Journal of World-Systems Ressearch - Festschrift for Immanuel Wallerstein Part I


398

The Past and the Future of the 
Developmental State

Amiya Kumar Bagchi

Amiya Kumar Bagchi
Centre for Studies in Social Sciences, Calcutta
R-I, Baishnabghata Patuli Township, Calcutta-94
West Bengal, India. 
http://www.socialsciencecal.org/
bagchi@csssc.ernet.in

journal of world-systems research, vi, 2, summer/fall 2000, 398-442
Special Issue: Festchrift for Immanuel Wallerstein – Part I
http://jwsr.ucr.edu
issn 1076-156x
© 2000 Amiya Kumar Bagchi

i.the concept of the developmental state and its 
transformations through history

Like most human institutions—the family, the village, the city, the state, customs, laws, the nation—the developmental state was born long 
before anybody thought of naming it. There are debates about when it was 
born, whether all developmental states (as they are usually characterized) 
are properly labeled, and whether there have been developmental states 
overlooked literature. In this paper, it will be claimed, inter alia, that indeed 
there were developmental states long before economists, political scientists 
or historians recognized them as such, and that not all developmental states, 
as conventionally labeled, have been true members of the select club of 
developmental states.

First, let us see what a developmental state (DS) means in the era of the 
global spread of capitalism. It is a state that puts economic development as 
the top priority of governmental policy and is able to design effective instru-
ments to promote such a goal. The instruments would include the forging 
of new formal institutions, the weaving of formal and informal networks 
of collaboration among the citizens and offi cials and the utilization of new 
opportunities for trade and profi table production. Whether the state gov-
erns the market or exploits new opportunities thrown up by the market 
depends on particular historical conjunctures. One feature of a successful 

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Amiya Kumar Bagchi399 The Past and the Future of the Developmental State 400

order to ensure that centuries of effort were not swept away in devastating 
fl oods. This ‘fl ood society’ dispensed with both the functional need and 
the historical justifi cation that buttressed social dependence in the rest of 
the European countryside. If deference to social superiors was based on 
reciprocity for physical safety, it was the dike reeve and the locally elected 
heemraadschappen, the water guardians, rather than any vassal lord, who 
were in the best position to require it. The autonomy of local communities 
in respect of taxing themselves to meet hydraulic needs was the territorial 
basis for their assumptions about ‘the “ascending” nature of political author-
ity, conferred (or at least assented to) from below, rather than devolved from 
above’ (Schama 1987:40). Intensive involvement in trade and commerce 
facilitated by numerous rivers, inlets and ports, and the innovations called 
forth in the struggle to subdue an inclement nature made the agriculture and 
animal husbandry of the Low Countries the most productive in the whole 
of western Europe and provided the basis for a highly urbanized society in 
which more people engaged in trade, industry and other non-agricultural 
activities than in agriculture by the middle of the seventeenth century (De 
Vries 1976: 69-75; De Vries and Van der Woude 1997: chapter 11).

The revolt of the Netherlands against Habsburg rule was triggered by 
the determination of Philip II to impose Roman Catholicism on a country 
in which a large proportion had renounced it and his attempt to impose 
centrally appointed (and inexperienced) dike inspectors and centralize the 
power to tax the villages and towns for the purpose of maintaining the dikes 
and waterworks. The burgher oligarchs of the major towns prevailed in 
open confl ict with their erstwhile Spanish overlords, sometimes in opposi-
tion to rural landowners exercising political power in the inland provinces. 
Thus, successful revolt in turn strengthened a state run by merchant princes 
and manufacturers. Burgher rule was a very potent weapon for the victory 
of the Dutch over many of their enemies still ruled by feudal lords (Boxer 
1973: chapter 1; Schama 1987: chapters 1-4; Israel 1995: chapters 17-22).

A second factor which made the Netherlands into a formidable DS was 
the intense patriotism of the Dutch. This was strengthened in their epic 
confl ict with the most powerful state in Europe. The Dutch rejected most 
of their recent history, except that part which invoked the heroism and mar-
tyrdom of their revolutionary leaders; and they reached back into the days of 
the Roman empire and the history of the Jews in order to create a patriotic 

developmental state is its ability to switch gears from market-directed to 
state-directed growth, or vice-versa depending on geopolitical circum-
stances, as well as combine both market and state direction in a synergistic 
manner, when opportunity beckons.

Thus the degree and nature of DS involvement in economic activity are 
likely to vary over time, with neither undiluted etatisme nor a dogmatic com-
mitment to the free market likely to characterize a successful DS. We will 
also see that the instruments for pursuing these goals are likely to change 
from state to state and epoch to epoch.

ii.the netherlands as a developmental state in the 
sixteenth and seventeenth centuries

The fi rst DS in our sense to emerge since the sixteenth century was that 
of the northern part of the Spanish Netherlands which, after the reconquest 
of the southern part by Spain, evolved into today’s Netherlands. The begin-
ning of an independent state of Netherlands is generally dated to 1568, 
when the Protestant dukes of Egmont and Hoorn were executed at Brussels 
by the Spanish authorities. In 1572, the Calvinist ‘Sea Beggars’ captured Den 
Briel, a port at the mouth of the Rhine. In 1579, the seven northern prov-
inces formed themselves into the United Provinces, with a States-General 
elected as the legislative (and executive) body for the federation. In 1581, 
William I of Orange, speaking on behalf of the seven provinces, renounced 
allegiance to Spain, and their career began as federated States (Boxer 1973: 
332-3; Israel 1995: chapters 9-11).

During the next fi fty years, the Netherlands, a country of about 1.5 
million people in 1600 (Klep 1988: Table 13.4), became the top seafaring 
nation in Europe and the world, with an empire that dotted the globe from 
Indonesia (and briefl y Formosa, today’s Taiwan) to the Caribbean. There 
were many elements that led to this achievement; geography, social struc-
ture, nationalism, a fi erce spirit of independence, undaunted realism and an 
ability to adapt their strategy to the military and political needs of the day 
all played a part (Israel 1995: chapters 11-24).

Feudalism had been virtually unknown in Holland and other maritime 
provinces of the Netherlands since the thirteenth century, and geography at 
least partly contributed to this situation (Israel 1995: chapters 2-6). Dikes 
had to be built in order to protect the land, water had to be drained in order 
to reclaim it, and an elaborate system of maintenance had to be devised in 



Amiya Kumar Bagchi401 The Past and the Future of the Developmental State 402

lore for themselves. They thought of themselves as the inheritors of the Bat-
avian republic which reputedly resisted Roman rule, and also as the Chosen 
People who would be tested by God in trials by water and fi re (Boxer 1973: 
chapter 1; Mulier 1987: chapter 1; Schama 1987: chapters 1 and 2).

Their nationalism was, however, intensely practical. While they were 
ever ready to combat Spanish aggression and smite the Popish infi dels wher-
ever they could, they would make peace whenever the oligarchs considered 
it profi table to consolidate their gains rather than squander their resources 
seeking glory. The Dutch expected their rulers to engage in prodigious 
efforts and had no problems with sacrifi cing them when national interest 
seemed to demand it. Thus Johan van Oldenbarnveldt, the chief minister of 
the Dutch Republic, personally promoted a huge land reclamation project 
and also played an active part in promoting the Dutch East India Company. 
The latter proved a formidable agency for wresting control of the trade 
of Indonesia and the spice trade from the Portuguese (Boxer 1973: 25-6; 
Schama 1987: 38-9). Oldenbarneveldt guided the destinies of the republic 
for most of the period of the twelve years’ peace with Spain (from 1609 to 
1621). But he was executed on a trumped-up charge in 1619, when the war 
party, represented by Maurice of Nassau, gained the upper hand. Normally, 
the two most important personages among the rulers of the country would 
be the Stadholder, always a member of the house of Orange, and the Grand 
Pensionary of Holland. But between 1650 and 1672, the country was with-
out a Stadholder (who was a half-way incumbent between the commander-
in-chief of the Dutch armed forces and a constitutional monarch) and was 
guided by Johan De Witt, a fervent republican (Mulier 1987). However, in 
1672, the Netherlands got involved in a war with two of their most powerful 
enemies, the English and the French. The brothers De Witt were murdered 
by an Amsterdam mob, and William III, the then Stadholder, assumed 
charge of Dutch defence.

Not only were the practical Dutch willing to sacrifi ce their rulers when 
need arose, the rulers also did not hesitate to tax themselves, and, of course, 
the common people for keeping up the defence forces, maintaining the 
elaborate infrastructure for agriculture and trade, and to some extent, suc-
couring the poor who were no longer looked after by the church. Ironically 
enough, the Republic extracted a higher tax revenues from the Dutch bur-
ghers than the Spanish rulers ever managed.

A third notable characteristic of the Dutch DS was its religious toler-
ance. While Protestantism or even its narrower version, Calvinism, was 
declared the state religion in several of the states, the regents generally 
managed to keep the zealots among the Calvinists from enacting Draconian 
measures against the dissenters (Boxer 1973: chapter 5; Schama 1987: chap-
ters 1-2). As a result, not only did the persecuted Protestants from southern 
Netherlands and Huguenots from France fi nd a refuge in the northern 
Netherlands, but Jews and heretics fl eeing the Spanish Inquisition also 
fl ocked to the republic. The infl ux of these refugees strengthened the skill-
base of the republic and raised its productivity. The southern Netherlands, 
and especially Antwerp, had enjoyed primacy in trade and commerce before 
the revolt of the Netherlands. But they lost it after the reconquest by the 
Spanish army and the sacking of Antwerp by the mutinous soldiers of that 
army in 1576, when Philip II went bankrupt yet again. The departure of the 
Protestant burghers contributed to this downfall. Conversely, the northern 
Netherlands gained from the infl ux of the same refugees.

A fourth characteristic of the Dutch republic was a deliberate attempt 
to create institutions and habitats which would facilitate clean living and 
growth. The cleanliness of Dutch cities and the orderliness of its institutions 
of credit and taxation became a by word among contemporaries. Between 
1640 and 1655, the rate of interest at which the Dutch republic was able to 
raise government loans came down from 6.25 percent to 4 per cent. Even in 
1672, when the French troops overran the Dutch territory, the republic was 
able to raise loans for hiring auxiliary troops (Clark 1947: 44-5). The Bank 
of Amsterdam, founded in 1609, became a model for all subsequent state or 
state-backed banks of western Europe, and presided over a system of public 
and private credit extended at low rates of interest. These low rates in turn 
encouraged accumulation.

In many of their designs and projects the Dutch consciously emulated 
Italian city states, or Spain and Portugal. But they introduced their own 
innovations so as to adapt the foreign designs to their needs. This applied 
to the variety of Dutch ships which had to be easily maneuverable in the 
treacherous shoals and islands of the North Sea while also allowing them to 
carry guns that would be effective in naval warfare on the open seas. Even in 
armed warfare on land, Maurice of Nassau and his brother William Louis 
introduced major innovations such as constant drill in peacetime, and coun-



Amiya Kumar Bagchi403 The Past and the Future of the Developmental State 404

termarches by formations of soldiers armed with slow-fi ring muskets who 
could fi re almost continuous volleys at the enemy (McNeill 1983: 128-36; 
Parker 1988: 18-19). Maurice was also the fi rst to use modern instruments 
such as the telescope in the business of war (for a list of Maurice’s innova-
tions, see Clark 1947: 112-3).

It is important to note that all these innovations presupposed a ruling 
class which was literate and often highly educated. The Dutch ruling class 
encouraged education and the useful arts and founded academies or train-
ing institutes for advancing them. New universities were founded at Leyden 
(in 1575) after the siege of the town by the Spanish army had been lifted 
(in 1574), at Harderwijk in 1600, Groningen in 1614, and Utrecht in 1634. 
These universities proved to be the most open seats of learning in Europe of 
the seventeenth century (Clark 1947: 291-2; Israel 1995: chapter 24). Thus 
the Dutch also displayed a high degree of ability and willingness to learn 
from others.

The Dutch republic, of course, was not an idyllic commonwealth. It 
was a highly unequal society, with great differences in income and political 
power between the poor and the rich. Only the wealthy merchants and land-
owners could participate in the apparatus of rule at different levels, and the 
poor were kept tightly under control. But the poor were looked after, even 
if under a harsh regime. The rasp-houses (where brazilwood was rasped to 
serve as dyes) and spinning houses of Holland became tourist attractions 
and later, models for workhouses in other west European countries (Lis and 
Soly 1982: 118-19; Schama 1987: chapter 1). During its career as an effec-
tive developmental agency, the Dutch state followed a policy of full employ-
ment for its original inhabitants and for the immigrants whom it recognized 
as legal entrants.

Later, we will briefl y examine the causes of the demise of the devel-
opmental state of the Netherlands and some of its consequences. As we 
shall see, both the success of that state and the malignity and accession of 
strength to its competitors made for the death of the developmental state 
and the decline of the Netherlands (Wilson 1939).

iii. england (or britain) as a developmental state 1560-1851

In many (if not most) accounts of the triumph of industrialization in 
England and its emergence as the fi rst industrial nation, only the role of 
private enterprise and free trade are emphasized. However, in the victory of 

private enterprise, the construction of a state fostering its growth played a 
critical role, and free trade as a policy did not gain ascendancy until Britain 
had already emerged as the most powerful nation in the world economically, 
militarily and politically. It was the maturation of the DS that made a policy 
of free trade optimal for the British ruling classes. Without the success of 
the former, such an outcome might have remained highly problematic.

The recognition of England, and later on, the United Kingdom, as a DS 
has been delayed for several reasons. First, it was very slow in its maturation 
process. Secondly, long before it became a fully free-trading nation it had 
begun preaching the doctrine of free trade to others, even enforcing it with 
gunboats and soldiers, as in the case of the fi rst Opium War or England’s 
intervention in the wars of independence launched by the Latin American 
criollos against Spain and Portugal. Thirdly, although by the beginning of the 
eighteenth century Britain had emerged as a state with all powers of national 
policy-making centralized in the Parliament, it operated a highly decentral-
ized state apparatus run by the property-owners in the counties, provincial 
cities and towns. Still, this failure to recognize England as a DS has begun 
to change (see, for example, Corrigan and Sayer 1985; Brewer 1989).

The beginnings of the DS in Britain go back to the sixteenth century, 
if not earlier. The peasant revolts from the fourteenth century managed 
to eradicate most of the real content of serfdom and feudal subjugation 
of the peasantry by the time the Tudor kings came to rule England. The 
Reformation in England occurred very much as a state-led enterprise. This 
had the momentous result of destroying the established (Roman Catholic) 
church as owner of property and a power independent of the throne while 
also creating a new section of landowners who became enriched through 
the expropriation of the church. The remnants of English feudalism were 
abolished in the civil war between the king and the parliament, and under 
the short-lived but mighty republic created by the parliamentary party led 
by Oliver Cromwell (Hill 1961: chapters 3 and 9; Corrigan and Sayer 1985: 
chapters 3 and 4). England was the fi rst large country in Western Europe 
(barring the Netherlands, that is) to abolish all the usual appurtenances 
of feudalism and convert land into a commodity, transferable, salable and 
heritable, except for restrictions which sought to preserve large properties in 
their entirety. In the rest of Western Europe, it took another century and a 
half (from the 1780s to the end of Napoleon’s wars) for feudalism to release 



Amiya Kumar Bagchi405 The Past and the Future of the Developmental State 406

land and peasants from its bondage. In much of Central and Eastern Europe 
feudal tenures were not abolished until after the revolutions of 1848, and in 
Russia, Hungary and Rumania, it was only in the 1860s that feudal tenures 
and serfdom were formally abolished (Blum 1978: chapters 16-19).

The abolition of feudal tenures and the formal freeing of labour from 
non-market bondage, the easing of medieval restrictions on trade, and the 
acquisition of political power by a group who owed their position to owner-
ship of property rather than rank and birth per se gave England an enormous 
advantage over all its proto-capitalist competitors in Europe. In the sequel, 
England beat fi rst the Netherlands and then France in the race for political, 
economic and military dominance in Europe and extended that dominance 
to the whole world by the middle of the nineteenth century. The acquisition 
of colonies and the envelopment of the major part of the Atlantic slave trade 
by Britain helped it to accumulate capital and ease its climb to the position 
of supremacy. This ability to conquer other lands militarily and economi-
cally must be seen as a result primarily of the domestic transformation that 
made it the formidable DS that it became.

A second aspect of the DS was the enormous capacity of the British 
state and society for learning from others and its ability to make its own 
adaptations and innovations on the foundation of foreign learning. The 
British learned from the other European countries, of whom perhaps the 
foremost were the Italian city states. Theories of states guided by precepts 
other than those of religion or feudal notions of honor and vassalage were 
borrowed from Machiavelli and other Italian writers. Then in the seven-
teenth century, Thomas Hobbes, John Locke and a host of other theorists 
formulated the principles of sovereignty and citizenship in constitutional 
monarchies and republics alike.

In the area of technology the British learned from the Italians, the 
Huguenot refugees from France, the Dutch (especially in the areas of 
agriculture, irrigation, drainage and land reclamation) and later on from 
the Chinese and the Indians. During the reign of Elizabeth I, the British 
imitated the practice of the Venetians in granting patents for introduction 
and use of foreign innovations on English soil and encouraging domestic 
innovations. These patents were granted to foreign immigrants endowed 
with the scarce knowledge and skill, and increasingly to Englishmen (Cor-
rigan and Sayer 1985: 66; MacLeod 1988: chapter 1). In order to prevent 

abuse of Englishmen’s patents by arbitrary rulers, the parliament introduced 
the Statute of Monopolies in order to restrict the issue of patents to genuine 
innovations and select projects judged to be of overriding public interest. By 
the eighteenth century Britain emerged as the pacesetter of technological 
innovations the world over.

In the economic development of Britain, the role of the state has been 
underestimated because the state was rendered ‘invisible’ to many observers, 
and partly even to the common people in normal times through measures of 
decentralization, the taxing of property of the landowners and the operation 
of the navy rather than a large national standing army as the bulwark of Brit-
ish defence and its major offensive force (Corrigan and Sayer 1985: chapter 
5). But the British state was strong nevertheless and exerting its infl uence 
on both the supply and the demand sides of burgeoning private enterprise. 
On the supply side: the growth of private enterprise was smoothed by the 
removal of most restrictions on the mobility and transferability of assets; 
the regulation of the labour market and the disciplining of labour through 
a series of legislative Acts going back to the Statute of Artifi cers of 1563; 
various Acts regulating the relations of masters, and ‘servants’; the outlawing 
of workers’ combinations, draconian laws such as the Black Act of 1723 pro-
tecting property (including Acts that made petty stealing a capital offence) 
and public and private Acts enforcing the enclosure of millions of acres of 
land. (Thompson 1977; Corrigan and Sayer 1985: 95-99). On the demand 
side the national market was protected for the production of corn, sugar, 
textiles, naval stores, and timber with tariffs, the banning of the importation 
of various kinds of goods from foreign countries including France, Spain, 
India, from colonies (such as Ireland). Navigation Acts passed in 1651 and 
1662, made it illegal to import goods from abroad in foreign or third country 
bottoms, and sumptuary regulations restricted or banned the consumption 
of certain kinds of foreign goods within British territory.

On the demand side, again, the navy played a very important role by 
providing support for a host of industries catering to shipbuilding and naval 
armament. The British state generally spent much more on the navy than on 
the army (Clark 1947: 110; Brewer 1989: chapters 2-4). As the strength of 
the British economy and its armed forces grew, so too did military spending. 
Between 1710 and 1780, the estimated national income of Britain rose from 
£59.8 million to £97.7 million and military spending increased from £5.4 



Amiya Kumar Bagchi407 The Past and the Future of the Developmental State 408

million to £12.2 million (Brewer 1989: 41). Both were to grow, and military 
spending at a much faster rate, during the 1790s and up to 1815, as a result 
of the wars with the French. Moreover, owing to the necessity of managing 
naval ships and large merchant boats, the skills of organizing and disciplin-
ing the workforce of large factories became diffused among property owners 
in Britain. A typical man-of-war in the eighteenth century cost several times 
a cotton spinning mill, the largest modern factory known at that time.

This scale of public expenditure required a reliable system of public 
credit and taxation. Here also the British learned from advanced foreign 
competitors and added innovations of their own. The British consciously 
followed the example of the Bank of Amsterdam in establishing their own 
Bank of England in 1694. The latter was a private bank but most of its capi-
tal was laid out for loans to the government which in turn allowed the bank 
to issue its own notes which could be used to settle public dues. The Bank 
of England, the East India Company and the South Sea Company provided 
the bastion of public credit which allowed the British state to raise loans at a 
low rate during wars as well as in peacetime (Dickson 1967; Brewer 1989).

Wars also required higher taxes. Here the British ruling classes showed 
their sense of responsibility as rulers by taxing themselves. They also, of 
course, raised a number of indirect taxes which impinged on the poor. But 
with the onset of the wars under Dutch William in the 1690s, a land tax 
was introduced on landowners without any exemption. The landowners 
generally managed to pass the tax on to their tenants and to consumers 
through higher prices (since the production of corn was protected by tariffs, 
or sometimes, outright prohibition of imports) (Corrigan and Sayer 1985: 
chapter 5). The upper classes did pay the tax and did not generally try to 
evade it. ‘In the 1760s Britain succeeded in appropriating about 20 per cent 
of the nation’s output in taxation, almost twice the corresponding French 
fi gure’ (Thane 1990: 3). This was very important at the time, because France 
had emerged as England’s chief political rival. Not only did the French state 
fail to get as large a percentage as the British state in taxes, its taxes were also 
resented more by the general population. Indeed, the taxation system was a 
major contributor to the popular upsurge that led to the French revolution. 
Again, in 1799, the British parliament imposed an income tax which was 
levied on all incomes above a certain level; it promptly abolished it in 1816, 
when it was deemed no longer necessary with the defeat of the French.

The taxability and disciplining of the upper classes as well as the lower 
is thus a characteristic of the DS. For example, the economic decline of the 
Netherlands in its ‘periwig’ phase occurred partly because its upper classes 
chose a life of ease rather than one of stern self-discipline.

Finally, we turn to another aspect of Britain as a DS which is often 
relegated to a chapter on social history, or with Polanyi, is considered a posi-
tive hindrance to Britain’s career as the fi rst fully evolved market economy. 
This is the extensive and decentralized system of poor relief evolved since 
the time of Elizabeth I. ‘The Elizabethan poor laws, an amalgam of earlier 
laws and practices, were codifi ed in 1597-98 and reenacted in 1601. The 
latter…established the principles of the “old poor law” as it later became 
known: the parish as the basic unit of administration, a compulsory poor 
rate levied on householders by overseers appointed by the local justices (the 
overseers obliged to serve under penalty of a fi ne), and various types of relief 
for various kinds of needy—alms and almshouses for the aged and infi rm, 
apprenticeships for children, and work for the able-bodied (and punishment 
or confi nement for the “sturdy beggar”)’ (Himmelfarb 1984: 25). The poor 
laws were, of course, enforced with differing degrees of slackness or harsh-
ness in the succeeding centuries. But they were taken seriously enough for 
them to have cost more than £2 million in rates in the second decade of the 
eighteenth century, in a total population of under 6 million (Ibid. 26). The 
objective of the laws (including a law which allowed the local authorities to 
send back paupers or persons who might claim poor relief to the parish they 
came from) was to discipline labour and regulate the labour market as well 
as to succour the poor.

By the end of the eighteenth century it was accepted that the local 
authorities had a special duty to relieve the poor in periods of acute scarcity. 
During the French wars of the 1790s prices of necessities rose all round and 
severely hit the poor. ‘The justices of Berkshire [in England], meeting at the 
Pelikan Inn, in Speenhamland, near Newbury, on May 6, 1795, in a time of 
great distress, decided that subsidies in aid of wages should be granted in 
accordance with a scale dependent upon the price of bread’ (Polanyi 1957: 
78). This measure still did not prevent real wages, especially of agricultural 
labourers, from declining substantially in the decades up to the 1820s and 
1830s in many counties of England. But they helped contain social and 



Amiya Kumar Bagchi409 The Past and the Future of the Developmental State 410

political discontent and put a ratchet below the domestic demand for the 
basic consumer goods.

iv. the developmental state in germany 1850-1914

The spectacular rise of a unifi ed Germany between 1871 and 1914 to 
the position of the premier industrial nation in Europe, ranking only second 
to the USA, has obscured the fact that the career of Germany as a DS had 
begun considerably earlier. The real beginnings can be traced back to 1850. 
According to Tilly’s new estimates the real acceleration of the rate of growth 
of net domestic product in Germany dates to the 1850s. Moreover, it was 
only after the abortive revolution of 1848 that the last remnants of feudal-
ism were abolished throughout the German territory (Tilly 1991:176-77).

Many of the usual explanations for the pattern of German development 
take either Hoffman’s theory of stages of industrial development or Ger-
schenkron’s hypothesis of the advantages of moderate backwardness as their 
starting point. According to the former theory (based primarily on Britain’s 
experience), the share of capital goods in factory production goes up only at 
a later stage of development while consumer goods produced in factories act 
as the lead sector in the beginning. Germany did not fi t this pattern since by 
the time factory production made its presence felt on any scale production 
of iron, steel and mineral products took the lead. Gerschenkron’s hypothesis 
adds on to this early growth of capital and basic goods sectors certain insti-
tutional features, such as a more pervasive intervention of the state in guid-
ing the economy, and a more pronounced role of banks in fi nancing industry 
as characteristics of the development of a backward economy (Hoffman 
1955; Gerschenkron 1965).

The beginning of Germany’s ‘relative backwardness’ within western 
Europe can be traced back to the Thirty Years’ War in the fi rst half of the 
seventeenth century. That war led to a precipitous population decline, a 
devastation of the infrastructure, and the consolidation of feudal-military 
authoritarianism in a Germany which was fragmented into a few large states 
(such as Prussia or Bavaria) and hundreds of tiny principalities. In the east-
ern parts of Germany the commercialization of the grain trade had induced 
a further consolidation of feudal power and the reduction of the dependent 
peasants to virtual slavery (Borchardt 1973: 85-98). The abolition of feudal-
ism in most German states was the direct outcome of the challenge posed 

by a revolutionary France which was easily able to defeat the military forces 
of the most powerful German princes until the fi nal overthrow of Napoleon 
in 1815. The end of feudalism (which took place between the 1810s and 
1850s) led also to the creation of a rural proletariat because emancipation 
came with a stiff price for the peasants. The latter had to buy the land they 
cultivated at a price capitalized at twenty years’ rent, leaving hundreds of 
thousands of peasants landless when they were unable to raise the required 
sum (Blum 1978, Borchardt 1973).

The process of abolition of direct rule by feudal princes and the emer-
gence of Prussia as by far the most powerful state in Germany facilitated 
German unifi cation. In the centuries of feudal consolidation since the 
sixteenth century, German nationalism had remained dormant, and mostly 
confi ned to the sphere of literature and culture. It gained a new impetus 
from the example of the power of French nationalism that was unleashed 
after 1789 (Greenfeld 1992: chapter 4). The major central and south 
German states (except Austria which was part of the Austro-Hungarian 
empire) joined a customs union with Prussia in 1834, and the other German 
states joined the union between 1835 and 1867 (Borchardt 1973:105).

The economic unifi cation of the German states, the abolition of internal 
tariffs, customs and serfdom, and massive investments in railway networks 
by Prussia and other German states from the 1830s led to a vigorous expan-
sion of the domestic market. The bourgeoisie did not manage to gain con-
trol of the state apparatus, which was manned by the powerful bureaucrats 
and nobility with roots in the ancien regime. But the state effectively pursued 
goals of capitalist development, partly as a means of enhancing its military 
power and partly, of course, with the objective of enhancing the standards of 
living of all Germans. The state remained highly authoritarian in character. 
Authoritarianism acquired a nationalist rationale under Bismarck with his 
successful pursuit of a policy of Prussian imperialism. From the 1880s, the 
social democrats challenged the authoritarian and inegalitarian policies of 
the Prussian state, but this did not alter the character of the state until the 
German empire collapsed in defeat in the fi rst World War. For our purpose, 
it is not necessary to enter into debates about whether the German state 
was ruled by bureaucrats and aristocrats who embraced bourgeois values or 
whether Germans were effectively ‘feudalized’ in their values and behaviour 
(for a survey of the debate see Blackbourn and Eley 1984). There is little 



Amiya Kumar Bagchi411 The Past and the Future of the Developmental State 412

doubt, however, that, especially after the consolidation of rule by conserva-
tive forces under Bismarck’s patronage and the pact between the landlords 
and industrialists on tariff protection, the power of the Junkers in Prussia 
gained a new lease on life, and agrarian capitalism remained constrained to 
that extent (on Junker power and agrarian capitalism, see Byres 1991:23-7).

A successful DS actively encourages learning from foreigners, adapta-
tion of technologies and organizations to local conditions and introduction 
of productive innovations. In that respect, even small German principalities 
and states had been gearing up to enable the full development of a DS long 
before Germany was unifi ed. Most German states had founded universities 
by the eighteenth century where theology, philosophy, law, mathematics and 
even science were taught. Most of the states encouraged the formal train-
ing of craftsmen and technologists in state-supported or guild-supported 
technical schools (Blackbourn 1984:176-7). From the eighteenth century 
many states also encouraged the setting up of factories on the British model. 
While only a few of these enterprises proved fi nancially viable, they acted as 
training grounds for businessmen, technocrats and technologists and labo-
ratories for trying out the techniques and products that might ultimately 
win the race (Landes 1965:364-6). Some constituent states were among 
the pioneers of compulsory education in Europe. By the middle of the 
nineteenth century, Germany, with a much larger population than Britain, 
had a considerably higher rate of literacy. Within Prussia, already by 1850, 
the percentage of bridegrooms who signed with marks (and were, therefore, 
functionally illiterate) had declined to 10 per cent, whereas in England and 
Wales, even in 1853-5, the corresponding percentage was 30. In the latter it 
was only in 1886 that the same degree of literacy as in the Prussia of 1850 
was attained (Mitchell 1973:801-2). In the discussion of the retardation 
of the British economy since the last third of the nineteenth century, this 
aspect of the British underperformance compared with the German is often 
overlooked.

We fi nally turn to the other aspects of the developmental state, par-
ticularly in unifi ed Germany, that have received considerable attention in 
the literature surrounding the Gerschenkron hypothesis—the character of 
state patronage, and especially its paternalism and protectionism, the sec-
toral composition of German industrial growth, and the role of the banking 
system.

In Germany, both the state and the big employers tried to act paternalis-
tically towards the workers (Lee 1978; Craig 1981:150-2). The big employ-
ers such as Krupp and Zeiss of Jena, provided housing and other facilities 
to workers, partly to attach the workers to the company, partly to protect 
industrial secrets through close surveillance, and partly to fend off the threat 
of militant trade unions which became a serious force after the growth of 
the social democratic party under the leadership of Wilhelm Liebknecht 
and August Bebel. In the 1880s, Germany took the leadership in Europe 
in passing successively a sickness insurance law for workers (in 1883), an 
accident insurance law (in 1884) and an old age and disability insurance law 
(in 1889). These laws were accompanied by the savage anti-socialist policies, 
backed by legislation, followed by Bismarck since 1879. Creating loyalty 
among workers, fi ghting trade unions with ideologies which challenged the 
established order and fending off the socialists—all of these acted as power-
ful motives for Bismarck and the other conservative-authoritarian elements 
guiding the destinies of Germany between 1866 and 1914. There were some 
differences between the large fi rms or cartels operating in iron and steel, 
electrical and chemicals, and other industries in which the predominant ele-
ments were small fi rms or even craftsmen among whom trade union orga-
nization faced lesser obstacles. During this period German scientists and 
technologists made major innovations (such as the Haber process for pro-
ducing ammonia) which proved highly profi table. They also proved adept 
at taking over and further advancing inventions from other countries (such 
as innovations in the electrical industry by Siemens and AEG, and the Gil-
christ-Thomas process for reduction of phosphatic iron ore). However, side 
by side with such innovations originating in or affecting large-scale fi rms, 
Germany continued the old system of apprenticeship and certifi cation by 
craft associations and guilds, and built up perhaps the best-educated and 
best-trained working force in Europe. This system was a major departure 
from that prevailing in Britain, illustrating the point that every successful 
DS introduces its own innovations in the economic and social organization 
of the country and cannot afford to simply live on imitations.

In the banking sector, Germany created the system of universal banking, 
and the associated arrangement under which banks had a strong presence 
on the boards of companies funded by them, often exercising a supervisory 
function, particularly in periods of crisis. This system developed since the 



Amiya Kumar Bagchi413 The Past and the Future of the Developmental State 414

days of the railway boom of the 1830s and 1840s but matured after the eco-
nomic crisis that followed the boom and infl ation produced by the German 
victory in the Franco-Prussian war (Tilly 1986, 1991; Sylla 1991). The 
interventionist policy of banks partly compensated, and partly substituted, 
for the lack of a developed stock market until the industrialization process 
had gone quite far.

Finally, the German DS was highly protectionist and interventionist 
especially from the late 1870s (Craig 1981:78-100; Tilly 1991). The pre-uni-
fi cation German states had been strongly infl uenced by free trade doctrines 
and were only moderately protectionist. However, the agricultural depres-
sion beginning in 1873 hit the East German grain producers hard and some 
producers of iron and steel also found it diffi cult to cope with foreign com-
petition. So Bismarck presided over a marriage of ‘iron and rye’ by steeply 
increasing duties on imported iron and steel and grain. The grain tariff was 
increased again in 1888 and 1902 as the German producers were threatened 
by increases in imports. The economic growth of Germany was spurred not 
only by this protection but also by the strong growth of capital goods indus-
tries sustained by high rates of private capital accumulation, public expen-
diture on social overhead capital and military expenditures (Tilly 1978). 
German rates of capital formation as a proportion of net national product 
were about one-eighth in 1870, but had risen to about one-sixth in 1899. 
The corresponding fi gures for the U.K. were a little above one-sixteenth in 
1870 and one-eleventh in 1899 (Mitchell 1978: Table J1).

The German DS was hampered by its burden of military expenditure 
and the associated authoritarianism that kept the growth of real wages 
below the strong rates of growth of productivity. The full fl owering of 
this DS, as in the case of Japan, was to be witnessed only after the military 
authoritarian apparatus had been largely dismantled as a result of defeat in 
the second World War.

v. the developmental state in japan

As in the case of other DSs, the Japanese DS also evolved over time 
until it assumed its mature form in the late 1950s. The beginning of modern 
Japanese development is generally assigned to the period of the Meiji Resto-
ration, and by and large this chronology is right. But some preconditions for 
the construction of a DS had been laid down before 1868. These included 

freedom from foreign rule; in spite of the unequal treaties imposed on Japan 
after Commodore Perry’s successful bombardment of Japanese ports, the 
Japanese attained a high degree of national autonomy in policymaking. 
Other factors included the intense nationalism of the Japanese ruling class 
and its demonstrated ability to learn from foreigners such as the Chinese 
who had better technologies of production or war, or useful principles for 
organization of the state and society (Kahn 1973: chapter 2; Morishima 
1982: Introduction).

After the Meiji Restoration, the earlier, feudal ‘…categories of court 
noble, warrior, peasant, merchant and outcast were done away with and 
restructured into two new classes—a small nobility and everyone else. By 
1876 the government also succeeded in pensioning off all the former mem-
bers of the warrior class [the samurai A.B.].’ Previously ‘they had received 
stipends from Tokugawa or from their domains—at a cost of over 200 mil-
lion yen’ (Ohkawa and Rosovsky 1978:142-3). The Meiji law also freed rural 
labour from various degrees of debt bondage, ranging from servitude for life 
to bondage only for the duration that the loan was not repaid (Taira 1978: 
170). But the law did not give the land to the peasants as Rosovsky and 
Ohkawa (1978:143) claim. It converted feudal into private tenures and most 
of the dependent peasantry of feudal times became tenants or part-time 
tenants eking out their income from their small holdings with labour on the 
fi elds of others. Around 1853, about 80 per cent of the people were farmers. 
By 1940 this proportion had gone down to 40 per cent, but the absolute 
number of families dependent on agriculture had gone up from 5,518,000 
in 1886 to 5,642,000 in 1932 (Ladejinsky 1947:70). Because of the highly 
unequal distribution of land in a land-scarce economy (with 2.7 acres of 
land per agricultural household in 1939), in the 1940s 28 per cent of the 
farmers owned land, and 40 per cent had to supplement their income from 
owned land by leasing land from others (Ibid. 68). Because of the scarcity of 
land and lack of fast expanding alternative employment opportunities, the 
tenants and part tenants were virtually tied to the land and landlords and 
had to pay very high rents. In the 1930s, a survey of 9,134 villages by the 
Japanese Department of Agriculture showed that ‘in 70 per cent of the cases 
the rental from a single-crop fi eld constituted more than 50 per cent of the 
crop; from a two-crop fi eld the rent [was] around 60 per cent of the crop’ 
(Ibid. 41). The net income of the peasant was even lower than this fi gure 



Amiya Kumar Bagchi415 The Past and the Future of the Developmental State 416

indicates, because he had to bear the costs of cultivation, and pay a number 
of taxes besides the land tax.

Thus the DS in Japan was even more hampered, before the second 
World War, by the burden of a highly exploitative landlord class than the 
DS of Bismarck’s Germany. This is one of the main reasons why, in spite 
of a tremendous effort to industrialize without allowing foreigners to gain 
control of any sector of the economy, the rate of growth of the Japanese 
economy did not attain the spectacular levels that have been witnessed 
since 1953 or so, by which date Japan had reconstructed her war-ravaged 
economy (Ohkawa and Rosovsky 1978: Table 28; Ohkawa et al. 1993: Table 
2.4). The annual rates of growth of Japanese national income in the periods 
1897-1919 and 1919-1938 were 2.8 per cent and 3.5 per cent respectively, 
and these were pulled up by two war-induced spurts in the periods 1912-
1917 and 1931-1937 when the respective annual rates of growth of GNP 
were 4.56 per cent and 5.71 per cent (Ohkawa and Rosovsky 1978: Table 
28). By contrast, the annual rates of growth of Japanese national income in 
the periods 1953-1969 and 1969-1979 were 10.0 per cent and 8.5 per cent 
respectively (Ohkawa et.al. 1993: Table 2.4).

Despite the failure to abolish landlordism in the countryside and to take 
adequate measures to succour the working population, the quality of the 
effort made, and the strategy adopted, by the Japanese ruling classes after 
the Meiji Restoration remain very impressive by the standards of Japan’s 
forerunners in the industrialization race, especially in contrast with the tra-
jectories travelled by the ruling classes of most other non-European nations. 
For example, many members of the samurai played an important role in 
abolishing their own class and the old rank-order of society: they realized 
that these impeded the release of the energy of the country and its defence 
against aggressive Western powers. For example, Itagaki Taisuke, head of a 
middle level samurai family argued in 1871 that ‘human skills were the result 
of natural endowment’ and did not depend on ‘a division into classes, as sam-
urai, farmers, artisans, and merchants’ (Beasley 1973: 384). He wanted the 
responsibility for civil and military function to be spread among the people 
without confi ning them to the samurai, so that ‘each [might] develop his 
own skill and abilities’ (Ibid.). Itagaki cited the stiff resistance from ordinary 
Frenchmen against Prussian aggression at the time of the Paris Commune 
to argue for the creation of institutions that accorded dignity to the people: 

In order to make it possible for our country to confront the world and succeed 
in the task of achieving national prosperity, the whole of the people must be 
made to cherish sentiments of patriotism, and institutions established under 
which people are treated as equals. There is no other course…After all, the 
people’s wealth and strength are the government’s wealth and strength, and 
the people’s poverty and weakness the government’s poverty and weakness 
(Memorial by Itagaki Taisuke, 1870 -71, as translated and quoted by Beasley 
1973:384-5).

The leaders of the Meiji Restoration realized the supreme importance 
of education in their pursuit of ‘civilization and enlightenment,’ and their 
campaign for strengthening the state so as to be able to resist the Western 
intruders. Hence, in 1872, a law was proclaimed which set out a scheme of 
education from the primary to university levels, also making primary educa-
tion compulsory. The enforcement of this law was not smooth-sailing (Taira 
1978:196-9), but eventually resistance was overcome and the money was 
found for funding the programme. As a result, while in 1873 only 28 per 
cent of the school age population was attending school, the corresponding 
fi gure had risen to 98 by the end of the century, rendering Japan one of the 
most literate countries in the world (Morishima 1982:102). The close inte-
gration of government planning and business strategies also date from the 
early days of the Meiji Restoration.

Many other institutions characteristic of the Japanese economy—the 
close links between conglomerates and banks, the life-time employment 
system for skilled workers and managers, the promotion of managers on 
the basis of seniority, profi t-sharing systems tying workers and employers, 
extensive subcontracting between a few principals and numerous small and 
medium-scale fi rms—had their basis in a bedrock of nationalism, and the 
ability of the Japanese ruling classes—many of them ex-samurai but many 
springing from families of merchants or prosperous farmers—to work 
together so as to keep out foreign control. But the specifi c institutions grew 
out of particular circumstances in different phases of post-Meiji Japanese 
history (Watanabe 1987; Wan 1988).

In a sustained effort to speed up the development of the economy and 
increase its military potential, the Japanese government promoted and 
fi nanced railways, telegraph lines, ports, shipyards and naval installations. 
But it also set up pioneer factories. Most of these state-sponsored shipyards 
and factories were later turned over to private enterprise. But they acted 



Amiya Kumar Bagchi417 The Past and the Future of the Developmental State 418

as training grounds for workers, technologists and managers, and led to 
adaptations of techniques and management styles to Japanese conditions 
and requirements. Because of the government’s continued interest in the 
development of capital goods industries and armaments factories and its 
repeated involvement in war, starting with the Sino-Japanese war of 1894-
95, the close collaboration between government and business continued and 
was even intensifi ed in the most militaristic phase of Japan’s history viz., the 
period from 1931 to 1945.

The close relation of banks and trading houses grew up quite early in 
the Japanese drive toward industrialization: trading houses found that it was 
useful to start a bank which would fi nance their trading, and even more, 
their long-gestation investment activities; they were devices for mobilizing 
capital and spreading risks (Yamamura 1972:1978).

Similarly, the profi t-sharing system and the relatively low differential 
in salaries between different levels of management and skilled workers and 
managers was a response to the shortage of trained personnel in the initial 
decades of industrialization and the disincentive effects of conspicuously 
large salaries in a society in which a sense of duty and responsibility to 
the state still exerted a powerful infl uence (Taira 1978; Morishima 1982: 
chapters 3-4). Again, the socalled lifetime employment system which gov-
erns perhaps a third of the male workers in large enterprises in Japan was 
a response to severe labour shortages, absenteeism and labour poaching 
during the fi rst World War and the 1920s. Paradoxically enough, these 
institutions, along with a deliberate management strategy to win the loyalty 
of workers through the formation of company or plant-level trade unions, 
were strengthened in response to some initiatives taken by the post-Second 
World War American occupation authorities (SCAP) to provide security 
to workers (Taira 1978; Bagchi 1987b).

Throughout these years, even when unequal treaties were still in force, 
Japan kept foreign capital and foreign enterprise at bay. While showing a 
fi erce determination to learn ‘the skills of the barbarians,’ the Japanese gov-
ernment got rid of foreign experts as soon as the skills had been absorbed 
and never allowed foreign enterprises to obtain a foothold in any major 
sector. Japan’s drive for increasing exports at almost any cost was also moti-
vated by a desire to avoid dependence on foreign capital and resulting for-
eign political control. It is a measure of the strength of Japan’s nationalism 

that such policies could be continued even when Japan was occupied by the 
Allied (American) forces.

Despite all these remarkable features of the society and economy, the 
Japanese miracle did not happen until after the Second World War. A key 
factor contributing to that miracle was the thoroughgoing land reform car-
ried out under American supervision. There had been a number of attempts 
in Japan from 1922 to improve the condition of tenants and redistribute 
land to them, but the lack of any provision for confi scation or compulsory 
sale of land by landlords with ownership holdings above a certain size ren-
dered such efforts ineffectual (Ladejinsky 1947:87). In December 1945, a 
defeated Japanese government placed before the Diet a land reform law 
which would have allowed landlords to retain up to 5 hectares of owned 
land, and would have freed forty per cent of the tenanted land as the prop-
erty of former tenants (Dore 1959; Tadashi 1967). But the occupation 
authorities proposed a much more drastic land reform which was enacted 
the following year as the ‘second land reform law’. This law specifi ed that ‘(1) 
all the land of absentee owners [was] to be purchased by the government; 
(2) all tenanted land owned by resident landowners in excess of one cho (2.5 
acres), or 4 cho in Hokkaido, [was] to be purchased by the government’; 
and ‘(3) the purchase price’ would be ‘in bonds bearing interest rates of 3.6 
per cent and redeemable in 30 years’ plus some bonus in cash (Tsuru 1993: 
21). This was virtually a confi scatory land reform. This measure destroyed 
the power of the landlords in the countryside and released the surplus rural 
labour for non-agricultural employment when economic growth started at 
unprecedented rates in the 1950s.

The SCAP imposed on Japan a number of other reforms in the areas of 
civil service, labour and industrial relations (which we have already referred 
to), constitutional provisions and institutions for establishing formal, west-
ern-style democracy (Tsuru 1993:18-36). The Occupation authorities at 
fi rst also wanted to break up the Zaibatsu, the Japanese conglomerates, as 
they saw them as major pillars of militarism. However, in every case, the Jap-
anese ruling class adapted the reforms to suit their own conditions. This was 
made easier after the U.S. involvement in the Korean War when the Ameri-
can government came to regard Japan as the main bastion of their defensive 
wall against communism in Asia, moving to revive Japan’s economy rather 
than allow it to remain weakened.



Amiya Kumar Bagchi419 The Past and the Future of the Developmental State 420

The Japanese ability to turn defeat into an opportunity is exemplifi ed 
by the outcome of the attempted abolition of the Zaibatsu by the occupation 
authorities. When the directors and controllers of the ex-Zaibatsu groups 
were removed, the middle-level managers of the companies:

…found themselves unexpectedly promoted to the top without any prepara-
tion…these new young executives began securing their positions by making 
their friends’ companies become big shareholders in their own companies so 
that these persons could support them.

However, these new shareholders were poor because they too had fi rst been 
promoted from positions of middle management… They exploited the power 
accompanying [ their new ] positions to establish a system for the mutual sup-
port of these proletarian managers…(Morishima, 1995: 151-2).

Thus the interlocking of directorships of different fi rms, and of trad-
ing and industrial fi rms and banks, and the close involvement of banks and 
fi rms in monitoring one another was re-established in postwar Japan and 
was styled on the relationship between keiretsu fi rms. This system largely 
insulated fi rms from hostile takeover bids, from ‘short-termism’ and liquidity 
crises and fi nancial collapses stemming from short-term diffi culties. These 
relations, together with profi t-sharing arrangements between fi rms and 
their employees, and the reluctance of fi rms to get rid of employees who had 
served them for a long time also ensured a degree of management-employee 
collaboration which was the envy of most advanced capitalist countries 
(Aoki 1987, Koike 1987; Ito 1993: chapter 7). Institutional reforms of the 
land and labour markets contributed substantially towards relatively egali-
tarian income distribution and expansion of the home market (Minami 
1998). The relatively egalitarian distribution of earnings between managers 
and workers, and the drive to increase market shares of fi rms, contributed 
to the growth of the domestic market, making Japanese fi rms formidable 
competitors in export markets. The opening of western European and US 
markets, of course, also contributed to Japanese growth. The abolition of the 
burden of military expenditures freed Japanese resources and innovations 
for concentration on the development of products for civilian use.

The full-grown Japanese DS was very much a post-war phenomenon 
as was the Japanese miracle. This state began facing a crisis only at the end 
of the 1980s. Still, while it lasted it, this DS raised Japan to the position of 
the second industrial power globally and allowed the Japanese a standard 

of living equal to or greater than those of the Western European countries, 
U.S.A., Canada, Australia and New Zealand.

vi. south korea: the final frontier of the developmental 
state?

We now turn to South Korea, which has been celebrated in the recent 
literature as one of the four East Asian dragons or tigers. South Korea is 
distinguished from our earlier examples of developmental states by two 
major characteristics, namely: it is a former colony of an imperial power, and 
secondly, its spectacular growth is almost entirely a post-second World War 
phenomenon. Formally the Netherlands had also been a colony of Spain. 
However, the Netherlands was only a part of the so-called Holy Roman 
Empire, with a system of governance of its own. Korea under Japan had 
been an abject dependency, and its maturation into a DS required special 
geopolitical conditions.

It has been sometimes argued, especially by some Japanese and Ameri-
can scholars, that Japanese colonialism laid the foundations of postwar 
growth in Korea, that Korean growth can be understood as a more or less 
continuous process since the days of Japanese colonialism (cf. Fei, Ohkawa, 
and Ranis 1985; Kikuchi and Hayami 1985). In fact, under Japanese colo-
nialism, the growth of Korea (and Taiwan) was respectable by the standards 
of most nonwhite colonies of the European powers, but not at all that 
spectacular, indeed and may have coincided with the impoverishment of the 
mass of Koreans (Ladejinsky 1940; Woo 1991: chapter 2).

Alice Amsden (1987, 1989: chapter 1), in her otherwise excellent 
book, has alleged that South Korea shares with other ‘late industrializers’ 
the peculiarity that its industrialization was based on learning from other 
countries rather than any innovations in processes or products. As we have 
seen, one distinguishing mark of any successful DS in history has been 
its ability to learn from others. There were not many product or process 
innovations which were associated with the emergence of the Dutch as the 
supreme naval power in Europe in the seventeenth century, except perhaps 
in shipbuilding. In the case of Japan, the most important ‘late industrializing 
country’ by Amsden’s criterion, innovations in automatic looms in cotton 
weaving preceded the second World War, and Japan has emerged as a major 
innovator in a whole range of consumer durables and processes of produc-
tion involving microelectronic technologies since the 1960s. Moreover, inno-



Amiya Kumar Bagchi421 The Past and the Future of the Developmental State 422

vations in organizational techniques have been almost wholly neglected by 
Amsden.

Korea was formally occupied by Japan in 1910. It was then developed as 
a base for the supply of rice to Japan. The Japanese government deployed its 
army and police to prevent peasant mobilization and instituted a cadastral 
survey and compulsory land registration. In the process, vast numbers of 
Koreans who could not prove their title lost their land to the occupying gov-
ernment or Japanese companies and individuals. The Japanese established 
the Oriental Development Company for exploiting Korean resources, but 
also passed ‘a Corporation Law that empowered the colonial government 
to control, and to dissolve if necessary, both new and established businesses 
in Korea’ (Woo 1991: 22). ‘Through 1919…those industries that thrived in 
colonial Korea were mostly household industries that did not require com-
pany registration, and large-scale factories employing more than fi fty work-
ers numbered only 89 (and were mostly Japanese owned), even as late as 
1922’. (Ibid. 23) In 1929, ‘the bulk of manufacturing output still remained in 
foodstuffs at 63.5 per cent, followed by textiles at 10.9 per cent.’ (Ibid. 24).

When Japan tried to conquer Manchuria and the rest of China, the 
Japanese government, and Japanese fi nancial and industrial fi rms sought to 
convert Korea into a supply base for the war. The Bank of Chosen, suppos-
edly the central bank of Korea, the Oriental Development Company, the 
Dai-Ichi Bank, and the Industrial Bank of Japan extended long-term loans 
to development corporations, and the Zaibatsu to establish hydroelectric 
power stations, steel mills, heavy machinery works and chemical factories 
in Korea. This policy also led to an extreme concentration of heavy indus-
tries in the hands of a few Zaibatsu. By 1945, one single Zaibatsu under 
the control of Noguchi Jun controlled about 35 per cent of Japanese direct 
investment in Korea (Ibid. 35). ‘By 1945, Japanese ownership, most of which 
was in the hands of the Zaibatsu, constituted 81.7 per cent of the paid-up 
capital of all industrial enterprises in Korea; 97 per cent in chemical indus-
try, 93 per cent in metal and machinery, 97 per cent in cement. Even in light 
manufacturing such as textiles and fl our mills, the ratios were 80 per cent 
and 81 per cent, respectively’. (Ibid. 40).

Under Japanese programmes of development and exploitation, the 
output of farm products, especially rice, increased quickly in colonial Korea, 
as did landlessness and tenancy. According to one estimate, in Korea, 

whereas in 1914, out of a total number of farming households of 2.59 mil-
lion, 0.57 million were owner-cultivators, 1.07 million were part-owners and 
part-tenants, and 0.91 million were full tenants, by 1938, the number of 
owner-cultivator households and part-tenant and part-owner households 
had declined to 0.54 million and 0.81 million respectively, whereas the 
number of part-tenant households had risen to 1.51 million (Ladejinsky 
1940:50). It was estimated that by the end of 1930, the Japanese owned 1.5 
million acres or about 11 per cent of the taxable land area in the colony 
(Ibid., p.51). By the time of the US occupation of Korea after the defeat of 
Japan, land held by Japanese companies and individuals amounted to 13-15 
per cent of arable (Choudhury and Islam 1993: 62).

The confi scation of Japanese property thus at once transferred a large 
stock of industrial assets to the successor government as well as a substan-
tial percentage of the cultivable land which could then be distributed to the 
Koreans. The American authorities and the Korean government proceeded 
with land reform measures out of fear that peasant unrest would prepare 
the road for the victory of communism as in China. Moreover, there were 
strong nationalist and left-wing movements demanding the abolition of 
landlordism of the Japanese and Koreans since the Korean landlords were 
seen as collaborators of the colonial power. In their initial drive through 
South Korea during the period of the Korean War, the North Koreans had 
abolished landlordism even during their brief sway in South Korea (Cum-
ings 1987: 66). The Korean land reform law was similar to the Japanese in 
that the government was empowered to purchase the lands of all absentee 
landlords, lands entirely given out in lease, and all lands above 3 hectares per 
household (even when they were cultivated by the owners). This land was 
then sold to tenants or owners with a holding size of less than 3 hectares 
on relatively easy terms (Lee 1979; Choudhury and Islam 1993: 62-3). As 
a result of the land reform process, between 1947 and 1965 the percentage 
of full owners among farm households increased from 16.5 to 69.5, whereas 
that of pure tenants declined from 42.1 to 7.0 only. Correspondingly, the 
number of landholdings above 3 hectares per household declined from 
31,000 in 1947 to 3,000 in 1965, and the number of households owning 
from less than 0.5 hectares to 1 hectare of land increased from 1,619,000 to 
1,780,000, while the number of households owning between 1 hectare and 3 
hectares showed a marginal decline (Lee 1979:26). These data also indicate 
the very low land/person ratio in Korea.



Amiya Kumar Bagchi423 The Past and the Future of the Developmental State 424

As a result of the pro-peasant land reform measures, rural incomes 
and assets became relatively equalized, and they increased substantially 
after 1963, particularly in the 1970s (Ibid.) Land was eliminated as an asset 
for speculation or as a lever for keeping actual producers dependent. Thus, 
landlordism was eliminated in South Korea as one of the major characteris-
tics of a DS was instituted.

South Korea also fulfi lled another characteristic of a DS, namely a 
strong and realistic sense of nationalism. This sense worked in unsuspected 
ways. Syngman Rhee, the dictatorial ruler of South Korea from the late 
1940s to 1960, when he fell as a result of student revolt which the military 
refused to suppress, was utterly dependent on U.S. military and economic 
aid. But he played on American fears of the resurgence of communism and 
his threat to invade North Korea and drag the USA again into a major war, 
in order to extract more aid and thwart various American designs (Haggard 
1990: 54-61; Woo 1991: chapter 3). He frustrated American attempts to 
privatise state-owned assets and to liberalise the foreign trade regime so as 
to make Korea revert to its prewar place of mainly supplying agricultural 
products in an East Asian international division of labour (mirroring the 
Japanese-engineered Co-prosperity Sphere) with Japan at the centre of it. 
During the 1950s, Rhee’s regime presided over an import substitution pro-
cess and a quite respectable rate of economic growth—4.5 percent of GDP 
growth per year.

Another contribution of the Rhee era was the education of the Koreans. 
From relatively low levels of literacy at the time of the end of Japanese colo-
nial rule, the adult literacy rates were raised to 71 percent already by 1960, 
and by 1980, an impressive 92 percent (Chaudhury and Islam 1993:152).

Of course, American aid and the Korean involvement in feeding the 
supply lines of the American war effort and military presence in the whole 
of East Asia, including China, Korea and later Vietnam, helped ease South 
Korea’s resource constraints and aided its skill formation (Mason et al., 
1980:165; Bagchi 1987:33-35). Still, a special effort at focusing the national 
effort and coordination of strategies was needed to utilize the privileged 
access South Korea enjoyed to U.S. capital and U.S. markets, especially in 
the 1960s and 1970s.

The turn in the 1960s in the South Korean economic policy has been 
often portrayed as the turn to export-led growth (e.g., Haggard 1990: 

chapter 3). It is better seen as a turn towards coherent planning and a drive 
towards accumulation for the sake of greater national strength. The bases 
for this had already been laid in the 1950s. A national planning body had 
been established in 1958, and the short-lived government of Chang Myon 
had drawn up a fi ve year development plan. But real teeth were put into 
planning when the Park government organised an Economic Planning 
Board which took over the Bureau of the Budget from the Ministry of 
Finance, and the Bureau of Statistics from the Ministry of Home Affairs. 
Its head was given the rank of Deputy Prime Minister ( Jones and Sakong 
1980: 46-8, and Bagchi 1987: 36). Since Korea had a large balance of pay-
ments defi cit, it made sense to put special emphasis on exports in order to 
gain policy autonomy vis-à-vis the US government, the sole source of aid. 
The basis for the export drive had been laid in the 1950s through the growth 
of the textile industry and a number of other light industries. The 1950s had 
also seen the emergence of the South Korean chaebol, organizations closely 
corresponding to the Japanese zaibatsu. Park’s government proceeded to dis-
cipline them for purposes of national accumulation, fi rst by arresting the 
chief tax-evaders among the big businessmen, and then allowing them to go 
free and make money on condition that they invested in areas designated by 
the government. The government made sure of this by nationalizing all the 
commercial banks (which had been briefl y privatized under US pressure) 
and taking over all foreign exchange for allocation between designated uses 
(Bagchi 1987: 36-8; Dreze and Sen 1989: 193-7; Woo 1991: chapters 4-5).

While exporters were allocated foreign exchange on a priority basis, the 
relative price structure did not particularly favour exports (Bagchi 1987: 
38-40). What favoured exports was growth, improvements in productiv-
ity through rising levels of education of the workforce, learning by doing 
and learning by using, and exploitation of economies of scale through the 
favoured treatment of large fi rms especially in exports (Bagchi 1987: 40-49). 
The regulation of real wages, which rose with productivity but at a lower 
rate, a rise in the share of profi ts and their systematic reinvestment drove the 
growth process forward but, of course, led to a more unequal distribution of 
income (Ibid., and Amsden 1989: 16-17n). One difference between the Japa-
nese and Korean developmental states and the Dutch and the British ones 
is that there was little explicit provision for preventing destitution through 
national social insurance or anti-poverty measures. However, in both cases, 



Amiya Kumar Bagchi425 The Past and the Future of the Developmental State 426

drastic, pro-peasant land reforms removed the worst cases of rural poverty 
after the second World War, and rapid growth and a tightening labour 
market raised real wages, especially for the more skilled male workers.

Eventually higher expenditures on R&D, a determined tying up of 
R&D set-ups run by the government and industrial fi rms, and a deliberate 
restructuring of industry with emphasis on such sectors as shipbuilding, 
electronics, automobiles, iron and steel, and petrochemicals made South 
Korea one of the champion performers in domestic investment and saving, 
the growth of national income, and exports of manufactures (Bagchi 1987: 
chapter 3; Amsden 1989: chapters 4-6). In this process, the close collabora-
tion between government and business and the effective monitoring by gov-
ernment of strategic business decisions played a highly important role.

As the South Korean manufacturing sector developed and South Korea 
began generating large surpluses vis-à-vis the U.S.A., the Korean govern-
ment played a less interventionist role in the economy. Many of the formal 
restrictions on entry of foreign goods and foreign capital were relaxed, partly 
under pressure from the US government and foreign transnational corpora-
tions.

In the 1990s, the South Korean DS entered into a phase of precocious 
maturity and decline. Several factors contributed to this. The deliberate 
promotion of chaebol by the South Korean government up to 1982-83, and 
in many cases even beyond that date, created a number of South Korean 
transnational corporations which set up branches and subsidiaries in many 
countries of the world, including the USA, Canada and major European 
countries. The latter now demanded freer entry for the investments and 
products of their fi rms into South Korea. Until 1993 or thereabouts, South 
Korea, following the Japanese example, had kept inward foreign investment 
at bay. After that year, restrictions on foreign portfolio and direct investment 
were relaxed and a much greater mobility of capital was permitted in inter-
national transactions. This led to an infl ow of foreign capital. Moreover, the 
Japanese yen and the Chinese won were substantially devalued from around 
the same date. These developments led to an overvaluation of the Korean 
currency, and South Korea ran up large defi cits in its balance of payments 
account. South Korean fi rms now borrowed large amounts abroad to meet 
the defi cits and to take advantage of lower interest rates abroad. By the 
beginning of 1997, South Korea was caught in a debt trap, and in the last 

quarter of that year it had to seek IMF assistance in order to avoid declara-
tion of debt default. (Bagchi 1998). The usual IMF conditionalities ended, 
at least temporarily, South Korea’s status as a DS.

Even though the currency crisis seems to have overwhelmed most of 
South and Southeast Asia, several developmental states are alive and kick-
ing in East Asia. The most dynamic among them is the People’s Republic of 
China, but the delineation of that state as the prime mover in development 
deserves a separate essay. We turn next to the fi nancialized twilight of the 
developmental states.

vii. the twilight of the developmental state: the 
dominance of finance over production

The Dutch DS fi rst faltered and then crumbled. A number of reasons 
can be assigned to the decline: the small size of the domestic market, the rise 
of wages beyond what would give the Dutch a competitive edge in compari-
son with their two major rivals, (Britain and France), and the unequal mili-
tary competition in which the Netherlands became engaged with England 
and France all played their part (Wilson 1939; Boxer 1973: chapter 10; De 
Vries 1982). But there are three other features which I would emphasize as 
major contributory factors. (By the criteria set out earlier, Britain between 
the reign of Elizabeth I and the Crystal Palace exhibition of 1851 was also 
a DS. When that DS entered into its twilight state it shared most of the 
characteristics of the twilight of the Dutch DS, except, of course, its subju-
gation by a foreign power). The fi rst was the enmeshing of the economy in a 
network of international trade which prevented it from competing on equal 
terms with the newly emerging DS. While Britain, France and other close 
competitors of the Dutch in the seventeenth and eighteenth centuries took 
measures to protect their fi sheries, ship-building, or infant textile industries 
against foreign competition and unifi ed their national markets, the Dutch 
could not follow them to the logical end without hurting their entrepot 
trades. Morever, the decentralized nature of their state prevented the Dutch 
from getting their act together against the increasingly centralized British 
and French states.

Secondly, changes in the social structure, the increasing transformation 
of shipowners-cum-ship captains or merchants into pure shipowners, the 
inability of the Dutch with a stagnant population and an over-urbanized 
state to fi nd seamen and other workers in adequate numbers, and the large-



Amiya Kumar Bagchi427 The Past and the Future of the Developmental State 428

scale conversion of Dutch bourgeoisie into pure fi nanciers and rentiers 
blunted the competitive edge of the Dutch (Boxer 1973: chapter 10; Israel 
1995: chapters 37-39). Moreover, when the British industrial revolution 
set the pace for technical innovation in Europe, the Dutch failed not only 
to innovate but also to learn from other countries. As a result such vital 
branches of economic activity as ocean navigation, shipbuilding, whale-fi sh-
ing and textiles suffered obsolescence and decline.

Finally, the Dutch capitalists increasingly used their capital to fi nance 
the public debts, private enterprises and wars of England and other coun-
tries which had emerged as their major competitors. By 1782, for example, 
out of an estimated Dutch investment of a thousand million fl orins in 
public loans and precious metals, fully 335 million was invested in foreign 
loans and another 140 million in colonial loans. Of the 335 million lent to 
foreigners, 280 million was invested in English loans (Braudel 1984: 267). 
In 1801, the Dutch were found to be the largest foreign holders of English 
national debt: they held £10.54 million out of £17.44 million of the English 
debt held abroad (Neal 1990: 207).

The Dutch Republic fi nally ended in 1806, after suffering the humili-
ation of rule by the French. In the nineteenth century Dutch industrializa-
tion had to be resumed on different foundations; explicitly, as the follower 
of the British. The latter aided this effort by allowing the Dutch to retake 
Indonesia as a colony as part the post-Napoleonic settlement. The colonial 
plunder of Indonesia enormously aided Dutch industrialization and the 
re-entry of the Dutch into the western European club of affl uent nations 
(Bagchi 1982: chapter 4).

I need not devote much space here to the decline of the British DS, for 
the explanation of the end of British economic hegemony in the nineteenth 
century has spawned an enormous literature. The decline of the spirit of 
entrepreneurship, the conversion of businessmen to the ethos of the public 
school and its school-boy codes of honour, the stiff upper lip, the values 
of the gentleman who scorn trade and the sordid affair of making money, 
all these have been added to the more strictly economic factors such as a 
relatively low rate of saving and insuffi cient investment in the domestic 
economy in order to explain the decline of Britain as an economic hegemon 
(Elbaum and Lazonick 1986; McCloskey 1973; Wiener 1981). Through 
the nineteenth century, British capital markets remained imperfect, system-

atically discriminating against domestic industry in favor of agriculture and 
portfolio foreign investment and foreign and colonial public loans (Kennedy 
1987). Britain invested half of its savings in foreign loans and investments 
during the period 1870-1914, but that investment was in fact matched by 
the income generated by its past investments (Pollard 1985). British agri-
culture and some parts of its staple industries suffered badly in the so-called 
Great Depression from the 1870s to the 1890s. British policies favoured free 
trade and free mobility of capital because the interests of the empire and its 
payments balances and those of its upper class demanded these policies. 
Domestic industrial growth could be traded against burgeoning incomes 
from the empire and foreign investments. The dominance of fi nance and 
empire ultimately proved detrimental to the upkeep of a developmental 
state.

Is Japan bound to follow the earlier example of the Dutch republic and 
Britain, allowing fi nance to dominate industry, and foreign investment to 
lord over the priorities of domestic economic growth? There has been a deep 
crisis in the stock markets and prices of real estate in Japan since the end of 
the 1990s (Morishima 1995), but it is not inevitable that Japan will fall into 
the trap of fi nancial dominance. The close linkages of industrial fi rms, their 
subcontractors and the main banks are still in place despite some deregula-
tion of money and capital markets (Ito 1992: chapters 5 and 7; Aoki 1994). 
Again, the proportion of imported manufactures in the consumer basket of 
the Japanese remains far lower than the corresponding fi gure for other affl u-
ent countries with similar levels of income. Finally, the Japanese have proved 
more tenacious than other advanced countries in retaining so-called sunset 
industries, allocating considerable amounts of public funds for adapting 
those industries to competition from lower-wage countries.

viii. failed developmental states: the soviet union, brazil, 
india

The collapse of the Soviet Union is generally seen as the failure of ‘actu-
ally existing socialism’. But it is perhaps understood better if we view it as 
the breakdown of a DS that could not cope with the challenge of a resurgent 
global capitalism. The Soviet Union provided the model of developmental-
ism for many countries. The Soviet Five Year plans, implemented at the time 
of the deep crisis of the capitalist system, inspired developmentalism even in 
countries where the ruling classes professed anti-communist ideology.



Amiya Kumar Bagchi429 The Past and the Future of the Developmental State 430

The Soviet DS clocked up some major achievements up until the 
1950s. It raised the rates of economic growth, however measured, way 
above the historical trends. It led to a high rate of industrialization and a 
rapid transformation of the occupational structure, so that the majority of 
the people ceased to be employed in agriculture. The tremendous effort at 
accumulation and the building of capital goods industries, and the ideology 
of a working class bent on building socialism, helped a relatively economi-
cally backward Soviet Union resist the onslaught of Nazi Germany, playing 
a major role in its downfall. The reconstruction of the Soviet Union and 
major parts of Eastern Europe after the Second World War, with little help 
from the hostile Western capitalist powers, was again a major achievement. 
In the fi elds of technology, the independent construction of nuclear power 
plants and the credit of putting the fi rst man in space also belong to this era. 
Through the 1950s and until the beginning of the 1960s, the Soviet citizen 
also gained tremendously in general health and longevity.

Bairoch’s calculations of comparative industrialization levels (Bairoch 
1982: 281) show that the per capita index for the USSR (with the level in 
the U.K. in 1913 equal to 100) was 20 in 1913, remained 20 in 1928 (after 
recovery from the destructive effect of the fi rst World War, foreign invasion 
and civil war), but increased to 73 in 1953 (after recovery from the effects of 
the Second World War). For Japan, the per capita levels of industrialization 
were 20 in 1913, 30 in 1928 and 40 in 1953. Thus, economically, the USSR 
was doing better than Japan up until the 1950s. After that date, however, 
there was drastic slippage: in 1980 the per capita industrialization levels were 
252 for the USSR but 353 in Japan. This retrogression is evident also from 
measured rates of productivity growth (Bergson, 1989, chapter 6). The total 
factor productivity growth (percentage per year) in the USSR were 3.63, 
1.83, and only 0.26 over the periods 1950-60, 1960-70 and 1970-75 respec-
tively. Over this period the Soviet workers also made impressive advances 
in education. If allowance is made for growth in educational attainments of 
labour, the productivity growth rates over the three periods (1950-60, 1960-
70, 1970-75) come down to 3.26, 1.29 and -0.21 respectively (Ibid. 113).

Even before the crisis of the 1980s engulfed Eastern Europe it was 
known that the Soviet economic system had become bound up in a number 
of mutually reinforcing problems (Nove 1977). Public enterprises systemati-
cally demanded more resources than were available and planning authorities 

failed to discipline them. The result was over-investment and a fall in the 
productivity of inputs. The problems were compounded by an inability to 
devise an incentive system that would allow the results of R & D to be used 
for civilian production purposes: innovations in the military fi eld were not 
applied to raise standards of consumption in other fi elds. Even when inno-
vations were put to use in some factories no mechanism existed for their 
speedy diffusion to other enterprises. Partly because of Western embargoes 
on transfers of key technologies to the Soviet Union, but also because of the 
blinkered attitude of the Soviet bureaucratic-political system, the USSR 
increasingly failed to absorb advances in technology made in other countries 
(Nove 1977: chapter 6).

Behind the failure of the Soviet DS lay several political and social fail-
ures. There was little democracy within the Communist party and in the 
functioning of the political apparatus. The Soviet Union failed to use the 
market mechanism as a supplement to planning and for smoothing out 
awkward corners (Brus 1995). Finally, a failed DS was unable to tackle the 
military and economic challenge posed by an aggressive capitalist block in 
the 1980s (Halliday 1990). However, there was nothing inevitable about the 
collapse of Soviet developmentalism or Soviet-style socialism as it existed 
until the 1950s. It has been cogently argued (Chandra 1993) that the real 
rot set in during the 1960s when Krushchev’s attempts to reform the party 
apparatus, and its relation to the people, and his bid to discipline enterprise 
managers through the imposition of an obligation to make profi ts in a more 
competitive environment were defeated by an entrenched and self-perpetu-
ating party bureaucracy led by Breznev. The fruits of land reforms, expul-
sion of foreign oligopolists, universal education and an egalitarian income 
distribution were squandered by a self-serving nomenklatura, and a mockery 
was made of the real goals of socialism.

The cases of the failed Brazilian and Indian DS can be disposed of much 
more summarily. The reason for failure of Brazilian developmentalism was 
not simply that it was authoritarian (Fiori, 1992). After all, the Prussian 
(German), Japanese and South Korean DSs were also not exactly demo-
cratic. But Brazilian authoritarianism had insecure foundations, and was 
directed towards a rather narrow range of objectives. First, there was never 
any serious attempt to introduce or implement pro-peasant land reforms in 
Brazil. This led to the entrenchment of landlord power in the villages, and 



Amiya Kumar Bagchi431 The Past and the Future of the Developmental State 432

the tentacles of that power extended to the cities and the political appara-
tus of the nation, involving workers, businessmen, and political bosses in 
intricate patron-client relations. Secondly, the state did not try to discipline 
domestic or foreign capitalists. As domestic investment faltered, the econ-
omy became increasingly dependent on foreign capital, and the autonomy of 
state action became seriously compromised, even when the military seemed 
to control the whole state apparatus. Thirdly, a weak educational base and 
an increasingly unequal distribution badly impaired productivity growth 
and the international competitive prowess of Brazil.

Very similar comments would apply to the Indian DS, some of whose 
planning ideologies were consciously imitative of Soviet precedents. How-
ever, socialism was only a slogan for the top Indian decision-makers (Bagchi 
1995a; Chaudhuri 1995; Kaviraj 1995). Except in the three states of Jammu 
and Kashmir, Kerala and West Bengal, no serious redistribution of land 
rights in favour of cultivating peasants was effected, and most of India’s 
countryside continued to be dominated by landlords wielding non-market 
power. Secondly, the progress of education took place at a snail’s pace, and 
the majority of India’s population remained illiterate even in the 1980s. 
Thirdly, signifi cant sectors of the Indian economy were controlled by foreign 
capital, which inhibited domestic capital and independent entrepreneurial 
initiatives. Fourthly, property laws governing the major business communi-
ties remained family-based and created barriers to entry and enormously 
increased transactions costs.

Democracy acted as a mechanism for arriving at compromises among 
the ruling, upper class strata. But it also provided an apparatus for resisting 
the worst excesses of domestic monopoly capital and TNCs. However, the 
debt crisis of 1991, which was almost deliberately engineered by certain sec-
tions of technocrats, businessmen and politicians favouring increased lib-
eralisation, badly damaged the policy autonomy of the Indian state vis-à-vis 
the IMF, World Bank, transnational capital and internationalized domestic 
capital. The rise of a Hindu fundamentalist party and the fall-out of its 
nuclear adventurism have further eroded the prospect of rebuilding a DS 
on stronger foundations of social capital. The continued crisis in external 
payments balances has been aggravated by the increase in defence expen-
ditures resulting from the nuclear tests, by the Asian currency crisis and by 
the economic sanctions imposed by the U.S.A. and some of its allies. The 

‘Swadeshi’ (indigenous) bomb has made India more dependent on private 
infl ows of foreign capital and subservient to transnational capital than even 
before.

ix. the future of the developmental state

At least since the sixteenth century, the DS has played a major role 
in pushing forward the development of economies and societies in major 
regions of the world. Moreover, the DS is very much alive and kicking in 
East Asia. 

It has been argued that strong economies of scale preclude domestic 
nurturing of infant fi rms or the generation of new technologies. On the 
other hand, the densely networked economies of East and South East Asia 
have demonstrated that many such economies can be reaped by regional 
cooperation within countries and between countries as well, but market-
driven regional integration seems to have reached its limits in that region 
(Bagchi, 1998). In the so-called Third Italy centered on Emilia Romagna we 
have witnessed the power of municipal nurturing of industry associations 
which can overcome problems connected with large overhead expenditures, 
exploiting the external economies of networking. The remarkable growth 
and dynamism of the town and village enterprises and some of the surviving 
collective village organizations in China have also shown the power of con-
sciously designed networks of cooperation in production, research, market-
ing and fi nance. In fact, with appropriate changes in social organization and 
continuous upgrading of human skills through education and learning by 
doing, a developmental state can be energized by something akin to cellular 
developmentalism.

The experience of the period since the Second World War demon-
strates that, with appropriate strategies in place, economies can grow much 
faster now than they ever did before the War. Japan and Italy made their 
real transition to affl uence after 1945 (Maddison 1996; Zamagni 1993:37). 
Taiwan, Singapore, Hong Kong and South Korea have also caught up with 
or even surpassed standards of living of many OECD countries.

We have stressed the role of nationalism in enabling a state to pursue a 
cohesive, sustained development-oriented policy. The ability of the state to 
pursue such a policy is in turn contingent on the rapid accumulation and 
diffusion of what has sometimes been styled ‘social capital’ (Loury 1977; 



Amiya Kumar Bagchi433 The Past and the Future of the Developmental State 434

Coleman 1988; Benabou 1993, 1996) sometimes called ‘social construction 
of economic institutions’ (Granovetter 1992), and sometimes covered under 
the generic name of ‘public action’. The different analysts have focussed, 
however, on different aspects of the building up of social capital. Economic 
theorists have used game theory to model ‘trust’ as a ‘commodity’ or cor-
porate culture resulting out of the interaction of utility-maximizing indi-
viduals (Dasgupta 1988; Kreps 1990). Historians have shown how trust, 
and hence the moral basis of major segments of society, can be destroyed 
through inimical public policies (see, for example, Pagden 1988).

‘Social capital’ can also be used to designate the willingness and ability 
of dominant groups in society to engage in the construction of enabling 
institutions and devote resources to the spread of education, sanitation and 
more generally, the conditions of better living (Loury 1977; Coleman 1988). 
The forms the construction of such social capital take will vary from coun-
try to country, and epoch to epoch, even in the case of a successful DS. In 
the case of the Dutch DS, as we have seen, the construction of ‘social capital’ 
involved the reclamation and protection of land from the sea and the build-
ing up of clean cities and educational institutions. After the abolition of the 
properties of the Roman Catholic Church and its doles, it also involved the 
provision of succour against destitution under highly punitive conditions. 
The decline of the DS in the eighteenth century was also associated with 
the deterioration of the institutions for supporting or building social capital 
(Israel 1995: chapters 37 and 39).

In Britain, the building of a unitary nationalism under Elizabeth I also 
coincided with the enactment of laws for succouring the destitute and con-
trolling the masterless men that swelled in visibility, if not in numbers, as a 
result of the expropriation of the church and the massive transfers of land 
that took place between the sixteenth and eighteenth centuries. The Speen-
hamland system was introduced to cushion some of the worst effects on the 
poor, especially wage-earning poor, of the infl ation attending the Napoleonic 
wars. The new Poor Law, introduced in the 1830, was meant mainly to ease 
the burden of the Poor Rates on local bodies and shift some of that burden 
from the losing parishes on to those which gained in population because 
of the growth of industry. Neither in the Dutch Republic nor in Britain 
were property owners particularly compassionate towards the poor. They 
had no conpunction in cutting nominal wages when they were facing stiffer 

competition, nor in executing or jailing offenders against property rights. 
However, their consciousness of the dependence the prosperity and health 
of their realm had on the general social conditions covering both the rich 
and the poor led them collectively to build up social capital. This collective 
action was often locally based and apparently detached from the supreme 
government based in Amsterdam or London. But action by the towns of 
the seventeen states in the Dutch Republic, or scores of local bodies spread 
throughout England, created a network of local and global public goods 
which created a positive synergy between cleanliness, health and education.

The emphasis on an active creation of social capital is necessary to cor-
rect the impression that market-driven economic growth necessarily ensures 
sustained human development in the long run. The Dutch DS eventually 
failed not only to meet the challenges of the new, larger DS of Britain but 
also to reverse the demographic decline of the eighteenth century. In Britain, 
the industrial revolution was attended with a huge increase in mortality in 
many of the industrial towns. The threat of social disorder was also present 
in many of these towns. It was only repeated action by the central govern-
ment, local bodies and private charities that led to improvement in health 
and education, and kept the threat of social disarray at bay (Szreter 1997; 
Thompson 1990). By the beginning of the twentieth century, these efforts 
proved to be visibly inadequate (as shown, for example, by the poor phy-
sique and morale of the common British soldier fi ghting the Boers of South 
Africa) and Lloyd George proceeded to lay the foundations of the welfare 
state in Britain.

Similar examples of faltering and renewed build-up of social capital can 
be culled from the experience of the Nordic countries and Germany (cf. 
Senghaas 1985). The building up of social capital will often be differenti-
ated along class lines, and in a capitalist DS the working class will be differ-
entiated from the capitalists by education, habitat and standards of public 
health. But if the demarcation line becomes an almost unbridgeable barrier 
and intergenerational mobility across class lines becomes too diffi cult then 
the policing costs of the social order will rise, the process of continuous 
upgradation of skills will be hampered, productivity growth will slow down 
and the state will fi nd itself lagging behind in international competition 
(Benabou 1993:1996). If such stratifi cation begins early enough, it will 
choke off the possibility of a country ever constructing a DS. If such strati-



Amiya Kumar Bagchi435 The Past and the Future of the Developmental State 436

fi cation occurs when a DS has attained or passed the stage of maturity then 
capitalist affl uence will be not only punctuated by the usual business cycles 
but also characterized by high levels of unemployment, widening earnings 
differentials and endemic social violence. This has been the experience of 
many cities of the USA for a long time, and this experience is being repeated 
in many European cities with large immigrant populations.

The West European DSs and Japan have joined the club of affl uent 
nations; unregulated mobility of capital between them has led to realign-
ments of locational patterns, and pockets and regions of severe unemploy-
ment. This pattern will be repeated again, especially if Japan ultimately 
demolishes most of the non-transparent barriers against the entry of for-
eign goods and capital. However, with similar levels of labour productivity 
and with endowments of TNCs in every OECD country, these countries 
are likely to grow at a positive rate, even if the dominance of fi nance over 
industry leads to a slowdown of investment everywhere. However, a disman-
tling of the welfare state is taking its toll on living standards in most of the 
OECD countries. In virtually all of these countries real wages of low-skilled 
labour have stagnated or even declined since the onslaught of fi nancial lib-
eralization beginning in the 1980s, and inequality has increased enormously 
in virtually all the European countries, as well as the U.S.A. and Canada 
(Atkinson et al., 1995).

The developing countries which have failed to construct DSs are now 
being bullied by the IMF, the World Bank and transnational capital into 
opening up their economies to unrestricted entry of foreign goods, services 
and capital, and the state is withdrawing from all sectors of economic activity 
except the provision of infrastructure. At the same time, their ability to raise 
resources for creating social capital has been crippled by the doctrine that 
taxing the rich is harmful for the economy. These policies have hampered 
the prospects of growth at a respectable rate (say 5-8 per cent per annum) 
and led to an increase in income inequality in these economies, even in cases, 
such as Brazil, where such inequality was already very high (UNCTAD 
1997: Part II). There is mounting evidence that in the long run, increases 
in inequality tend to depress income growth further (for a summary of the 
evidence and the analysis, see UNCTAD 1997: Part II, chapter 5). Thus 
without a drastic change in policies leading to increased construction of 

social and physical capital, these developing countries will remain doomed 
to poverty and social disarray.

For the existing DSs in East Asia not yet members of the OECD club 
several dangers loom ahead. The fi rst is unregulated or badly monitored 
fi nancial liberalization, which we have discussed earlier, whose effect has 
been evident in the recent Asian currency and macroeconomic crisis. The 
second is the dismantling of institutions for the building of social capital 
and upgrading of the skills, health and security of labour under the illusion 
that such dismantling and lowering of wages and public expenditures will 
make the country more competitive in export markets. The third danger is 
that the DSs concerned will continue to rely on market-driven integration 
without aiming at integration as a political project to be executed through 
deliberate policies. In Europe, individual countries achieved partial inte-
gration with one another by pursuing similar policies and permitting free 
mobility not only of productive capital but also labour. From the end of the 
Second World War, European integration was pursued as a political project 
with determination on the part of most segments of opinion. Such an active 
willingness to integrate is as yet not in evidence in East and Southeast Asia 
despite the existence of the ASEAN (Bagchi 1998). The diffi culties recently 
faced by South Korea are partly attributable to this absence of integration 
and unregulated competitiveness prevailing in that region.

I conclude by observing that if today’s underdeveloped countries are to 
provide decent standards of living to their citizens, construction of viable 
developmental states, consciously integrated with other similarly placed 
DSs, will have to remain high on their agenda. 

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