Accumulation Models and State Forms in Underdeveloped Capitalism_Vivek Chibber

7/31/2019 Accumulation Models and State Forms in Underdeveloped Capitalism_Vivek Chibber

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Accumulation Models and State Forms in Underdeveloped Capitalism

Vivek Chibber

Sociology DepartmentNew York University

269 Mercer Street,Room 410

New York, NY10003

[email protected]

Paper for conference on Politics and the Varieties of Capitalism, Berlin, Oct. 31-

Nov. 2, 2003. Please do not quote without permission.


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The basic insight of the Varieties of Capitalism approach (henceforth VOCA) is thatthe institutional organization of capitalist economies can vary greatly, and that firms

response to competitive pressures differ on this basis of this variation. Different varieties

of capitalism thus elicit quite distinct survival strategies from firms, which, in turn,aggregate into macro-level patterns. What this amounts to is an argument that modal

types of capitalist markets are associated with corresponding kinds of economic strategiesand policy styles. This line of analysis differs from two rival approaches which enjoy

some currency today. On one side, it warns against the hyper-structuralism of neo-liberals, who employ a one size fits all approach to economic policy. VOCA avers thatthere is no single policy package which conduces to economic competitiveness. Policy

prescriptions have to be crafted to the particular ensemble of institutions whichcharacterize the economy in question, because, depending on the organization, the same

package of policies might generate very different responses by firms. On the other hand,VOCA also stands apart from recent constructivist approaches, which sometimes veer

toward the argument that the range of options open to firms at any given conjuncture isvery wide, enough so to neutralize the notion of structural constraints. VOCA argues thatchoices are certainly available, but within discernable limits structures matter.

The idea, then, is that the varied economic strategies found across capitalismsresult from the different kinds of incentive systems that the institutional arrangements setup for firms. But is it also possible to establish that the organization of capitalist

production also can be associated with corresponding political arrangements? Inparticular, is there a correspondence between varieties of capitalism and forms of the

state? VOCA would not be the first approach to hazard such a claim. It was central tothe ambitions of the structuralist state theory of the 1970s, and has remained so amongstructuralisms various contemporary avatars. Perhaps its most famous current example

is the work being done within the ambit of the French Regulation school and its NorthAmerican counterpart, the Social Structure of Accumulation approach. Both make the

claim that there is an elective affinity between the reigning economic organization ofproduction and its social and political integument. As economic organization changesover time, it creates pressures for appropriate transformations in the political

superstructure. In state theory proper, Bob Jessop and some theorists coming out of theGerman state derivationist school have spent considerable energy arguing that distinct

accumulation models select for corresponding state-forms. It would not be stretching thepoint to say that what binds these approaches is the notion that varieties of capitalism,interpreted appropriately, are associated with their own kinds of state.

So the political ambitions of VOCA are not unprecedented. Indeed, indeclaring them, it joins a quite thriving line of inquiry. But to achieve success, it must

also avoid some of the shortcomings which have haunted its forerunners. Chief amongthem is the problem of establishing the relevant causal mechanisms which linkaccumulation strategies to state forms. While the attractiveness of the basic theoretical

claims are easy to see, the fact is that, across the board, the arguments regarding stateforms have not spent a great deal of effort on hard empirics. The most common

stratagem has been a kind of hand-waving exercise, in which some causal process ispointed to which might link states to economic structures but the claim is often


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gestural; at worst, as in the case of Poulatzas work, the relation between the two isasserted in an openly functionalist style, simply setting aside the elucidation of

mechanisms.I believe that the ambition to establish links between economic dynamics and

forms of state can be realized, and I hope to demonstrate that in this paper. The argument

fits comfortably within the VOCA frame, though its basic inspiration is Marxian in originand substance. I will show that indeed, there are causal processes linking economic

dynamics (choose your jargon -- accumulation models, production regimes, regimes ofaccumulation) to variations in state form. Not surprisingly, the processes reside in the

decisions of capitalists (firms) thus the compatibility of my argument with VOCA. Butin arguing that the institutional structure of the state was constrained and shaped bydecisions of capitalists, I also make an argument that sits firmly in the tradition of the

structuralist state theory developed by neo-Marxists. It is in this respect that I inject aMarxian flavor to the VOCA agenda.

The paper has two aspects which are somewhat unusual in the literature onemethodological and one substantive. Methodologically, it cashes out its claims through a

detailed historical analysis of the relevant cases, using mainly archival sources. Most ofthe work done in VOCA abjures historical analysis, and that which does undertake itrarely relies on original sources. But if the problem of establishing the appropriate causal

mechanisms is to be overcome, it hard to imagine a better stratagem. Careful historicalresearch is the best way to show the process through which interests are aggregated andthen translated, through collective action, to changes in state structure. Archival and

manuscript sources, in particular, are indispensable for uncovering the intentions of therelevant actors, within the state or without.

Substantively, the paper is unusual because the state form which it takes up is notthe one which typically inhabits discussions in VOCA, or any of the other frameworksmentioned above. Research inspired by these approaches has focused almost exclusively

on states in the advanced capitalist world; hence, the analyses are, almost withoutexception, of the welfare state, social democracy, and the like. I focus, instead, on that

othergreat capitalist state form of the twentieth century, viz. the developmental state.There is no reason for VOCA to be restricted to the analysis of social democracy, oradvanced industrial economies more generally. That it is so is testimony to two things:

the evacuation from developmental studies of much of the theoretical ambition that wasvisible in the 1970s, so that the field is now taken over by policy-wonk; and secondly, an

unfortunate narrowness in what we know as state theory, which, over the years, hascomfortably settled upon an ambit that is restricted to Europe and the United States. Ofcourse, there is no warrant for either of these states of affairs. And I hope to show that

both camps development specialists and VOCA partisans stand to benefit frombringing the developmental state into the frameworks purview.

The Setting

In the second half of the twentieth century, many developing countries launched andsustained ambitious projects of rapid industrialization. By the end of the century, studies

of these projects pointed to two facts about them which tended to stand out: first, that thedevelopmental strategy adopted was one in which the state played a central role in


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fostering industrial transformation; and second, that despite the constancy of stateintervention in industry, its actual success in promoting development turned out to be

extremely uneven. While in some countries, most notably South Korea and Taiwan, stateefforts at promoting industrialization were a stunning success, in most other cases such

strategies led to results ranging from mixed to disastrous. For students of development,

this variation in outcomes has become an enticing puzzle. Why were a small number ofstates successful in initiating a traversal to dynamic industrial growth and efficiency,

while others, many of which frequently tried very similar policies, failed?The answer to which many analysts are attracted focuses on the relations between the

state and private firms. Alice Amsden has argued forcefully that while the earliergeneration of late developers relied heavily on infant industry protection, the post-warattempts at rapid industrialization were built on the ubiquitous subsidy, which included

protectionplus financial incentives to firms (Amsden 1989: 143-44). The pervasivesubsidization of enterprises was justified in a variety of ways, but core idea was that, in a

world in which markets were already dominated by firms from advanced industrialcountries, and where minimum scales of operation required outlays which were typically

beyond the reach of start-up undertakings in poor countries, the state would have to playan active role in nurturing domestic capital in the initial years of industrialization. Thisrole for the state came with the expectation that, with the subsidies in hand, firms would

undertake the kinds of investments which could put the domestic economy on a path ofhigh-speed growth.

But it soon emerged that firms quite often did not react in the fashion state planners

had hoped. In many countries, the easy access to subsidies simply made domesticcapitalists ignore the need to upgrade equipment and innovate, choosing to make easy

profits from protected markets and cheap finance (Krueger 1990; Krueger 1993). The quite spectacular exception to this trend has been the East Asian Newly IndustrializingCountries (hereafter NICs), in which state subsidization has in fact had the virtuous

effects that economic planners had intended. Instead of the one-way relation witnessed inSouth Asia and Latin America, the relation between the state and firms in the East Asian

NICs has been one of reciprocity subsidies in exchange for high performance.Alice Amsden has ably summed up the phenomenon, as well as its analytical

significance:

All governments know that subsidies are most effectivewhen they are based on performance standards.

Nevertheless state power to impose such standards, andbureaucratic capability to implement them, vary fromcountry to country The state in Korea, Japan, and

Taiwan has been more effective than other late-industrializing countries because it has had the power to

discipline big business.1Amsdens verdict has been echoed in a large proportion of the recent research on the

developmental state. A host of studies have now documented the particular means

employed by Korea and Taiwan to coax, cajole, and persuade local firms to undertake thenecessary investments and then perform up to international standards (Amsden 1989;

1Amsden, Third World Industrialization: Global Fordism or a New Model?, 23-24 for first part of

quote; ibid., p. 16 for second part, emphasis added.


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Haggard 1990; Wade 1990; Woo 1993) , and compared this to the failure of other statesto do the same (see Gereffi and Wyman 1990; Anglade and Fortin 1990; Evans 1995).

Indeed, the past decade has seen a virtual avalanche of studies on the components of statecapacity in the miracle economies of East Asia in this sense, the state has quite

magnificently been brought back in in development studies (see Evans, Ruechemeyer,

and Skocpol, 1985).The emerging consensus can be summed up as follows: the East Asian states

success in fostering development was at least in part because of their ability to disciplinecapital, and that this was in turn dependent on state institutional capacity (Schneider

1998; Cheng, Haggard, and Kang 1998; Bardhan 2000). Despite this recognition of theimportance of the state for understanding post-war patters of development, it cannot yetbe said that we have come anywhere near a genuine sociology of the developmental state.

The energy expended on describing the institutional mechanisms through which stateswere able to impose discipline has not been matched by a comparable effort toward the

next, obvious, question, which of central analytical importance: why did some countriesfind themselves in possession of states with adequate capacity, while others did not? In

other words, if better success at industrial policy depends on having more capable stateapparatuses, how do we explain the fact that some states were able to install suchapparatuses, while others were not (Bardhan 1991: 108-109; Kang 1995: 555)? It is to

this question that this paper is devoted.

The Argument

A genuine sociology of the developmental state needs to explain where suchstates come from. In this paper, I offer an argument toward this end. My argument rests

on two nested claims: first, that that the ability of political elites to build state capacity forindustrial policy in the post-war period was heavily conditioned by their autonomy frombusiness classes. I will argue that state-building for industrial policy is a very tricky

business, because, under particular conditions, capitalists have good reason to oppose it.And where they do oppose it, it greatly reduces the prospects for building a state with the

requisite institutions. On the other hand, where they support it (or are too structurallyweak to matter), political elites can gather the autonomy to build such a state. So the firstcomponent of the argument is that in the state-building project, a critical mediating factor

is the orientation of the capitalist class.Second, I propose a theory of the conditions under which capitalists are likely to

oppose, or support, state building. I argue that the central condition is the accumulationmodel adopted by policy-makers. In the post-war world, two such models dominated thepolicy agenda: import-substituting industrialization (hereafter ISI) and export-led

industrialization (ELI). That the two models have carry different economic incentives forfirms has been widely noted (World Bank 1993; Cypher and Dietz 1997); what is less

widely appreciated is that these models also bring with them contrasting politicalincentives for firms with regard to the state-building project. Whereas ELI makes itrational for firms to accommodate, and even ally with, a developmental state, there is

reason to expect that ISI will induce them to resist the agenda to build such a state. Thefirst claim is about what kind of state/class relations were necessary for the construction

of developmental states, while the second is about the conditions under which theappropriate nexus could be expected to emerge.


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The argument is illustrated by a detailed examination of two cases, Indiaand South Korea. Both countries started their development efforts soon after the Second

World War, making their experiences largely concurrent; both were at broadly similarlevels of industrial development at the start of their post-war trajectories, as shown in

Table 1; in both countries, the industrial sector was dominated by a small number of

Table 1: Share of Manufacturing and Allied Activities in GNP, India (1950) and

Korea (1960-62)

Sector Share of GNP

India (1950)

Share of GNP

Korea 1960-62

Manufacturing andconstruction

15.4% 17.1%

Utilities a 1.1%Mining and Quarrying 0.7% 2.0%

Total 18.1% 20.2%a: Included in the figure for Manufacturing

Sources : For India, Raymond Goldsmith, The Financial development of India, 1869-1977, (New Haven:Yale University Press, 1977), Table 3.2. For Korea, Edward Mason et al, The Economic and SocialModernization of the Republic of Korea, (Cambridge: Harvard University Press, 1980), Table 1.3.

business houses, which accounted for a disproportionate share of output and investment(Woo 1993: 171; Bardhan 1984: Table 20); in both cases, the policy design was heavily

interventionist, relying on extensive government intervention in, and regulation of, theprivate sector; and in each case, industrial policy was directed by the central government,and nominally concentrated in a few key ministries and agencies. Thus, in both cases,

industrial policy was crafted with the needs and the proclivities of capitalist firms inmind. In this respect, the two cases embodied the classic state-led capitalist developmentstrategy that has occupied the attention of recent debates.

However, while capitalist planning was central to both endeavors, they divergedsharply in their success: where the Korean state is widely acknowledged to have been a

spectacular success in its strategy, its Indian counterpart is now pointed to as the mostdramatic case of a failed developmental state in the post-war period (Herring 1999).The Korean state was able to impose discipline on the recipients of its largesse -- indeed,

it is seen as the archetypal disciplinary sate whereas Indian planners were famous fortheir incapacity in this regard. This similarity in basic ambitions, contrasted against the

stark difference in capacity to fulfill the ambitions, has attracted the attention of a numberof scholars (Evans 1995; Dutt 1994; Sridharan 1993; Chang 1993). In keeping with thegeneral focus of the literature, however, the issue of why the Koreans were able to install

a developmental state, and why their Indian counterparts were not, has not been

addressed at any length.I will argue that the two cases exemplify the dynamics that I have submitted as

central to the building of developmental states. Political elites in both countries wereaware that the success of industrial policy depended primarily on the capacity of the state

apparatus to formulate and implement policy as required; further, political elites in bothcountries were committed to building such states. But in India, this project was scuttled

by the business class, through a massive campaign launched immediately afterindependence. In Korea, however, the state-building agenda was aided by the fact that


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political elites were able to harness leading industrialists to their project, thus escapingthe onslaught to which the Indians were exposed. This difference in capitalist classes

reaction was in turn, I shall argue, generated by the accumulation models which framedthe two countries trajectories: whereas India embarked on a path of ISI, Koreas state-

building program was coeval with a switch to ELI. The different orientations of the

business classes were thus generated by the differing models of development. But beforespelling out this argument in more detail, let us clarify what is meant, in this paper, by

state capacity.

The Elements of State Capacity:For the analysis of state-building, or the building of state capacity, to even get off

the ground, we first need an identification of what the concept denotes. Capacity is an

instrumental good it is always capacity toward a certain end, or capacity for something(Weiss 1998). In this case, our interest is in the ability of the state to accelerate industrial

transformation by disciplining capital that is, by ensuring that firms, in exchange for thesubsidies meted out to them, reciprocate by meeting competitive standards of

performance. In the rest of this paper, I shall refer to such development policy asdisciplinary planning, or disciplinary industrial policy, to distinguish it fromplanning, or industrial policy, without such capacity.

What are the institutions which can enhance the states ability to achieve this end?The existing literature has stressed two basic imperatives. First, if planners are to holdfirms to certain performance standards, they need, at the very least, to have the ability to

communicate these standards to them, and have the means to monitor firms subsequentactions (Schneider 1998; Aoki et al 1997; Evans 1995). One mechanism which several

scholars have pointed to as a means toward this end is the trade or industry association.Such associations have served as a critical conduit between state policy agencies andindividual firms, in several developing countries; in East Asia, as well as in some

countries in Latin America, they were instrumental in collecting firm-level informationfor planners, which in turn was critical to the formation of realistic performance targets

(Evans 1995). Associations were actually given, in corporatist fashion, the right tobargain with the state on behalf of individual firms; in turn, they had the responsibility topressure the latter to conform to economic agreements (Wade 1990; Fields 1995).

Further, sectoral associations were used to arrange collective action, by organizing firmsinto cartels or more informally, through coordinating investment decisions (Noble 1999;

Park 1987). Institutions of this sort, which enabled states to communicate and bargainwith targeted firms, greatly enhanced the formers institutional capacity.

Simply being able to communicate with economic actors cannot, however, is not

enough if states are to extract performance in a growth-enhancing fashion. Policy makersmust also be able to coordinate flows of information within the state both from the

disparate sectoral committees, and back to them to construct a policy frame that iscoherent and consistent. In the absence of some coordinating mechanism, it is easy foradministrative bodies to degenerate into independent fiefdoms; in such an eventuality, the

positive impact of sectoral bodies of the kind just outlined is greatly reduced. Much ofthe recent literature therefore points to the importance of installing a nodal agency, or

pilot agency, which is given the authority to coordinate the functioning of the economicagencies within the state (Schneider 1991; Woo 1993; Weiss 1998; Maxfield and


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Schneider 1995). Korea is the exemplar in this regard, with the centralization of power inthe Economic Planning Board, which acted as the nodal agency for industrial policy for a

significant period (Kuznets 1990; Choue 1988; Amsden 1989); the historical model forthis role, however, was the legendary MITI in Japan, which was brought to center stage

in the West in Chalmers Johnsons well-known study (Johnson 1982). Together, these

two institutional mechanisms increase the states capacity to carry out two functionscritical for disciplinary development policy: monitoring targeted firms, and ensuring that

relevant information is processed into coherent and effective policy.The rest of the paper is divided into two main parts. First, I explore and defend in

more detail the theoretical claims being made: that the installation of a developmentalstate hinges on the reactions of the business class, and that this reaction is itselfpredicated on the accumulation model that is adopted. Second, I present an analysis of

the two cases, showing how the state-building agenda was mediated by the autonomy ofpolitical elites from their capitalist classes. In so doing, I hope to not only offer an

explanation for why two well-known cases diverged in their outcomes, but moreimportantly, I hope to develop a framework which can be extended to the study of other

developmental states.

Capitalist Class Interests and the Developmental State

The Two Sides of Industrial Policy:Among aspiring developmental states in the post-war world there was a basic

consensus around one basic point: that development would have to rest on a dynamicindustrial sector, and that this sector could not flourish without active assistance from the

state. Industrial policy in these countries therefore naturally took the form of an allianceof sorts between political elites and bureaucrats on one side, and local firms on the other;in some cases the alliance came to include foreign capital as well (Evans 1979), but the

more basic point is that it was simply taken as given that development would not be leftto the vagaries of market outcomes alone. Industrialization was, in this sense, a joint

project between the state and private capital, as Peter Evans has recently noted (Evans1995).

But, as suggested in the preceding section, the very act of aiding industry by

subsidizing it in various ways brings with it the imperative of ensuring that funds do notfritter away the funds on unproductive activities, or those with low social returns. The

need for discipline arises from the fact that, while the state can assist local industry andoffer it incentives to invest in sectors deemed necessary for rapid development, ultimatecontrol over investment remains in private hands. How funds are used, whether they are

in fact invested in targeted sectors, and just as importantly, how efficiently they areutilized, is at the discretion of individual capitalists (Milor 1994). And there is no reason

to assume that the latter will in fact abide by the directives of policy, or the agreementsreached with state planning agencies.2 The state therefore has to take it upon itself to

2This was clearly recognized by advocates of industrial policy in the developing world. It was common,

therefore, for them to advocate that industries so targeted also be subjected to government regulation of

various sorts; in the case of tariffs, it was also recognized that they could turn into sops for domestic capital

if they became permanent, making it imperative that the state credibly withdraw it protection after a

stipulated period. For examples of such advice in the Indian case, see the recommendations of the National


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monitor firms in some way, and find means of holding them accountable, either throughmoral suasion, or through punitive measures.3

While the imposition of discipline might appear as a virtue to the state, thecapacityto actually impose it is not automatic. This requires the existence institutions

adequate to the task, and there is no reason to suppose that they will actually be available.

This would be true for any state, including those of developed industrial countries. Forexample, it has been argued that the British decision to opt for Keynesian demand

management instead of French-style industrial policy after World War II was driven bythe British states lacking the machinery for the task (Hall 1986; Zysman 1983). If such

dilemmas were not uncommon to the developed world, they were even more severe fordeveloping countries in the aftermath of the War; many of them were emerging from along period of colonial rule, in which the states that had been constructed were geared

toward extractive activities and political order, not industrial planning. The institutionsfor industrial policy, and especially those for monitoring and disciplining capital, had to

be built.This means that in the post-war world, the situation confronting state managers in

developing countries was this: that the commitment to subsidizing domestic capital wastaken as binding, while the ability to extract adequate performance from them waslimited, and its further acquisition dependent on building adequate state capacity. Now

consider that for domestic capitalists, the prospect of being confronted with a state thatwielded such power if the institution-building agenda came to fruition could not beviewed with equanimity. Even under the best of conditions, with a state run by elites that

were ideologically acceptable, not corrupt, and minimally efficient, the imposition ofdisciplinary industrial policy carried certain objectionable consequences. At the very

least, it meant that the government would take it as its prerogative to influence firmsinvestment decisions. This influence could be exerted through incentives, but it couldalso be coercive as in cases of state-imposed mergers in Korea, or arm-twisting

managers into expanding into particular sectors (Amsden 1989: 15-16; Song 1990: 102,145; Kang 1996: 130). Further, the states monitoring of firms meant having to deal with

an intrusive bureaucracy, and the there was no getting around the fact that the monitoringwas to ensure that firms complied with conditions which they may prefer to circumvent.

This means that, in examining the dynamics governing the construction of

developmental states, there is no reason to assume that the consensus aroundindustrialization need have carried over into its disciplinary components. Capitalists

certainly stood to benefit from a developmental state, insofar as the latter wouldaccelerate their growth in myriad ways. But its disciplinary component mean that theyalso faced the prospect, minimally, of untold irritations from the very same state, which,

if circumstances changed and a less agreeable political elite came to power, could evenbe used against them.4 This means that local business leaders could tilt against the state-

Planning Committee (Indian National Congress 1940) and by K.T. Shah, one of the moving spirits behind

planning in India (Shah 1948). For worries about tariffs, see the Report of the Fiscal Commission (1950).3

None of this is to deny that the development process is a kind of partnership, or joint project, between

the state and capitalists. Partnerships are often based on contractual agreements, and are subject to their

observation by the parties involved. The imposition of discipline on firms is tantamount to ensuring that

they abide by the terms on which the joint project was initiated.4

For a general discussion of business distrust of the state, see Vogel (1978). The distrust that industrialists

have of a developmental state should be seen as a variant of the more general distrust that Vogel describes.


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building project for quite rational reasons, opposing the initiative to install the institutionsthat would make disciplinary policy possible. What makes this especially significant, of

course, is that domestic capitalists are not just any constituency; because of their controlover investment and their wealth, they occupy a position of power and privilege enough

for their opposition to the state-building agenda to impose especially severe obstacles on

state managers. With such opposition, the end result could very well be a state whichdoled out subsidies, but lacked the ability to monitor and punish firms.

The issue then becomes: is it possible to identify the mechanisms which governwhich way the domestic business class would tilt toward the building of a

developmental state or against it? It is the argument of this paper that the orientation ofdomestic capitalists in developing countries was not random, and that it was cruciallyconditioned by the governing accumulation model. In the next section, I will present an

argument as to how the two dominant models in the post war period ISI and ELI differed, and how they generated different incentive structures for capitalists in relation to

the state-building project.

The Politics of Accumulationt Models:Recent arguments have stressed the fact that post-war industrialization among

late-developers was, in many ways, a joint project between states and capitalists. In thepreceding section, I argued at a fairly general level that the industrialization drive wasindeed a joint project, but I also suggested that there is no reason to presume that the

consensus extended to all of its aspects. More specifically, there is no reason to presumethat capitalists would embrace the disciplinary components of state-led development,

which means that they could very well oppose the move build state institutions adequateto this task. In this section I proceed to provide more concrete arguments about theconditions under which we should expect that industrialists would oppose building a

disciplinary state, and also those conditions under which they might support it.

The Incentive Structure of ISI:Why should import-substituting industrialization generate incentives to resist the

disciplinary side of the state-building project? There are two facts about ISI strategies

that are relevant here: the nature of their economic benefits to domestic firms, and thegeneral market conditions in which they are implemented.

At the core of ISI was the doctrine of infant industry protection, which aimed tonurture domestic business undertakings to ready them for the rigors of the world market(Irwin 1996; Waterbury 1999). This had two sides to it. On the one hand was protection

from foreign competition, through the erection of tariff barriers, quantitative restrictionson imports, and other such measures. These were intended to create a space for the

products of local capitalists, which would, it was felt, not otherwise survive long enoughto mature. The second side of infant-industry protection was the funneling of publicfunds to local firms often the same ones that enjoyed protection as subsidies,

incentives, credit, and the like (Cypher and Dietz 1997). This second component was notonly intended to assist firms in their investments and growth, although that was certainly

an important motivation. It was also driven by another conviction, viz. that the kinds ofinvestments which were required for development would not be taken up spontaneously


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by domestic firms. The latter were more prone to venture into sectors which offeredquick and high returns, like luxury consumer goods; but future development would

require investment in projects which, initially, would not render high yields and carriedgreater risks (see Ray 1998, Chapter 5). Private capital was to be drawn to these sectors

by the offer of considerable subsidies and safe markets.

But another consequence of this model was that it also typically generated amonopoly or oligopoly in the sectors targeted for growth. The first step toward this was,

of course, the insulation from international competition (Bhagawati 1988; Bhagwati andDesai 1970). But competition among domestic producers was also attenuated, because of

two factors. First, the small size of the market meant that it was easy for the first entrantto secure a dominant position. Since market and product diversification was still verynarrow, there was a direct benefit of being the first mover into new areas and establishing

market control. This would not be the case, of course, if each producer was very small, asin neoclassical models. But the fact about late developers is that firms are in fact quite

often very large, part of larger conglomerates, and can easily establish control over aconsiderable portion of the market (Leff 1978).5 A second route to monopoly or

oligopoly was that policy-makers themselves intentionally limited the number ofproducers in each sector, for fear of allowing over-investment and hence idle capacity. Ina developing country, with its severe constraints, planner often saw excess capacity as an

unconscionable waste of precious resources.These economic consequences of ISI have been recognized by development

theorists; what has not been adequately appreciated are itspolitical consequences,

particularly with regard to the project of building disciplinary developmental states. Theintention of political elites and economic planners in these countries was to offer local

industrialists safe profit-making opportunities, but to also regulate and monitor the flowof capital, to ensure it went into targeted areas and that it was used efficiently.Investment licenses and credit agreements were therefore typically granted with certain

conditions attached to them, which stipulated the sector in which investment was tooccur, the scale of operations, etc. The agreements were, to the policy agencies, a kind of

contract.But for the recipients of the largesse, there was ample reason to resist the terms of

these contracts. While state policy agencies granted subsidies to firms on the basis of a

development plan with particular priorities, business houses made their own investmentplans, based on their prognoses and their priorities which often did not coincide with

those of planners (Chandrasekhar [1994]; Ghosh 1974). Domestic industrialists rightlysaw ISI as a tremendous opportunity for growth and profits, because of the sectors beingliterally handed over to them free of international competition. But for this very reason,

they also regarded the disciplinary component of ISI as an unacceptable encumbrance; inorder to exploit their opportunities fully, firms would need maximum latitude to make

their own decisions as to which sectors they would expand into, where new investmentswould be made. The best way to use ISI was to encourage the states commitment tosubsidies, while insisting that private capital should have the maximum latitude in their

actual disposition. Again, this was all the more attractive because of the highlydiversified character of many business houses. Funds given by the state for one project

5The significance of the industrial group has been emphasized repeatedly by Alice Amsden in her work.

See Amsden (1989: Chapter 5; Amsden 1997).


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could easily be diverted to other, more attractive projects being taken up by an enterprisein the business group if the group could escape the states monitoring apparatus ( See

GOI 1967). Capitalists therefore had an interest supporting the subsidizing side of ISI,while strenuously opposing the states power to regulate and monitor the flow and

utilization of investment.

This has a direct bearing on business groups orientation toward the state-buildingproject. Since their preference is for the state to offer up its assistance, but without the

right, or the ability, to make demands on them, firms will have an incentive to oppose theproject of building a disciplinary planning apparatus. This is not to say that they will

oppose state intervention in the economy; after all, the offer of subsidies and protectioncan hardly be regarded an instance of laissez faire. The opposition will be to a particularkindof intervention, one which seeks to regulate the flow and disposition of investment.

The political consequences of ISI, therefore, are that capitalists will support the idea ofplanning as state subsidization of industry, but not the project of building the institutional

basis for a disciplinary planning regime. They will support building the means tomobilize and distribute funds to the private sector, but oppose the states moves to

monitor and regulate their use.The critical factor underlying this resistance to discipline is the attenuation ofcompetitive pressures in ISI. It may be wondered why firms would resent demands made

by the state to perform at competitive standards, which, in many respects, is certainly intheir interests. The reason is that, with the entry of international competitors blocked byprotectionist measures, and with internal competition muted owing to the small size of

the market, firms are under no systematic pressure to constantly upgrade their operations(Krueger 1993).6 With each influx of newly acquired credit, managers do not feel

compelled to increase the efficiency of existing undertakings, since there is no imminentthreat of losing market share. Instead, as long as their market positions are secure, thereis an incentive to enter new lines, new market niches, as first movers and secure a

dominant position. The states insistence on operating at certain warranted levels ofefficiency are thus resisted, in favor of diversifying their position into new, lucrative

fields (See Chandrashekhar 1994; Sheahan 1987: 86-93). 7 The way in which ISI thusgenerates a peculiar political incentive structure for firms can be better appreciated if weturn now to the political consequences of export- led industrialization.

The Incentive Structure of ELI:

Most developing countries in the aftermath of the Second World War resorted toISI as the nucleus of their development strategy (Waterbury 1999). But starting in thelate 1950s, and especially in the early 1960s, many countries began placing a greater

emphasis on exports in their economic policies; and in a very few cases, this push forexport promotion was carried further, so that exports came to occupy the strategic core of

6This is of course the most well-known criticism of ISI. Examples can be found in just about any

introductory textbook on development economics.7

Note that the claim being made is that firms lack a direct reason to be efficient, not that they actually have

an incentive to be inefficient . If they do not favor alternative lines for expansion, they may very well

choose to use the state subsidies as directed, and increase efficiency.


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the development policy. 8 This was the case most famously in Korea and Taiwan, whichare rightly considered the exemplars of an export-led path of industrialization (World

Bank 1993). It is important to note that the turn to ELI was not symptomatic of a broadercommitment to an open trade regime, as some earlier commentators suggested. The turn

to ELI was not tantamount to the adoption of free trade. Indeed, in Korea, imports

continued to be subject to strict controls, and the domestic market carefully protected(Luedde-Nuerath, 1986; Wade 1993). Nevertheless, exports grew at phenomenal rates in

the decades starting in the 1960s, until they accounted for a substantial part of thedomestic economy. Further, aside from the quantitative importance of exports, they

exercised a critical qualitative impact on the economy, as the regime used export successby firms as a condition for access to further subsidies (World Bank 1993; Kim andLeipziger 1993; Rhee, Ross-Larson, and Purcell 1984).

Unlike the case of ISI, where investment plans of local firms were shaped by theeasy opportunities of the domestic market, firms in ELI had to adapt to the rigors of

international competition. And from this difference in economic challenges came thedifference in political incentive structures. Recall that the resort to import controls and

protection across the developing world including Korea came because of theapprehension that competitors from more advanced economies would decimate localproducers. If local firms cold not be expected to withstand international competition at

home, they hardly stood a chance as exporters to the markets of the industrializedcountries. Indeed, the difficulty of entry and survival there would be even greater. First,they have to secure funds to make the make the minimum scales of investment

individually; but a more important obstacle was that these investment would have to be intechnologies with which the firms had no experience and training; and worse yet, any

given investment would typically require complementary investment by other firms,either upstream or downstream, if it was to bear fruit (Ray 1996: Chapter 5; Matsuyama1996).

In addition to these obstacles related to investment, there was also the overheadcost of establishing marketing and sales networks in countries where the firms had no

history of success (see Lall 1991; Gereffi 1996). Success thus involved overcoming thepaucity of funds, acquiring and mastering new technology, solving the problem ofinvestment coordination, and gathering the information and contacts needed for

marketing. Now, these are problems that are present in any capitalist market, whetherlocal or external. What made it pressing and forbidding for exporters, however, was that

these conditions had to be secured in a context of intense competition with producers whohad access to far greater funds, who not only had experience with new technology buthad in fact developedit, and who had a massive advantage in sales networks. This placed

severe pressure on exporting firms to not only solve the problems just outlined, but to doso rapidly, and on a continuing basis.

The severity of these conditions makes for a different kind of relation with thestate, as compared with ISI. First, state managers now have far greater leverage againstfirms, since the latter must depend on the former to solve many of the problems just

mentioned. So long as firms are willing to hazard the export market, and hence must

8This difference between an emphasis on exports and bringing them to the core of development policy is

captured by the distinction between exportpromotion and export-ledstrategy. See Cypher and Dietz

(1997: 318-319).


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13

survive in that market, they have to depend on the state to provide a steady stream offinance, help acquire and unpack technology and its attendant supports, establish sales

and marketing networks, and perhaps most importantly, to coordinate investment incomplementary lines. This gives state managers the bargaining power to make demands

on firms in return for the subsidization and support that they provide.

But just as crucial is a second aspect of the state-business relation: under ELI, notonly does the states role assume greater importance, but there is a greater incentive for

firms to comply with state managers demands for performance. Under ISI, the ability offirms to secure dominant positions in particular lines and deter entry in them tends to

sever the link between high profits and efficient production; businesses can take loans orcredits granted for a particular project and divert them to other lines, with no great worryabout losing market share. But when they have to perform in the more competitive

external markets, there is a direct incentive to adhere to the states demands forincreasing the efficiency of production in a line, because the firms survival in that line

depends in steadily increasing its productivity.It is this second effect of ELI that most sharply distinguishes its incentive

structure from ISI. In both models, the state provides firms with assistance and support;in both models, it demands in return certain standards of performance, as a conditionalityof that support. But in pure import-substituting regimes, the economic environment gives

firms an incentive to take the subsidies offered by the state, while rejecting its prerogativeto regulate their flow and the utilization. Hence, firms will also have a political incentiveto resist the agenda to build a state with the institutional capacity to impose disciplinary

industrial policy. In ELI, however, because of the greater competitive pressure, firmshave a greater reason to take the subsidies, and then to channel them into upgrading

productive efficiency. Further yet, they have an interest in having a state that has thecapacity to effectively coordinate and monitor investment, in order to more ably assisttheir expansion into external markets. The upshot is that in export-led strategies,

capitalists have no reason to oppose the project of building a disciplinary developmentalstate; indeed, they have good reason to support it.

Different accumulation models thus generate correspondingly different incentivestructures for capitalists, and these incentive structures in turn generate contrastingorientations toward the state-building project. The rest of this paper is devoted to

demonstrating this argument through an examination of the Indian and Korean cases.The two cases are examined with a focus on the critical junctures during which the

instruments for industrial planning and policy were installed (see Collier and Collier,1992). In India, this was the period immediately following independence, comprising theyears 1946-1951; most of the key institutions, and all of the relevant legislation, for state-

led development were put in place during these years. For Korea, the relevant period is1960-1965, when the authoritarian rule of Park Chung Hee was established, and Korea

turned to a state-led policy of ELI.

THE CAPITALIST CLASS AND STATE-BUILDING IN INDIA

The Indian National Congress (hereafter INC), committed itself to import

substitution and the subsidization of domestic capital more than a decade before thedeparture of the British (Chattopadhyay 1985: Chapter 3). This commitment was


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amplified by the leading lights of the Indian business class a few years later, when thefive most well-known industrialists in the country published a call for a mixed economy

and industrial planning to be the guiding principles for policy after independence(Thakurdas et. al, 1944-45). As independence approached, the leadership of the INC met

with leading industry representatives in several organized forums to discuss concretely

the modalities of assistance, its sectoral composition, and its parameters.

9

By the time ofthe British departure, the commitment to ISI as the basic structuring principle for

industrial development was complete. 10It is important to note that the idea of a close, working partnership between the

state and capital was in place as a structuring principle long before any concretedevelopment plans were drawn up for future policy. In this, the Sub-Continent was nodifferent from any other developing region in the world, where, since the Great

Depression, programs of import-substitut ion had been underway, and then got moredeeply entrenched during World War II (Bulmer-Thomas 1994; Bethell 1998). National

development was taken to be synonymous with industrialization, and insofar as it was tobe carried out within a capitalist framework, the state was obliged to assist industrialists

in whatever way it could. Hence, Indian capitalists could simply take it for granted that,whatever else may come, state subsidization of private firms was not to be questioned. 11But if state assistance was virtually guaranteed, the threat of international competition

was to be greatly attenuated, and domestic markets dominated by oligopolies ormonopolies, then the pressure of continually upgrade plant and equipment wascorrespondingly lessened; and if this was so, then why tolerate a state which would

attempt to enforce such performance standards with all the attendant intrusiveness, redtape, controls, etc.? As we shall see, the demands of the Indian capitalist class embodied

this reasoning.

The Instruments for Development Planning:With the general vision of future development in place, the focus shifted to issues

of implementation. In the years immediately before and after 1947, there emerged aconsensus of sorts within the top level of the bureaucracy and the INCs own intellectualson the instruments for industrial policy in the new order. At the core of the new set-up

was to be a Planning Commission, which would be given broad charge of devising andcoordinating industrial policy (Government of India: 1947; Shah: 1948). The precise

9The first such forum was the National Planning Committee, formed in 1938 and formally disbanded after

the War, though it really became inactive by 1941. This was a body comprised mainly by INC leaders and

businessmen, which mapped the contours of industrial policy for post-independence India; the National

Planning Committee passed the baton to the Advisory Planning Board in 1945-46, which, like the former,

which had a composition similar to that of the former, but now with a bureaucratic presence added on.Both bodies announced a firm commitment to state subsidization of industry. For details, seeChattopadhyay (1985) and Chibber (1999a).10

This was given its most explicit sanction in the publication of the Fiscal Commission Report in 1950,

which called for the establishment of a permanent Tariff Commission to investigate the degree of

protection and support that would be granted to particular industries (GOI 1950).11

It is worth noting here that there was no question at all of abolishing private ownership. Despite the lip-

service to Indian socialism in Party organs of the time, the top leadership of the INC was steadfastly

committed to a capitalist framework of development. Even Nehru, the erstwhile socialist, had come to this

position a full decade before Independence. See Chattopadhyay (1985: Chapters 2 and 3).


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powers of the Commission were not delineated at this stage, but the gist of thediscussions was in the direction of granting it considerable power. That this would be so

in the formulation of economic plans was not surprising: such a role has been the guidingmotivation for planning bodies across the world. What was perhaps more significant was

that, in the initial proposals, the Commission was also seen as occupying center stage in

the implementation of policy (Shah: 1948). Most crucially, this included the authority tomake allocative decisions with respect to scarce resources being handed out to firms; it

was the Planning Commission that would be given final charge of this responsibilitywithin the state. Hence, at this stage, a powerful Planning body in the range of the

Economic Planning Board in Korea -- was very much on the cards.The Planning Commission was to be the nodal authority for the execution of

industrial planning. The central task of this body was to ensure that the flow of

investment both public and private was in directions which would conduce to ongoingeconomic development. For this it was to be given instruments with which it could steer

such investments. For influencing flows of private capital, a variety of inducements wereto be used which raised the profitability of targeted sectors the offer of protection,

cheap credit, foreign exchange for importing inputs, etc (Jalan 1991; Hansen 1965). Forensuring that flows into these sectors did not become excessive, the main instrument wasto be a law mandating that all new industrial undertakings would have to obtain a license

from the government (Marathe 1986). The two were to work in tandem: one set ofmeasures raised the attractiveness of targeted sectors, while the licensing policy allowedthe authorities to act as gatekeeper, ensuring that only those firms were allowed to

enter which were deemed appropriate (Milor 1995).The key to this policy, however, lay in a third component, which was the power to

monitor firms and punish them if, in exchange for the guarantee of high profits, they didnot utilize the resources efficiently. From the very first drafts of the legislation relevant

to industrial policy, planners and Congress intellectuals as well as many in the political

leadership insisted that without the power to impose discipline on firms, the state wouldleave itself open to abuse by the recipients of largesse .12 Hence, in the proposed

legislation, recipients of investment licenses were to be subject to inspection by statefunctionaries, their performance monitored through periodic reports, and liable to havinglicenses withdrawn if performance was not judged up to standard (GOI: 1949). Industrial

licenses were thus viewed very much as contractual agreements, in which firms weregranted scarce resources conditional on their efficient and effective use. Where firms

were seen to be reneging on this agreement, the state arrogated to itself the right tointervene.

All this is to say that, at the time of Independence, the idea for a developmental

state, with power not only to assist capital but also to discipline it, was very much on theagenda. Indian capitalists could take as given the states commitment to subsidize their

further development; but this subsidization could either be carried out by a state with theinstitutional capacity to monitor and regulate their investment decisions, or by a statewhich lacked the means to do so. At this stage, policy elites had only announced their

intentions to build such a state, for they did not inherit the appropriate institutions from

12See Legislation for the regulation of certain industries by the Central government, by S.

Bhoothalingam, Joint Secretary to the Industry Ministry, in File I(4)/1(9)/48, Records of the Department of

Industrial Policy and Promotion (DIPP), Industry Ministry, Udyog Bhavan, New Delhi.


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the British. In the next section, we examine the dynamics surrounding the INCsattempts to install the institutions for disciplinary planning.

The Business Attack:

The INCs commitment to some kind of state- led model of development was, as

the previous section showed, established long before it actually came to power. On thisissue it also had the strong support of the domestic business class, which considered state

intervention in industry not only inevitable, but also in large measure necessary(Thakurdass et al, 1944-45). It was widely recognized that the private sector could not

develop at the desired rate without the assistance of public resources. What was not yetdecided, and what was the object of sharp differences, was the terms on which theseresources would be forthcoming. This was clearly recognized by leading elements within

the business class. Even before independence was officially achieved in August 1947,industrialists began a campaign to set the parameters on future state economic policy.

This set off the conflict that would not abate until the new state took final form five yearslater.

The basic strategy of Indian business was two- fold. Its most visible dimensionwas to insist that the state radically curtail its ambitions to regulate the private sector.Toward this, business groups presented a series of proposals designed to eviscerate the

disciplinary components of the new policy. On the other hand, they continued to insiston the states responsibility to assist and nurture private enterprise in the interest ofnational development (Chibber 1999a: Chapter Six). Throughout the period under study,

industrialists continued to insist on the states responsibility toward them, both in theshort run, to get over the dislocation of partition and the post-war recession, as well as in

the long term. The call for state assistance was ubiquitous in the industrial sector. It wasespecially strong in the basic and capital goods industries, which depended on the state asa source of demand;13 but it also emanated from consumer industries, which called for

assistance not only in the creation of a market but also in securing inputs.14 And finally,virtually all sectors cried out for protection from international competition (GOI 1950) .

But all this assistance was to be granted without the conditionalities that the stateplanners were demanding. This pertained to both of the central elements in the newregimes industrial policy, i.e. the power to channel the flow of investment as well as its

use.First, business organs were opposed to any institutionalized control on the

direction of investment. Private capital was, on their design, to be allowed to base itsdecisions on market signals alone, and the state disallowed from putting impediments inits way for example, in the form of industrial licenses. 15 This was a complete reversal

of the states agenda, in which the direction of investment was to be controlled so that itwas consistent with economic policy. Second, business groups also demanded a

13 For coal, see Capital, 2/14/46, 3/14/46, 3/6/47; for the chemicals, machine tools, and steel industries, see

the minutes to the meetings of the Sub-Committees of the Central Advisory Council for Industries in 1949,

in File 188, Walchand Hirachand papers, NMML, New Delhi.14

Immediately after the War, G.D. Birla, one of Indias biggest industrialists called for economic planning

as a means for increasing the Indian market for automobiles! See the report on his speech on All-India

Radio in Capital, 12/6/45.15

Circular, Report regarding the meeting of the Federations representatives with the Select Committee on

August 5th

, 1949, File 1065, M.A. Master Papers, Nehru Memorial Museum and Library, New Delhi.


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thorough revision of the proposals relating to the states power to intervene in thefunctioning of enterprises. All provisions giving the state the power to punish owners

short of criminal activity were to be rescinded, as were the right of inspection, and ofdemanding periodic reports.16 Of course, much of this simply followed once industrial

licenses were done away with, since such powers were seen by the state as mechanisms

for enforcing the contract embodied in the license. But business groups gave thesemeasures an importance all their own, to underline their opposition to disciplinary efforts

of any sort17. Put together, these two demands were intended to attack disciplinaryplanning on both of its core components: the states power to channel the flow of

investment, and to demand efficient and appropriate use of the resources it funneled tofirms.

The demands were pressed through an impressive campaign at several levels.

The business press and news dailies, owned by the major industrial houses, issued astream of invective against the objectionable components of the proposed legislation

(Kidron 1965). This was complemented by an intense lobbying effort by the majorbusiness and trade associations, led by the Federation of Indian Chambers of Commerce

and Industry (FICCI) the largest and most important such organization the IndianMerchants Chamber, and just about every regional association. It is noteworthy thatthere was virtually no variation in the opinions expressed by these organs, at least as

regards the merits of the states agenda. This is not entirely surprising; an examination ofthe archives of the Indian Merchants Chamber reveals that there was considerablecoordination among the business associations to ensure that their views were harmonized,

to further facilitate the lobbying effort18. Finally, these arms- length strategies wererounded off by the use of whatever personal ties there were and these were considerable

between business leaders and the leadership of the INC. In this, the former had asympathetic listener in V.B. Patel, the Deputy Prime Minister and second- most powerfulman in the partys leadership. Patel enjoyed very close ties to the business community,

especially to G.D. Birla, and was ideologically inclined to favor the view that the policyinitiative ought to lie with business, rather than the state 19.

The demands being made by capitalists were made all the more pressing by atightening of the structural constraints on the state. The domestic economy in theaftermath of independence was suffering from enormous strains, partly because of the

post-war shortages which many countries experienced, added to which was the economicfallout of the partition between India and Pakistan, which disrupted production in the

northwest and the east. India was thus thrown into an economic recession from which itdid not fully emerge until the Korean War (Rangnekar 1958; Venkatasubbiah 1961). Therecession was in turn exacerbated by what appeared to be an investment strike launched

16 G.L. Bansal, Secretary to the Federation of Indian Chambers of Commerce and Industry, to SyamaPrasad Mookerjee, 9/26/49, File I(4)-1(57)/49, Industrial Policy and Promotion Department, IndustryMinistry17

The industrialists leading the charge realized this and said so. See the Note by B.M. Birla to the

Federation of Indian Chambers of Commerce and Industry in File 1063, M.A. Master papers, NMML.18

The harmonization occurred mainly through a mutual vetting of memoranda aimed at the relevant

government offices. It was fairly widespread, though the main links were between the IMC and FICCI.19

See the correspondence between Patel, his secretary, and Birla in Reel 11 of the Patel papers, National

Archives of India, New Delhi. Note that Patel was not inclined toward laissez faire no-one in the INC

leadership was.


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by large sections of the capitalist class. Though there is no way of ascertaining howmuch of the downturn was caused by the investment strike, there is considerable evidence

that the leaders of the major business houses were withholding new investments until thegovernment brought policies closer to their demands.20

This state of affairs had a drastic impact on the new regimes priorities. While the

transformation of domestic structures was still a goal, it was now conjoined with theimmediate need to somehow revive investment. This fact was not lost on the business

class. Leading representatives adroitly packaged the ir protests against disciplinaryplanning with warnings that, unless the regime backed down, investment would continue

to falter.21 In this situation, the agenda to build a disciplinary planning regime came totake on a new meaning; whereas it had initially been viewed as the most natural way toimplement industrial policy and launch India onto a new growth trajectory, it increasingly

took on the appearance of a major impediment. All promises of a new dispensationwould just remain empty talk unless business could be persuaded to invest (Kidron 1965:

Chapter 3);22 but business would do no such thing so long as the states designs remainedunaltered. Hence, the call within government for pragmatism or flexibility gained

ground as time went on, so that the constituency for disciplinary planning becamereduced to those who were ideologically committed to a strong state (Kochanek 1968:138-145) . But for the bulk of the leadership, the character of future policy instruments

became blurred, as long-term objectives came to be seen as obstacles in the way ofimmediate recovery (Ibid.: 141-143; Chibber 1999a: Chapter 6). Exactly how thisaffected specific elements of the state planning apparatus, and hence future state capacity,

is examined in the next section.

The Institutional Outcome:As suggested in the preceding section, the INCs commitment to the disciplinary

components of the proposed planning apparatus did not, for the most part, flow from an

ideological opposition to private capital (See Chattopadhyay 1985: Chapter Four) 23. It

20See Market Slump, Indian News Chronicle, June 25, 1948; Sentiment of the Bombay Business

Community at the Beginning of 1949, Dispatch #5, 1/5/49, 845.5017/1-549, RG 59, DSR; within the

Indian Government, the need to revive the investment climate by moderating the tone of economic policy

was recognized in confidential internal documents. See the document produced by the Industry Ministry,

Suggestions for the Formulation of a Short -Term Economic Policy by the Government of India,

contained in Dispatch #365, 5/2/49, 845.50/5-249, RG 59, DSR.21

Hence, in his recommendation of talking points made to the Industry Ministry in a meeting in January

1949, the Vice-President of the All-India Manufacturers Association listed as the following as the very

first imperative: The Need for Inspiring Confidence Among Industrialists and Investors in the Industrial

Future. Indian industry was thus very candid about its lack of confidence in the investment climate, and

about the fact that it was up to the state to inspire confidence. See Memorandum to Members of the

Central Advisory Council of Industries, File 181, Walchand Hirachand Papers, NMML, New Delhi.22

Another alternative would have been a wholesale nationalization of industry as a counter-threat torecalcitrant firms, in order to cajole them to play along. But while there were elements within the INC

who were calling for such a strategy, it was never entertained by the leadership. As early as 1938, Nehru

had decided against such a strategy, and he did not waver in this at any point thereafter (Chattopadhyay

1985: Chapter Four). This was crucial, for the Congress right-wing, led by Patel, was ideologically

opposed to large-scale nationalization, and any move against them would have required Nehrus assistance.23

With the departure of the Congress Socialists from the INC in 1948, the section that was ideologically

opposed to capital became very small, and had very little representation in the leadership. The two deepest

studies of this dynamic within the INC are Chattopadhyay 1985 and Kidron 1965.


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was, instead, driven by a pragmatic worry that future development would not be possiblewithout industrial policy, and that the latter in turn would not succeed unless the state

built up adequate capacity to block the possibility of rent-seeking by firms. Once therecession set in, and prominent industrialists made it clear that they were holding back

from investing because of the coercive elements in the new agenda, the leaderships

resolve began to waver. Whereas earlier the blueprint for the new state had beendesigned with the needs of planning in mind, it was now gradually revised to

accommodate the new, more pressing need, viz. restoring business confidence. Newinstitutions for industrial policy were still installed, but their design was crucially affected

by the business offensive. In what follows, we examine this dynamic by focusing on twocritical components of the new apparatus, the Planning Commission (hereafter PC) andthe bi-partite sectoral Development Councils (hereafter DC).

The Planning Commission -- A Powerless Nodal Agency : The initial design for

the PC had not been elaborated in any great detail, but it was along the lines of a strongcentralized body with executive powers, as outlined above. Once it come time to actually

concretize the broad ideas into institutional form, the responsibility was handed to G.L.Nanda, who was later to serve for years as the highest official in the Commission. Nandawas strongly in favor of a centralized planning apparatus, much along the lines of what

Park Chung Hee was to install years later in Korea. In a memorandum submitted to theCongress Party Working Committee, Nanda urged that the PC not only be entrusted withdesigning industrial policy, but that it also be given powers to ensure its implementation

(Kochanek 1968: 142). This meant that along with power over the allocation ofresources, the PC would also have the power to oversee the performance of relevant

economic ministries. Throughout the debate over the new PC, Nanda continued to pressfor this design.24

The ongoing slowdown in the economy, however, reordered priorities for the INC

in a fashion that ran counter to Nandas agenda. The Congress leadership becameextremely hesitant to undertake any course of action which would impede an economic

recovery, and the kind of state restructuring being called for by the partisans of a strongPC was viewed as just such an action. This had to do with the particular institutionalfacts about post-war economic policy in India. Since 1945, the new state policy agencies

had not yet emerged, but economic policy, of course, had nonetheless to be implemented.In lieu of the new agencies, the policy was carried on by the ministries that were already

constituted. This meant that by 1950 when the debate on the PC came to a head therewere a number of new industrial projects that had already been launched under theguidance of existing ministries. Projects had been launched, budgets passed under

particular assumptions, import licenses handed out, and, most importantly, liaisonsestablished between the ministries and relevant firms (Economic Weekly, 3/25/50). For

industrial policy to be centralized under the new PC, it would require that responsibilityfor the projects shift from the ministries to the PC. A concern emerged within theleadership that this kind of restructuring would disrupt the recovery that was desperately

being attempted through these new projects (ibid.; Kochanek 1968: 142). Even if the

24See his comments to an American Embassy officer in Spring of 1950, where he reiterated this belief:

Timberlake to Department of State, #366, 4/1/50, 791.00/4-150, Record Group 59,Department of State

Records, National Archives and Records Adminis tration, College Park, Maryland.


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immediate responsibility remained with the ministries, the PC would still insist on vettingthem, approving them, and, in all likelihood, it would rearrange them according to its

designs. In the context of the crisis in business confidence, this potential for disruptioncame to be seen as intolerable.

In the face of this dilemma, those pushing for a restructuring of the state around a

new, centralized policy apparatus were put on the defensive. Nandas pleas for a strongPC got nowhere, and its final form was quite distant from what he and others had

proposed (Kochanek 1968: 142-145). As once contemporary observed, the objectives ofthe Commission appear to have been formulated with the clear purpose of doing

minimum injury to business confidence (Economic Weekly, 3/25/50). Instead of acentralized body with powers over policy design as well as implementation, the PC wasinstalled as a purely advisory agency, without any power over other state

agencies(Chibber 1999a: Chapter 6). The immediate purpose of this was, of course, toprevent any disruption of existing projects. There would be no drastic re-apportioning of

responsibility within the state.But this accommodation to short-term imperatives also carried important long-

term consequences. Since it was now just one ministry among many, the PC had no realpower to be the nodal agency within the policy process. 25 It could not, therefore, makeany demands on economic ministries of the sort that the EPB in Korea could.26 It was,

instead, dependent on the willing cooperation of the various institutions, both fortransmitting the relevant information about the sectors for which they were responsible,and for executing the industrial policy as designed by the PC (Kabra 1993; Shourie

1967). This was made unlikely for two reasons: first, normal inter-agency rivalry madeministries resentful of the PCs encroachment on what they regarded their legitimate

domain; the formers requests for information and to be included in key decisions werethus routinely ignored by the latter (GOI: 1967; GOI 1968a; GOI 1968b; Shourie 1973).Second, the decision to leave the jurisdiction over industrial sectors to various ministries

created the following problem: even if the PC decided to take it upon itself to monitor thevarious executive agencies, the dispersal of authority into the far reaches of the state

raised the monitoring costs to a prohibitive level (Chibber 1999a: Chapters 7 and 8). ThePC simply could not muster the resources. The long-term result was that two of the keyelements for building state capacity mechanisms to ensure the smooth flow of

information, and an agency with the power to ensure policy implementation were neverdeveloped.

The Absence of Corporatism: The dispersal of authority within the state severelycrippled the efforts to build adequate capacity for industrial policy. A second front on

25 The one area where the Commission did, and has continued to, exercise some real influence is in center-state fiscal relations. The disbursement of funds from the Center to individual States has been cruciallydependent on the input of the PC. But industrial policy was, throughout the period ofdirigisme, basically

under the power of the Central government, not the states. So the PC could not parlay its power over inter-

state fiscal transfers into real influence in industrial policy matters.26

This account goes against the mythology about the PC that can be found in some of the literature, viz.

that it was in fact the kind of nodal agency as the EPB was in Korea. This has been suggested by Haggard

et al (1991: 856), who are under the impression that the EPBs power over the budgetary process and

imports was modeled after the PCs power over the same domain in India. But this is mistaken. Virtually

every study of the PC has shown that, in fact, it rarely had real control over ei ther of these fields.


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which the business offensive had an impact was the efforts to institutionalize state-firmlinks. The design for industrial policy had included, from the start, various proposals to

create instruments for ongoing liaisons between the state and business representatives.The precise form that this would take was, however, subject to considerable debate. As

in the case of the Planning Commission, the final shape that was given to these

institutions was crucially affected by the business offensive.In Korea and Taiwan, state agencies designed and implemented industrial policy

through constant contact with business representatives, institutionalized at the level of theministries (See Evans 1995). It was not dialogue per se, however, that was the key; the

critical component was that various sectors were organized into sectoral associations,which were then given formal powers to represent their firms to state managers. Thelatter in turn were able to hold the associations accountable for collecting information and

organizing the effective implementation of industrial policy. In an important sense, thetrade and sectoral associations were an extension of the state planning apparatus,

accountable to it as much as to their members. In fact, it was not unusual for theirpresidents to be retired bureaucrats, or even appointed directly by planners (Wade 1990;

Park 1987; Fields 1995). In their capacity as virtual extensions of the planning agencies,the sectoral associations functioned to reduce the transaction of costs monitoringeconomic actors, as well as that of transmitting relevant signals to the latter (Sabel 1994;

Aoki et al 1997).The circumstances in India in the years after independence made the installation

of such instruments highly unlikely. Business associations were not opposed to the idea

of state-capital links per se; what they objected to was any hint that the new agencieswould be used to exert a power over the wider class. Instead of the state using these

agencies to monitor and transmit policies to business, and then hold them accountable fortheir execution, Indian capitalists insisted on reversing the dynamic: it was capital thatwould have the initiative in their constitution and functioning, and the state that would be

reactive. This reversal was captured in two key demands made by business associations:first, that in any corporatist or quasi-corporatist body, industry should have a statutory

right to choose their own representation. 27 This was explicitly intended to ensure thatthe representatives were not nominated by the state, and that, in case of disagreement,they would back industrys demands.28 Second, business demanded that any

discretionary intervention in the industrial sector be approved by sectoral standingcommittees, which would be dominated by represented chosen by the business class

itself.29 State intervention would thus be subject to the prior approval of Indiancapitalists. These proposals were intended to ensure that, in effect, it was business thatwould discipline the state, and not vice versa.

27Madras Chamber of Commerce to Associated Chamber of Commerce, Calcutta, 4/9/49, contained as

Enclosure 1 in Streeper to Secretary of State, Despatch #83, 4/16/49, 845.60/4-1649, RG 59, DSR,

NARA, College Park, Maryland; also, see Memorandum from United Provinces Chamber of Commerce

to Ministry of Industry and Supply, 7/18/49, File 1(4)-1(44)/49, Records of the Industrial Policy and

Promotion Department, Industry Ministry, Udyog Bhavan, New Delhi.28

See Comments of Sir Shri Ram on the Industries (Development and Control) Bill, 1949, File 1063,

M.A. Master Papers, NMML, New Delhi.29

See Circular, Report regarding the meeting of the Federations representatives with the Select

Committee on August 5th

, 1949, File 1065, M.A. Master Papers, NMML, New Delhi.


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These demands made it clear to the state that the Indian capitalist class wasstrongly opposed to the idea of state-controlled corporatist structures. Given the anxiety

of the Congress government to restore business confidence, it had a dramatic effect --once the sectoral development committees were set up, they were carefully structured to

avoid any hint of coercive powers. The representatives that staffed them would be there

on a voluntary basis, and not be appointed by government; these representatives were tohave no legal authority to bargain on behalf of the firms in their sector (GOI 1951:

Section 6(4) and Schedule II); this in turn implied that they would have no authority toenforce compliance from the firms in the sector, since they were there only in an

individual capacity. In effect, the DCs were constituted as advisory bodies, and notcorporatist institutions (Hanson 1966: 454). Of course, this also made them far lessuseful as policy organs, because they neither had the power to compel firms to hand over

relevant information, nor to make them abide by whatever recommendations therepresentatives made to the state (Venkatasubbiah 1961: 174-175). For its part, the

states legitimacy to enforce compliance on the basis of advice given by therepresentatives was greatly reduced, since the advice had no sanction from the wider

class. Policy elites were aware of the implications of this structure. In early meetings ofthe Planning Commission, it was pointed out by planners that negotiating with industry

on an ongoing basis would be of little use unless, as one advisor put it, each sector wasorganized effectively under a representative body [which] could control its members30 exactly what Korean planners did, and their Indian counterparts did not. To this, Prime

Minister Jawaharlal Nehru candidly responded that, under the crisis conditions of theperiod, there was a need for caution to avoid a major breakdown. 31 As in the case of

the PC, the business offensive had affected the preferences of policy elites all the way toNehru himself; the ongoing economic downturn now made the long-term benefits ofinstitutional restructuring recede against the short-term costs it might generate. Only that

restructuring of the state and class organizations would occur which seemed the leastdisruptive. The long-term legacy of this was that, instead of strong corporatist bodies

which had the authority to collect and relay information and to bargain on behalf ofindustry, the Indian planning apparatus was saddled with enfeebled advisory bodies, withlittle power to do anything but offer opinions.

Reprise:

As India emerged from the early years following independence, with theinstitutions for industrial policy now in place, their actual form was at quite a distancefrom what had been hoped for, and from what was required. Of the two elements that we

chose to examine as sources of increased state capacity a nodal agency and quasi-corporatist bodies bringing together planners and firms India could muster neither. The

Planning Commission remained an advisory body, and numerous studies have shown

30This was the view of D.R. Gadgil, who criticized the whole approach to dealing with the private sector as

a fantasy. See his remarks in the Summary Record of the First Meeting of the Planning Commission

Advisory Board, August 21st

-23rd

, 1950, in File LSR/PC-2, Lala Shri Ram Archives, New Delhi.31

This was in reply to Gadgil in a later meeting of the Advisory Board. See the Summary Record of the

Second Meeting of the Planning Commission Advisory Board, July 24th

-25th

, 1951, in LSR/PC-2, Lala

Shri Ram Archives, New Delhi


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how it was without any significant power in the industrial policy process (GOI 1967; GOI1968; GOI 1968a; Chibber 1999a; Shourie 1973). Similarly, the Development Councils,

while in place for some years, quickly became known as pointless talking shops, whichplayed no role whatsoever in the formation or implementation of policy (Chibber 1999a:

Chapter Seven; Marathe 1986). The long-term legacy of the critical juncture of 1947-

1951 was that India launched its program of developmentalism with only the feeblestinstitutions for its governance.

It is important to highlight how the outcome is consistent with the argument madein this paper about the political incentives generated by ISI. Indian industrialists did not

attack the idea of state intervention in the economy; they attacked only its disciplinarycomponents, designed to equip the state with the power to monitor and regulate the flowof capital. Capitalists wanted to maximize the flow of resources coming in from public

coffers, while also maximizing their freedom over the disposition of this largesse. Forthis, it was critical to block the states agenda of building institutions which would be

capable of imposing discipline. This was the basic dilemma of ISI for state planners:while the model made it very attractive for domestic capital to ent

Accumulation Models and State Forms in Underdeveloped Capitalism_Vivek Chibber

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