Interdependent Microeconomic Capabilities And Incentives

Published Date: 02 Nov 2017

Terry Eagleton in his article on Post-colonialism states that;

"The term'post-colonialism' won't do because it falsely homogenizes a set of diverse conditions; because it throws up all sorts of hair-raising chronological difficulties; because it suggests a confident posteriority to a condition which still prevails in transformed guise; because it passes cavalierly over those sectors of the globe which are still full-bloodedly colonial; because it is a eurocentric way of seeing; because it is post-modernism's way of taking care of everything south of Palermo, because it suggests that everything in a 'postcolonial' society is post - colonial in the sense that everything colored green is green, and so on." [1] 

Micheal Todaro defines economic development by the increase in a country's living standards, self esteem, freedom from oppression and access to greater choice. Economic development usually refers to the adoption of new technologies, transition from agriculture-based to industry-based economy, and general improvement in living standards. [2] According to Harvard Professor Michael E. Porter, economic development is the "long-term process of building a number of interdependent microeconomic capabilities and incentives to support more advanced forms of competition." These capabilities and incentives include the nature and extent of the inputs required by firms to produce goods or services; the rules, incentives and norms governing the type and intensity of local rivalry; the quality of demand for local services; and the extent and quality of local suppliers and related industries. [3] 

For South Asia and many other colonies, economic development is a post colonial experience. The scope of coverage of the term postcolonial varies across disciplinary fields and authors. For the purpose of this essay, the term postcolonial will not only refer simply to the period after colonialism but will assume its continuity, in terms of the continued effects of processes initiated during colonialism, as well as discontinuity, in terms of new processes unfolding subsequently.

The end of colonial rule in 1947 marked the beginning of modern economic growth in South Asia. The governments of the newly independent countries made a determined effort to lift their economies to a higher growth path, by altering the colonial structure of production with the help of a series of economic plans. The results have been quite impressive, in comparison with the past, even if they are not as spectacular as those achieved by some high performing countries of East and South-East Asia. This paper attempts to discuss postcolonial India and Pakistan in reference to Hamza Alavi, Atul Kohli and Peter Evans’s explanations of the economic development trajectory.

In an influential essay on Pakistan and Bangladesh, "The State in Post-Colonial Societies—Pakistan and Bangladesh" (1972), Hamza Alavi states that the postcolonial state was "over-developed" due to its foreign creation. It was consequently particularly powerful compared to the leading agrarian and industrial classes, the latter being "under-developed." He argues that the original base of the state apparatus inherited-by a 'post-colonial society' lay in the metropole that represented existing class forces to subordinate all the indigenous classes and hence it was 'over-developed' in relation to the ex-colonial society once it rested on the support of at least one indigenous class after the colonialists withdrew. [4] Specifically, according to Alavi, it inherits a strong military-administrative apparatus. And the state directly allocates a large part of the economic surplus in bureaucratically directed 'development' activity. The 'centrality' of the post-colonial state, which evidently follows from these propositions, implies the 'centrality' of the state bureaucracy. The idea of the relative autonomy of the state was proposed because of the independent material base of the bureaucratic-military oligarchy and its relative autonomy from the other propertied classes.

Critics of Alavi's position point to the idea of the state being reduced to a handful of bureaucrats and military officers in his analysis (Saul, Leys). Understanding the limitations placed on the state's responses to pressures from hegemonic interests requires a closer examination of the state, and a more comprehensive view of classes. Alavi talks about two existing classes that determine the politics of power and resource distribution. In his analysis, the intermediate or middle classes have relatively high organizational capabilities compared to workers and poor peasants, because of their greater education and wealth and compared to capitalists and large landlords; they have a political advantage of numbers and legitimacy in organizing broader social groups on grounds of shared affinities, values or interests.

There are significant differences in the origin and material interests of the middle class in early capitalist developers and late developers like India, Pakistan and Bangladesh. In colonial countries, ‘middle class’ emerged before a substantial development of capitalism, as a result of colonial strategies of promoting the income and status of groups whose political and administrative support was required by the rulers. Due to this power middle class groups in colonial countries could swing from conservatism to radicalism because their well-being depended on creating pressure on the state to ensure the accommodation of their particular group. Excluded groups therefore had a strong incentive to adopt political ideologies that distinguished them from established groups.

Hamza Alavi argued that the state in these societies acted as an arbiter between groups and was therefore ‘relatively autonomous’. The state did not reflect the interests of any particular group but was in the business of balancing the interests of different classes and factions within classes to maintain social stability. This feature allowed the colonial state to create new groups and classes from above, in particular the ‘salariat’ which played a significant role in ‘managing’ society for the colonial power.

This role of the state continued in post-colonial economies. But the state was only relatively autonomous because it was subject to the ‘structural imperative’ of peripheral capitalism. Alavi had a deterministic Marxist model of the logic of capitalism where the state had to support capitalist accumulation for the economy to survive and this meant that it was limited in its autonomy and it was only relatively autonomous.

However, this part of Alavi’s analysis of how constrained was the state was weak but he was right in his description of social engineering by an ‘overdeveloped’ colonial state meaning a state more powerful than the dominant social classes. In Alavi’s analysis the creation of a large salariat or professional class had a negative effect on growth later because the income of this salariat depended on their continuous political pressure on the state which is nowadays described as rent seeking.

The strength of Alavi’s analysis is that he identified the "tension between politics and economics". The weakness of his analysis is that the mechanisms through which this tension worked were inadequately developed.

Peter Evans on the other hand tried to explain economic growth of the developmental states by drawing on the predatory, exploitative or "grabbing hand" theories of the state. Evans (1989: 562) argues that a predatory state is one where "those who control the state apparatus seem to plunder without any more regard for the welfare of the citizenry than a predator has for the welfare of its prey". Evan’s definition emphasizes that "at the root of the grabbing hand analysis are models of political behavior that argue that politicians do not maximize social welfare and instead pursue their own selfish objectives". [5] 

In the concerned article Evans (1995: 228) argued in the context of South Korea, the very state policies which have brought about rapid industrialization also brought new and powerful actors onto the political stage such as independent trade unions, and these new forces could well "threaten the stability of the state-society coalition that made success possible to begin with". [6] In most parts of South and South East Asia where the coalitions are more fragile, and where governments often appear less willing to accommodate new political actors, it is possible that political instability will continue to threaten economic progress. Evans theoretical contribution of relation between state and society with economic development is through what he calls "embedded economy". It is widely acknowledged that government policies can be a decisive factor in the growth experience of developmental states and connections between state and social groups as defined by "embeddedness" is necessary for their existence. He characterizes India as an intermediate state where lack of bureaucratic capacity and corporate coherence makes growth experience undependable due to its clientelist network resulting in sudden change in policies.

Kohli’s definition of the developmental state is a state that has this general power of disciplining, and he focuses primarily on the disciplining of labour. According to Kohli, the Indian state during planning was not a developmental state because its ‘socialism’ meant a commitment to labour that prevented the full development of capitalism. The withdrawal of socialism and the emergence of a more pro-business state in the 1980s was according to Kohli the emergence of a more ‘developmental’ state in India, and this explains the higher growth.

The implication of Kohli’s position is that a sustained shift towards capital and against labour will ensure pro-capitalist policies that will sustain growth. The problem with Kohli’s view of the developmental state is that it lacks any analysis of the contracting failures the state has to address, and if learning is an important problem, the issue is how to devise financing for learning that can impose discipline on capital has argued that Japanese colonial control in Korea was crucial in destroying the last remnants of the traditional predatory state and laying the foundations not of a western-style regulatory state, but of a Japanese-style developmental state. They structured the nucleus of the administration, both under the American occupation and after the independent state of South Korea where the Japanese presided over a rapid growth in the size of the bureaucracy in Korea, and although more than half the establishment consisted of Japanese expatriates, a substantial number of Koreans were also employed. . In the three decades after the end of the Pacific war, the dramatic economic success of both Japan and it two former colonies led to the evolution of another view of the role of government in the development process, that of the 'developmental' state. [7] 

We have to keep in mind that politics in the two countries in concern, India and Pakistan is dominated by the competition between very large numbers of clientelist political organizations, each composed of many sub-organizations or factions organized by individual leaders. Political parties are composed of large numbers of smaller clientelist political organizations that come together often in very opportunistic ways (so opportunistic that all South Asian countries have constitutional limits on ‘crossing the floor’ in parliament). In all countries, political stability requires redistribution to powerful classes and groups who have organizational power. If powerful groups do not achieve redistribution through the political mechanism, they can disrupt political stability, and ultimately form an alternative coalition to replace the current ruling group or government. In advanced countries, as much as 35-50% of GDP is redistributed through the budget. However, in developing countries including the Indian subcontinent, the tax share in GDP in the 1960s was around 10-15% meaning little is available for redistribution through the budget. Significance of this being that redistribution to powerful groups and classes often comes from off-budget sources, for instance the granting of government contracts, the overlooking of corruption and theft and the discretionary allocation or appropriation of public resources. This type of analysis can explain the fluidity of ideological affiliations of individuals and groups in Pakistan and Bangladesh.

Acceleration of growth in post-colonial Pakistan and Bangladesh was slow but its starting point was much poorer and growth in industry and manufacturing was faster than and India due to lack of institutions and structure. The paradox of development in these two countries was partly due to the fact that low-wage economies often have high unit costs of production, demonstrating the importance of missing organizational capabilities that are essential for raising firm-level productivity. Pakistani planners relied less on licensing. Initial level of industry was much lower and the priority was to set up new industrial sectors through the Pakistan Industrial Development Corporation (PIDC) by absorbing the risk of setting up new industries for eventual divestment to entrepreneurs. Savings were raised by consumption repression through overvalued exchange rates and learning was organized through export subsidies (the Bonus Voucher scheme of the early 1960s) and the protection of domestic markets.

In both countries, savings and investment rates went up as licensing and protection discouraged consumption and increased investment in new sectors. Government planning attempted to address the coordination problem to some extent, contracting failures of discovery and learning were being addressed by these strategies. However, South Asian industrial policies did not take off in the way they did in East Asia, and by the 1980s, these countries had abandoned their interventionist policies. In both countries the subsidization of learning strategies resulted in the rapid growth of investment in new sectors and some capability development but both countries failed to discipline subsidy recipients and infant industry strategies eventually became unviable.

In Pakistan, by the mid-1960s there were major mobilizations against crony capitalists and criticisms of the violations of conditions, non-repayment of bank loans. The problem was not ignorance but the political inability to take action and discipline subsidy recipients. Kohli argues that East Asia was different because Japanese colonialism wiped out social resistance to the state and allowed an autonomous state to emerge. However, the middle class was not absent in South Korea it was just differently organized. Moreover, Kohli misrepresents the developmental state as ‘autonomous’. No state is truly autonomous, what matters, is how it works with different social classes and groups and whether policy can be disciplined.

This argument is not convincing because import-substitution could also result in a collective desire for efficiency if the government could credibly commit to reducing tariff barriers over time where capitalists would then be concerned about the poor quality of inputs from other capitalists. The real failure seems to be the permanence of the support, not its type like import substitution and unlike South East Asia where support came with conditions.

This argument is further strengthened when we look at Pakistan which was export-oriented (unlike India) but here the export subsidies were permanent and therefore there was little effect on the compulsions for effort. Alternative explanation is that there were many powerful political coalitions in India and capitalists could easily ‘purchase’ one or more organizations to provide protection for their individual rents. This political condition simply did not exist in East Asia for a long time. Kohli is among those who have provided a political economy explanation of Indian growth with an emphasis on the conditions that allow the state to enforce disciplined economic policies and this is a partial explanation because capitalists on their own were not strong enough in either India or South Korea to be able to ensure disciplining based on their support.

However, it is true that in India and Pakistan the state was unable to discipline capitalists, but I have argued this is not because capitalists on their own were strong and lacked the incentive to support disciplining, but rather because in South Asia they could form coalitions with powerful political organizations to protect their rents. Kohli’s focus on the colonial heritage is important but for somewhat different reasons compared to the ones Kohli identified that Japanese colonialism destroyed pre-existing elites and created a strong state that could discipline all social classes. A shift towards business interests will on its own not ensure this, and could simply mean that business can capture easy rents by cornering markets or getting cronyistic contracts, as is happening in India today.

However, what is interesting about Kohli’s analysis is that it helps us to trace the origins of the evolution of the South Asian political settlement to the colonial impact of the accelerated emergence of competitive clientelism that can be traced to that impact. Disciplining of the learning process is difficult not because of regulations protecting labor but because politics allows subsidy recipients (management) to protect themselves from disciplining.

Ishrat Hossain compiles the problems of these two countries in the following statement;

"The weaknesses in governance in the legal and judicial system, poor enforcement of private property rights and contracts, preponderance of discretionary government rules and regulations and lack of transparency in decision making act as brakes on broad-based participation and sharing of benefits by the majority of the population." [8] 

Overall development in both India and Pakistan fares mixed results with common problems like inherited legacy of control minded government, a rent seeking private sector and poor economic management. While India fared better in export growth rate, Pakistan made greater progress in privatization and attracting FDI. The interpretation of Alavi’s oligarchy, Evans predatory and intermediate state or Kohli’s developmental state to me does not sufficiently explain the state society relation in India and Pakistan. India was not a capitalist economy; it did not have a state that was strongly supporting capitalists and the capitalist sector did not dominate the economy. Nor was it fully socialist. It was an intermediate economy based on private property and to some extent on the market that was following a ‘non-capitalist’ path of development. Middle classes that includes rich peasants, middle peasants, the urban petty-bourgeoisie, the professionals, the broader educated ‘middle class’ and the educated unemployed developed in the colonial times were not only politically powerful but also economically dominant because these countries had a production system where the middle classes played a controlling role in the economy and this class acted collectively to protect and further their class interests. Indian state did not follow policies that favoured these classes. And this characterizes the heart of the clientelist political economy that characterizes these two influential countries of South Asia.

I find these countries to be unique in their development trajectory sharing their colonial experience followed by a very uneasy relationship and characterized by a set of paradoxes since the five decades of their independence. Though the shared envy, admiration, rivalry and proximity makes it difficult to objectively asses their politics and policies it seems clear to me that following the colonial state will ensure their positions as periphery states as intended by the colonial state as stated by Terry Eagleton and never be able to become developed states.