Editor’s note: Dr. Costantinos Beruhtesfa Costantinos had recently made some brief remarks to local media concerning the role of the private sectors and the developmental state model. In response to HornAffairs’ request for clarification, Dr. Costantinos provided us the following elaborate commentary on the matter. We are optimist that he will continue to provide us insights on this and other areas of his expertise.
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(Dr. Costantinos Beruhtesfa Costantinos)
The UNECA has made the developmental state a model for African development in its 2011 Economic Report. Needless to say, there are both supporting for and counter arguments against UNECA’s submission. Mkandawire asserts, indeed, the creed-edifice ideological nexus distinguishes a developmental state. It’s essential ideological underpinning and source of its political authenticity is ensuring high rates of accumulation and industrialisation, where an élite coalition establishes an ideological ascendancy around which key developmental institutions adhere to. Such characterisation of the developmental state notwithstanding, it may fall into the trap of being repetitious, redundant, reiterative and pleonastic; since evidence is often drawn deductively from the performance of the economy that equates economic success to state strength while measuring the latter by the presumed outcomes of its policies. It has led to myopic focus of scrutiny around success to the neglect of the trial and error nature of policy-making, even in the most successful cases. If a developmental state is not be defined as an invincible regime locally, then the definition must include situations in which exogenous structural dynamic (such as the global economic crises) can torpedo genuine commitments and efforts by the state.
The developmental state model has a very long history. It started in Europe particularly in Germany and France. In fact, even as late as 1968, France had nationalized all financial institutions. Of course, the developmental states’ best model that we know is Japan, which undertook a very heavy and rapid development. Later on came what we call the tiger economy of South Asia: South Korea, Taiwan etc., which had also used the developmental state model.
Well, we have a very wide literature on Japan and the others. What we should know very clearly today is the assessment of the developmental state model was neither developmental nor democratic. I think that is why our country is talking about the democratic developmental state. In most of the tiger economies, it was under military dictatorship that the developmental state developed itself very well. Investors were happy to go and invest in these countries. They had cheap labour. The labour law allowed them to recruit cheap labour and environmental laws were non-e existent. As we hear today, China, which is one of the new developmental state, is now plugged with pollution. Today, I was listening to a radio that the Beijing pollution has gone 26 times more than what is allowed by World Health Organization.
That was the kind of attraction they had.
Nevertheless, these developmental states had what we call an elite coalition. This elite coalition consist of the state which is the purveyor of political goods; the academia, which is doing in the thinking and the research; and of course the private sector, which is the engine of developments. In developmental states, government is responsible for developing the developmental research through the academia to provide the resource for the private sector and regulating industrialization. The second thing about the developmental state model is when foreign investors come into the country they don’t only bring finance; they also bring technology. They bring know-how, the kind of discipline that is necessary for industrialization to happen. The tiger economies actually benefit from it, and a case in point is China. Much of American products we see are made in China. They are only produced in China because of cheap labours and lax environmental and tax laws they have. Otherwise, every research design putting to it is undertaken in the G7 economies. Even then, as little as $10 of the value of every iPhone or iPad actually ends up in the Chinese economy.
When we talk about the developmental state model, it is very difficult to find good example in the mainstream that we could say the good practice in terms of having a democratic state model. Every state is developmental in a sense that it has to make laws, provide the necessary foundation for the private sector to be able to lead development, create employment and opportunity for further research and development.
In the case of Ethiopia, we can achieve development. I do not think that is a problem. However, the fact that the government holds on to the main instruments of production and communication and finance means that our participation in the international arena becomes very low. I will give you an example. With the participation of the international financial institutions in Ethiopia, the big banks come here and start operating. They will bring capital to be able to provide the private sector with the necessary engine for growth.
When we talk about the private sector, we are not talking about the Ethiopian private sector. There is always an undercurrent that Ethiopian private sector is underdeveloped. Under the global economy, we do not have such a situation where a certain private sector becomes responsible for a certain country’s national development. The private sector is now a super-state institution within which companies like IBM and Microsoft and the big banking institutions are in almost every country in the world. They are not accountable to any regime or any single government and therefore when we talk about the private sector and its ability to invest in industrial development, which means we are talking about the global private sector.
Therefore, we should have conditions beyond tax holidays and duty holidays. We should have the enabling environment for this private sector to be able to function in our country. Such a private sector will need finance. Such a private sector will need a kind of latest technology for development and consumer based activity. It is consumer based because we are almost ninety million people now in Ethiopia. The problem of Foreign Direct Investors coming here is that the industries need good international finance. The availability of international banks with some amount of resources would enable the international private sector to have the resources to develop our agriculture.
Frankly much of our country now is covered with what we call the Protection of Basic Services and Productive Safety Nets and micro-finance. If we had had strong financial institutions in this country, they would have been able to provide the private sector with sufficient finance and resources to be able to employ much of the peasantry we have in Ethiopia. The process of development has been globally on move from rural to urbanization, from farming to productive industry. I believe this is the road we need to travel. Even in communist countries under Lenin and Stalin, the idea of what we call changing the farmers into a proletariat class (workers) was the basic concept of development. The role of the state in all this is to create strong regulatory institutions especially in finance industry, in manufacturing and in education. The other challenge we have in this model is the education system is dominated by the government. Especially, while primary education is free and allowed to every citizen, but the quality of education we have at higher education institution does not present opportunities for us to be able to get the necessary skills that the industry wants in our country. I will give you an example. We have more than two million Ethiopians who are selling their skills to the European and American economies; but we do not have that number who can do the same to our economy.
The other problem of course is the level of meritocracy in governments. The merits and qualification of people employed by government need to be assessed very carefully because they are the ones leading developments especially at the local level. Therefore, the government, if it wants to implement ‘development’ programmes by itself, it has to be able to pay competitive remuneration. You can see for example how medical doctors as soon as they graduate leave the country. A country like Botswana has the majority of their medical staffs Ethiopians. So how do we stop this brain drain from our country and ensure that these people live within Ethiopia? I have been on record saying that the role of the state in achieving rapid and sustained economic growth and development combined with deep structural transformation must be channelled through a disciplined planning approach… such a role is best performed by states operationalising transformative institutions that are both developmental and democratic.
Nevertheless, awkward comparisons of African entrepreneurs against Western capitalists and the fear of state capture by corrupt ‘traders’ have led to a naïve realism of public power and private interests, a view that pre-empts or precludes the possibility of building elite developmental coalitions. If market entrepreneurship is to be practicable, it must be augured on the aptitude, faculty and competence of an entrepreneurial genre. The state, as a regulatory organ, has to direct state policy toward nurturing indigenous capitalist accumulation by facilitating institutions of stabilising capital-labour relations and supplying technical services and physical infrastructure. Social entrepreneurs on the other hand must convince the nation that capital accumulation is in the national interest, while acquiring the capacity for thriftiness and investment and organisational capacity to not only manage one’s enterprise, but also impose self-discipline.
A process of continuous educational and technological innovation, industrial upgrading and diversification and improvements in the various types of infrastructure and institutional arrangements constitute the context for business development and wealth. As witnessed in the experience of all countries that have successfully transformed from agrarian economies to modern advanced economies, however, market mechanisms may not be sufficient and the government has a potential role to play in helping such entrepreneurial ventures. Think tank driven knowledge and innovation, human capital institutions, infrastructure and policies, including fiscal, monetary, exchange rate, capital flows and trade policies, are important for success. Critical human skills are of essence in the establishment and development of capital markets. The quantum of skills in the state is key to the positive role of government aligning financial intermediaries that convert savers to investors, the principal clientele of markets.
Advocating a stronger role for the state in development should neither be seen in terms of the old and tired debate of state versus the market. Nor should it be understood that the private sector should not remain the only engine of growth. The issue is not whether the state, like the market, should play a role in economic transformation but rather how to strengthen their capacity and accountability to design and implement more effective policies and strategies. Events of many emerging economies’ success stories provide valuable lessons that may not simply be transplanted… Ethiopia must nurture think tanks. In the interminable faculty of think tanks to innovate and an unquenchable desire to reinvent, developed nations reap the developmental booty of an exceedingly proactive and skilled entrepreneurial leadership.
Like Ghana and Brazil, state planning and policy-making must be based on on-going dialogue; a coherent and coordinated approach between different government agencies in their dealings with the business community; flexibility in response to global phenomena and emphasis on achieving high levels of performance. Beyond GDP growth, performance anatomy is perhaps the most elusive characteristic of all great economies. Nonetheless, interaction between leadership and strategy, technology and human capital development, meritocracy, performance measurement and innovation, are critical to defining a high-performance market economy that lifts nations out of penury.
While Ethiopia’s economy has been growing rapidly, so far the role of the private sector as we see from the assessments made by the International Monetary Fund and the World Bank has been one of the lowest in the world. Therefore, private sector investment is the only empirical proof that our country can develop economically. Moreover, that economic development should lead us to sustainable democracy. I think when we talk about the developmental state model we have to define very clearly, what the roles of the private sector and that of the academia are.
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*The author, Dr. Costantinos Beruh Tesfa Berhe, is Professor of Public Policy at Addis Ababa University. His area of work include participatory policy analysis, formulation and management – local institutions, civil society development, and strategic planning and resource management as a senior adviser for a number of international and regional organizations such as AU, EU, UNDP, UNECA, UNICEF, and countries in Africa. He is author of numerous papers published in professional journals, presented to workshops and symposium. Recently he has written serious of books on governance, resource management and climate change adaptation.
