JPRI Critique Vol. V No. 4 (May 1998)
The Myth of the Powerless State
by Linda Weiss

Whether as enthusiasts or critics, analysts or observers, many contemporary thinkers subscribe to the influential view that globalization is the master concept of our time. Those who adhere to the global idea firmly believe that as the integration of the world economy advances, national governments are becoming less relevant, losing their powers not only to influence macroeconomic outcomes and to implement social programs, but also to determine strategies for managing the industrial economy. From their globalist perspective, the string of currency crises in the East Asian region in the second half of 1997 are simply one more piece of incontrovertible evidence that, when push comes to shove, the nation-state is but a pawn in the invisible hand of the global market.

I would like to question such claims of state powerlessness. I believe the impact of external economic pressures on national economies and public policies depends to a large degree on the strength or weakness of domestic institutions. What institutions and orientations strengthen or weaken the state's transformative capacity? Why is a state robust in some cases and weak in others? Why are a state's responses to international pressures managed either effectively or poorly, and why does state involvement get such mixed results, producing relatively robust effects in some settings but poor or perverse outcomes in others? Answers to these questions can only be arrived at by looking in each case at the particular combination of a state's fundamental priorities, its architecture, and its linkages with key economic actors.

Where the synergy of goal-oriented state agencies, closely interacting with key economic actors, bolsters the state's transformative capacity, we have something I call 'governed interdependence.' In those cases where governed interdependence has taken a definite form and adapted to the changing tasks of economic management (e.g., Japan, Germany, and Taiwan) states have retained or are in the process of reconstituting a fairly robust capacity for guiding and coordinating economic change. In such cases, adjustment to economic crisis is likely to mobilize and reinvigorate core state capacities. In other cases where interdependence has become partially, though increasingly, 'ungoverned' (e.g., South Korea in the 1990s), state capacity has been relatively weakened, the potential for business failure has increased, and the response to economic crisis is likely to be more protracted and uncertain.

My argument is not concerned with that fictional domain, state omnipotence. What I do seek to highlight, in contrast to globalization orthodoxy, is that states are far from powerless and passive as they confront global market forces. In principle, if not always in practice, there is much that states can do to foster the creation of wealth and social well-being. The tasks of national economic management are not fixed and finite but ever-changing; and since the tasks are always evolving, it stands to reason that the policy tools must also vary over time. Contrary to much current thinking about the state's place in economic management, such changes imply that states adapt, not retreat, and they suggest tighter rather than looser connections with economic actors. In short, there are numerous areas where state involvement in the industrial economy remains important and vital to national prosperity, even as economies develop and mature.

The series of financial crises that have engulfed South-East Asia (mainly Thailand, Malaysia and Indonesia), and most recently South Korea are cases in point. In many quarters, the occurrence of severe financial dislocation in the region is being taken as evidence of the final unraveling of the East Asian 'miracle,' as a sign of the profound pitfalls of state-guided development, and as final triumphant proof of the overwhelming force of global markets disempowering national governments. I would argue that the financial dislocation of the kind we are witnessing in the late 1990s definitely gives some muscle to the otherwise flabby notion of a globalizing economy. Indeed, money markets are perhaps the only true face of global capitalism in the late twentieth century.

So what does this whole episode of apparent financial meltdown in Northeast and Southeast Asia imply? For many commentators, what began as a currency crisis and developed successively into a stockmarket and banking crisis seems to be a clear case of strong states being brought to heel by global markets, or of markets exacting revenge on excessive state involvement. Dramatic currency devaluations of up to 30 percent, effectively reducing the hard-won benefits of rapid growth, seem to leave no doubt that global markets rule. Or do they? On the face of it, East Asia's financial woes offer an open-and-shut case: the state is heavily involved in the economy, so the strong state must be the source of the problem. The neoliberal message could not be clearer: state involvement earns the revenge of the market. What this viewpoint overlooks, however, is that state involvement is not the same thing as a state's transformative capacity.

This important point can be restated in a slightly different way. Transformative capacity is not widely diffused throughout the region. The point deserves emphasis because many commentators, including the World Bank, have helped to perpetrate the view of an undifferentiated East Asia. In this view, it seemed as if each of the region's component parts was moving in roughly the same direction, following basically similar goals with institutionally similar means. However, the differences most notably between Southeast and Northeast Asia, remain stark.

For example, in the second-generation NICs of Southeast Asia, the political priorities, state structures, and government-business relations that prevailed during their high-growth phase have differed remarkably from that more typically found in Northeast Asia. At the most basic level, there are major differences in public priorities, as well as in the number, quality and organizational commitment of career bureaucrats who might be mobilized to coordinate transformative projects.

One important consequence--evident as much in Thailand and Indonesia as in Malaysia--has been the absence of investment coordination to ensure that resources are directed to more productive ends. A substantial proportion of domestic and foreign finance has been allocated to speculative projects (especially to property development and showcase projects) rather than to industrial production. In Thailand in the 1990s, for example, the availability of easy finance coupled with the virtual absence of investment guidelines contrasts dramatically with the highly coordinated investment strategies put in place earlier by the Taiwanese, Koreans and Japanese at a similar stage of development. Whereas the state-guided strategies of the Northeast Asian states generated high levels of investment in high growth industries, Thailand's uncoordinated approach, coupled with the availability of easy money, encouraged intense speculative activity, leading to a frenzy of over investment in the property sector and ultimately contributing to the currency crisis of 1997.

Slightly different versions of this basic tale can be told about Malaysia and Indonesia. What all of them point to is the weakness of domestic institutions. The relatively weak transformative capacities of these states led to the massive inflation of asset values that rapid growth and easy money allowed. The Southeast Asian economies have thus become ever more vulnerable to the disruptive potential of global money markets. Viewed from this perspective, the Southeast Asian crisis provides little support for the thesis of 'strong states at the mercy of global markets.' If the state turns out to be part of the problem in this setting, it is more precisely a problem of too little state capacity, rather than too much state involvement, that has left these countries vulnerable to global (and domestic) speculators.

The Korean crisis of November 1997 is undoubtedly more challenging to my thesis. Korea's transformative capacity is less stable, and its difficulties, although superficially similar to those of Southeast Asia, have quite different roots. According to the The Economist (November 29, 1997), a long tradition of state-guided development is the fundamental cause of Korea's problems. But this verdict seems rather wide of the mark, for it completely overlooks a number of important changes that, in combination, have substantially altered the structure of 'state-guidance.'

Whereas the Southeast Asians have typically maintained little control over the pattern of domestic investment, the South Koreans have increasingly relinquished state control over the past decade. With partial liberalization of the financial system, the state progressively loosened its grip over the type and level of industrial investment sustained by the Korean chaebol. The chaebol, in turn, achieved greater independence of the state-run financial institutions. Instead of depending on state-directed credit to feed their huge investment requirements, they turned increasingly to foreign capital markets, taking advantage of competitive interest rates. But these conglomerates hedged their bets, on the one hand seeking financial independence in international markets, while on the other hand looking to the state for support in times of trouble.

In this half-way house of economic management, the Korean system of governed interdependence became ever more 'ungoverned' in critical areas. Increasingly, the chaebol were doing their own thing, spreading their tentacles into other chaebols' areas of protection even when--in spite of all the economic bureaucracy's warnings and protestations--overlapping investments threatened to result in overcapacity (as occurred in petrochemicals, steel and, most recently, automobiles).

In short, the Korean system has, since the late eighties, witnessed a gradual unraveling of the three fundamentals of transformative capacity. First, as returning U.S.-trained economists have colonized the economic ministries preaching state retreat from economic affairs there has been mounting disagreement over the definition of public priorities, hence over the nature of the national system of economic management. Second, the Economic Planning Board, the key pilot agency of industrial transformation since the 1960s, has been dismantled. Finally, the chaebol have achieved greater financial independence, thus loosening the government-business ties that underpinned the strong transformative capacity of the high-growth era.

In this context of diminished coordination of investment behavior, Korean companies rushed to invest in each other's areas and failed to develop the self-governing collaborative structures through which to regulate excess production. The results are now all too clear: a weakened state capacity, the slowing of industrial and technological upgrading, and substantial overinvestment in mature industries. The Korean crisis shapes up as a crisis, not of a strongly intrusive state, but of weakened institutional capacity for governing the economy.

The South Korean experience raises two important questions. One is whether the transformative capability of developmental states--i.e., synergistic government-industry coordination--has had its day. The experiences of Taiwan and Japan would seem to argue against such a view. The other question is whether, once unraveled, core capacities can be recomposed or knitted together once again. Germany's postwar experience, especially of the past two decades, would indicate that recomposition to meet new tasks is indeed possible, even after a lengthy period of state submergence.

In the Korean case, the current crisis would seem to provide an extraordinary opportunity for state recomposition. Above all, it offers strong potential for the very restructuring of the conglomerates and their financing that the government has long sought. But while the depth of the crisis provides an opportunity for organizational reform of the chaebol and for recomposition of state capacity, the outcome will be decided in the realm of domestic politics, not global markets.

LINDA WEISS is associate professor of comparative politics in the Department of Government, University of Sydney, and coauthor with John M. Hobson of States and Economic Development: A Comparative Historical Analysis (Cambridge, UK: Polity Press, 1995). This essay for JPRI Critique is adapted from her latest book, The Myth of the Powerless State (Cornell University Press, 1998).

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