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Back to the Future: Rehabilitating the Developmental State

Two conditions are required for achieving a turnaround: political will, and political and administrative capacity. Both have been manifestly lacking

Rajiv Servansingh

The concept of a developmental State has evolved since the end of the Second World War. It referred to those countries in which governments took a leading role in defining specific policies to support economic growth and achieve such objectives as export promotion and employment creation. Initially these types of States closely collaborated with authoritarian regimes in South East Asia, supported by the United States of America in its crusade against the spread of “communism” by the USSR during the Cold War era.

Those States were characterized by a close collaboration between a few rich families and government officials as well as officers of the army high command. The generals had huge influence in the running of governments in that era of permanent psychosis of external threats. In reality the demarcation lines between business, the army and government were hardly visible. In their most evolved “avatar”, such as South Korea in the 1970s, a familiar feature of such regimes was the overwhelming roles of a few huge conglomerates in the national economy which were instrumental in the implementation of the industrial policy decided by the government.

Paradoxically until the 1980s this basic model of the developmental state was hailed as one of successful “free-market” economy to be replicated in other developing nations. The cumulative effects of the end of the Cold War and of the disruptive forces of globalization were soon to uncover the fault lines of the model with the advent of the Asian financial crisis of the late 1990s, which exposed the whole system as an ultimate form of “crony capitalism”.

Although at the time of their accession to independence many African nations were tempted by the South East Asian model of state-led economic development, there are no successful examples to speak of on the continent. Mauritius is probably the only African nation which has rather successfully institutionalized a form of developmental state and that too without some of its worst aspects such as extreme authoritarianism.

The principal reason for this was that the country benefited from the presence of the two essential ingredients needed for a successful developmental state to operate, namely, a local dynamic private sector and a strong state bureaucracy. Add to this the presence of strong legal institutions and long standing democratic traditions, which probably account for the fact that authoritarian temptations were thwarted.

The “economic miracle”, which was achieved in the 1980s when the country’s GDP grew by an average of nearly 7% for a number of years, was primed by a close collaboration between the public and private sectors whereby government created the framework for the development of new pillars of economic activity and offered fiscal and other incentives for private sector investments, including Foreign Direct Investments. It was under such a regime that the country diversified from a classic plantation type mono-crop economy to a diversified and dynamic economy and raised the per capita income to nearly 15,000 USD at the turn of the last century.

Since the beginning of this century, Mauritius like the South East nations has been put under pressure by the same disruptive forces of globalization and then the effects of the Great Financial Crisis of 2008. The response to both has characteristically been to adopt more open trade regimes under the decrees of the WTO while introducing more “free-market” policies internally.

In Mauritius three principal measures have insidiously impacted the effectiveness of the erstwhile developmental state. First, the introduction of the “flat tax” of 15% has all but deprived the State of one of its principal policy tools – the use of fiscal incentives as an instrument of “industrial policy”. In this regard the request by Business Mauritius for “fiscal incentives” to stimulate exports growth is an interesting development which signals a more realistic posture from the business community.

Second, the introduction of statutory limits on the level of fiscal deficits coupled with the commitment to an addictive “low tax” regime for corporations has resulted in a situation where successive governments have found it more convenient to “save” on capital expenditure for a number of years in order to meet their self-imposed restrictions on budget deficits, again depriving the State of a powerful policy instrument for stimulating economic growth.

Finally, it is postulated here that the liberalization of the labour laws in Mauritius is a typical case of one-size-fits-all policies usually propagated by the World Bank/IMF compact. Given the history and social structure of the island, it is most likely that this sort of “liberalization” of labour regulations has an overall negative impact on productivity.

What is most dramatic is that these “liberalization” measures were all undertaken at a time when Mauritius was poised for a radical transformation of its socio-economic structures. The existing model of development had reached its limits in the new global competitive environment. At that crucial time, amputated of two of its two effective arms for policy formulation, the developmental state as we had known it engaged on an accelerating phase of decay.

Stimulus packages for specific firms and “doing business” measures for improving the general business environment in the country can at best improve the status quo on the margins but cannot ever substitute for the transformative policy-driven changes which the country needs at this juncture.

There is enough evidence to show that the tinkering and muddling through, not to say the absence of effective policy directions coming from the State since at least the beginning of this century is a critical cause of the economic stagnation which has characterized this period. Two conditions are required for achieving a turnaround: political will, and political and administrative capacity. Both have been manifestly lacking and without a serious and convincing dose of the first, the second condition cannot be realized.

The idea that the government should have a role in promoting development is of course nothing new. Nearly one and a half century ago Friedrich List in his critique of Francois Quesnay and Adam Smith argued (1885) that “less advanced nations first required ‘artificial means’ to catch up with the advanced nations. It was the task of political economy and hence the state, to ‘accomplish the economical development of the nation and to prepare it for admission into the universal society of the future'.”

Rajiv Servansingh

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Tags:   Rajiv Servansingh   Developmental State   Free Market Policies   South Korea Democracy   Second World War   South East Asia   USSR    Business Mauritius   Stimulus Package    Friedrich List   Francois Quesnay   Adam Smith