Anthony Gokianluy

PLSC 20716 Memo 3

The degree of state management or action in the economic growth of late developing countries is a matter of great debate. Robert Wade considers Taiwan and South Korea as cases where active government regulation was beneficial for economic growth and transformation. Chaudhry, Evans, and Gerschenkron argue that while state action is important in economic development and industrialization especially at an institutional or beaurocratic level, unproductive rent-seeking and institutional weaknesses of the state can impede a developing country. By comparing all analyses, I argue that government regulations can promote economic growth; however, the state must be supported by the requisite social and political institutions in the period of economic adjustment. For many countries, the capital needed for industrialization was obtained through government regulationsthe compulsory machinery of the government, which through its taxation policies, succeeded in directing incomes from consumption to investment (Gerschenkron, p.20). Without the government acting as a central redistributive financial body, the growth of industries with the most economic potential may not have been realized. In a similar way, Wade sees the control of certain national governments on trade and economic expansion as highly beneficial. Taiwans development was attributed to strong government management and effective institutional support from within the core economic beaurocracy and from external monitoring entities. The success of Taiwan supports the notion that the East Asian cases that were most successful in implementing programs of industrial transformation have also been most successful at dealing with issues of adjustment (Evans, p.142). As Taiwan grew economically, implementation of regulations on industries promoted balanced trade across international and domestic markets while highly developed organizations surrounding the economic beaurocracy assisted in accurate information gathering and sharing (Wade, p.157). In particular, Taiwans prestigious civil service and outside checks-and-balances on officials eliminated detrimental rent-seeking schemes. Chuadhry, however, recognizes that although the government can reduce transaction costs and act as a source of information, many developing states lack the prerequisite institutional infrastructure and effective regulatory policies that translate to efficient markets. This view provides an interesting comparison to the assertion that government intervention is advantageous for the developing country. From the perspective of Gerschenkron, who studied the industrial revolution of Russia in the early 1900s, successful government initiatives came at a price, noting that the incompetence and corruption of the beaurocracy were greatthe amount of waste that accompanied the process was formidable (Gerschenkron, p.20). Chaudhry supports this observation, writing that at a political level, regulatory institutions employ the political and economic interests of dominant coalitions (Chaudhry, p.247). I thought that this comment was important in the context of young, developing economies where the lack of institutional capacity to properly regulate or enforce rights leads to a possibility of market failure and a loss of capital due to corruption. This situation can be contrasted with the anti-competitive outcomes of a free, unregulated market that includes monopolies or collusion among merchants against consumers. Taiwans economic growth constituted an ideal situation where moderated government regulations expedited economic progress, but it can be argued that an economic growth strategy ultimately depends on the economic and political capacity of a government and its supporting institutions, which are constraints that can vary from country to country. For instance, liberalization packages dramatically increased poverty and skewed income distributions when states failed to implement any social welfare safety nets (Chaudhry, p.263). Governments should take into account limitations and the negative consequences associated with their regulations. Modern economies cannot develop or operate effectively without regulatory national institutions that can control volatile market forces, especially in industries increasingly dominated by international trade.

Anthony Gokianluy

PLSC 20716 Memo 3

Discussion Questions: 1) Both Gerschenkron and Evans (p.144) state that corruption or rent-seeking by officials can be a hindrance to economic development in economically backwards and late developing countries. Gerschenkron (p.20), however, mentions that rent-seeking policies by the government allowed capital to be available for the needs of industrialization. To what extent and under what circumstances is rent-seeking beneficial to a developing economy? Can there be productive rent-seeking? 2) Chaudhry argues that state institutions can reduce transaction costs and free up surpluses but that institutional weaknesses of the state can lead to a failure to create unified national markets and lead to corruption. On the other hand, a lack of government intervention can promote collusion or anti-competitive schemes on the side of the merchants and entrepreneurs (Chaudhry, p.249). Given the economic principles and conditions, would you advocate for increased government intervention or more laissez faire free market policies? 3) From your knowledge of the readings, are global changes in economic production more effective in forcing economic liberalization programs than government regulations?

Government intervention was a special institutional response to economic backwardness (Chaudhry, p.245). It is also possible that aside from poor government regulations, external factors inhibit the government from being effective at its job, globalization of capital also curtails the ability of all governments to tax, regulate, and gather information (Chaudhry, p.259).