Accumulation Models and State Forms in Underdeveloped Capitalism

Vivek Chibber Sociology Department New York University 269 Mercer Street, Room 410 New York, NY 10003 212-998-3541 Vivek.Chibber@nyu.edu

Paper for conference on Politics and the Varieties of Capitalism, Berlin, Oct. 31Nov. 2, 2003. Please do not quote without permission.

The basic insight of the Varieties of Capitalism approach (henceforth VOCA) is that the institutional organization of capitalist economies can vary greatly, and that firms response to competitive pressures differ on this basis of this variation. Different varieties of capitalism thus elicit quite distinct survival strategies from firms, which, in turn, aggregate into macro- level patterns. What this amounts to is an argument that modal types of capitalist markets are associated with corresponding kinds of economic strategies and policy styles. This line of analysis differs from two rival approaches which enjoy some currency today. On one side, it warns against the hyper-structuralism of neoliberals, who employ a one size fits all approach to economic policy. VOCA avers that there is no single policy package which conduces to economic competitiveness. Policy prescriptions have to be crafted to the particular ensemble of institutions which characterize the economy in question, because, depending on the organization, the same package of policies might generate very different responses by firms. On the other hand, VOCA also stands apart from recent constructivist approaches, which sometimes veer toward the argument that the range of options open to firms at any given conjuncture is very wide, enough so to neutralize the notion of structural constraints. VOCA argues that choices are certainly available, but within discernable limits structures matter. The idea, then, is that the varied economic strategies found across capitalisms result from the different kinds of incentive systems that the institutional arrangements set up for firms. But is it also possible to establish that the organization of capitalist production also can be associated with corresponding political arrangements? In particular, is there a correspondence between varieties of capitalism and forms of the state? VOCA would not be the first approach to hazard such a claim. It was central to the ambitions of the structuralist state theory of the 1970s, and has remained so among structuralisms various contemporary avatars. Perhaps its most famous current example is the work being done within the ambit of the French Regulation school and its North American counterpart, the Social Structure of Accumulation approach. Both make the claim that there is an elective affinity between the reigning economic organization of production and its social and political integument. As economic organization changes over time, it creates pressures for appropriate transformations in the political superstructure. In state theory proper, Bob Jessop and some theorists coming out of the German state derivationist school have spent considerable energy arguing that distinct accumulation models select for corresponding state- forms. It would not be stretching the point to say that what binds these approaches is the notion that varieties of capitalism, interpreted appropriately, are associated with their own kinds of state. So the political ambitions of VOCA are not unprecedented. Indeed, in declaring them, it joins a quite thriving line of inquiry. But to achieve success, it must also avoid some of the shortcomings which have haunted its forerunners. Chief among them is the problem of establishing the relevant causal mechanisms which link accumulation strategies to state forms. While the attractiveness of the basic theoretical claims are easy to see, the fact is that, across the board, the arguments regarding state forms have not spent a great deal of effort on hard empirics. The most common stratagem has been a kind of hand-waving exercise, in which some causal process is pointed to which might link states to economic structures but the claim is often

gestural; at worst, as in the case of Poulatzas work, the relation between the two is asserted in an openly functionalist style, simply setting aside the elucidation of mechanisms. I believe that the ambition to establish links between economic dynamics and forms of state can be realized, and I hope to demonstrate that in this paper. The argument fits comfortably within the VOCA frame, though its basic inspiration is Marxian in origin and substance. I will show that indeed, there are causal processes linking economic dynamics (choose your jargon -- accumulation models, production regimes, regimes of accumulation) to variations in state form. Not surprisingly, the processes reside in the decisions of capitalists (firms) thus the compatibility of my argument with VOCA. But in arguing that the institutional structure of the state was constrained and shaped by decisions of capitalists, I also make an argument that sits firmly in the tradition of the structuralist state theory developed by neo-Marxists. It is in this respect that I inject a Marxian flavor to the VOCA agenda. The paper has two aspects which are somewhat unusual in the literature one methodological and one substantive. Methodologically, it cashes out its claims through a detailed historical analysis of the relevant cases, using mainly archival sources. Most of the work done in VOCA abjures historical analysis, and that which does undertake it rarely relies on original sources. But if the problem of establishing the appropriate causal mechanisms is to be overcome, it hard to imagine a better stratagem. Careful historical research is the best way to show the process through which interests are aggregated and then translated, through collective action, to changes in state structure. Archival and manuscript sources, in particular, are indispensable for uncovering the intentions of the relevant actors, within the state or without. Substantively, the paper is unusual because the state form which it takes up is not the one which typically inhabits discussions in VOCA, or any of the other frameworks mentioned above. Research inspired by these approaches has focused almost exclusively on states in the advanced capitalist world; hence, the analyses are, almost without exception, of the welfare state, social democracy, and the like. I focus, instead, on that other great capitalist state form of the twentieth century, viz. the developmental state. There is no reason for VOCA to be restricted to the analysis of social democracy, or advanced industrial economies more generally. That it is so is testimony to two things: the evacuation from developmental studies of much of the theoretical ambition that was visible in the 1970s, so that the field is now taken over by policy-wonk; and secondly, an unfortunate narrowness in what we know as state theory, which, over the years, has comfortably settled upon an ambit that is restricted to Europe and the United States. Of course, there is no warrant for either of these states of affairs. And I hope to show that both camps development specialists and VOCA partisans stand to benefit from bringing the developmental state into the frameworks purview.

The Setting In the second half of the twentieth century, many developing countries launched and sustained ambitious projects of rapid industrialization. By the end of the century, studies of these projects pointed to two facts about them which tended to stand out: first, that the developmental strategy adopted was one in which the state played a central role in

fostering industrial transformation; and second, that despite the constancy of state intervention in industry, its actual success in promoting development turned out to be extremely uneven. While in some countries, most notably South Korea and Taiwan, state efforts at promoting industrialization were a stunning success, in most other cases such strategies led to results ranging from mixed to disastrous. For students of development, this variation in outcomes has become an enticing puzzle. Why were a small number of states successful in initiating a traversal to dynamic industrial growth and efficiency, while others, many of which frequently tried very similar policies, failed? The answer to which many analysts are attracted focuses on the relations between the state and private firms. Alice Amsden has argued forcefully that while the earlier generation of late developers relied heavily on infant industry protection, the post-war attempts at rapid industrialization were built on the ubiquitous subsidy, which included protection plus financial incentives to firms (Amsden 1989: 143-44). The pervasive subsidization of enterprises was justified in a variety of ways, but core idea was that, in a world in which markets were already dominated by firms from advanced industrial countries, and where minimum scales of operation required outlays which were typically beyond the reach of start- up undertakings in poor countries, the state would have to play an active role in nurturing domestic capital in the initial years of industrialization. This role for the state came with the expectation that, with the subsidies in hand, firms would undertake the kinds of investments which could put the domestic economy on a path of high-speed growth. But it soon emerged that firms quite often did not react in the fashion state planners had hoped. In many countries, the easy access to subsidies simply made domestic capitalists ignore the need to upgrade equipment and innovate, choosing to make easy profits from protected markets and cheap finance (Krueger 1990; Krueger 1993). The quite spectacular exception to this trend has been the East Asian Newly Industrializing Countries (hereafter NICs), in which state subsidization has in fact had the virtuous effects that economic planners had intended. Instead of the one-way relation witnessed in South Asia and Latin America, the relation between the state and firms in the East Asian NICs has been one of reciprocity subsidies in exchange for high performance. Alice Amsden has ably summed up the phenomenon, as well as its analytical significance: All governments know that subsidies are most effective when they are based on performance standards. Nevertheless state power to impose such standards, and bureaucratic capability to implement them, vary from country to country The state in Korea, Japan, and Taiwan has been more effective than other lateindustrializing countries because it has had the power to discipline big business. 1 Amsdens verdict has been echoed in a large proportion of the recent research on the developmental state. A host of studies have now documented the particular means employed by Korea and Taiwan to coax, cajole, and persuade local firms to undertake the necessary investments and then perform up to international standards (Amsden 1989;
1

Amsden, Third World Industrialization: Global Fordism or a New Model?, 23-24 for first part of quote; ibid., p. 16 for second part, emphasis added.

Haggard 1990; Wade 1990; Woo 1993) , and compared this to the failure of other states to do the same (see Gereffi and Wyman 1990; Anglade and Fortin 1990; Evans 1995). Indeed, the past decade has seen a virtual avalanche of studies on the components of state capacity in the miracle economies of East Asia in this sense, the state has quite magnificently been brought back in in development studies (see Evans, Ruechemeyer, and Skocpol, 1985). The emerging consensus can be summed up as follows: the East Asian states success in fostering development was at least in part because of their ability to discipline capital, and that this was in turn dependent on state institutional capacity (Schneider 1998; Cheng, Haggard, and Kang 1998; Bardhan 2000). Despite this recognition of the importance of the state for understanding post-war patters of development, it cannot yet be said that we have come anywhere near a genuine sociology of the developmental state. The energy expended on describing the institutional mechanisms through which states were able to impose discipline has not been matched by a comparable effort toward the next, obvious, question, which of central analytical importance: why did some countries find themselves in possession of states with adequate capacity, while others did not? In other words, if better success at industrial policy depends on having more capable state apparatuses, how do we explain the fact that some states were able to install such apparatuses, while others were not (Bardhan 1991: 108-109; Kang 1995: 555)? It is to this question that this paper is devoted. The Argument A genuine sociology of the developmental state needs to explain where such states come from. In this paper, I offer an argument toward this end. My argument rests on two nested claims: first, that that the ability of political elites to build state capacity for industrial policy in the post-war period was heavily conditioned by their autonomy from business classes. I will argue that state-building for industrial policy is a very tricky business, because, under particular conditions, capitalists have good reason to oppose it. And where they do oppose it, it greatly reduces the prospects for building a state with the requisite institutions. On the other hand, where they support it (or are too structurally weak to matter), political elites can gather the autonomy to build such a state. So the first component of the argument is that in the state-building project, a critical mediating factor is the orientation of the capitalist class. Second, I propose a theory of the conditions under which capitalists are likely to oppose, or support, state building. I argue that the central condition is the accumulation model adopted by policy-makers. In the post-war world, two such models dominated the policy agenda: import-substituting industrialization (hereafter ISI) and export-led industrialization (ELI). That the two models have carry different economic incentives for firms has been widely noted (World Bank 1993; Cypher and Dietz 1997); what is less widely appreciated is that these models also bring with them contrasting political incentives for firms with regard to the state-building project. Whereas ELI makes it rational for firms to accommodate, and even ally with, a developmental state, there is reason to expect that ISI will induce them to resist the agenda to build such a state. The first claim is about what kind of state/class relations were necessary for the construction of developmental states, while the second is about the conditions under which the appropriate nexus could be expected to emerge.

The argument is illustrated by a detailed examination of two cases, India and South Korea. Both countries started their development efforts soon after the Second World War, making their experiences largely concurrent; both were at broadly similar levels of industrial development at the start of their post-war trajectories, as shown in Table 1; in both countries, the industrial sector was dominated by a small number of Table 1: Share of Manufacturing and Allied Activities in GNP, India (1950) and Korea (1960-62) Sector Share of GNP Share of GNP India (1950) Korea 1960-62 Manufacturing and 15.4% 17.1% construction Utilities a 1.1% Mining and Quarrying 0.7% 2.0% Total 18.1% 20.2%
a: Included in the figure for Manufacturing Sources: For India, Raymond Goldsmith, The Financial development of India, 1869-1977, (New Haven: Yale University Press, 1977), Table 3.2. For Korea, Edward Mason et al, The Economic and Social Modernization of the Republic of Korea, (Cambridge: Harvard University Press, 1980), Table 1.3.

business houses, which accounted for a disproportionate share of output and investment (Woo 1993: 171; Bardhan 1984: Table 20); in both cases, the policy design was heavily interventionist, relying on extensive government intervention in, and regulation of, the private sector; and in each case, industrial policy was directed by the central government, and nominally concentrated in a few key ministries and agencies. Thus, in both cases, industrial policy was crafted with the needs and the proclivities of capitalist firms in mind. In this respect, the two cases embodied the classic state- led capitalist development strategy that has occupied the attention of recent debates. However, while capitalist planning was central to both endeavors, they diverged sharply in their success: where the Korean state is widely acknowledged to have been a spectacular success in its strategy, its Indian counterpart is now pointed to as the most dramatic case of a failed developmental state in the post-war period (Herring 1999). The Korean state was able to impose discipline on the recipients of its largesse -- indeed, it is seen as the archetypal disciplinary sate whereas Indian planners were famous for their incapacity in this regard. This similarity in basic ambitions, contrasted against the stark difference in capacity to fulfill the ambitions, has attracted the attention of a number of scholars (Evans 1995; Dutt 1994; Sridharan 1993; Chang 1993). In keeping with the general focus of the literature, however, the issue of why the Koreans were able to install a developmental state, and why their Indian counterparts were not, has not been addressed at any length. I will argue that the two cases exemplify the dynamics that I have submitted as central to the building of developmental states. Political elites in both countries were aware that the success of industrial policy depended primarily on the capacity of the state apparatus to formulate and implement policy as required; further, political elites in both countries were committed to building such states. But in India, this project was scuttled by the business class, through a massive campaign launched immediately after independence. In Korea, however, the state-building agenda was aided by the fact that 5

political elites were able to harness leading industrialists to their project, thus escaping the onslaught to which the Indians were exposed. This difference in capitalist classes reaction was in turn, I shall argue, generated by the accumulation models which framed the two countries trajectories: whereas India embarked on a path of ISI, Koreas statebuilding program was coeval with a switch to ELI. The different orientations of the business classes were thus generated by the differing models of development. But before spelling out this argument in more detail, let us clarify what is meant, in this paper, by state capacity. The Elements of State Capacity: For the analysis of state-building, or the building of state capacity, to even get off the ground, we first need an identification of what the concept denotes. Capacity is an instrumental good it is always capacity toward a certain end, or capacity for something (Weiss 1998). In this case, our interest is in the ability of the state to accelerate industrial transformation by disciplining capital that is, by ensuring that firms, in exchange for the subsidies meted out to them, reciprocate by meeting competitive standards of performance. In the rest of this paper, I shall refer to such development policy as disciplinary planning, or disciplinary industrial policy, to distinguish it from planning, or industrial policy, without such capacity. What are the institutions which can enhance the states ability to achieve this end? The existing literature has stressed two basic imperatives. First, if planners are to hold firms to certain performance standards, they need, at the very least, to have the ability to communicate these standards to them, and have the means to monitor firms subsequent actions (Schneider 1998; Aoki et al 1997; Evans 1995). One mechanism which several scholars have pointed to as a means toward this end is the trade or industry association. Such associations have served as a critical conduit between state policy agencies and individual firms, in several developing countries; in East Asia, as well as in some countries in Latin America, they were instrumental in collecting firm- level information for planners, which in turn was critical to the formation of realistic performance targets (Evans 1995). Associations were actually given, in corporatist fashion, the right to bargain with the state on behalf of individual firms; in turn, they had the responsibility to pressure the latter to conform to economic agreements (Wade 1990; Fields 1995). Further, sectoral associations were used to arrange collective action, by organizing firms into cartels or more informally, through coordinating investment decisions (Noble 1999; Park 1987). Institutions of this sort, which enabled states to communicate and bargain with targeted firms, greatly enhanced the formers institutional capacity. Simply being able to communicate with economic actors cannot, however, is not enough if states are to extract performance in a growth-enhancing fashion. Policy makers must also be able to coordinate flows of information within the state both from the disparate sectoral committees, and back to them to construct a policy frame that is coherent and consistent. In the absence of some coordinating mechanism, it is easy for administrative bodies to degenerate into independent fiefdoms; in such an eventuality, the positive impact of sectoral bodies of the kind just outlined is greatly reduced. Much of the recent literature therefore points to the importance of installing a nodal agency, or pilot agency, which is given the authority to coordinate the functioning of the economic agencies within the state (Schneider 1991; Woo 1993; Weiss 1998; Maxfield and

Schneider 1995). Korea is the exemplar in this regard, with the centralization of power in the Economic Planning Board, which acted as the nodal agency for industrial policy for a significant period (Kuznets 1990; Choue 1988; Amsden 1989); the historical model for this role, however, was the legendary MITI in Japan, which was brought to center stage in the West in Chalmers Johnsons well-known study (Johnson 1982). Together, these two institutional mechanisms increase the states capacity to carry out two functions critical for disciplinary development policy: monitoring targeted firms, and ensuring that relevant information is processed into coherent and effective policy. The rest of the paper is divided into two main parts. First, I explore and defend in more detail the theoretical claims being made: that the installation of a developmental state hinges on the reactions of the business class, and that this reaction is itself predicated on the accumulation model that is adopted. Second, I present an analysis of the two cases, showing how the state-building agenda was mediated by the autonomy of political elites from their capitalist classes. In so doing, I hope to not only offer an explanation for why two well-known cases diverged in their outcomes, but more importantly, I hope to develop a framework which can be extended to the study of other developmental states. Capitalist Class Interests and the Developmental State The Two Sides of Industrial Policy: Among aspiring developmental states in the post-war world there was a basic consensus around one basic point: that development would have to rest on a dynamic industrial sector, and that this sector could not flourish without active assistance from the state. Industrial policy in these countries therefore naturally took the form of an alliance of sorts between political elites and bureaucrats on one side, and local firms on the other; in some cases the alliance came to include foreign capital as well (Evans 1979), but the more basic point is that it was simply taken as given that development would not be left to the vagaries of market outcomes alone. Industrialization was, in this sense, a joint project between the state and private capital, as Peter Evans has recently noted (Evans 1995). But, as suggested in the preceding section, the very act of aiding industry by subsidizing it in various ways brings with it the imperative of ensuring that funds do not fritter away the funds on unproductive activities, or those with low social returns. The need for discipline arises from the fact that, while the state can assist local industry and offer it incentives to invest in sectors deemed necessary for rapid development, ultimate control over investment remains in private hands. How funds are used, whether they are in fact invested in targeted sectors, and just as importantly, how efficiently they are utilized, is at the discretion of individual capitalists (Milor 1994). And there is no reason to assume that the latter will in fact abide by the directives of policy, or the agreements reached with state planning agencies. 2 The state therefore has to take it upon itself to
2

This was clearly recognized by advocates of industrial policy in the developing world. It was common, therefore, for them to advocate that industries so targeted also be subjected to government regulation of various sorts; in the case of tariffs, it was also recognized that they could turn into sops for domestic capital if they became permanent, making it imperative that the state credibly withdraw it protection after a stipulated period. For examples of such advice in the Indian case, see the recommendations of the National

monitor firms in some way, and find means of holding them accountable, either through moral suasion, or through punitive measures. 3 While the imposition of discipline might appear as a virtue to the state, the capacity to actually impose it is not automatic. This requires the existence institutions adequate to the task, and there is no reason to suppose that they will actually be available. This would be true for any state, including those of developed industrial countries. For example, it has been argued that the British decision to opt for Keynesian demand management instead of French-style industrial policy after World War II was driven by the British states lacking the machinery for the task (Hall 1986; Zysman 1983). If such dilemmas were not uncommon to the developed world, they were even more severe for developing countries in the aftermath of the War; many of them were emerging from a long period of colonial rule, in which the states that had been constructed were geared toward extractive activities and political order, not industrial planning. The institutions for industrial policy, and especially those for monitoring and disciplining capital, had to be built. This means that in the post-war world, the situation confronting state managers in developing countries was this: that the commitment to subsidizing domestic capital was taken as binding, while the ability to extract adequate performance from them was limited, and its further acquisition dependent on building adequate state capacity. Now consider that for domestic capitalists, the prospect of being confronted with a state that wielded such power if the institution-building agenda came to fruition could not be viewed with equanimity. Even under the best of conditions, with a state run by elites that were ideologically acceptable, not corrupt, and minimally efficient, the imposition of disciplinary industrial policy carried certain objectionable consequences. At the very least, it meant that the government would take it as its prerogative to influence firms investment decisions. This influence could be exerted through incentives, but it could also be coercive as in cases of state- imposed mergers in Korea, or arm-twisting managers into expanding into particular sectors (Amsden 1989: 15-16; Song 1990: 102, 145; Kang 1996: 130). Further, the states monitoring of firms meant having to deal with an intrusive bureaucracy, and the there was no getting around the fact that the monitoring was to ensure that firms complied with conditions which they may prefer to circumvent. This means that, in examining the dynamics governing the construction of developmental states, there is no reason to assume that the consensus around industrialization need have carried over into its disciplinary components. Capitalists certainly stood to benefit from a developmental state, insofar as the latter would accelerate their growth in myriad ways. But its disciplinary component mean that they also faced the prospect, minimally, of untold irritations from the very same state, which, if circumstances changed and a less agreeable political elite came to power, could even be used against them. 4 This means that local business leaders could tilt against the statePlanning Committee (Indian National Congress 1940) and by K.T. Shah, one of the moving spirits behind planning in India (Shah 1948). For worries about tariffs, see the Report of the Fiscal Commission (1950). 3 None of this is to deny that the development process is a kind of partnership, or joint project, between the state and capitalists. Partnerships are often based on contractual agreements, and are subject to their observation by the parties involved. The imposition of discipline on firms is tantamount to ensuring that they abide by the terms on which the joint project was initiated. 4 For a general discussion of business distrust of the state, see Vogel (1978). The distrust that industrialists have of a developmental state should be seen as a variant of the more general distrust that Vogel describes.

building project for quite rational reasons, opposing the initiative to install the institutions that would make disciplinary policy possible. What makes this especially significant, of course, is that domestic capitalists are not just any constituency; because of their control over investment and their wealth, they occupy a position of power and privilege enough for their opposition to the state-building agenda to impose especially severe obstacles on state managers. With such opposition, the end result could very well be a state which doled out subsidies, but lacked the ability to monitor and punish firms. The issue then becomes: is it possible to identify the mechanisms which govern which way the domestic business class would tilt toward the building of a developmental state or against it? It is the argument of this paper that the orientation of domestic capitalists in developing countries was not random, and that it was crucially conditioned by the governing accumulation model. In the next section, I will present an argument as to how the two dominant models in the post war period ISI and ELI differed, and how they generated different incentive structures for capitalists in relation to the state-building project.

The Politics of Accumulationt Models: Recent arguments have stressed the fact that post-war industrialization among late-developers was, in many ways, a joint project between states and capitalists. In the preceding section, I argued at a fairly general level that the industrialization drive was indeed a joint project, but I also suggested that there is no reason to presume that the consensus extended to all of its aspects. More specifically, there is no reason to presume that capitalists would embrace the disciplinary components of state- led development, which means that they could very well oppose the move build state institutions adequate to this task. In this section I proceed to provide more concrete arguments about the conditions under which we should expect that industrialists would oppose building a disciplinary state, and also those conditions under which they might support it. The Incentive Structure of ISI: Why should import-substituting industrialization generate incentives to resist the disciplinary side of the state-building project? There are two facts about ISI strategies that are relevant here: the nature of their economic benefits to domestic firms, and the general market conditions in which they are implemented. At the core of ISI was the doctrine of infant industry protection, which aimed to nurture domestic business undertakings to ready them for the rigors of the world market (Irwin 1996; Waterbury 1999). This had two sides to it. On the one hand was protection from foreign competition, through the erection of tariff barriers, quantitative restrictions on imports, and other such measures. These were intended to create a space for the products of local capitalists, which would, it was felt, not otherwise survive long enough to mature. The second side of infant-industry protection was the funneling of public funds to local firms often the same ones that enjoyed protection as subsidies, incentives, credit, and the like (Cypher and Dietz 1997). This second component was not only intended to assist firms in their investments and growth, although that was certainly an important motivation. It was also driven by another conviction, viz. that the kinds of investments which were required for development would not be taken up spontaneously

by domestic firms. The latter were more prone to venture into sectors which offered quick and high returns, like luxury consumer goods; but future development would require investment in projects which, initially, would not render high yields and carried greater risks (see Ray 1998, Chapter 5). Private capital was to be drawn to these sectors by the offer of considerable subsidies and safe markets. But another consequence of this model was that it also typically generated a monopoly or oligopoly in the sectors targeted for growth. The first step toward this was, of course, the insulation from international competition (Bhagawati 1988; Bhagwati and Desai 1970). But competition among domestic producers was also attenuated, because of two factors. First, the small size of the market meant that it was easy for the first entrant to secure a dominant position. Since market and product diversification was still very narrow, there was a direct benefit of being the first mover into new areas and establishing market control. This would not be the case, of course, if each producer was very small, as in neoclassical models. But the fact about late developers is that firms are in fact quite often very large, part of larger conglomerates, and can easily establish control over a considerable portion of the market (Leff 1978). 5 A second route to monopoly or oligopoly was that policy- makers themselves intentionally limited the number of producers in each sector, for fear of allowing over- investment and hence idle capacity. In a developing country, with its severe constraints, planner often saw excess capacity as an unconscionable waste of precious resources. These economic consequences of ISI have been recognized by development theorists; what has not been adequately appreciated are its political consequences, particularly with regard to the project of building disciplinary developmental states. The intention of political elites and economic planners in these countries was to offer local industrialists safe profit- making opportunities, but to also regulate and monitor the flow of capital, to ensure it went into targeted areas and that it was used efficiently. Investment licenses and credit agreements were therefore typically granted with certain conditions attached to them, which stipulated the sector in which investment was to occur, the scale of operations, etc. The agreements were, to the policy agencies, a kind of contract. But for the recipients of the largesse, there was ample reason to resist the terms of these contracts. While state policy agencies granted subsidies to firms on the basis of a development plan with particular priorities, business houses made their own investment plans, based on their prognoses and their priorities which often did not coincide with those of planners (Chandrasekhar [1994]; Ghosh 1974). Domestic industrialists rightly saw ISI as a tremendous opportunity for growth and profits, because of the sectors being literally handed over to them free of international competition. But for this very reason, they also regarded the disciplinary component of ISI as an unacceptable encumbrance; in order to exploit their opportunities fully, firms would need maximum latitude to make their own decisions as to which sectors they would expand into, whe re new investments would be made. The best way to use ISI was to encourage the states commitment to subsidies, while insisting that private capital should have the maximum latitude in their actual disposition. Again, this was all the more attractive because of the highly diversified character of many business houses. Funds given by the state for one project
5

The significance of the industrial group has been emphasized repeatedly by Alice Amsden in her work. See Amsden (1989: Chapter 5; Amsden 1997).

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could easily be diverted to other, more attractive projects being taken up by an enterprise in the business group if the group could escape the states monitoring apparatus ( See GOI 1967). Capitalists therefore had an interest supporting the subsidizing side of ISI, while strenuously opposing the states power to regulate and monitor the flow and utilization of investment. This has a direct bearing on business groups orientation toward the state-building project. Since their preference is for the state to offer up its assistance, but without the right, or the ability, to make demands on them, firms will have an incentive to oppose the project of building a disciplinary planning apparatus. This is not to say that they will oppose state intervention in the economy; after all, the offer of subsidies and protection can hardly be regarded an instance of laissez faire. The opposition will be to a particular kind of intervention, one which seeks to regulate the flow and disposition of investment. The political consequences of ISI, therefore, are that capitalists will support the idea of planning as state subsidization of industry, but not the project of building the institutional basis for a disciplinary planning regime. They will support building the means to mobilize and distribute funds to the private sector, but oppose the states moves to monitor and regulate their use. The critical factor underlying this resistance to discipline is the attenuation of competitive pressures in ISI. It may be wondered why firms would resent demands made by the state to perform at competitive standards, which, in many respects, is certainly in their interests. The reason is that, with the entry of international competitors blocked by protectionist measures, and with internal competition muted owing to the small size of the market, firms are under no systematic pressure to constantly upgrade their operations (Krueger 1993). 6 With each influx of newly acquired credit, managers do not feel compelled to increase the efficiency of existing undertakings, since there is no imminent threat of losing market share. Instead, as long as their market positions are secure, there is an incentive to enter new lines, new market niches, as first movers and secure a dominant position. The states insistence on operating at certain warranted levels of efficiency are thus resisted, in favor of diversifying their position into new, lucrative fields (See Chandrashekhar 1994; Sheahan 1987: 86-93). 7 The way in which ISI thus generates a peculiar political incentive structure for firms can be better appreciated if we turn now to the political consequences of export- led industrializatio n. The Incentive Structure of ELI: Most developing countries in the aftermath of the Second World War resorted to ISI as the nucleus of their development strategy (Waterbury 1999). But starting in the late 1950s, and especially in the early 1960s, many countries began placing a greater emphasis on exports in their economic policies; and in a very few cases, this push for export promotion was carried further, so that exports came to occupy the strategic core of

This is of course the most well-known criticism of ISI. Examples can be found in just about any introductory textbook on development economics. 7 Note that the claim being made is that firms lack a direct reason to be efficient, not that they actually have an incentive to be inefficient. If they do not favor alternative lines for expansion, they may very well choose to use the state subsidies as directed, and increase efficiency.

11

the development policy. 8 This was the case most famously in Korea and Taiwan, which are rightly considered the exemplars of an export- led path of industrialization (World Bank 1993). It is important to note that the turn to ELI was not symptomatic of a broader commitment to an open trade regime, as some earlier commentators suggested. The turn to ELI was not tantamount to the adoption of free trade. Indeed, in Korea, imports continued to be subject to strict controls, and the domestic market carefully protected (Luedde-Nuerath, 1986; Wade 1993). Nevertheless, exports grew at phenomenal rates in the decades starting in the 1960s, until they accounted for a substantial part of the domestic economy. Further, aside from the quantitative importance of exports, they exercised a critical qualitative impact on the economy, as the regime used export success by firms as a condition for access to further subsidies (World Bank 1993; Kim and Leipziger 1993; Rhee, Ross-Larson, and Purcell 1984). Unlike the case of ISI, where investment plans of local firms were shaped by the easy opportunities of the domestic market, firms in ELI had to adapt to the rigors of international competition. And from this difference in economic challenges came the difference in political incentive structures. Recall that the resort to import controls and protection across the developing world including Korea came because of the apprehension that competitors from more advanced economies would decimate local producers. If local firms cold not be expected to withstand international competition at home, they hardly stood a chance as exporters to the markets of the industrialized countries. Indeed, the difficulty of entry and survival there would be even greater. First, they have to secure funds to make the make the minimum scales of investment individually; but a more important obstacle was that these investment would have to be in technologies with which the firms had no experience and training; and worse yet, any given investment would typically require complementary investment by other firms, either upstream or downstream, if it was to bear fruit (Ray 1996: Chapter 5; Matsuyama 1996). In addition to these obstacles related to investment, there was also the overhead cost of establishing marketing and sales networks in count ries where the firms had no history of success (see Lall 1991; Gereffi 1996). Success thus involved overcoming the paucity of funds, acquiring and mastering new technology, solving the problem of investment coordination, and gathering the information and contacts needed for marketing. Now, these are problems that are present in any capitalist market, whether local or external. What made it pressing and forbidding for exporters, however, was that these conditions had to be secured in a context of intense competition with producers who had access to far greater funds, who not only had experience with new technology but had in fact developed it, and who had a massive advantage in sales networks. This placed severe pressure on exporting firms to not only solve the problems just outlined, but to do so rapidly, and on a continuing basis. The severity of these conditions makes for a different kind of relation with the state, as compared with ISI. First, state managers now have far greater leverage against firms, since the latter must depend on the former to solve many of the problems just mentioned. So long as firms are willing to hazard the export market, and hence must
8

This difference between an emphasis on exports and bringing them to the core of development policy is captured by the distinction between export promotion and export-led strategy. See Cypher and Dietz (1997: 318-319).

12

survive in that market, they have to depend on the state to provide a steady stream of finance, help acquire and unpack technology and its attendant supports, establish sales and marketing networks, and perhaps most importantly, to coordinate investment in complementary lines. This gives state managers the bargaining power to make demands on firms in return for the subsidization and support that they provide. But just as crucial is a second aspect of the state-business relation: under ELI, not only does the states role assume greater importance, but there is a greater incentive for firms to comply with state managers demands for performance. Under ISI, the ability of firms to secure dominant positions in particular lines and deter entry in them tends to sever the link between high profits and efficient production; businesses can take loans or credits granted for a particular project and divert them to other lines, with no great worry about losing market share. But when they have to perform in the more competitive external markets, there is a direct incentive to adhere to the states demands for increasing the efficiency of production in a line, because the firms survival in that line depends in steadily increasing its productivity. It is this second effect of ELI that most sharply distinguishes its incentive structure from ISI. In both models, the state provides firms with assistance and support; in both models, it demands in return certain standards of performance, as a conditionality of that support. But in pure import-substituting regimes, the economic environment gives firms an incentive to take the subsidies offered by the state, while rejecting its prerogative to regulate their flow and the utilization. Hence, firms will also have a political incentive to resist the agenda to build a state with the institutional capacity to impose disciplinary industrial policy. In ELI, however, because of the greater competitive pressure, firms have a greater reason to take the subsidies, and then to channel them into upgrading productive efficiency. Further yet, they have an interest in having a state that has the capacity to effectively coordinate and monitor investment, in order to more ably assist their expansion into external markets. The upshot is that in export- led strategies, capitalists have no reason to oppose the project of building a disciplinary developmental state; indeed, they have good reason to support it. Different accumulation models thus generate correspondingly different incentive structures for capitalists, and these incentive structures in turn generate contrasting orientations toward the state-building project. The rest of this paper is devoted to demonstrating this argument through an examination of the Indian and Korean cases. The two cases are examined with a focus on the critical junctures during which the instruments for industrial planning and policy were installed (see Collier and Collier, 1992). In India, this was the period immediately following independence, comprising the years 1946-1951; most of the key institutions, and all of the relevant legislation, for stateled development were put in place during these years. For Korea, the relevant period is 1960-1965, when the authoritarian rule of Park Chung Hee was established, and Korea turned to a state- led policy of ELI. THE CAPITALIST CLASS AND STATE-BUILDING IN INDIA The Indian National Congress (hereafter INC), committed itself to import substitution and the subsidization of domestic capital more than a decade before the departure of the British (Chattopadhyay 1985: Chapter 3). This commitment was

13

amplified by the leading lights of the Indian business class a few years later, when the five most well-known industrialists in the country published a call for a mixed economy and industrial planning to be the guiding principles for policy after independence (Thakurdas et. al, 1944-45). As independence approached, the leadership of the INC met with leading industry representatives in several organized forums to discuss concretely the modalities of assistance, its sectoral composition, and its parameters. 9 By the time of the British departure, the commitment to ISI as the basic structuring principle for industrial development was complete. 10 It is important to note that the idea of a close, working partnership between the state and capital was in place as a structuring principle long before any concrete development plans were drawn up for future policy. In this, the Sub-Continent was no different from any other developing region in the world, where, since the Great Depression, programs of import-substitut ion had been underway, and then got more deeply entrenched during World War II (Bulmer-Thomas 1994; Bethell 1998). National development was taken to be synonymous with industrialization, and insofar as it was to be carried out within a capitalist framework, the state was obliged to assist industrialists in whatever way it could. Hence, Indian capitalists could simply take it for granted that, whatever else may come, state subsidization of private firms was not to be questioned. 11 But if state assistance was virtually guaranteed, the threat of international competition was to be greatly attenuated, and domestic markets dominated by oligopolies or monopolies, then the pressure of continually upgrade plant and equipment was correspondingly lessened; and if this was so, then why tolerate a state which would attempt to enforce such performance standards with all the attendant intrusiveness, red tape, controls, etc.? As we shall see, the demands of the Indian capitalist class embodied this reasoning.

The Instruments for Development Planning: With the general vision of future development in place, the focus shifted to issues of implementation. In the years immediately before and after 1947, there emerged a consensus of sorts within the top level of the bureaucracy and the INCs own intellectuals on the instruments for industrial policy in the new order. At the core of the new set- up was to be a Planning Commission, which would be given broad charge of devising and coordinating industrial policy (Governme nt of India: 1947; Shah: 1948). The precise
9

The first such forum was the National Planning Committee, formed in 1938 and formally disbanded after the War, though it really became inactive by 1941. This was a body comprised mainly by INC leaders and businessmen, which mapped the contours of industrial policy for post-independence India; the National Planning Committee passed the baton to the Advisory Planning Board in 1945-46, which, like the former, which had a composition similar to that of the former, but now with a bureaucratic presence added on. Both bodies announced a firm commitment to state subsidization of industry. For details, see Chattopadhyay (1985) and Chibber (1999a). 10 This was given its most explicit sanction in the publication of the Fiscal Commission Report in 1950, which called for the establishment of a permanent Tariff Commission to investigate the degree of protection and support that would be granted to particular industries (GOI 1950). 11 It is worth noting here that there was no question at all of abolishing private ownership. Despite the lipservice to Indian socialism in Party organs of the time, the top leadership of the INC was steadfastly committed to a capitalist framework of development. Even Nehru, the erstwhile socialist, had come to this position a full decade before Independence. See Chattopadhyay (1985: Chapters 2 and 3).

14

powers of the Commission were not delineated at this stage, but the gist of the discussions was in the direction of granting it considerable power. That this would be so in the formulation of economic plans was not surprising: such a role has been the guiding motivation for planning bodies across the world. What was perhaps more significant was that, in the initial proposals, the Commission was also seen as occupying center stage in the implementation of policy (Shah: 1948). Most crucially, this included the authority to make allocative decisions with respect to scarce resources being handed out to firms; it was the Planning Commission that would be given final charge of this responsibility within the state. Hence, at this stage, a powerful Planning body in the range of the Economic Planning Board in Korea -- was very much on the cards. The Planning Commission was to be the nodal authority for the execution of industrial planning. The central task of this body was to ensure that the flow of investment both public and private was in directions which would conduce to ongoing economic development. For this it was to be given instruments with which it could steer such investments. For influencing flows of private capital, a variety of inducements were to be used which raised the profitability of targeted sectors the offer of protection, cheap credit, foreign exchange for importing inputs, etc (Jalan 1991; Hansen 1965). For ensuring that flows into these sectors did not become excessive, the main instrument was to be a law mandating that all new industrial undertakings would have to obtain a license from the government (Marathe 1986). The two were to work in tandem: one set of measures raised the attractiveness of targeted sectors, while the licensing policy allowed the authorities to act as gatekeeper, ensuring that only those firms were allowed to enter which were deemed appropriate (Milor 1995). The key to this policy, however, lay in a third component, which was the power to monitor firms and punish them if, in exchange for the guarantee of high profits, they did not utilize the resources efficiently. From the very first drafts of the legislation relevant to industrial policy, planners and Congress intellectuals as well as many in the political leadership insisted that without the power to impose discipline on firms, the state would leave itself open to abuse by the recipients of largesse . 12 Hence, in the proposed legislation, recipients of investment licenses were to be subject to inspection by state functionaries, their performance monitored through periodic reports, and liable to having licenses withdrawn if performance was not judged up to standard (GOI: 1949). Industrial licenses were thus viewed very much as contractual agreements, in which firms were granted scarce resources conditional on their efficient and effective use. Where firms were seen to be reneging on this agreement, the state arrogated to itself the right to intervene. All this is to say that, at the time of Independence, the idea for a developmental state, with power not only to assist capital but also to discipline it, was very much on the agenda. Indian capitalists could take as given the states commitment to subsidize their further development; but this subsidization could either be carried out by a state with the institutional capacity to monitor and regulate their investment decisions, or by a state which lacked the means to do so. At this stage, policy elites had only announced their intentions to build such a state, for they did not inherit the appropriate institutions from
12

See Legislation for the regulation of certain industries by the Central government, by S. Bhoothalingam, Joint Secretary to the Industry Ministry, in File I(4)/1(9)/48, Records of the Department of Industrial Policy and Promotion (DIPP), Industry Ministry, Udyog Bhavan, New Delhi.

15

the British. In the next section, we examine the dynamics surrounding the INCs attempts to install the institutions for disciplinary planning. The Business Attack: The INCs commitment to some kind of state- led model of development was, as the previous section showed, established long before it actually came to power. On this issue it also had the strong support of the domestic business class, which considered state intervention in industry not only inevitable, but also in large measure necessary (Thakurdass et al, 1944-45). It was widely recognized that the private sector could not develop at the desired rate without the assistance of public resources. What was not yet decided, and what was the object of sharp differences, was the terms on which these resources would be forthcoming. This was clearly recognized by leading elements within the business class. Even before independence was officially achieved in August 1947, industrialists began a campaign to set the parameters on future state economic policy. This set off the conflict that would not abate until the new state took final form five years later. The basic strategy of Indian business was two- fold. Its most visible dimension was to insist that the state radically curtail its ambitions to regulate the private sector. Toward this, business groups presented a series of proposals designed to eviscerate the disciplinary components of the new policy. On the other hand, they continued to insist on the states responsibility to assist and nurture private enterprise in the interest of national development (Chibber 1999a: Chapter Six). Throughout the period under study, industrialists continued to insist on the states responsibility toward them, both in the short run, to get over the dislocation of partition and the post-war recession, as well as in the long term. The call for state assistance was ubiquitous in the industrial sector. It was especially strong in the basic and capital goods industries, which depended on the state as a source of demand; 13 but it also emanated from consumer industries, which called for assistance not only in the creation of a market but also in securing inputs. 14 And finally, virtually all sectors cried out for protection from international competition (GOI 1950) . But all this assistance was to be granted without the conditionalities that the state planners were demanding. This pertained to both of the central elements in the new regimes industrial policy, i.e. the power to channel the flow of investment as well as its use. First, business organs were opposed to any institutionalized control on the direction of investment. Private capital was, on their design, to be allowed to base its decisions on market signals alone, and the state disallowed from putting impediments in its way for example, in the form of industrial licenses. 15 This was a complete reversal of the states agenda, in which the direction of investment was to be controlled so that it was consistent with economic policy. Second, business groups also demanded a
13

For coal, see Capital, 2/14/46, 3/14/46, 3/6/47; for the chemicals, machine tools, and steel industries, see the minutes to the meetings of the Sub-Committees of the Central Advisory Council for Industries in 1949, in File 188, Walchand Hirachand papers, NMML, New Delhi. 14 Immediately after the War, G.D. Birla, one of Indias biggest industrialists called for economic planning as a means for increasing the Indian market for automobiles! See the report on his speech on All-India Radio in Capital, 12/6/45. 15 Circular, Report regarding the meeting of the Federations representatives with the Select Committee on August 5th , 1949, File 1065, M.A. Master Papers, Nehru Memorial Museum and Library, New Delhi.

16

thorough revision of the proposals relating to the states power to intervene in the functioning of enterprises. All provisions giving the state the power to punish owners short of criminal activity were to be rescinded, as were the right of inspection, and of demanding periodic reports. 16 Of course, much of this simply followed once industrial licenses were done away with, since such powers were seen by the state as mechanisms for enforcing the contract embodied in the license. But business groups gave these measures an importance all their own, to underline their opposition to disciplinary efforts of any sort 17 . Put together, these two demands were intended to attack disciplinary planning on both of its core components: the states power to channel the flow of investment, and to demand efficient and appropriate use of the resources it funneled to firms. The demands were pressed through an impressive campaign at several levels. The business press and news dailies, owned by the major industrial houses, issued a stream of invective against the objectionable components of the proposed legislation (Kidron 1965). This was complemented by an intense lobbying effort by the major business and trade associations, led by the Federation of Indian Chambers of Commerce and Industry (FICCI) the largest and most important such organization the Indian Merchants Chamber, and just about every regional association. It is noteworthy that there was virtually no variation in the opinions expressed by these organs, at least as regards the merits of the states agenda. This is not entirely surprising; an examination of the archives of the Indian Merchants Chamber reveals that there was considerable coordination among the business associations to ensure that their views were harmonized, to further facilitate the lobbying effort 18 . Finally, these arms- length strategies were rounded off by the use of whatever personal ties there were and these were considerable between business leaders and the leadership of the INC. In this, the former had a sympathetic listener in V.B. Patel, the Deputy Prime Minister and second- most powerful man in the partys leadership. Patel enjoyed very close ties to the business community, especially to G.D. Birla, and was ideologically inclined to favor the view that the policy initiative ought to lie with business, rather than the state 19 . The demands being made by capitalists were made all the more pressing by a tightening of the structural constraints on the state. The domestic economy in the aftermath of independence was suffering from enormous strains, partly because of the post-war shortages which many countries experienced, added to which was the economic fallout of the partition between India and Pakistan, which disrupted production in the northwest and the east. India was thus thrown into an economic recession from which it did not fully emerge until the Korean War (Rangnekar 1958; Venkatasubbiah 1961). The recession was in turn exacerbated by what appeared to be an investment strike launched
16

G.L. Bansal, Secretary to the Federation of Indian Chambers of Commerce and Industry, to Syama Prasad Mookerjee, 9/26/49, File I(4)-1(57)/49, Industrial Policy and Promotion Department, Industry Ministry 17 The industrialists leading the charge realized this and said so. See the Note by B.M. Birla to the Federation of Indian Chambers of Commerce and Industry in File 1063, M.A. Master papers, NMML. 18 The harmonization occurred mainly through a mutual vetting of memoranda aimed at the relevant government offices. It was fairly widespread, though the main links were between the IMC and FICCI. 19 See the correspondence between Patel, his secretary, and Birla in Reel 11 of the Patel papers, National Archives of India, New Delhi. Note that Patel was not inclined toward laissez faire no-one in the INC leadership was.

17

by large sections of the capitalist class. Though there is no way of ascertaining how much of the downturn was caused by the investment strike, there is considerable evidence that the leaders of the major business houses were withholding new investments until the government brought policies closer to their demands. 20 This state of affairs had a drastic impact on the ne w regimes priorities. While the transformation of domestic structures was still a goal, it was now conjoined with the immediate need to somehow revive investment. This fact was not lost on the business class. Leading representatives adroitly packaged the ir protests against disciplinary planning with warnings that, unless the regime backed down, investment would continue to falter. 21 In this situation, the agenda to build a disciplinary planning regime came to take on a new meaning; whereas it had initially been viewed as the most natural way to implement industrial policy and launch India onto a new growth trajectory, it increasingly took on the appearance of a major impediment. All promises of a new dispensation would just remain empty talk unless busine ss could be persuaded to invest (Kidron 1965: Chapter 3); 22 but business would do no such thing so long as the states designs remained unaltered. Hence, the call within government for pragmatism or flexibility gained ground as time went on, so that the constituency for disciplinary planning became reduced to those who were ideologically committed to a strong state (Kochanek 1968: 138-145) . But for the bulk of the leadership, the character of future policy instruments became blurred, as long-term objectives came to be seen as obstacles in the way of immediate recovery (Ibid.: 141-143; Chibber 1999a: Chapter 6). Exactly how this affected specific elements of the state planning apparatus, and hence future state capacity, is examined in the next section. The Institutional Outcome: As suggested in the preceding section, the INCs commitment to the disciplinary components of the proposed planning apparatus did not, for the most part, flow from an ideological opposition to private capital (See Chattopadhyay 1985: Chapter Four) 23 . It
20

See Market Slump, Indian News Chronicle, June 25, 1948; Sentiment of the Bombay Business Community at the Beginning of 1949, Dispatch #5, 1/5/49, 845.5017/1-549, RG 59, DSR; within the Indian Government, the need to revive the investment climate by moderating the tone of economic policy was recognized in confidential internal documents. See the document produced by the Industry Ministry, Suggestions for the Formulation of a Short-Term Economic Policy by the Government of India, contained in Dispatch #365, 5/2/49, 845.50/5-249, RG 59, DSR. 21 Hence, in his recommendation of talking points made to the Industry Ministry in a meeting in January 1949, the Vice-President of the All-India Manufacturers Association listed as the following as the very first imperative: The Need for Inspiring Confidence Among Industrialists and Investors in the Industrial Future. Indian industry was thus very candid about its lack of confidence in the investment climate, and about the fact that it was up to the state to inspire confidence. See Memorandum to Members of the Central Advisory Council of Industries, File 181, Walchand Hirachand Papers, NMML, New Delhi. 22 Another alternative would have been a wholesale nationalization of industry as a counter-threat to recalcitrant firms, in order to cajole them to play along. But while there were elements within the INC who were calling for such a strategy, it was never entertained by the leadership. As early as 1938, Nehru had decided against such a strategy, and he did not waver in this at any point thereafter (Chattopadhyay 1985: Chapter Four). This was crucial, for the Congress right-wing, led by Patel, was ideologically opposed to large-scale nationalization, and any move against them would have required Nehrus assistance. 23 With the departure of the Congress Socialists from the INC in 1948, the section that was ideologically opposed to capital became very small, and had very little representation in the leadership. The two deepest studies of this dynamic within the INC are Chattopadhyay 1985 and Kidron 1965.

18

was, instead, driven by a pragmatic worry that future development would not be possible without industrial policy, and that the latter in turn would not succeed unless the state built up adequate capacity to block the possibility of rent-seeking by firms. Once the recession set in, and prominent industrialists made it clear that they were holding back from investing because of the coercive elements in the new agenda, the leaderships resolve began to waver. Whereas earlier the blueprint for the new state had been designed with the needs of planning in mind, it was now gradually revised to accommodate the new, more pressing need, viz. restoring business confidence. New institutions for industrial policy were still installed, but their design was crucially affected by the business offensive. In what follows, we examine this dynamic by focusing on two critical components of the new apparatus, the Planning Commission (hereafter PC) and the bi-partite sectoral Development Councils (hereafter DC). The Planning Commission -- A Powerless Nodal Agency: The initial design for the PC had not been elaborated in any great detail, but it was along the lines of a strong centralized body with executive powers, as outlined above. Once it come time to actually concretize the broad ideas into institutional form, the responsibility was handed to G.L. Nanda, who was later to serve for years as the highest official in the Commission. Nanda was strongly in favor of a centralized planning apparatus, much along the lines of what Park Chung Hee was to install years later in Korea. In a memorandum submitted to the Congress Party Working Committee, Nanda urged that the PC not only be entrusted with designing industrial policy, but that it also be given powers to ensure its implementation (Kochanek 1968: 142). This meant that along with power over the allocation of resources, the PC would also have the power to oversee the performance of relevant economic ministries. Throughout the debate over the new PC, Nanda continued to press for this design. 24 The ongoing slowdown in the economy, however, reordered priorities for the INC in a fashion that ran counter to Nandas agenda. The Congress leadership became extremely hesitant to undertake any course of action which would impede an economic recovery, and the kind of state restructuring being called for by the partisans of a strong PC was viewed as just such an action. This had to do with the particular institutional facts about post-war economic policy in India. Since 1945, the new state policy agencies had not yet emerged, but economic policy, of course, had nonetheless to be implemented. In lieu of the new agencies, the policy was carried on by the ministries that were already constituted. This meant that by 1950 when the debate on the PC came to a head there were a number of new industrial projects that had already been launched under the guidance of existing ministries. Projects had been launched, budgets passed under particular assumptions, import licenses handed out, and, most importantly, liaisons established between the ministries and relevant firms (Economic Weekly, 3/25/50). For industrial policy to be centralized under the new PC, it would require that responsibility for the projects shift from the ministries to the PC. A concern emerged within the leadership that this kind of restructuring would disrupt the recovery that was desperately being attempted through these new projects (ibid.; Kochanek 1968: 142). Even if the
24

See his comments to an American Embassy officer in Spring of 1950, where he reiterated this belief: Timberlake to Department of State, #366, 4/1/50, 791.00/4-150, Record Group 59,Department of State Records, National Archives and Records Adminis tration, College Park, Maryland.

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immediate responsibility remained with the ministries, the PC would still insist on vetting them, approving them, and, in all likelihood, it would rearrange them according to its designs. In the context of the crisis in business confidence, this potential for disruption came to be seen as intolerable. In the face of this dilemma, those pushing for a restructuring of the state around a new, centralized policy apparatus were put on the defensive. Nandas pleas for a strong PC got nowhere, and its final form was quite distant from what he and others had proposed (Kochanek 1968: 142-145). As once contemporary observed, the objectives of the Commission appear to have been formulated with the clear purpose of doing minimum injury to business confidence (Economic Weekly, 3/25/50). Instead of a centralized body with powers over policy design as well as implementation, the PC was installed as a purely advisory agency, without any power over other state agencies(Chibber 1999a: Chapter 6). The immediate purpose of this was, of course, to prevent any disruption of existing projects. There would be no drastic re-apportioning of responsibility within the state. But this accommodation to short-term imperatives also carried important longterm consequences. Since it was now just one ministry among many, the PC had no real power to be the nodal agency within the policy process. 25 It could not, therefore, make any demands on economic ministries of the sort that the EPB in Korea could. 26 It was, instead, dependent on the willing cooperation of the various institutions, both for transmitting the relevant information about the sectors for which they were responsible, and for executing the industrial policy as designed by the PC (Kabra 1993; Shourie 1967). This was made unlikely for two reasons: first, normal inter-agency rivalry made ministries resentful of the PCs encroachment on what they regarded their legitimate domain; the formers requests for information and to be included in key decisions were thus routinely ignored by the latter (GOI: 1967; GOI 1968a; GOI 1968b; Shourie 1973). Second, the decision to leave the jurisdiction over industrial sectors to various ministries created the following problem: even if the PC decided to take it upon itself to monitor the various executive agencies, the dispersal of authority into the far reaches of the state raised the monitoring costs to a prohibitive level (Chibber 1999a: Chapters 7 and 8). The PC simply could not muster the resources. The long-term result was that two of the key elements for building state capacity mechanisms to ensure the smooth flow of information, and an agency with the power to ensure policy implementation were never developed. The Absence of Corporatism: The dispersal of authority within the state severely crippled the efforts to build adequate capacity for industrial policy. A second front on
25

The one area where the Commission did, and has continued to, exercise some real influence is in centerstate fiscal relations. The disbursement of funds from the Center to individual States has been crucially dependent on the input of the PC. But industrial policy was, throughout the period of dirigisme, basically under the power of the Central government, not the states. So the PC could not parlay its power over interstate fiscal transfers into real influence in industrial policy matters. 26 This account goes against the mythology about the PC that can be found in some of the literature, viz. that it was in fact the kind of nodal agency as the EPB was in Korea. This has been suggested by Haggard et al (1991: 856), who are under the impression that the EPBs power over the budgetary process and imports was modeled after the PCs power over the same domain in India. But this is mistaken. Virtually every study of the PC has shown that, in fact, it rarely had real control over either of these fields.

20

which the business offensive had an impact was the efforts to institutionalize state- firm links. The design for industrial policy had included, from the start, various proposals to create instruments for ongoing liaisons between the state and business representatives. The precise form that this would take was, however, subject to considerable debate. As in the case of the Planning Commission, the final shape that was given to these institutions was crucially affected by the business offensive. In Korea and Taiwan, state agencies designed and implemented industrial policy through constant contact with business representatives, institutionalized at the level of the ministries (See Evans 1995). It was not dialogue per se, however, that was the key; the critical component was that various sectors were organized into sectoral associations, which were then given formal powers to represent their firms to state managers. The latter in turn were able to hold the associations accountable for collecting information and organizing the effective implementation of industrial policy. In an important sense, the trade and sectoral associations were an extension of the state planning apparatus, accountable to it as much as to their members. In fact, it was not unusual for their presidents to be retired bureaucrats, or even appointed directly by planners (Wade 1990; Park 1987; Fields 1995). In their capacity as virtual extensions of the planning agencies, the sectoral associations functioned to reduce the transaction of costs monitoring economic actors, as well as that of transmitting relevant signals to the latter (Sabel 1994; Aoki et al 1997). The circumstances in India in the years after independence made the installation of such instruments highly unlikely. Business associations were not opposed to the idea of state-capital links per se; what they objected to was any hint that the new agencies would be used to exert a power over the wider class. Instead of the state using these agencies to monitor and transmit policies to business, and then hold them accountable for their execution, Indian capitalists insisted on reversing the dynamic: it was capital that would have the initiative in their constitution and functioning, and the state that would be reactive. This reversal was captured in two key demands made by business associations: first, that in any corporatist or quasi-corporatist body, industry should have a statutory right to choose their own representation. 27 This was explicitly intended to ensure that the representatives were not nominated by the state, and that, in case of disagreement, they would back industrys demands. 28 Second, business demanded that any discretionary intervention in the industrial sector be approved by sectoral standing committees, which would be dominated by represented chosen by the business class itself. 29 State intervention would thus be subject to the prior approval of Indian capitalists. These proposals were intended to ensure that, in effect, it was business that would discipline the state, and not vice versa.

27

Madras Chamber of Commerce to Associated Chamber of Commerce, Calcutta, 4/9/49, contained as Enclosure 1 in Streeper to Secretary of State, Despatch #83, 4/16/49, 845.60/4-1649, RG 59, DSR, NARA, College Park, Maryland; also, see Memorandum from United Provinces Chamber of Commerce to Ministry of Industry and Supply, 7/18/49, File 1(4)-1(44)/49, Records of the Industrial Policy and Promotion Department, Industry Ministry, Udyog Bhavan, New Delhi. 28 See Comments of Sir Shri Ram on the Industries (Development and Control) Bill, 1949, File 1063, M.A. Master Papers, NMML, New Delhi. 29 See Circular, Report regarding the meeting of the Federations representatives with the Select Committee on August 5th , 1949, File 1065, M.A. Master Papers, NMML, New Delhi.

21

These demands made it clear to the state that the Indian capitalist class was strongly opposed to the idea of state-controlled corporatist structures. Given the anxiety of the Congress government to restore business confidence, it had a dramatic effect -once the sectoral development committees were set up, they were carefully structured to avoid any hint of coercive powers. The representatives that staffed them would be there on a voluntary basis, and not be appointed by government; these representatives were to have no legal authority to bargain on behalf of the firms in their sector (GOI 1951: Section 6(4) and Schedule II); this in turn implied that they would have no authority to enforce compliance from the firms in the sector, since they were there only in an individual capacity. In effect, the DCs were constituted as advisory bodies, and not corporatist institutions (Hanson 1966: 454). Of course, this also made them far less useful as policy organs, because they neither had the power to compel firms to hand over relevant information, nor to make them abide by whatever recommendations the representatives made to the state (Venkatasubbiah 1961: 174-175). For its part, the states legitimacy to enforce compliance on the basis of advice given by the representatives was greatly reduced, since the advice had no sanction from the wider class. Policy elites were aware of the implications of this structure. In early meetings of the Planning Commission, it was pointed out by planners that negotiating with industry on an ongoing basis would be of little use unless, as one advisor put it, each sector was organized effectively under a representative body [which] could control its members30 exactly what Korean planners did, and their Indian counterparts did not. To this, Prime Minister Jawaharlal Nehru candidly responded that, under the crisis conditions of the period, there was a need for caution to avoid a major breakdown. 31 As in the case of the PC, the business offensive had affected the preferences of policy elites all the way to Nehru himself; the ongoing economic downturn now made the long-term benefits of institutional restructuring recede against the short-term costs it might generate. Only that restructuring of the state and class organizations would occur which seemed the least disruptive. The long-term legacy of this was that, instead of strong corporatist bodies which had the authority to collect and relay information and to bargain on behalf of industry, the Indian planning apparatus was saddled with enfeebled advisory bodies, with little power to do anything but offer opinions. Reprise: As India emerged from the early years following independence, with the institutions for industrial policy now in place, their actual form was at quite a distance from what had been hoped for, and from what was required. Of the two elements that we chose to examine as sources of increased state capacity a nodal agency and quasicorporatist bodies bringing together planners and firms India could muster neither. The Planning Commission remained an advisory body, and numerous studies have shown
30

This was the view of D.R. Gadgil, who criticized the whole approach to dealing with the private sector as a fantasy. See his remarks in the Summary Record of the First Meeting of the Planning Commission Advisory Board, August 21st -23rd, 1950, in File LSR/PC-2, Lala Shri Ram Archives, New Delhi. 31 This was in reply to Gadgil in a later meeting of the Advisory Board. See the Summary Record of the Second Meeting of the Planning Commission Advisory Board, July 24th -25th , 1951, in LSR/PC-2, Lala Shri Ram Archives, New Delhi

22

how it was without any significant power in the industrial policy process (GOI 1967; GOI 1968; GOI 1968a; Chibber 1999a; Shourie 1973). Similarly, the Development Councils, while in place for some years, quickly became known as pointless talking shops, which played no role whatsoever in the formation or implementation of policy (Chibber 1999a: Chapter Seven; Marathe 1986). The long-term legacy of the critical juncture of 19471951 was that India launched its program of developmentalism with only the feeblest institutions for its governance. It is important to highlight how the outcome is consistent with the argument made in this paper about the political incentives generated by ISI. Indian industrialists did not attack the idea of state intervention in the economy; they attacked only its disciplinary components, designed to equip the state with the power to monitor and regulate the flow of capital. Capitalists wanted to maximize the flow of resources coming in from public coffers, while also maximizing their freedom over the disposition of this largesse. For this, it was critical to block the states agenda of building institutions which would be capable of imposing discipline. This was the basic dilemma of ISI for state planners: while the model made it very attractive for domestic capital to enter into a partnership with the state around the project of industrialization, it also made it rational for the former to reject the disciplinary component of the project. THE CAPITALIST CLASS AND STATE BUILDING IN KOREA If the Indian case shows that business class mobilization can scuttle the statebuilding agenda, the Korean experience is positive proof of the virtues of an alliance between the state and capitalists. In this section I argue that political elites in Korea were successful in building a developmental state in part because unlike their Indian counterparts they were able to forge an alliance with leading segments of the local capitalist class around their state-building agenda. Further, this alliance was undergirded by an export- led accumulation model, as against the adoption of ISI in India. Under the conditions of ISI, Indian firms benefited most from a state which doled out subsidies, but lacked the ability to extract performance in return. I shall argue that the conditions generated by ELI made for a very different incentive structure; here, firms had it in their interest to have a disciplinary state, for the simple reason that they were exposed to market conditions which made their survival without such a state highly unlikely. This made it rational for firms to ally with the state around the institutionsbuilding project. Once this alliance was formed, it opened up a space for political elites to re-organize the state structures -- and the relevant class organizations -- around the needs of disciplinary planning. Unlike the Indian case, where the business offensive had the effect of re-ordering state managers preferences away from the long-term agenda and toward short-term exigencies, the Koreans were able to preserve the integrity of their ambitions. The different accumulation models thus generated contrasting orientations of the capitalist classes toward the state, which in turn generated correspondingly different outcomes in state-building. Park Chung-Hee and the Developmental State: South Korea did not emerge from the Korean War as anything resembling the miracle it was to become. Indeed, for the first decade of its post-war history, Korea

23

was seen as something of a developmental disaster (Westphal 1998). During the 1950s the Korean political economy seemed to be careening toward the kind of corrupt oligarchic rule witnessed in Marcos Philippines or Suhartos Indonesia, as Synghman Rhee settled into a cozy triangular relationship with the U.S. on one side and local industrialists on the other (Woo 1993; Jones and Sakong 1980). Under Rhee, Korea embarked on a program of ISI financed by American aid, which was something of a bonanza for domestic capitalists (Ahn 1992). While it was supposed to be part of a comprehensive development package, Rhees economic policy was guided more by his need for a patronage network than by any developmental criteria. The Korean state in this period had neither the capacity, nor the direction, to be developmental. The Synghman Rhee regime was toppled by a popular uprising, which placed Chang Myon at the helm of the state. The new regime lasted a scant six months, falling victim to a military coup led by a small group of army officers, which included the eventual President of Korea, Park Chung- hee. It was under Parks rule, which lasted until his assassination in 1979, that the Korean miracle was crafted. Park came to power with a strong commitment to economic development, and a keen appreciation of the states complicity in the dismal record of the preceding decade. Transforming the states economic policy institutions was therefore an integral part of his strategy. The commitment to a new kind of dispensation was certainly evident from the outset. Park launched his regime with a number of flamboyant measures, most of which turned on reforming the state institutions and establishing a new, more productive relation with the domestic capitalist class. Much of the literature on Korea therefore dates the consolidation of the developmental state to these very early months of Parks rule. But I shall argue in what follows that, in fact, the installation of the developmental state was achieved in two stages, of which these early efforts were just the first. The final consolidation came a little over three years later, when Park and the Korean business class settled on a developmental strategy export- led industrialization and revamped the state apparatus in a fashion consistent with the strategy. Restructuring The Political Economy: Stage One: The initial stage of reforms started immediately after the coup, and lasted the duration of the short- lived First Five- year Plan Park, i.e. from mid-1961 to 1963. Park moved swiftly to initiate changes within the state policy institutions, as well as in the nexus between the state and the domestic business class. However, the restructuring remained limited in its impact. Within the state, formal restructuring of the policy apparatus did not yet bring with it the full measure of substantive changes; and while the Korean capitalist class was brought into a new kind of alliance with the state (after some initial saber-rattling), the alliance remained tenuous and was not cemented in any concrete development plan. These weaknesses came to the fore in the First Five Year Plan, which failed miserably within two years of its launching. But its failure also marked the opening which Park needed to push through more substantive changes in the state apparatus, cement a stronger alliance with leading industrialists, and concretize this in an ambitious development model in the Second Plan, which marked the full installation of the developmental state.

24

The State Apparatus Two problems had bedeviled economic planning in the Rhee era: rampant corruption throughout the state, and, just as importantly, a complete lack of coordination between policy agencies. Park moved swiftly against both of these. He launched an ambitious anti-corruption drive within the state, bringing over 40,000 bureaucrats under scrutiny and dismissing close to 2,000 of them on charges of graft (Haggard, Kim, and Moon 1991: 857). It is of course impossible to imagine that corruption within the Korean state was confined to a scant 2,000 miscreants, but the move was nevertheless of some importance: it sent a clear signal that graft, to the extent that it was to continue, would not go unnoticed. The later trajectory of Korean development suggests that what was behind the purge was in fact not a commitment to eliminate corruption, but to confine it strategically so that it would serve the political ends of the regime, without interfering with its economic strategy (Kang 1985). Along with the effort to restore some coherence to bureaucratic functioning, Park launched his well-kno wn initiative to curb the dispersal of effective authority between the institutions responsible for economic policy. Soon after the coup, a new Economic Planning Board (EPB) was announced, which quickly became the apex body for economic policy and planning (Kim 1997: 34; Haggard, Kim, and Moon 1991: 860). The new body took charge of statistical operations (previously housed in the Ministry of Home Affairs), the all- important budgetary operations (previously the provenance of the Finance Ministry), and overall plan coordinating authority (previously in the Ministry of Reconstruction). Monetary policy was taken away from the independent Monetary Board and brought under the power of the Finance Ministry, which in turn was under the influence of the EPB (Lee 1992: 190). The nominal effect of this restructuring was to remove the institutional paralysis that had gripped the Korean state during the 1950s, and vest authority over policy unambiguously into one agency. It is important to note, however, that despite the reform of the state apparatus and the installation of the Economic Planning Board (EPB), the latter did not yet have any real power in the policy process. The enduring operational rules which were to give it authority over other state agencies were not yet in place; despite its formal power over policy formulation and implementation, the actual functioning of the state was not yet reorganized around its mandate. Real power in the planning process at this stage was held by the officers in the military junta; the role of the EPB was more in the way of fill[ing] in the details within the guidelines that they had been given by the military (Cole and Nam 1970: 18). The restructuring of the state thus remained incomplete. The State and the Capitalist Class: Industrial policy in the Rhee era had often been reduced to a series of unconditional handouts from the state to the domestic business class, generating one of the classic patterns of rent-seeking behavior among developing countries industrialists. Here too, Park moved swiftly to initiate changes, in a two step-process. First, he made it clear that he would not tolerate a corrupt business class living off the largesse coming from the state, and arrested some of the biggest industrialists in the country, threatening imprisonment and even expropriation (Jones and Sakong 1980: 280-82). But this threat, while real, was also followed up by intense efforts to assure business that, if it played by

25

the rules, the regime would do it no harm. The junta worked with a clear understanding that if economic growth was to be achieved, it would have to maintain a healthy investment climate and the first precondition to this was that it could not alienate local industrialists. Hence, far from punishing business, the ruling junta strained throughout the latter half of 1961 to restore business confidence in any way it could. 32 Very few of the industrialists were imprisoned, the punishment typically was commuted to a payment of fines. Later, the fines were reduced, and eventually very few of those were even paid (Lim 1996: 251-60; Yoo 1990: 184-187). Instead, the biggest industrialists were encouraged to form a new body, the Korean Businessmens Association, which the regime would now respect as the representative body for Korean capital (Haggard, Kim, and Moon 1990) Indeed, the KBA was immediately dispatched to the U.S., in official capacity, to search for investment funds and partners. This signaled an incorporation of the leading businessmen the very ones who had been arrested some months back into the developmental coalition (Lim 1996). But here too, the restructuring remained incomplete. While the regime did undertake efforts to avert a crisis of confidence among industrialists, and to strike up some kind of alliance with them, it did not yet bring their interests into the core of the ruling coalition. Instead, it was more concerned with shoring up its base among the larger mass of small farmers and small businesses. This concern for the latter groups was clearly reflected in the First Five Year Plan, launched in late 1961, which forgave all rural debt for small farmers, promised to mobilize credit and savings for farmers and small businesses, and offered other populist measures (Yoo: 94-120; Choue: 155-166). The Plan itself was crafted and launched with very little involvement of the big industrialists (Yoo 1990: 170-172), who were given little access to policy makers; the Plans main production incentives were directed toward fishing, farming and mining, which were dominated by small producers (Lim 1997: 104-106). Hence, in the initial years of the regimes rule, the juntas main concern was not to ally with big business. Instead, it sought to placate business in order to avert an investment downturn -- while allying with small producers. Hence, in the first two years of the new regime, important steps were taken toward restructuring the Korean political economy, but these steps remained incomplete. The fractured state apparatus was nominally centralized under the aegis of the new EPB, but real authority still did not rest in the latters hands; hence, there did not yet exist a nodal agency for industrial planning. Further, while business was given a clear signal that the regime expected it to turn away from unproductive activities, this was not yet balanced by bringing it into the fold as an ally. The Korean industrialists were shunted to the outer reaches of the ruling coalition. The transition to a new political economy was to come later, starting in 1964, with the failure of the First Plan and the search for a new development model. We turn now to this later period.

32

Berger to Secretary of State, 8/1/61, 895B.00/8161, RG 59, DSR; Berger to Secretary of State, 9/29/61, 895B.00/92961, RG 59, DSR. In these early months, the staff at the U.S. embassy in Seoul was working desperately to mediate between Park and Korean industrialists, to avert what they were convinced was looming in the near future -- an investment strike.

26

Restructuring the Political Economy: Stage Two While the changes initiated in the juntas first year were important, there was no sign yet of the consolidation of a genuinely disciplinary planning regime. There were very few mechanisms to enforce compliance to plan directives from local firms, and the economic policy apparatus was still not effectively coordinated by an identifiable agency. This was most forcefully evidenced in the First Plans rapid descent into crisis, which hit in 1962. The onset of crisis prompted the regime to announce an annulment of the Plan in late 1963, and start the task of devising a new one (Choue: 155-166; Kim 1988: 192193). The general failure of the First Plan which came about for a number of reasons, including sheer incompetence by the military planners was made more pointed by the recognition that Korean business was making investment decisions largely independently of Plan signals (Cole and Lyman 1971: 218). 33 As noted above, this was not surprising the state did not yet have any real mechanisms for monitoring firms, nor did it have a policy apparatus with the requisite institutional structure for the smooth flow of information. This meant that the plan frame was turning out to be of little operational significance, since it did not accord with firms own investment priorities, and the state did not yet have the instruments to compel firms to change these priorities. Indeed, planners had, in the early phase of the Plan, extracted a promise from thirty leading firms that the latter would undertake investment projects consistent with the plan frame; twenty-six of these, however, were never taken beyond the initial design stage by the industrialists and there was no action taken by the state (Kim 1988: 192-93). The crisis delivered up an opportunity to start afresh. What is crucial for our purposes is that, within the state, Park seized upon this opportunity to oust the juntas military planners and consolidate the position of the EPB as a genuine nodal agency for planning; and outside the state, Parks move coincided with a development of tremendous importance, viz. the growing alliance between big Korean industrialists and Japanese capital, around launching an export-drive to American markets. In what follows, we will see how these two processes provided the rationale and the opportunity to change development policy drastically, and to install a developmental state based on an alliance between the ruling regime and domestic capital hence avoiding the backlash witnessed in the Indian case. The Consolidation of the Economic Planning Board: The failure of the First Plan, while troubling to the junta, presented Park with an opportunity to consolidate his power within the policy institutions. Since the Plan had been the brainchild of the military planners, they suffered a major loss of prestige and legitimacy once it was admitted that their economic schemes had failed. Park seized this occasion to dismiss the group, and to announce that henceforth, the EPB would become the nodal agency for economic planning (Choue 1988: 161-162; Kim 1983: 261-263). Measures that had formally vested authority in the EPB, but had remained inoperative because of the real power enjoyed by the military planners, now came into effect. This turned out to be the decisive shift within the state -- away from ministerial autonomy, and toward a centralization of authority in the EPB.
33

The authors, who were present in Korea at the time as advisors, recall that planning as such was definitely not a well-established or influential process as late as 1964 (Cole and Lyman 1971: 218).

27

Soon after coming to power, the members of the Planning Board set about designing a new economic plan to replace the failed First Plan. But whereas in the first Plan, the big industrialists had been kept at the margins of the discussions of Plan design, this time they were brought into the fold much more intimately (Yoon 1990: 158-167, 204-207). The conduit for the discussions with the business class was the KBA, which consisted of the biggest domestic industrialists, and which had been newly formed soon after the coup (Haggard, Kim and Moon 1991: 859). The Alliance with Domestic Capitalists: The new relationship with the KBA, in which it moved from the outer reaches of policy circles to the inner core, was the crucial second stage in the developing alliance between the state and Korean business. It provided the basis for the hitherto notional alliance to take concrete expression in the form of a development plan, to which local firms could then be held accountable. At the core of this new model was an increasing emphasis on exports to the markets of advanced industrial countries, most notably the United States and Japan (Castley 1997a; Castley 1997b). Export performance now became central to the Korean development model, and performance in this regard was made the leitmotif not only for policy agencies, but also for firms. For the Park regime, the turn to exports made good sense for obvious reasons. All developing countries run up large import bills as they have to purchase capital goods and raw material from abroad, and also because of the burden of repaying foreign debt. But in Korea of 1963, the failure of the First Plan had saddled the regime with a particularly harsh payments crisis on the external front, which only made the general concern for export success more pointed. As the EPB started work on the Second Plan, the need to boost exports was therefore at the forefront of all considerations. For Korean industrialists, the turn to exports was acceptable because of a series of developments which combined to make success in foreign markets highly likely. Starting in 1960, Japanese companies had been coming to Korea and establishing links with Korean firms, to set up joint operations for exporting light manufacturing goods to U.S. markets (Chibber 1999b). Through joint ventures, Korean firms could potentially gain access to Japanese know-how and finance, while the Japanese could find partners who knew how to work the local bureaucracy and handle local labor. Just as importantly, local partners would provide a market for Japanese capital goods. Along with joint ventures, the Japanese arrived in the form of their giant trading companies, the Sogo Sosha, which held the promise of providing Korean firms with two critical resources for export success: cheap commercial loans to buy raw material and (Japanese) capital goods, as well as access to their marketing and sales networks in the U.S. (Castley 1997a: 144; Lie 1988: 86, 129; Mason et al: 139). Growing ties with the Japanese thus made good economic sense for Korean firms, since they offered an extraordinary chance to penetrate the enormous American market. The ties were facilitated by the fact that several of the biggest Korean industrialists had personal connections with their counterparts, having been educated in Japan. For example, Yi Pyon Chol, the founder of Samsung, had been educated in Japan, and had always maintained close relations with old contacts there (Kim 1996: 205, 207). Hence, the pace at which Japanese firms branch operations were opened up in Korean was rapid: in 1962, thirteen Japanese firms had set up operations in Korea, despite the absence

28

of normal relations between the two countries;34 one year later, thirty firms had opened offices in Korea, and agreements had been reached with local firms for the production of fertilizer, textiles, machinery, and transportation equipment, mostly for export (Far Eastern Economic Review: January 3, 1963: 11). 35 So by 1964, as the EPB and the Park regime was gravitating toward a new economic Plan placing greater stress on exports, the biggest Korean industrialists were themselves viewing the chances of export success with great optimism. It was around this point that the idea of a policy shift, away from a strategy centering on import-substitution to one hinging on exports, started to congeal. Although incentives to raise exports had been in place since 1960, talk of making exports the center of economic plans did not emerge until the early months of 1964 (Brown 1973: 142-144); it was announced only in the middle of that year, and became embodied in the planning process in 1965 (Haggard et al, 1991: 865-866). 36 By 1965 the centrality of exports was announced publicly, and in 1966 the Second Five Year Plan which operationalized this shift -- was launched. Thus, the consolidation of the EPB as a nodal agency, and the alliance of the new regime with leading segments of the business class, both developed in two stages. The first stage was in the immediate aftermath of the juntas ascension to power, when the EPBs launching was announced, and the biggest industrialists were first threatened and then placated with promises of close relations with the regime. Both of these measures, however, had remained only partial. The EPB, while nominally in charge of economic policy, had remained on the sidelines of the actual policy process, as real power still remained with military planners and the ministries. The big industrialists, while grouped into the KBA at the juntas prodding and given official imprimatur as the business representative with the state, did not penetrate the core of the policy discussions. At the same time, the overtures toward the leading industrialists, however tepid they might have been, retained their significance because the state did not, in these early years, make any attempt to actually impose investment discipline on them. Capitalists were enjoined to undertake investment projects, but there was little monitoring of these activities, and no real action taken if they ignored plan signals. However, the inability to impose discipline also meant that the regime did not alienate the biggest capitalists by making demands on them; this allowed the nebulous alliance between the two actors to remain intact in this early period. The change came with the failure of the First Plan. On one side, Park took the opportunity to dismiss the military planners and finally vest real power in the civilian planners housed in the EPB; on the other, the EPB and Park were able to find agreement with the business class on the core element of a new development plan, which would place a greater emphasis on exports. The general overtures made toward Korean capitalists in the first phase of the alliance were thus made concrete in the Second Plan, devised in 1965 and launched in 1966. The Basis for Disciplinary Planning:
34

Biweekly Economic Review #9, 5/4/64, E2-2, KOR S, Box# 735, Subject Numeric Files, 1964-1966, RG 59, DSR. 35 See also Textile Industry Report, 6/13/65, INCO-FIBERS, KOR S, Box #1141, Subject-Numeric Files, 1964-1966, RG 59, DSR. 36 Biweekly Economic Review #3, 2/10/64, E 2-2 KOR S, Box #735, Subject-Numeric Files, RG 59, DSR;

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The turn toward an export- led strategy was found desirable by the new regime as well as by the leaders of the Korean capitalist class. Jus t as importantly, the particular exigencies of the export market, and the inexperience of Korean business, gave the state the leverage to impose discipline on local firms. Korean manufacturers, though eager to expand into the highly lucrative U.S. market, immediately found themselves struggling. American importers were suspicious of the ability of Korean manufacturers to meet international standards of efficiency, as an industrial mission from the U.S. related to Korean officials in 1962; 37 these doubts were entirely reasonable, as American importers routinely found themselves having to file complaints against Korean exporting firms for delivering shoddy products. 38 The frustrations of their customers were paralleled by the suspicions of their new partners, the Japanese, who bluntly announced that, at this stage, Korean firms cannot be trusted to deliver goods to the specifications ordered. 39 Local exporters were thus faced with the prospect of being shut out of markets, despite the extraordinary opportunity provided by the arrival of the Japanese. It took the intervention of the state, a disciplinary intervention, to alleviate the situation: in 1964, the Ministry of Commerce and Industry instituted a series of quality control measures on exports, as a way of raising the confidence of both the Japanese and the Americans. 40 Measures such as these, and the institutions to support them, were not only tolerated by the Korean capitalist class, but were necessary for its own success in the export strategy a strategy which it had shown a willingness to embrace. The promulgation of quality control measure, for example, made sense not only for the new regime, but also for the exporting firms themselves. Hence we observe that as the turn toward exports solidified, so instruments to help and to push firms into greater efficiency and quality were installed. In particular, those instruments which allowed planners to directly monitor and affect firms investment decisions. The first step was the formation of the Korean Traders Association in 1965, which consolidated export manufacturers into one group, and met regularly with planners to set export targets, and then report back on performance (Brown 1973: 143; Haggard et al 1991: 865). Monitoring of exports was made routine starting in early 1966 with the Monthly Export Promotion Meetings, at which planners were able to keep tabs on the success of export targets, either through reports from individual industrialists, or, more commonly, through reports by groups like the Traders Association (Rhee, Larson and Pursell 1984; Brown 1973: 145). The establishment of the Korean Traders Association, and its use as a disciplinary device, quickly became a more generalized model. Korean firms were increasingly amalgamated into sectoral associations, membership in which was typically compulsory; these associations were often staffed by government-appointed officers, and assigned to relevant ministries (Clifford 1994: 63). In all such arrangements, associations had representational monopoly over their constituents, and hence the power to not only lobby on their behalf, but also to collect information from their members, to suggest targets based on this information, and hence were liable to being held accountable for the
37 38

Pappano to Dept. of State, 5/31/62, 895B.00/5-3162, RG 59, DSR. Biweekly Economic Report, #9, 9/18/64, E2-2 KOR S, Box #735, Subject-Numeric Files 1964-1966, RG 59, DSR. 39 Doherty to Dept. of State, 4/10/62, 494.95B41/4-1062, RG 59, DSR 40 Quarterly Economic Summary, 12/17/64, E 2-3 KOR S, Box #735, Subject-Numeric Files 1964-1966, RG 59, DSR.

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fulfillment of these targets (Amsden and Hikino 1994). In this, the associations contrasted significantly with the Indian Development Councils, in which the business representatives had been present only as advisors, having no authority over, or on behalf of, the sectors from which they came. But just as importantly, trade representatives also had the right to report on problems created by inept or unresponsive government officials, who were in turn expected to respond directly to the plaintiffs in the Monthly Export Promotion Meetings, they were expected to respond, on the spot, to the President himself (Brown 1973: 145). Hence, while the new arrangement was used as a device to monitor firms and hold them accountable, it also retained its legitimacy with firms, in part because it provided them with a forum to foist accountability onto state functionaries. With these instruments, the Korean developmental state was fully in place. Park Chung Hee and his junta not only possessed a nodal agency for industrial policy in the EPB, but also the means to monitor and discipline private firms. Crucial to this was the alliance that was formed with the most important domestic industrialists around the export-oriented developmental strategy, which congealed in 1965 and was embodied in the Second Plan, launched in 1966. Once the alliance was in place, Park moved swiftly to complement the states internal coherence with the tools to extract performance from firms. From this point onward, firms were to be given access to state largesse cheap credit, protection from international competition, import licenses etc. only if they were able to demonstrate performance, which was usually judged by sales in export markets (World Bank 1993; Amsden and Hikino 1994; Amsden 1989). Just as importantly, so long as firms were to compete in these markets, they had good reason to comply with the states disciplinary devices. The turn to ELI thus provided state managers with the space to build a developmental state, because the incent ive structure that ELI generated made it rational for firms to have such a state. CONCLUSION Social scientists have been quite successful in recent years in arguing that the success of industrial policy in the developing world has been, and continues to be, a highly contingent affair. And a primary determinant of the outcome is the institutional capacity of the state which takes such policies upon itself. The variation in this capacity has been demonstrated in numerous case studies, which now cover every region of the developing world. What has not been studied with great analytical care so far is the issue of why some political elites were able to build such states, making them developmental, while their counterparts elsewhere were not. While the importance of state-building has been realized, its systematic analysis is still at an early stage. This essay has tried to move in just such a direction, by offering an argument for why the orientation of the domestic business class should be taken as an important determinant of success, and then a further argument as to the conditions under which such classes might be expected to cooperate with, or oppose, state-building. The argument emerges from an examination of two key experiences in the post-war saga of developmentalism, but it also offers up clear hypotheses to be further tested through an examination of new cases. Specifically, it predicts that in other regions where political elites tried to build developmental states, such efforts will have been less successful

31

where the governing accumulation model was ISI, and more so where it was ELI; further, it suggests that the mechanism linking the accumulation model with state-building outcomes is the differential political interests that each model generates for domestic capitalists. The argument thus joins the effort to establish a framework for understanding the diversity of experiences among developing countries in the post-war period. What the paper does not do is to explain why the models themselves were chosen by the two countries. That is, the argument restricts itself to suggesting the constraints imposed by the accumulation models, while leaving open whether the choice about the models was itself constrained. This is a natural question to be posed, if the argument about the different incentives generated by ISI and ELI is found persuasive. If India was hobbled by the fact that ISI made it rational for capitalists to oppose state-building, why did it not choose a path of ELI instead? I believe this is an important question in its own right, but it is beyond the bounds of this already lengthy paper. And further, it is a question which does not have a direct bearing on the specific question addressed here, about the political consequences of the two developmental models. Superficially, there appears to be reason to think that the theory presented above is robust. The states most typically identified as exemplars of developmentalism, exhibiting an ability to turn subsidization of firms into competitive performance, are the Northeast Asian triad of Japan, Korea, and Taiwan. All of these, as is well known, placed exports at the center of their economic strategy, thus falling under the rubric of export- led developers. On the other hand, the well-known cases of relative failure at such an attempt have been states which remained wedded to ISI through their statebuilding period states such as those in the Southern Cone and South Asia. There appears, then, to be a striking correlation between ELI and success in state-building, complemented by an even stronger one between ISI and failures in state-building. Whether or not this correlation was generated by the mechanisms adduced in this paper will, it is hoped, be a subject of future research.

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