In a recent debate on Facebook about the propriety or otherwise of the highly indebted Ghanaian state building and running factories (something not on the immediate policy agenda but frequently demanded by the country’s residual Marxist intelligentsia), a number of my sparring partners brought up, as expected, the ascendant theory of the “developmental state”.
The phrase, “developmental state”, has breathed new life into boring, old, “mixed economy” tropes of which the economic debate of the last hundred years has never been short of.
Luckily for the champions of this old-new paradigm, the fall from grace of the Washington Consensus and its neoliberal agenda in the late 90s and early part of this Century, following successive global economic crises and “corrections”, has provided fresh context for ceaseless reminders about how no industrialisation or economic development has ever been witnessed anywhere in the world without strong government intervention in the economy.
These interventions have been said to have included “infant industry protection”, “high tariffs”, “political pressure to force-open foreign markets for state-backed enterprises”, “subsidies”, “mercantilist militarism” (opium wars, anyone?), “price controls”, “outright import bans”, “picking winners”, “export promotion”, “labour protections”, etc.
Some of these disparate “interventions” are even used interchangeably in popular formulations of this view, exemplified by such commentators as Ha-Joon Chang, whose 2002 book, Kicking Away the Ladder, combines many staples of the mixed-economy diet to produce a platter of seemingly fresh arguments for the expressed purpose of “debunking the myth of free trade from a historical perspective”.
The problem with many of these economic and political economy works that seek to construct an accurate history of economic development as a note of caution to developing countries about the importance of drawing the correct insights from the historical practices of today’s successful countries in order to more effectively chart their own unique path to development is their weak use of the techniques of historiography themselves. They should perhaps embrace the humility they so often admonish their debating rivals to acquire.
Because, strictly speaking, tracing the actions of States in the management of national economies starts from a foundation in policy history and not development economics. I very much doubt that the likes of Chang, Thandika Mkandawire, and Peter Evans (despite his more careful elicitations) spend as much time as they should examining the works of policy historians like Harry Dickinson and Ernest Bogart.
If they do, there is little trace in their work. How does this limit the value of their recommendations?
It drills a hole in the bottom of their analysis, starting from a fundamental mistake that all actions of the state are to be distinguished from its inactions and classified as evidence of autonomous “intervention”, which presumably keeps the “free market” and its constituent entrepreneurs and capitalist mavens in check, or dictates their conduct.
So, in Chang’s writings, whenever he sees any record in the literature of Britain imposing high tariffs or the USA investing heavily in defence R&D, he immediately snaps his finger: State at work, Market at bay!
It would be less of a problem if the works of people like Chang, Mkandawire and Evans were not frequently cited by policy actors in developing countries who interpret them to mean that developing countries need to imitate the actions the successful countries took when they were at a lower level of development if they are to see serious growth themselves. This is of course bolstered by the elaborate arguments made in support of the extension of the thesis to the extraordinary economic turnarounds we are seeing in China and a few East Asian countries today (i.e. the so-called “late industrialisation” phenomenon).
That highly mercantilist practices were practiced for most of Africa’s, the Middle East’s and India’s post-colonial period with minimal results, or that tariffs and other interventionist measures, both of a formal and informal variety, remain very high in these regions, is merely put down as further evidence of the importance of “heterodoxy” or of the need for “state intervention to be done right”.
There is, sadly, one little problem with this neat, rubik cube approach to development, argument.
Firstly, the “State” often implied, with a certain degree of “boundedness”, in the works of Paul Bairoch, Angus Maddison, and Kenneth Pomeranz in relation to economic matters before the 19th and especially the 20th century was an infinitely more malleable and amorphous organism than comes across when one reads the likes of Chang and Bairoch.
Whether in the UK, the US, or Japan, the “State” in these bygone eras were, in matters of policy, apprentices to better organised interests in whichever domain held sway. I believe that the phrase “state capture” was of such routine valence that it would have been meaningless to use it in describing affairs in 18th Century Britain, France or the United States in policy terms.
Frequently, state action was merely an extension of the will of the harnessers of market forces since the notion of “public interest” was in those times even more underdeveloped than it is at present.
So, whether it was banning calico or unbanning it. Advocating for a Cotton Tax or abandoning it at the behest of the Manchester Magnates. Opening up to Ireland or clamming up again. Imposing the Corn Laws (which restricted the import of grain into the UK) or repealing it. Signing bilateral trade pacts with former enemy states or revoking them. The true impulses germinated and emanated from dominant actors in the marketplace merely using the state institutions as extensions to their business will.
In fact, the word “lobby” came from a reference to the inner forecourts of the British Parliament in the 18th Century, in a time of intense State manipulation when no registration of lobbyists or conflict of interest legislation was appreciated or in place.
The State’s policy autonomy was heavily circumscribed, lacking as it did bureaucrats with a strategic understanding of emerging phenomenon such as maritime imperialism, colonisation, cross-border banking, the impact of excise duties on trade, the effects of arsenic bleaching on the body, and of course the inner workings of manufacturing and international trade.
Rather than a powerful and knowledgeable State constructing the scaffolding which the private sector meekly climbed to construct the ensuing economic boom, after which the same State kicked away the scaffolding to prevent other societies from emulating this strategic technique, a proper reading of policy history shows something else. It shows that for the most part policies already designed or preferred by manorial entrepreneurs, acting as “Consiglieres” to the State faction within the elite, were legitimised by State endorsement in a far more brutal fashion than any anti-cronyism campaigner today could ever imagine.
In no context is this more graphic than in the colonial and “trade chartering” enterprise, which peaked in the period between the 18th and 19th centuries. The argument that the State had barely any public interest policymaking capacity finds its strongest support here.
Whilst trade policy was firmly in the hands of the league of merchants, such as the Company of Merchants Adventurers and its offshoots, Consiglieres and entrepreneurs like John Cabot (not his original name), Columbus, Don Diego de Azambuja and a whole host of pirates and private warlords dictated the foreign policy of these 18th Century States, occasionally returning to the metropolitan hub for re-endorsement purely as a means of post-facto legitimation.
There is no doubt that had Columbus been as successful as we now know that John Cabot was in raising funds from finance houses on the Continent, he would have approached the Iberian monarchs in the same way that Cabot approached the English Monarch: to ask only for royal endorsement.
Poor Christopher needed money, thus his plea to the Crown of Castile was for a full commission. He was rejected on the advice of the bureaucrats and technocrats in charge of the formal State. But the man wouldn’t take no for an answer; he continued to press and push, until finally, against the counsel of the Civil Service, the Iberian Monarchy grudgingly decided to fund him.
Thereafter, he more or less wrote his own contract, including in it a few choice provisions, such as reserving for himself the position of Governor of the lands he anticipated discovering. It is highly doubtful that the Iberian aristocrats knew much about the elements of this endeavour. But Señor Columbus seemed on top of his brief, and the returns seemed good, so like good European Monarchs of the era, they just signed the papers.
On the strength of these covenants, Columbus was soon installed at the head of a petty, and utterly vicious, despotism in Hispaniola (present-day Haiti and the Dominican Republic). By the time petitions and pleas forced the Iberian State to intervene, recall and imprison him, the man had basically wiped out the indigenous races on the Islands. Was this exactly Iberian foreign policy? Very doubtful. At least at that time. The State will learn over time the lucrativeness of colonial brutality, but only because they had such fine teachers in “privateers” such as Señor Columbus.
This pattern is evident across most of the States that successfully industrialised and have today become models of effective economic development. For centuries, States were happy to be at the padded end of the golden leash, following entrepreneurs, adventurers, warlords and inventors around as they learnt the ropes. State competence was slow to build and concepts of public interest and public administration we take for granted today developed slowly, often long after they had been established in private enterprise.
A look at the accounting systems of the Adriatic and other continental trading houses compared to the “political arithmetic” texts adopted by the likes of the French Treasury of the same period, and in general between the 15th and 18th century, demonstrates clearly this gap in competence. But let’s broaden the horizon beyond the Occident.
In South Korea, the rise of General Park Chung-Hee marked the beginning of the country’s modern rebirth. The justifiable focus on the human rights abuses of the era has had an unfortunate side effect of characterising the regime as an all-powerful micromanager of the economy, dictating to all economic actors in a manner consistent with its political dictatorship. This however masks the true sequence of the country’s economic policy evolution, and seriously marginalises the role of the Federation of Korean Industries (FKI), recognised then and after as the prime architects of the Chaebol-spirited blueprint of industrialisation.
When General Park overthrew the corrupt technocracy created by the Ivy League – educated Syngman Rhee, bureaucratic top-down blueprints by then leader John Chang were the guiding spirit of policy. Park, a lifelong mediocre student, had little understanding of policy or administration. He knew this. Thus, despite packing virtually all political institutions with military and military-affiliated cronies, he was remarkably “obedient” on matters of economic policy, allowing the newly formed FKI, powerful Chaebol chieftains, and other economic actors to guide the administration as it drove through the backward economy a mixture of mercantilist and liberal reforms until his assassination after nearly two decades at the helm, by which time the foundations of an industrial power had already been formed.
When people like Ha-Joon Chang and Bruce Cummings talk about the Economic Planning Board of South Korea or Japan’s MITI, they often underplay the microtubules in these overarching frameworks, thereby allowing to fester the naïve assumption that State intervention to direct the conduct of private economic actors was the main game in town. By so doing they misconstrue the “unusual humility”, or “deference” of these so-called “entrepreneurial-states” to the guiding forces of “Consigliere private interests”. Even though they know better.
In many ways this is what truly distinguishes all the governments that successfully industrialised from those that did not.
Whilst the degree of perversity of the “State capture” by the Consiglieres differed significantly from location to location and epoch to epoch: from Finland in the Baltics to Israel in the Negev; and from context to context: from the Pacific Railway Acts in the United States to the Decree on Factory Privatisation by the Meiji in Japan; the apprenticeship of States to Consiglieres is a consistent feature until the relative balance between public interest and capital interests shifted ever so slowly towards the centre in the second half of the 20th Century.
And whether the Consiglieres were of the calibre of the Strutts, Arkwrights, Cobdens and the Quakers and Manchesterians of Britain, or more like the Zubaitsu grandmasters of Japan, or even more colourfully still, like the Tai-Pans and Hua-Qiao/Hua-Ren Lords of the Chinese seas, the fundamental principle of negotiating legitimation for Consigliere interests under State imprimatur is a recognisable feature in all contexts.
Of course, it would be sheer mendacity to insist that a J.P. Morgan is scarcely different from a Sir Henry Morgan (the feared buccaneer) as far as this model of Consigliere-State Capture is concerned. The key point however is that the notion of the State apprenticing itself to powerful non-state actors until state actions become merely the vessel for achieving the entrepreneurial agenda of more competent cabals has a long footprint in the annals of policy history. Many purported “State actions” in this view could thus be interpreted as either market or corporatist-driven, with a sheen of official legitimation.
In summary, therefore, there is a very sophisticated reason why some records of prolonged state intervention in certain societies in certain epochs appear so rosy whilst others in other societies emit such foul odour.
This same reason explains why Uganda failed so miserably to industrialise under the high-handedness of Obote and Amin but Taiwan flourished under the overbearing Chiang Kai-Shek. Just as it does the divergence between the outcomes of Levi Eshkol’s economic plans, which enhanced Israeli national competitiveness, and those of Nasser’s State Capitalist strategies in Egypt followed by Sadat’s more liberal-oriented approaches, which both failed to yield substantial industrialisation and economic transformation.
The reason is simple: in those countries where the State either refused to be led or led without the chaperoning arms of powerful Consiglieres, the economic transformative policies of the State rarely led to market growth or subsequent economic development.
When a State is led by the likes of a Mobotu or Kamuzu Banda, an Enver Hoxha or a Plaek Phibunsongkhram (Chomphon Por), the prospects of deferential State attitudes to Consigliere direction and guidance decreases rapidly.
In the above light, the economic development that developmental state theorists claim results from effective State interventions becomes stunted in situations where the State is a domineering force in the economy. This does not require the presence of predatory behaviour on the part of the State, a la Evans, at all.
Worse still, the State of the disposition described in the preceding paragraphs, denied the learning that comes from policy apprenticeship, sidesteps its necessary “captivity period”, and never builds the capacity and competence to rule well when the era of public interest policy-making dawns. Such a State fails both its pre-enlightenment mandate of rapid capital accumulation for economic development and its enlightenment mandate of institutional development for good governance and human development.
A double tragedy we are witnessing in many parts of Latin America, Africa, and South & West Asia today.
Should the government build factories? Or invest in business ventures? In Ghana?
It is one of the abiding mysteries of contemporary society that discomfort about government ownership and management of business ventures is seen as ideological, whilst support for the conduct is seen as “pragmatism”.
The truth though is that the pragmatic position would be to oppose direct government investment in business ventures, at least in Ghana, on grounds of common sense.
Why? Simple: common sense.
Why would a government be investing in a company? Not for revenue? What should the revenue be spent on? Not public/social welfare?
With that in mind, consider what such an investment would really mean.
The Ghanaian government suffers a perpetual budget deficit, so every investment would mean borrowing to invest.
Due to the genius of our ways, our government borrows at nearly 20% at the medium-term international cedi rate or 9% at the international dollar rate. It borrows at roughly 15% at the short-term, domestic, cedi rate, but that is irrelevant for this analysis, since no serious business investment can be short-term.
So assuming government goes and borrow at 20% in order to establish a business, say in agro-processing.
Since the government is borrowing at 20% to invest, we have to assume that its required return on capital is at least 30%.
Assuming the government wants to set up a chocolate factory in Sefwi to take advantage of the cocoa industry there.
The intended end products are cocoa butter and dark cocoa powder/refined cake.
From detailed schematics I have seen in the context of a private project, $7.5 million is required for a plant that can process 2 tons per hour. Just the plant for now. Let’s say Government wants to make a serious dent in our raw cocoa exports so they peg the production at 80,000 tons per annum, which is about 10% of the average annual yield over the analysis horizon.
The minimum investment required for such a plant would be $160 million (including start-up working capital and auxiliaries).
For perspective, note that the most consistent production plant we have had in the contract is the CPC plant (various others have collapsed or are on the verge of collapse). It is a 65,000 ton capacity plant, which now needs urgent capitalisation to the tune of $300 million. It is swimming in debt and currently reliant on political life-support, being a relatively successful state-owned enterprise.
Let’s say that capacity utilisation is a remarkably successful 75%.
The final conversion ratios for cocoa butter and powder are quite similar, at around 70%. So let’s adjust our capacity numbers for finished products to, say, 26,000 tons of cocoa powder and 30,000 tons of cocoa butter.
Let’s use $7000 as the projected mean price for high grade cocoa butter, based on our historical analysis and a price of roughly $2500 for powder.
Let us also assume an average price over the period under analysis of $2500 for Ghana grade I cocoa beans (note that if Government decides to subsidise the light crop beans as it has sometimes done in the past, this will still involve spending Government funds).
This is all very rosy analysis, but let’s keep it that way for simplicity sake.
Gross margin per ton of cocoa products manufactured will thus be $3500 or 58%.
However, adjusting for conversion factors we get this interesting result:
$200 million goes into purchasing cocoa. When the cocoa is ground, converted to butter and powder/cake, and sold, the proceeds amount to less $280 million. A 28% gross margin.
Labour costs haven’t been accounted for. Electricity, no. Water, no. Maintenance, no. Depreciation, no. Overheads, no. Supplies, no.
Is it any surprise then that well-funded cocoa processing companies run by seasoned management executives cannot afford to pay Cocobod (the national cocoa agency) for the cocoa they buy? Or that many have shut down? A story similar across our industrial landscape?
Let’s say, the Government of Ghana has miraculous powers.
Let’s say, all other costs of the factory are squeezed into 60 million dollars per year. So a neat profit of $20 million can be realised from pure operations (i.e. ignoring financial effects).
How long will it take the Government of Ghana to pay off the $160 million loan?
Eight years, right? If nothing out of the ordinary happens. Of course, as the factory ages, costs will escalate due to higher maintenance and replacement costs etc. (as the finance folks like to say, risk is a function of time) but let’s keep things simple, shall we.
But actually it is not 8 years. That’s too optimistic. There is something crazy called “compound interest”. Let’s ask Excel to help us.
Actually if year 8 was to be chosen as the break-even year, the amount owed would have ballooned to $520 million thereabouts, assuming no money was borrowed to run the factory in the intervening period.
No matter how you looked at the picture, it isn’t pretty. We haven’t even touched the IRR and NPV calculations using the 30% weighted average cost of capital. But even without any detailed analysis, I am sure that you can see cumulative losses in the region of at least $400 million in the first decade of the operation of this factory.
Now here is the question, if the point was social or public welfare, why not simply invest the $160 million directly in health, education, and the like today and reap the results earlier?
I can hear two objections: a) you chose cocoa processing deliberately to present an impossible prospect; b) you are only accounting for economic costs and results, what about the benefits of employment?
Sadly, none of these protests make any sense.
Whatever the venture you choose, if it is manufacturing, the payback period in Ghana would not be less than 8 years. In so far as government’s cost of capital is so ridiculous, forget it. It will produce only losses. But do we want government to get into trading and services? In industries requiring low capitalisation and quick payback period? I don’t hear a ‘yes’.
What does this mean?
No way can a government that fails to create an environment for flourishing private enterprise do better in the same environment running businesses that the private sector is failing at. But if the private sector is flourishing in a sector then what is the point of government intervention there? Why not just take 25% of what they make as taxes plus the payroll taxes as well?
Secondly, the employment that shall be generated is a function of the profitability of that enterprise. If the government is paying too much for labour, then the losses will compound.
At any rate, if these labourers are citizens of Ghana then their employment shall be at the expense of other Ghanaians denied the social investments that could have been made with the $160 million and saddled, on top of the neglect, with the $400 million dollars debt burden. The 500 or so workers of one factory will be living large on the misery of 500,000 Ghanaians. In fact, as we saw with Ghana Airways, that usually is the case: only the Government hirelings benefit.
Now, tell me: who is being pragmatic and who is being ideological: the constructive sceptics who advise against direct government investment into business ventures or the ideologues who have never developed any model or simulation to back their views but hold on to them like articles of faith?
“Religious mindfulness” or “Religious mindedness” is a gift. It is a miraculous gift. Its possibility is an extraordinary mystery.
If you are blessed with a religious mind, treasure it. It shall not always be as easy to acquire and cultivate as it apparently is today for many millions.
Is “personal faith” distinct from “social faith”? Yes. And the fascinating thing is that one does not even have to be religiously minded to have personal faith. Any more than one has to be romantic to experience love.
Personal faith is like music. Since it requires no socialisation per se for its enjoyment, personal faith needs no explicit contemplation of religious objects. Like good sleep or the preference for particular meals, it is one more element of the complexity of self that is lost when it is measured or justified.