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Submission for the John Locke Institute 2020 Essay Competition

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Submission for the John Locke Institute 2020 Essay Competition
Wong Yi Hao
Hwa Chong Institution, Singapore

History Q2. Is a strong state a prerequisite or an obstacle to economic growth? (Professor

Terence Kealey, economic historian, University of Buckingham)

Despite Pope Benedict XVI’s declaration that “we do not need a State which regulates
and controls everything”,1 the economic powerhouses of the late 20th century appear to be
mostly driven by efficient bureaucracies with political and economic power centralised
within an extensive state apparatus. When we think of “strong states”, we generally consider
a government’s ability to efficiently discharge its basic functions and administer national
institutions, with states that are “weaker” generally lacking in their ability to exert authority
over their territory, maintain trust in the law and government, and provide security for their
people.2 In contrast, the extent to which a state ​intervenes ​in the economy, whether through
economic policy or direct participation in enterprises,3 is commonly seen as a question of
how ​limited the state is. However, insofar as this constitutes the state directly ​exercising i​ ts
strength, I argue that government involvement in the economy needs to be examined just as
critically for its contribution to economic growth. Notably, “big government” is not
necessarily repressive in nature.4 However, the specific mechanisms states use to intervene in
the economy, and the general direction of economic policy - whether it is one that seeks to be
supportive of (and/or secondary to) regular economic function, or to ​dominate domestic
economic activity - should be investigated for how they affect the economy, and the quality
of growth they can help to bring about. It is generally agreed that governments have a
standard set of economic obligations, such as enacting frameworks for property rights and
corporate dispute resolution, but almost everything else is up for debate when it comes to

1
From Pope Benedict XVI’s first papal encyclical, ​Deus Caritas Est​ (God is Love), 2005.
2
In particular, the Economist Intelligence Unit (EIU) identifies a set of 12 unweighted indicators to qualitatively
measure the strength of a state: its age, its recent history of stability, the security of its citizens, the level of
corruption, the size of the grey economy, the rule of law, the quality of its bureaucracy, whether the government
controls all its territory, the extent of foreign influence, and the degree of ethnic fragmentation, social cohesion
and trust in public institutions.
3
As observed by the Center for International Private Enterprise, disagreements have emerged in recent
economic theory over the “optimal extent of state intervention” and regulation in specific economic sectors.
This has implications for how the term “strong state” is understood and how the government’s actions influence
the economy.
4
In the context of the economy, a “big government” is one that intervenes to a significant extent in the workings
of the economy. In so-called free-market economies, for instance, this can be seen in the practice of central
planning with strategic support given to selected industries rather than having their development be decided by
the price mechanism.

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promoting growth. There is also a noteworthy emphasis, especially in the West,5 on the
importance of democratic freedoms in promoting growth.6

In this essay, with reference to a diversity of case studies,7 I suggest that a strong state
is a​ prerequisite for economic growth, but not ​all strong states will necessarily bring about
positive economic outcomes. The global economy, at present, appears to further necessitate
some level of state involvement in the economy, but ​how states use their strength is more
pivotal in determining how the economy will develop.

On a fundamental level, a state needs to be strong in order to guarantee economic

growth. A strong state acts as an “encompassing organisation to override various pressures of
local clientelism”,8 going beyond providing public goods and maintaining a fair regulatory
environment to ​proactively establish fiscal and legal frameworks for the country’s economy.
This is especially pivotal in the early stages of economic growth as observed by Rostow,
where the state’s ability to control far-flung areas or territories in the country and integrate
them into the market is a necessary condition for the emergence of a wider range of economic
activities, such as trade.9 In economic terms, it can be seen that a state’s ability to administer
land and natural resources within its territory is conducive for extensive ​growth, while its
provision of basic services for its people can raise their productivity and thus drive ​intensive
growth.10 This conclusion is evident in comparing the examples of Yemen, a “failed state”
ravaged by civil war where 14 million people are vulnerable to starvation and fatal diseases
and airstrikes on markets, schools and other facilities have decimated public infrastructure;
against Japan, where the civil service’s so-called “elite bureaucracy” has delivered
high-quality healthcare and education to the people, enabling them to live (and work) longer,
and find high-paying, skills-intensive employment. In the Third World especially, the
infeasibility of relying on the private sector and/or free market to provide public goods and
infrastructure, at scale and at low cost, necessitates a strong state able to quickly deliver high
5
Notably, former American State Secretary Hillary Clinton stated in her 2014 memoir ​Hard Choices that
“political liberalisation” was a necessary prerequisite for “economic liberalisation”, suggesting that the absence
of a “free exchange of ideas and strong rule of law” in more authoritarian societies would cause “innovation and
entrepreneurship [to] wither”.
6
Author’s Note: While the question of whether democracy is a favourable condition for economic growth is
secondary to the main discussion of strong states, I will investigate this suggestion by examining a range of case
studies with differing political systems. This same principle will apply in determining whether, and how, the
choice of economic model (ie. capitalist, socialist, communist etc) has ramifications for growth.
7
Author’s Note: It should be noted that the design of different state apparatuses has some implications on the
execution of economic policies and the consistency of state strength (eg. a federalist system in the US with state
governments is clearly different from the absolute monarchy in Brunei); however, I consider that to be a
secondary discussion, with different terms of reference, that would not fit into this essay well.
8
See: Bardhan, Pranab, “State and Development: The Need for a Reappraisal of the Current Literature,” ​Journal
of Economic Literature 5​ 4, no. 3 (September 2016): pp. 862-892.
9
Economist Walt Whitman Rostow posits in his “stages of economic growth” model that these constitute
favourable conditions for the “take-off” stage of development, in which productive sectors emerge within the
economy and fuel its growth.
10
Whereas extensive growth refers to a qualitative increase in the economic resources (eg. land) available for
use and/or production, intensive growth is marked by a quantitative increase in the efficiency of the use of
inputs (eg. better education improving the capabilities of a workforce).

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Wong Yi Hao | Singapore
standards in this regard, so as to kickstart development. Even at the later stages of an
economy’s development, the role of the state is evident in continually laying the groundwork
for the workforce to drive higher-value-added economic growth. Thus, a strong state is a
foundation for economic growth to take place, even when the government is not particularly
interventionist in the economy.

However, strong states have also come under fire for inhibiting growth by violating
the natural operation of a market. Adam Smith spoke of the “visible hand of the state”
interfering with the ability of the market’s “invisible hand” to efficiently allocate economic
resources, and indeed this can still be seen in China’s “partially-reformed economy”,11 where
state-owned enterprises (SOEs) suffer from problems of excess capacity and inefficiency in
production, despite enjoying greater access to credit. Lardy points out that Chinese SOEs’
preferential access to financing distorts the market’s ability to decide the success or failure of
firms purely based on their competitiveness.12 State domination - a strong state crossing over
into the realm of the private sector - can thus be detrimental to sustaining positive economic
performance, let alone other related problems of crony capitalism in countries where
politically-connected firms enjoy government protection from failure, creating moral hazard.
Such was the case in the Indonesian New Order, where businessmen linked to President
Suharto’s family were able to take out large loans without sufficient collateral, paving the
way for economic collapse in the 1997 Asian Financial Crisis, with the rupiah losing up to
85% of its value. That being said, state domination of the economy does not follow naturally
from state strength, but exists at the crossroads of a state’s strength and ideological
orientation. Specifically, this tendency to exert control over most, if not all, aspects of the
economy has been observed more frequently in socialist or communist states, owing to their
fundamental rejection of a market economy. In these cases, a strong state is a means to the
end of creating a socialist economy; it might be unable to create significant economic growth,
but then again, that might not even be the state’s intention (as opposed to achieving equity or
practicing economic nationalism, for example). It is thus reductive to write off state presence
in the economy as an inherent obstacle to growth, given that it is affected by the other
characteristics of the state. Additionally, rather than proving the superiority of one philosophy
(capitalism) over another (socialism), the gradual transition of socialist states toward
(quasi-)capitalism over time, such as Vietnam’s ​doi moi reforms in the 1980s intended to
liberalise the economy and move away from agricultural collectivisation, are a testament
instead to the crucial role played by the state, in deciding to create conditions for growth.

11
Liou and Tsai (2020) point out that a “partially-reformed economy” such as that of China lacks “well
established” market mechanisms and will face difficulties managing supply and demand. See: Liou, Chih-Shian
and Tsai, Chung-Min, “The Governing Paradox in a Transition Economy: Repeated Institutional Reforms and
Increasing Regulatory Capture in China’s Energy Sector,” ​Problems of Post-Communism 67, no. 2 (2020): pp.
156-168.
12
Nicholas Lardy, Anthony M. Solomon Senior Fellow at the Peterson Institute for International Economics,
has pointed out that enterprises owned by or linked to the government in China receive disproportionately
greater access to bank credit as compared to the private sector.

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John Locke 2020 Essay Competition - History
Wong Yi Hao | Singapore
Targeted intervention by a strong state can bring about beneficial strategic outcomes
for its economy. Historically, the rapid industrialisation witnessed in the “Asian Tiger”
economies (Taiwan, Hong Kong, South Korea and Singapore) can be primarily attributed to
the state’s provision of administrative, financial and technical support in allowing companies
to “close the gap” economically with other countries and realise Gerschenkron’s conception
of “catch-up economics”.13 As Asian societies with an emphasis on Confucianist values,
including respect for (state) authority, the Asian Tigers also successfully adopted a
pro-business orientation in having the state suppress labour rights,14 thus attracting
investment from foreign multinationals. Even the United States, a firm advocate for the
rules-based enforcement of free-market norms in the WTO, was guilty of enacting
protectionist policies, specifically in the automotive industry,15 in the 1970s to facilitate its
industrial development. The strength of the American state in upholding these protections,
despite other countries’ objections, has proven to be beneficial for its economic growth. In
the present day, the Indian government’s comprehensive corporate taxation regime, covering
sales, dividends and more,16 is set to generate greater revenue for the government to direct
into stepped-up spending on other programmes to stimulate growth. The ability of the
government - sometimes dubbed “India Inc.” in a nod to the statist slant in the economy - to
exercise its strength in such a manner is pivotal to boosting government expenditure, which
adds to GDP growth. While these policies have been castigated in some circles for being
unfriendly to businesses, it should be noted that the state’s strength, in itself, is not
antithetical to economic growth; how it is used is more important as a deciding factor. Thus, a
strong state can be a prerequisite for growth, without ​all s​ trong states necessarily being
successful in creating growth, just as squares are by definition rectangles but not all
rectangles are squares.

Nevertheless, critics point out that states should guard against being sucked into a
“race to the bottom” where the interventionist policies of one government artificially distort
the workings of the global economy, forcing other states to similarly interfere in the economy
to keep up. The trend of East Asian newly-industrialising economies relying on strategic state
subsidies, and “competent bureaucrac[ies] that encourag[e] credible government commitment

13
In the 1950s, Harvard University economist Alexander Gerschenkron first popularised the idea that countries
far behind the technological frontier could rapidly play catch-up, whether by assimilating existing technology or
benefitting from the outsourcing of some industries from other developed countries. This would facilitate the
process of economic growth to close economic disparities from behind.
14
For example, a 1973 emergency decree in South Korea outlawed all work stoppages, while the expansion of
the National Trades Union Congress, which is closely linked to the government, in Singapore along with a
tripartite labour framework for dispute resolution saw workers’ unionisation rights eroded. See: Curless, Gareth,
“Trade Unions, Decolonisation and the Myth of ‘Anti-Nationalism’,” in ​Living with Myths in Singapore,​ ed.
Loh et al (Singapore: Ethos Books, 2017), 125-134.
15
Nelson (1994) suggests that throughout the 1970s, a consensus was formed among American legislators that
the “core industry” of automotives was being “threatened” by Japanese competition and thus warranted
administrative responses. See: Nelson, Douglas R, “The Political Economy of U.S. Automobile Protection,”
National Bureau of Economic Research Working Paper No. 4746, May 1994.
16
These provisions include a 20% levy on share buy-backs, 35% corporate tax and 28% sales tax.

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John Locke 2020 Essay Competition - History
Wong Yi Hao | Singapore
to long-term, growth-enhancing policies”,17 to capitalise on the growth of the regional “flying
goose” - Japan,18 was one such example. More recently, the perception of unfair competition
from China, stemming from government protection for local corporations, has raised
questions in Europe over whether to similarly respond with administrative measures to prop
up European tech companies. The failure of bodies like the WTO to enforce respect for
free-market norms in such cases only further incentivises states to jump on the bandwagon of
intervention. This can become an obstacle to growth if/when states get their economic
policies wrong, as in the case of Latin American import-substitution policies which set the
stage for the debt crises of the 1980s. Additionally, strong states may be disadvantaged in the
area of encouraging (technological) innovation, the key engine for improving Total Factor
Productivity and creating new areas of growth for an economy.19 Daron Acemoglu describes
the tendency of strong states to discourage private investment by imposing overly-high taxes,
“distorting” the equilibrium between private and state investment in the economy.20 Under
this view, the reliance of China on product reverse-engineering and forced technology
transfer to achieve gains in the knowledge-based sector, as opposed to the organic creativity
the American Silicon Valley is known for, is seen as evidence of a strong state’s
encroachment on the ability for the economy to realise ground-up innovation in order to
sustain high-value growth. However, from a historical perspective, this skepticism is allayed
by the experience of South Korea,21 which witnessed state-led initiatives to develop the
high-tech sector such as the 1971 establishment of the Korea Advanced Institute of Science
and Technology as well as a 1982 nationwide R&D campaign, but nonetheless emerged as a
technological leader in its own right by the turn of the century, with homegrown Samsung
and LG becoming global brand names. State support, if executed correctly, can be a force for
nurturing innovation; in fact, a strong state is necessary for the establishment of a
comprehensive regime of intellectual property rights, which in turn encourages innovation.

17
According to Professor Hilton Root of the Schar School of Policy and Government, the “Asian economic
miracle” was led by “strong states that have [...] institutionaliz[ed] [...] executive discretion”. See: Root, Hilton
L, “Do Strong Governments Produce Strong Economies?” ​The Independent Review 5​ , no. 4 (2001): pp.
565-573.
18
First popularised by Japanese economist Kaname Akamatsu, the “flying geese paradigm” is a model of
economic division of labour based on dynamic comparative advantage among the East Asian economies, with
Japan as the “leading goose” driving growth in the regional economies by progressively offshoring its
high-value economic activities as it moved up the value chain.
19
​Ceteris paribus​, the marginal production output of a process even with increased inputs of labour or capital
decreases over time, requiring technological innovations in the production process to maximise and increase the
efficiency of inputs. Technological advancement thus constitutes the cornerstone of Total Factor Productivity
(TFP), which also factors in capital stock and labour inputs. See: Federal Reserve Bank of St. Louis, “What
Drives Long-Run Economic Growth?” On the Economy Blog, June 1, 2015.
20
Acemoglu asserts that a strong state’s inability to achieve such a “balanced” situation involving investments
from “all parties” results in it becoming an “impediment” to economic growth. See: Acemoglu, Daron, “Politics
and economics in strong and weak states,” ​Journal of Monetary Economics​ 52, no. 7 (2005): pp. 1199-1226.
21
Pan (2016) evaluates the state’s interactions with industry to create “innovation partnerships” through the
triple-helix innovation model, suggesting that Asian states like South Korea and Singapore have successfully
encouraged businesses to lead the economy up the global value chain. See: Pan, Zhengqi, “State-Led Innovation
Partnerships: Asian Development States within the Triple Helix Paradigm,” ​European Journal of East Asian
Studies ​15, no. 1 (2016): pp. 108-143.

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John Locke 2020 Essay Competition - History
Wong Yi Hao | Singapore
Looking ahead, the present international division of labour suggests that state
presence in the economy will become more prevalent, as a prerequisite for growth. The
design of the global value chain in the 21st century is set to create a “Great Divergence”
where the outsourcing of production processes to different parts of the world, coupled with
the greater complexity of later-stage production processes, makes it difficult for poorer
countries to move up the value chain solely by relying on the “invisible hand” of the global
economy. Hausmann and Hidalgo have proposed a “quiescence trap” in which
presently-disadvantaged states have to adopt “activist policies” to catch up economically,
rather than hoping that “catch-up economics” will naturally work out. Furthermore, the
occurrence of “black swan” events like the COVID-19 pandemic, which do not obey market
forces, warrant comprehensive policy corrections in the economy.

Strong states are evidently a prerequisite for economic growth, by creating favourable
conditions for high-value economic activities to take place and directly supporting other
economic agents through centrally-planned policy. The exercise of strength takes place in
many areas of the economy and can be seen in most, if not all, countries. Therefore, the
question is not whether state strength can bring about growth, but how best to direct it to this
purpose rather than dominating and distorting the economy.

1997 / 2000 words

Citations
1. Acemoglu, Daron. “Politics and economics in strong and weak states.” ​Journal of
Monetary Economics​ 52, no. 7 (2005): pp. 1199-1226.
2. Bardhan, Pranab. “State and Development: The Need for a Reappraisal of the Current
Literature.” ​Journal of Economic Literature ​54, no. 3 (September 2016): pp. 862-892.
3. Cai, Jane and Elmer, Keegan. “Is the US right to cry foul about forced technology
transfer to do business in China – and what is Beijing’s position?” ​South China
Morning Post​, January 10, 2019.
https://www.scmp.com/news/china/diplomacy/article/2181528/us-right-cry-foul-about
-forced-technology-transfer-do-business​.
4. Caporaso, James A. “The State's Role in Third World Economic Growth.” ​The Annals
of the American Academy of Political and Social Science​ 459 (1982): 103-11.
5. Center for International Private Enterprise. “The Meaning of a Strong State?” Blog.
September 30, 2009.
https://www.cipe.org/blog/2009/09/30/the-meaning-of-a-strong-state/​.
6. CrashCourse. “Government Regulation: Crash Course Government and Politics #47.”
Uploaded February 6, 2016. Video.
https://www.youtube.com/watch?v=sDqGzMdhL1M​.
7. CrashCourse. “Market Economy: Crash Course Government and Politics #46.”
Uploaded January 29, 2016. Video.
https://www.youtube.com/watch?v=6yLY06tTQ1A​.

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John Locke 2020 Essay Competition - History
Wong Yi Hao | Singapore
8. Curless, Gareth. “Trade Unions, Decolonisation and the Myth of ‘Anti-Nationalism’”.
In ​Living with Myths in Singapore,​ edited by Loh, Kah Seng, Thum, Ping Tjin and
Chia, Jack Meng-Tat, 125-134. Singapore: Ethos Books, 2017.
9. “L’industrie, c’est eux: Europe is rediscovering its penchant for statist intervention.”
The Economist,​ January 16, 2020.
https://www.economist.com/europe/2020/01/16/europe-is-rediscovering-its-penchant-
for-statist-intervention​.
10. Federal Reserve Bank of St. Louis (written by Chien, Yi-Li). “What Drives Long-Run
Economic Growth?” On the Economy Blog, June 1, 2015.
https://www.stlouisfed.org/on-the-economy/2015/june/what-drives-long-run-economi
c-growth​.
11. Flores-Macías, Gustavo A. “Statist vs. Pro-Market: Explaining Leftist Governments'
Economic Policies in Latin America.” ​Comparative Politics​ 42, no. 4 (2010): 413-33.
12. Hausmann, Ricardo. “Why do some countries develop faster than others?” ​World
Economic Forum,​ August 21, 2014.
https://www.weforum.org/agenda/2014/08/countries-development-inequality/​.
13. Hausmann, Ricardo and Hidalgo, César A. “Country Diversification, Product
Ubiquity, and Economic Divergence.” Harvard Kennedy School Faculty Research
Working Paper 10-045, November 2010.
14. Human Rights Watch. ​World Report 2019: Yemen.​ Accessed July 8, 2020.
https://www.hrw.org/world-report/2019/country-chapters/yemen​.
15. “Modi blues: India Inc is growing disenchanted with Narendra Modi.” ​The
Economist,​ August 17, 2019.
https://www.economist.com/business/2019/08/17/india-inc-is-growing-disenchanted-
with-narendra-modi​.
16. Kekic, Laza. “The state of the state.” ​The Economist,​ November 22, 2010.
https://www.economist.com/news/2010/11/22/the-state-of-the-state​.
17. Lardy, Nicholas R. ​Markets Over Mao: The Rise of Private Business in China.​ New
York: Columbia University Press, 2014.
18. Liou, Chih-Shian and Tsai, Chung-Min. “The Governing Paradox in a Transition
Economy: Repeated Institutional Reforms and Increasing Regulatory Capture in
China’s Energy Sector.” ​Problems of Post-Communism​ 67, no. 2 (2020): pp. 156-168.
19. Nelson, Douglas R. “The Political Economy of U.S. Automobile Protection.”
National Bureau of Economic Research Working Paper No. 4746, May 1994.
20. Pan, Zhengqi. “State-Led Innovation Partnerships: Asian Development States within
the Triple Helix Paradigm.” ​European Journal of East Asian Studies 1​ 5, no. 1 (2016):
pp. 108-143.
21. Pritchett, Lant. “Divergence, Big Time.” ​The Journal of Economic Perspectives ​11,
No. 3 (1997): 3-17.
22. Root, Hilton L. “Do Strong Governments Produce Strong Economies?” ​The
Independent Review ​5, no. 4 (2001): pp. 565-573.

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Wong Yi Hao | Singapore
23. Shim, Jaiheon. “Intensive Growth vs. Extensive Growth and their Historical
Implications.” MA diss., University of Southern California, 1986.
24. Tang, Eddie Wing Yin, and Hedley, R. Alan. “Distributional Coalitions, State
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