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Democracy and the Future of Ethiopia’s Developmental State Conference

Professor Francis Fukuyama, Stanford University

Hyatt Regency Hotel

Addis Ababa, Ethiopia

June 11, 2019

Thank you for the warm and generous introduction. I am really delighted to be here, in Addis, today. This is my first visit to Ethiopia. This is a country that I have followed over the decades, with a good deal of interest, and it is very satisfying to actually be here and talk to people about the remarkable changes that are going on in the country. My talk will be about developmental states, because this is a subject that I have been interested in over the years. I don’t think I can give Ethiopia much specific advice, but I do think that an understanding of the way developmental states have, and have not, worked in other parts of the world is important.

I actually, about 15 years ago, was given a copy of Meles Zenawi’s Master’s Thesis, that he wrote as a correspondence student for a Dutch University, which was an extended critique, basically, of the reigning neoliberal development paradigm. I remember reading it back then and being absolutely astonished at how somebody that was actively a commander in a civil war could take the time to study and to write as sophisticated a thesis as this one. I think, it very clearly laid out the theoretical basis for the Ethiopian developmental state that would follow.

Now, the history of thinking on developmental states has had its ups and downs. It was very much opposed by most free market, American economists back in the 1990s. After the Asian Financial Crisis, and up until the subprime crisis in 2008, I think there was a feeling among many economists that, even if developmental states had worked in Japan, South Korea and China, that they were becoming outmoded. But I think that the crisis, and the rethinking of development that happened after 2008, has led to a resurgence of interest in the developmental state, and a degree of respectability. So, if you look at some of the democratic candidates, like Elizabeth Warren, that are trying to run for president next year, the developmental state or a more active state is definitely on the agenda.

So, I want to just go over a little bit of the theory behind the developmental state, and then what some of the pitfalls and advantages are.

The critique of the neoliberal model, I think, is pretty well established at this point. The Washington Consensus made some fairly heroic assumptions about economic conditions that were faced by developing countries. Most important, was it assumed that institutions existed, property rights existed, the rule of law could adjudicate disputes, and it assumed that there was going to be perfect information on the part of economic actors about market opportunities. It also assumed that financial systems existed, transaction costs were very low, there would be no external shocks, and the international environment would be permissive of development if you just simply get the state out of the way.  And of course, this was wildly unrealistic for most developing countries. And in fact, the theory behind developmental states made a lot of sense in economic terms. For example, infant industry protection was one of the key pillars of many developmental states. It makes sense. The United States itself practiced a high-level protection of its manufacturing industry sector throughout 19 th century as it was becoming internationally competitive. The idea is that it takes time to scale up, to walk down a learning curve, and to be ultimately internationally competitive.

Similarly, I think that, and this is a point that Dani Rodrik has made, there is a huge coordinating function that states can play very usefully in the development process. If you want to build a factory, you are not going to invest in it unless you know that there is electricity, roads and rail roads to take your goods to a port. All of these complementary institutions and investments have to be made before that private sector actor is going to make the investment in the factory, and the coordination that is required to ensure that all of these different pieces exist and come together, is something that oftentimes a state can do, primarily through its investments in things like infrastructure. In fact, this was the kind of policy that many East Asian Developmental States undertook. It was a series of coordination problems, one after another, that occurred in the process of development where the state can actually play a helpful role. And finally, I would say, in favor of the developmental state, that if you are developing late, meaning you are not the first country to industrialize, it is easier. You do not have to invent technology, you can buy the technology. You can see what the next stage in the industrialization ladder is going to be, and you can target moving up that ladder. This is exactly what a state like South Korea did.

The critique of these developmental state theories was made by a lot of economists. Paradoxically, the critique is more political than economic. The critique really had to do with rent seeking. And the argument was that if the government put itself in a position where it was directing investment through subsidized credits, export licensing, or other forms of state intervention. It was a very powerful tool that would be used by politicians not to pursue developmental ends, but to line their own pockets. That infant industry protection, for example, while it worked well in certain countries like South Korea or Japan, it did not work so well in Pakistan, Argentina or many other places, where the government wants the infant grown up to a viable adult, it could compete globally; but the government did not take away the subsidies. They did not allow the child become an adult, and therefore created non-competitive protected industries for essentially political reasons.

And the state, in any event, would not know how to pick winners, it did not have the foresight. Especially as the level of technology began to approach the global frontier of technology development, the state would be much less capable than the private sector of actually knowing what the next stage of technology would be. So, the Japanese industrial state ran into a big problem in the 1990s with its so called fifth generation computer program – it had no idea that personal computer was going to be the frontier of computer development. The bureaucrats did not have any better idea than private market participants. This was the argument that has gone back and forth on the advantages and disadvantages of developmental states.

If you look at the academic literature on the developmental state, I do think that there was consensus on a certain set of conditions that really had to be met, and were met, by many of the East Asian fast developers for this kind of state-directed development to work. By the way, there is a very nice little book published last year by Stephan Haggard, professor at the University of California, San Diego, called “Developmental States”. I strongly recommend it. He was one of the longtime observers of this phenomenon. And he has encapsulated this entire debate in a very compact book – it is only about 100 pages. But I would say that the conclusion of the scholarship says the following: that if a developmental state is actually going to succeed the way that the ones in East Asia did, the single most important condition is state quality. If you do not have a state that has a certain set of characteristics, it is probably better not to pursue this in the first place because the state is, basically, going to screw-up the process.
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