Study Notes

State Intervention – Growth and Development

Level:
A Level
Board:
AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

In many countries, active state interventions have been at the forefront of growth and development strategies.

Brazil

The Brazilian government has established development programmes where active state intervention is seen as crucial for inclusive growth. In 2009 the former President Lula da Silva was quoted as saying:

“If the global financial crisis put any development model on trial, it was the free-market or neoliberal model, which emphasizes a small state, deregulation, private ownership, and low taxes. Few developing countries consider themselves to have fully adopted that model.”

Some elements of their programme include:

  • Direct intervention in the currency markets to prevent the Brazilian Real from appreciating and making Brazilian industries uncompetitive in world markets
  • Strong regulatory control of their banking system + controls on capital flows in and out of Brazil
  • A targeted industrial policy picking likely winners in emerging industries and subsidising them)
  • Conditional cash transfer policies as part of their state welfare system

South Korea

Ha Joon Chang

“Development used to be about the transformation of the productive structure and the capabilities that support it, and the resulting transformation of social structure (e.g., oil-rich countries, Germany after WWII)

Now, development is about poverty reduction, provision of basic needs, individual betterment, and the sustenance of the existing production structure”

South Korea is one of the most notable development success stories of recent times – it has made impressive progress in escaping the middle-income trap and becoming a successful member of the OECD. Their development policies have moved away from the standard Washington Consensus model.

Ha Joon Chang from Cambridge University has written extensively about the South Korean development model.

Ha Joon Chang is a heterodox economist who challenges conventional views on policy for example in the areas of trade, macro policy and industrial policies.

His main argument is that the South Korean development miracle was achieved under policies that combined the market with a high degree of government involvement. He argues that there is no such thing as the free market and that most countries – including the USA and the UK – relief heavily on active state intervention and industrial policies when they were in their fast-development stages.

From South Korea’s experience he picks out some of the following features:

  • Extensive use of selective industrial policy – actively looking for growth potential industries
  • Combining protectionism with export subsidies especially in the early stages of growth
  • Tough regulations on foreign direct investment – moving away from the free flow of capital
  • Active but selective use of state-owned enterprises

Bolivia

Bolivia has chosen a development path that involves partial re-nationalization of businesses / industries that had formerly been privatized. The aim is to keep in government hands the revenues and profits from extracting natural resources. Nationalization has taken place in hydrocarbons, electricity generation and transmission, telecommunications and smelting.

In 2012 for example, Bolivia nationalized two electricity distribution companies owned by Spanish utility Iberdrola. The danger is that ad hoc nationalization of assets will frighten off future private sector foreign investment because of the high risks of state appropriation of private wealth.

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