Institutions and Growth in East Asia* Stephan Haggard

Haggard 53

Institutions have played a central role in political economy explanations of East Asia’s growth, from the developmental state to the micro-institutions of industrial policy. A review of these institutional explanations finds that few if any of the pos- tulated institutional explanations involve either necessary or sufficient conditions for rapid growth. This finding suggests two conclusions. First, there are multiple institutional means for solving the various collective action, credibility, and informational problems that constitute barriers to growth. The search for a single institutional “taproot” of growth is likely to be a misguided exercise, and more attention should be given to understanding the varieties of capitalism in East Asia. Second, institutions are themselves endogenous to other political factors that appear more consequential for growth, including particularly the nature of the relationship between the state and the private sector. he debate about the relationship between institutions and economic growth in TAsia has its own distinctive pedigree, and as a result must be understood through a sociology of knowledge. Japan’s post-Meiji transformation and subsequent re- construction after the Pacific War naturally attracted attention, but could initially be dismissed as sui generis. Other developing countries, particularly in Asia, were unlikely to replicate Japan’s entry into the ranks of the advanced industrial states; indeed, it was doubtful that Japan itself would sustain its extraordinary burst of postwar growth. Three developments, spread over several decades, redefined the study of Asia’s political economy. The first was the explosive growth of the newly industrializing countries (NICs)—Korea, Taiwan, Hong Kong, and Singapore—that began in the

Stephan Haggard is the Lawrence and Sallye Krause Professor at the Graduate School of Interna- tional Relations and Pacific Studies, University of California, San Diego. He is the author of Path- ways from the Periphery: The Political Economy of Growth in the Newly Industrializing Countries (1990) and The Political Economy of the Asian Financial Crisis (2000). He is the co-author (with Robert Kaufman) of The Political Economy of Democratic Transitions (1995) and (with David McKendrick and Richard Doner) From Silicon Valley to Singapore: Location and Competitive Ad- vantage in the Hard Disk Drive Industry (2000). Also with Robert Kaufman, he is co-editor of The Politics of Economic Adjustment (1992). He is currently working with Robert Kaufman on a project on changing social contracts in East Asia, Latin America, and Central Europe. Studies in Comparative International Development, Winter 2004, Vol. 38, No. 4, pp. 53-81. 54 Studies in Comparative International Development / Winter 2004 mid 1960s, followed by extraordinary episodes of high growth in Thailand, Indo- nesia, and Malaysia, as well. Japan was no longer alone. The second development was Japan’s apparent economic invincibility. Until the economic malaise of the 1990s set in, Japan’s success in key industries from autos to electronics was taken as evidence of the superiority of its dirigist economic model.1 The third development occurred when, after 1978, China and Vietnam pursued a reform course that avoided the devastating collapse of output that characterized the transition in the former Soviet Union and Eastern Europe. By comparison to all relevant groups (other developing countries, the OECD, and other socialist economies in transition), the countries of East Asia were outliers. The emergence of the NICs had particular significance for debates about development in general, and I focus primarily on them here. John Williamson’s (1990) famous checklist of the “Washington Consensus” could have been taken directly from the early literature on the NICs; the list of desirable policies included stable fiscal and monetary policy; low inflation; exploitation of comparative advantage through trade, exchange rate, and foreign investment policies; flexible labor markets; and market-friendly—if not exactly laissez-faire—governments. At least in North America, the counter-revolution against these views can be dated quite precisely to the appearance of Chalmers Johnson’s MITI and the Japa- nese Miracle in 1982. Johnson emphasized the positive role of industrial policy in Japanese growth, but his account was predominantly political rather than economic. MITI explained how distinctive features of the political system allowed the bureaucracy to steer a course between Anglo-American minimalism (the “regulatory state”) and the problematic features of socialist planning. Johnson’s work on the “developmental state”—including his own extensions of the concept to Korea and Taiwan (Johnson 1987)—structured the debate about Japan’s development for over a decade (Samuels 1987; Friedman 1988; Okimoto 1989; Calder 1993; Ramseyer and Rosenbluth 1993; Noble 1998), influenced a large body of comparative political economy literature on the East Asian NICs (Deyo 1987; Chu 1989; Gereffi and Wyman 1990; Haggard 1990; Cheng 1990; Doner 1991; Evans 1995; Chan, Clark, and Lam 1998; Woo-Cumings 1999), and presented the stylized facts of the Japa- nese case for comparisons within the OECD (Berger and Dore 1996; Hall and Soskice 2001). The literature on the developmental state was complemented by a second body of work on precisely how government interventions contributed to growth. Spear- headed by scholars outside the mainstream of North American economics, this work began by underlining empirical anomalies: the myriad ways in which the East Asian cases failed to conform to the neoclassical view. Alice Amsden (1989) suggested that Korea had grown rapidly because it had gotten prices wrong, but in ways that nurtured firm-level learning and innovation. Robert Wade (1990), an anthropolo- gist by training, and Ha-Joon Chang (1994), who taught at Cambridge University, outlined the central features of industrial policy in Taiwan and Korea, respectively. A succession of excellent industry studies by sociologists, political scientists, and students of business dissected the workings of industrial policy and institutions at the sectoral level (for example, Rhee 1994; Evans 1995; Kuo 1995; Uriu 1996; Noble 1998) and firm level (for example, Dore 1973; Aoki 1988; Hamilton and Biggart 1988; Fields 1995; Fruin 1998). A handful of economists (Pack and Westphal Haggard 55

1986; Lall 1996; Kim and Nelson 2000; Amsden 2001) emphasized the role of technology, a topic that mainstream economists tended to avoid. And of course, some economists from Japan (for example, Shinohara 1982; Aoki 1988; Yanagihara and Sambommatsu 1997; Aoki, Kim, and Okuno-Fujiwara 1996) and elsewhere in the region (for example, Jomo et al. 1997; Wong and Ng 2001) never bought into the neoclassical consensus in the first place, and developed their own lines of thought. Little of this work gained any recognition from the American economics profes- sion, where a renaissance in the study of economic growth in the 1980s shifted attention back to the macro level. Endogenous growth theory opened the door to interpretations of the role of policy, institutions, and learning. Yet in important empirical papers, Kim and Lau (1994) and Young (1994, 1995) argued that Asia’s growth could be explained largely by sheer capital accumulation. If productivity did not appear to be very important for the region’s development, both neoclassical interpretations (emphasizing the role of policy in achieving allocative efficiency) and those looking at industrial policy (and emphasizing the role of the state in “creating” comparative advantage) were barking up the wrong tree. Either there was no puzzle to be explained, as Krugman (1994) argued, or the puzzle was why the region managed such rapid accumulation of physical and human capital (for very different perspectives, see Ito and Krueger 1995; Rodrik 1995; Easterly 1995; Young 1994, 1995). In the 1990s, intellectual developments with respect to imperfect competition, information economics, and institutions provided the study of government intervention with micro-foundations that made them legitimate to the economics pro- fession. The World Bank (1993) made an important bow to institutional factors in its much-debated Miracle report on the region’s growth. That bow deepened during the 1990s as the international financial institutions placed greater and greater emphasis on “governance” as a central determinant of growth (World Bank 1997, 2003). The Asian financial crisis of 1997–98 sparked another round of controversy about East Asia’s experience. The “Washington” postmortems on the crisis focused on institutional failures such as weaknesses in financial regulation and corporate governance (for example, World Bank 1999). Not coincidentally, the post-crisis period saw a much more skeptical literature on the nature of business-government relations (for example, Jomo and Kahn 2000; Campos 2001; Kang 2002a, 2002b) and Asian political institutions more generally (Haggard 2000; MacIntyre 2001a, 2003). The crisis was interpreted very differently by a dissident group of economists who emphasized the risks associated with financial market integration. Underlying their critique was a broader reinterpretation of the region’s history that was very similar to what Gérard Roland (SCID 38:4, 110) calls an “evolutionary-institutionalist perspective.” Led in part by a Nobel laureate (Stiglitz and Uy 1996; Stiglitz and Yusuf 2001; Stiglitz 2002), this analysis emphasized how Asia (including China and Vietnam) had succeeded through an extraordinarily protracted “transition” that lasted several decades and was highly experimental in nature. These interpretations emphasized gradualism, strong governments, a variety of coordinating institutions, and self-conscious development of local technological capabilities. In sum, thirty years after general interpretations of East Asia’s postwar growth first appeared, new interpretations emphasizing the role of institutions are still finding their way into print. I structure my review of this work around three central de- 56 Studies in Comparative International Development / Winter 2004 bates: (1) the role of “big” institutions in capital accumulation and growth; (2) the significance of industrial policy; and (3) the nature of business-government relations. An important source of growth in East Asia is the region’s very high level of physical and human capital accumulation. A number of institutional approaches suggest why governments might be able to elicit high levels of private investment, including strong protection of property rights, authoritarian political systems, and institutional innovations such as business-government counsels and “strong” bureaucracies. These theories exist in substantial tension with one another, and none makes a convincing case for the necessity or sufficiency of any given institutional arrangement. Plausible links can be drawn between these institutions and growth in particular instances, but the variance across countries is high and no single institutional model of accumulation emerges clearly from the historical record. A second big debate on institutions and growth in East Asia concerns industrial policies for “governing the market” (Wade 1990). We have impeccable theoretical reasons to explain why such coordination can be welfare-improving and numerous case studies of industrial policies that appeared to work. Yet superficially similar strategies had deleterious effects in other settings, and East Asia has its own share of industrial policy failures. A plausible explanation for this variance is that the institutions surrounding these policies mattered. Theory provides good reasons why such institutions might be efficiency-enhancing, but the empirical variation is again quite large, and some countries grew rapidly with only “thin” institutions of this sort. In the third and concluding section of this article, I suggest that these analytic problems are self-induced and spring in part from the misguided effort to find a single institutional “taproot” for the region’s growth—a sin cognate to what Peter Evans calls, in this volume, “institutional monocropping.” But the problem is deeper. The preoccupation with institutions, and the functionalism in much institutionalist thinking (Roland, this volume), has obscured more fundamental political and social processes that are themselves determinants of institutional form and quality. There are gains in returning to some fundamental questions about political economy: Who rules? What are their preferences and capabilities? In this article, I consider business-government relations in the region and how they influenced both institutions and the growth process. Political elites in the region forged alliances with the private sector, but simultaneously retained independent sources of political power over it. The erosion of these conditions and the growth of business power was one factor in the onset of the Asian financial crisis of the late 1990s. Rebuild- ing institutions to check the private sector is a common theme in current reform efforts, and those efforts emanate not only from “Washington” but from deep-seated political processes in the region itself.

Regimes of Accumulation: “Big” Institutions, Investment, and Policy Reform

In a simple accounting sense, economic growth can result from productive inputs— capital and labor—or from greater efficiency in their use. Early growth accounting suggested that virtually all of Asia’s growth could be explained by sheer accumulation. This view is still contested, but physical and human capital accumulation in Asia was clearly extraordinary.2 Three closely related theories link institutions to Haggard 57

FIGURE 1 Institutional Models of Capital Accumulation

Property Rights I Strong property rightsÎinvestmentÎgrowth

Property Rights II Political stabilityÎcertainty over property rightsÎinvestmentÎgrowth

Regime Type I Authoritarian regimeÎdirect mobilization of resources and pro-investment policiesÎinvestmentÎgrowth

Regime Type IIa Authoritarian regimeÎstable macroeconomic policyÎinvestmentÎgrowth

Regime Type IIb Authoritarian regimeÎpolicy reforms that improve allocative efficiencyÎinvestment and increased productivityÎgrowth

Credible Business-government networks and/or counsels limit commitments I: predation and solve credible commitment Representative problemsÎinvestmentÎgrowth institutions

Credible Delegation and “Weberian” bureaucracies limit predation, commitments II: solve credible commitment problems, and improve the Delegative quality of policyÎinvestmentÎgrowth institutions investment; respectively, they emphasize property rights, regime type, and institutional solutions to credible commitment problems. The basic arguments and the variants I explore here are outlined in Figure 1. The first, owed to North (1990) and others, emphasizes clear definition and protection of property rights, and needs little elaboration. Strong property rights provide incentives to invest, overcome problems that arise in private contracting, and constitute a check on the predatory behavior of the state (Besley 1995). The proxies for property rights protection are far from perfect, and most cross-national empirical studies have relied on subjective evaluations by investors rather than objective indicators of legal rules.3 Nonetheless, in the last decade some cross-national empirical work has found that strong property rights are positively related to growth (Knack and Keefer 1995; Acemoglu, Johnson, and Robinson 2001). East Asia does relatively well on some, but not all, of these measures. Campos and Nugent (1999), for example, compare East Asia favorably to Latin America. Rodrik (1997) argues that differences in growth within Asia are associated with measures of institutional quality as well, with protection of property rights only one element of the compos- ite measure used. A literature on political instability and growth can also be given a property rights 58 Studies in Comparative International Development / Winter 2004 interpretation (for example, Barro 1991, 1996; Alesina and Perotti 1996; Feng 1997). Not surprisingly, political uncertainty—whether measured by the incidence of political violence or government turnover—is associated with lower growth in a cross section of countries. Insecurity of property rights may be one reason for this result. Casual empiricism suggests that the growth miracles in East Asia occurred during relatively long periods of political dominance by conservative parties or elites that might have mitigated property rights concerns—the Liberal Democratic Party (LDP), Kuomintang (KMT), and People’s Action Party (PAP) in Japan, Taiwan, and Singapore, respectively; Park Chung Hee, Soeharto, and Mahathir in Korea, Indo- nesia, and Malaysia; the British colonial administration in Hong Kong; and a surprisingly stable alliance of king, military, and bureaucracy in Thailand. The Chinese Communist Party fits this model over the last two decades, as well. Despite these findings, Asia presents some fairly obvious anomalies—at least if we consider property rights to ultimately rest on the rule of law and other constraints on state power. I have already noted the biggest anomaly of all: in China, a communist party dictatorship with weak legal and judicial institutions has nonetheless enjoyed unprecedented capital inflows, investment, and growth for two decades. However, most of the other East Asian miracles were authoritarian systems in which executives enjoyed substantial discretion. If property rights were secure, such security did not rest on formal legal and institutional constraints on state power. Informal institutions or some other mechanism must have been at work. A second and more contested theory for rapid capital accumulation and growth argues that authoritarian regimes were a crucial element of the story. Two implicit political models run through the developmental state literature, including my own writing (1990). The first begins with the trade-off between investment and consumption. Growth requires capital accumulation, which in turn demands that resources be diverted from consumption to investment.4 Voters (or the poor or labor, depending on the precise specification) are likely to oppose such a reallocation.5 If we take the problematic assumption of myopia at face value, limiting the political voice of “pro-consumption” groups could increase aggregate investment. The second authoritarian model focuses on the general policy environment. Eco- nomic performance depends heavily on the conduct of macroeconomic policy, including stable and appropriate real exchange rates and fiscal and monetary policies that limit high and variable inflation (for example, Fischer 1993). Growth also depends on allocative efficiency,6 an important barrier to which is policy-induced distortions of various sorts. Trade policy in the region, for example, was far from liberal, but when compared with other developing countries, incentives to export were stronger. How did Asian governments get macroeconomic policy and incentives “right?” The policy status quo in many developing countries is characterized by high and erratic inflation, overvalued exchange rates, and a welter of interventions tied to rent-seeking groups of various sorts. The political economy problem is one of transition. Dictators can overcome collective action problems inside and outside the government, override rent-seeking pressures, and thus push the economy onto a more efficient growth path. The controversy surrounding the effects of regime type has resurfaced in recent years because of the widespread transition to democratic rule, as occurred in the Haggard 59

Philippines (1986); Korea (1987); Taiwan and Thailand (gradually, beginning in the mid 1980s); and Indonesia (1998). If the authoritarian hypothesis is correct, the transition to democracy should imply more consumption, less investment, less coherent economic policy, and correspondingly slower growth. With the exception of Indonesia, none of the Asian countries that democratized experienced an immediate or dramatic slowdown in growth,7 and some—most notably the Philippines—performed better than they had under authoritarian rule. However, a number of studies appearing in the wake of the financial crisis of 1997 to 1998 argued that democracy complicated the policy-making process. Moon and Mo (1999) state the case most forcefully; they argue that democratization in Korea compounded problems of moral hazard before the financial crisis and undermined the coherence of economic policy making once the crisis broke. Others are more cautious, arguing that it was not democracy per se but particular democratic institutions that have adverse consequences. In an important book on the financial crisis, MacIntyre (2003) argues that both authoritarian and democratic systems with a high number of veto players are more prone to policy failures and crisis. Cheng (2003) provides an even broader catalogue of institutional weaknesses in Asia’s new democracies, from excessive legislative powers on the part of presidents, to features of the electoral system (such as the non-concurrency of elections and term limits), to the weakness of party systems. At least in theory, all of these could have adverse consequences for economic policy making and thus for growth. For many years, the political science discipline wrestled with the link between regime type and growth, with inconclusive results. Adam Przeworski and his col- leagues (2000) have made substantial progress toward resolving the debate. In a sophisticated set of tests covering a very large sample of countries over the 1950– 90 period, Przeworski et al. report the following:

• Controlling for income and a number of other variables, regime type has no effect on investment, the growth rate of the capital stock, or overall income growth. • Dividing the sample into wealthy and poor countries (above and below $3000 per capita income), there is no evidence that regime type affects growth in poor countries. • There is no significant difference in the aggregate economic performance of wealthy dictatorships and wealthy democracies, but the nature of growth differs. Wealthy democracies exhibit somewhat slower growth in the capital stock and much slower growth in the labor force, but use labor more productively, pay higher wages, and show higher productivity growth. • The standard deviation of growth in the sample of dictatorships is much larger than in the democracies (6.08 vs. 3.87, controlling for a number of potentially confound- ing factors), suggesting that dictatorships include both high-growth “miracles” and low-growth “debacles.” • Dictatorships that experience high growth for some period—even an extended period—revert to the mean or even experience disastrous growth collapses; Nigeria, Iraq, Romania, and Ecuador provide examples. If any other region were under consideration, the debate could end with the observation that no convincing empirical evidence exists that authoritarian regimes outperform democratic ones. However, a high proportion of all growth miracles in the developing world are concentrated in East Asia, and all of the countries except 60 Studies in Comparative International Development / Winter 2004

Japan were under authoritarian regimes during their inflection onto a high growth path. Moreover, if we discount a few non-trivial anomalies (the Marcos period in the Philippines; the disastrous collapse of the Soeharto regime in Indonesia; the even more horrifying history of Pol Pot’s Cambodia), authoritarian regimes in Asia did not show the tendency visible in other high-growth authoritarian cases toward a marked slowdown in growth over time. Thus, while regime type may not matter for growth in a cross section of countries, the Przeworski et al. findings offer little insight into why East Asian dictatorships cluster at the high-accumulation, high- growth tail of the authoritarian distribution. This statement of the problem brings us to a third approach that stresses the resolution of credible commitment problems. Note that the property rights and authoritarian models are in significant theoretical tension. The “naïve” property rights approach outlined above simply assumes that rights are credibly defined and en- forced. Yet authoritarian regimes lack credible checks on executive discretion and should therefore suffer from credibility problems in protecting property rights.8 One possible explanation for East Asia’s success is that authoritarian regimes inherited, evolved, or consciously devised institutions that allowed them to signal their commitment to property rights and a stable policy environment conducive to long-run growth. Some historical context suggests the plausibility of this approach. All of the high-growth Asian countries began their postwar histories in extraordinarily inaus- picious circumstances; indeed, it is hard to imagine a part of the world where the immediate postwar future looked so bleak. Japan had been completely defeated in war. South Korea was subjected to a relatively hostile American occupation, riven by near-civil war, and then engulfed in a devastating conflict with North Korea. The Communists defeated the KMT on the mainland, forcing them to relocate to Taiwan. China experienced revolution, and then the equally disruptive Great Leap and Cultural Revolution, both of which had spillovers for Hong Kong. The Philip- pines, Indonesia, Singapore, and Malaysia went through domestic political uncer- tainties associated with independence that were arguably no worse than those faced elsewhere, but Indonesia subsequently experienced devastating loss of life in 1965 as the Sukarno regime collapsed in indiscriminate slaughter. Singapore faced isola- tion following the collapse of its union with Malaya and the subsequent withdrawal of the British military. Thailand’s geographic position left it exposed to uncertain- ties associated with the wars in Vietnam, Cambodia, and Laos. In sum, political leaderships in all of these countries faced the problem of how to mobilize resources under political circumstances that were highly uncertain.9 The solution was to provide assurances to the private sector—in effect, to separate economic, civil, and political liberties (Chan 2002). Grabowski (1994, 1997) and Huff, Dewit, and Oughton (2001) have modeled relations between a developmental state and the private sector as a simple game in which the government signals its credibility to the private sector by complementary investments that elicit private investment. These models do not consider institutions centrally,10 but the idea that institutions can help solve credible commitment problems is by now highly famil- iar (North and Weingast 1989; Cox and McCubbins 2000). Two types of institutions arise repeatedly in efforts to explain why East Asia’s authoritarian governments were distinctive. I call them “partially representative” Haggard 61 and “delegative” institutions. The World Bank (1993), Campos and Root (1996), and Root (1996) develop the argument that “deliberation councils” linking business and government played an important role in resolving credibility problems associated with authoritarian rule and building trust between the public and private sectors. Evans (1995), Maxfield and Schneider (1997), Weiss (1998), and Moon and Prasad (1999) cast the argument in more general terms, claiming that a com- plex of both formal and informal networks between the public and private sectors played a similar function. In Evans’ (1995) felicitous phrase, the East Asian state was characterized by “embedded autonomy”: strong political and bureaucratic institutions that simultaneously maintained dense ties with the private sector. How did it work? These councils and networks operate at different levels in the political system (from the bureau to the chief executive), can include representa- tives of formal business associations as well as individual firms, and may consider functional (e.g., export promotion, wage-setting), industry-specific, or even firm- specific issues. They are “partially” representative because, unlike corporatist arrangements and policy networks in Europe, labor and other social groups were under-represented or represented only through controlled organizations. Formal councils and informal networks provide opportunities for private sector actors to relay information to politicians and bureaucrats and allow politicians and bureaucrats to signal their intentions and commitment and thus to build trust (Maxfield and Schneider 1997 provide an overview; see also Evans, this volume, on the role of deliberation).11 Unlike informal networks—such councils limited private sector opportunism. The relative inclusiveness of participation and the establishment of clear and transparent “rules of the game” with respect to particular policy areas limited the ability of individual firms to secure particularistic rents. Such councils had a similarly restraining effect on the predatory tendencies of the government. Root (1996: 12) explains by reference to an implicit model of costly signaling:

Tying the fortunes of many groups to the continued use of the cooperative decision- making structures raises the cost of altering the system ex post. Once councils permeate an economy, a government that unilaterally imposes its will on an industry or sector will risk undermining the value of councils for other groups, thus subverting the entire system of cooperative decision-making. Government, then, is unlikely to abide only by those decisions it prefers, overturning those it opposes . . . . By institutionalizing delib- erative councils, government reduces its discretionary power but gains the confidence of business in the stability of agreed upon policies.

Business-government networks exist almost everywhere, and are difficult to map; nor is it easy to distinguish “good” networks from “bad” ones ex ante. How preva- lent were these business councils and what role did they play in contributing to a favorable policy environment? The existence and operation of such councils is thoroughly documented for Ja- pan (Okimoto 1989; Schwartz 2001; Schaede 2001). The early Korean experience of export-promotion meetings chaired personally by Park Chung Hee is also a fre- quently used example (Rhee, Ross-Larson, and Pursell 1984). Yet as we move beyond these two Northeast Asian cases, the evidence thins. The World Bank’s Miracle report demonstrates the problem of drawing wider conclusions. With the exception 62 Studies in Comparative International Development / Winter 2004 of Japan, the World Bank (1993: 184) deems public-private consultation “most explicit” in Singapore, where private citizens serve as directors on statutory boards and as members of ad hoc government advisory councils, and the government so- licits the opinion of private industry groups. Yet such practices are hardly distinctive, and the report neglects to mention that the local private sector in Singapore is politically and economically the weakest in the region. Many of the statutory boards on which private citizens serve oversee activities that directly usurp the private sector, including activities which members of the private sector have repeatedly (and unsuccessfully) argued should be ceded to them. Thailand offers another example. The country developed a coordinating council mechanism in the early Prem years, and the most prominent study of it underlines its purpose in securing private sector support (Laothamatas 1992). But the experi- ment was short-lived and does not appear to fit the model of a government preoccupied with stimulating private investment. Rather, Prem was preoccupied with securing private sector support for the political changes he sought to introduce. In Malaysia, such institutions did not appear until 1991, when Mahathir’s “Look East” campaign sought to emulate the Northeast Asian NICs. Yet in a succession of outstanding studies, Gomez (1991; Jomo and Gomez 1997) has detailed how this period was the high point of corruption, cronyism, and the interpenetration of government, state, and party. The Malaysian Business Council served important informational functions but had no decisional authority, and Mahathir maintained other political channels to the private sector. Moreover, this council does not appear to fit the model of a government trying to reassure a skeptical private sector. Investment was robust and the political objective was primarily to buttress the Malay private sector vis-à-vis the Chinese. As the World Bank admits (1993: 184–5), “formal mechanisms for business-government interface are almost entirely lacking in Taiwan . . . and . . . Indonesia lacks the formal coordinating links of other high-per- forming Asian economies.” In his 1994 study of business-government relations in Asia, MacIntyre (1994) finally stated the claim more generally: the Southeast Asian countries simply do not fit models of business-government relations derived from the Northeast Asian cases.12 But even those paradigmatic cases require closer scrutiny. In Korea, the most important case (outside of Japan) for the significance of such councils, institution- alized consultation between the government and the private sector was transformed during the heavy industry and chemical industry drive of the 1970s into more particularistic relationships between the executive and the largest groups (Rhee 1994). As Evans (1995: 53) admits, “embeddedness under Park was a much more ‘top down’ affair than the Japanese prototype, lacking the well-developed intermediary associations and focused on a small number of very large firms.” Business-government relations became acrimonious during the Chun Doo Hwan years (1980–87; Haggard and Moon 1990) and substantially more particularistic and corrupt, as well (Kang 2002a, 2002b; Schopf 2001). In sum, partially representative institutions performed useful functions in some cases for some periods of time, but to the extent that dictatorial regimes faced credible commitment problems, representative institutions did not appear to be a necessary condition for solving them. Authoritarian governments established their credentials with private actors through other commitment technologies: industrial Haggard 63 policies, subsidies, rents, corruption, particularistic ties, and simple “repeat play.” Through non-predatory behavior and restraint, sustained over time, governments signaled that the property rights of favored groups were assured. Institutions were not necessarily important, and to the extent that they were, they rested on more fundamental political coalitions and exchange relationships. By “delegative institutions,” I mean bureaucratic agencies that are granted broad developmental mandates and insulated in various ways from political interference. Internally, such agencies are run on meritocratic principles with strong internal systems of both rewards (such as competitive pay and long-term career tracks) and controls (sanctions for corruption) designed to ensure the alignment of individual incentives with broader organizational goals. Delegation is necessarily imperfect in all political systems. In democracies, legislators can take back what they have granted, although at some cost; in dictatorships, such delegation is even more easily reversed. Similarly, the Weberian bureaucracy is clearly an ideal type. Yet these real-world imperfections do not negate the positive effects that delegation and bureaucratic reform can have in signaling government intentions to private actors, increasing the decisiveness of decision making, and simply improving the quality of policy formulation and implementation. Cross-national evidence of the effects of bureaucracy is scarce because of the difficulty of measuring its quality with any precision. In a highly innovative study, Evans and Rauch (2000) found that the “Weberianness” of the bureaucracy was in fact associated with growth in a cross section of thirty-five developing countries. Case-study work finds that economic reforms in the region were typically accom- panied by major bureaucratic reorganizations that concentrated economic decision- making authority in one or several lead agencies, strengthened the role of technocrats in formulating policy, and reformed internal bureaucratic routines (Haggard 1990). Reform of the bureaucracy did not typically reach the entire administrative apparatus. Pockets of bureaucratic efficiency coexisted with ministries that dispensed “pork” and political favors (Kang 2002a, 2002b). Nonetheless, all of the high-growth Asian countries had strong “delegative” institutions: core economic ministries and/or specialized agencies with important policy-making powers that were run on meritocratic principles and had strong internal rules and norms. Despite the tight theoretical and empirical fit between delegation, bureaucratic reform, and economic take-off, the underlying causal connections are very far from clear. Indeed, in recent years an acrimonious debate has emerged on the importance of the bureaucracy in the policy-making process in Asia. Japan has been the battle- ground of this fight, with Johnson’s MITI and the Japanese Miracle once again at the center of the debate. Johnson claimed that bureaucrats and politicians in Japan operated under a tacit division of labor, in which politicians reigned but bureaucrats actually ruled and pursued their own developmental objectives even when they clashed with those of politicians. This view was never the dominant one within Japanese studies (e.g., Krauss and Murimatsu 1984), but the challenge was given a new theoretical edge in the 1990s by political scientists working with a principal- agent framework. Ramseyer and Rosenbluth (1993) argued forcefully that bureaucrats in Japan were little more than agents of politicians who ultimately dictated the course of policy. Noble (1998) showed that the consultative structure of MITI and its particular interventions were closely tied to the electoral strategy of the LDP. 64 Studies in Comparative International Development / Winter 2004

Look closely enough, and the core principal-agent relationships could always be found, with politicians and their electoral incentives in command. It is even more misleading to think that bureaucrats enjoyed independence in the authoritarian regimes. Rather, bureaucracies are rightly interpreted as instruments of authoritarian rulers, reformed not to ensure their independence but to assure their loyalty to the leadership. Nunberg’s (2002) biting critique of East Asia’s institutional “conceit” notes that although initial recruitment in the region tended to be meritocratic, seniority often drove advancement, and performance was judged by rule compliance “appropriate for carrying out directives handed down from the commanding heights of government” (Nunberg 2002: 5). I began this section by arguing that rapid growth in East Asia was attributable in the first instance to extraordinary levels of sheer capital accumulation. Strong property rights constitute one “big” institutional theory that might explain why East Asia did well in this regard. Conservative governments in the region did signal their commitment to the development of the private sector, but not through limited- government institutions such as the rule of law and independent courts. Arguments about regime type do not fare well, either; as a general proposition, there is no connection between regime type and growth, although we are left with the puzzle that most of Asia’s high-growth economies were authoritarian. Partially representative institutions catering to business might have contributed to the credibility of East Asia’s dictatorships. But such institutions were neither ubiquitous nor necessarily salutary in their effects, as I will show. Bureaucratic reform signaled government commitment, resolved collective action problems within governments, and simply improved the quality of policy. However, it is highly unsatisfying to invoke partially representative and delegative institutions as prime movers when they are so obviously endogenous to some deeper political process.

Institutions Writ Small: The Industrial Policy Debate

Before turning to what those processes might be, it is useful to descend from the macro to the micro levels and review the debate about industrial policy in Asia. The first question concerns the underlying theoretical rationale for such policies, which I define as selective interventions designed to influence the allocation of resources among different activities. The second question is an empirical one: did such policies matter? Finally, and of most interest to us here, did the institutions associated with such policies influence their effectiveness and efficiency? Did governance matter? Theoretically, selective intervention can be welfare-enhancing only under re- strictive conditions—namely, that it addresses well-defined problems of market imperfection and externalities. Although these arguments take a wide variety of forms, their underlying structure is similar in emphasizing coordination problems that private actors cannot resolve efficiently through private contracting (Chang 1994; Noland and Pack 2003: 16–8). Institutions feature prominently in the discussion of these policies because they address just such coordination problems. Four lines of theory and research provide a sense of both the argument and the historical experience of the region; those that emphasize coordination problems in the real sector, capital market failures, technology, and agglomeration economies. Haggard 65

These four lines of thought also follow an admittedly imperfect historical sequence, from the dictates of early industrialization, to the demands of a more open and technologically demanding phase of economic growth. A number of recent studies have revived “big-push” models of growth that emphasize coordination problems in the industrial sector, particularly in its early stages of growth (Chang 1994; Rodrik 1995; Matsuyama 1996). In these models, efficient investment can be deterred by small market size and the absence of complementary suppliers or customers. Current market prices will not adequately convey information about future growth, and countries thus forego investments that would lower production costs through larger plant size. Big-push–like investments by the government and subsidies, protection, and other incentives to private firms can overcome these collective action problems, but only if explicitly coordinated; such coordination is where institutions come in. Okazaki (1996), for example, details how MITI’s Council for Industrial Rationalization resolved pricing problems between the coal, steel, and downstream industries. Similar efforts have been well documented in Korea’s heavy-industry drive of the 1970s, although the breakdown of coordination ultimately resulted in substantial surplus capacity (Rhee 1994; Stern et al. 1995). The coordination rationale for intervention can also be seen in less obvious cases than the heavy intermediates such as steel and petrochemicals. For example, Gold (1981) and Kuo (1995) document the Taiwanese government’s role in coordinating complementary investments in different segments of the textile industry, such as between the spinning and weaving segments, and Doner (1991) examines coordination problems between assemblers and suppliers in the automobile industry in Southeast Asia. A second theoretical rationale for intervention centers on failures in capital markets. Hellman, Murdock, and Stiglitz (1996) have offered a neatly integrated theoretical framework of systems of “financial restraint” motivated directly by the East Asian experience. In the model, controls on deposit rates and limitations on entry create rents for financial intermediaries (“franchise value”). These rents provide incentives for banks to expand their deposit base, thereby contributing to financial deepening, and to undertake socially profitable projects that banks would not other- wise finance due to problems of adverse selection and moral hazard. Controls on lending rates create rents for firms in the real sector, as well. These rents do not necessarily imply inefficiencies if banks are capable of monitoring firms, and if firms have incentives to increase their equity stake in a given project. In addition to general controls on deposit and lending rates, more direct government intervention in channeling credit to particular high-return sectors may still be justified by the divergence of private and social returns due to market failures. Government-di- rected finance was particularly important in the Korean case (Woo 1991) but is visible in particular sectors and projects elsewhere in the region, as well (Haggard, Lee, and Maxfield 1993; Jomo et al. 1997). Again, government and private institutions each play a coordinating function in such a system. Governments must be able to coordinate with banks—which have superior information on potential borrowers—and among them on grounds similar to those outlined with respect to big-push strategies (Hellman, Murdock, and Stiglitz 1996: 185–99). In an intriguing application of principal-agent and transactions- costs models motivated by the Korean case, Lee (1992) argues that hierarchical 66 Studies in Comparative International Development / Winter 2004 forms of financial coordination (a “quasi-internal organization”) economize on com- munication costs, reduce opportunism, resolve small-number bargaining indeter- minacies, and permits auditing of outcomes. A third rationale for industrial policy centers on technology and has produced its own quite distinctive literature. The NICs succeeded largely through processes of imitation, yet even the success of imitative policy is subject to a variety of market failures (Amsden 2001: Chapter 3); firms lack full information on technological alternatives, function with imperfect information on the technologies they do ac- quire, and are subject to variable, unpredictable, and highly path-dependent learning processes (Lall 2000). Actual innovation is even more difficult. Rationales for government intervention include incomplete appropriability that leads to underinvestment in R and D, coordination problems such as standards setting, and above all, the externalities that arise from R and D activities. The firm is the ultimate locus of innovation, but some countries produce a larger number of innovative firms than do others. It is therefore highly plausible that “national systems of innovation”—including sector-specific policies—influence technological trajectories and thus patterns of international specialization and trade (for an application to Asia, see Lundvall 1992; Tyson 1993; Zysman 1996; and Kim and Nelson 2000). Numerous policies and institutions may matter, from the supply of high-quality education to strategic technology alliances among firms. Nonetheless, selective interventions may also be appropriate, including protection, restrictions on licensing and royalties, and government support for research consortia (Lall 1996). Again, institutions play a role in providing public goods and coordinating both with and among private sector actors; the government-run research institute and subsidies in support of R and D consortia are the paradigmatic examples. All governments in the region (including Hong Kong) have had some form of sector- specific technology policies. A sizable literature on the electronics industry has documented how countries in the region supported this high-growth sector (for example, Ernst and O’Connor 1992; Hobday 1997; L. Kim 1997; Matthews and Cho 2000). A fourth body of work on location gained prominence with Paul Krugman’s (1991) simple observation that the dynamism and growth of “national” economies is driven by the dynamism and growth of particular regions and cities. This is no less true in Asia than elsewhere, and research on regional and urban clusters in the region has itself become a growth industry (Yusuf 2003: Chapter 6). The externalities associated with such agglomeration include both the concentration and diversity of skills in the labor market; the advantages of a wide range of suppliers of specialized inputs and services; lowered transactions costs associated with proxim- ity; and informal exchanges that occur outside of market relations, such as the transfer of business information, that generate knowledge and technology spillovers. Some clusters emerge through the activities of dominant firms, and generic policies such as good urban planning are adequate to foster them. However, both the R and D and production activities in such clusters are often quite specialized, and as a result the “public” goods they require are highly specific to the activity in question. For example, innovative clusters often arise around strong universities and thrive on complementarities between university-based research, specialized graduates, and the R and D and personnel needs of related firms; the rise of Route 128 in Boston Haggard 67 and the emergence of Silicon Valley in California are examples in the United States (Saxenian 1994), but Singapore provides examples, as well (McKendrick, Doner, and Haggard 2000). Specialized training provides another example of a localized coordination problem. Governments and public-private partnerships can overcome well-known collective action problems that can arise when firms invest heavily in worker training, but are subject to poaching. Government training programs, such as those implemented in Singapore, and quasi-public entities such as the Penang Skills Development Centre in Malaysia, are models of collective efforts to solve such coordination dilemmas in the labor market. So much for the theory. Does any of it matter? A surprisingly common research design is to pick a successful (or unsuccessful) industry, demonstrate that policy support existed, and conclude that the case for the significance of industrial policy is made (or rejected). Even some of the most widely cited studies in the field, including studies by Wade (1990) and Evans (1995), are guilty of this post hoc ergo propter hoc reasoning. Stern et al. (1995) summarize:

A policy may succeed at one level but, by introducing other economic distortions, may undermine developments elsewhere. Or the seeming success of the policy may have come about through exogenous factors, leading to the erroneous observation that the policy created the apparent economic success. And finally, a policy may appear to have been implemented when, in fact, the implementation was neither effective in practice nor so dramatically different from what might have occurred if the policy had not been enunciated.

The ideal way to resolve the issue is to examine industry-level data gathered from a range of sectors (or regions) within a given country to determine if those that received policy support surpassed others on some metric, such as total factor productivity (TFP), export growth, or profitability. Smith (1995), Rodrik (1996), and Noland and Pack (2003) provide overviews of these efforts, and the findings are generally not encouraging for industrial policy advocates. The amounts of mea- surable support are relatively small; protection and other instruments are often tar- geted to the “wrong” sectors (in Japan, for example, toward non-competitive, resource-based sectors; Beason and Weinstein 1995); and policy does not appear to be correlated strongly, or even positively, with measures of success such as TFP growth. Even if such a correlation existed, the effects on overall growth (as op- posed to sectoral outcomes) would probably be slight. Success in any given sector does not demonstrate that aggregate social welfare was enhanced, and may reflect the diversion of resources away from equally if not more profitable activity. Of course, such studies cannot capture the full range of informal policies or institutional arrangements that might have affected industry performance. Most importantly, these policies could have played an important function in the political economy by signaling government commitment to private sector profitability and growth. Nonetheless, the controversy has reached an unproductive standoff between the “anecdotal” evidence that makes a plausible case for industrial policy in particular sectors, and the “systematic” evidence that is more skeptical, but necessarily omits significant institutional detail. This standoff is not easily resolved, but we can shift the terrain back to the un- 68 Studies in Comparative International Development / Winter 2004 derlying conditions that make it more likely that any given intervention will be welfare-enhancing. Recall that critics of industrial policy cannot cast their arguments in general theoretical terms: market failures provide a justification for selective intervention. As a result, critics of industrial policy revert to the following syllogism about government failure:

1) Even if an intervention may be warranted in theory, politicians, bureaucrats, interest groups, and individual firms can bias all of the selective interventions outlined above in inefficient and even resource-destroying ways; 2) East Asia was unique in its ability to limit government failure; 3) Any efforts to replicate that experience in other settings is likely to fail; 4) The safest way to avoid inefficient rent-seeking is to limit the distribution of rents in the first place. Rather than constituting a general critique of industrial policy, this line of argument simply admits our ignorance about the political and institutional conditions that generate or limit government failures. These conditions must be discussed in greater detail. The logical place to start is with the specific political tasks which coordinating institutions must perform. Most obviously, the decision-making process must be organized in a way that generates growth-promoting policies. This apparently ano- dyne observation is no less significant for neoclassical interpretations of the region’s growth than it is for “heterodox” ones; in both cases, we need a theory of efficient government.13 First, if rents are extended for any of the purposes outlined above, they must be conditional. Governments must define the objectives of the rent in terms of some discernible market failure or externality, monitor rent recipients, and credibly commit to withdraw rents for non-compliance or non-performance (Amsden 2001, 8; Aoki, Murdock, and Okuno-Fujiwara 1996).14 A related observation is that the ability to impose market discipline and competition on firms is a crucial component of any credible industrial policy.15 If governments cannot credibly signal their willingness to revert to a market equilibrium, or some other punishment strategy for non-compliance, then firms will exploit the government. Institutions mitigate these problems by limiting rent-seeking that wastes resources, either in the rent-seeking process or in the subsequent introduction of distortions. Beginning with the state itself, Schleifer and Vishney (1993) provide an influential model of corruption that outlines a rationale for centralization (see Kang 2002a, 2002b; and MacIntyre 2001b for applications to Asia). Rent-seekers demand a range of complementary government-supplied goods. If the state is highly decentralized, different branches of government, ministries, or bureaus pursue their own interests, pushing the cost of government-supplied goods to a suboptimal level and introducing uncertainty over property rights in those rents. Political centralization does not eliminate corruption, but bounds it by solving these collective action problems, pricing rents at an “appropriate” level, and providing security of property rights, which stimulates investment. The Shleifer and Vishney model conceptualizes the state in a highly stylized way as a collection of administrative agencies that control rents, but their findings parallel other work on constitutional design, electoral rules, and party systems. For Haggard 69 example, Hicken (2001) shows how a fragmented party system, coalition cabinets, weak party labels, and candidate-centered electoral strategies produced strong incentives for Thai politicians to channel benefits to narrow constituencies. Con- versely, centralization of authority (for example, through strong executive powers or parties) operates as a control mechanism and has been used to explain the difference between the Thai experience following the financial crisis and Korea under Kim Dae Jung (Haggard 2000: Chapter 2). Somewhat similar arguments have been made about the internal coherence of the bureaucracy. In the previous section, I emphasized the role that bureaucratic reform played in signaling commitment and improving the overall quality of policy. But meritocratic recruitment and promotion, adequate compensation, and career paths with clear rewards at the top are important for controlling rent-seeking, as well (Rose-Ackerman 1997). Evans (1995) and Evans and Rauch (2000) suggest that the internal coherence of the bureaucracy is the key factor allowing “embeddedness” to occur without degenerating into inefficient rent-seeking. The case-study work on industrial policy repeatedly returns to the significance of independent bureaucratic capabilities and information as a condition for effective governance. Within the literature on the “micro-institutions” that link government to the private sector, there is less consensus regarding the effects of institutional design on the efficiency of policy. Networks linking individual politicians and bureaucrats who control rents paid to individual firms (or family members) are prone to quite obvious inefficiencies. Particularistic, patron-client relations may have played an important role in assuring business clients at crucial historical junctures, but such networks are almost certain to lack transparency or incentives to monitor corporate behavior. Studies of corruption in the Philippines (Hutchcroft 1998), Indonesia (MacIntyre 2001b), and Malaysia (Gomez 1991; Jomo and Gomez 1997) typically underline the costs of particularistic networks (see Khan 2000b for a comparative perspective). At the other extreme are arguments for broad, “encompassing” representation through peak or sector-wide private sector organizations.16 In addition to resolving the credibility and information problems outlined above, breadth of representation can incorporate checks on both the state and the private sector. On the one hand, broadly-organized business sectors act as a check on government through what Kang (2002a, 2002b) calls “mutual hostage-taking.” Where states are centralized (in the Shleifer and Vishney sense) and private sectors are well-organized, neither is in a position to exploit the other. Wide representation of the private sector can also check particular sectors or firms because one firm’s rent is another’s cost (Doner 1991; Kuo 1995; Campos and Root 1996: Chapter 4).17 Noble (1998) and Doner and Ramsay (1997, 2000) show how fragile such results can be. Their more fine-grained institutional analysis shows that the nature of the coordination problem will determine what institutional arrangements are opti- mal. Noble’s comparative work on industrial policy in Japan and Taiwan, for example, shows how “encompassing” arrangements can easily degenerate into collusion, and that such arrangements are kept efficient not through enforcement of coordination, but through defection by a competitive fringe. The idea that governments must be able to effectively structure competition for rents is also one of the 70 Studies in Comparative International Development / Winter 2004 more interesting analytic contributions of the World Bank (1993) Miracle report. Governments in Japan and Korea established competition for rents that were non- compulsory and open, but rent-distribution was dependent on fulfilling performance criteria such as exports, investment, or cost-reductions. Analyses of such “performance-indexed rewards” imply an altogether different institutional relationship between the government and the private sector than those analyses focusing on the advantages of “encompassing” arrangements. If the common theme of the previous section on capital accumulation was the importance of checking the state, the discussion of industrial policy underlines the importance of checking private rent-seeking (see Khan 2000a, 2000b). Strong theoretical justifications exist for selective intervention and various forms of coordination, but institutions affect whether these policies will be efficient. Some degree of centralization in the allocation of rents, appropriate incentives within the bureaucracy, and limits on particularistic business-government networks seem plausible institutional requirements for a coherent industrial policy—or any policy, for that matter. But findings about the organization of any particular policy effort appear to be highly sensitive to the particular coordination problem at hand. In cases where defection carries high costs, such as in the coordination of training efforts, encompassing organizations with the capacity to sanction are the most efficient institutional form. Yet in other instances, more open and competitive institutional arrangements will be more effective over the long run; R and D consortia provide an example. At this point, we still know far too little about government and market institutions at this level of analysis, but we also know too little about the complementarity among these “small” institutions and the larger political order. I conclude by returning to this question.

Business-Government Relations and the Varieties of Capitalism in East Asia

An enduring problem with the institutionalist approach to Asia’s growth is its functionalist form: the tendency to address the capacity of the state but not its motiva- tions is characteristic of the approach. East Asian states may have been “strong,” but ultimately we want to know why they embraced relatively efficient, outward- oriented, growth-promoting policies. More generally, we need to be wary of the functionalist view of institutions that is so central to much economic reasoning (see Roland, this volume, for a similar critique). Institutions do produce gains from coordination and exchange, but there is typically more than one way to structure them to achieve those ends. As Knight (1992: 28) argues, “if we want to explain the development and maintenance of social institutions in terms of the relevant actors’ preferences, we will need to specify what rational actors want the substantive con- tent of such rules to be in the context of diverse distributional forms.” The institutionalist literature on East Asia is not unaware of this problem, and typically pursues one of four escape routes. The first is ideology. State officials developed, inherited, or imported ideas about how to achieve economic growth, and used their control over material and organizational resources to implement them. Johnson’s account of MITI relies on ideological considerations to a substantial degree, and Vogel (1991) and others have emphasized the spread of Japanese ideas about development throughout the region (see also Haggard 1990). Haggard 71

A second option is to argue that political elites in East Asia were constrained by international pressures of various sorts. Bruce Cumings (1984) and Meredith Woo- Cumings (1991, 1996, 1999b) have been the most consistent advocates of this view. They describe how first a Japanese imperial system and then an American-domi- nated regional order influenced the emergence and subsequent behavior of state structures. Japanese colonialism had a profound effect on Korea and Taiwan, and the United States strengthened right-wing authoritarian governments throughout the region in the postwar period, creating various networks of influence over economic policy. Resource constraints (Haggard 1990) and security threats (Kang 2002a, 29–40) have also been invoked as external pressures that limited the predatory tendency of the state and pushed governments toward greater efficiency. Third, the outward-oriented, mixed-economy strategies of the region might be interpreted in terms of the material interests of the government itself. Rent-seeking and predatory-state models assume that the interests of political elites are necessarily in conflict with economic efficiency, but this cannot be correct; a number of growth-promoting reforms benefit the government directly, by increasing the supply of foreign exchange and taxes or deepening financial intermediation, for example. Many “market-oriented” reforms in the region were not motivated by efficiency, but by efforts on the part of state elites to extract resources. A fourth option is to return to state-society relations. A central critique of the developmental state approach from its inception was its excessive focus on institutions and relative neglect of social actors, and business interests in particular (Doner 1991; MacIntyre 1994; Evans 1995; Fields 1995; Moon and Prasad 1997; E. M. Kim 1997; Chan, Clark, and Lam 1998). All governments in the region reached explicit or implicit political agreements with segments of the private sector; these agreements or coalitions served as the political foundation for rapid growth (Cam- pos and Root 1996: Chapter 4). The absence or repression of the left and the weakness of labor no doubt shaped these bargains (Deyo 1989), as did the relatively equitable distribution of the gains from growth (Campos and Root 1996). But governments in the region typically had independent sources of political and/or organizational power that allowed them to check the private sector. 18 When we look more closely at how this balancing act worked, we find—again— not a single model of business-government relations, but significant variations. First, political institutions differed in the extent to which they provided opportunities for business groups or firms to gain access to, and control over, the policy agenda, through elections or corporatist arrangements, for example. Second, the political power of business varied across the region in its organizational coherence, ability to mobilize support from other sections of the population, and ability to withdraw economic support from the government (the exit option). I have developed this argument at greater length elsewhere (Haggard 1999; 2000: Chapter 1), and will confine myself here to some comparative examples from the early period of high growth and some observations on the debate surrounding the origins of the Asian financial crisis. The Korea-Taiwan comparison provides a sense of the argument (see Cheng 1990 in particular). On relocating to Taiwan following the civil war on the mainland, the KMT had few ties with indigenous elites; the party initially relied on a military and a bureaucracy composed overwhelmingly of mainlanders. The 72 Studies in Comparative International Development / Winter 2004 government’s independence was buttressed by military and police power, the absence of open political competition, a relatively large state-owned enterprise sector, and control over commercial banks. State-corporatist business organizations provided nominal channels of representation for the private sector, and we are con- tinually learning more about the range of relationships that existed between parts of the bureaucracy and the Taiwanese private sector as early as the 1950s. But from a comparative perspective, local business had little formal or informal representation in the tightly-organized dominant party system and, at least initially, few independent organizational capabilities, either. In Korea, by contrast, the American occupation imposed nominally democratic institutions on Korea. However abused, these institutions forced Rhee, and later Park, to woo private-sector support. The collusive relations between Rhee, the Lib- eral Party, and the private sector explain the extent of corruption and rent-seeking during that period, as well as the growth of a well-organized and highly concentrated big-business sector. Riding a tide of popular revulsion toward both Rhee and the inefficiencies of the short-lived Second Republic, Park Chung Hee’s military dictatorship gained substantial leverage over these rent-seeking groups, both politically and through its seizure of control over the banking system. Yet the military junta in Korea was ultimately more dependent on the private sector than was the case in Taiwan. The state-owned enterprise sector was small, the military lacked a coherent party apparatus for mobilizing support along one-party lines, and Ameri- can pressure again contributed to the reinstitution of electoral politics that required financial resources. Outstanding comparative analyses by Cheng (1990, 1993), Fields (1995), and Noble (1998) have shown that these political arrangements had profound consequences for the conduct of economic policy and structure. In Taiwan, the state- owned enterprise sector remained larger for longer. Although the Taiwanese private sector was allowed to flourish, the KMT always feared industrial concentration and private control over the “commanding heights” of the economy, particularly the financial sector. The result was a growth trajectory that relied on smaller firms to a much greater degree than did that seen in Korea, where the government’s partner- ship with business and aggressive industrial policies produced highly diversified corporate conglomerates. In sum, industrial organization and financial and corporate structure in both countries were directly influenced by the politics of business- government relations. Comparative analyses along similar lines have been used to understand the differences between the industrial policies of Japan and Taiwan (Noble 1998); between Hong Kong’s laissez-faire and the more statistic approach to growth in Singapore (Chiu, Ho, and Liu 1997); and between the “developmental states” of Northeast Asia and their Southeast Asian counterparts (MacIntyre 1994; Jomo et al. 1997). Yet with the important exception of the Philippines (where problems of capture, rent-seeking, and corruption were apparent quite early in the postwar period), political elites enjoyed a degree of political, organizational, and economic independence from private sector actors in the early phases of the region’s growth, and this key political fact was reflected in institutional arrangements. Governments sought cooperation from the private sector on a selective basis, but could use alternative sources of political support (for example, from the rural sector in Korea, Haggard 73

Taiwan, Thailand, and Indonesia; from the popular sector in the 1950s in Singapore; from indigenous ethnic majorities in Malaysia and Indonesia) as well as the organizational resources of the state itself to limit business access, force coordination on private sector actors, and impose conditions on access to rents. In sum, institutional arrangements, however crucial, were embedded in more fundamental relationships between political elites and the private sector. These “business-government risk partnerships,” as Wonhyuk Lim (2003) calls them, were not without their risks from the beginning. Yet what is striking is the steady rise of the political power of business over time, and the relative decline in both the willingness and capacity of governments to check it. The rise of the private sector is not surprising given the extraordinary economic transformation of the region, but several factors buttressed it. First, the levels of both industrial concentration and the concentration of private ownership in the region are quite high, as a direct result of government policies that explicitly or implicitly encouraged the expansion of diversified business groups. Economic concentration implies that private actors can bring substantial resources to bear on the political process and can blackmail the government, shifting risk back onto the public sector. Political developments in the region also tended to enhance business power. In the authoritarian systems, corrupt business-government relations became more entrenched over time as the empires of cronies expanded and even colonized sections of the state; the Philippines under Marcos and the development of cronyism in Malaysia and particularly Indonesia over the 1990s are examples. But democracies were not altogether immune from these processes either; in Thailand, Korea, the Philippines, Taiwan, and to some extent Malaysia, competitive politics provided new opportunities for the private sector to exercise influence, as it did throughout the postwar period in Japan. A brief consideration of the political economy of the financial crisis that swept the region in the late 1990s provides a fitting conclusion (see Pempel 1999; Hag- gard 2000; MacIntyre 2003). Again, the sociology of knowledge is as revealing as the substance of the conflicting analyses that emerged in the crisis’ wake. An initial emphasis on political economy factors and crony capitalism was quickly drowned out by attention to the risks of deregulation, the irrationalities of international capital markets, and the various errors of the IMF—in short, anything but domestic politics (see Radelet and Sachs 1998; Wade and Veneroso 1998; Stiglitz 2002). This analysis shifted considerations of moral hazard at the national level toward relations between governments, foreign lenders, and the international financial institutions. These incentive and moral-hazard problems had to do either with governments’ willingness to offer implicit guarantees to foreign lenders (the “left” view) or the IMF’s willingness to offer implicit guarantees to foreign investors through bailouts ex post (the “right” view). Yet the decision to liberalize the capital account, the choice of a fixed exchange rate, the decision to bail out connected firms, and the weakness of regulation as governments moved toward deeper financial market integration, were endogenous to some political process in which private sector actors had very large stakes. The weakness of institutions for regulating and overseeing the private sector, and the financial sector in particular, was not simply an accident of history, a sin of omis- sion on the road to liberalization. These weaknesses were consistent with the evo- 74 Studies in Comparative International Development / Winter 2004 lution of political economies in which business influence over regulatory institutions and processes limited the ability of those institutions to check the socialization of risk and moral hazard. Not surprisingly, the current agenda of reform in the region mirrors these considerations to a substantial degree. At the most general level, the push for greater transparency and for more democratic and competitive politics can be interpreted as a backlash against closed political systems that shielded collusive business-government relations. The victory of Corazon Aquino over the cronyism of the Marcos regime was an early example of this trend, but we see parallel developments in the election of the Democrat Party in Thailand (1997) and of Kim Dae Jung (1997) and Roh Moo-hyun (2002) in Korea, in the reform movement around Anwar in Malay- sia, and in the social mobilization that led to the collapse of the Soeharto regime; all exemplify these reform politics. The substance of economic policy reform also shows a push not simply toward liberalization of markets—the so-called Washington agenda—but the pressing need to reassert regulatory oversight of business. Examples include reform of laws on campaign contributions, corruption, corporate governance, and, perhaps above all, the financial sector, where the socialization of losses in the wake of the crisis was staggering in its dimensions. The countries in the region are unlikely to converge on a single institutional model for solving these problems, but the push for regulation will be a central feature of the region’s political economy for years to come.

Conclusion

Institutions have been at the center of the study of East Asia’s political economy for decades, and that focus has yielded a rich body of theoretical and empirical work on the relationship between institutions and growth. If one central lesson emerges, it is that we have hit the point of diminishing marginal returns in the quest for a unifying “model” of East Asia’s growth. Countries in Asia solved the problems that institutionalists highlight—guaranteeing property rights, making credible commitments, pursuing efficient policy making, and limiting rent-seeking and corruption— in a wide variety of ways. This fact supports Roland’s advocacy (in this volume) of an experimental approach to policy reform and institutional design; Asia proves that a variety of institutional arrangements can contribute to high growth. Under- standing the diversity of institutional arrangements, however, requires analytic strategy that differs somewhat from focusing on the functions that institutions might perform, and calls on us to dig beneath institutional arrangements to reveal the political relationships that create and support them.

Notes

*I am indebted to Tun-Jen Cheng, Rick Doner, Cheng-Tian Kuo, Greg Noble, and Andrew MacIntyre, not only for comments but for extended discussion of these issues over the years. 1. Probably the most widely read of these accounts was Ezra Vogel’s (1979) Japan as Number One, which was sober by comparison with some of its more alarmist counterparts. 2. I focus here primarily on physical capital accumulation; surprisingly little attention has been Haggard 75

given to the political economy of education and human capital formation. See Birdsall, Ross, and Sabot (1995). 3. The bias of greatest concern is that subjective evaluations do not adequately separate success from institutional quality but suggest that if a country has high growth, then the institutions must be good. 4. As Johnson (1999, 52) puts it, while denying any necessary connection, “authoritarianism can sometimes inadvertently solve the main political problem of economic development using market forces—namely, how to mobilize the overwhelming majority of the population to work and sacrifice for development projects.” 5. An important strand of the literature on East Asian growth looks at the labor-repressive nature of industrial relations in the region; I return to it briefly below. 6. Actually, this issue is tricky. As Noland and Pack (2003, 16) point out, most theoretical models are static and thus the effects of policy should be expressed in terms of improving welfare rather than accelerating growth. But as they point out, the terms “welfare-enhancing” and “growth- accelerating” are often used synonymously. 7. Haggard and Kaufman (1995) outline a political model in which new democratic governments have few incentives to deviate from the policies of their authoritarian predecessors so long as those policies were successful. 8. Mancur Olson (1993) tries to wriggle out of this conundrum by arguing that long-lived, “station- ary” autocrats have an “encompassing” interest in the growth of their domains. But Olson offers us no clues on how to distinguish good and bad autocrats ex ante; we only know that dictators have long time horizons and “encompassing” views of their domains ex post. 9. One solution was for the state to undertake this role itself, and in some countries it did; state- ownership of industry even played an important role in the more open countries in the region, such as Singapore (Lim 1983). 10. Not coincidentally, Huff, Dewit, and Oughton (2001) argue that democratic governments facing electoral constraints find it difficult to stick to such a strategy. 11. In some instances, most notably Japan, such councils are delegated effective decision-making and implementation authority. 12. For a contrasting view, see Jomo et al. (1998), which recognizes the differences between North- east and Southeast Asia but nonetheless makes the case for the significance of industrial policy in Southeast Asia. 13. These costs include both the distortions that can arise from the granting of the rent, and the resources that are eaten up trying to secure it. 14. An important corollary of this requirement, emphasized by Lee (1992) in connection with di- rected credit and stated more generally by Chang (1994, 83), is that states must have the capabil- ity to prevent the diversion of resources into unproductive venues. 15. The economic advantages of an export-oriented growth strategy have been a staple of the literature on the region for some time, but exports also provided clear information to the government and economized on direct monitoring of firm performance (World Bank 1993, 97–99). 16. On labor, for example, see Lange 1984. On the governance of particular industries, see Hollingsworth, Schmitter, and Streeck 1994. 17. Kuo (1995) provides a test along these lines by looking at three industries (textiles, plywood, and electronics) in two countries (Taiwan and the Philippines) and isolates four institutional arrangements. He argues that performance in sectors organized on corporatist lines with wide industry representation outperform those with “clientelist” business-government ties as well as sectors in which the state attempts independent action or simply leaves outcomes to the market. 18. Evans (1995) and Kang (2002a, 2002b) make this point in criticizing the developmental state literature, but autonomy from business was central to the whole concept of a developmental state from the beginning. However, see the work of Johnson (1999, 56–60), who now argues that the public-private distinction is misleading in the Asian context. 76 Studies in Comparative International Development / Winter 2004

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