metadata: authors: 0: author: Findlay, Ronald
count: World
docna: 0: docna: Is the new political economy relevant to
            developing countries ?
docty: Policy Research Working Paper
subtopic: Social Analysis,Quality of Life & Leisure,National Governance,Government Policies,Construction Industry,Common Carriers Industry,Food & Beverage Industry,General Manufacturing,Pulp & Paper Industry,Plastics & Rubber Industry,Labor Markets,Administrative & Civil Service Reform,Public Sector Administrative & Civil
            Service Reform,International Trade and Trade Rules,Youth and Governance,Business Cycles and Stabilization Policies,Democratic Government,Public Sector Administrative and Civil
            Service Reform,De Facto Governments
teratopic: Governance,Environment,Macroeconomics and Economic Growth,Finance and Financial Sector Development,Public Sector Development
abstracts: cdata!: Protectionism and industrial regulation
            are two topics in which the interplay of politics and
            economics is so strong that one wonders why the intellectual
            merger between the two approaches in the New Political
            Economy has taken so long. After describing the emergence of
            the state in Western Europe and the contemporary Third
            World, the author presents an economic model of the state,
            in which he tries to integrate its productive and predatory
            features. He applies the insights from that analysis to some
            simple general equilibrium models of trade theory, to
            consider the activities of a public sector within open
            economies in which trade taxes provide the main source of revenue.
repnme: repnme: Is the new political economy relevant to
            developing countries ?
display_title: Is the new political economy
            relevant to developing countries
listing_relative_url: /research/1989/11/700414/new-political-economy-relevant-developing-countries
topicv3: Political Economy of Reform m1326263 836,Manufacturing Sectors m1326521 1281,Trade m1326924 698,Human Resources for Public Sector m1327490 724,Labor Supply m1504055 2751
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Governance,Environment,Macroeconomics and Economic Growth,Finance and Financial Sector Development,Public Sector Development
origu: Policy Plan & Prog Review Dept (PPR)
no_of_pages: 49
model_extractions: **Maroeconomic Adjustment and Growth**

**Poly, Planning, and Research |**

Protcctionism and industrial regulation are two topics in which the interplay of politics and economics is so strong that one wonders why the intellectual merger between the two approaches - in the New Political Economy - has taken so long.

The literature of the New Political Economy largely postulates a framework of political institutions and behavior like those in the advanced industrial countries, especially the United States. The state is seen as passive, and the emphasis is on the activities of interest groups to gct lcgislation favorable to themselves passed by political parties whose only concem is electoral success.

Most developing countries are ruled by military juntas or one-party dictatorships. One doesn't see in them the kind of equilibrium between contending interest groups that characterizes the New Political Economy.

Organized private interests in civil society can be said to emasculate the state in industrialized nations. In contrast, the state in developing countries disproponionately dominates (often represses) a weak and fragmented civil society (often in the interests of a minority that controls the bureaucratic apparatus).

Is the New Political Economy relevant in the Third World?

Yes, says Findlay.

Using the methods and spirit of the New Political Ecunomy, one can develop a theory of the autonomous state, applying it to the conditions prevailing in different developing countries. Using this approach makes possible an explanation of several major featt es of Third World experience: the extensive growth of govemrnment relative to the private sector, the intensity of trade restrictions and the associated phenomenon of the import substitution syndrome, the urban bias of economic policy and resource allocation, and the degree of dependence on foreign capital.

After describing the emergence of the state in Westem Europe and the contemporary Third World, Findlay presents an economic model of the state, in which **lie** tries to integrate its productive and predatory features.

He applies the insights from that analysis to some simple general equilibrium models of trade theory, to consider the activities of a public sector within open economies in which trade taxes provide the main source of revenue.

He applies his analysis to Turkey (which went from surplus-maximizing traditional monarchy to developmental dictatorship), India (a successor state to a gunpowder empire), Africa (with its marketing boards), Latin America (whose diverse economies tend to go through three stages: o;;garchy, populism, and bureaucratic-authoritarianism), and the four Far Eastem newly industrializing economies (Hong Kong, Korea, Singapore, and Taiwan, the star performers in development).

This paper is a product of the Macroeconomic Adjustment and Growth Division, Country Economics Department. Copies are available free from the World Bank, - 1818 H Street NW, Washington DC 20433. Please contact Raquel Luz, room Ni 057, extension 61588 (44 pages with figures).

The PPR Working Paper Series disseminates the findings of work under way in the Bank's Policy, Planning, and Research I Complex. An objective of thte series is to get these findings out quickly, even if presentations are less than fully polished. LThe fn'ings, interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank.<sup>4</sup> Produced at the PPR Dissemination Center
# Is the New Political Economy Relevant to Developing Countrles?*

<!-- Start of picture text --> by<br>Ronald Findlay<br><!-- End of picture text --> <!-- Start of picture text --> Table of Contents<br>I. The Autonomy of the State 4<br>11. An Economic Model of the State 12<br>111. Factor Proportions, Trade Taxes, and the State 19<br>IV. Some Particular Experiences 29<br>Bibliography 37<br>Figures 40<br><!-- End of picture text -->

* Paper presented at the Conference on "The New Political Economy and Development Policy-Making," Lake Palpa, Colombia, July 12-14, 1989, and forthcoming in the proceedings of the Conference to be edited by Gerald M. Meier. For helpful comments and encouragement, I would like to thank Pranab Bardhan, Jagdish Bhagwati, Gerald Meler, Gus Ranis, T. N. Srinivasan, Augustine Tan, John Toye, and Stan Wellisz. The paper was mostly written while visiting the Faculdade de Economia, Universita Nova de Llsboa, In the summer of 1989. 1 am grateful to the Director, Professor Jaime Reis, Luis Cunha, and other colleagues for their kind hospitality and generous support during my visit.
# THE NEW POLfTICAL ECONOMY!

It's **Explanatory Power** as Related to LDCs The term New Polidcal Economy presumably refers to the extensive work done over the last two or three decodes under a variety of names, prominent among which have been "public choi.ce"' "rent-seeking", "directly-unproductive profit-seeldng activities" and, most recently, "new institutional economics". The pioneers have been Anthony Downs, Mancur Olson, James Buchanan, Gordon Tullock and Douglass North, whose work has ated increasing attention from economists specializing in more traditonal areas such as innational trade and industrial orgnization. Prtectonism and industral regulation are two topics where the interplay of politics and economics is so strong that it is surprising how long it has taken for the inteliectual merger between economic and political approaches to occur., For the most part this literature has posuaed a framework of political institutions and behavior that coesponds to that of the advanced industrial countries and, even more specifically, to mhat prevailing in the contempomry United States. The "state" as such is passive and the emphasis is on the activities of interest groups to obtain legislation favorable to themselves through the intemediation of political parties whose only concern is with electoral success. Other work has been concerned with voting schemes and problems of constitutional design, which also presumes "pluralist" dernocracies of the Anglo-Saxon or Swss type.

it is of course an unfortunate fact that most LDCs today are rued by militaiy juntas or one-party dictatorships of one kind or another, in none of which does it appear that economic policy is decided by the kind of equilibrium between contending interest groups that is such a prominent featume of the New Political Economy. The state tends to dominate "civil wiety", which is weak and fragmented in the LDCs, whereas the rich texture of
organized private intsts in civil society emasculates the state as an autonomous entity in the context of advanced industrial democracies. Hence, I suppose, the reason for Gerry Meier to raise the question with which this paper will be concerned, of whether or not the New Political Economy is relevant for the LDCs. My answer, in short, is going to be a resounding "yes", despite the fact just noted that most of the existing literature on the New Political Economy generally presumes political conditions vastly different from those prevailing in the typical LDC The bc reason for the positive posidon that I have taken on this question is that one can use the methods and the spirit of the New Political Economy to develop a theory of the autonomous state, which can then be applied **to** condidons prevailing in LDCs of different types. Thc use of this approach makes possible a parsimonious and hopefully credible explanation of several major features of Third World experience. These are the extensive growth of government relative to the private :ector, the pervasiveness of "corruption" in varied forms, the intensity of trade restrctions and the associated phenomenon of the "import substitution syndrome", the "urban bias" of economic policy and resource allocation and the degree of dependence on foreign capitaL Since the notion of the "state" is going to be central for my argument the first section will be a brief survey and analysis of the emergence of the state in the experience of Western Europe and its nature and charcter in the contemporary Third Wor]kL The next section is an economic model of the state, which will attempt the task of integmting the "productive" and "predatory" aspects of this institution. The third secdon will apply the insights of this apprch to the state to some simple general equilibrium models of the trade theory type which will consider the activities of a public sector within open economies in which trade taxes provide the main source of revenue. A final section will offer comments on the relations between the present analysis and recent work on the political economy of some selected countries that might be of general interest.

2
To avoid misunderstanding I should stess that the objective of this paper is strictly "positive" in natuc, i.e. to present hypotheses and models based on the insights of the New Political Economy to see how far they can go towards being consistent with at least some of the major "stylized facts" of Third World experience. It is s intended as yet another diatribe against state intervention and in praise of the "magic of the market". The whole question of what La the appropriate role of the state in economic development, the "normative" issue, is left entirely aside, thought of course the analysis presented may hopelly have some relevant implications for any attempt to address it.

3
# **I.** The Antonnmv of the State

(i) "Bringing the State Back In" is the tide of an interesting recent book edited by Theda Skocpol and others.<sup>2</sup> The common theme that Skocpol finds in much recent<sup>social</sup> science literure, and which is further emphasized in the papers of the edited volume, is the rediscovery by a number of authors, Marxists as wel as "mainstream" scholars, of the "autenomy of the state", which makes it necessary to treat it as a dynamic independent force instead of as a passive agent of society at large and its various interest groups contending "horizontally", as in libeal pluaist theoy, or as the "executive committee of the ruling class" as in vulgar Marxism There are many theoretical avenues through which this issue of the autonomy of the state can be addessed, which are not only not mutually exclusive but which can possibly contribute to a wider Marxists, foilowing Engels in O heami1y Privai and.Ui Sate and Marx in his Eightamh Riirofn is NAUWa look to situations in which class interests achieve something of a deadlock **in** their natual antagonism, leaving it open to a dynasty, dictator as rling clique of some s'rt to pursue independent policies of aggrandizement that may diverge from the interests of each of the classes themselves, though of course a prudent ruler would be careful to play off one group against another by partial concessions and favors, Some of these autonomous "ends" might be the wealth and privileges of the ruling circles, military glory, or what is most likely in the modem world, an enlargement of the st's bureaucradc apparatus for its own sake. The sociological distincdon between "latent"<sup>and</sup> "manifest" motived objectives is of cowse crucial in this regid. 'Economic development", "national securty, "socialist construction" are all labels that have<sup>been used</sup> with greater or less sincrty but all of which opeate at the "manifest" level. The task<sup>of</sup> the social scientist should be to penetrate these myths, while recognizing their force, and<sup>to</sup> reach into the "latent" core of individual or group self-interes **t** hat underlies them.<sup>3</sup> 4
Perhaps the mort natural approach for an economist to the problem<sup>is in terms of</sup> the "principal-agent" famework. Thus whether one views the government as the agent of "the people", as in Locke or Rousseau, or of the "rulin ,Iass" only as in thc cruder Marxian varianr, the principal in both cases has the difficult problem of "monitoring"<sup>the</sup> activities of the agent to see whether or not they are in keeping with the<sup>implicit social</sup> contract that underlies both eases. The conventional principal-agent<sup>problem is of course</sup> enormously compounded by the fact that the "agene' in this<sup>case is empowered with the</sup> "monopoly of the use of force, that is necessary for the enforcement<sup>of the conventional</sup> types of contract between principals and agents. Once the people,<sup>or the bourgeoisie, or</sup> the proletariat appoint or accept a "guardian" then who is to guard them<sup>from the guardian?</sup> Recognition of this problem probably led Hobbes to his conception of the sovereign<sup>as</sup> necessarly absolute.

(ii) The "modem state" as we know it evolved in the West during the course<sup>of</sup> a miilennium from tAc feudalism of the Carolingian empire, through<sup>the "sdndel</sup> ' and the absolutist state to the constitutional state of the nineteenth century,<sup>culminating in the</sup> universal suffrage and the welfare state of today.<sup>4</sup> Throughout this<sup>evolution the state at</sup> each phase was intimately involved with the evolution of civil society,<sup>both shaping and</sup> being shaped by it. Even in its most "primidve" form, the feudalism<sup>of the Middle Ages, it</sup> was marked by an acknowledgment of the limitations of the mler in relaton<sup>to his subjects.</sup> Lord and vassal both shared in the status of knighthood, and were<sup>,herefore in one sense</sup> "equals" though of different degree in terms of circumstances and<sup>power. Magna Carta is</sup> the best known butby no means the only acknowledgement by<sup>a sovereign of the limits</sup> beyond which he could not encroach on the rights of his aristocratic vassals.<sup>The urban</sup> merchants and craftsmen in the rising towns of the Middle Ages were<sup>also able to secue</sup> rights and privileges for themselves in relation to the crown, in exchange<sup>for the financial</sup> assmstance they were able to provide the monarchs in thei struggles to pa the unruly barons. The Church, furthermore, had always been a powerful institution<sup>whose vast</sup> _5_
landed wealth augmented its spiritual influence on civil society. Thus the Standostaat or "Estate Society" was marked by a "dualism" of power between crown and estates, as Otto von Gierke emphasized.

Despite their appellation, the "absolutist" states of early modem Europe were constrained sharply by the historical circumstances within which they emerged, with its inherited struture of rights and privileges that the various segments of civil society enjoyed. Thus although the fact that the Estates General of Frnce were not summoned between 1618 and 1789 is generally taken as indicating the power of the Bourbons to rule unhindered, the odter side of the uoin is that there were "no new taxes" that they could _leIy._ They had to supplemen **t** he rising yield frm the traditional taxes by a variety of expedients, such as the sale of offices, the farming of the tax revenues and of course the issue of public debt. All of these crated trouble for the future since they wae accompanied by the granting of exemptions and privileges to wider segments of society. The very efficiency of the IntwMfla, the royal officials who admiistered France, most of whom v,ere a meritocracy of "new men", undermined the social basis of the Ancien Regime, as de Tocqueville pointed out, since it rendered the aristwcracy superfluous as a "functional" class. The French Revolution continued the trend towards a more centralized administration but with the extension of civil rights to the '"people" as a whole. In England the Whig oligarchy that ruled since 1689 grdually extended the fianchise and reformed the electoral system in the nineteenth century.

The "modern state" can be thought of as a contrimce or invention of administave technology, that is.apable of being transferred or imported into societies that originally did not possess it. As it moved eastward in Europe, to the German prncipalities and Russia, it became more authoritarian in nature. The historian Mark Raeff (1983) has examined the concept of The Well-Ordered Police State in his fascinating book of the same name. In the German principalities, particularly Prussia, the rulers established bureaucracies that meticulously attempted to regulate civil society in the spheres of educadon and the economy 6
in order to develop along more modern lines, which at that time of course meant imitating the French. This '"diffusion" of the modem state worked relatively well in the Germaii case despite its authoritarian character and legacy, since civil society itself was sE Ificiently developed to respond positively to the detailed regulations and intervention. In the case of Russia, however, the succession of "revolutions from above", from Peter the Great down to Mikhail Gorbachev, have yet to succeed in transforming civil society up t0 the westem European level, despite the bloody sacrifices that have been imposed on the people in the attempt.

(iii) If the modem state, which attained its "ideal" form in post-Revoludonary France, was modified and distorted in its journey eastwards to Germany and Russia, it has certaiy spawned an exotic new stwain in its recent journey "south" to the fomnerly colonial temtmries that attained their independence in Asia and Africa in the aftemath of World War IL Particularly in the former British colonies, the modern constitutional state with its full panoply of checks and balances, privileges and safeguards was left behind lock, stock and barrel by the departing representadves of the crown, as the final culmination of decades if not centuries of "'reparation for self-government", along with the new flags and national anthems. If the Western state took a millennium to develop from " feudal anarchy" to constitutionalism the hird World states have sadly given the impression, in many cases, of running the film backwards, at an accelerated rate that covers the same distance in less than half a century. Whle there are many notable exceptions to this gloomy spectacle it is fair to say that the recod has on the whole been arather dismal one, especially in the light of the wave of hope and ethusiasm that the national independence movements initiaUy aroused. Som conservative critics have said that the colonial powers left too soon, before their "civilizing mission" was fully accomplished. This argument is not convincing, particularly when one notes that the longer and harder the colonial power resisted the demand for independence the more violent and radical has been the regime that eventually took over. Another, more pernicious argument has been that Third World people do not 7
share the values of individual freedom and civil liberty with the West, and are thus reverting to the mek acceptance of despotic rule with which they are familiar from their pre-colonial past. It is hani to maintain this view in the light of the dramatic popular protests in the Philippines, South Korea, Burma, Algeria and China that have all taken place recently.

What then is the problem? Why has not the modern constitudonal state "taken" in its transplantation into the less developed world? The basic answer is that there is a disproportion in the Third World context between the state and the development of "civil society", such that the forms of the state are perverted into making it an instrument of repression of the mass of the people Athe interests of a small minority that attain control of the bureaucratic apparatus. This minority is not defined, as in Maxism by its ownership or control of the means of producdon but by its control over the "means of administration", which ultimately consists of course in the effective monopoly of the use of force. The closest approximation to a Marxian 'ruling class" view of the state is in parts of Central and South America, where land-owning elites exercise domination through political parties that closely represel ' their interests, backed by armies whose officer corps come from the same social stratumn In their effort to chateize the Third World State social scientists have turned to Max Weber's typology of authority under the rubrics of "patimonial"', "charismatic" and "rational-legal". The first generation of nationalist leaders tended to be striking figures, such as Kemal, Nasser, Nehru, Nkrumah and others. These were natural candidates for the "charismatic"'tegory, and indeed some of their achievements could perhaps only be accounted for in terms of the force of their personalities. Subsequent developments were also sought to be explained by Weber's notion of the "routinization of charisma". The explanatory power of this approach seems however t) have faded along with the transient glories of the "modernizing dictator'. A more illuminating application of Weber's categories is Christopher Clapham's (1985) concept of "neo-patrimonialism" a; being the 8
ge-teral underlying characteristic of Third World states. By this he means the use of modem rational-legal forms, i.e. imnersonal "universalistic" systems and rules, for private "paricularistic" purposes. A patrimonial ruler of the pure type would give gifts to his followers and kinsmen to cement their loyalty to him in his struggles with his opponents, these gifts coming out of his own personal resources, since such a system would lack any distinction between the private and public purse. A modem Third World leader, however, who wanted to perform essent;ally the same activity of rewarding followers and kinsmen would do so typically by assigning them jobs or import licenses or contracts that ostensibly ought to go only to those satisfying certain impersonal objective criteria of functional qualificadon.

Many widely noted aspects of Third World expenence fall into place in in the light of this fruitful characterization. The pervasiveness of the state in the economy and society at large, and the extent and persistence of economic controls and reguladons, become explicable as maximizing the "base" on which the neo-patnimonial ruler can reward himself and his followers. Admonitions by thc IMF and World Bank, universal guardians of the "rational-legal" order in the economic sphere, to "get the prices right" will obviously be resisted directly or by a baffage of subterfuges Negative extemnal shocks will tend to be responded to by borrowing rather than "adjustment', since the latter would not only lead to a cut in present consumption of the rling group but an erosion of its essential politcal support as well.

The more successful the neo-patrimonial state is in its predatory exactions on society, however,j.e less the "legidmacy" of the regime in the eyes of the people, since the more blatant will be the violation of the publicly proclaimed rational-legal norms. The response to this is typically political repression of varying degrees of severity, depending upon the magnitude of the perceived threat. Also, the more valuable the "prize" of the control of the state, the more intense will be the pressure of rival claimants, and so the regime will have to face the problem of how wide or narrow to make the coalition that 9
enjoys the benefits of rule. Much of the politics of the Third World is concerned with the ebb and flow of thew concessions and retractions to various segments of the society. (iv) Despite its appeal as a charcteization of Third World states the neopatrimonial concept needs to be supplemented by some typology or classification of the scores of actual states that at present exist in Asia, Africa and Latin America, among which there is enormous variation in size, ideology and political organization, even if they all share the feature of neo-patrimonialism in some degree or other. Democracy and dictatorship is one axis along which they might be situated, and "market-oriented" versus "centrally planned" another, giving us four catergories if each of these distinctions is applied dichotomously. I had hoped that the liteature on comparative polidcs would have produced some usable classification but have not yet come across ore. What follows is therefore a very rough and ready one of my own devising, which I will be very happy to discard if a superior alternative can be found.

# 1. Traditional Monarchies

There are a number of significant and interestiTg cases that can be placed in this category. One thinks readily of Saudi Arabia and the Gulf oil sheikdoms, Morocco and Jordan, as well as of Ethiopia under Haile Selassie. In each of these cases the ruler could claim legitimacy on the basis of the traditional authority of the institudon of the monarchy and of the dynasty in particular. In Weber's terms they correspond more to his "patrimonial" category then to the modem mixture of this with rational-legal norms that Clapham stresses. Qperationally the difference is that the extracdon and redistribution of rents from the economy and society can be made more openly, with the sanction of royal authority, than under regimes in which this is done behind a facade of impersonal and objective rules. In other words the distinction between the public treasury and the private purse of the monarch is blurred.

10
# 2. Tradiltionail Dietatorshins

In this category I would place such states as Paraguay under Stroessner, the Dominican Republic under Trujillo, Cuba under Batista, Haiti under the Duvaliers, Nicaragua under Somoza and the Philippines under Marcos. These share with the monarchies the fact that they are based on absolute Nsonal rule, but with the difference that they lack the legidmacy of the former. Their exploitation of their respective countries is more blatant and on a greater scale, not being tempered by the awareness of past and future obligation that constrains a royal dynasty. They also do not seriously espouse any ideology of national development and can perhaps best be described by the derogatory nubric of"kleptocracy".

The next two categories I shall distinguish are Right and Left-wing Authoritarian states. These states are either stnctly one-party states, with no opposition parties allowed, or in which opposition parties have never been able to take power. The military play a dominant role, either directly or behind the scenes, in many of them.

# 3. Right-Wing Authoritarian States

In this category are Turkey and Egypt in the Islamic World; Argendna, Brazil, and Chile for most of their recent history, as well as Mexico in Latin America; Kenya, Nigeria, Ghana, the Ivory Coast and Malawi in Africa; and a number of states in East and SouthEast Asia including Korea, Taiwan, Singapore, Malaysia, Thailand and Indonesia. In some of these states such as Twkey and Thailand there has been a fair amount of democratc politics with politcal partes competing quite actively but in which the army defines "the narrow limits of the possible" for the politcal arena. There is generally market orientation in economic policy, but this is consistent either with protectionism and import substitution, as in Latin America, or with outward orientation as in much of East and South-East Asia. Corruption is on the whole much less than in the taditional dictatorships idendfied above, and nadonal development is an explicit commitment of the army or ruling 11
party that it genuinely attempts to promove, with varying degrees of success in different countries.

# 4. Left-Wing A1thoritar1in States

Here I would include the explicitly Communist states of China, North Korea, Vietnam and Cuba as well as Nicaragua under the Sandinistas and Ethiopia under Mengistu as close cousins; Algeria, Libya, Syria, Iraq, Tanzania, Angola and Mozambique in the Middle East and Africa; and Burma with its military socialism and one-party state as the only non-communist exarnple in Asia of left-wing authoritarianism. State intervntion and controls are much more pervasive in these states than in their right-wing counterparts, though many are attempting to experiment with greater reliance on markets, mnst notably China.

# S. Democratic States

In this final category we have most prominently Lndia, Sri Lanka, Venezuela, Costa Rica, Jamaica and the other former British West Indies islands, as well as Malta and Mauritius. In all of these states there have been peaceful truders of state power determined by elections and a considerable freedom of civil society to modify the authority of the state by the threat of defeat at the polls. This, however, does not mean that the state power itself is weak or insignificant. On the contrary the role of the state is quite extensive, in producdon as well as in the scope for the disbursement of patronage.

# II. An Economic Model of the State

Economists have traditionally not had much to say about the theory of the state. The view of the state that most commonly prevails in economics is of a 'Yunctional" or "instumental" agency that performs the trditional tasks of providing public goods and off12
setting extemalities and other " market failures" by corrective taxes and subsidies. In so far as the state undertakes income redistribution through its tax and expenditure policy it is in relation to some ethically specified "social welfare function". In the tradition of Pigou and Meade the state is seen as a benevolent guardian of the public interest. Baumol's Welfare Economics and the Theory of the State is perhaps stll the most explicit and thorough statement of this approach, even though it was written as early as 1952.

The "public choice" theorists, however, have taken a more cynical view of the state that sees it as a grasping monster, a Leviathan that extracts revenue from its subjects for the private interests and enjoyment of the individuals or groups in whom the power of rule adheres. Machiavelli and Hobbes, rather than Bentham and his modern disciples, are the inspiration of these writers. What I have not been able to find in the literature, however, is an approach that is flexible enough to handle the tension between these two aspects of the state, the "productive" and the "predatory". In the rest of this secdon I will present a model of the state that will attempt to accomplish this, in the simplest possible way. I will then relate this model to the generaWiscussion of the role of the state in LDCs that was given in the previous section.<sup>5</sup> The productive role of the state is expressed in this model by the hypothesis that public expenditure on administration, law and order, roads, justice and so on acts as an "externality" to private economic activities, enhancing the priyate output from prvate inputs. We thus treat public goods as "intermediate inputs" in the provision of final private goods rather than treating them as final goods in their own right.

This idea iSpnbodied in the following simple formal structure. Let Y he "national income", a composite commodity for which the production function is Y=A(Lg)F[Lp,Kl (1) with Lg+Lp=L (2) 13
(3) A' (LgL> 0, A" (Lg) < 0, A(0) = 1 and where Lg and Lp are labor in government and private employment respectively.

The function F is of the familiar neoclassical type and for simplicity is homogeneous of the first degree.

When Lg = 0 and therefore A(0) = 1 we get the level of output under anarchy or the Hobbesian "state of nature" in which YO = F [L,K] . As Lg is increased the marginal productivity of a wocker will be higher in the public than in the private sector and so output will rise initially, but then it will decline after reaching a maximum when the condition F A'(Lg) = A (Lg) FL (Lp) (4) is met, in which the left hand side is the marginal product of labor in the public sector and the right hand side the marginal product of labor in the private sector. This condition determines the optimal allocation of labor Lg and Lp between the two sectors, that makes final output a maximum at Y*. The wages in the two sectors would obviously have to be equalized to achieve (4), and so the shadow price of labor in the public sector will be the margial productivity of labor in the private sector. The opdmal level of public expenditure wLg, where w denotes the common wage, is then determined, and so a proportional tax rate t can be calculated to satisfy

> - t Y = w _ Lg * _(5)_

where w=(l-t) A (Lg)FL (Lp) (6) Once state aethority is vested in an autonomous ruler, however,there is no guarantee that he will bring society to this opdmal allocation. If the ruler is conceived as "absolute" in the literal sense of the term, i.e. with no constraints at all on his abi;ity to secure his will at the expense of society, h will indeed find it in his own interest to maximize Y by meeting condition (4) but he will then proceed to appropriate the entire 14
surplus, Y* - YO, above that obtainable by his subjects in the state of nature. Hobbes explicitly recogniz0 that there is nothing to prevent his absolute sovereign from proceeding in this fashion should he be so inclined. fhis makes it difficult for those like C.B. Macpherson (1962) who sought to repan1 Hobbes as the apostle of "possessive individualism" and a "bourgeois revolution'.

As mentioied in the previous section, however, even the "absolutist" monarchs of early mo&-es Europe did not have things all thew own way to this extent, since they were constained by histoncal precedents **in** the degree to which they could tax their subjects and otherwise violate p.4vate property rights. Let us suppose therefore that the monarch cannot raise the tax rate on output above mne specified level, which we can take to be the t of the "optimal" solution just obtained. In addidon we assume that he cannot conscript labour, ie. he has to pay any public employees the after-tax wage that they could earn in the private sector.

Under these crcumsnces a self-interested ruler would choose Lg so as to Maximize S t A (Lg) F [Lp,K] - (I - t) A FL Lg (7) subject to (2).

The necessary condition to achieve this is seen to be tLFA'(Lg)-A(Lg)FLJ = (l-t)[A(Lg)FL+Lg (A'(Lg)FL.A(Lg)FLL)] (8) The left-hand side is the marginal gain in the surplus obtained by tansferring a worker from the privab- to the public sector. The right-hand side is the marginal cost of doing this which is the rise in the cost of public employment. Surplus is maximized when these two magnitudes are equated. Since FLL < 0 the right-hand side is positive and therefore F A'(Lg) > AQLg) FL (9) which means that surplus is maximized when Lg is IM than the optimal level. The surplus-maxing ruler will provide less than the optimal level of public services since to _15_
increase Lg further would raise Y but rduce S. The situation is conveniently depicted in terms of Figure 1.The concave and convex functions in Figure 1 represent revenue and public expenditure respectively. The expenditure function is convex since the wage-rate is an increasing function of public expenditure because marginal labor productivity in the private sector rises with rising public employment. Surplus is the vertical distance between these functions at each value of Lg, and is maximized where the slopes of the two functions are equaL with Lg equal to OW, public expenditure equal to VW and surplus equal to UV. This surplus is available for the consumption of the ruler or for disposidon in any other way that he sees fit. Public employment is thus Iua than the socially optimal level of OX, at which the final output Y is maximized.

An alternative possibility for an autonomous state is that it maximizes the level of public expenditure, subject only to the revenue constraint. This hypothesis is of course the one advanced by students of bureaucracy from Parkinson (1958) to Niskanen (1971). In this case public employment would expand to OZ and the surplus would be driven to zero, the point at wh -h the two functions cross. Thus, instead of public services being too small as under the hypothesis gf surplus maxiion, they could be too large, as depicted in Figure 1, in the case of the bureaucratic hypothesis.

Notice that the state becomes analogous to an economy-wide firm in our model. The surplus maximizing "absolutist" state becomes like a "natural monopoly", while the bureaucratic case corresponds to the "sales maxtion" hypothesis of the "divorce of ownership and contror' in the modern corporadon.

These two hypotheses of course only provide extreme polar cases. Any particular instance is likely to involve some level of public employment between OW and OZ and surplus between UV and zero. The surplus could be allocated to any purpose whatsoever, worthy causes like transfers to widows and orphans or "rents" to social parasites of various ypes. A "developmental" state could allocate it to public investment.

16
Thus far we have assuming that the tax rate and the labor supply are both exogenously given. It would clearly be desirable to extend the model in such a way that each of these is determined endogenously by the maximization process, along with all the other variables of the system.

In order to do tis we first observe that for any tax rate and labor supply the model already defmes a maximized level of surplus. Furthermore, it is readily seen that surplus is increased by a rise in either of these parameters. This enables us to define a family of isosurplus contours S = S(t,L) (10) St >0, SL >0 as indicated by the curves SS°, SS* and SS' convex to the origin in Figure 2, along each of which the naximized level of surplus is constant.

Assume now that labor supply is not fixed but an increasing function of the aftertax wage rate. This gives rise to the concave frontier Tr depicted in Figure 2 which shows the trade-off to the state between the tax rate and the labor supply, upon which the revenue base depends, a higher tax-rate having a negadve repevrcussion on the supply of labor and hence on the revenue base. Although intuidively plausible the frontier Tr has to be derived from the model itself, and this can be conveniently done by use of Figure 3.

The positively sloped curve AA' is simply the supply curve of labor as a function of the after-tax wage. ITe negatively sloped curve BB' shows the equilibrium after-tax wage corresponding to each level of labor supply, for a gjn tax-rate. Thus for any level of labor supply and the tax rate (which is constant at aU points on BB') the model determines the surplus-maximizng allocation of labor between the public and private sctrs and hence the equilibrium after-tax wage. An increase in the tax rate reduces the after-tax wage for each level of labor input and so shifts the BB' curve to the lekf **t** , hus reducing the equilibrium labor supply. We have therefore shown why the frontier 1T in Figure 2 displays a negative relationship between the tax-rate and the labor supply. The tangency of 17
SS* with Tr in Figure 2 determines the equilibrium tax-rate t* and labor supply L* for the surplus-maximizing case.

The budget-maximizing "bureaucrtic" version of the model can be solved in analogous fashion. Given the tax-rate and labor supply the model already determines the maximized budget level, so that we can define the iso-budget contours B = B(t,L) (11) SB 8B 8t 8L since the level of the budget is obviously an increasing function of the tax-rate and labor supplies as well. The frontier showing the labor supply as negatively related to the tax-rate can also readily he obtained in this case. The supply curve of labor as a positive function of the after-tax wage in Figure 3 is invariant to the nature of the xmizing hypothesis for the state. It is easy to see, however, that the negatively sloped "demand curve' for labor wil lie to the tight of the corresponding case for the surplus-maximizing hypothesis. This is because for any given tax-rate and labor input the demand for labor, and hence the after-tax wage, will be higher under the "bureaucratic" hypothesis, as we have already seen from Figure 1. This means that for any tax-rate the equilibrium supply of labor will be greater than under surplus maximization so that the frontier lies outside that of the previous case. The optimal point on the frontier is where it is tangential to the highest iso-budget contour, Thus the state "squeezes" more resources out of society under the bureaucratic than under the surplus-maximization hypothesis.

We can now link the two versions of the autonomous state analyzed in this section with the typology of LDC states presented in the previous section. The surplus maximization case would appear to correspond to the traditional monarchies and traditional dictatorships. The ruler in the first case has his legitimacy confered by right of dynastic succession while in the second his authority over civil society is sufficiently strong for him not to have to bother with an extensive apparatus of control. In both cases, therefore, it 18
would seen that therm could be limited government in the sense of resource-using public services, but with a considerable margin between revenue and the cost of public services, which is available for the enjoyment of the ruler and those on whom he chooses to confer special favor or buy off with bribes.

The authoritarian states, on the other hand, are dominated by armies or parties that need to justify their nrle over society by the apparent execution of grandiose tasks, for which they would seek to maximize the available budgetary resources. While key personnel would no doubt live well these would tend to be officiaUy sanctioned "perks", rather than simple graft though the line may be hard to draw in many cases.

Dcmoatic states do not really fit into the model since in this case the levels of public reve .ue and public expenditure (in the resource-using sense), as weU as who benefits from tansfer payments, are determined by electoral competition. The situation is thus "oligopolistic" rather than "monopolistidc", as in our simple model. In this case the more standard approach of the New Political Economy comes irto its own and we ha"-' nothing specific to add here.

# III. Facor Prolortions. Trade Taxesand the State

In this section we will apply the hypotheses regarding the behavior of the suite that have been discussed in the previous section to models of a "typical" LDC economy to see whether they can generate outcomes that are consistent with the "stylized facts" of LDC experience. Siwc4e vast majority of LDC's are highly open economies we will naturally stress the relationship between the fiscal behavior of the state and inermational trade and capital movements.

# (i) A Viner-Ricardo Model

In this well-known model there is a primary sector producing output as a fimction of labor and a "specific" input called "land", but which can of course be thought of as a 19
natural resource of any kind, and a manufacturing sector that produces output with labor and another specific input called "capital", which may be either exogenously fixed or internationally mobile as a function of the rate of return obtainable. Both sectors compete for the same homogeneous labor pool. Relative prices of the two goods are fixed on world markets but are of course internally variable as a result of state policy.

To begin with let us suppose that capital is perfectly mobile internationally at an exogenous rate of return r. Assuming constant returns to scale in the production function for manufacturing this means that f'(km) = _-'_ (12) where km is the capital-labo **r** atio and f(km) is the marginal productivity of capital. From (1) it follows that f(km) - f(km) km = w (13) The externally fixed ? thus determines km and the real wage w in terms of manufactures for the LDC The allocation of the fixed labor pool between the two sectors is detemined by p [g(qa) -g'(qa) qal = w where g(qa) is output per worker in the agricultural or pimary sector, qa is the land-labor ratio in the sectar and p is the exogenously given world price ratio of the two goods. Since the total supply of "land", specific to the primary sector, is fixed, qa depends only on employment La in that sector. We also have La+Lm=L (15) and since J is uniquely determined by (14) we also uniquely determine Lm. Since km is determined by (12) we therefore also know the endogenous capital input Km. This d is divided between an initially fixed domestic component K: and the foreign capital inflow K, which is f d Km = Km -Kmn (16) 20
(17)

# National income would be

# Y=wL+#K,;+pg'(qa)qaLa

where the first term is total wages, the second is profits of domesdcally owned capital and the third is the natural resource rents of the prinary sector. Since the economy is "small" in world markets Y represents the maximum income that domestic residents can obtain and therefore corresponds to the socially optimal level, if distributive problems are either ignored or taken care of by the usual fiction of non-distortionary "lump sum" transfers.

Into this idyllic "first best" world we now introduce, like a serpent in the garden, the "autonomous" state. While the previous section has stressed the "productive" role of the state, despite its perversion to "predatoty" ends, in this section we will simplify by assuming either that there is already a pool of resources set aside for public use, at a level just sufficien **t** o sustain private ictivity at the opdmal level, or more blatandy by just ignoring that aspect of the problem here since it is ifrelevan **t** o the present objective.

We will assume, with good reason, that the state finds it most convenient to tax taade, rather than wealth or incomes direcdy. There is ample evidence that public finances in the Third World do just this. Since we are ignoring productive pub'r.^ expenditure maximizing surplus and maximizing revenue are now equivalent. It is instructive to consider the popular device of a "marketing boad" to tax the resource-intensive primary sector which is the source of the country's experts and foreign exchange earnings.

The impact of a revenue-maximizing marketing board on the economy is illustrated in Figure 4. The horizontal axis measures employment in the pdmary sector and the vertical axis is used to indicate the wage and marginal product of labor in this sector, evaluated at the world price p in terms of manufactures. The distance OW indicates the wage and the Line AV is the marginal productivity curve of labor in the primary sector 21
(drawn as linear for convedence of exposition). Employment is equal to OG, the rent from natural resources is the triangle AWV and OWVG is the wage -bill in the primary sector.

The marketing board acting as a maximizing monopsonist drives a wedge equal to ST between the world and domestic prices of the primary export, T being the point at which the horizontal wage line is intersected by the line AT which is the marginal revenue product curve. The maximum revenue of the marketing board is the area of the rectangle UWST. The rents to private citizens in the primary sector fall to the triangle AUS, while the triangle STV is the deadweight loss to the economy as a whole from the restiictive policies of the marketing board. Employment in the primary sector contracts to OF, so that PO workers are released to the manufacturing sector. Addidonal foreign capital will flow in to employ these workers, who will earn the same wage as before. The returns to capital, however, will not be a part of national income since they will accrue to the foreign owners. The economy has become (a) more industrialized, since the primazy sector contracts and manufacturing expands (b) more dependent on foreigp capital because of the additional induced inflow (c) less wel off than before because of the net loss of real national income equal to the area of the tiangle STV (d) restricted in its tade since the contraction of primary output is at the expense of exports, so that imports must decline as well because of the decline in net foreign eamings.

What does the state do with its revenue? There are a number of possibilities. Frs, it could simply be enjoyed as the private income of a traditional monarch or dictator, if we have the frst two types of state that we considered in the previous section. Swiss bank accounts, luxury imports, construction of monuments using some of the released labor are all possible uses of the surplus each of which can be amply illustrated by recent and contemporary Third World examples.

Alternatively, if the state is of a more modern authoritarian type of either the left or the right, there could be the establishment of a public bureaucracy that perhaps enhances the productivity of the economy to some extent but which is more likely to be largely parasitic 22
on the civil society, engaging itself on phantom tasks defined in tems of those old standbys such as national unity or security, development and so on. Wages in the public sector could be above market levels, to reward friends and favorites or simply to create commitments and dependence on the regime.

Another effect of the "squeeze" on agricultural rents is that the price of the product is lowered to domestic consumers, an effect which is particularly important when the primary product is a food staple, such as rice in South East Asia or beef and wheat in Argendna The state could, of course, charge the world price to domestic consumers and thus maximize its returns from exports to the world market. There would be administrative difficulties, however, and besides there is the substandal political benefit of providing a subsidy to urban dwellers, the likeliest source of visible opposition to the regime. Thus in vrually all known cases the benefit of the squeeze on the primary sector is passed on to the domestic consumers as an implicit or even explicit subsidy.

The model is easily adapted to the case of no capital mobility at all, or of the foreign capital inflow being an increasing function of the rate of return that is obtainable in the economy. In both cases the rate of return becomes an endogenous variable, along with the foreign capital inflow in the latter case. The tax on the primary sector will result in a diversion of the labor force into manufacturing, raising the rate of return and the inflow of foreign capital into that sector. Domestic as well as foreign capitalists are indirect beneficiaries of the squeeze on the primary sector. Thus the state would get an additional payoff from the goodwill that this generates, which can of course be converted into revenue or private connecuns between functionaries and the relevant firms. Foreign and domestic capital interact in complex ways, some competitive and some complementary. The state can mediate these relationships to serve its "own" purpose as well as the private interests of those who rule in its name.

Finally, the state could use the revenue that it obtains for accumulation of capital in new state-owned enterprises. While these may originally be set up as "statutory boards" to 23
be run on commercial principles they can soon become subject to use for "politcal" purposes as rewards to the members of the ruling elite or as bribes to potentally threatening outsiders which may include army officers if these are not already in the inner circle. A new "bureaucratic-bourgeoisie" can be built up in this way, some of whom could establish private enterprises out of the rents that they inidally obtained from the state.

(ii) A Heckschr-Ohlin Mod Similar implications can be derived fom a Heckscher-Ohlin model, with a state that maximizes its budget in Parkineson-Niskanen fashion. We assume a two-factor, two-good "small" open economy, with fixed endowments of capital and labor. The export good is labor-intensive and the import-competin **g** ood capital-intensive. Revenue comes fiom the proceeds of a tariff, the level of which is to be determined endogenously, along with the level of public employment.

Since the world price-ratio is fixed the domestic price-ratio is uniquely deternined by the level of the taiff. This domestic price-ratio in tun, by the Stolper-Samuelson therem, uniquely determines the real wage and return to capitaL Since imports are capitalintensive the higher the tariff the lower the real wage and the higher the return to capital.

The government's problem is to choose the tariff rate, t, and the level of public employment, Lg, in such a way as to

# Maximize w(t) Lg

# Subject to

# w(t) Lg S t p* M ( (l+t) p*, Lg)

where p* is the wJI price-ratio, M is the level of imports and w(t) is the wage-rate which is a negative function of t. The level of imports varies negatively with the domestic priceratio, which is equal to (1+t) p*. It also depends on Lg, since employment in the public sector withdraws labor from the producion of the two tradable goods. With the capital stock fixed, more public employment reduces the labor force in the tadable sector, and hence by the Rybezynski theorem increases the output of the capital-intensive import24
competing good, and therefore reduces the level of imports<sup>and hence tariff revenue as</sup> well. The solution of the problem is indicated in Figure _5._ The<sup>concave fronder FF'</sup> shows the maximum feasible w(t) for any given value of Lg.<sup>Supposz Lg at some positive</sup> level and the tariff t at zero. The wage w(t) would then be at its<sup>maximum free-trade level</sup> but revenue would be zem, so that the government oudget<sup>constraint would be violated.</sup> As the tariff is increased w(t) will fall, so that expenditure is reduced,<sup>and revenue will be</sup> incrased. Thus corresponding to the given value of Lg we can find<sup>a taiff t and hence a</sup> wage-rate w(t) at which the budget constraint is satisfied with<sup>equality. A higher value of</sup> Lg will involve a lower revenue for a given value of<sup>t, since the volume of imports will be</sup> lower. Hence we must have a higher tariff, and thus<sup>a lower wage-rate, at a higher level of</sup> public employment. This explains why FF is negatively sloped.

the objective function w(t) Lg can be represented in Figure<sup>S</sup> by<sup>a family of</sup> rectangular hypebolas. The optimal point z is where<sup>FF is tangential to the highest of</sup> these, yielding the optimal values w(t*) and Lg.

Our hypothesis of a budget-maximizing bureaucradc regime has thus determined the tariff level ndoagn*l, along with the size of the public<sup>sector itself in the setting of a</sup> small open economy. More standaid models of endogenous<sup>tariffs, such as Findlay and</sup> Wellisz (1982) and Mayer (1984), postulate democratic pluralist regimes,<sup>less consistent</sup> with Third World reality and are therefore more suited to conditions<sup>in the advanced</sup> countr.es. The model presented here is a refinement<sup>of an earlier version contained in</sup> Section H of Findla&and Wellisz (1983). This model points<sup>to the possibilities of a</sup> "bureaucratic-capitalist" alliance, that has often been noted in the Latin American context and which will be elaboraed upon in the potentially richer model<sup>in the next section.</sup> (iii) An "Australian" Model Finally let us consider a model that neatly combines Viner-Ricardo<sup>and Heckscher-</sup> OhLin features. This model can be found in a paper<sup>by Fred Gmen and Max Corden (1970)</sup> 25
and is also used to good effect in Anne Krueger's (1977) Graham Lecture. The<sup>Australian</sup> connection of all tee authors is responsible for the appellation that I have<sup>given it.</sup> Suppose we have two sectors, a prirary sector and a manufacturing sector,<sup>but</sup> while the primary sector continues to produce a single good, using "land" and labor, manufacturing is nov differentiated between capital-intensive and labor-intensive goods, both using capital and labor. Thus labor is used in all three, capital in two and<sup>land only in</sup> one of the goods that are produced. All endowments are given and relative<sup>prices, as</sup> before, are determined exogenously on world markets. In the absence of state<sup>intervention</sup> suppose that technology, preferences and endowments are such that the economy<sup>experts</sup> the primary good and the labor-intensive industrial good and imports the capital-intensive good.

Since the industrial sector has a Heckscher-Ohlin specification the relative<sup>price of</sup> the two industrial goods on the world market would detenn the return to capital and the real wage. Let us say that the nimerair is the labor-intensive good. With<sup>the price of the</sup> primary export also given in terms of the nmmie it is apparen **t** hat employment in the primary sector, and hence rent and output, are all determined by the equality<sup>of the marginal</sup> product of labor with the real wage. This gives the labor force for the indusil<sup>sector and</sup> hence the production levels of both goods produced by that sector. National<sup>income as</sup> well as both relative prices now being given, domestic consumption of<sup>each good can also</sup> be determined and hence the volume of trade in all three goods.

One of the most interesting feature of this model, from a political economy standpoint, is that iris possible for a tariff on industral imports to<sup>benefit landownnr To</sup> see this consider a tariff on the import of the capital-intensive good.<sup>By the Stolper-</sup> Samuelson theorem again the real wage will be lower, while the price<sup>of the primary good</sup> will be unchanged, both in terms of the numeraire. Thus the effect will<sup>be to increase</sup> employment, and hence rents, in the primary sector. All agents in the model<sup>will be worse</sup> off as consumers, because of the distortion in domestic prices caused by the<sup>tariff, but it is</sup> 26
clealy possible for landowners to gain on a net basis. Thus both capitalists and landowners can gain as a result of a tariff on capital-intensive imports, while wokers of course are definitely worse off.

An export tax on agriculture, or tie pricing policies of a marketing board, clearly depresses the returns to this sector and reduces the level of employment within it.<sup>The</sup> influx of labor to the industrial sector would, however, increase the output of laborintensive goods, while reducing the output of capital-intensive goods. Real wages remain unchanged in terms of the manufactured goods but they in terms of the primary good, since the intemal price of that good has fallen as a result of the policy of taxing<sup>agriculture.</sup> The decline in output of capital-intensive goods would also be accompanied by an increase in imports. Protecionist interests in industry, together with the ever-present dtirst for revenue on the part of the state could lead to imposition of, or a rise in, tariffs on<sup>capital-</sup> intensive imports. This would off-set at least part of the increase in real wages of<sup>the</sup> workers and produce a rise in the return to capitaL The scenario of the previous paragraph has considerable relevance to the case of Argentina.<sup>6</sup> That country in its heyday was an "agro-export oligarchy" in which dhe expansion of the grain and beef exports produced by the fertile = created one of the most prosperous societies in the entire Southem hemisphere. Politics was dominated<sup>by</sup> the rich landowners and the professional urban middle class that arose as an off-shoot of this group. Workers, who tended to be recendy arrived immigrants from<sup>Italy and Spain,</sup> did not succeed in entening the political arena significandy, since the<sup>anarchist and</sup> syndicalist parties thjt attempted to represen **t** hem were crushed<sup>by armed forces that</sup> reflected the domination of the nual magnates and the urban bourgeoisie. The difficulties caused by the depression of the thirties resulted in military intervention<sup>of a conservative,</sup> and even reactionary character. The adverse shift of the terms of trade, and isolation<sup>during</sup> the second world % ar, stimulated the development of urban industry and thus expanded the very class that was kept out of the political system.

27
This situadon provided a clear opportunity for someone to capitalize on by mobilizing this latent political base. The opportunity was seized by Juan Peron in 1946. Though his personal rule ended in 1956 Peronism has become a permanent feature of Argentine political life, the latest chapter of which has just opened with the victory at the polls of Carlos Menem. The formula for Peronism was to squeeze the primary sector by taxes and price controls that simultaneously provided revenue to the state, lowered the cost of living of the workers since grain and beef were such important components of their consumption baskets and also enabled tht regime to gain credit by opposing the landed "oligarchy" in the interest of the common man. Nationalization and an expanding bureaucracy could also keep the urban middle class happy by providing career opportunies in the expanded realm of the state. Combined with the charisma of Evita Peron the formula was clearly extraordinarily effective.

The losers, however, particularly the landowners and associated sections of the army as well as financial and industrial interemsts were never defeated outright and were able to mount effective resistance, particularly when the excesses of the Peronists combined with unfavorable external developments produced crises. This would bring waves of economic liberalization combined with political rpreson, since the attempts to revive lagging primary exports though higher relative prices were risted by workers anxous to preserve their real wages. The Peronist defeat of 1956 led to severl orthodox stabilization and liberalization attempts by Frondizi, Illia, Ongania and others which in turn led to collapse and the return of Peronism in the early seventies. The ensuing chaos led again to a military regime andAhe orthodox liberalization measures, which again failed. Like his Radical party predecessors Frondizi and Mia, Raul Alfonsin was not able to defeat Peronism at the polls by providing a workable economic framework and the stage is apparendy set for yet another turn of the wheeL 28
# IV. **Some Particular &xperiences**

In this final section we attempt to complemen **t** he somewhat abstract chaacter of the analysis with some observations on experiences in different countries and regions of the world There is no particular principle underlying the choices made, which have been dictated partly by the availability of relevant litrature.

# (i) Tske

The case of Turkey is a particularly interesting one in the polidcal economy of development. Among other rasons this is because of her early experience with a "developmental dictatorship" under Mustapha Kemal Atatwuk durng the inter-war years, providing a preview of many recent Third World scenarios of development. My discussion is heavily indebted to the excellent historical study by Keyder (1987).

The ouiginal system of the Ottoman empire fits into our model of a "surplusmaximizing" traditional monarchy, with the surplus shared between the monarch himself and the class of state funcdonaries that administered the system. Unlike Eurpe of the Old Regime or Latin America there was no class of large landowners, the soil being mainly worked by peasants who were heavily taxed. Turkey was drawn into the grat expansion of world trade from 1870 t 1914 as an exporter of primary products, with Greek and Armenian merchants playing the role of intmediaies between the world madret and the Turkish peasant producers. Needless to say the state was not slow to take the opportunity to substantially inse its revenue, thus leading to an enhancement of the traditional domination of the bjeaucracy in Turkish society. Ihe "alien" merchant community was ceraiy not able to challenge this hegemony. The ravages of World War I and the associated conflicts with the Greeks and Armenians led to the almost total disappearance of the merchant community as a result of prsecutdon and flight. The twenties saw a condnuation of agricultural exports under the new regime of KemaL 29
The situation was drastically altered by the impact of the Great Depression. Relative prices turned very sharply against agriculture and the stimulus to industry that<sup>this</sup> offered was enhanced by import restrictions. A new class of Turkish industrialists emerged, in close association with the bureaucracy. The two forces merged in the policy of "etatism" that characterized Turkey from this period on. The inspiration came<sup>from</sup> Mussolini's "corporate" state. The pattern of industrialization was of the famdliar import substitution type, with the boards of the large banks and productive enterprises containing heavy representation of the bureaucracy, many of whom also directly<sup>entered the field of</sup> industry. Civil liberties were suppressed and a firm alliance of "state and capital" was achieved, with a squeeze on the agricultural sector and the working class. The situation thus corresponds to the models of the previous section of this paper, with relative<sup>prices</sup> turned against land and labor in favor of profits and state revenue.

The one-parity state was abolished and a democrtic system established in 1946 which eventually led to the victory of Menderes and his Democratic Party in 1950. This liberalizadon of the polity was also accompiried by economic changes that<sup>tuned in the</sup> direction of market- oriented policies. Combined with the boom in primary<sup>product pnces</sup> this led to prosperity of the small cultivator class, who were also an important constituency for the competing parties. US foreign aid and politcal influence<sup>also worked significantly,</sup> and perhaps even crucially, in bringing about the new configuration. The bureaucracy<sup>lost</sup> some of its primacy over economy and society. The external environment<sup>however</sup> eventually tuumd unfavorable and the attempt by Menderes to sustain growth through inflation led to disption that triggered a military coup in 1960 that restred<sup>civilian ule</sup> eventually but with a new program of inport-substitutng industrialization, with<sup>the</sup> bureaucracy back in full force with a plethora of planning agencies that<sup>allocated scarce</sup> inputs, particularly foreign exchange, with the predictable "rent-seeking" consequences.<sup>In</sup> fact Anne Krueger's (1974) original article appears to have been based on her experience<sup>of</sup> working in Turkey. Buoyed by foreign aid and the large inflow of remittances<sup>fom the</sup> 30
flood of Turkish workers to Western Europe, the system expanded until it was brought to a crisis by the oil shocks and associated world recession. Violence erupted within civil society between the extreme right and left, leading to military intervention in 1980. Since then there has been success with outward-looking policies leading to a rapid growth of manufactured exports. It remains to the seen, however, whether "bureacmratic authoritaianism" in Turkey will follow the East Asian rather than the Latin American pattern.

# (i India

India, like Turkey and Iran, is a successor state to the three great "gunpowder empires 'of the Ottomans, Safavids and Mughals. The long British colonial interlude modenized the traditional bureaucratic system and left a democratic pariamentay regime as its legacy. The question therefr e arises as to whether the modern Indian polity functions as an "autonomous" centralized state insulated from the pressures of civil society or whether it is best looked upon as a pluralistic democracy of the Western type, distinguished only by a lower standard of living from its Western European and North American counteparts.

Bardhan (1984), in a brief but stimulating study of the political economy of Indian development, begins with the hypothesis of the relative autonomy of the post-colonial state, building on the heritage of the Mughals and the scarcely less imperial British vicemys. He points out that the Nehru generation's authority, derived from its leadership or the independence struggle, enabled the Indian state initialy **to** impose a particular pattern of development, stressjg the role of the public sector in bringing about a "socialistic pattern of society" while raising per capita incomes. He argues, however, that the subsequent generations of the Nehru dynasty have increasingly yielded to pressures from three main groups -- big industrialists and the bureaucracy in the cities and large farmers in the rual areas. The result, although Bardhan does not draw this conclusion, seems **to** me to be 31
hardly distinguishable from t. kind of "chumning" redistributive state that we are familiar with in the more developed countries.

The combination of an extremely extensive role for the state, with sweeping control over finance, industry, transport and trade, together with an "open" polity that is subject to lobbying pressures from almost any organized interest group has resulted in disappointing growth performance over the last two decades, despite some successes in agriculture. The "surplus" has tended to be frittered away in subsidies to farmers and inefficient state enterprises, while an expanding bureaucracy continues its lucrative hegemony over a labyrinthine maze of regulations and controls. No substandal free enterprise coalition has been able to form to push back the frontiers of the state from its control over key sectors, while the bureaucracy is always able to undermine tentative attempts by the leadership to liberalize the system The dependence of the ruling party on contributions from "rentseeldng" lobbies also imparts stability to the existing structure. Gunnar Myrdal's wellknown complaint about the "soft state" in India is related to this tendency to be unable to insulate itself from these intrusions and to pursue its "higher developmental objectives.<sup>7</sup> Despite all these disappointments about Idia not fulfilling the outstanding potential for development provided by her entrepreneurs nd diverse base of human capital, it remains a remarkable achievement to have maintained such a vibrant and stable demoraic regime for so long when so many of her neighbors have fallen into dictatorial nrle.

32
# (iii) Afra

The moderof a marketing board in a Viner-Ricardo economy presented earlier fits African experience remarkably well.<sup>8</sup> The institution of the marketing board, particularly in West Africa, owed its origin to the colonial regimes which built up large surpluses from their opeation during the Second World War and the period preceding independence. In the case of cash crops such as cocoa, coffee, sugar, sisal, groundnuts and so on, and in particular when the producers are peasant small holders, they are natural victims of the predatory state that we have analyzed. Our general equilibrium model also simultaneously accounts for the induced bias in favor of urban industry and capital, as well as for the diversion of the rents to the ruling elite, popularly known as the WaBenzi, the MercedesBenz tribe, in much of Africa.

The "exceptions which prove the rule" are also interesting to note, the Ivory Coast and Kenya. In both these states an indigenous planter class was an important part of the independence movement that took over power. Felix Houphouet-Boigny, in fact, was cofounder and president of the Syndicat Agricole Africain, an organization devoted to the interests of indigenous planters, many of whom were from his tribe, the Baould.<sup>9</sup> It is therefore not surprising that in these cases the independent African state has done well by permitting export agriculture to flourish, and allowing foreign participation. The benefits of development can still be channelled toward the ruling elite, in these cases, but in a more "efficient" or 'radonar" manner from the standpoint of the functioning of the system as a whole.

The works Robert Bates (1972, 1983) has provided excellent analysis and documentation of the political economy logic of agricultural pricing policies in Africa in a spirit that is entirely consistent, so far as I can see, with that of the approach taken here. (iv) Ladn Anria Latin America presents the greatest variation in economic and political experience in the Third World, not only because of diversity in resource base and social structure, but 33
because of its longer history of independence. Discussions of this experience have tended to identify thrce bmad phases or stages in the development of most of the countries of the region. These are (i) An "oligarchic" phase of domination by a landowning elite, with an economic orientation geared to the export of land-intensive primary products to the world market. (ii) 'Populism", a regime in which a charismatic leader such as Peron in Argentina or Vargas in Brazil adopts more nationalisdc economic policies, stressing industrialization and import subsdtudon, restrictive measures against the former "oligarchs", redistribution in favor of the "popular classes" and their incorporation into the polidcal arena. (iii) "Bureaucratic-Authoritarianism,' a term coined by the Argentine political scientist Guillermo O'Donnell, in which there is an alliance between the upper echelons of the military and civilian bureaucracy, foreign capital in the s:.ape of multnaional corporations and "advanced" sectors of domestic industry. This type of regime attempts to follow "liberal" economic policies in the macro economic sphere, though it is concerned with the continuation and indeed the further promotion to "deeper" levels of import substituting industrialization. Politically it is repnessive and "exclusionary" towards mass participation, since this is regarded as disruptive of orderly progress.l1 Again, it seems that our models are well adapted to embody the features of each of these different politico-economic "regimes". The technocatic bias and orientation of the bureaucracy is consistent with our "budget-maximizing" version of the autonomous state. The alliance between the bureaucracy and foreign and domestic capital emerges clearly in our Heckscher-Ohlin and "Australian" models. This last model is also able to capture the - relationships betwean different interest groups the landowners, workers, "advanced" industry as represented by the capital-intensive manufacturing sector as distinct from laborintensive industry, and of course the state itself. The model could also be adapted to handle differentiation within the primary sector, between large-scale land-intensive production of livestock say and subsistence production in a labor-intensive peasant sector. "Dualistic" societies such as Peru and Bolivia could be analyzed in corresponding terms.

34
# (v) The Far Eastern NlCs

The four Far Eastern NICs -- Korea, Taiwan, Singapore and Hong Kong have clearly been the star performers in the development field over the last two decades or more. It is therefore a question of particular importance as to what, if anything, the New Political Economy can contribute towards an understanding of the reasons for their success. In this connection it is not enough simply to point out that they have been just about the only group of LDCs to have made a systematic and sustained commitmen **t** o "outward orientation" in their economic policies. In fact the crucial political economy question is precisely why this is so.

Certainly the major theme of the present paper, the "relative autonomy" of the state, continues to hold in this case. By comparison with say India, or even Brazil, the state and its economic policy apparatus has been "insulated" from the pressures of lobbies and - special interests in all four cases military dictatorships in two, a dominant-party state in another and British "guardians" in the case of Hong Kong. Thus the subsidies, transfers, regulations and bureaucratic proliferation that have shackled the Indian entrepreneurs have either been absent or channelled towards export performance. Except in the case of Hong Kong this has certainly not meant laissez faim but it has meant the ability of the state to pursue a sustained strategy of export-led growth."I But if Korean and KMT Chinese generals have succeeded because of the autonomy of the states that they have set up why not the Latin American juntas or the legion of African soldiers ranging in rank from field marshal to master sergean **t** hat have taken over control of their socieies? In the case of the African countries one could perhaps say that the levels of physical and social infrastructure are as yet inadequate for a policy of growth based on labor-intensive manufactured exports, and that the temptation to squeeze the natural resource-based export sectors is too strong. In Latin America the infrastructure is available in many cases but the military is itself too caught up in the complex antagonisms of civil society, which has a richer texture than in the Far Eastern cases, **to** follow a 35
sustained path of export orientadon. Chile is close to becoming the "exceptlon that proves the rule" in this regard since the long period in which the Pincochet regime has been abie to function has enabled it to eventually embark on a successful economic course. It is very much to be hoped that the imminent restoration of democracy will not cause a setback in the development of the economy.

- I The flavor of the New Political Economy reseach is perhaps best conveyed by the voltunes of readings edited by Buchanan, Tollison and Tullock (1980), Collander (1984) and Stigler (1988). Analytical surveys of essential issues and results are provided by Bhagwati (1982), Srinivasan (1985) and Wellisz and Findlay (1988).

- 2 See her Introduction to Evans, Rueschmeyer and Skocpol, ag. (1985).

- 3 Discussions of the autonomy of the state from the Marxist perspective can be found in Miliband (1977) and Elster (1985), while Anderson (1974) is the most impessive appication of the Marxist approach in a specific historical context, the "absoludst" states of early modan Europe. A stimulating and original conceptu analysis of the stab is de Jasay (1985).

- 4 The subsequent dscussion draws on Badie and Birnbaum (1983) and Poggi (1978).

- 5 The model presented here is a significant extension over an earlier version contained in Fmdlay and Wilson (1987), since the tax rate is now endogeaous, with the labor supply an increasing function of the after-tax wage insteadof being perfectly inelastic. The model draws on the insights into the "productive" chart of the state contained in North (1981), chapter 3, on "A Neoclassical Theory of _the_ State" and into its "edatory" aspect by Brennan and Buchnan (1980). The prdoy nature of the state is also stressed in Lal (1985) and Ttily (1985). None of these authors however have attempted to embody their ideas in a formal general equilibrium model, even a very simple one such as is given here.

- 6 On modem Argentine economic history see the classic study of Diaz Alejandro (1970). A convenient summary of political developments in welation to the economic background is provided in chapter 3 of Skidmore and Smith (1984). The present effort at attempting to model this hisoWical experience is also indebted to Lal (1986).

- 7 See Myrdal (1968). For a brief but incisive evaluation of Indian economic performance and policy see also Bhagwati (1987).

- 8 For a penetrating summary of African experience with respect to marketing boards see Bauer (1987).

- 9 See the chapter on the Ivory Coast in Dunn, ed. (1978).

- 10 See O'Donnell (1979), Collier, ed. (1979) and Evans (1979) for analyses of thc role of the state in Latin American developmenL

- 11 See Findlay (1988) and references cited therein on the polidcal economy of exportoriented growth.

36
# Bibliogra&hy

Anderson, P. Lineages of the Absolutist State, New Left Books, 1974.

Badie, B. and P. Birnbaum The Sociology of the State, University of Chicago Press, 1983.

Bardhan, P.K, The Political Economy of Development in India, Blackwell, 1984.

Bates, R.H. Markets and the State In Tropical Africa, University of California Press, 1972.

Essays in the Political Economy of Rural Africa, University of California Press, 1983.

Bauer, P.T. "Marketing Boards" in J. Eatwell CLBL (eds.) The New Palgrave: A Dictionary of Economics, Macmillan, 1987.

Baumol, W.J. Welfare Economics and the Theory of the State, Harvard University Press, 1952.

Bhagwati, J.N. "Directly Unproductive, Profit Seeking (DUP) Activities" Journal of Political Economy, October 1982.

'itndian Economic Performance and Policy Design", khakrdas Memorial Lecture, Indian Institute of Bankers, 1987.

Brennan, G. and J. Buchanan The Power to Tax, Cambridge University Press, 1980. Buchanan, J.M., R.D. Tollison and G. Tullock, (eds.) Toward A Theory of the Rent-Seeking Society, Texas A & M University Press, 1980.

Clapham, C. Third World Politics, University of Wisconsin Press, 1985. Collander, D. (ed.) Neoclassical Political Economy, Ballinger, 1984.

Collier, D. (ed.) The New Authoritarianism in Latin America, Princeton University Press, 1979.

37
Diaz Alejandro, C.F. Essays on the Economic History of the Argentine Republic, Yale TTnversity Press, 1970.

Dunn, J. (ed.) West African States, Cambridge University Press, 1978.

Elster, J. Making Sense of Marx, Cambridge University Press, 1985.

Evans, P.B. Dependent Development, Princeton University Press, 1979.

, D. Rueschmeyer and T. Skocpol (eds.) Bringing The State Back In, Cambridge UJniversity Press, 1985.

Findlay, R. "Trade, Development and the State" in G. Ranis and T.P. Schultz (eds.) The State of Development Economics, Blackwell, 1988.

and S. Wellisz "Endogenous Tariffs, the PoAitical Economy of Trade Restrictions and Welfare" in J. Bhagwati (ed.) Import Competition and Response, University of Chicago Press, 1982.

and S. Wcllisz "The Political Economy of Trade Restrictions" Kyklos, vol. 36, pp. 469-481, 1983.

and J.D. Wilson "The Political Economy of Leviathan" in A.Razin and E. Sadka (eds.) Economic Policy in Theory and Practice, Macmillan, 19u7.

Gruen, F. and W.M. Corden "A Tariff that Worsens the Terms of Trade" in I.A. McDougall and R.H. Snape (eds.) Studies in International Economics, North-Holland, 1970.

Jasay, A. de The State, Blackwell, 1985.

Keyder, C. State and Class in Turkey, Verso, 1987.

Krueger, A.O. "The Political Economy of the Rent-'leeking Society", American Economic Review, June, 1974.

"Growth, Factor Market Distortin.s and Patterns of Trade Among Many Countries", Princeton ctudies in International Finance, No. 40, 1977.

Lal, D. "The Political Economy of the Predatory State" mimeo, 1985.

38
# "The Political Economy of Industrialization in Primary Product Exporting Countries" mimeo, 1986.

- Macpherson, C.B. The Political Theory of Possessive Individualism, Oxford University Press, 1962.

- Mayer, W. "Endogenous Tariff Formation" American Economic Review, December 1984.

- Miliband, R. Marxism and Politics, Oxford University Press, 1977.

Myrdal, G. Asian Drama, Pantheon, 1968.

- Niskanen, W. Bureaucracy and Representative Government, Aldine, 1971.

- North, D. Structure and Change in Economic History, Norton, 1981.

- O'Donnell, G. Modernization and Bureaucratic Authoritarianism, University of Califomia Press, 1979.

- Parkinson C.N. Parkinson's Law, John Murray, 1958.

- Poggi, G. The Development of the Modern State, Stanford University Press, 1978.

- Raeff, M. The Well-Ordered Police State, Yale University Press, 1983.

- Skidmore, T. and P.M. Smith Modern Latin America, Oxford University Press, 1984.

- Srinivasan, T.N. "Neoclassical Political Economy, the State and Economic Developmene' Asian Development Review, vol. 3, no. 2, 1985.

- Stigler, G. (ed.) Clflcago Studies in Political Economy, University of Chicago Press, 1988.

- Trliy, C. "War Making and State Making as Organized Crime" in Evans fiL (eds.), 1985.

- Wellisz, S. and R. Findlay "The State and the Invisible Hand" World Bank Research Observer, January 1988.

39
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44
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,/