Policy, Planning, and Research
Macroeconomic Adjustment
and Growth
Country Economics Department
The World Bank
November 1989
WPS 292
Is the New Political
Economy Relevant
to Developing Countries?
Ronald Findlay
Can the methods and spirit of the New Political Economy be
used to explain common features of Third World experience --
such features as the extensive growth of government relative to
the private sector, the intensity of trade restrictions and the
import substitution syndrome, the urban bias of economic policy
and resource allocation, and the heavy dependence on foreign
capital?
The Policy. Planning, and Research Complex distnbutes PPR Working Papers to dissaminate the findings of work in progress and to
encourage the exchange of ideas among Bank staff and all others interested in development issues. These papers carry the names of
the authors, reflect only their views, and should be used and cied accordingly. Ihe find:gs, interpretations, and conclusions are the
authors own. They should not be attnbuted to the World Bank, its Board of Directors, its management. or any of its member countries.


Policy, Planning, and Research
Macroeconomic Adjsmn
and Growth
Protectionism and industrial regulation are two    Using the methods and spirit of the New
topics in which the interplay of politics and  Political Ecunomy, one can develop a theory of
economics is so strong that one wonders why the  the autonomous state, applying it to the condi-
intellectual merger between the two approaches  tions prevailing in different developing coun-
- in the New Political Economy - has taken     tries. Using this approach makes possible an
so long.                                       explanation of several major featt es of Third
World experience: the extensive growth of
The literature of the New Political Economy  government relative to the private sector, the
largely postulates a framework of political    intensity of trade restrictions and the associated
institutions and behavior like those in the ad-  phenomenon of the import substitution syn-
vanced industrial countries, especially the    drome, the urban bias of economic policy and
United States. The state is seen as passive, and  resource allocation, and the degree of depend-
the emphasis is on the activities of interest  ence on foreign capital.
groups to gct legislation favorable to themselves
passed by political parties whose only concern is  After describing the emergence of the state
electoral success.                             in Western Europe and the contemporary Third
World, Findlay presents an economic model of
Most developing countries are ruled by      the state, in which lie tries to integrate its
military juntas or one-party dictatorships. One  productive and predatory features.
doesn't see in them the kind of equilibrium
between contending interest groups that charac-    He applies the insights from that analysis to
terizes the New Political Economy.             some simple general equilibrium models of trade
theory, to consider the activities of a public
Organized private interests in civil society  sector within open economies in which trade
can be said to emasculate the state in industrial-  taxes provide the main source of revenue.
ized nations. In contrast, the state in developing
countries disproportionately dominates (often      He applies his analysis to Turkey (which
represses) a weak and fragmented civil society  went from surplus-maximizing traditional
(often in the interests of a minority that controls  monarchy to developmental dictatorship), India
the bureaucratic apparatus).                   (a successor state to a gunpowder empire),
Africa (with its marketing boards), Latin Amer-
Is the New Political Economy relevant in the  ica (whose diverse economies tend to go through
Third World?                                   three stages: oigarchy, populism, and bureau-
cratic-authoritarianism), and the four Far Eastern
Yes, says Findlay.                          newly industrializing economies (Hong Kong,
Korea, Singapore, and Taiwan, the star perform-
ers in development).
This paper is a product of the Macroeconomic Adjustment and Growth Division,
Country Economics Department. Copies are available free from the World Bank,
1818 H Street NW, Washington DC 20433. Please contact Raquel Luz, room NIl -
057, extension 61588 (44 pages with figures).
The PPR Working Paper Series disseminates the findings of work under way in the Banks Policy, Planning, and Research
I Complex. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished.
The finrlings, interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank.
Produced at the PPR Dissemination Center


Is the New Political Economy
Relevant to Developing Countries?*
by
Ronald Findlay
Table of Contents
I.   The Autonomy of the State                                    4
II.  An Economic Model of the State                              12
Ill. Factor Proportions, Trade Taxes, and the State              19
IV. Some Particular Experiences                                  29
Bibliography                                                     37
Figures                                                          40
* Paper presented at the Conference on "The New Political Economy and Development
Policy-Making," Lake Palpa, Colombia, July 12-14, 1989, and forthcoming in the
proceedings of the Conference to be edited by Gerald M. Meler. For helpful comments
and encouragement, I would like to thank Pranab Bardhan, Jagdish Bhagwati, Gerald
Meler, Gus Rants, T. N. Srinivasan. Augustine Tan, John Toye, and Stan Wellisz. The
paper was mostly written while visiting the Faculdade de Economla, Universita Nova
de Lisboa, in the summer of 1989. I am grateful to the Director, Professor Jaime Reis,
Luis Cunha, and other colleagues for their kind hospitality and generous support
during my visit.


THLNEW POLITICAL ECONOMY!
It's Explanatory Power as Related to LDCs
The tern New Political Economy presumably refers to the extensive work done
over the last two or three dec?des under a variety of names, prominent among which have
been "public choice", "rent-seeking", "directly-unproductive profit-seeking activities" and,
most recently, "new institutional economics". The pioneers have been Anthony Downs,
Mancur Olson, James Buchanan, Gordon Tullock and Douglass North, whose work has
attracted increasing attention from economists specializing in more traditional areas such as
international trade and industrial organization. Protectionism and industrial regulation are
two topics where the interplay of politics and economics is so strong that it is surprising
how long it has taken for the intellectual merger between economic and political approaches
to occur.1
For the most part this literature has postulated a framework of political institutions
and behavior that corresponds to that of the advanced industrial countries and, even more
specifically, to treat prevailing in the contemporary United States. The "state" as such is
passive and the emphasis is on the activities of interest groups to obtain legislation
favorable to themselves through the intermediation of political parties whose only concern
is with electoral success. Other work has been concerned with voting schemes and
problems of constitutional design, which also presumes "pluralist" democracies of the
Anglo-Saxon or SAss type.
it is of course an unfortunate fact that most LDCs today are ruled by military juntas
or one-party dictatorships of one kind or another, in none of which does it appear that
economic policy is decided by the kind of equilibrium between contending interest groups
that is such a prominent featute of the New Political Economy. The state tends to dominate
"civil tociety", which is weak and fragmented in the LDCs, whereas the rich texture of


organized private interests in civil society emasculates the state as an autonomous entity in
the context of advanced industrial democracies. Hence, I suppose, the reason for Gerry
Meier to raise the question with which this paper will be concerned, of whether or not the
New Political Economy is relevant for the LDCs. My answer, in short, is going to be a
resounding "yes", despite the fact just noted that most of the existing literature on the New
Political Economy generally presumes political conditions vastly different from those
prevailing in the typical LDC.
The basic reason for the poritive position that I have taken on this question is that
one can use the methods and the spirit of the New Political Economy to develop a theory of
the autonomous state, which can then be applied to conditions prevailing in LDCs of
different types. Thc use of this approach makes possible a parsimonious and hopefully
credible explanation of several major features of Third World experience. These are the
extensive growth of government relative to the private sector, the pervasiveness of
"corruption" in varied forms, the intensity of trade restrictions and the associated
phenomenon of the "import substitution syndrome", the "urban bias" of economic policy
and resource allocation and the degree of dependence on foreign capital.
Since the notion of the "state" is going to be central for my argument the first
section will be a brief survey and analysis of the emergence of the state in the experience of
Western Europe and its nature and character in the contemporary Third Work. The next
section is an economic model of the state, which will attempt the task of integrating the
"productive" and "predatory" aspects of this institution. The third section will apply the
insights of this apprgach to the state to some simple general equilibrium models of the trade
theory type which will consider the activities of a public sector within open economies in
which trade taxes provide the main source of revenue. A final section will offer comments
on the relations between the present analysis and recent work on the political economy of
some selected countries that might be of general interest.
2


To avoid misunderstanding I should stress that the objective of this paper is strictly
"positive" in nature, i.e. to present hypotheses and models based on the insights of the
New Political Economy to see how far they can go towards being consistent with at least
some of the major "stylized facts" of Third World experience. It is =sg intended as yet
another diatribe against state intervention and in praise of the "magic of the market". The
whole question of what il the appropriate role of the state in economic development, the
"normative" issue, is left entirely aside, thought of course the analysis presented may
hopefully have some relevant implications for any attempt to address it.
3


I.    The AntonnmX of the State
(i) "Bringing the State Back In" is the title of an interesting recent book edited by
Theda Skocpol and others.2 The common theme that Skocpol finds in much recent social
science literature, and which is further emphasized in the papers of the edited volume, is the
rediscovery by a number of authors, Marxists as well as "mainstream" scholars, of the
"autonomy of the state", which makes it necessary to treat it as a dynamic independent
force instead of as a passive agent of society at large and its various interest groups
contending "horizontally", as in liberal pluralist theory, or as the "executive committee of
the ruling class" as in vulgar Marxism. There are many theoretical avenues through which
this issue of the autonomy of the state can be addressed, which are not only not mutually
exclusive but which can possibly contribute to a wider understanding. Marxists, following
Engels in Origin of the Family. Privat Roe  and te State, and Marx in his Eightemh
rnimake of nis Napolen. look to situations in which class interests achieve something
of a deadlock in their natural antagonism, leaving it open to a dynasty, dictator as ruling
clique of some s-vt to pursue independent policies of aggrandizement that may diverge
from the interests of each of the classes themselves, though of course a prudent ruler would
be careful to play off one group against another by partial concessions and favors, Some
of these autonomous "ends" might be the wealth and privileges of the ruling circles,
military glory, or what is most likely in the modern world, an enlargement of the state's
bureaucratic apparatus for its own sake. The sociological distinction between "latent" and
"manifest" motivoVW objectives is of course crucial in this regard. "Economic
development", "national security", "socialist construction" are all labels that have been used
with greater or less sincerity but all of which operate at the "manifest" level. The task of
the social scientist should be to penetrate these myths, while recognizing their force, and to
reach into the "latent" core of individual or group self-interest that underlies them.3
4


Perhaps the mort natural approach for an economist to the problem is in terms of
the "principal-agent" framework. Thus whether one views the government as the agent of
"the people", as in Locke or Rousseau, or of the "rulin lass" only as in thc cruder
Marxian varian, the principal in both cases has the difficult problem of "monitoring" thc
activities of the agent to see whether or not they are in keeping with the implicit social
contract that underlies both cases. The conventional principal-agent problem is of course
enormously compounded by the fact that the "agene' in this case is empowered with the
"monopoly of the use of force", that is necessary for the enforcement of the conventional
types of contract between principals and agents. Once the people, or the bourgeoisie, or
the proletariat appoint or accept a "guardian" then who is to guard them from the guardian?
Recognition of this problem probably led Hobbes to his conception of the sovereign as
necessarily absolute.
(ii)  The "modem state" as we know it evolved in the West during the course of
a millennium from 'he feudalism of the Carolingian empire, through the "tndsaat and
the absolutist state to the constitutional state of the nineteenth century, culminating in the
universal suffrage and the welfare state of today.4 Throughout this evolution the state at
each phase was intimately involved with the evolution of civil society, both shaping and
being shaped by it Even in its most "primitive" form, the feudalism of the Middle Ages, it
was marked by an acknowledgment of the limitations of the ruler in relation to his subjects.
Lord and vassal both shared in the status of knighthood, and were ,herefore in one sense
"equals" though of different degree in terms of circumstances and power. Magna Carta is
the best known but-by no means the only acknowledgement by a sovereign of the limits
beyond which he could not encroach on the rights of his aristocratic vassals. The urban
merchants and craftsmen in the rising towns of the Middle Ages were also able to secure
rights and privileges for themselves in relation to the crown, in exchange for the financial
assistance they were able to provide the monarchs in their struggles to pacify the unruly
barons. The Church, furthermore, had always been a powerful institution whose vast
5


landed wealth augmented its spiritual influence on civil society. Thus the Standestaat or
"Estate Society" was marked by a "dualism" of power between crown and estates, as Otto
von Gierke emphasized.
Despite their appellation, the "absolutist" states of early modem Europe were
constrained sharply by the historical circumstances within which they emerged, with its
inherited structure of rights and privileges that the various segments of civil society
enjoyed. Thus although the fact that the Estates General of France were not summoned
between 1618 and 1789 is generally taken as indicating the power of the Bourbons to rule
unhindered, the other side of the voin is that there were "no new taxes" that they could
Ic q. They had to supplement the rising yield from the traditional taxes by a variety of
expedients, such as the sale of offices, the farming of the tax revenues and of course the
issue of public debt. All of these created trouble for the future since they were
accompanied by the granting of exemptions and privileges to wider segments of society.
The very efficiency of the Intena, the royal officials who admitastered France, most of
whom vere a meritocracy of "new men", undermined the social basis of the Ancien
Regime, as de Tocqueville pointed out, since it rendered the aristocracy superfluous as a
"functional" class. The French Revolution continued the trend towards a more centralized
administration but with the extension of civil rights to the "people" as a whole. In England
the Whig oligarchy that ruled since 1689 gradually extended the franchise and refonmed the
electoral system in the nineteenth century.
The "modem state" can be thought of as a contrivnce or invention of administrative
technology, that is.apable of being transferred or imported into societies that originally did
not possess it. As it moved eastward in Europe, to the German principalities and Russia, it
became more authoritarian in nature. The historian Mark Raeff (1983) has examined the
concept of The Well-Ordered Police State in his fascinating book of the same name. In the
German principalities, particularly Prussia, the rulers established bureaucracies that
meticulously attempted to regulate civil society in the spheres of education and the economy
6


in order to develop along more modem lines, which at that time of course meant imitating
the French. This 'diffusion" of the modem state worked relatively well in the German case
despite its authoritarian character and legacy, since civil society itself was st Ificiently
developed to respond positively to the detailed regulations and intervention. In the case of
Russia, however, the succession of "revolutions from above". from Peter the Great down
to Mikhail Gorbachev, have yet to succeed in transforming civil society up tj the western
European level, despite the bloody sacrifices that have been imposed on the people in the
attempt.
(iii)  If the modern state, which attained its "ideal" form in post-Revolutionary
France, was modified and distorted in its journey eastwards to Germany and Russia, it has
certainly spawned an exotic new strain in its recent journey "south" to the formerly colonial
territories that attained their independence in Asia and Africa in the aftermath of World War
IL Particularly in the former British colonies, the modem constitutional state with its full
panoply of checks and balances, privileges and safeguards was left behind lock, stock and
barrel by the departing representatives of the crown, as the final culmination of decades if
not centuries of "preparation for self-government", along with the new flags and national
anthems. If the Western state took a millennium to develop from " feudal anarchy" to
constitutionalism the Third World states have sadly given the impression, in many cases, of
running the film backwards, at an accelerated rate that covers the same distance in less than
half a century. While there are many notable exceptions to this gloomy spectacle it is fair to
say that the record has on the whole been a rather dismal one, especially in the light of the
wave of hope and enthusiasm that the national independence movements initially aroused.
Some conservative critics have said that the colonial powers left too soon, before
their "civilizing mission" was fully accomplished. This argument is not convincing,
particularly when one notes that the longer and harder the colonial power resisted the
demand for independence the more violent and radical has been the regime that eventually
took over. Another, more pernicious argument has been that Third World people do not
7


share the values of individual freedom and civil liberty with the West, and are thus
reverting to the meek acceptance of despotic rule with which they are familiar from their
pre-colonial past. It is hard to maintain this view in the light of the dramatic popular
protests in the Philippines, South Korea, Burma, Algeria and China that have all taken
place recently.
What then is the problem? Why has not the modern constitutional state "taken" in its
transplantation into the less developed world? The basic answer is that there is a
disproportion in the Third World context between the state and the development of "civil
society", such that the forms of the state are perverted into making it an instrument of
repression of the mass of the people Athe interests of a small minority that attain control of
the bureaucratic apparatus. This minority is not defined, as in Marxism by its ownership or
control of the means of production but by its control over the "means of administration",
which ultimately consists of course in the effective monopoly of the use of force. The
closest approximation to a Marxian "ruling class" view of the state is in parts of Central and
South America, where land-owning elites exercise domination through political parties that
closely represel their interests, backed by armies whose officer corps come from the same
social stratum.
In their effort to characterize the Third World State social scientists have turned to
Max Weber's typology of authority under the rubrics of "patrimonial", "charismatic" and
"rational-legal". The first generation of nationalist leaders tended to be striking figures,
such as Kemal, Nasser, Nehru, Nkrumah and others. These were natural candidates for
the "charismatic"Ategory, and indeed some of their achievements could perhaps only be
accounted for in terms of the force of their personalities. Subsequent developments were
also sought to be explained by Weber's notion of the "routinization of charisma". The
explanatory power of this approach seems however to have faded along with the transient
glories of the "modernizing dictator". A more illuminating application of Weber's
categories is Christopher Clapham's (1985) concept of "neo-patrimonialism" a. being the
8


ge-eral underlying characteristic of Third World states. By this he means the use of
modem rational-legal forms, i.e. inmersonal "universalistic" systems and rules, for private
"particularistic' purposes. A patrimonial ruler of the pure type would give gifts to his
followers and kinsmen to cement their loyalty to him in his struggles with his opponents,
these gifts coming out of his own personal resources, since such a system would lack any
distinction between the private and public purse. A modem Third World leader, however,
who wanted to perform essentially the same activity of rewarding followers and kinsmen
would do so typically by assigning them jobs or import licenses or contracts that ostensibly
ought to go only to those satisfying certain impersonal objective criteria of functional
qualification.
Many widely noted aspects of Third World experience fall into place in in the light
of this fruitful characterization. The pervasiveness of the state in the economy and society
at large, and the extent and persistence of economic controls and regulations, become
explicable as maximizing the "base" on which the neo-patrimonial ruler can reward himself
and his followers. Admonitions by the IMF and World Bank, universal guardians of the
"rational-legal" order in the economic sphere, to "get the prices right" will obviously be
resisted directly or by a barrage of subterfuges. Negative external shocks will tend to be
responded to by borrowing rather than "adjustment', since the latter would not only lead to
a cut in present consumption of the ruling group but an erosion of its essential political
support as well.
The more successful the neo-patrimonial state is in its predatory exactions on
society, however,.*e less the "legitimacy" of the regime in the eyes of the people, since the
more blatant will be the violation of the publicly proclaimed rational-legal norms. The
response to this is typically political repression of varying degrees of severity, depending
upon the magnitude of the perceived threat. Also, the more valuable the "prize" of the
control of the state, the more intense will be the pressure of rival claimants, and so the
regime will have to face the problem of how wide or narrow to make the coalition that
9


enjoys the benefits of rule. Much of the politics of the Thiird World is concerned with the
ebb and flow of those concessions and retractions to various segments of the society.
(iv)  Despite its appeal as a characterization of Third World states the neo-
patrimonial concept needs to be supplemented by some typology or classification of the
scores of actual states that at present exist in Asia, Africa and Latin America, among which
there is enormous variation in size, ideology and political organization, even if they all
share the feature of neo-patrimonialism in some degree or other. Democracy and
dictatorship is one axis along which they might be situated, and "market-oriented" vers
"centrally planned" another, giving us four categories if each of these distinctions is
applied dichotomously. I had hoped that the literature on comparative politics would have
produced some usable classification but have not yet come across one. What follows is
therefore a very rough and ready one of my own devising, which I will be very happy to
discard if a superior alternative can be found.
1. Traditional Monarchies
There are a number of significant and interesti.g cases that can be placed in this
category. One thinks readily of Saudi Arabia and the Gulf oil sheikdoms, Morocco and
Jordan, as well as of Ethiopia under Haile Selassie. In each of these cases the ruler could
claim legitimacy on the basis of the traditional authority of the institution of the monarchy
and of the dynasty in particular. In Weber's terms they correspond more to his
"patrimonial" category then to the modem mixture of this with rational-legal norms that
Clapham stresses. Qperationally the difference is that the extraction and redistribution of
rents from the economy and society can be made more openly, with the sanction of royal
authority, than under regimes in which this is done behind a facade of impersonal and
objective rules. In other words the distinction between the public treasury and the private
purse of the monarch is blurred.
10


2. Traditionail Dictatorshins
In this category I would place such states as Paraguay under Stroessner, the
Dominictn Republic under Trojillo, Cuba under Batista, Haiti under the Duvaliers,
Nicaragua under Somoza and the Philippines under Marcos. These share with the
monarchies the fact that they are based on absolute prsnal rule, but with the difference
that they lack the legitimacy of the former. Their exploitation of their respective countries is
more blatant and on a greater scale, not being tempered by the awareness of past and future
obligation that constrains a royal dynasty. They also do not seriously espouse any
ideology of national development and can perhaps best be described by the derogatory
rubric of "kleptocracy".
The next two categories I shall distinguish are Right and Left-wing Authoritarian
states. These states are either strictly one-party states, with no opposition parties allowed,
or in which opposition parties have never been able to take power. The military play a
dominant role, either directly or behind the scenes, in many of them.
3. Right-Wing Authoritarian States
In this category are Turkey and Egypt in the Islamic World; Argentina, Brazil, and
Chile for most of their recent history, as well as Mexico in Latin America; Kenya, Nigeria,
Ghana, the Ivory Coast and Malawi in Africa; and a number of states in East and South-
East Asia including Korea, Taiwan, Singapore, Malaysia, Thailand and Indonesia. In
some of these states such as Turkey and Thailand there has been a fair amount of
democratic politictaith political parties competing quite actively but in which the army
defines "the narrow limits of the possible" for the political arena. There is generally market
orientation in economic policy, but this is consistent either with protectionism and import
substitution, as in Latin America, or with outward orientation as in much of East and
South-East Asia. Corruption is on the whole much less than in the traditional dictatorships
identified above, and national development is an explicit commitment of the army or ruling
11


party that it genuinely attempts to promote, with varying degrees of success in different
countries.
4. Left-Wing Anthoritarian Statea
Here I would include the explicitly Communist states of China, North Korea,
Vietnam and Cuba as well as Nicaragua under the Sandinistas and Ethiopia under Mengistu
as close cousins; Algeria, Libya, Syria, Iraq, Tanzania, Angola and Mozambique in the
Middle East and Africa; and Burma with its military socialism and one-party state as the
only non-communist example in Asia of left-wing authoritarianism. State intervention and
controls are much more pervasive in these states than in their right-wing counterparts,
though many are attempting to experiment with greater reliance on markets, most notably
China.
5. Democratic States
In this final category we have most prominently India, Sri Lanka, Venezuela, Costa
Rica, Jamaica nd the other former British West Indies islands, as well as Malta and
Mauritius. In all of these states there have been peaceful transfers of state power
determined by elections and a considerable freedom of civil society to modify the authority
of the state by the threat of defeat at the polls. This, however, does not mean that the state
power itself is weak or insignificant. On the contrary the role of the state is quite extensive,
in production as well as in the scope for the disbursement of patronage.
II.   An Economic Model of the State
Economists have traditionally not had much to say about the theory of the state.
The view of the state that most commonly prevails in economics is of a "functional" or
"instrumental" agency that performs the traditional tasks of providing public goods and off-
12


setting externalities and other " market failures" by corrective taxes and subsidies. In so far
as the state undertakes income redistribution through its tax and expenditure policy it is in
relation to some ethically specified "social welfare function". In the tradition of Pigou and
Meade the state is seen as a benevolent guardian of the public interest. Baumol's Welfare
Economics and the Theory of the State is perhaps still the most explicit and thorough
statement of this approach, even though it was written as early as 1952.
The "public choice" theorists, however, have taken a more cynical view of the state
that sees it as a grasping monster, a Leviathan that extracts revenue from its subjects for the
private interests and enjoyment of the individuals or 3roups in whom the power of rule
adheres. Machiavelli and Hobbes, rather than Bentham and his modem disciples, are the
inspiration of these writers. What I have not been able to find in the literature, however, is
an approach that is flexible enough to handle the tension between these two aspects of the
state, the "productive" and the "predatory". In the rest of this section I will present a model
of the state that will attempt to accomplish this, in the simplest possible way. I will then
relate this model to the generaWiscussion of the role of the state in LDCs that was given in
the previous section.5
The productive role of the state is expressed in this model by the hypothesis that
public expenditure on administration, law and order, roads, justice and so on acts as an
"externality" to private economic activities, enhancing the Miyate output from qdIS
inputs. We thus treat public goods as "intermediate inputs" in the provision of final private
goods rather than treating them as final goods in their own right
This idea ispnbodied in the following simple formal structure. Let Y he "national
income", a composite commodity for which the production function is
Y = A(Lg) F [ Lp,K]                                         (1)
with
Lg+Lp=L                                                 (2)
13


and
A' (Lg)> 0, A" (Lg) <0 , A(0) = 1                     (3)
where Lg and Lp are labor in government and private employment respectively.
The function F is of the familiar neoclassical type and for simplicity is homogeneous of the
first degree.
When Lg = 0 and therefore A(0) = 1 we get the level of output under anarchy or the
Hobbesian "state of nature" in which Yo = F [L,K] . As Lg is increased the marginal
productivity of a worker will be higher in the public than in the private sector and so output
will rise initially, but then it will decline after reaching a maximum when the condition
F A'(Lg) = A (Lg) FL (Lp)                                 (4)
is met, in which the left hand side is the marginal product of labor in the public
sector and the right hand side the marginal product of labor in the private sector. This
*     *
condition determines the optimal allocation of labor L and  between the two sectors,
that makes final output a maximum at Y*. The wages in the two sectors would obviously
have to be equalized to achieve (4), and so the shadow price of labor in the public sector
will be the marginal productivity of labor in the private sector. The optimal level of public
*
expenditure wLg, where w denotes the common wage, is then determined, and so a
proportional tax rate t can be calculated to satisfy
t Y* = w L                                                (5)
~      ~    *     *
where w=(l-t)A (L)FL(Lp)                                  (6)
Once state aethority is vested in an autonomous ruler, however,there is no
guarantee that he will bring society to this optimal allocation. If the ruler is conceived as
"absolute" in the literal sense of the term, i.e. with no constraints at all on his ability to
secure his will at the expense of society, h: will indeed find it in his own interest to
maximize Y by meeting condition (4) but he will then proceed to appropriate the entire
14


surplus, Y* - Yo, above that obtainable by his subjects in the state of nature. Hobbes
explicitly recognizas that there is nothing to prevent his absolute sovereign from proceeding
in this fashion should he be so inclined. this makes it difficult for those like C.B.
Macpherson (1962) who sought to regard Hobbes as the apostle of "possessive
individualism" and a "bourgeois revolution'.
As mentioed in the previous section, however, even the "absolutist" monarchs of
early mo-ei Europe did not have things all their own way to this extent, since they were
constrained by historical precedents in the degree to which they could tax their subjects and
otherwise violate pivate property rights. Let us suppose therefore that the monarch cannot
raise the tax rate on output above sore specified level, which we can take to be the 7 of the
"optimal" solution just obtained. In addition we assume that he cannot conscript labour,
Le. he has to pay any public employees the after-tax wage that they could earn in the
private sector.
Under these circumstances a self-interested ruler would choose Lg so as to
Maximize SatA (Lg) F [Lp,K] - (1 - t) A FL Lg                  (7)
subject to (2).
The necessary condition to achieve this is seen to be
t[FA'(Lg)-A(Lg)FL1= (1-t)[A(Lg)FL+Lg (A'(Lg)FL-A(Lg)FLL)]     (8)
The left-hand side is the marginal gain in the surplus obtained by transferring a
worker from the private to the public sector. The right-hand side is the marginal cost of
doing this which is the rise in the cost of public employment. Surplus is maximized when
these two magnitudes are equated. Since FLL < 0 the right-hand side is positive and
therefore
F A'(Lg) > A(Lg) FL                                           (9)
which means that surplus is maximized when Lg is IM than the optimal level. The
surplus-maximizing ruler will provide less than the optimal level of public services since to
15


increase Lg further would raise Y but reduce S. The situation is conveniently depicted in
terms of Figure 1.-
The concave and convex functions in Figure 1 represent revenue and public
expenditure respectively. The expenditure function is convex since the wage-rate is an
increasing function of public expenditure because marginal labor productivity in the private
sector rises with rising public employment Surplus is the vertical distance between these
functions at each value of Lg, and is maximized where the slopes of the two functions are
equal, with Lg equal to OW, public expenditure equal to VW and surplus equal to UV.
This surplus is available for the consumption of the ruler or for disposition in any other
way that he sees fit Public employment is thus Ia than the socially optimal level of OX,
at which the final output Y is maximized.
An alternative possibility for an autonomous state is that it maximizes the level of
public expenditure, subject only to the revenue constraint. This hypothesis is of course the
one advanced by students of bureaucracy from Parkinson (1958) to Niskanen (1971). In
this case public employment would expand to OZ and the surplus would be driven to zero,
the point at wf -h the two functions cross. Thus, instead of public services being too small
as under the hypothesis 9f surplus maximization, they could be too large, as depicted in
Figure 1, in the case of the bureaucratic hypothesis.
Notice that the state becomes analogous to an economy-wide firm in our model.
The surplus maximizing "absolutist" state becomes like a "natural monopoly", while the
bureaucratic case corresponds to the "sales maximization" hypothesis of the "divorce of
ownership and control" in the modern corporation.
These two hypotheses of course only provide extreme polar cases. Any particular
instance is likely to involve some level of public employment between OW and OZ and
surplus between UV and zero. The surplus could be allocated to any purpose whatsoever,
worthy causes like transfers to widows and orphans or "rents" to social parasites of various
types. A "developmental" state could allocate it to public investment.
16


Thus far we have assuming that the tax rate and the labor supply are both
exogenously given. It would clearly be desirable to extend the model in such a way that
each of these is determined endogenously by the maximization process, along with all the
other variables of the system.
In order to do this we first observe that for any tax rate and labor supply the model
already defines a maximized level of surplus. Furthermore, it is readily seen that surplus is
increased by a rise in either of these parameters. This enables us to define a family of iso-
surplus contours
S = S(t,L)                                                (10)
St >0, SL >0
as indicated by the curves SSO, SS* and SS' convex to the origin in Figure 2, along
each of which the maximized level of surplus is constant.
Assume now that labor supply is not fixed but an increasing function of the after-
tax wage rate. This gives rise to the concave frontier Tr depicted in Figure 2 which
shows the trade-off to the state between the tax rate and the labor supply, upon which the
revenue base depends, a higher tax-rate having a negative repercussion on the supply of
labor and hence on the revenue base. Although intuitively plausible the frontier Tr has to
be derived from the model itself, and this can be conveniently done by use of Figure 3.
The positively sloped curve AA' is simply the supply curve of labor as a function of
the after-tax wage. The negatively sloped curve BB' shows the equilibrium after-tax wage
corresponding to each level of labor supply, for a gyn tax-rate. Thus for any level of
labor supply and the tax rate (which is constant at all points on BB) the model determines
the surplus-maximizing allocation of labor between the public and private sectors and hence
the equilibrium after-tax wage. An increase in the tax rate reduces the after-tax wage for
each level of labor input and so shifts the BB' curve to the left, thus reducing the
equilibrium labor supply. We have therefore shown why the frontier 'TT in Figure 2
displays a negative relationship between the tax-rate and the labor supply. The tangency of
17


SS* with 'IT in Figure 2 determines the equilibrium tax-rate t* and labor supply L* for the
surplus-maximizing case.
The budget-maximizing "bureaucratic" version of the model can be solved in
analogous fashion. Given the tax-rate and labor supply the model already determines the
maximized budget level, so that we can define the iso-budget contours
B = B(t,L)                                                (11)
SB      8B
St     8L
since the level of the budget is obviously an increasing function of the tax-rate and
labor supplies as well. The frontier showing the labor supply as negatively related to the
tax-rate can also readily he obtained in this case. The supply curve of labor as a positive
function of the after-tax wage in Figure 3 is invariant to the nature of the maximizing
hypothesis for the state. It is easy to see, however, that the negatively sloped "demand
curve" for labor will lie to the right of the corresponding case for the surplus-maximizing
hypothesis. This is because for any given tax-rate and labor input the demand for labor,
and hence the after-tax wage, will be higher under the "bureaucratic" hypothesis, as we
have already seen from Figure 1. This means that for any tax-rate the equilibrium supply
of labor will be greater than under surplus maximization so that the frontier lies outside that
of the previous case. The optimal point on the frontier is where it is tangential to the
highest iso-budget contour, Thus the state "squeezes" more resources out of society under
the bureaucratic than under the surplus-maximization hypothesis.
We can now link the two versions of the autonomous state analyzed in this section
with the typology of LDC states presented in the previous section. The surplus
maximization case would appear to correspond to the traditional monarchies and traditional
dictatorships. The ruler in the first case has his legitimacy conferred by right of dynastic
succession while in the second his authority over civil society is sufficiently strong for him
not to have to bother with an extensive apparatus of control. In both cases, therefore, it
18


would seen that there could be limited government in the sense of resource-using public
services, but with a considerable margin between revenue and the cost of public services,
which is available for the enjoyment of the ruler and those on whom he chooses to confer
special favor or buy off with bribes.
The authoritarian states, on the other hand, are dominated by armies or parties that
need to justify their rule over society by the apparent execution of grandiose tasks, for
which they would seek to maximize the available budgetary resources. While key
personnel would no doubt live well these would tend to be officially sanctioned "perks",
rather than simple graft, though the line may be hard to draw in many cases.
Democratic states do not really fit into the model since in this case the levels of
public reve .ue and public expenditure (in the resource-using sense), as well as who
benefits from transfer payments, are determined by electoral competition. The situation is
thus "oligopolistic" rather than "monopolistic", as in our simple model. In this case the
more standard approach of the New Political Economy comes iito its own and we ha-
nothing specific to add here.
III.  Factor Proportlons. Trade Taxes and the State
In this section we will apply the hypotheses regarding the behavior of the state that
have been discussed in the previous section to models of a "typical" LDC economy to see
whether they can generate outcomes that are consistent with the "stylized facts" of LDC
experience. SincaAwh vast majority of LDC's are highly open economies we will naturally
stress the relationship between the fiscal behavior of the state and international trade and
capital movements.
(i) A Viner-Ricardo Model
In this well-known model there is a primary sector producing output as a function
of labor and a "specific" input called "land", but which can of course be thought of as a
19


natural resource of any kind, and a manufacturing sector that produces output with labor
and another specific input called "capital", which may be either exogenously fixed or
internationally mobile as a function of the rate of return obtainable. Both sectors compete
for the same homogeneous labor pool. Relative prices of the two goods are fixed on world
markets but are of course internally variable as a result of state policy.
To begin with let us suppose that capital is perfectly mobile internationally at an
exogenous rate of return i. Assuming constant returns to scale in the production function
for manufacturing this means that
f (km) = If                                                     (12)
where km is the capital-labor ratio and f(km) is the marginal productivity of capital.
From (1) it follows that
f(km) - f'(km) km = w                                           (13)
The externally fixed7 thus determines km and the real wage w in terms of
manufactures for the LDC The allocation of the fixed labor pool between the two sectors
is determined by
F [g(qa) - g'(qa) qal = w                                       (14)
where g(qa) is output per worker in the agricultural or primary sector, qa is the
land-labor ratio in the sector and P is the exogenously given world price ratio of the two
goods. Since the total supply of "land", specific to the primary sector, is fixed, qa depends
only on employment La in that sector. We also have
La + Lm=L                                                       (15)
and since J is uniquely determined by (14) we also uniquely determine Lm. Since
km is determined by (12) we therefore also know the endogenous capital input Km. This
d
is divided between an initially fixed domestic component Km and the foreign capital inflow
f
Km which is
f         d
Km = Km - Km                                                   (16)
20


National income would be
- d
Y =wL+# Km +p g'(qa) qaLa                                     (17)
where the first term is total wages, the second is profits of domestically owned
capital and the third is the natural resource rents of the primary sector. Since the economy
is "small" in world markets Y represents the maximum income that domestic residents can
obtain and therefore corresponds to the socially optimal level, if distributive problems are
either ignored or taken care of by the usual fiction of non-distortionary "lump sum"
transfers.
Into this idyllic "first best" world we now introduce, like a serpent in the garden,
the "autonomous" state. While the previous section has stressed the "productive" role of
the state, despite its perversion to "predatoty" ends, in this section we will simplify by
assuming either that there is already a pool of resources set aside for public use, at a level
just sufficient to sustain private ictivity at the optimal level, or more blatantly by just
ignoring that aspect of the problem here since it is irrelevant to the present objective.
We will assume, with good reason, that the state finds it most convenient to tax
trade, rather than wealth or incomes directly. There is ample evidencr that public finances
in the Third World do just this. Since we are ignoring productive pub'41 expenditure
maximizing surplus and maximizing revenue are now equivalent. It is instructive to
consider the popular device of a "marketing board" to tax the resource-intensive primary
sector which is the source of the country's exports and foreign exchange earnings.
The impact of a revenue-maximizing marketing board on the economy is illustrated
in Figure 4. The horizontal axis measures employment in the primary sector and the
vertical axis is used to indicate the wage and marginal product of labor in this sector,
evaluated at the world price P in terms of manufactures. The distance OW indicates the
wage and the line AV is the marginal productivity curve of labor in the primary sector
21


(drawn as linear for convenience of exposition). Employment is equal to OG, the rent from
natural resources is the triangle AWV and OWVG is the wage -bill in the primary sector.
The marketing board acting as a maximizing monopsonist drives a wedge equal to
ST between the world and domestic prices of the primary export, T being the point at
which the horizontal wage line is intersected by the line AT which is the marginal revenue
product curve. The maximum revenue of the marketing board is the area of the rectangle
UWST. The rents to private citizens in the primary sector fall to the triangle AUS, while
the triangle STV is the deadweight loss to the economy as a whole from the restrictive
policies of the marketing board. Employment in the primary sector contracts to OF, so that
FO workers are released to the manufacturing sector. Additional foreign capital will flow
in to employ these workers, who will earn the same wage as before. The return, to capital,
however, will not be a part of national income since they will accrue to the foreign owners.
The economy has become (a) more industrialized, since the primary sector contracts and
manufacturing expands (b) more dependent on foreign capital because of the additional
induced inflow (c) less well off than before because of the net loss of real national income
equal to the area of the triangle STV (d) restricted in its trade since the contraction of
primary output is at the expense of exports, so that imports must decline as well because of
the decline in net foreign earnings.
What does the state do with its revenue? There are a number of possibilities. First,
it could simply be enjoyed as the private income of a traditional monarch or dictator, if we
have the first two types of state that we considered in the previous section. Swiss bank
accounts, luxury igports, construction of monuments using some of the released labor are
all possible uses of the surplus each of which can be amply illustrated by recent and
contemporary Third World examples.
Alternatively, if the state is of a more modern authoritarian type of either the left or
the right, there could be the establishment of a public bureaucracy that perhaps enhances the
productivity of the economy to some extent but which is more likely to be largely parasitic
22


on the civil society, engaging itself on phantom tasks defined in terms of those old
standbys such as national unity or security, development and so on. Wages in the public
sector could be above market levels, to reward friends and favorites or simply to create
commitments and dependence on the regime.
Another effect of the "squeeze" on agricultural rents is that the price of the product
is lowered to domestic consumers, an effect which is particularly important when the
primary product is a food staple, such as rice in South East Asia or beef and wheat in
Argentina. The state could, of course, charge the world price to domestic consumers and
thus maximize its returns from exports to the world market. There would be administrative
difficulties, however, and besides there is the substantial political benefit of providing a
subsidy to urban dwellers, the likeliest source of visible opposition to the regime. Thus in
virtually all known cases the benefit of the squeeze on the primary sector is passed on to the
domestic consumers as an implicit or even explicit subsidy.
The model is easily adapted to the case of no capital mobility at all, or of the foreign
capital inflow being an increasing function of the rate of return that is obtainable in the
economy. In both cases the rate of return becomes an endogenous variable, along with the
foreign capital inflow in the latter case. The tax on the primary sector will result in a
diversion of the labor force into manufacturing, raising the rate of return and the inflow of
foreign capital into that sector. Domestic as well as foreign capitalists are indirect
beneficiaries of the squeeze on the primary sector. Thus the state would get an additional
payoff from the goodwill that this generates, which can of course be converted into revenue
or private connectins between functionaries and the relevant firms. Foreign and domestic
capital interact in complex ways, some competitive and some complementary. The state
can mediate these relationships to serve its "own" purpose as well as the private interests of
those who rule in its name.
Finally, the state could use the revenue that it obtains for accumulation of capital in
new state-owned enterprises. While these may originally be set up as "statutory boards" to
23


be run on commercial principles they can soon become subject to use for "political"
purposes as rewards to the members of the ruling elite or as bribes to potentially threatening
outsiders which may include army officers if these are not already in the inner circle. A
new "bureaucratic-bourgeoisie" can be built up in this way, some of whom could establish
private enterprises out of the rents that they initially obtained from the state.
(ii)  A Heckscher-Ohlin Model
Similar implications can be derived from a Heckscher-Ohlin model, with a state that
maximizes its budget in Parkinson-Niskanen fashion. We assume a two-factor, two-good
"small" opn economy, with fixed endowments of capital and labor. The export good is
labor-intensive and the import-competing good capital-intensive. Revenue comes from the
proceeds of a tariff, the level of which is to be determined endogenously, along with the
level of public employment.
Since the world price-ratio is fixed the domestic price-ratio is uniquely determined
by the level of the tariff. This domestic price-ratio in turn, by the Stolper-Samuelson
theorem, uniquely determines the real wage and return to capital. Since imports are capital-
intensive the higher the tariff the lower the real wage and the higher the retum to capital.
The government's problem is to choose the tariff rate, t, and the level of public
employment, Lg, in such a way as to
Maximize w(t) Lg
Subject to
w(t) Lg -5 t p* M ( (l+t) p*, Lg)
where p* is the wtJl price-ratio, M is the level of imports and w(t) is the wage-rate which
is a negative function of t. The level of imports varies negatively with the domestic price-
ratio, which is equal to (1+t) p*. It also depends on Lg, since employment in the public
sector withdraws labor from the producion of the two tradable goods. With the capital
stock fixed, more public employment reduces the labor force in the tradable sector, and
hence by the Rybezynski theorem increases the output of the capital-intensive import-
24


competing good, and therefore reduces the level of imports and hence tariff revenue as
well.           -
The solution of the problem is indicated in Figure 5. The concave frontier FF'
shows the maximum feasible w(t) for any given value of Lg. Suppose Lg at some positive
level and the tariff t at zero. The wage w(t) would then be at its maximum free-trade level
but revenue would be zero, so that the government oudget constraint would be violated.
As the tariff is increased w(t) will fail, so that expenditure is reduced, and revenue will be
increased. Thus corresponding to the given value of Lg we can find a tariff t and hence a
wage-rate w(t) at which the budget constraint is satisfied with equality. A higher value of
Lg will involve a lower revenue for a given value of t, since the volume of imports will be
lower. Hence we must have a higher tariff, and thus a lower wage-rate, at a higher level of
public employment. This explains why FF' is negatively sloped.
The objective function w(t) Lg can be represented in Figure 5 by a family of
rectangular hyperbolas. The optimal point z is where FF is tangential to the highest of
these, yielding the optimal values w(t*) and Lg.
Our hypothesis of a budget-maximizing bureaucratic regime has thus determined the
tariff level endogenously along with the size of the public sector itself in the setting of a
small open economy. More standard models of endogenous tariffs, such as Findlay and
Wellisz (1982) and Mayer (1984), postulate democratic pluralist regimes, less consistent
with Third World reality and are therefore more suited to conditions in the advanced
countries. The model presented here is a refinement of an earlier version contained in
Section H of Findla&and Wellisz (1983). This model points to the possibilities of a
"bureaucratic-capitalist" alliance, that has often been noted in the Latin American context
and which will be elaborated upon in the potentially richer model in the next section.
(iii)  An "Australian" Model
Finally let us consider a model that neatly combines Viner-Ricardo and Heckscher-
Ohlin features. This model can be found in a paper by Fred Gruen and Max Corden (1970)
25


and is also used to good effect in Anne Krueger's (1977) Graham Lecture. The Australian
connection of all thee authors is responsible for the appellation that I have given it.
Suppose we have two sectors, a primary sector and a manufacturing sector, but
while the primary sector continues to produce a single good, using "land" and labor,
manufacturing is now differentiated between capital-intensive and labor-intensive goods,
both using capital and labor. Thus labor is used in all three, capital in two and land only in
one of the goods that are produced. All endowments are given and relative prices, as
before, are determined exogenously on world markets. In the absence of state intervention
suppose that technology, preferences and endowments are such that the economy exports
the primary good and the labor-intensive industrial good and imports the capital-intensive
good.
Since the industrial sector has a Heckscher-Ohlin specification the relative price of
the two industrial goods on the world market would detennine the return to capital and the
real wage. Let us say that the n mraire is the labor-intensive good. With the price of the
primary export also given in terms of the numeraire it is apparent that employment in the
primary sector, and hence rent and output, are all determined by the equality of the marginal
product of labor with the real wage. This gives the labor force for the industrial sector and
hence the production levels of both goods produced by that sector. National income as
well as both relative prices now being given, domestic consumption of each good can also
be determined and hence the volume of trade in all three goods.
One of the most interesting feature of this model, from a political economy
standpoint, is that irs possible for a tariff on industrial imports to benefit landownrs. To
see this consider a tariff on the import of the capital-intensive good. By the Stolper-
Samuelson theorem again the real wage will be lower, while the price of the primary good
will be unchanged, both in terms of the numeraire. Thus the effect will be to increase
employment and hence rents, in the primary sector. All agents in the model will be worse
off as consumers, because of the distortion in domestic prices caused by the tariff, but it is
26


clearly possible for landowners to gain on a net basis. Thus both capitalists and
landowners can gain as a result of a tariff on capital-intensive imports, while workers of
course are definitely worse off.
An export tax on agriculture, or the pricing policies of a marketing board, clearly
depresses the returns to this sector and reduces the level of employment within it. The
influx of labor to the industrial sector would, however, increase the output of labor-
intensive goods, while reducing the output of capital-intensive goods. Real wages remain
unchanged in terms of the manufactured goods but they g in terms of the primary good,
since the internal price of that good has fallen as a result of the policy of taxing agriculture.
The decline in output of capital-intensive goods would also be accompanied by an increase
in imports. Protectionist interests in industry, together with the ever-present thirst for
revenue on the part of the state could lead to imposition of, or a rise in, tariffs on capital-
intensive imports. This would off-set at least part of the increase in real wages of the
workers and produce a rise in the return to capital.
The scenario of the previous paragraph has considerable relevance to the case of
Argentina.6 That country in its heyday was an "agro-export oligarchy" in which the
expansion of the grain and beef exports produced by the fertile DatDA created one of the
most prosperous societies in the entire Southern hemisphere. Politics was dominated by
the rich landowners and the professional urban middle class that arose as an off-shoot of
this group. Workers, who tended to be recently arrived immigrants from Italy and Spain,
did not succeed in entering the political arena significantly, since the anarchist and
syndicalist parties tht attempted to represent them were crushed by armed forces that
reflected the domination of the rural magnates and the urban bourgeoisie. The difficulties
caused by the depression of the thirties resulted in military intervention of a conservative,
and even reactionary character. The adverse shift of the terms of trade, and isolation during
the second world % ar, stimulated the development of urban industry and thus expanded the
very class that was kept out of the political system.
27


This situation provided a clear opportunity for someone to capitalize on by
mobilizing this latent political base. The opportunity was seized by Juan Peron in 1946.
Though his personal rule ended in 1956 Peronism has become a permanent feature of
Argentine political life, the latest chapter of which has just opened with the victory at the
polls of Carlos Menem. The formula for Peronism was to squeeze the primary sector by
taxes and price controls that simultaneously provided revenue to the state, lowered the cost
of living of the workers since grain and beef were such important components of their
consumption baskets and also enabled the regime to gain credit by opposing the landed
"oligarchy" in the interest of the common man. Nationalization and an expanding
bureaucracy could also keep the urban middle class happy by providing career
opportunities in the expanded realm of the state. Combined with the charisma of Evita
Peron the formula was clearly extraordinarily effective.
The losers, however, particularly the landowners and associated sections of the
army as well as financial and industrial interests were never defeated outright and were able
to mount effective resistance, particularly when the excesses of the Peronists combined
with unfavorable external developments produced crises. This would bring waves of
economic liberalization combined with political repression, since the attempts to revive
lagging primary exports through higher relative prices were resisted by workers anxious to
preserve their real wages. The Peronist defeat of 1956 led to several orthodox stabilization
and liberalization attempts by Frondizi, Illia, Ongania and others which in turn led to
collapse and the return of Peronism in the early seventies. The ensuing chaos led again to a
military regime anddhe orthodox liberalization measures, which again failed. Like his
Radical party predecessors Frondizi and Mia, Raul Alfonsin was not able to defeat
Peronism at the polls by providing a workable economic framework and the stage is
apparently set for yet another turn of the wheeL
28


IV.   Some Particular Exoeriences
In this final section we attempt to complement the somewhat abstract character of
the analysis with some observations on experiences in different countries and regions of the
world. There is no particular principle underlying the choices made, which have been
dictated partly by the availability of relevant literature.
(i) TurkM
The case of Turkey is a particularly interesting one in the political economy of
development. Among other reasons this is because of her early experience with a
"developmental dictatorship" under Mustapha Kemal Ataturk during the inter-war years,
providing a preview of many recent Third World scenarios of development. My discussion
is heavily indebted to the excellent historical study by Keyder (1987).
The original system of the Ottoman empire fits into our model of a "surplus-
maximizing" traditional monarchy, with the surplus shared between the monarch himself
and the class of state functionaries that administered the system. Unlike Europe of the Old
Regime or Latin America there was no class of large landowners, the soil being mainly
worked by peasants who were heavily taxed. Turkey was drawn into the great expansion
of world trade from 1870 to 1914 as an exporter of primary products, with Greek and
Armenian merchants playing the role of intermediaries between the world market and the
Turkish peasant producers. Needless to say the state was not slow to take the opportunity
to substantially increase its revenue, thus leading to an enhancement of the traditional
domination of the bgreaucracy in Turkish society. The "alien" merchant community was
certainly not able to challenge this hegemony. lhe ravages of World War I and the
associated conflicts with the Greeks and Armenians led to the almost total disappearance of
the merchant community as a result of persecution and flight. The twenties saw a
continuation of agricultural exports under the new regime of Kemal.
29


The situation was drastically altered by the impact of the Great Depression.
Relative prices turmed very sharply against agriculture and the stimulus to industry that this
offered was enhanced by import restrictions. A new class of Turkish industrialists
emerged, in close association with the bureaucracy. The two forces merged in the policy of
"etatism" that characterized Turkey from this period on. The inspiration came from
Mussolini's "corporate" state. The pattern of industrialization was of the familiar import
substitution type, with the boards of the large banks and productive enterprises containing
heavy representation of the bureaucracy, many of whom also directly entered the field of
industry. Civil liberties were suppressed and a firm alliance of "state and capital" was
achieved, with a squeeze on the agricultural sector and the working class. The situation
thus corresponds to the models of the previous section of this paper, with relative prices
turned against land and labor in favor of profits and state revenue.
The one-parity state was abolished and a democratic system established in 1946
which eventually led to the victory of Menderes and his Democratic Party in 1950. This
liberalization of the polity was also accompanied by economic changes that turned in the
direction of market- oriented policies. Combined with the boom in primary product prices
this led to prosperity of the small cultivator class, who were also an important constituency
for the competing parties. US foreign aid and political influence also worked significantly,
and perhaps even crucially, in bringing about the new configuration. The bureaucracy lost
some of its primacy over economy and society. The external environment however
eventually turned unfavorable and the attempt by Menderes to sustain growth through
inflation led to disiption that triggered a military coup in 1960 that restored civilian rule
eventually but with a new program of import-substituting industrialization, with the
bureaucracy back in full force with a plethora of planning agencies that allocated scarce
inputs, particularly foreign exchange, with the predictable "tent-seeking" consequences. In
fact Anne Krueger's (1974) original article appears to have been based on her experience of
working in Turkey. Buoyed by foreign aid and the large inflow of remittances from the
30


flood of Turkish workers to Western Europe, the system expanded until it was brought to a
crisis by the oil shocks and associated world recession. Violence erupted within civil
society between the extreme right and left, leading to military intervention in 1980. Since
then there has been success with outward-looking policies leading to a rapid growth of
manufactured exports. It remains to the seen, however, whether "bureaucratic
authoritarianism" in Turkey will follow the East Asian rather than the Latin American
pattern.
(ii) India
India, like Turkey and Iran, is a successor state to the three great "gunpowder
empires" of the Ottomans, Safavids and Mughals. The long British colonial interlude
modernized the traditional bureaucratic system and left a democratic parliamentary regime
as its legacy. The question therefor e arises as to whether the modern Indian polity
functions as an "autonomous" centralized state insulated from the pressures of civil society
or whether it is best looked upon as a pluralistic democracy of the Western type,
distinguished only by a lower standard of living from its Western European and North
American counterparts.
Bardhan (1984), in a brief but stimulating study of the political economy of Indian
development, begins with the hypothesis of the relative autonomy of the post-colonial state,
building on the heritage of the Mughals and the scarcely less imperial British viceroys. He
points out that the Nehru generation's authority, derived from its leadership of the
independence struggle, enabled the Indian state initially to impose a particular pattern of
development, stressi*g the role of the public sector in bringing about a "socialistic pattern
of society" while raising per capita incomes. He argues, however, that the subsequent
generations of the Nehru dynasty have increasingly yielded to pressures from three main
groups -- big industrialists and the bureaucracy in the cities and large farmers in the rural
areas. The result, although Bardhan does not draw this conclusion, seems to me to be
31


hardly distinguishable from t.0 kind of "churning" redistributive state that we are familiar
with in the more developed countries.
The combination of an extremely extensive role for the state, with sweeping control
over finance, industry, transport and trade, together with an "open" polity that is subject to
lobbying pressures from almost any organized interest group has resulted in disappointing
growth performance over the last two decades, despite some successes in agriculture. The
"surplus" has tended to be frittered away in subsidies to farmers and inefficient state
enterprises, while an expanding bureaucracy continues its lucrative hegemony over a
labyrinthine maze of regulations and controls. No substantial free enterprise coalition has
been able to form to push back the frontiers of the state from its control over key sectors,
while the bureaucracy is always able to undermine tentative attempts by the leadership to
liberalize the system. 'Te dependence of the ruling party on contributions from "rent-
seeking" lobbies also imparts stability to the existing structure. Gunnar Myrdal's well-
known complaint about the "soft state" in India is related to this tendency to be unable to
insulate itself from these intrusions and to pursue its "higher" developmental objectives.7
Despite all these disappointments about India not fulfilling the outstanding potential
for development provided by her entrepreneurs and diverse base of human capital, it
remains a remarkable achievement to have maintained such a vibrant and stable democratic
regime for so long when so many of her neighbors have fallen into dictatorial rule.
32


(iii) Afca
The moderof a marketing board in a Viner-Ricardo economy presented earlier fits
African experience remarkably well.8 The institution of the marketing board, particularly in
West Africa, owed its origin to the colonial regimes which built up large surpluses from
their operation during the Second World War and the period preceding independence. In
the case of cash crops such as cocoa, coffee, sugar, sisal, groundnuts and so on, and in
particular when the producers are peasant small holders, they are natural victims of the
predatory state that we have analyzed. Our general equilibrium model also simultaneously
accounts for the induced bias in favor of urban industry and capital, as well as for the
diversion of the rents to the ruling elite, popularly known as the WaBenzi, the Mercedes-
Benz tribe, in much of Africa.
The "exceptions which prove the rule" are also interesting to note, the Ivory Coast
and Kenya. In both these states an indigenous planter class was an important part of the
independence movement that took over power. Felix Houphouet-Boigny, in fact, was co-
founder and president of the Syndicat Agricole Africain, an organization devoted to the
interests of indigenous planters, many of whom were from his tribe, the Baoul6.9 It is
therefore not surprising that in these cases the independent African state has done well by
permitting export agriculture to flourish, and allowing foreign participation. The benefits
of development can still be channelled toward the ruling elite, in these cases, but in a more
"efficient" or "rational" manner from the standpoint of the functioning of the system as a
whole.
The work4i Robert Bates (1972, 1983) has provided excellent analysis and
documentation of the political economy logic of agricultural pricing policies in Africa in a
spirit that is entirely consistent, so far as I can see, with that of the approach taken here.
(iv) Latin Ameria
Latin America presents the greatest variation in economic and political experience in
the Third World, not only because of diversity in resource base and social structure, but
33


because of its longer history of independence. Discussions of this experience have tended
to identify three broad phases or stages in the development of most of the countries of the
region. These are (i) An "oligarchic" phase of domination by a landowning elite, with an
economic orientation geared to the export of land-intensive primary products to the world
market. (ii) "Populism", a regime in which a charismatic leader such as Peron in
Argentina or Vargas in Brazil adopts more nationalistic economic policies, stressing
industrialization and import substitution, restrictive measures against the former
"oligarchs", redistribution in favor of the "popular classes" and their incorporation into the
political arena. (iii) "Bureaucratic-Authoritarianism", a term coined by the Argentine
political scientist Guillermo O'Donnell, in which there is an alliance between the upper
echelons of the military and civilian bureaucracy, foreign capital in the shape of
multinational corporations and "advanced" sectors of domestic industry. This type of
regime attempts to follow "liberal" economic policies in the macro economic sphere, though
it is concerned with the continuation and indeed the further promotion to "deeper" levels of
import substituting industrialization. Politically it is repressive and "exclusionary" towards
mass participation, since this is regarded as disruptive of orderly progress.10
Again, it seems that our models are well adapted to embody the features of each of
these different politico-economic "regimes". The technocratic bias and orientation of the
bureaucracy is consistent with our "budget-maximizing" version of the autonomous state.
The alliance between the bureaucracy and foreign and domestic capital emerges clearly in
our Heckscher-Ohlin and "Australian" models. This last model is also able to capture the
relationships between different interest groups - the landowners, workers, "advanced"
industry as represented by the capital-intensive manufacturing sector as distinct from labor-
intensive industry, and of course the state itself. The model could also be adapted to handle
differentiation within the primary sector, between large-scale land-intensive production of
livestock say and subsistence production in a labor-intensive peasant sector. "Dualistic"
societies such as Peru and Bolivia could be analyzed in corresponding terms.
34


(v) The Far Eastern NICs
The four Far Eastern NICs -- Korea, Taiwan, Singapore and Hong Kong have
clearly been the star performers in the development field over the last two decades or more.
It is therefore a question of particular importance as to what, if anything, the New Political
Economy can contribute towards an understanding of the reasons for their success. In this
connection it is not enough simply to point out that they have been just about the only
group of LDCs to have made a systematic and sustained commitment to "outward
orientation" in their economic policies. In fact the crucial political economy question is
precisely why this is so.
Certainly the major theme of the present paper, the "relative autonomy" of the state,
continues to hold in this case. By comparison with say India, or even Brazil, the state and
its economic policy apparatus has been "insulated" from the pressures of lobbies and
special interests in all four cases - military dictatorships in two, a dominant-party state in
another and British "guardians" in the case of Hong Kong. Thus the subsidies, transfers,
regulations and bureaucratic proliferation that have shackled the Indian entrepreneurs have
either been absent or channelled towards export performance. Except in the case of Hong
Kong this has certainly not meant laing faim, but it has meant the ability of the state to
pursue a sustained strategy of export-led growth.1I
But if Korean and KMT Chinese generals have succeeded because of the autonomy
of the states that they have set up why not the Latin American juntas or the legion of
African soldiers ranging in rank from field marshal to master sergeant that have taken over
control of their societies? In the case of the African countries one could perhaps say that
the levels of physical and social infrastructure are as yet inadequate for a policy of growth
based on labor-intensive manufactured exports, and that the temptation to squeeze the
natural resource-based export sectors is too strong. In Latin America the infrastructure is
available in many cases but the military is itself too caught up in the complex antagonisms
of civil society, which has a richer texture than in the Far Eastern cases, to follow a
35


sustained path of export orientation. Chile is close to becoming the "exception that proves
the rule" in this regard since the long period in which the Pincochet regime has been abie to
function has enabled it to eventually embark on a successful economic course. It is very
much to be hoped that the imminent restoration of democracy will not cause a setback in the
development of the economy.
1    The flavor of the New Political Economy research is perhaps best conveyed by the volumes of
readings edited by Buchanan, Tollison and Tullock (1980), Collander (1984) and Stigler (1988).
Analytical surveys of essential issues and results are provided by Bhagwati (1982), Srinivasan (1985)
and WcHisz and Findlay (1988).
2     See her Introduction to Evans. Rueschmeyer and Skocpol, all. (1985).
3    Discussions of the autonomy of the state from the Marxist perspective can be found in Miliband
(1977) and Elster (1985), while Anderson (1974) is the most impressive application of the Marxist
approach in a specific historical context, the "absolutist" states of early modern Europe. A
stimulating and original conceptual analysis of the state is de Jasny (1985).
4     The subsequent discussion draws on Badie and Birnbaum (1983) and Poggi (1978).
5    The model presented here is a significant extension over an earlier version contained in Findlay and
Wilson (1987), since the tax rate is now endogenous, with the labor supply an increasing function of
the after-tax wage insteadof being perfectly inelastic. The model draws on the insights into the
"productive" character of the state contained in North (1981), chapter 3. on "A Neoclassical Theory of
the State" and into its "predatory" aspect by Brennan and Buchanan (1980). The predatory nature of
the state is also stressed in Lal (1985) and Tilly (1985). None of these authors however have
attempted to embody their ideas in a formal general equilibrium model, even a very simple one such
as is given here.
6    On modern Argentine economic history see the classic study of Diaz Alejandro (1970). A convenient
summary of political developments in relation to the economic background is provided in chapter 3
of Skidmore and Smith (1984). The present effort at attempting to model this historical experience
is also indebted to Lal (1986).
7     See Myrdal (1968). For a brief but incisive evaluation of Indian economic performance and policy
see also Bhagwati (1987).
8    For a penetrating summary of African experience with respect to marketing boards see Bauer (1987).
9     See the chapter on the Ivory Coast in Dunn, ed. (1978).
10 See O'Donnell (1979). Collier, ed. (1979) and Evans (1979) for analyses of the role of the state in
Latin American development.
11   See Findlay (1988) and references cited therein on the political economy of export-oriented growth.
36


BibliograshU
Anderson, P. Lineages of the Absolutist State, New Left Books, 1974.
Badie, B. and P. Birnbaum The Sociology of the State, University of Chicago
Press, 1983.
Bardhan, P.K, The Political Economy of Development in India, Blackwell,
1984.
Bates, R.H. Markets and the State In Tropical Africa, University of California
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Essays in the Political Economy of Rural Africa, University of
California Press, 1983.
Bauer, P.T. "Marketing Boards" in J. Eatwell =LL (eds.) The New Palgrave: A
Dictionary of Economics, Macmillian, 1987.
Baumol, W.J. Welfare Economics and the Theory of the State, Harvard
University Press, 1952.
Bhagwati, J.N. "Directly Unproductive, Profit Seeking (DUP) Activities" Journal of
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"Indian Economic Performance and Policy Design", Thakurdas Memorial
Lecture, Indian Institute of Bankers, 1987.
Brennan, G. and J. Buchanan The Power to Tax, Cambridge University Press, 1980.
Buchanan, J.M., R.D. Tollison and G. Tullock, (eds.) Toward A Theory of the
Rent-Seeking Society, Texas A & M University Press, 1980.
Clapham, C. Third World Politics, University of Wisconsin Press, 1985.
Collander, D. (ed.) Neoclassical Political Economy, Ballinger, 1984.
Collier, D. (ed.) The New Authoritarianism in Latin America, Princeton
University Press, 1979.
37


Diaz Alejandro, C.F. Essays on the Economic History of the Argentine
Republic, Yale Unversity Press, 1970.
Dunn, J. (ed.) West African States, Cambridge University Press, 1978.
Elster, J. Making Sense of Marx, Cambridge University Press, 1985.
Evans, P.B. Dependent Development, Princeton University Press, 1979.
, D. Rueschmeyer and T. Skocpol (eds.) Bringing The State Back In,
Cambridge University Press, 1985.
Findlay, R. "Trade, Development and the State" in G. Ranis and T.P. Schultz (eds.) The
State of Development Economics, Blackwell, 1988.
and S. Wellisz "Endogenous Tariffs, the Poitical Economy of Trade
Restrictions and Welfare" in J. Bhagwati (ed.) Import Competition and
Response, University of Chicago Press, 1982.
and S. Wellisz "The Political Economy of Trade Restrictions" Kyklos, vol.
36, pp. 469-481, 1983.
and J.D. Wilson "The Political Economy of Leviathan" in A.Razin and E.
Sadka (eds.) Economic Policy in Theory and Practice, Macmillan, 19.7.
Gruen, F. and W.M. Corden "A Tariff that Worsens the Terms of Trade" in I.A.
McDougall and R.H. Snape (eds.) Studies in International Economics,
North-Holland, 1970.
Jasay, A. de The State, Blackwell, 1985.
Keyder, C. State and Class in Turkey, Verso, 1987.
Krueger, A.O. "The Political Economy of the Rent-"eeking Society", American
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"Growth, Factor Market Distortions and Patterns of Trade Among Many
Countries", Princeton Ctudies in International Finance, No. 40, 1977.
Lal, D. "The Political Economy of the Prtdatory State" mimeo, 1985.
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"The Political Economy of Industrialization in Primary Product Exporting
Countries" mimeo, 1986.
Macpherson, C.B. The Political Theory of Possessive Individualism, Oxford
University Press, 1962.
Mayer, W. "Endogenous Tariff Formation" American Economic Review, December
1984.
Miliband, R. Marxism and Politics, Oxford University Press, 1977.
Myrdal, G. Asian Drama, Pantheon, 1968.
Niskanen, W. Bureaucracy and Representative Government, Aldine, 1971.
North, D. Structure and Change in Economic History, Norton, 1981.
O'Donnell, G. Modernization and Bureaucratic Authoritarianism, University of
California Press, 1979.
Parkinson C.N. Parkinson's Law, John Murray, 1958.
Poggi, G. The Development of the Modern State, Stanford University Press,
1978.
Raeff, M. The Well-Ordered Police State, Yale University Press, 1983.
Skidmore, T. and P.M. Smith Modern Latin America, Oxford University Press,
1984.
Srinivasan, T.N. "Neoclassical Political Economy, the State and Economic Developmene
Asian Development Review, vol. 3, no. 2, 1985.
Stigler, G. (ed.) Cflcago Studies in Political Economy, University of Chicago
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Tilly, C. "War Making and State Making as Organized Crime" in Evans =A (eds.),
1985.
Wellisz, S. and R. Findlay "The State and the Invisible Hand" World Bank Research
Observer, January 1988.
39


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PPR Working Paper Series
Contact
IA                          Author                 Da          for paper
WPS266 Policy Changes that Encourage  Mansoor Dailami      August 1989    M. Raggambi
Private Business Investment in                                    61696
Colombia
WPS267 Issues in Income Tax Reform in  Cheryl W. Gray      August 1989    N. Campbell
Developing Countries                                              33769
WPS268 Shortcomings in the Market for  John Wakeman-Linn   September 1989  S. King-Watson
Developing Country Debt                                           33730
WPS269 Women in Development: Issues   Women in Development  August 1'789  J. Lai
for Economic and Sector Analysis  Division                        33753
WPS270 Fuelwood Stumpage: Financing   Keith Openshaw       September 1989  J. Mullan
Renewable Energy for the     Charles Feinstein                    33250
World's Other Half
WPS271 The Industrial Labor Market and  Katherine Terrell
Economic Performance in      Jan Svejnar
Senegal: A Study of Enterprise
Ownership, Export Orientation, and
Government Regulation
WPS272 Women's Changing Participation  T. Paul Schultz
in the Labor Force: A World Perspective
WPS273 Population, Health, and Nutrition:  Population and Human  September 1989  S. Ainsworth
FY88 Annual Sector Review    Resources Department                 31091
WPS274 The Demography of Zaire:       Miriam Schneidman
Review of Trends in Mortality and
Fertility
WPS275 Revised Estimates and          Fred Arnold          August 1989    S. Ainsworth
Projections of International                                      31091
Migration, 1980-2000
WPS276 Improving Rural Wages in India  Shahidur R. Khandker  August 1989  B. Smith
35108
WPS277 The Effect of Formal Credit on  Shahidur R. Khandker  August 1989  B. Smith
Output and Employment in Rural  Hans P. Binswanger                35108
India
WPS278 Inflation and the Company Tax  Anand Rajaram        September 1989  A. Bhalla
Base Methods to Minimize                                          60359
Inflation-induced Distortions
WPS279 What Determines the Rate of    Paul M. Romer        September 1989  R. Luz
Growth and Technological Change                                   61760


PPR Working Paper Series
Contact
IWA                           Au[b[r                 Dat          for paler
WPS280 Adjustment Policies in East Asia  Bela Balassa       September 1989  N. Campbell
33769
WPS281 Tariff Policy and Taxation in  Bela Balassa          September 1989  N. Campbell
Developing Countries                                              33769
WPS282 EMENA Manufactured Exports     Bela Balassa          September 1989  N. Campbell
and EEC Trade Policy                                              33769
WPS283 Experiences of Financial Distress  Tipsuda Sundaravej
in Thailand                   Prasarn Trairatvorakul
WPS284 The Role of Groups and Credit  Gershon Feder         October 1989   C. Spooner
Cooperatives in Rural Lending  Monika Huppi                       30469
WPS285 A Multimarket Model for        Jeffrey S. Hammer     October 1989   P. Planer
Turkish Agriculture           Alexandra G. Tan                    30476
WPS286 Poverty and Undernutrition in  Martin Ravallion      September 1989  C. Spooner
Indonesia During the 1980s   Monika Huppi                         30464
WPS287 The Consistency of Government  Thanos Catsambas      October 1989   M. Ruminski
Deficits with Macroeconomic   Miria Pigato                        34349
Adjustment: An Application to
Kenya and Ghana
WPS288 School Effects and Costs for   Emmanuel Jimenez      October 1989   C. Cristobal
Private and Public Schools in  Marlaine E. Lockheed               33640
the Dominican Republic        Eduardo Luna
Vicente Paqueo
WPS289 Inflation and Seigniorage in   Miguel A. Kiguel      October 1989   R. Luz
Argentina                     Pablo Andr6s Neumeyer               61588
WPS290 Risk-Adjusted Rates of Return  Avinash Dixit         November 1989  C. Spooner
for Project Appraisal         Amy Wiilliamson                     30464
WPS291 How Can Indonesia Maintain     Sadiq Ahmed           October 1989   M. Colinet
Creditworthiness and Noninflationary Ajay Chhibber                33490
Growth?
WPS292 Is the New Political Economy   Ronald Findlay        November 1989  R. Luz
Relevant to Developing Countries?                                 61588
WPS293 Central Bank Losses: Origins,  Mario 0. Teijeiro     October 1989   R. Luz
Conceptual Issues, and Measurement                                61588
Problems
WPS294 Irreversibility, Uncertainty, and  Robert S. Pindyck  October 1989  N. Carolan
Investment                                                        61737