Do Strong Governments Produce Strong Economies?

• Author: ROOT, HILTON L.

Few terms are as ubiquitous as the strong state in the social sciences, yet there is no agreement on how to define it. The strong state crops up in the writings of economists, political scientists, and sociologists, who label it both a destroyer and a creator of wealth. It has been connected both to chronic underdevelopment and, just as frequently, to high levels of economic performance. If everyone knows what a strong state is, why do analysts disagree over its role?

In the conventional, "neoclassical" view of the state and economic development, two types of government exist--strong and weak--and the latter usually receives better grades for promoting economic performance (Klitgaard 1991). In this view, strong states typically choose interventionist strategies for development. This notion is based largely on examples of the strong states of Latin America, where state interventions in economic affairs include populism, import substitution, and regulatory manipulation of markets, often designed to obtain substantial and, typically, unsustainable redistributive goals (see Dornbusch and Edwards 1991).

The usual justification for developing countries to adopt strong activist states has been that the private sector would not provide the massive public investments needed for economic growth. In reality, however, strong states have often ended up pursuing power for the sake of their own leaders, and elitism, corruption, and misallocation of resources have resulted. Disillusionment with the performance of state-led growth strategies has caused critics to champion weak states, which foster growth by leaving markets alone (Friedman and Friedman 1980). The minimalist state is touted for doing no more than providing a stable, credible currency and a strong legal system designed to enforce private property rights and contract law. On the other hand, such weak states have historically been unable to prevent the capture and distortion of economic policy by oligopolies and rent-seeking elites.

The conventional language of strong versus weak thus fails to explain a government's ability to foster or hinder economic performance. East Asia's high-performing economies--South Korea, Malaysia, Taiwan, Hong Kong, and Singapore--have dramatically demonstrated the inadequacy of the traditional neoclassical categories. In East Asia, strong, not weak, states have enabled the private sector to make a major contribution to growth. Contrary to expectation, the weakest states in that region--Indonesia and the Philippines--have not nurtured strong private sectors; in fact, they have been much less successful than the others in generating home demand and in accumulating capital and skills.

In response to the economic successes of the activist East Asian governments, a new generation of statist scholars has emerged to advocate the role of a strong state in promoting economic development (see Campos, Levi, and Sherman 1994; Evans 1992; Johnson 1982; Wade 1990a, 1990b). The result is a strong polarity in the literature. In one camp, a strong state is viewed as an obstacle to economic development; in the other, state activism is touted as an essential component in the most celebrated cases of economic growth since the end of World War II. Both of these views contain important elements of truth, but both are too limited to account for the varied performance of developing nations.

Weak States

A weak government is handicapped by the inability to enforce property rights or even many of its own laws. Because of the legal inadequacy of a weak state, its interventions are based not on rules but on administrative or executive discretion; this practice results in corruption and opportunism rather than in supervision. In fact, insufficient legal clarity is often intentional, facilitating random interventions by political authorities. For example, to compensate for rampant tax evasion, governments in developing countries devise tax regimes that allow considerable official discretion in assigning rates. But the capricious application of expansive tax powers drives private firms into the informal sector. Deprived of these tax revenues, government cannot provide basic services such as law enforcement, and few benefits remain for those firms that do disclose profits. When transparency becomes a risk, firms have difficulty attracting capital, and government becomes weaker still.

When states are too weak to control their own officials, agents of the state may act independently of one another. A policy of reform may be announced by one part of the government, while another part blocks its implementation. The inability to enforce rules reduces private business activity unless some important actor of the state, such as the president's family or inner circle, intervenes--as, for example, in Indonesia under Suharto, the Philippines under Marcos, or Russia under Yeltsin. Political power is needed to defend property rights when the impartiality of the legal system is compromised or when the rules are themselves inadequate. When countervailing institutions such as an...