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From Truncated Developmental State to Failed State in Latin America

Summary:
I gave a talk last year in Argentina that forced me to think about the notion of the developmental state and its limits for Latin America. I discussed it in Mexico too, and I added a bit more about the notion of failed states, also discussed in my first presentation. This week I presented at Boston University, for the first time for a mostly English speaking audience. This is a brief summary of some of my ideas, based on those presentations.National state formation in Latin America, during the last quarter of the 19th century, in what has been termed in the more conventional literature the 1st globalization, was related to the incorporation of the region in the networks of trade, finance and the migratory flows, in particular in relation to the United Kingdom and the United

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From Truncated Developmental State to Failed State in Latin America

I gave a talk last year in Argentina that forced me to think about the notion of the developmental state and its limits for Latin America. I discussed it in Mexico too, and I added a bit more about the notion of failed states, also discussed in my first presentation. This week I presented at Boston University, for the first time for a mostly English speaking audience. This is a brief summary of some of my ideas, based on those presentations.

National state formation in Latin America, during the last quarter of the 19th century, in what has been termed in the more conventional literature the 1st globalization, was related to the incorporation of the region in the networks of trade, finance and the migratory flows, in particular in relation to the United Kingdom and the United States. On the other hand, the disintegration of the national states in the neoliberal period, starting with the collapse of the so-called Golden Age of Capitalism, is the result of the same necessity to promote the integration of the region in the global economy. Strong or weak state, but with the same objective, to promote the subordinate integration of the region into the global economy. It must be emphasized that it is NOT a Latin American phenomenon, and that the Failed State in the region corresponds to what James Galbraith has called the Predator State in the case of the US, which implies the use of the state to promote the private gains of corporations and the wealthy.


Neoliberalism is NOT a right-wing phenomenon, since the existence of progressive neoliberals, as denominated by Nancy Fraser, referring to left of center, or more appropriately centrists like Clinton and Obama. Right-wing and left-wing populism are to a great degree a reaction to Neoliberalism.

The concept of the developmental state is often used, but seldom analyzed more carefully. The narrative is often associated with the Asian experience in the post-war period, from Japan to China, including in particular South Korea. Conceptually the work of Chalmers Johnson, and his followers (e.g. Amsden, Chang, Evans, and Wade, to cite the most prominent) is central, building on a tradition that harks back to Friedrich List. But the logic of the developmental state is actually related to the American experience, and to the legacy of Alexander Hamilton, who was the inspiration for List, as noted by Cohen and DeLong, discussed here before. In my view, that should be extended to the British case in the 18th century, which was the ultimate inspiration for Hamilton in his 'Report on Manufactures.'

It seems reasonable that what John Brewer called the British Fiscal-Military State  (old post on that here) is the original developmental state. In my view, the central characteristic of the developmental state is its ability to borrow more or less without limit and also without the possibility of default. It is true that the British currency was effectively tied to gold from the early 1700s, but convertibility was suspended in periods of crisis like the Napoleonic Wars. At the core of the developmental state is the ability to spend, without external restrictions. It must have the hegemonic currency, or it must not have a significant shortfall of it.

Charles Tilly famous dictum according to which “war made the state, and the state made war” is correct. It must be complemented by the work by Jan Glete, which extends to the work by Roberts and Parker on the Military Revolution, and the role of a permanent navy and naval warfare in the formation of the state. Nicholas Rodger refers to the Fiscal-Naval State. War matters, but control of the sea matters even more. What is missing in Tilly, and his followers, is the peripheral state, and the relation of the latter with the developmental state. In this case, if we take the Asian case as paradigmatic, we could say that the state lost the war, and the loss made the developmental state.

The developmental state in the periphery appears in the post-war period, with the establishment of American hegemony. The reasons for the collapse of the 1st globalization are complex, but at a deeper level Charles Kindleberger suggested that the roots of the inter-war crisis, including the Great Depression, and the wars too, were associated to the decline of British hegemony and the slow emergence of the American one. But it is not the collapse of the British hegemony, neither the rise to dominance by the United States, that allowed for the appearance of a developmental state in the periphery, and arguably in Latin America too.

The crisis per se opens space for new policies, without a doubt. But it is ultimately the Russian Revolution, and the Cold War, which provides an alternative to capitalism, that opens up space for both alternative policies in the periphery, but additionally for support by the new dominant hegemon in promoting development and lifting the external constraint, that I suggested was at the core of the possibility for a developmental state. In the Asian case, the very existence of the developmental state was to some extent tied to the special relation with the US within the geopolitical situation that included, not only the Soviet Union, but also communist China, North Korea, Vietnam, and the domino theory, according to which Asian economies would fall and become communist if a neighboring country also did. And that is without considering India, Indonesia and the non-aligned movement.

This generated the conditions for an American procurement policy for Asian firms. Daniel Immerwahr argues that Toyota, the firm famous for ‘just-in-time’ or flexible production methods that superseded Fordist mass production, was virtually broke at the beginning of the Korean War. The firm was saved by Pentagon purchases, which guaranteed demand, and the same time that it enforced standards, and transferred technology. In Latin America there was nothing similar to this. Volta Redonda, the first steel mill in Brazil, which depended on US technology transfer and resulted from the US military base in Natal during World War II, would pale in comparison. It was assumed, not completely incorrectly, that our elites would align themselves with the West, and that a communist revolution could not take roots in the region. When it occurred the long and harsh embargo on Cuba was imposed, and a similar one now on Venezuela. Sticks rather than carrots were used in the backyard.

In the case of Latin America, the legacy of the Monroe Doctrine, implied that the benevolent policy referred to as “development by invitation” by Immanuel Wallerstein, following the ideas of Arthur Lewis, was never really a possibility, and revived more recently by Carlos Medeiros and Franklin Serrano.

The limited impact of the developmental state in the region, when compared with the Asian experience, should not be seen as a complete failure. The economies of the region grew relatively fast, and even an incomplete or developmental welfare state was created, as noted by Sonia Draibe and Manuel Riesco. Nor should the debt crisis of the 1980s, which closes the cycle, be seen as the result of state-led industrialization. In fact, it is the debt crisis that leads the region more decisively into neoliberalism, even if neoliberalism had started before with the Southern Cone at the forefront.

What has not been discussed in more detail is the role of the United States opening of China, and the role of development by invitation in Asia for the Latin American periphery. In the case of Latin America the end of the developmental period, and the opening up of China, has gone hand in hand with a reprimarization of production and exports in South America, and with a maquilization – which implies higher dependence on imported components – in Mexico and Central America. The new integration implies a peripheral integration with the Southern periphery. But the decision to open up Asia does not come from Latin America. It is an American decision, based on geopolitical calculations, isolate the Soviet Union, back then, and also to discipline the labor force in the center.

It is in this context that the failed state starts to take a hold in the region. But the failed state, defined broadly as one that is incapable to intervene coherently in the economy, or unable to maintain the monopoly of violence, is by no means a mistake. It is functional and necessary for the integration to the global economy. In contrast to the relatively strong state of the late 19th century needed to integrate our economies to the global markets, now, in the 2nd globalization, a weak state, incapable of defending the rights of the working class, is necessary. In the same sense that American elites abandoned their working class, and have weakened and promoted the destruction of the welfare state institutions, the same has taken place in Latin America, but in more dramatic fashion, since in the region the welfare state was already incomplete or truncated, to use Fernando Fajnzylber’s expression about our industrialization.

The protests in the region, and in the center, have opened the possibility for alternatives to neoliberalism, but it would be a mistake to presume that the latter is dead. In general, when left of center governments manage to get elected they must contend with managing the failed state left by neoliberalism.
Matias Vernengo
Econ Prof at @BucknellU Co-editor of ROKE & Co-Editor in Chief of the New Palgrave Dictionary of Economics

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