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Contributions from
the Column
Focus
Lessons learnt from East Asia
Ghana: problems with private sector promotion
Private business as technology partner
Making FDI work for the poor
Benefiting from globalised value chains
05/2005
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Government intervention and private enterprise
Poverty reduction is impossible if the economy does not flourish, driven by a dynamic private sector. However, a purely market-led strategy simply increases corporate profits. It does not help a national economy to develop. Japan and the East Asian “tiger states” took a different approach. In these cases, strong governments competently directed private enterprise. Development policy should consider this model.
[ By Reinold E. Thiel ]
Cashew nuts are a popular snack with an evening beer but, far more importantly, they are a major economic asset for a number of African countries. Tanzania and Guinea-Bissau each account (or accounted) for 8 percent of world production, Ivory Coast for six percent and Mozambique for three percent. The importance of cashew nuts is even clearer if looked at from the countries’ perspective. They were Mozambique’s second largest export product for a long time – next to sugar. Today, however, most of the factories which processed cashew nuts for export have closed down in Mozambique and Tanzania. This has been caused by the privatisation and liberalisation policy of the World Bank and the International Monetary Fund . What happened?
Mozambique had built up an industry processing cashew nuts for export. In 1994-95, at the insistence of the World Bank, the 18 state-owned businesses, with approximately 10,000 employees, were privatised and passed into the hands of local business people. No sooner had this happened, than the World Bank released a study which claimed that the processing industry was so inefficient that the country was losing money. The Bank said it would be more profitable to export raw nuts to India: the country’s export earnings would increase, as would farmers’ incomes. Until then, Mozambique’s government had banned the export of unprocessed nuts in order to protect its own industry. The multilateral organisations now made the free export of cashews a strict condition for further loans, and the government found itself forced to lift the ban.
As a result, most of the businesses had to cease production (in 2003, only seven of the 18 were still in operation). Nonetheless, farmers did not make any more money than before. Middlemen were pocketing the profit, factory workers were on the streets and export earnings dropped. Whereas Mozambique earned $ 151 million in 1971 from cashew exports, the figure had gone down to only $ 11.5 million by 2001.
In a study carried out subsequently at the personal request of World Bank President James Wolfensohn, the Bank stated that the policy imposed on Mozambique was totally wrong and should be abandoned. It said that the Indian cashew nut industry was only profitable thanks to state subsidies and that, in Mozambique, the value added by processing was a reason to keep the industry alive. It had, however, already been ruined. The latest development was that two transnational corporations (OLAM from Singapore and TechnoServe, a US-based organisation) formed a partnership in February 2005 to revive the cashew industry in four African countries (including Mozambique). OLAM is the world’s largest processor of cashew nuts and also controls the Indian market and TechnoServe has the latest technology. Multinationals are taking over.
Serving corporate interests
Perhaps it was a mere coincidence that OLAM and TechnoServe appeared on the scene. However, an explanation might also be found in a book which appeared on the New York Times 2004 bestseller list: “Confessions of an Economic Hit Man” by John Perkins. The author describes how he travelled all over the world, commissioned by the US government and multinationals, to draw the governments of third world countries into a network of US interests, to make them financially dependent and bring them under political and economic control. Perkins describes cases similar to the one above, and others such as that of the Iranian Prime Minister, Mossadegh, who nationalised the American oil companies and was thereupon ousted from office. Companies such as Bechtel and Halliburton are named, which recently played disreputable roles in Iraq. These cases are always about restricting the opportunities for autonomous national economic decisions and making the third world countries dependent on the US.
The following case (not one of Perkins’) is another such example. Ghana has some of the world’s largest bauxite reserves. After Ghana’s independence in 1957, one of President Nkrumah’s top goals was to exploit these reserves. Four things were needed: mining the bauxite, an aluminium smelter, sufficient production of electricity and a port. The country funded construction of the port – the colonial government had handed over healthy coffers. The Volta Dam, which allowed cheap electricity to be produced, was financed by an American loan (after Nkrumah had threatened to ask the Soviet Union for funds). An American consortium, Kaiser/Reynolds, built the aluminium smelter VALCO. This left the most important thing: the bauxite mine. But it was made clear to Nkrumah that this could not be financed too. A contract provided that alumina (the intermediate product between bauxite ore and aluminum) should be imported for ten years – from far-off Jamaica. After ten years, this would be reconsidered.
The Volta Dam delivered the first electricity in 1965, aluminum production began in 1966, Nkrumah was ousted in a coup in 1967. There are still rumours that the US was involved. The bauxite reserves in Kibi, which is barely 100 km from the port of Tema, were never mined and the contract was still in force until recently. Since there was no duty on the alumina imported and the aluminum exported, Ghana never really reaped any benefits from the project. VALCO was sold by Kaiser to Ghana in 2004. The plant no longer yielded adequate profit with increased cost of electricity. Bauxite mining is now once again under discussion.
The two examples of the cashew nut industry in Mozambique and the aluminum smelter in Ghana clearly show the blessings associated with private enterprise – for internationally active corporations, not for the countries concerned. In both cases, governments were not strong enough to protect the interests of their national economies from the large corporations and their strategic allies. This is one version of how private enterprise development can take place.
Active governments in East Asia
There is another version which is typical of the East Asian tiger states. It first occurred in Japan and then, following the example, in South Korea and Taiwan, finally in Malaysia and Thailand too. These countries have developed their economies, raised the standard of living for their people and all but eliminated poverty. They did adopt the private, capitalist model for development, but not the market-led variety. The state kept the leading role for itself. This should not be confused with the state-owned economy found in socialist countries. Here, we are dealing with the model of private enterprise directed by the state.
Japan, an industrialised country even before World War II, had to rebuild its economy after 1945. This was done through “administrative guidance”, in other words, in close cooperation of government and corporations. The most important state agencies involved were the Ministry of International Trade and Industry (MITI), the Economic Planning Agency (EPA) and the central bank. Special branches in all government bodies (“mirror units”) took care of those industries that planners considered most promising. These were targeted by the State for support and enjoyed preferential credits, subsidised import of machine tools, upgrading of infrastructure, grants for joint research projects and the protection from excessive competition. The Japanese market was shielded from imports for a considerable time, until its own industry was competitive and able to export. This strategy was so effective that Japan soon became an efficient competitor of the old industrialised countries.
Development in the “small tiger states” did not follow the Japanese model in all details, but there were more similarities than differences. State control was more rigorous in South Korea (a “development dictatorship”) than it was in Japan – but the instruments used were similar. The main players in economic development were the large private conglomerates, or “Chaebol”, which are similar to the “Keiretsu” in Japan (a set of companies with interlocking business relationships and shareholdings). Apart from state planning specifications, these conglomerates were closely connected to the state by recruiting civil servants as their senior staff. In Taiwan, there were more state-owned industries to start with (they clocked up 56 per cent of all industrial value added in 1952). Even in the 1970s and 1980s, state-owned companies were still being set up in industries with high investment costs (steel, ship building, the automotive industry). Only later were they privatised. But as early as the 1960s, there also was rapid growth in small- and medium-sized enterprises. Their share of exports amounted to 65 per cent in 1988. In both countries, there was a land reform early on, which set the basis for an equitable distribution of wealth and, at the same time, made available the funds for the industrial development.
A second generation of tiger states, Malaysia, Thailand and Indonesia, followed this model with some variations. Malaysia’s long-standing Prime Minister Mahathir, designing a Look-East Policy, explicitly deviated from the European-American model. The Pioneer Industries Ordinance of 1958 set the direction and was later replaced by the Investment Incentives Act. The other countries had similar laws.
In all these cases, it was decisive that there was (to varying degrees) a “rational bureaucracy” (as defined by Max Weber) which did not merely look at the country with predators’ eyes. To be sure, there was and is corruption. However, bureaucrats were always well aware that one must first invest before one can reap benefits. Following the model of MITI and EPA in Japan, state planning agencies were set up, which gave the political specifications for economic development: the Economic Planning Board in Korea, the Council for Economic Planning and Development in Taiwan, the Economic Planning Unit in Malaysia, the National Economic and Social Development Board in Thailand. The intellectual elites of the civil service were gathered this way. They followed external advice only if that served the country. Foreign investment (in principle welcome by all means) was subject to strict conditions.
Oskar Weggel, a Hamburg-based Asia expert, confirms that this policy was good for the people of those countries, saying that, astonishingly, growth did not distort the distribution of incomes but, on the contrary, led to a fair distribution which is almost unique worldwide. In the meantime, as the third generation, Mainland China and Vietnam are following the model. They have not yet reached the same stage of development.
Lessons for poor countries
The East Asian countries are the only countries in the world to have reached a level of economic and social development similar to Europe and its derivatives in North America and Australia. Neither real socialism in East Europe nor anarchic capitalism in Latin America led to comparable results. Therefore, the question arises what conclusions can be drawn from the Asian experiences for other poor countries in the world. I believe that government-coordinated private enterprise, rather than market liberalism, is the model which national economies should follow if they are to prosper.
There can no longer be any doubt that the Washington Consensus has failed. However, its successor, the Post-Washington Consensus, only has a vague orientation towards poverty eradication. Nobody has a precise idea what instruments might serve effective implementation. In its justification of a research project called “Operationalising pro-poor growth”, the KfW development bank states: “Currently, our knowledge is limited concerning which political measures have to be taken in order to increase the broad-scale impact of economic growth processes.” Hopes are mainly directed at an increase in development aid, which could then be used to expand the social sector. There is almost no mention of economic development in the Poverty Reduction Strategy Papers, the most important achievement in recent anti-poverty policy. And this while nobody doubts that economic growth is a necessary requirement for poverty reduction.
The creation of an “enabling environment” is still the last word on how to stimulate economic development. However, it has for long been obvious that, on its own, this strategy only leads to cherry-picking by local and foreign investors. They look for individual investment options that are profitable (such as aluminum in Ghana). However, this does not contribute to the development of the national economy, but only serves shareholder interests.
The early development economists in the 1950s and 1960s, such as Hirschman, Nurkse and Rosenstein-Rodan, were right after all. Hirschman expected impulses for development from his concept of “forward and backward linkages”, through processing chains in other words. Rosenstein-Rodan recommended the “big push”, simultaneously supporting several industries. The names of these development theorists have wrongly been forgotten. Paul Krugman, one of the most celebrated economists today, called this approach “high development theory” in 1994 and stated that it “really does make a lot of sense, after all”.
If German development policy is truly interested in starting the economic development of third world countries in cooperation with private partners, then it should endeavour to learn from the East-Asian model in some or at least one of its priority countries. This would require first, support for the creation of a Planning Board. A number of well-trained and motivated planners and economists originating from the country in question should be recalled from wherever they are currently employed (Europe, USA, international organisations) and be paid attractive salaries. Their task would then be to design an economic and social master plan which should amount to more than a mere wish list. Finally, adequate funds would have to be made available to implement the plan – among other things, to draw private investors into the country with appropriate tax and other incentives (but not by providing rent-opportunities). This would be a project calling for great staying power – at least 20 years, with considerable German involvement to start with, decreasing over time. A condition for this would nevertheless be that the country is released from many of the World Bank and IMF liberalisation conditions – they must be allowed to use the same ladder that other countries, today industrialised, climbed up before them.
Reinold E. Thiel
was Editor in Chief of D+C until the end of 2003. Since then, he has been working as a freelance writer.
ret-gzt@t-online.de
References
Amsden, Alice H., 1994: Why Isn't the Whole World Experimenting with the East Asian Model to Develop? in: World Development, vol. 22, no.4
Draguhn, Werner (Ed.), 1993: Neue Industriekulturen im pazifischen Asien.
Hamburg: Deutsches Übersee-Institut (German Overseas Institute)
Krugman, Paul, 1994: The rise and fall of development economics, in: Rodwin, Lloyd, Donald A. Schon (Eds.): Rethinking the development experience.
Washington: Brookings Institution Press
Perkins, John, 2004: Confessions of an Economic Hit Man. Berrett-Koehler Publishers
Voss, Sönke, 2002: Das Volta-Projekt in Ghana. Research paper. Kiel.
Internet: http://www.soenkevoss.de
Weggel, Oskar, 1999: Wie mächtig wird Asien? Munich: C.H. Beck
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