A Lecture for Aporde, jointly hosted with NUMSA, 5 May 2011

Ben Fine
Ben Fine, Professor of Economics at the School of Oriental and African Studies, University of London

I am honoured and privileged to have been invited to give this lecture. Whilst I have done so a number of times before for APORDE alone, I am delighted to be hosted by NUMSA as well. As far as I am concerned, as these things go, this is as good as it gets.

My topic for tonight is the developmental state or, more exactly, beyond the developmental state. But “beyond” in what sense? For those economies that have been dubbed developmental states, in Latin America and most prominently, East Asia, the “beyond” has tarnished their record, at least relative to the economic performance that got them there. This is especially true of Japan that has stagnated over the past two decades. On the other hand, for those yet to attain the status or fruits of a Developmental State, which might include South Africa, the beyond is too far away to contemplate. Primarily, today, though, I will talk about beyond the developmental state in terms of its strength and weaknesses analytically.
My own relationship with the developmental state goes back 25 years, to the mid-1980s. I was familiar with it as an economist in a casual way but a deeper attachment was inspired by exploring whether what I shall call the developmental state paradigm, DSP, could be used to understand the nature and potential of the South African economy, especially in responding to requests by the ANC to assist in formulating policy for the post-apartheid period. My answer was NO, with an alternative dedicated concept developed to characterise the South African economy as the minerals-energy complex, MEC. This notion critically departed from the DSP, and I will explain how and why later.

First, though, I am mindful of why I have been asked to lecture on the DSP. Whilst my own relationship with it, like a bad marriage, has been a combination of love and hate, the developmental state in South Africa has been, at least initially, more like an end of the summer romance or even fling, in which past President Mbeki and his coterie desperately sought to revitalise appeal to the masses through promises of better times ahead. As we now know, though, this attempt at saving a marriage with the people failed miserably, not least as our erstwhile President is known to be a monogamist and there was little faith in his ability to hold together a marriage based on two different partners, neo-liberalism and the developmental state. On the other hand, the new President who
replaced him is a renowned polygamist, and so may be more accomplished at satisfying the competing if not incompatible demands of different mistresses, not least as neo-liberalism and the developmental state have traditionally been seen as impossible bedfellows. Nor is this as fanciful as it might sound for, South Korea has, in the wake of the crisis of 1997/98 and the most recent, been understood as a neo-liberal developmental state. This is so for broader reasons to which I will return.

What of the DSP itself? Whilst it can be traced back in all but name at least as far as the 18th Century and US protectionism, the 19th Century and German protectionism, through Japan and Latin American import substituting industrialisation, the DSP has been most prominent as a way both of explaining the success of East Asian NICs and vehemently and intellectually successfully opposing the neo-liberal Washington Consensus and its antipathy to the state that emerged so strongly and rapidly in the 1980s. But, although not to be underestimated in terms of its narratives of successful state intervention and refutation of neo-liberal dogma, this prominence and success was achieved at some cost or, more exactly, at the expense of unresolved tensions and limitations of the paradigm that went unnoticed at the time and which primarily continue to be overlooked.

First and foremost, the DSP has been pre-occupied with successful, latecomer or catch up, industrialisation, with each of these terms of some significance.

Second, then, the DSP has offered limited attention despite a universal framework of analysis, to which I will return, to failures. This is especially important for Africa for, with minor exceptions such as Botswana and Mauritius, the DSP has proceeded as if the dark continent does not exist.

Third, accepting that development does go through stages, the DSP has little to say about earlier and later stages. How do we get from agrarian to industrial society so we can even begin latecomer catch up? And getting to the frontier is one thing, getting ahead of it is another as those you are catching can hardly be expected to stand still or, possibly, offer you a helping hand as opposed to kicking away the ladder.

Fourth, then, there is the neglect of other aspects of development apart from industry. What about the role of agriculture, health, education and welfare, democracy and labour (other than in provision of skills). There are also other neglected areas or issues, such as macro-policy, the functioning of the financial system (other than in directing finance to industrialists), and the role of globalisation. To some extent, these absences (and I will also refer to technology again later) reflect, conscious or otherwise, an implicit and complicit acknowledgement of the weaknesses and limitations of the DSP in its mission to discredit the Washington Consensus from a progressive, interventionist stance. It would not help to raise questions of welfare, democracy and trade union rights, organisation and action (and the presumption, to some degree false, that these were minimal in the East Asian NICs and destroyed the
developmental states of Latin America). And, despite globalisation, there is a presumption that all can become national developmental states as long as the right policies are adopted, whereas convergence of economies has been notably absent over the past three decades.

Fifth, this belief in the capacity for global capitalism to allow all nation-states to be developmental is a mirror-image to the neo-liberal dogma that it is a fait accompli so long as everything is left to the market. In part, within the DSP, this reflects two further weaknesses. One is that the DSP literature has primarily been divided between two separate schools, the economic and political schools. For the economic school, the focus is on those (economic) policies, often narrowly drawn and conceived, that are necessary for an economy to achieve development. Drawing primarily on the idea that markets do not work perfectly and, correspondingly, upon (imperfect market) economics as a discipline, the state is required to accrue, for example, the economies of scale and scope, to coordinate investments within and across sectors, to harness positive and eliminate negative externalities, and so on. For the economic school, then, it is a matter of identifying the appropriate policies, with the presumption that they will be implemented by a developmental state because they ought and/or need to be.

By contrast, and completely complementary, the political school with its own disciplinary origins predominantly from within political science (and certainly separate from economics), is remarkably aloof from consideration of the economy itself and the nature of the policies required to bring about development. Rather, the political school is concerned with the nature of the state itself and whether it has the potential in general, and the independence in  particular, to adopt the necessary policies more or less irrespective of what these might be. Here emphasis is placed upon the necessity for the developmental state to be free of capture by particular interests, and so to be able to adopt developmental policies.

Taken together, the economic and political schools address what policies are to be adopted and what allows them to be adopted. Successful cases of development in practice can be interpreted through this dual prism, and such is a major methodological thrust of both schools. For each has been highly inductive in practice, examining the role of economic policy in bringing about development and the nature of the states adopting such policies. This is not to suggest, however, that the developmental state literature has been without theory or analytical content. The economic school, for example, strongly emphasises the significance of market imperfections and the role of a developmental state in addressing, if not necessarily correcting them. In highlighting the departure from neo-liberalism, Alice Amsden famously declared that it was a matter of “getting relative prices wrong”, of not conforming to the dictates of the market.

Similarly, the political school has tried to identify empirically what characterises the nature of the states, and the societies containing them, in which development has proven possible. Posing this in terms of the independence of the state from economic or other interests has itself presumed an analytical approach in which society is structured along the lines of the state as opposed to the market, with the addition of civil society to fill out the remaining economic, political and ideological space. In this way, not only is the (developmental) state seen as potentially independent, the term favoured is autonomous, it is also perceived to evolve interests of its own that prevail over those of the market and civil society, especially where these conflict with
developmentalism. This approach of the political school is admirably captured in the notion of “Bringing the State back in” as an agent of development in its own right, at times autonomous from interests, at other times embedded with them as long as this allows it to be developmental.

Across both economic and political schools, then, there is a predilection to set up an opposition between state and market which is the source of another analytical weakness. For the economic school, the state overrules the market and so is able to improve upon it. Class does not tend to appear at all for it is simply a matter of identifying the right policies and not whether they have sufficient support to be implemented, and on whose behalf or to whose benefit. For the political school, the state needs to stand aloof of the market, and the economic interests found within it. It is not that class or more general economic interests are absent but it is important that the state has the capacity to neutralise if not to override them. The result has been to downplay
the role of class in the DSP, a skewed neglect rather than an absolute absence. The DSP has tended to focus on state-(industrial) capital relations at the expense of the way in which class relations, and more general economic, political and ideological relations are formed, expressed and evolve through the state and the market. So, class relations should, in contrast to the DSP, be taken as analytically prior to the state-market duality which is shared with the Washington Consensus, albeit on a considerably more favourable stance towards the state.

And, as mentioned, of overwhelming importance if so much taken to be granted as more or less to remain unstated, there is a total pre-occupation with the nation-state and its capacity to bring about development irrespective of the impact of international or global factors. This does not mean that the global is absent, only that it is only incorporated as a positive (availability of catch-up technology, for example) or as a negative (competition from imports or imposition of wrong policies) influence in the policies to be adopted or the attainment of independence in policymaking.

On this basis, let me now turn to the rhythm of the DSP, its shifting profile and content over time. As already indicated, it was at its height from the mid-1980s for a decade, in opposition to the Washington Consensus and drawing upon a systemic, inductive understanding of what brings about successful latecomer, catch up industrialisation and pointing to the irreducible role of the state. From the mid-1990s, though, even before the Asian crisis of 1997/98, the DSP was going into decline the reason being that it was thought to be its own grave-digger, to coin a phrase, a victim of its own success. In South Korea, for example, having created large, powerful conglomerates, the chaebol, that dominated the economy, these could no longer be controlled let alone
coordinated by the state. And development also brought strengthened demands for democracy, trade unions and higher wages and benefits. On top of this, both before and after the Asian crisis, some began to deny there had ever been a (developmental state) miracle, and the Washington Consensus gave way to the post Washington Consensus which is both more state-friendly, at least in principle if not so much in practice, and yet never mentions the DSP which, consequently, became squeezed on all sides.

Just for the record, the South African Government of National Unity came to power in 1994 just as the DSP was at its height, international solidarity could not have been stronger, internal forces were well organised, the country was not beholden to the IMF or the World Bank and, in any case, the Washington Consensus was in disarray after two lost decades for development. South Africa seemed set to pioneer, and could have pioneered, a developmental strategy led by the state as a beacon for others as well as for itself. But the RDP gave way to GEAR and the Freedom Charter to neo-liberalism, properly understood, and it has reigned supreme subsequently.

Over the past few years, though, the DSP has enjoyed something of a limited revival. With tongue in cheek, let me begin to explain why and how by stating two laws of economics, not of the economy. The first will be well-known and is that monetarism flourishes whenever there is inflation. The second is that the DSP flourishes wherever there is development. And, of course, there has been development, especially across the BRIC, if not the BRICS. So, China in particular has been understood as a developmental state. But the DSP has changed to become a failed buzzword.

What do I mean? A buzzword in development is something that is used indiscriminately and incoherently across a wide range of applications. Today, the DSP is used whenever there is any piecemeal example of developmental success involving the state without necessarily referencing development itself as systemic transformation. It could be, for example, biological instruments produced in Singapore or the reconstruction of the Tema port in Ghana. This is what the DSP has become. So, anything good involving the state makes in developmental (and everything else can be carefully forgotten).

This is why and how the DSP has become a buzz. But so much is development discourse dominated by the World Bank that it now effectively decides what is, and what is not, a buzzword. Typically buzzwords are “poverty reduction, social protection, globalisation, participation, citizenship, empowerment, social capital, gender, sustainability, rights, NGOs, social movements, country ownership, transparency, accountability, corruption, governance, fragile states,
and knowledge.” The state is notably absent, as of necessity is the DSP, since the World Bank remains staunchly opposed to interventionism on a systemic scale and sees its role as supporting the neutrally conceived market as opposed to development itself other than through market means.

This explains why DSP can create a buzz in South Africa, with the added irony of its being a developmental state in the making. By the way, South Korea did not even know it was or had been a developmental state until it was told so by western economists and political scientists after which it trained its own economists, primarily in America, the so-called ATKE, and collapsed into crisis once their numbers reached a critical point. There may be another law here, of economists, the more you have and the more influential they are, the worse is the performance of the economy. Significantly, though, South Africa does the South Korean story backwards, claiming to be a developmental state in advance of achievement!

But, before returning to South Africa once more, I want to take a digression on China as it is illustrative of many of the issues I have raised today, irrespective of the value of the DSP as a policy frame. The value of discussing China arises out of the example it provides (although hard to emulate – get a population of one billion or, as has been pointed out for South Korea, get yourself invaded by Japan to destroy the landed aristocracy and then supported by US aid in the Cold War). And China is also significant simply because of its impact and diversity.

Let me offer here, a few simple assertions. First, Chinese economic development has been primarily based on rapidly expanding domestic markets. This has been accompanied by relatively rapid growth in labour productivity, contingent upon very high levels of investment and has given rise to increasing real wages and the emergence even of shortages for skilled labour.

Second, export growth has been of increasing importance more recently, with corresponding widening of China’s trade surplus, but this has been more associated with lower levels of wages, for employment in sectors attached to foreign direct investment, particularly geared towards the processing trade. Whilst this has been large enough at least to account for China’s total trade surplus, its contribution to value added is no more than 5% of Chinese GDP, more or less conforming to an enclave-type economy, typically found across multinational corporation activity across the world within export-processing zones, etc. But this should not be taken as typical of, nor predominant in, the Chinese economy and its success.

Third, the dependence of China upon banks for finance for industrial investment is staggering. It is proportionately roughly four times higher than for the United States, and at least double that of most other countries. This is, however, indicative of the limited extent of financialisation of the Chinese economy, since finance has derived primarily from state-owned banks that have been policy driven. Of course, this does not guarantee developmental success in the absence of other conditions but these are precisely what have been present in China where, nonetheless, development is fraught by the tensions associated
with sustaining international competitiveness and domestic economic and social stability.

Fourth, this is indicative of the much more extensive reliance of China upon policies that have totally broken from the Washington Consensus in general and those for transition economies in particular, where the outcomes by comparison with Eastern Europe are salient. Significantly, for a short period, China did succumb to Washington Consensus style policies in the mid-1990s but, as a matter of pragmatism in wake of the crisis this induced, it immediately abandoned them for policies of Keynesian expansionism led by welfare provision, a renewal of the role of the state sector, and reversal of foreign sector liberalisation.

Fifth, in this light, it is hardly surprising that a very wide spectrum of opinion from across different positions regarding the sources of China’s success and its responsibility, or not, for prompting, aggravating or ameliorating the current crisis, have some common positions on how it should proceed – by expanding domestic production to serve both higher wages and higher levels of social provision, and reducing the overall level of domestic investment as a proportion of GDP. Indeed, such postures are in line with those being adopted by China itself.

Nonetheless, sixth, myths do prevail concerning China and its role in the world economy. These tend to originate from an ethos of blame either incorrectly specifying factors or their causal roles in response to problems that derive other than from China itself. These include the idea of a global savings glut, unreasonable trade surplus and competitiveness from too low an exchange rate, and China’s export growth at the expense of its domestic consumption. In contrast, it should be emphasised that China’s success or impact in these terms, properly interpreted, can only be of considerable benefit to the world economy (as well as its own) although the incidence of such benefits are uneven and possibly negative for some. Failure to realise these benefits is no
fault of China and that they do not accrue for other, unrelated reasons, of which global and national financialisation elsewhere is clearly culpable, is no reason to displace blame onto China.

In short, the lessons to be learned from China for national developmentalism are, broadly and overgeneralising, in contemporary conditions, especially in the wake of the current crisis, that a corresponding positive role for the state depend upon: insulating the mobilisation and allocation of finance from financialisation in all of its forms; the promotion of secure domestic provision of goods for domestic consumption especially as far as the meeting of basic needs and poverty alleviation are concerned; and a strong commitment to state provision of social and economic infrastructure attached to a developmental welfare state, and targeted industrial (and other) strategies designed to expand employment and productivity in line with corresponding increases in wages.

This does, however, in light of previous remarks, need to be situated in relation to global factors. I want to address this in two ways – in relation to production, especially in relation to technology, and in relation to finance both of which have been less prominent in the DSP than trade (getting prices wrong, and import substitution versus export promotion as elements of a developmental state).

As mentioned, the DSP has tended to neglect technology in terms of close examination of where it comes from and how it improves. The exception in
this respect is the “flying geese” approach. This has two aspects. On the one hand are the dynamic linkages from one sector to another with potentially increasing degree of technical sophistication and value added as we move through the flock. On the other hand, “flying geese” serves to highlight the shifting international division of labour between, or across, national economies as those at lower levels of development and wages and skills take on the relocated manufacturing roles of those already upgrading or upgraded to higher stages of industrialisation. The classic case is Japan’s investment strategy into the Asia-Pacific Rim in the last decades of the twentieth century although China currently presents a more complex picture as it both leads the geese of follower nations and competes with them through its vast reserves of labour. This and closer examination of historical experience in terms of, or increasingly at the expense of the metaphor adopted of flying geese, suggests questioning whether geese fly in a two-dimensional V-shaped pattern or formation alone, and might not other birds or creatures either join the flock and even challenge hierarchy within it. Otherwise is to suggest a limited form of technological determinism that strains both the evidence and the potential for policies that breach with, or progress beyond, confinement to latecomer
catch-up that preserves the existing order in the international division of labour, ones that have indeed been broken by the East Asian NICs in the past, with China possibly ready to repeat the exercise in its own fashion.

More specifically, as far as China might serve as an enabling factor in the promotion of developmental states elsewhere, its size and diversity give rise to a complex mix of complementary opportunities and sources of competition. Inevitably, these are variously spread across different countries, at different stages of development, across different sectors, technological capabilities and levels of value-added, and corresponding position within global value chains/networks. Across the literature more generally, the levels of uncertainty and unevenness involved is conducive to appeal to metaphor as China is variously understood as Engine, Conduit, or Steamroller as far as other economies are concerned, or is it a perpetrator of Flying Geese or of Sitting Ducks.

This all suggests that technological upgrading, a necessary aspect of the industrialisation putatively promoted by national developmental states, is no longer, even to the extent that it was, a linear step-by-step progression up the ladder of latecomer catch up. Industrial production is organised across global networks, through value chains that have mixed content and potential for spin-off, that do not necessarily neatly fit into uniform patterns. I could go into this in detail. But let me quote from one account of China’s role:

As China has moved up the value chain in recent years, increasing its presence in electronic high-tech exports in particular, there have also been shifts in the pattern of production in the other economies in the region. For instance, Japan and Korea have further increased their presence in the medium-tech automotive industry and Singapore has developed its biomedical sector. At the same time, the Philippines has increased its revealed comparative advantage in exports of electronic high-tech products, a large proportion of which are parts and components. However, our analysis of product displacement suggests that
China’s increasing export share has not reduced export growth for the other countries in the high-tech industries, although it has had a negative effect in the medium-tech and low-tech industries.

And, from another:

there is no doubt that China is displacing other Asian economies across a wide spectrum of markets. Not all of this displacement is symptomatic of competition. First, a significant portion of the final assembly of Asian-made products takes place in China.

As suggested, by reference to China which is simultaneously at top and bottom, this is symptomatic of no neat fit across countries in terms of stages of industrial development, with corresponding implications for industrial policy not simply targeting a step up the rung. It is so much a ladder that has been kicked away by neo-liberalism, in the phrase so tellingly cited again and again by Ha-Joon Chang from the German protectionist, Friedrich List, as a whole sheaf of policies that are needed to negotiate an extraordinarily tricky and complex rock climb, with corresponding ties to the specificities of particular sectors and broader attention to developmental goals.

On the other hand, certainly compared to the post-war boom, when foreign direct investment was heavily concentrated in the hands of US multinational corporations, together with the UK as junior partner, there are now many different sources of FDI, including from within the South. This means that opportunities to deploy as well as to be exploited by FDI have expanded, alongside competition for it. But the conclusion to draw from the previous discussion of global production is that such simple prognoses as enhanced opportunity versus enhanced competition as such are inadequate as they do not adequately address the complexities and diversities of global production, nor the broader national contexts and policy interventions that might render them both successful and developmental.

Let me now turn to financialisation, which some of you may have noticed I previously introduced surreptitiously. In brief, financialisation has involved: the phenomenal expansion of financial assets relative to real activity (by three times over the last thirty years); the proliferation of types of assets, from derivatives through to futures markets with a corresponding explosion of acronyms; the absolute and relative expansion of speculative as opposed to or at the expense of real investment; a shift in the balance of productive to financial imperatives within the private sector whether financial or not; increasing inequality in income arising out of weight of financial rewards; consumer-led booms based on credit; the penetration of finance into ever more areas of economic and social life such as pensions, education, health, and provision of economic and social infrastructure; the emergence of a neo-liberal culture of reliance upon markets and private capital and corresponding anti-statism despite the extent to which the rewards to private finance have in part derived from state finance itself. Financialisation is also associated with the continued role of the US dollar as world money despite, at least in the current crisis, its deficits in trade, capital account, the fiscus, and consumer spending, and minimal rates of interest. I observe here, in passing and for future reference, that the policies adopted by the USA and some other developed countries have been exactly the opposite of those advised, or should that be imposed, on developing countries experiencing similar crises in the past. As Ha-Joon Chang has been at the forefront of arguing in the context of historical
paths to development, those that have traversed it insist, “Do not do as we did, do as we say” to which should be added the nostrum, “Do not do as we do, do as we say”.

However we define financialisation, its consequences have been: reductions in overall levels and efficacy of real investment as financial instruments and activities expand at its expense even if excessive investment does take place in particular sectors at particular times (as with the dotcom bubble of a decade ago); prioritising shareholder value, or financial worth, over other economic and social values; pushing of policies towards conservatism and commercialisation in all respects; extending influence of finance more broadly, both directly and indirectly, over economic and social policy; placing more
aspects of economic and social life at the risk of volatility from financial instability and, conversely, placing the economy and social life at risk of crisis from triggers within particular markets (as with the food and energy crises that preceded the financial crisis). Whilst, then, financialisation is a single word, it is attached to a wide variety of different forms and effects of finance with the USA and the UK to the fore. And, even if exposed in acute form by the crisis, its expansion over the last few decades has been at the expense of the real economy despite otherwise extraordinarily favourable “fundamentals” for capitalism, including huge advance in technologies, in reserves of labour, in decline and defeat of progressive movements, and the triumph
of neo-liberalism. Over the last thirty years, capitalism has engineered a dream lottery ticket for itself. Yet, all it managed was low rates of growth compared to the post-war boom and, ultimately, a crisis of classic proportions.

This is the key to understanding the malaise of South African economy and society, once wedded to an understanding of it as historically and currently dominated by the minerals-energy complex. What is this MEC? It is the specifically South African system of accumulation, that has been centred on core sectors around, but more wide-ranging than, mining and energy, evolving with a character and dynamic of its own that has shifted over time. Its history and consequences can be traced back to the emergence of mining in the 1870s through to the present day. In the interwar and immediate post-war period, core MEC sectors drove the economy, furnishing a surplus for the protection and growth and, ultimately, incorporation of Afrikaner capital. State corporations in
electricity, steel, transport and so on, represented an accommodation across the economic power of the mining conglomerates and the political power of the Afrikaners, an uneasy compromise of evolving fractions of classes and their interests forged through both state and market. The apartheid labour systems were less an accommodation than a common bond across capitals and against labour. But the divisions between Afrikaner and mining capitals precluded a more general strategy of industrial diversification out of core MEC sectors, leading to a partial vacuum in intermediate and capital goods capability, a failure to accrue economies of scale and scope other than in core MEC sectors, and an inefficient consumer goods industry surviving by protection upon demand.

At the economic level, if temporarily accepting the notion, these characteristics offer the most obvious similarities with and differences from the developmental states of the East Asian economies (although their own experiences, and the reasons for them, should not be unduly homogenised). If South Africa has ever been a developmental state, it was so from the 1970s, given the close relationship between large-scale capital and the state. This was not a matter of state versus market, or even of state plus market, but of fractions of capital represented through both state and the market for the purposes of the most extreme forms of “labour market” oppression.

By the 1970s then, Afrikaner and mining-related capital had been sufficiently integrated for a common economic strategy to be adopted, as had always been the case for labour systems. But, with the collapse of the post-war boom and the Bretton Woods system based on gold at $35 per ounce, and the sharp rise in oil and energy prices, a huge premium attached to both gold and energy. As a result, an industrial strategy for diversification was scarcely considered let alone adopted. Instead, the 1970s witnessed an extraordinary state-led expansion of gold and energy production. Into the 1980s, the crisis of apartheid also
precluded a state and/or private strategy for industrial promotion. But, whilst the core MEC industries remained central to the economy, capital controls meant that profits generated internally that were not illegally transferred abroad, see below, were confined to accumulation within the South African economy itself. This gave rise both to further conglomeration across the economy but, first and foremost, to the expansion of a huge and sophisticated financial system as cause and consequence of the internationally confined, but domestically spread, reach of the South African conglomerates with Anglo-American in the lead.

The MEC is the system of accumulation that was inherited by post-apartheid South Africa. And it has survived more or less intact over the post-apartheid period. This is not to say it has remained unchanged, quite the opposite, just as it has experienced significant change in the past. Unfortunately, those changes have, however, reflected the extent to which South Africa is the exact opposite of a development state and has been driven further away from being so. In particular, the South African economy over the post-apartheid period has been driven by what might be termed a backlog in financialisation and globalisation that was inherited from the apartheid period. These have dominated both the low pace of domestic accumulation and the form and composition taken by the restructuring of the domestic economy. Whilst the MEC core sectors have strengthened, the fastest growing sector in the economy over the last twenty years has been finance and related services, now taking as much as 20% of GDP, although 40% of the population benefit from no financial services at all.

Now according to the efficient market hypothesis as far as those supporting financialisation are concerned, the role of financial markets is to provide for the efficient mobilisation and allocation of resources to investment. Has this been done by the South African financial system? Not at all, domestic levels of investment are running at half those generally acknowledged to be necessary for developmental state status. And where are all the resources going? Well, one answer has already been provided, they go into the financial sector itself. I exaggerate somewhat as, of course, some financial services are completely
essential, like high security protection of the rewards and properties of the most unequal society in the world. But, essentially, far from adding 20% to GDP, financial services are taking away a quarter of GDP and cheekily suggesting that by doing so they add the equivalent to GDP. Across the world, as already mentioned, three times as many financial assets are now required to serve on unit of GDP than thirty years ago. If this were true of any other input, such as energy, steel, or whatever, we would be outraged. But finance gets away with it.

But the South African situation is even more serious and disturbing because this financialisation is not only associated, as elsewhere, with exaggerated rewards to those working within finance, and conducive to credit-based levels of consumption based on speculation in housing markets, it has been accompanied by unprecedented levels of capital flight, much of it totally illegal (and managed by large-scale corporations through transfer pricing – declaring value of exports from South Africa at a lower price than charged to importing countries). Illegal capital flight was certainly extensive during the apartheid period but it has attained new and dramatic heights subsequently, with capital flight exceeding 20% of GDP in peak years. This is, first and foremost, why South Africa has moved away from being a developmental state whose preconditions depend upon the use of domestically generated resources for attaining developmental goals. Until this issue is addressed, South Africa has no chance of being a developmental state other than in the utopian minds of those who dream of policies without the resources to implement them.

Unfortunately, far from addressing this problem, the record of post-apartheid governments has been at best to turn a blind eye, and at worst to facilitate it, as illegal capital flight has increasingly been legalised with a programme of relaxation of exchange controls. Recent developments indicate that this is worsening. Government only a year ago announced its intention to grant an amnesty for illegal capital flight upon payment of a 10% penalty, as a step towards removing all exchange controls. This is akin to announcing an amnesty for illegal firearm possession as the first step to removing all restrictions on possession. Why would anyone make use of the amnesty let alone reduce their use and possession of firearms. The South African Reserve Bank and the Treasury
have been little short of scandalous in their failure to report upon and, one must suspect, pursue illegal capital flight, let alone take into account what impact it has had upon the economy. As far as these two hypocritical guardians of sound finance and austerity are concerned, it is as if capital flight does not exist, or as if it is a harmless and/or unpreventable, like possession of marijuana in the UK, illegal, tolerated and benign.

But capital flight ought to be seen as what is known as a class A drug in the UK as far as the South African economy and its potential to become a developmental state are concerned. For the influence of dealing in this crack-cocaine extends far beyond the admittedly devastating and debilitating drainage of resources from the economy. As a component part of globalisation and financialisation, capital flight places the economy on the cusp of instability, and this has had to be accommodated, and has even driven, macroeconomic policy to its advantage. Interest rates have been held high in order that short-term capital inflows (a source of volatility) can compensate for long-term outflows. And the exchange rate has been held at a high level with the effect of making capital outflows worth more in foreign currency to those who benefit from them, whilst making it ever more difficult to sustain both the exchange rate and
economic growth.

This is so for the restructuring of domestic industry which has not been driven by the need to fill in the hollowed out industrial structure inherited from apartheid, with its limited capacity to build upon the MEC core strengths and diversify through capital and intermediate to more competitive and higher quality consumption goods. Rather the conglomerate structure has been dismantled to create sectoral monopolies whose profitability depends upon high prices and not productivity increase, the very antithesis of much needed three-high economy – high investment, high productivity and high wages. By the same token,
industrial policy has itself been token, with some exceptions that tend to prove the rule, as with the auto industry. What has been notably absent is the commitment to secure long-term finance for investment in labour-intensive domestic production to meet domestic consumption of basic needs, thereby creating jobs, alleviating unemployment and addressing the backlog of provision and inequality inherited from apartheid. Again, with token if significant exceptions, inequality has strengthened post-apartheid.

Similar considerations apply in one way or another to each and every aspect of economic and social policy. They have been squeezed into the margins created by the triple whammy of MEC, financialisation, and globalisation. The one exception, of course, is BEE. There can be little doubt that a new elite has been created out of the form and content that restructuring and accumulation have taken in South Africa. Once again, from the perspective of the DSP, South Africa has moved away from its putative role as a developmental state, for BEE represents a fraction of capital that is almost entirely parasitical, adding nothing to the formulation let alone the implementation of developmental goals. Indeed, the impact of BEE has been much worse than this because it is conducive
to an ethos, a skewed building of capacity and governance, a structure and hierarchy of institutions, indeed a politics and an ideology that is once more the antithesis to the creation of a democratic developmental state. Even if it were appropriate in the past to place faith in the emergence of a black national bourgeoisie as a source of developmentalism, that opportunity has long since passed in the current South African and global context. For it is one in which financial elites have both emerged and strengthened, at considerable cost to the vast majority who have been required to adjust to their pernicious impact upon economic and social functioning.

To put it pithily, and symbolically, developmental states do not run out of electricity, especially a mere decade after benefitting from massive excess capacity. The reasons for the power cuts were various but primarily reflect a nationalised utility left in limbo as the state refused to finance investment and commit to public ownership by the people for the people, and the domestic conglomerates refused to fund privatisation in the rush to free their resources from the domestic economy and being more than content to enjoy state-subsidised pricing and state responsibility for handling social protests. Meanwhile,
renewable energy, in which South Africa could take a pioneering role, stagnates as it offers little by way of quick-fix rewards to an aspiring black bourgeoisie that can cherry pick mining leases, corporate fronting and the like.

I paint a bleak picture but one that I hope you find an appropriate assessment of current realities. Remarkably, the transition from apartheid in retrospect looks like the last throw of the dice of hopes for traditional third world revolution, associated as it was with a successful liberation movement, international solidarity, well-organised and politicised industrial trade unions and civic movements, and the Triple Alliance of COSATU, CPSA and ANC. What is striking is not so much the failure to make that revolution, even much by way of reform, but how rapidly its momentum was not only defeated but dissipated. This speaks volumes for the power of neo-liberalism, overt and covert, vulgar and insidious. But all is by no means lost. Campaigns and organisations for alternatives can re-emerge, renew, unite and prosper. Perhaps NUMSA will be in the vanguard with Aporde alumni as intellectual figureheads.
Whether this can and will be done under the banner of the developmental state is another matter, contingent upon how best to unite for alternatives without unduly compromising both outcomes and forward momentum.

It is crucial to be mindful that the turn to the state in the wake of the crisis, to rescue the banks, to promote public-private partnerships, and so on, is no more than an explicit demand upon the state to be developmental for private capital in general and for private finance in particular. Taking a long view, it may well be that the developmental state can serve as a stepping stone for radical and progressive reform but, equally, it could prove a potential pitfall for more progressive policies. The decisive issue will be who defines the development state, and how.

This paper draws and builds upon longstanding work on both the developmental state and the South African economy. Previous contributions include the following:

Ashman, S., B. Fine and S. Newman (2010) “The Developmental State and Post-Liberation South Africa”, in Misra-Dexter and February (eds) (2010).
Ashman, S., B. Fine and S. Newman (2010) “The Crisis in South Africa: Neoliberalism, Financialization and Uneven and Combined Development”, in L. Panitch et al (eds) The Crisis This Time, Socialist Register, 2011, London: Merlin Press, pp. 174-95.
Ashman, S., B. Fine and S. Newman (2011) “Amnesty International?: The Nature, Scale and Impact of Capital Flight from South Africa”, Journal of Southern African Studies, vol 37, no 1, pp. 7-25.
Edigheji, O. (ed) (2010) Constructing a Democratic Developmental State in South Africa: Potentials and Challenges, Cape Town: Human Sciences Research Council Press.
Fine, B. (2004) “Beyond the Developmental State: Towards a Political Economy of Development”, in Hirakawa et al (eds) (2004), (in Japanese), with English version in Lapavitsas and Noguchi (eds) (2005).
Fine, B. (2006) “The Developmental State and the Political Economy of Development”, in Jomo and Fine (eds) (2006).
Fine, B. (2007) “State, Development and Inequality: The Curious Incidence of the Developmental State in the Night-Time”, paper presented to Sanpad Conference, Durban, June 26-30, www.networkideas.org/ideasact/jan09/PDF/Fine.pdf
Fine, B. (2008) “The Minerals-Energy Complex is Dead: Long Live the MEC?”, Amandla Colloquium, eprints.soas.ac.uk/5617/
Fine, B. (2008) “Engaging the MEC: Or a Lot of My Views on a Lot of Things”, paper for MEC workshop at University of KwaZulu-Natal, Durban, June, eprints.soas.ac.uk/5813/ in shortened version as “Engaging the MEC: Or a Few of My Views on a Few Things”, Transformation, no 71, 2010, pp. 26-49.
Fine, B. (2010) “The Developmental State?”, in Maharaj et al (eds) (2010).
Fine, B. (2010) “Can South Africa Be a Developmental State?”, in Edigheji (ed) (2010).
Fine, B. (2011) “Locating the Developmental State and Industrial and Social Policy after the Crisis”, mimeo, prepared for UNCTAD.
Fine, B. and Z. Rustomjee (1997) South Africa’s Political Economy: From Minerals-Energy Complex to Industrialisation, Johannesburg: Wits University Press.
Fine, B., J. Saraswati and D. Tavasci (eds) (2012) Beyond the Developmental State: Industrial Policy into the 21st Century, London: Pluto, in preparation.
Fine, B. and C. Stoneman (1996) “The State and Development: An Introduction”, Journal of Southern African Studies, vol 22, no 1, pp. 5-26.
Hirakawa, H. et al (eds) (2004) Beyond Market-Driven Development: A New Stream of Political Economy of Development, Tokyo: Nihon Hyoron Sha, in Japanese.
Jomo, K and B. Fine (eds) (2006) The New Development Economics: After the Washington Consensus, Delhi: Tulika, and London: Zed Press.
Lapavitsas, C. and M. Noguchi (eds) (2005) Beyond Market-Driven Development: Drawing on the Experience of Asia and Latin America, London: Routledge.
Maharaj, B., A. Desai and P. Bond (eds) (2010) Zuma’s Own Goal: Losing South Africa’s ‘War on Poverty’, Trenton, NJ: Africa World Press, Inc.
Misra-Dexter, N. and J. February (eds) (2010) Testing Democracy: Which Way Is South Africa Going?, Institute for a Democratic South Africa, Cape Town: ABC Press.

* Ben Fine is Professor of Economics at the School of Oriental and African Studies, University of London. He was a contributing editor to the MERG (Macro-Economic Research Group) policy book, Making Democracy Work: A Framework for Macroeconomic Policy in South Africa, and co-authored with Zavareh Rustomjee, The Political Economy of South Africa: From Minerals-Energy Complex to Industrialisation (1997). He served as international expert on the Presidential Labour Market Commission, South Africa, 1995/1996. He is joint winner of the 2009 Deutscher Prize and the 2009 Gunnar Myrdal Prize.