, and failures in one area may cause a collapse, so the question of creating a solid political base for it is essential. As developmentalism refers to a capitalist economy, where most of the economy is in private hands (even if there sometimes are sizeable State Owned Enterprises as well), there will necessarily be a close relationship between the private sector and the State. This is a very complicated relationship, as interests are only partly overlapping. There will permanently be an attempt by big business to capture the State, in which case the Developmentalist State easily degenerates into pure ‘Crony-Capitalism’, which rarely leads to development. So for developmentalism to work, there has to be an independent and relatively competent State bureaucracy. It can only stay independent if the political leadership (elected or not) is backing it. A weak Government will not be able to withstand the pressure. To discipline the private companies, developmental states generally use a combination of rewards and punishment (carrot-and-stick). The rewards have typically been protection from international competition, sometimes awarding (or creating) a monopoly on the domestic market, cheap loans, tax exemptions and direct subsidies to for example Research and Development (R&D). If the private companies don’t deliver the planned investments and development of production, there will normally be punishments, as e.g. stop for loans, requirements for paying back subsidies and the like. If there are no punishments, the whole thing degenerates into Crony-Capitalism. Hence, the need for a strong and independent bureaucracy with political backing. Historically, the successful developmental state has been based on an alliance between Government and industrial capitalists, with the Government in the driver’s seat. The financing has been provided by either nationalised banks (case of South Korea) or a state-owned development bank and heavily controlled private banks (Japan). In both Japan, South Korea and Taiwan, an agrarian reform had previously put an end to a semi-feudal land tenure system and created a large sector of family-owned farms (by forcing the landlords to sell their lands). Labour was not part of the coalition, at least not initially, and government controlled unions dominated. Even so, as massive amounts of jobs were created in industry and unemployment was reduced, labour benefited also from the development. . Agrarian reform put an end to semi-feudal land tenure systems in East Asia after World War 2. This is by many considered as a factor that contributed to the development of the “Asian Tigers”. Not so, says the US Magazine “The Atlantic”, an informal NATO mouthpiece: “For authoritarians, land reform is a convenient tool to destroy rival elites in the countryside while entangling rural workers in the tentacles of authoritarian influence”. This point of view is not shared by many. Now that there is an increasing interest in developmentalism around the world, what worries many is that historically it was often implemented, at least initially, by military dictatorships (for example South Korea, Brazil, Peru, Philippines, Indonesia) or authoritarian governments (for example Taiwan, Japan, Mexico). So does a developmentalist state necessarily imply a strongman as leader (as presently in Russia, China)? And is it possible for popular sectors (trade unions, small farmers and so on) to form a leading part of the developmental coalition? It is important to note that all governments, be they elected or not, need to have a coalition behind them to be able to govern. Elected developmentalist governments have often had a charismatic leader (as for example Joko Widodo in Indonesia, Narendra Modi in India, Vladimir Putin in Russia or Evo Morales in Bolivia). The development in Bolivia since the first MAS government in 2006 is a peculiar example, as the coalition behind the government has principally been indigenous organisations, small farmers, small urban businesses and (only partly) labour unions, while it has struggled to make an alliance with the private industrial sector, and has been met with clear hostility and obstruction from the large scale commercial farmers in the lowlands. There are some claiming that history is of no use, because now the world is dominated by the knowledge economy, industries are networking in complicated international supply chains, or even that we now live in a post-industrial society where services are, and should be dominating. The idea that the developing countries should leap-frog directly to a post-industrial society is to my opinion ridiculous. All this nonsense ends up as excuses for the present unsustainable system where most developing countries are exporting raw materials and migrants to the developed countries and their overgrown service sector is dominated by low-quality informal jobs with subsistence incomes (or often not even that). Developmentalist States are often led by charismatic leaders which means that they have substantial personal power. On the photo Indonesian President Joko Widodo meeting with Indian Prime Minister Narendra Modi in New Delhi in 2018, Public domain, via Wikimedia Commons This doesn’t mean that the experiences from Japan and South-East Asia should be copied. The challenge is how to mobilise a majority of the population in the developing countries in some sort of democracy as part of a developmental alliance, not as a short-term euphoric policy bubble, but in a long haul. There are some lessons to be learned from history. Firstly, in the absence, hopefully, of a dictatorship, a broad majority should be mobilized behind the policy. The main pitfall is unsustainable redistribution policies, as there is a temptation to try to keep this broad majority together by delivering more benefits than what the local production can sustain. The result is inflation, budget deficit and so on. Secondly, it should be clear from the outset that the Developmental State is the leader, and the industrial capitalist class, even if a beneficiary, doesn’t have the right to take over and it has to deliver. This is not easy. In most developing countries, the well-off families (“the elite”) see the State as their prey by birth right. They may fight over it between themselves (traditionally in an alternating two-party system), but they will never accept peacefully that hitherto marginal classes suddenly take over. This is the reason for the violent hatred of for example Salvador Allende in Chile, Juan Velasco Alvarado in Perú, and more recently Hugo Chavez in Venezuela and Evo Morales in Bolivia. In this context it should be remembered that the power relations normally change over time, and if there is a political crisis, big business is more than willing to break the alliance (despite having benefited from it) and take over itself, with force if needed. South Korea is often mentioned as an example of how the powerful Chaebols were disciplined by the (military) Government, and in China the Government is visibly keen on avoiding that the multi-billionaires, created thanks to its policy, become too powerful. So managing a Developmental State is navigating Scylla and Charybdis between unsustainable redistribution policies and crony-capitalism. It requires an adroit helmsman. *********************** This is the second article on developmentalism. In the next article we shall look at the content of developmentalist policies. To read the first artcile, click on the link below: 1. It is time to dust off some old ideas about economic development.

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Is the Russian economy really a mystery?

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