Governing the Market, by Robert Wade

Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, by Robert Wade
1990, 438 pp

Despite its rather modest ambition, Robert Wade's Governing the Market is a triumph of scholarship. Wade is a stalwart of the interdisciplinary anti-neoclassical school of thought which roughly encompasses sociology, economic history, development economics, and the much-marginalized field of political economy and which includes Alice Amsden, Peter Evans, and the late Susan Strange. There is at present only one major success story in the field of development economics: the rapid rise of East Asia from largely rural, agrarian, feudal, low-capital Third World backwaters to modern manufacturing and export powerhouses. The fundamental question with which any theory of development must eventually grapple is to explain why these countries developed when they did and as quickly as they did, and why Latin America, South Asia, and Sub-Saharan Africa has not. It is to these ends that Governing the Market was written, and it might provide the only convincing argument on the subject I've yet read.

Upon picking up the book, the reader will immediately notice that, quite contrary to most recent scholars of the subject, Wade knows how to logically organize a cogent argument. After introducing the problem, he gives a quick overview of the history of development economics from Smith's emphasis on capital accumulation, through the early 20th century fixation on efficient allocation which began with A.C. Pigou, past the brief (and exciting) flirtation with structuralism, to the reigning neoclassical orthodoxy. He then proceeds not only to explain the neoclassical theory, but also to provide five indicators by which to judge its success or failure. They are: the presence of neoclassical growth factors over time (low protectionism, floating exchange rates, etc), a history of little government intrusion in industrial development, few instruments for government leadership, few institutions to exercise and organize government leadership, and the degree of unity of political power.

In brief, the orthodox explanation for East Asia's success is that they "got the prices right": i.e. there was very little government intervention, very little protectionism, and consequently very little price distortion between the domestic and international markets. This, combined with low wages and high investment in human capital provided East Asia with a skilled and cheap labor force they used to produce exports at competitive prices. Wade refers to this as the Free Market theory (FM henceforth) and its quieter cousin, the Simulated Market (SM) approach. Then Wade introduces his own theory, which he calls the Governed Market (GM) approach. For a seasoned veteran of virtually every major critique of capitalism in general and neoclassical economics in particular, his theory is surprisingly restrained, and the distinction he draws between it and the prevailing wisdom is quite precise. He then refers back to the five indicators mentioned above and explains what differences his theory expects to see in the data from what neoclassical theory predicts. At this point I was slightly tempted to drop a postcard to Amartya Sen: "Dear Professor Sen: Please see Wade (1990) on how to properly organize an argument."

Wade's case study is Taiwan, which has received comparably little attention compared to Korea, Japan, Singapore, and Hong Kong. His approach is genuinely interdisciplinary: the reader gets a comprehensive history of Taiwan from the time of Japanese colonialism, an analysis of industrial development, an examination of bureaucratic organization, a chapter of political philosophy, and quite a lot of economic theory. Unlike many non-technical economists writing about the subject, Wade is clearly well versed in the mechanics of quantitative economics. He argues convincingly and in great detail about interest rates, inflation, savings, investment, and capital accumulation, and he is both willing and able to skewer a study which does not demonstrate sufficient rigor in their multivariable regression analysis. His evidence about Taiwan is overwhelming (and at times, quite dry: the sections on the development of the petrochemical industry do not make for gripping bedtime reading) and indeed the reader is often struck by two urgent thoughts: "How the hell did anyone ever really think Taiwan had a free market with little government intervention?" and: "How has any country NOT been able to do this? It all seems so obvious now!"

Indeed, Wade's explanation of Taiwan's industrial policies seems like it could serve as a how-to manual for development. To discourage a landed aristocracy or unproductive investment, the government capped land holdings, and distributed excess land to the poor, thereby giving them a stake in the government system. There was indeed some free trade, but only in imports of intermediate goods, which would then be processed in high value-added industries and exported for profit. High interest rates encouraged big domestic savings (and therefore a steady supply of capital to draw on) but capital controls kept out destructive flows of foreign capital. The financial system was restricted to banks (think how much more pleasant America's circumstances would be without the shadow banking system!) and those banks operated under tight government control and supervision, which ensured capital would flow to the most productive industries. The government set up public entities to control the "commanding heights" of the market: heavy industry, oil, steel, petrochemicals, shipping, machinery, and fertilizer are all government-owned utilities. The downstream industries are private free-market actors, but the leverage lies clearly with the government. Exports are promoted through tax incentives, government marketing, government-enforced quality standards, and cheap government credit to exporters. The government ownership of major inputs means they can hide subsidies by providing extra-cheap inputs to major exporters. Then there is the political system: efficient and centralized. Every industry with more than five firms must form a government-chartered association, and all institutions in civil society are set up and monitored by the government. While the centralization (and effective one-party dictatorship) are particularly disturbing, they did have the beneficial effect of eliminating the rise of power interest groups, regulatory capture, and rival power structures. In developing countries with weak governments and crises of legitimacy, the utility of something like this is clear.

It is in his discussion of Taiwan's political system that Wade is the least convincing. He comes perilously close at times to advocating the "Lee thesis" of the efficacy of authoritarian development, but even here he draws an interesting distinction. Amidst all the rather chilling descriptions of state control in Taiwan, he outlines an analysis of "corporatist" civil society, in which institutions are not set up freely, but are chartered by the government. In his view, societies are less in an either/or "pluralist" vs. "corporatist" dichotomy, but rather on a sort of sliding scale. Most European countries have far more prevalent government-affiliated institutions in civil society than does the United States, which has a government notorious for its management of the affairs of powerful interest groups. He does not explore the possibility of a democratic corporatist hybrid, but the idea is an intriguing one well worth further theorizing.

In the midst of Wade's tremendous outpouring of knowledge about Taiwan's history, economy, and organization, he always pauses to examine what the empirical evidence shows in regards to the five key indicators. On each occasion, the evidence is overwhelmingly on his side, and I was again possessed by the desire to send a postcard: "Dear Neil Fligstein: ask Pete Evans to refer you to Bob Wade about how to thoroughly, systematically, and methodically critique neoclassical economics."

Wade's prose is as lively and arresting as it is possible to be while discussing the organization of a chemical industry. He gets in several memorable zingers, and is remarkably open about indicating where the evidence for his theory is weak, or where there are gaps in his understanding and experience. His argument is authoritative enough and his organization clear enough that the reader is propelled through the thickets of organizational minutia with the least discomfort possible. His concrete material analysis and thoroughly delineated policy prescriptions rescue him from either being fruitlessly descriptive (as much modern social science insists on being) or rhapsodically self-referential and theoretical. At the end of the book, I felt like if I were suddenly appointed Zambia's Minster of Finance, I'd have some idea of what to do, rather than a vague notion about modifying "conceptions of control" to change a "field" (or is it the other way around? I can never remember).

Finally, Wade offers some conclusions and policy prescriptions for states interested in attempting to repeat Taiwan's success. To be sure, his target is not so much the "bottom billion," but rather those states which at least have a functioning government and which are attempting to make the transition to the glittering category of Newly Industrialized Countries. These sections are a veritable manual for how to make winners, shape the social structure of investment, and shape relative prices to ensure profitability of target industries. When taken in conjunction with Chalmers Johnson's groundbreaking work on Japan's MITI, and Alice Amsden's studies of Korean industrialization, it is difficult not to conclude that the problem of East Asian development has been solved.

Though Wade effectively demolishes neoclassical theory, he does not come across as a radical. Governing the Market is not a defense of Raul Prebisch-style import substitution industrialization and protectionism, or an attack on free trade. He does not rail against the Washington Consensus or the Bretton Woods agencies, and he fully recognizes the happy confluence of American benevolence, cultural respect for authority, absence of opposing elites, and lack of class consciousness which have made East Asian industrialization a shallower hill to climb than that of many other places. But still, his is an argument that development is not only possible but quite feasible, and it is a major theoretical and empirical contribution to an otherwise impoverished field. Unequivocally recommended for any serious student of development, political economy, or economic history, and well worth repeated study and consideration.