State and Market in Development: Synergy or Rivalry?

By Louis Putterman; Dietrich Rueschemeyer | Go to book overview

5
A Theory of Government
Intervention in Late Industrialization

ALICE H. AMSDEN

The Inability to Industrialize When Markets
Are Working, Not “Failing”: An Overview

The plot continues to thicken over the role of the state in late industrialization, where lateness refers to countries whose leading enterprises do not enjoy (at least not at first) the competitive asset of pioneering technology. Pioneering technology was the crux of the competitiveness of leading enterprises in the first and second Industrial Revolutions and a principal reason why they could prosper with less government intervention than has been necessary in the twentieth century. Late industrializers must grow exclusively by borrowing technology. Denied a competitive advantage from new products and processes, they initially have only their low wages to rely on in wresting market share from countries with higher productivity.1 Low wages, however, are a necessary but insufficient condition for industrial development.

As late industrialization has unfolded, it has become clear from observing its “leading sector”—cotton textiles—that low wages are no match for the higher productivity of more industrialized countries. If one looks at South Korea and Taiwan in the 1960s, two of the lowest-wage lateindustrializing countries, with unusually good educational systems and modem infrastructure thanks to foreign aid, and if one studies their cotton spinning and weaving industry, then what is apparent is that even after South Korea and Taiwan borrowed foreign technology and repeatedly devalued their real exchange rate to appease US aid advisors, their leading enterprises in cotton textiles still could not compete on the basis of low wages against the more productive cotton textile industry of Japan. Under these circumstances, and a fortiori in industries requiring greater skills and capital investments, governments have to intervene and deliberately distort prices to stimulate investment and trade. Otherwise industrialization won’t germinate.

Needless to say, the modern view of government intervention in late industrialization originated in the ideas of Alexander Gerschenkron.2 But

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