Globalization, Development and The State: The Performance of India and Brazil since 1990 (International Political Economy)

Globalization, Development and the State The Performance of India and Brazil since 1990

Jørgen Dige Pedersen

International Political Economy Series General Editor: Timothy M. Shaw, Professor and Director, Institute of International Relations, The University of the West Indies, Trinidad & Tobago

Titles include: Hans Abrahamsson UNDERSTANDING WORLD ORDER AND STRUCTURAL CHANGE Poverty, Conflict and the Global Arena Morten Bøås, Marianne H. Marchand and Timothy Shaw (editors) THE POLITICAL ECONOMY OF REGIONS AND REGIONALISM Sandra Braman (editor) THE EMERGENT GLOBAL INFORMATION POLICY REGIME James Busumtwi-Sam and Laurent Dobuzinskis TURBULENCE AND NEW DIRECTION IN GLOBAL POLITICAL ECONOMY Elizabeth De Boer-Ashworth THE GLOBAL POLITICAL ECONOMY AND POST-1989 CHANGE The Place of the Central European Transition Bill Dunn GLOBAL RESTRUCTURING AND THE POWER OF LABOUR Myron J. Frankman WORLD DEMOCRATIC FEDERALISM Peace and Justice Indivisible Helen A. Garten US FINANCIAL REGULATION AND THE LEVEL PLAYING FIELD Barry K. Gills (editor) GLOBALIZATION AND THE POLITICS OF RESISTANCE Richard Grant and John Rennie Short (editors) GLOBALIZATION AND THE MARGINS Graham Harrison (editor) GLOBAL ENCOUNTERS International Political Economy, Development and Globalization Patrick Hayden and Chamsy el-Ojeili (editors) CONFRONTING GLOBALIZATION Humanity, Justice and the Renewal of Politics Axel Hülsemeyer (editor) GLOBALIZATION IN THE TWENTY-FIRST CENTURY Convergence or Divergence? Helge Hveem and Kristen Nordhaug (editors) PUBLIC POLICY IN THE AGE OF GLOBALIZATION Responses to Environmental and Economic Crises Takashi Inoguchi GLOBAL CHANGE A Japanese Perspective

Jomo K. S. and Shyamala Nagaraj (editors) GLOBALIZATION VERSUS DEVELOPMENT Dominic Kelly and Wyn Grant (editors) THE POLITICS OF INTERNATIONAL TRADE IN THE 21st CENTURY Actors, Issues and Regional Dynamics Craig N. Murphy (editor) EGALITARIAN POLITICS IN THE AGE OF GLOBALIZATION George Myconos THE GLOBALIZATION OF ORGANIZED LABOUR 1945–2004 John Nauright and Kimberly S. Schimmel (editors) THE POLITICAL ECONOMY OF SPORT Morten Ougaard THE GLOBALIZATION OF POLITICS Power, Social Forces and Governance Jørgen Dige Pedersen GLOBALIZATION, DEVELOPMENT AND THE STATE The Performance of India and Brazil since 1990 Markus Perkmann and Ngai-Ling Sum GLOBALIZATION, REGIONALIZATION AND CROSS-BORDER REGIONS Leonard Seabrooke US POWER IN INTERNATIONAL FINANCE The Victory of Dividends Timothy J. Sinclair and Kenneth P. Thomas (editors) STRUCTURE AND AGENCY IN INTERNATIONAL CAPITAL MOBILITY Fredrik Söderbaum and Timothy M. Shaw (editors) THEORIES OF NEW REGIONALISM Susanne Soederberg, Georg Menz and Philip G. Cerny (editors) INTERNALIZING GLOBALIZATION The Rise of Neoliberalism and the Decline of National Varieties of Capitalism

International Political Economy Series Series Standing Order ISBN 978-0-333-71708-0 hardcover Series Standing Order ISBN 978-0-333-71110-1 paperback (outside North America only) You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and one of the ISBNs quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England

Globalization, Development and the State The Performance of India and Brazil since 1990 Jørgen Dige Pedersen Associate Professor, Department of Political Science, University of Aarhus, Denmark

© Jørgen Dige Pedersen 2008 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2008 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN-13: 978-0-230-20271-9 ISBN-10: 0-230-20271-3

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This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Pedersen, Jørgen Dige. Globalization, development and the state : the performance of India and Brazil since 1990 / Jørgen Dige Pedersen. p. cm. — (International political economy series) Includes bibliographical references and index. ISBN 0-230-20271-3 (alk. paper) 1. Globalization—Economic aspects—Developing countries. 2. Brazil—Economic policy. 3. Brazil—Economic conditions—1985– 4. India—Economic policy. 5. India—Economic conditions—1947– I. Title. JZ1318.P428 2008 337.54—dc22 10 9 8 7 6 5 4 3 2 1 17 16 15 14 13 12 11 10 09 08 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

2008016167

Contents List of Tables

vii

List of Figures

viii

List of Abbreviations

ix

Introduction

1

Outline of the book

7

1 Globalization, Contemporary Capitalism and Its Challenges for Developing Countries Introduction Economic globalization and developing countries Towards a new stage in global capitalism (1) The emergence of a new techno-economic paradigm for industrial production (2) A financial revolution? A new and expanded role for financial flows (3) A new global regulatory framework Summary

8 8 11 16 18 22 23 25

2 The State and Economic Development in Developing Countries

26

3 The Analytical Framework and the Two States

34

Methodological issues and the selection of the two case countries India and Brazil – a brief introduction The analytical model 4 Brazil

35 37 39 42

Introduction and overview: The 1980s and 1990s Managing the industrial challenges Managing the financial challenges Managing the new international economic arena Summing up: How Brazil managed the challenges of economic globalization in the 1990s

v

42 50 59 70 77

vi

Contents

5 India

80

Introduction and overview: The 1980s and the 1990s Managing the industrial challenges Managing the financial challenges Managing the new international economic arena Summing up: How India managed the challenges of economic globalization in the 1990s

80 91 102 114

6 Comparison and Explanation: New Developmental States

124

Comparison A first explanation India: Changes in state–business relations Developments before the late 1980s From the late 1980s onwards Summing up Brazil: Changes in state–business relations Developments before the late 1980s From the late 1980s onwards Summing up State–business relationship as an explanatory factor Conclusion Conclusion and general lessons Broader implications Theoretical perspectives and future research agenda

120

124 129 130 130 134 139 140 140 146 155 156 160 160 163 166

Notes

168

References

191

Index

212

Tables 1.1

Developing countries in global trade, 1970–2005

13

1.2

Developing countries in global financial flows, 1970–2005

14

4.1

Brazil: Sector composition of GDP, 1960–2005

43

4.2

Brazil: Manufacturing production by selected industrial sectors (%)

54

Brazil: Distribution of net sales of non-financial companies (%)

55

Brazil: Foreign trade orientation, 1980–2005

76

5.1

India: Sector composition of gross value added, 1960–2005

82

5.2

India: Value of output from registered manufacturing major sectors

96

5.3

Distribution by ownership of corporate sector assets

99

5.4

Selected items on India’s balance of payment, 1990–1 to 2005–6

111

India: Foreign trade orientation, 1980–2005

119

4.3 4.4

5.5

vii

Figures 3.1

Model of the causal structure of the argument

40

4.1

Brazil: Annual growth of GDP, 1970–2005

43

4.2

Brazil: Imports and exports, 1980–2005 (FOB values)

48

4.3

Brazil: Net inflow of foreign direct investments, 1980–2005

49

4.4

Brazil: Annual growth of manufacturing production, 1970–2005

53

4.5

Brazil: Gross domestic savings/GDP ratio, 1980–2005

65

4.6

Brazil: Selected external debt indicators, 1980–2005

65

4.7

Selected resource flows to/from Brazil, 1980–2005

66

4.8

Brazil: International reserves and short-term debt, 1980–2005

69

5.1

India: Annual growth of GDP, 1970–1 to 2005–6

82

5.2

Net flows of external financial resources to India, 1970–2003

84

5.3

India: Exports and imports, 1980–1 to 2005–6

90

5.4

Foreign direct investments into India, 1980–2005

90

5.5

India: Annual growth of manufacturing production, 1970–1 to 2005–6

95

5.6

India: Approved financial and technical collaboration agreements, 1970–2004

97

5.7

India: R&D/Sales ratio for selected groups of companies

98

5.8

India: FDI companies: Estimated share of production and paid-up capital in the corporate sector

100

India: Domestic savings/GDP ratio, 1980–1 to 2005–6

108

5.9

5.10 India: External debt indicators, 1980–2005

110

5.11 India: International currency reserves and short-term foreign debt, 1980–2005

112

6.1

127

Brazil and India: High technology exports, 1993–2005

viii

Abbreviations ABDIB

Associação Brasileira para o Desinvolvimento das Indústrias de Base

AIEI

Association of Indian Engineering Industry

ANPEI

Associação Nacional de Pesquisa, Desinvolvimento & Engenharia das Empresas Inovadoras

ASEAN

Association of Southeast Asian Nations

Assocham

Associated Chambers of Commerce and Industry

BANESPA

Banco de Estado de São Paulo

BIS

Bank for International Settlements

BJP

Bharatiya Janata Party

BNDES

Banco Nacional de Desenvolvimento Econômico e Social

BOVESPA

Bolsa de Valores de São Paulo

BRIC

Brazil, Russia, India and China

BSE

Bombay Stock Exchange

BVRJ

Bolsa de Valores de Rio de Janeiro

CACEX

Carteira de Comércio Exterior

CAMEX

Câmara de Comércio Exterior

CDE

Conselho de Desenvolvimento Econômico

CDI

Conselho de Desenvolvimento Industrial

CEI

Confederation of Engineering Industry

CIESP

Centro da Indústrias do Estado de São Paulo

CII

Confederation of Indian Industry

CNI

Confederaçao Nacional da Indústria

CSIR

Council of Scientific and Industrial Research

CSO

Central Statistical Organisation

CVM

Comissão de Valores Mobiliários

CVRD

Compania Vale do Rio Doce ix

x

Abbreviations

DAC

Development Assistance Committee

DAS

Direção e Assessoramento Superior

DST

Department of Science and Technology

DGTD

Directorate General of Technical Development

ECIB

Estudo da Competitividade da Indústria Brasileira

EPW

Economic and Political Weekly

FDI

Foreign direct investments

FEMA

Foreign Exchange Management Act

FERA

Foreign Exchange Regulation Act

FICCI

Federation of Indian Chambers of Industry and Commerce

FIEO

Federation of Indian Export Organisations

FIESP

Federação da Indústrias do Estado de São Paulo

FIIs

Foreign Institutional Investors

FIPB

Foreign Investment Promotion Board

FIRJAN

Federação da Indústrias do Estado de Rio de Janeiro

FTAA

Free Trade Area of the Americas

GATS

General Agreement on Trade in Services

GATT

General Agreement on Tariffs and Trade

GDP

Gross Domestic Product

GNI

Gross National Income

IAS

Indian Administrative Service

IBGE

Instituto Brasileiro de Geografia e Estatística

ICRIER

Indian Council for Research on International Economic Relations

ICT

Information and communication technologies

IEDI

Instituto de Estudos para o Desenvolvimento Industrial

IIFT

Indian Institute of Foreign Trade

ILPIC

Industrial Licensing Policy Inquiry Committee

IMF

International Monetary Fund

INPI

Instituto Nacional da Propriedade Industrial

IPEA

Instituto de Pesquisa Econômica Aplicada

Abbreviations xi

ISI

Import Substitution Industrialization

LAIA

Latin American Integration Association

MCT

Ministério da Ciência e Tecnologia

MDIC

Ministério do Desinvolvimento, Indústria e do Comercio

Mercosur

Mercado Común del Sur

MIC

Monopolies Inquiry Committee

NIC

Newly Industrializing Countries

NRIs

Non-Resident Indians

NSE

National Stock Exchange

OECD

Organisation for Economic Co-operation and Development

PACTI

Programa de Apoio à Capacitacão Tecnológica da Industria Brasileira

PBQP

Programa Brasileiro de Qualidade e Productividade

PCI

Programa de Competitividade Industrial

PNBE

Pensamento Nacional das Bases Empresariais

PND

Programa Nacional de Desestatição

PROER

Programa de Estimulo à Restruração e ao Fortalecimento do Sistema Financeiro Nacional

PROES

Programa de Incentivo à Redução do Setor Público Estadual na Atividade Bancária

R&D

Research and Development

RBI

Reserve Bank of India

RIS

Research and Information Systems for Non-Aligned Countries

SAARC

South Asian Association for Regional Cooperation

SAFTA

South Asia Free Trade Area

SAPTA

South Asia Preferential Trade Arrangement

SDR

Special Drawing Rights

SEBI

Securities and Exchange Board of India

SIA

Secretariat for Industrial Assistance

SIMESP

Sindicato da Indústria de Máquinas do Estado de São Paulo

xii

Abbreviations

SINDIPEÇAS Sindicato Nacional da Indústria de Componentes para Veículos Automotores SUMOC

Superintendência da Moeda e do Crédito

TNC

Transnational Corporations

TRIMS

Trade-Related Investment Measures

TRIPS

Trade-Related Intellectual Property Rights

UBE

União Brasileira de Empresários

UNCTAD

United Nations Conference on Trade & Development

UNIDO

United Nations Industrial Development Organization

WTO

World Trade Organization

Introduction

In 2003 the international investment bank Goldman Sachs published a report describing what it claimed to be four future economic powers in the world. Two of these future powers were developing countries, Brazil and India, and they were lumped together with two former socialist (and for that reason not easily comparable to the others) countries, Russia and China, to form what became known as the BRIC countries.1 The BRIC countries were predicted to advance rapidly, and by 2050 they were projected to have surpassed established major economic powers such as the UK, France, Germany and perhaps even Japan and the USA. This optimistic scenario was markedly different from what had earlier been predicted for developing countries. Only few years earlier, many observers had seen the advent of globalization as marking a serious threat to developing countries. Rather than economic advancement, these countries would risk economic marginalization, and the risk of marginalization was increased by the fact that those developmental state actions that in earlier times had brought prosperity to a few East Asian countries would no longer be feasible due to the new international rules governing globalization. The chances for economic progress for poor countries were indeed seen to be bleak. For India and Brazil specifically, their designation as future economic powers was strikingly different from the picture drawn by researchers only a decade or so earlier. At that time both countries were widely seen as being unable to repeat what was regarded as the model story for economic advancement, South Korea (and the other East Asian ‘tigers’). Although not as badly positioned as most African nations, India and Brazil were portrayed as being vulnerable and having relatively weak state abilities to manage the challenges that the accelerating economic globalization would pose for them (Evans 1995).2 Others gave a gloomier 1

2

Globalization, Development and the State

outlook, especially for India, claiming that the Indian state was generally ‘weak in shaping the economy’ (Bardhan 1992, p. 323) or even that it constituted ‘the most dramatic case of a failed developmental state’ (Herring 1999, p. 306).3 India and Brazil are for many reasons, which will be elaborated on later, clearly not fully representative for the diverse group of developing countries. Nevertheless the two countries combined include many of those conditions that are normally associated with developing countries: poverty and deprivation, high-level indebtedness, external dependency and political instability. A study of how the two countries have managed the challenges of economic globalization since the early 1990s will for that reason be highly relevant for the broader debate on the prospects for economic progress in developing countries. In addition, given the important role of the state in the two countries, a study of their experience may contribute to the discussion of the continued relevance of and scope for developmental state action under conditions of economic globalization. The study may even provide some inspiration as to which forms of state action may be most appropriate and effective today. The approach chosen in this book is to trace in detail what has happened in both countries since the early 1990s and place it in the context of two different theoretical debates: (1) the debate on globalization and on how new transformations of global capitalism introduce new challenges to developing countries, and (2) the debate on developmental states, initially based on the experience of the successful Asian tigers. When combined, viewpoints from these debates point to central issues that help structure the analysis of the two countries. In broad terms, the study tries to answer the question whether there is still room for developmental actions by states in developing countries, and if so, what will be the character of state actions and under what circumstances may they be successful. The challenges for developing countries are many, but it is possible to identify at least three as being of particular importance. One challenge comes from the economic restructuring of production processes in what must be regarded as the core centres of world capitalism: the affluent, developed countries in North America, Europe and Japan. The turn away from traditional Fordist production practices towards more knowledge-intensive processes, on the one hand, leads to a global restructuring of industrial production and can thus be seen as a key driver behind economic globalization. On the other hand, the global transmission of the new production practices also changes the standards for what must be regarded as successful and sustainable economic

Introduction

3

development. To manage a development-oriented economic strategy under these circumstances is certainly a great challenge. Another challenge linked to globalization arises from the vastly increased global flows of financial resources and from the increased delinking of the sphere of finance from the field of productive activities. With increasing financial openness towards world markets, this development poses both challenges and high risks for developing countries as witnessed by the large number of financial crises. Increased global financial flows also mean new opportunities for accessing these potential resources for financing economic development in poor countries, and the management and balancing of risks and opportunities present a major challenge for developing countries. A final major challenge comes from the new global efforts, mainly by developed countries, to establish and refine the global institutional framework for managing the world economy, chiefly through the establishment of the World Trade Organization (WTO). The establishment of the WTO has greatly enlarged the agenda for international trade negotiations, and this development has constituted a major challenge for governments and private economic actors in developing countries. The debate on how and under which circumstances, states representing developing countries will be able to manage these challenges of economic globalization in a development-friendly way has broadly provided two contrasting answers. One pessimistic answer is that the ‘ladder’ used by earlier entrants to achieve high levels of economic development has been ‘kicked away’ (Chang 2002). This argument claims that the implementation of new policies, inspired by neoliberal economic thought through structural adjustment programmes and through the new set of global, WTO-enforced rules, has effectively eliminated the possibilities for using the state policies that in the past were instrumental in raising the level of economic development in today’s rich countries. Similar arguments have been voiced by Robert Wade (2003), who argues that the ‘development space’ for state actions by developing nations has been shrinking in recent years due to the new rules of the game for international economic exchanges embodied in the WTO. In a similar vein, some of those who saw capable states as a precondition for achieving economic development now fear the erosion of these capabilities and a dwindling likelihood of their emergence due to the increasing global dominance of transnational corporations (TNCs) (Evans 1998). A sharply contrasting answer is the optimistic claim advanced by dominant international institutions and others – often labelled the

4

Globalization, Development and the State

‘Washington Consensus’ (Williamson 1993) – that the growing application of neoliberal ideas and the increasing ‘openness’ and ‘marketfriendly’ economic environment achieved among an increasing number of less developed countries will make their future economic prospects much brighter (World Bank 2002). The beneficial results may still not have reached all developing countries, but the growing realization that there are limits to what can be achieved through state regulation, and the consequential lessening of the stranglehold of states on markets, in this perspective, carries great promises for the future. In this book, I offer an alternative view to both viewpoints. Through an empirical analysis of the way in which two large and newly liberalized developing countries – India and Brazil – have managed the challenges of economic globalization since the early 1990s, I end up with conclusions that are both optimistic and pessimistic. The basic argument is that economic globalization does indeed poses challenges for developmental actions to states, but that the challenges presented are new in nature implying that responses will have to be different from those successfully utilized by a few countries in an earlier phase of global capitalism. A comparison of the experiences of India and Brazil leads to a more nuanced picture of both prospects for and limits to the possible outcomes of different state actions. The optimistic conclusion comes from the fact that both India and – to a lesser degree – Brazil have managed to improve their economic performance since they both embraced globalization through a range of economic reforms implemented since the early 1990s. Both countries have actively tried to manage the different globalization challenges: within industrial technology, global finance and governance of international trade. The pessimistic conclusion comes from the difficulties faced by especially Brazil, and also India, in areas of technological development, financial resource availability and dependence on TNCs and international financial institutions. These difficulties point to the persistence of structurally given limits to what can be achieved even by relatively capable states. The differences in the degree of success by the two countries can, apart from different structural conditions, also be traced back to the different degrees to which both countries have succeeded in emulating a kind of state–business collaboration known from the East Asian developmental states. During the 1990s and into the new millennium, both Brazil and India have seen a gradual emergence of changing attitudes and perceptions among both state administrators and business organizations, resulting in closer and more mature institutionalized forms of cooperation concerning key economic policy issues. These changes in

Introduction

5

state–business relations developed earlier and became more mature in India than in Brazil due to the strongly organized domestic business in India and the minor role played here by foreign companies; but there are many similarities between the two countries in the development of closer links between the state and the business community. A particular interesting development is the increased involvement by various forms of independent technical and scientific experts because of the increased demand for scholarly insights in an era of increasingly knowledgeintensive, global activities. Another interesting feature concerns the circumstances under which the new developmental state such as interactions between private business and the state take place. Two differences arising from the comparison between India and Brazil seem particularly important. One is the degree of structural dependency as witnessed by Brazil’s persistent, severe indebtedness that acts as a strong impediment for more forceful state actions because of financial strings and the need for compliance with the rules of the International Monetary Fund (IMF) that this entails. In comparison, the Indian state has been much less constrained in its economic policymaking. A second and related difference concerns the structural position of both foreign and domestic companies within the domestic economy. As feared by many globalization critics, foreign companies have expanded their position within the Brazilian economy during the period of increased opening to the global economy. This is mainly a result of the privatization of many state-owned companies, but the entry of foreign companies has also forced a retreat of domestic companies in some branches. The result has been a change in the balance between domestic and foreign companies, and this has probably had a negative impact on the organizational efforts within the private business sector. It may also have impeded the access by private business to the national government and influenced the degree to which the government’s economic policies could favour local companies. Here India once again presents a contrast. In India, changes in government policies have been more gradual, and the policies more protective towards local Indian companies, and this may have allowed the Indian companies more breathing space to reorganize and turn competitive vis-à-vis their foreign competitors. Foreign companies have clearly increased their presence within the Indian economy, but, in relative terms, the balance between foreign and domestic companies has been maintained, thus preserving the dominant role of local business. The arguments presented here are inserted into a larger debate about states and economic development in which comparisons between India

6

Globalization, Development and the State

and Brazil have had a certain place. Peter Evans’s (1995) book on ‘embedded autonomy’ remains a milestone both for its introduction of the concept of embedded autonomy to characterize developmental states and for its comparison between India and Brazil, especially within the computer industry. Eswaran Sridharan’s (1996) comparative study of the development of the electronics industry in India and Brazil remains a valuable contribution, especially for its emphasis on the concept of strategic capacity of the state. Last, but certainly not least, Atul Kohli’s (2004) study on state-directed development over a much longer time period, which also includes a comparison of India and Brazil, stands out.4 A common feature of these studies is that they include other countries apart from India and Brazil (usually South Korea), and that except Kohli’s book, they have a narrower focus on particular industrial sectors. Another common element is that their analysis stops around 1990, just before the dramatic policy changes in both countries that constitute the starting point for this study. For this reason alone, the analysis offered here, apart from differences in the theoretical approach and scope of analysis, can be seen as a supplement to and an updating of these earlier contributions. One important new perspective in this book is the explicit focus on the new international context for development that both countries have faced since the early 1990s, especially the challenges of the new knowledge-intensive production paradigm and the new evolving international regulatory institutional framework. A related contribution is the tentative conclusion that points to the continued relevance of developmental state actions, but under new forms, which include a much more open form of state–business collaboration, that include important contributions in the form of independent expertise of a ‘softer’ intellectual or academic character. A repetition of the ‘dirigiste’ and authoritarian forms of developmental state actions that were found earlier in the light of the analysis presented here are not likely to lead to successful outcomes in the future. I focus exclusively on the modern sectors, especially the industrial sectors, of the two countries and on the role of the state and of private business. This implies that many of the issues that normally figure prominently in the debates on globalization – employment issues, poverty and social exclusion, cultural Westernization and others – are ignored, not because they are unimportant, but because I wanted to concentrate on the issue of the survival of the developmental role of the state in a narrow economic sense. I believe that this is an important issue in itself and that increased knowledge about the role of the state in the management of the economy is essential also for the broader

Introduction

7

social, political and cultural debates on the impact of globalization on developing countries. The book is based on primary data from government and other sources combined with a reading of secondary sources. It is also informed by a number of interviews with researchers, government officials and representatives from the private business sector in India and in Brazil. The field studies were conducted in New Delhi, Mumbai and Bangalore during November 1999 and April 2002, and Rio de Janeiro, Brasilia and São Paulo in January 2001. I am extremely grateful to all the wonderful people in both India and Brazil who helped me. Many of them I had met during previous visits to the two countries, and I made good use of information collected during those earlier trips. The information collected covers primarily the period till the start of the first Lula administration in Brazil in 2003 and till the end of the Bharatiya Janata Party (BJP) administration in India in 2004, but in a few instances, later developments have been included.

Outline of the book The book is organized as follows: Chapter 1 will present the theoretical discussion on economic globalization, the role of developing countries and the contours of a new global capitalism, and out of this extract three key contemporary challenges for late-comer developing countries. They include the challenges of a new knowledge-intensive paradigm for industrial production, the challenges of increasingly volatile and global financial markets and the challenges of the ongoing efforts to construct a new, international regulatory regime for global economic interaction primarily within the WTO. Chapter 2 presents the theoretical discussion on developmental states and identifies its key elements. Chapter 3 presents the two selected cases, India and Brazil, and summarizes the analytical model to be used in the empirical analysis that follows in the three following chapters. Chapters 4 and 5 contain the analysis of the two countries, starting with Brazil, and the chapters narrate in detail how they have managed the globalization challenges identified earlier. The results from this analysis are summarized and compared in Chapter 6, which then proceeds to investigate what becomes the main explanatory factor offered, namely, the different nature of the changes in state–business relations in the two countries. The book ends with a conclusion and a discussion of some of the theoretical perspectives and broader implications of the study.

1 Globalization, Contemporary Capitalism and Its Challenges for Developing Countries

Introduction In recent years, globalization has been regarded as the key challenge for nations and states all over the world. Nevertheless there is still much uncertainty and lack of clarity with regard to what globalization stands for and how it affects societies. Consequently, the academic discussion on globalization tends to cover almost the whole field of the social sciences – politics, economics and culture (Held et al. 1999). Even if we limit the discussion to economic globalization, there is only a little less disagreement and confusion over the use of the term (Dicken 1998, p. 4). In practical terms there is, however, considerable agreement among researchers and observers that an increase in ‘worldwide interconnectedness’ (Held et al. 1999, p. 2), including economic interconnectedness, constitutes a core element in the process of globalization.1 The disputes concern, among other things, the question of whether there has in fact occurred a significant increase in interconnectedness measured in terms of international flows of trade, direct investments and other financial flows. No one would dispute that all types of international economic flows have indeed increased tremendously in recent years, but many contend that the level of international interconnectedness is still lower than or on par with the level attained in the golden period of capitalist expansion in the late 19th/early 20th century (Hirst and Thompson 1996; Bairoch 1996). In terms of global spread of economic flows, this may well be the case, but it is not self-evident that those historical ‘international’ flows were in fact truly international. A significant proportion of trade and investment flows in those days was confined to geographical areas and societies which as colonies, dependencies or otherwise were under the control of the political authorities of 8

Challenges for Developing Countries 9

the leading imperialist powers. Trade and investments within colonial empires would hardly qualify as being international, at least in the sense of being outside the control of the ‘home’ state. If this is taken into account, there is little doubt that the current level and intensity of economic interconnectedness between countries is truly unprecedented in scale.2 A related and recent argument in the globalization debate holds that ‘the age of globalization’ was a short-term conjunctural phenomenon associated with the peculiar circumstances of the 1990s and that the world is now more or less back to normal (Rosenberg 2005). When applied to those sociological theories that once claimed the emergence of a wholly new and different global era of human existence, this assertion may well be true. If applied to the empirical realities of an increasingly interconnected world economy, it is certainly not true. There is, however, an important theme in this recent debate as to whether the increasing economic interconnectedness represents conjunctural or epochal changes (Callinicos 2005). As will be clear later, the viewpoint offered here is that it is analytically fruitful to associate globalization with more deep-rooted changes in the economic sphere, including changes in the nature of production processes. Whether these changes eventually prove to be historically irreversible will, of course, determine whether what may seem to be a conjunctural phenomenon is in reality a structural or epochal change. This links up with a second argument against the notion that the economic globalization of today expresses nothing historically new. Many observers have noted that the recent surge in international economic flows represents a number of qualitatively new phenomena with no historical parallel, often termed ‘deep integration’ (Haggard 1995; Dicken 1998, p. 5). This interpretation supports the notion that globalization represents an epochal shift in the development of capitalism.3 The same notion of epochal change comes naturally from those who see economic globalization in the context of global political changes, especially the emergence of a ‘new world order’ after the end of the Cold War (Gilpin 2000). The notion of qualitative changes is further supported by the fact that during the last two decades, international economic flows have not only increased in magnitude (and partly in rates of growth) but also changed in nature and overall composition. While the growth of international trade has increased the (commercial) interconnectedness of most countries (measured conventionally in terms of trade-to-GDP ratios), investment flows have increased the interconnectedness and international functional integration of production relations (Dicken

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Globalization, Development and the State

2003; Held et al. 1999, Chs 2 and 5). Most impressive, however, has been the tremendous increase in almost all types of financial flows, from currency conversions and trade in shares and bonds to new financial instruments such as futures, options and swaps (Held et al. 1999, Ch. 3; Strange 1998). These new developments have simultaneously increased the importance and power of those private actors who operate and organize international economic flows, that is, the TNCs and the financial conglomerates operating in the international financial markets (some of whom are also TNCs). TNCs have rightly been seen as ‘the primary movers and shapers of the global economy’ (Dicken 2003, Ch. 7). Increasingly, international trade is conducted as intrafirm trade of TNCs or as trade within business networks managed by TNCs. TNCs are by definition controlling international direct investment flows, and substantial parts of international financial flows are undertaken by the very same companies (Held et al. 1999, Ch. 5; Dicken 2003, Chs 7 and 8; UNCTAD, World Investment Report, annual). The dynamics behind this new economic globalization, then, are to be found in a complex combination of actions and decisions by TNCs, policies enacted by dominant states of the world and processes of rapid technological change (Dicken 2003). The drive towards global profit-making by TNCs and the liberalizing policies of dominant states combined with technological innovation, especially in communication and information technologies, are thus crucial determinants behind the surge of economic globalization (Dicken 2003). A key issue in the debate over the effects of economic globalization is the role of the state. One important aspect of this concerns the state’s functions and power vis-à-vis the domestic economy and towards the international system. It has been a widespread notion that economic globalization has eroded the capacities of states to regulate, influence and direct economic outcomes of its own societies (Strange 1996). It has furthermore been argued that the liberalizing economic policies enforced by the leading international institutions have increasingly excluded interventionist policies such as those which in earlier times ensured the economic growth of today’s developed countries (Chang 2002). In an even more pessimistic vision, this ‘retreat of the state’ is seen as being complemented by a ‘splintering’ or fragmentation of both the state itself (Cerny 2000) and civil society (Theobald 1995), thus enlarging the scope for private appropriation of public resources akin to what has traditionally been witnessed in some developing states. In contrast to the changes in the role of the state, the powers and capacities of private corporations, especially large TNCs, have increased

Challenges for Developing Countries 11

tremendously (Stopford and Strange 1991; Barnet and Cavanagh 1994; Korten 2001). The pessimistic view of state decline, though probably dominant, has not gone undisputed. It has been pointed out that economic globalization may in fact encourage state intervention, and while some forms of state intervention have been made redundant, others have increased in importance, the outcome so far being a change in rather than a decrease of state power (Evans 1997b; Weiss 1998). A related aspect of the changing role of the state concerns its form and internal functioning. It has been observed that economic globalization, in particular financial globalization, has tended to tilt the balance of power within the state towards agencies in control of macroeconomic policymaking – ministries of finance and the central banks (Sassen 1999, pp. 159, 165; Gilpin 2000, pp. 85–6).4 It is uncertain, however, whether this shift in power reflects the impact of economic globalization alone or is a reflection of the current hegemony of neoliberal economic philosophy. The same observation of a rise in importance of technocrats in charge of macroeconomic policymaking has been made in the discussion over the IMF- and World Banksponsored economic policy reforms in many developing countries since the early 1980s (Bates and Krueger 1993). As regards the international activities of the states, it has been pointed out that in terms of international collective actions, including the construction of international rules of the game, the states of the developed North in particular have increased their activities and their control over transborder economic activities (Scholte 1997). For some, this development even points towards an emerging supranational state serving a new global bourgeoisie (Burbach and Robinson 1999). Most of the discussion over economic globalization has been concerned with the situation of states in the advanced capitalist countries, largely ignoring the situation of states in the developing world (Held et al. 1999). It is now time to consider briefly how economic globalization is perceived from the point of view of developing countries.

Economic globalization and developing countries From a developing-country perspective, the discussion over the nature and dynamics of economic globalization displays some paradoxical features. While it is generally acknowledged that today economic globalization constitutes a main challenge for developing countries (Oman 1994), the nature of this challenge is clearly of a different order for developing countries than for developed states. One obvious reason for

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Globalization, Development and the State

this is that while deliberate policies by developed states have played an important role in promoting economic globalization, the states of developing countries have not been among the globalization drivers (Oman 1999; Khor 2000). States and companies based in developing countries have been ‘globalization-takers’, not ‘globalization-makers’, but they are the ones who would most immediately feel the impact of globalization and who will have to devise appropriate strategies to manage the challenges of economic globalization.5 The general challenges of economic globalization for developing countries are the twin dangers of, on the one hand, being economically marginalized – even excluded – from the world economy and, on the other hand, having their national capacity for independent developmental activities severely eroded (Hoogvelt 1997; Evans 1998; Oman 1999). As a quick reference back to dependency approaches and worldsystem theories will show, there is little new for developing countries in experiencing dangers from an engagement with the global economy.6 Contrary to the situation for developed countries, developing countries – the periphery – have for centuries been subjected to the vagaries of powers external to their own societies, be it politically through colonial powers or economically through the operation of international markets. And as formally independent states, they have been accustomed to having less than full sovereignty over the economic fate of their own societies, giving rise to notions like ‘quasi-states’ (Jackson 1990). This implies that the challenges of economic marginalization, increased economic dependency and eroded state capacities among developed states, rather than being seen as a wholly new phenomenon for developing states, must be seen as an intensification of those challenges that they have faced since their inception as formally independent states. The increasingly different economic trajectories of countries normally grouped together as ‘developing countries’ have been used as an argument for an abandonment of the category altogether (Harris 1987). In the context of economic globalization, it has also been argued that the former core–periphery hierarchy of nations is being, or maybe already has been, transformed into a social division of the world economy which cuts across national borders (Hoogvelt 1997, p. xii). My argument for sticking to the traditional core–periphery division or developed– developing country division rests with the fact that as long as states are still in charge of a significant part of the global economic policymaking authority – as I believe they are – it makes sense to group together those states that I have called ‘globalization takers’ which rule societies that by global standards must be regarded as relatively poor and economically

Challenges for Developing Countries 13

less developed. In the context of this investigation into the responses by selected developing states to the challenges of economic globalization, these states can be regarded as comparable because they face common challenges, although they possess different capabilities for responding to them (see the arguments for choosing India and Brazil as cases). In the following section, I will discuss further the nature of these challenges and the reasons for a reassessment and rethinking the role of economic globalization, but before that, it is warranted briefly to portray the changes in the overall position of developing countries and regions within the developing world within the global economy during the last decades of the 20th century. Table 1.1 shows the increasing share of developing countries in global trade and in trade in manufactured goods since 1970 (part of the increase in the 1970s and decline in the 1980s was caused by increases and decreases in oil prices). Data for the main regions show the worrisome decline of sub-Saharan Africa in global trade and its failure to advance to any significant degree in manufacturing. An opposite trend

Table 1.1

Developing countries in global trade, 1970–2005

(a) Share of export Developing countries Latin America Sub-Saharan Africa Asia* (b) Share of export of manufactured goods† Developing countries Latin America Africa‡ Asia* (c) Export/GDP ratio East Asia and Pacific South Asia Latin America Sub-Saharan Africa

1970

1980

1990

2000

2005

19.1 5.5 3.5 5.9

29.4 5.5 3.7 8.6

(%) 24.2 4.1 1.9 13.5

31.7 5.6 1.5 20.1

35.9 5.4 1.8 22.8

6.1 1.0 0.4 3.8

10.6 1.5 0.4 7.5

(%) 17.8 1.8 0.5 14.3

28.5 5.9 1.1 18.2

31.4 4.9 1.5 20.6

7.7 5.1 9.8 21.9

16.9 7.7 13.0 31.9

(%) 24.4 8.6 16.9 27.2

36.1 14.2 20.4 32.6

45.7 19.8 25.1 33.6

* Not including West Asia, Oceania/Pacific and Central Asia † The definition of ‘manufactured goods’ has been broadened after 2000. Figures for 2000 and 2005 are for this reason not comparable with figures for earlier years ‡ Including North Africa Source: (a–b) UNCTAD, Handbook of Statistics (online). (c) World Bank, World Development Indicators (online).

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Globalization, Development and the State

has characterized Asia with its increasing share of world trade, especially trade in manufactured goods. Latin America’s share of global trade has generally stagnated and its share of global manufactured trade has risen only slowly. Sub-Saharan Africa has over time experienced the strongest engagement with world markets; however, its export/GDP ratio has stagnated while all other regions have experienced a steady increase in their ratios. East Asia marks itself as the region with the fastest growth and it has today the highest level of global trade integration. Table 1.2 shows a similar but more fluctuating pattern of financial flows. Developing countries have gradually increased their share of global flows of foreign direct investments (FDI), with Africa declining, Asia rising and Latin America losing its previous prominent position as destination for Table 1.2

Developing countries in global financial flows, 1970–2005

(a) Share of FDI inflows Developing countries Latin America Sub-Saharan Africa Asia* (b) FDI (stock)/GDP ratio Developing countries Latin America Sub-Saharan Africa Asia*

1970

1980

1990

2000

2005

28.7 11.9 6.1 5.3

13.9 11.7 0.4 7.1

Per cent 17.8 4.8 0.8 11.0

18.1 6.9 0.4 10.3

33.2 8.0 1.7 17.7

—† — — —

4.9 4.3 8.5 3.9

9.8 10.3 12.0 9.1

26.3 25.8 33.0 30.5

27.0 36.7 30.2 25.8

100.0 (41.8) 44.2 (68.4) 5.5 (23.7) 34.1 (59.5) 5.3 (11.0)

100.0 (85.3) 20.0 (83.1) 5.5 (78.7) 45.2 (97.7) 5.8 (51.3)

100.0 (95.7) 26.9 (97.6) 4.8 (73.5) 20.5 (98.8) 5.4 (46.4)

(c) Share of private net financial flows to developing countries (private share of total flows) Developing countries East Asia and Pacific South Asia Latin America Sub-Saharan Africa

100.0 (55.1) 13.6 (44.0) 1.5 (6.9) 56.8 (78.7) 18.9 (47.3)

100.0 (55.9) 13.3 (61.6) 2.9 (19.7) 58.8 (84.1) 10.3 (37.7)

* Not including West Asia and Oceania/Pacific † Not available Source: (a–b) UNCTAD, FDI online database and World Investment Report (print edition); (c) World Bank, Global Development Finance (online).

Challenges for Developing Countries 15

international investments.7 All regions have seen their economies integrate closer with the global economy through foreign investments, as indicated by the rising share of these investments in the domestic economy. Africa has traditionally been the region with the closest links to global capital, but during the 1990s, Asian economies have increasingly become ‘globalized’ through foreign investments.8 Overall, private financial flows (including FDI) have gone to East Asia and to Latin America, while sub-Saharan Africa and South Asia have received much less. These regions have traditionally relied more on public flows (mostly aid), and for Africa this still continues to be the case. Despite some fluctuations over time, private financial flows have become more important for all regions of the developing world. The rising importance of FDI is a good indication of the rising importance of TNCs for the global economy and for developing countries. TNCs almost exclusively have their origin in developed countries, and along with increasing globalization, these typically very large private corporations have emerged as the most important private economic actors that developing countries are confronted with in their dealings with the global economy (UNCTAD, annual).9 TNCs are often the only sources for new industrial technologies; they may contribute financial resources for economic development and assist in export activities in addition to their potential contributions to gains in both employment and local income.10 While empirical information on the precise importance of TNCs for the global trade of developing countries is lacking, estimates of the large and most likely increasing weight in global trade indicate that their role must be very large indeed.11 The importance of TNCs as the key agents driving economic globalization underlines the importance for developing countries to manage their relationship with these large foreign companies. The overall picture of developing countries’ engagement with the global economy that comes out of this statistical exercise is one of an increasingly important and close involvement. The increase in interconnectedness has not, however, been a uniform and unbroken trend, and the position of different regions varies over time. Africa, in particular, seems, in many areas, to face the threat of economic marginalization; Asian countries face the problems of managing their integration into the global economy; and Latin America a bit of both, given its in-between position. The increasing interconnectedness between the global economy and developing countries makes it important to further conceptualize and specify the challenges posed by economic globalization.

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Globalization, Development and the State

Towards a new stage in global capitalism In order to conceptualize economic globalization and identify the globalization challenges for developing countries, it is necessary to move one step backwards and ask what exactly has changed in the nature of capitalism in the developed countries. Given the overall centre–periphery structure of the global system, the dynamics behind economic globalization are such that it is the characteristics of capitalism in the developed world that are being transmitted globally and, through this global expansion, constitute new challenges to developing countries. One particularly promising, but also complex and multifaceted, interpretation of and approach to the changes taking place in contemporary capitalism comes from the discussion over what has been termed ‘the crisis of Fordism’ in the developed countries/the Western world and the (possible) transition to a qualitatively new stage in global capitalism, often termed ‘post-Fordism’. This approach has originated in what has been called the French Regulation School, but its influence and the general debate over the changing nature of contemporary capitalism has reached far beyond that.12 Central for the regulation school is its holistic approach to contemporary capitalism. According to this approach, stability (and prosperity) depends upon the establishment of a functional ‘fit’ between the regime of accumulation (or production system) including its technological practices and the wider set of social procedures and institutions, the mode of regulation. The paradigmatic ideal type of a stable and prosperous combination is that of Fordism, which (briefly) represents a production system based upon the dominance of industrial mass production organized along the principles of Taylorism (scientific management) and a specific form of social regulation. In accordance with the Marxist tradition, which has inspired regulation school theorists, changes in production relations are regarded as the key to subsequent social and institutional changes.13 Complementing the production system of Fordism was a mode of regulation that at the national level was organized around a Keynesian welfare state which ensured the stable consumption of a mass market for the production of standardized industrial products. Most analyses of Fordism have focused on the national level and acknowledged that the fortuitous combination of mass production and mass consumption has taken many different national forms. It has, however, also been pointed out that in the post-war golden period of Fordism and Keynesianism, the national economic systems were complemented and shaped by international arrangements supporting the different national Fordist models through the ‘embedded liberalism’ of

Challenges for Developing Countries 17

the Bretton Woods system, at least in the relationship among the developed countries (Ruggie 1982; Ruccio 1989; Hoogvelt 1997). It is widely assumed that Fordism as a social system came into a crisis during the 1970s with the onset of the economic crisis in the dominant Western countries, with the abandonment of the post-war international Bretton Woods system of exchange rates in 1971 and with the exhaustion of the productive potentials of the Taylorist mass-production system. The crisis period was therefore also seen as the beginning of a transition to a new type of capitalism, often termed post-Fordism, the precise nature of which has been hotly debated.14 Given its emphasis on production relations, this discussion can easily be linked to the discussion on the emergence of new paradigms for industrial production that goes beyond the regulation theory, but clearly can be subsumed under its holistic approach (see the next section). The main advantage of the regulation approach to changes in contemporary capitalism lies in its emphasis of the holistic and functionally integrated nature of social systems, including socio-economic and socio-institutional changes. Changes in production processes are thus seen as being linked to changes in the wider framework of social regulation, social institutions and states and increasingly also the international regulatory framework and international institutions. It therefore provides a very broad agenda for the discussion over contemporary social change, including the nature and challenges inherent in the process of economic globalization.15 Indeed, its focus on changes in production processes also seems to indicate a view on economic globalization that sees this process of global expansion as being driven by more profound changes in the productive systems of the core capitalist countries. For obvious reasons, there has been considerable debate over the empirical relevance of macrosociological concepts such as Fordism, and especially post-Fordism. Disagreements have primarily arisen over the proper characterization of the nature of the new growth regime (mode of accumulation) and the key institutional arrangements of this emerging form of a new coherent capitalist system. Robert Boyer thus mentions seven alternative forms, from the advance of Japanese ‘Toyotism’ over various forms of information-, service- or knowledge-led growth regimes to competition- and export-led development to what he regards as the most recent candidate for the future, namely, what he terms a ‘finance-led growth regime’ (Boyer 2000, pp. 118–9). Each of these growth regimes is characterized by a particular set of institutional forms ranging from microlevel wage–labour arrangement over broader state– society relations to interstate regimes in the international system.

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Globalization, Development and the State

The list of alternative forms of growth regimes nicely illustrates that the regulation approach, far from being a coherent body of theory with firm predictive powers, must be seen as a heuristic, or open research agenda (Grahl and Teague 2000, p. 174). Proponents of the regulation approach themselves acknowledge that the emergence of new combinations of growth regimes and institutional forms is a trial-and-error process with no fixed final solution and no guarantee for a successful outcome (Boyer and Durand 1997; Boyer and Saillard 2002). This particular character of the approach has enabled it to include in the theorization many of the other debates over the future nature and organization of production activities and of the nature of states and other institutions at the local, national and international levels. Thus, debates over the impact of microelectronics and the new information and communication technologies (ICTs) on production processes, debates over changing forms of state regulation in advanced capitalist countries as well as debates over the changes in the international institutions can be subsumed under the umbrella of the transition from Fordism to something new.16 The emergence of a new post-Fordist stage in the countries at the centre of global capitalism will, according to the regulation theories discussed above, entail (1) a change in the nature of the process of production and (2) a change in the national and international regulatory framework. The implication is that changes in these areas, as transmitted globally from their centres in developed countries, will constitute new challenges for developing countries at the receiving end. Given their position as globalization takers, developing countries will, then, have to adapt to new processes of production and circulation, must devise new national regulatory frameworks and will have to face challenges of new international regulatory frameworks largely decided by others. For reasons that will be explained shortly, I have included a related challenge in addition to the challenge from a new technoindustrial paradigm, namely, the challenge arising from the increasing importance of financial relations as indicated above by Boyer (2000). From the debates over Fordism and post-Fordism, it is then possible to point to three important changes in the ‘heart’ of modern capitalism that through the process of economic globalization are becoming challenges for states and for economic actors in developing countries.17 (1) The emergence of a new techno-economic paradigm for industrial production As mentioned by Boyer (2000), there have been many contenders for the position as the defining paradigm for the growth regime of a new phase

Challenges for Developing Countries 19

of capitalist production systems, or as some prefer, a third industrial revolution (Dicken 2003, pp. 85–121) (the second industrial revolution being the Fordist one). There are, however, several characteristics in common among the various contenders that may facilitate a closer identification of some key elements in the new paradigm.18 One technical element is the increasing importance of microelectronics and, more generally, advances in ICTs. Another element is closely linked to changes in the organization of shop-floor production. While Taylorism entailed a clear organizational separation of the work of the hand and the work of the brain through ‘scientific management’ techniques, recent changes seem to entail a much closer integration of hand and brain and certainly a larger ‘amount’ or proportion of intellectual (‘brain’), or mental, work than was the case under Fordism. Some observers have also noted the change from rigid organization of work processes to more specialized and highly flexible organizational methods, ‘flexible specialization’ becoming a popular key characteristic for the new paradigm (Piore and Sabel 1984). The increasing use of intellectual labour is one reason for the use of the term ‘knowledge-based economies’ to characterize the change in the principal economies of the world and the concern for technology and industry policies that promote this new type of economy (OECD 1996).19 The most comprehensive way of conceptualizing the new or emerging techno-economic paradigm is probably to see it as being research-intensive and based upon deployment of mental labour to a significantly larger degree than was the case under Fordism.20 An important empirical consequence of this broad definition is that many activities hitherto classified in the national accounts as belonging to the service sector should today qualify as key productive activities. The writing of software would be one example, as would several forms of consultancy activities that have no direct link to ‘material’ production.21 The emergence of a new techno-economic paradigm can furthermore be seen as one key driving force behind economic globalization: It is this competitive strength of flexible post-Taylorist organizations in the OECD economies which, more than any other factor, is driving and shaping globalization today. (Oman 1999, p. 51) The debate over the transition to a new paradigm for capitalist development has mostly concerned developments in the leading developed countries. There are only a few attempts to systematically relate developments in the core countries to changes in the developing world.

20

Globalization, Development and the State

The first to seriously debate the consequences for developing countries of the new techno-economic paradigm and its associated socioinstitutional framework was Carlota Perez (1985), who in a seminal article argued that the new, flexible, information-intensive productive activities based upon the use of microelectronics while clearly presenting new obstacles to economic growth for developing countries, also meant new opportunities for ‘leapfrogging’ into the new technologies and for entering new emerging niches in international markets. She later expanded her argument, claiming that in a period of transition from one techno-economic paradigm to another, new entrants (developing countries) will have two options (Perez 2001). One option is, as envisaged in her first contribution, to try to enter the new upcoming industries or industries closely linked to it. Entry conditions are in some respects quite favourable because some of the key requirements of the new paradigm are to be found in the quality of personnel and organization rather than in costly capital equipment.22 The other option is to try to enter the mature, low-profit and globally stagnating industries of the previous paradigm (Fordism). Entering these industries will usually require less technological effort but very large investments, and the rewards in terms of profits tend to be modest. The crisis of Fordist practices in developed countries led Alain Lipietz (1987) to envisage a perspective for developing countries similar to that of Perez. His discussion concerned the impact of the crisis of central Fordism on developing countries in a manner similar to the debate over the new international division of labour a decade earlier.23 One response to this crisis, he contended, was the export of Taylorist production practices of central Fordism – mostly through foreign investments – to developing countries in the form of simple mass-production processes based upon the use of cheap labour but without the complete institutional framework/mode of regulation which in the developed countries through productivity and wage increases had created a mass market for industrial production. The production would consequently have to be highly export-oriented. This export of ‘bloody Taylorism’ thus would form the core of a specific kind of peripheral Fordism.24 The industrial activities that would be included in such an industrialization process would be those mature industries that Perez sees as being a characteristic of the declining techno-economic paradigm. In sum, this discussion on the impact of the transition from Fordism to post-Fordism on developing countries points to two ideal-type options available for developing countries in the context of a globalization of the

Challenges for Developing Countries 21

new growth regime. One option, as emphasized by Perez, is to seek out relevant niches and opportunities in the new regime for knowledgeintensive production and seek an insertion into the global economy on this basis. The other option, foreseen by Lipietz (and partly by Perez 2001) as an actually ongoing process, is to take over core elements from old Fordist industries based on cheap skilled labour and exports to world markets relying primarily on price competitiveness. In the real world, there are of course many options in between the two extremes, and the dividing line between them tends to be blurred. Empirical cases will show a mixed picture, and for many if not most countries, it will be more profitable, and the only option in the short run, to aim for established Fordist industries rather than to aim for a transition to the new paradigm. In the long run, the most viable option will, however, be to enter the new dominant production paradigm, if only because the change to more flexible production systems in developed countries sometime tends to make it more difficult for Taylorist producers in developing countries to remain competitive (Oman 1999, p. 55).25 Both strategies can potentially be implemented by inviting investments from TNCs. The first strategy can do this through an invitation to foreign companies to relocate their production facilities away from developed countries to low-wage developing countries with a sufficient supply of skilled workers. The second strategy could involve TNCs attracted by a highly educated workforce with innovative mental skills (and low wages being of less importance). Given TNCs’ high concentration and home bases in developed countries, it is to be expected that these corporations’ participation in an implementation of the first strategy will be much greater than their contribution to an industrial transformation based upon the second strategy. The first strategy can indeed be implemented solely based on the attraction of foreign investments. Establishment of a post-Fordist, high-tech industrial base in developing countries will in contrast most likely have to involve a strong element of local entrepreneurs.26 In empirical terms, the dividing line between the two different trajectories and strategies will be between, on the one hand, growth in ‘traditional’ industries (complemented by assertions over how much they have been restructured by new technologies, which makes any assessment based only on traditional industry characteristics problematic) and, on the other hand, the new knowledge-intensive industries, including ‘service’ industries consisting almost exclusively of ‘products’ of mental labour, one example being software.

22

Globalization, Development and the State

(2) A financial revolution? A new and expanded role for financial flows Parallel to the emergence of a new techno-economic paradigm, there has been a tremendous increase in financial activities and in the magnitude and scope of international financial flows, both globally and for developing countries (Stallings 2003; Table 1.2). One of the reasons for this increase in the importance of financial activities in the global economy lies in the liberalization policies towards the financial sector by leading industrial countries (Helleiner 1994), but it is also possible to point to developments that link the increased importance of financial activities with the advent of the new techno-economic paradigm. One element of the new paradigm is the increased research intensity of production processes. The development of new knowledge-intensive products today often involves huge outlays for research and development. This has intensified the need for companies to have easy access to large financial resources. This need for finance has, on the one hand, added significantly to the demand side pull for increased international credits (Strange 1996, pp. 9–12). On the other hand, the heavy costs of developing new products and new production processes result in a search for still larger markets to recapture development costs, thus in effect providing new incentives for increased globalization of markets (Scholte 1997).27 Some of the new technologies that are at the core of the new techno-economic paradigm, in particular, the new ICTs based on microelectronics, are at the same time those technologies that have made globalization, and in particular financial globalization, possible. The new forms of production and the emergence of global financial flows are in these perspectives thus structurally linked to the emergence of new techno-economic paradigm and to the increased economic globalization. A second form of linkage between the new emerging paradigm for industrial production and the increased importance of financial capital has been proposed by Carlota Perez, who sees a close relationship between the cyclical developments of techno-economic paradigms and the behaviour of financial or credit capital (Perez 2002). In the early stages of a new ‘industrial revolution’, there is a need for large inputs of fresh capital, and the simultaneous exhaustion of the old paradigm ensures that available capital is looking for new and more profitable investment opportunities. This ‘love affair of financial capital with the new technological revolution’ (Perez 2002, p. 90) will not, however, ensure full and productive use of all available capital, and for that reason credit flows may seek speculative outlets which may result in periodic financial crisis. In this perspective, the increased importance of financial flows is thus associated with the initial phase of a new

Challenges for Developing Countries 23

techno-economic paradigm. From the perspective of developing countries, however, the importance of financial flows and the risks of financial crisis – no matter whether they are structurally or conjuncturally related to the new techno-economic paradigm – represent important challenges associated with economic globalization which they will have to manage. As poor countries seek economic development, this management must aim at securing maximum access to global financial flows on the best possible terms; it will aim at reducing the risks of financial crisis undermining the financial base of the industrialization strategy; it may seek to reduce the reliance on fluctuating international financial flows through an increase in the availability of domestic finance/savings; and finally, it will require stable and capable domestic financial institutions. Among financial institutions, the central bank as the manager of the relationship between the domestic economy and the international financial system will be of crucial importance (Maxfield 1997). The independence of central banks may be used as a preliminary indication of institutional strength, if only because international financial market operators often tend to do so, but the linkage between independence and bank performance is probably not a firm one. (3) A new global regulatory framework The rise of a new paradigm for industrial production and the increased importance of finance have posed new problems for regulation at the national (state) level and at the international level. While leaving considerations over the national level and the role of the state until later, it is noteworthy that there has been since the mid-1980s a significant increase in international economic regulatory efforts. In international trade, negotiations under the Uruguay Round produced a new international trade organization, the WTO, which has broadened the agenda for negotiations over international economic issues and must be seen as the most important change in the international institutional framework for economic relations. The management of international banking has also been reformed since the 1980s through a strengthening of the less formal regime for financial institutions organized by the Bank for International Settlements (BIS) (Helleiner 1994; Strange 1998; Wood 2005). The membership of the BIS has also been expanded since 1996 to include representatives of larger developing countries, including Brazil and India (Woods 2000). For developing countries, the creation of WTO and the continuing negotiations within this forum constitute a significant addition to the intrusiveness that many countries experienced from having to deal with

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the international financial institutions, the World Bank and the IMF, especially since the beginning of the international debt crisis in 1982.28 The negotiations leading to the establishment of the WTO from 1995 represent what one developing-country participant called ‘a paradigm shift’ (Shukla 2002, p. 267). One of the important changes from the General Agreement on Tariffs and Trade (GATT) to the WTO justifying the notion of paradigmatic shift was the considerable broadening of the agenda for trade negotiations. The institutionalization of international economic negotiations represented by the WTO today includes to a significant degree issues relevant for knowledge-intensive productive activities, services and financial activities, thus clearly complementing the shift in domestic production activities towards a more knowledgeintensive form of techno-economic paradigm regime based upon increased use of mental labour. The agreement on Trade-Related Intellectual Property Rights (TRIPS), the General Agreement on Trade in Services (GATS), including financial services, and the agreement on Trade-Related Investment Measures (TRIMS), including foreign investment policies, all cover central elements for the globalization of a form of capitalism based on a new techno-economic paradigm and carried by investments from TNCs. The new rules of the game furthermore tend to exclude those protectionist state developmental activities that were earlier associated with national economic development under the Fordist regime (Wade 2003). Since 1995, the WTO has constituted the most important international forum for negotiations over international economic issues, and developing countries have since struggled to influence the ongoing negotiations over the evolution of the rules governing the international economy, including a significant part of their domestic economic rules.29 The challenge for individual developing states inherent in this process is twofold. One challenge is to influence the future development of the international rules of the game through participation in WTO negotiations and another is to prevent the domestic implementation of the new rules from damaging the prospects of local economic development.30 The enlarged agenda and the complexity that especially the newly included issue areas present have, however, meant that in order to manage the challenges successfully, developing countries need to substantially increase their capacity to participate in international negotiations, including their capacity to identify critical issues, to identify and promote national interests, to establish and maintain coalitions during negotiations and a lot of other skills (Michalopoulos 2001; Page 2002; Narlikar 2003). As an alternative or complementary strategy, developing countries may also seek to influence the impacts from globalization through regional collaborative arrangements.

Challenges for Developing Countries 25

Summary From the debate over the emergence of a new type of globally expanding capitalism, we (inspired by the regulation school) thus extract three main challenges for states (and businesses) in developing countries brought about by economic globalization. First, they have to manage the challenges of the new emerging techno-economic paradigm. This will entail finding a way between being inserted in the global economy via the ‘low road’ of relying on Taylorist mass production based on cheap, sometimes skilled, manual labour. This will mostly entail a focus on traditional industrial sectors. Or, on the other hand, they may strive to find and occupy niches for entering the new paradigm based upon a much larger element of mental labour, that is, entering the ‘knowledge economy’. This will mostly mean a focus on modern, high-tech industries and services based upon the use of mental labour. Second, developing countries have to find a way to integrate with the global financial structure and tap the global pool of financial resources without being overwhelmed by the volatility and high risks that today are associated with global finance. Third, they have to manage the challenges posed by the efforts of the leading developed states to construct, consolidate and refine a new international regulatory regime suitable for new postFordist economic activities through participating and influencing the establishment of the rules and institutional mechanisms and through influencing the working of already-established rules and regulations. In concrete terms, this primarily means working with the establishment of the WTO, its future development and the administration of its rules. ‘Learning to play the game’, once the basic rules of the game have been established, will be a key challenge for developing countries. It may also entail finding new and alternative forms of international economic engagement, one example being cooperation in regional economic associations. The central agent to manage these tasks in developing countries is, of course, the state, and it is therefore warranted to make a brief survey of the role of the state in the economic transformation of developing countries. This includes discussions on the optimal role for the state to be able to play a constructive role in the process of economic development. This means discussing the role of the so-called developmental state, its characteristics and the preconditions for its developmental role. In doing this, the role and nature of state–business relationship will figure prominently.

2 The State and Economic Development in Developing Countries

One of the key lessons from developments over the last 50 years or so has been the imperative for a country seeking economic development or transformation to possess an effective state (World Bank 1997; Adelman 2000).1 While many things may have changed, there is no reason to believe this to be different under conditions where a transformation of global capitalism is underway. On the contrary, it is plausible to envisage a different but possibly enhanced role for the state (see Chapter 1). In the context of the discussion over development prospects and patterns of socalled late-developers, it has often been contended that across different economic paradigms, different economic transformations of capitalism, the role of the state has tended to increase and, simultaneously, to be transformed, that is, undertake new task for late-developers starting with the classical statements of Alexander Gershenkron (1952; Adelman 2000).2 Most of the recent debate on the role of the state in economic progress has taken its inspiration from the debate over those latedeveloped states in East Asia that are regarded as the most recent examples of successful ‘catching-up’ strategies.3 It is to this debate we now turn in order to extract from the debate some of the key insights to be used as guidelines in the discussion of the policies of the states and (as will be apparent soon) the interaction between the state and the wider society, most prominently, the private business sector. The discussion on developmental states has moved from being preoccupied with a dispute over market- versus state-led development into a discussion that has (1) recognized the importance of state intervention for economic success, (2) been concerned with state–society links, in particular, state–business links and (3) been increasingly concerned with the capacities of the state or the state apparatus and – more sporadically – the capacities and characteristics of the private business sector.4 This 26

The State and Economic Development 27

movement can be illustrated by some of the key academic works on the developmental states of East Asia. It should be noted at the outset, however, that the notion of a ‘developmental state’ possesses a key weakness in its inherent danger of producing a tautological explanation: those states that rule over successful economies are termed ‘developmental’ and their characteristics are then presented as paradigmatic for successful state behaviour without always considering if factors other than state actions lay behind the economic success. In the discussion here we will primarily, however, be concerned with the characteristics extracted by researchers on the possibly defining elements of a developmental state. Later, we will briefly deal with those structural factors that may affect the possible success of state actions, opening up the (quite realistic) possibility of ‘developmental states’ being unable to achieve economic successes. The concept ‘developmental state’ was first introduced in Chalmers Johnson’s study (1982) of the highly successful industrial policies of Japan, but it was subsequently adopted for use in the debate over the origins of the other successful East Asian high-growth economies (IDS Bulletin 1984). The main target for the proponents of the developmental state thesis in the debate during the 1980s was the by then dominant notion that the successful economic growth of South Korea and Taiwan was caused by a deliberate policy characterized by a heavy reliance on market mechanisms. With the publication of the authoritative studies on the two countries by Robert Wade (1990) and Alice Amsden (1989), respectively, the debate gradually moved away from the simplistic ‘state versus market’ dichotomy into a debate over the characteristics of the developmental state and its relationship with the wider society.5 Based on an analysis of the causes of Taiwan’s successful industrial transformation, Wade formulated his theory of the ‘governed market’. According to Wade, a coherent, strong and authoritarian state that could govern the market constituted a necessary precondition for successful economic transformation, but he also made a note of a more recent movement in Taiwan in the direction of establishing and institutionalizing closer collaborative links between private business and the government (Wade 1990, p. 293). With a slightly different emphasis, Alice Amsden found in her study of South Korea how disciplining actions by a strong and autonomous government had succeeded in consciously guiding industrial activities in a direction different from what a reliance on ‘pure’ market mechanisms would have dictated. Like Wade, she also noted a recent increase in instances of close and collaborative relations between government and private business (Amsden

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Globalization, Development and the State

1989, p. 81). This more collaborative pattern of interaction between business and government in Korea has become more widespread ever since (Kim 1999). While both authors laid particular emphasis on the strong and authoritarian character of state interventions, seeing the state as a strong and disciplinarian actor vis-à-vis both private business and indeed industrial workers, later works have emphasized the collaborative nature of state–business relations. This change of emphasis also represented a movement away from a search for specific developmental policy recipes – import-substitution, tariff protection, financial-support programmes and so on – towards an emphasis on the institutional framework within which different developmental policies are selected and implemented. The implication of this movement is an abandonment of the search for ‘a fixed golden recipe of success’, and a theoretical position that saw the necessity of adapting concrete state policies to specific country circumstances and regarded this as possible to accomplish through a close and institutionalized collaboration between private businesses and states. An emphasis of institutionalized collaboration between state and private business was thus evident in the World Bank’s study of the ‘East Asian Miracle’, in which communication and cooperation through a variety of ‘deliberation councils’ uniting state and business representatives and sometimes also representatives of civil society groups were noted as an important element in the overall explanation of the ‘making of a miracle’ (World Bank 1993, Ch. 4). The collaborative relationship between the state and private business subsequently became the cornerstone in Peter Evans’s (1995) seminal contribution to the debate on developmental states. According to Evans, a strong and autonomous state had not been sufficient to secure a successful kind of state intervention. Based on studies of not only Korea and Taiwan, but also Brazil and India, Evans argued that in order for the state to be able to intervene in an informed and intelligent manner, it had to have extensive links with those private businesses that possessed the relevant information on market conditions necessary for policymakers to design policies. A cooperative relationship between the state and private business would result in industrial transformation only, however, if the state itself was able to act in a coherent, capable and relatively autonomous manner. This required a competent and capable bureaucracy similar to Max Weber’s notion of a bureaucratic and rational administrative state. Evans’s general proposition was that ‘a coherent, cohesive state apparatus with close, institutionalized links to an economic elite would be more effective at

The State and Economic Development 29

producing industrial transformation than other kinds of state-society relations’ (1995, p. 225). This kind of productive state–society relationship was termed ‘embedded autonomy’.6 Evans strongly emphasized that bureaucracy understood in a Weberian sense as a professional, rational, well-ordered administrative structure of the state was a fundamental prerequisite for the construction of the right kind of embeddedness with private business based on a joint project of economic transformation. In short, this amounted to a notion of ‘no bureaucracy, no development’, but he also noticed the importance of informal, network-like connections within the bureaucracy (Evans 1995, p. 59). While the ‘embedded autonomy’ argument still placed considerable emphasis on the existence of a strong, bureaucratic state capable of directing private enterprises,7 besides the interaction between state and business, the nature of business into which the state had to embed itself was largely ignored. In a later work, he focused more on the business side of the equation, however, by distinguishing between two potential roles performed by private business: the profit- and rent-seeking role and the productivity-seeking role, where only by securing a combination of the two could state interventions be expected to result in economic growth and transformation (Evans 1997a). By widening the focus to include the role of private business, considerations on the nature and characteristics of the business community with which the state has to interact have become more important. This is very much in line with recent theorizing on the role of the state and on state–society and state–business relations in developing countries. As an alternative to the strong state-centered focus of the early works on developmental states, it has been suggested to place the state in a society-centered approach, a state-in-society approach (Migdal et al. 1994; Migdal 2001). When used in the context of government–business relations, this becomes an argument for seriously considering the nature and organization of private business as an important factor for determining the success of economic state interventions (Schneider and Maxfield 1997, p. 25).8 The more recent emphasis on explanatory factors located on the society side of the state–society equation has also been reflected in Linda Weiss’s recent critique of the concept of ‘embedded autonomy’. Weiss notes that (1) autonomy alone is a poor predictor of state capacity and (2) that state capacity also depends on the organization of groups in society (1998, pp. 21, 34). She questions whether the partial subordination of private business to state directives that lies implicit in the notion of ‘embedded autonomy’ is sufficient to understand fully the success of developmental states, and argues that there is a need to incorporate

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the strength of the private sector in the theorizing over the character of state–society relations. Her conclusion is that the existence of both strong states and strong economic groups in society linked through institutionalized networks will be necessary for establishing the kind of ‘governed interdependence’ relationship where the state is able to use its autonomy to consult and to elicit consensus and cooperation from the private sector thereby achieving successful economic outcomes (ibid., pp. 36–9). The gradual change in the theoretical debate away from an emphasis on strong and autonomous states towards an emphasis on more collaborative and equitable relations and on the nature and organization of the private business sector may reflect changes in the real world as indicated by both Amsden (1989) and Wade (1990). In the light of the theorizing in Chapter 1 on the changes from Fordism to post-Fordism, it is tempting to offer a tentative interpretation that sees the authoritarian state interventions of the early developmental states as being closely linked to a Fordist type of late industrialization. The collaborative state–society relations in the ‘embedded autonomy’ and ‘governed interdependence’ varieties can then be linked to the new post-Fordist forms of industrialization.9 A partial support for this interpretation can be found in the fact that the empirical basis of Evans’s argument is the development of the (arguably post-Fordist) high-tech electronics and computer industry, and his argument for regarding the most supportive and collaborative roles of the state – alliance building through ‘midwifery’ and ‘husbandry’ – as the proper role for a future developmental state (Evans 1995, p. 205).10 With regard to Weiss’s arguments, it is noteworthy that they are based on evidence not only from high-growth, high-tech East Asian countries, but also on recent state behaviour in advanced developed countries. Similarly, a recent contribution to the debate has coined the term ‘flexible developmental state’ for the success of the Irish state to attract and nurture both foreign investments and the development of local capabilities with an explicit reference to the paradigmatic post-Fordist software industry (Ó Riain 2000). A part of the flexibility of this new type of developmental state comes precisely from its deviation from what was the most important characteristic of the East Asian developmental state: its fairly rigid bureaucratic structure. More flexibility allows the state to build networks connecting both local and global enterprises and through this encourages innovation and accumulation.11 Similar characteristics may be seen in the most recent developments of the state in Taiwan in its attempts to promote new knowledge- and innovation-intensive biotechnological industries (Wong 2005). While pursuing this line of argument is clearly beyond

The State and Economic Development 31

the purpose of this chapter, there seems to be potentially interesting avenues for research that combine the investigation of state–business links with changes in the organization and character of the industrialization processes as attempted by the debate on post-Fordism. At the very least, it points to the need to be open to possibly new forms of collaboration between state and private business compared to those prevalent in the early stages of the East Asian developmental states.12 One aspect of the debate on ‘developmental states’ that becomes increasingly important in the context of economic globalization is the international aspect or the international context for economic development. In all the above-mentioned works on the developmental states of East Asia, it was noted that the successful economic transformation of these countries took place under exceptionally fortuitous international political and economic circumstances, but that many of those circumstances are no longer present. Wade (1990, pp. 346–8) noted how stagnation of the world economy, rising protectionism in developed country market and the microelectronic revolution have combined to make an export-oriented development path difficult to pursue for developing countries. Peter Evans claimed that what he calls ‘the new internationalization’, would permanently undermine key features of the ‘embedded autonomy’ mechanisms that lay behind the success of developmental states: the possibilities for autonomous state action and the alliance between local capital and the state (Evans 1995, pp. 15–16, 206). Finally, the World Bank in its Asian Miracle study also emphasized that the present international economic environment with open financial markets and restrictions on the use of trade barriers will make it difficult to emulate the policies of the East Asian countries (World Bank 1993, pp. 24–5). Linda Weiss (1998) notes in this context that we may be witnessing a new type of developmentally successful states, catalytic states, who rather than intervene in the fashion of the early developmental states seek their goals by assuming a dominant role in coalitions of states, transnational institutions and private sector groups (Weiss 1998, pp. 209ff.). A prominent feature of this kind of ‘new developmental state’ would be its participation in various forms of international cooperation, including regional and international coalitions and organizations. The widespread pessimism with regard to the ability of developing countries to make a repeat performance of the East Asian newly industrializing countries (NICs) due to changing external circumstances provides a link to the debate on economic globalization (see Chapter 1). What is interesting is, however, that the international role and internationally

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oriented activities of the so-called developmental states have been largely neglected, possibly because these activities were limited in scope and because they have been considered less important than nationally oriented state activities.13 In principle, all states have the ability to promote economic transformation through a wide variety of internationally oriented activities – excluding outright imperialism – from establishing and shaping of international organizations and international regimes to specific interventions favouring, for example, the export or international investment activities of private national companies. It is well known from the discussion on international regimes that while international regimes are established by states, once in existence they influence and shape the future behaviour of the same states (Krasner 1983; Hasenclever et al. 1997). The shaping of international economic regimes can safely be assumed to be of greater importance for states under conditions of increasing economic globalization. This calls for more theoretical attention towards those – potential and realized – international interventions by the states, including developing states, which are directed towards influencing the nature of international economic regimes. Unfortunately, this has not happened in any significant scale as yet. Recently, however, John Hobson has linked some of his general observations on the role of the state in national wealth creation (Hobson 1997) with theoretical considerations that are linked to the debate on developmental states with a focus on what he terms ‘the international agential power’ of states, that is, ‘the ability of states to make foreign policy and to shape the international realm free of international structural requirements or the interests of international non-state actors’ (Hobson 2000, p. 7). International agential power or international state power is, according to Hobson, enhanced in a situation where the state is embedded within a broad range of domestic social actors (ibid., p. 207). In a context where the states of developing countries are in focus, this approach makes for a welcome contrast to traditional depiction of the inherent, structural weakness of developing states, including their (lacking) ability to shape the international realm (Krasner 1985). At the very least, the ‘international agential power approach’ theoretically opens the possibility for developing states to play a role in the shaping of ‘the international realm’. In conclusion, the debate on developmental states and on state– business interactions points to a number of aspects relevant when analysing and explaining the policies and the outcomes achieved by developing states in the areas that were identified as constituting key challenges posed by economic globalization. First, the internal organization of the state, including the nature of bureaucracy, becomes of interest

The State and Economic Development 33

as an important element in the determination of the developmental strength of the state. Second, the nature and organization of the national, private business sector are important to determine the developmental capacity of the local capitalist class. Third, and most important, the nature and institutionalization of state–society relations, in particular state–business relations, link the first two points and make an empirical assessment of the approximation to an ideal type of ‘developmental state’ possible. Finally, the nature and evolution of internationally oriented state activities must be investigated, supplementing the state’s nationally oriented developmental activities. This will include the policies towards international economic regimes and organizations mentioned in Chapter 1 as one of the main challenges for developing countries. To avoid the dangers of tautological reasoning inherent in the developmental state debate, state actions and developmental outcomes will have to be examined in the light of the given structural context. There hardly exist theoretical consensuses on the identification of the most important structural conditions that constitute limiting or enabling factors for successful state actions, and the goal of economic development can be defined as an overcoming of those structural limitations. There is, however, agreement on a number of important external economic limitations faced by developing countries because of the distinctive way they have been inserted into the international economy, which will have to be taken into account when making informed judgements about the degree of success of economic policies. While it is not possible to list all, various forms of historically given, economic dependencies will self-evidently be important. This would include a reliance on few internationally tradable goods and few markets, on a limited number of trading and investment partners and a high, possibly unsustainable level of international indebtedness. Policy dependency resulting from economic dependency such as commitments entered into, as part of debt refinancing agreements with international financial institutions is another obvious structurally rooted policy limitation. On the other hand, international trade agreements on a bilateral, regional or global level may provide a variety of economic opportunities not available to all countries. The general point of all this is that in order to make a fair assessment of the success of developmental state activities, the economic outcomes have to be measured against the prevailing structural opportunities and limitations.

3 The Analytical Framework and the Two States

How have developing states managed the new challenges posed by economic globalization, and what are the prospects for developmentoriented state actions? Those are the key questions posed in this book. The discussion in the two preceding chapters has provided some analytical distinctions that may help to clarify and provide guidelines for the analysis. Economic globalization has posed significantly new challenges to developing countries in at least three areas: the realm of industrial production, the realm of financial flows and the realm of international rules governing the global economy. Within these three areas, an account of the management by the selected case countries – India and Brazil – will form the mainstay of the next chapters. An explanation of the variations in the economic outcomes achieved will then be sought through an investigation into the nature and development of state–business interactions during the period of study. How precisely the state, the private business sector and their interrelationship may be constructed in order to successfully manage the challenges of economic globalization remains an open question to be answered only after an analysis of the empirical evidence. This way the two theoretical themes – globalization challenges and developmental states – will be combined in order to provide an understanding of the conditions for economic success of developing countries in the age of globalization. Before commencing the empirical analysis, some methodological issues, including key assumptions and key concepts, must be clarified, the two case countries have to be presented and the analytical framework has to be elaborated.

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The Analytical Framework and the Two States 35

Methodological issues and the selection of the two case countries The lack of precise and testable theories on the effects of economic globalization on the capacity (by states and businesses) to generate effective strategies, makes it both natural and necessary to adopt a pragmatic methodological approach combining elements of both deductive and inductive reasoning. The deductive elements come from the inspiration from theories on the changes in the nature of capitalism and from theories over the nature of developmental states. These theories are not, however, used to establish testable propositions but rather to pinpoint certain parameters for the empirical analysis. The analysis will lead to some empirical results which may subsequently form the basis for generally applicable theoretical statements. It is in this context that the justification for the selection of cases is found. The general argument behind the selection of cases is that only in relatively well-developed developing countries with relatively capable states will it be possible to find strategies empirically and detect effects which may have a full or partial application in other – often less developed – countries. The more developed among the developing nations are thus assumed to present to the less developed a picture of their possible future.1 India and Brazil are both large and – in comparative terms – capable developing states including relatively well-developed domestic entrepreneurial classes. They can therefore be expected to be able to both formulate and implement policies that to a considerable degree attempt to manage the challenges posed by economic globalization. At the same time, both countries still belong to the overall category of ‘developing countries’, many of whom possess much less capability to respond to economic globalization. The two countries are therefore not representative for developing countries in simple arithmetic terms. The reaction of the two countries to the challenges posed by economic globalization can, however, be expected to provide a nuanced illustration of the instruments and policies that are theoretically available to developing countries, but in practice can only be used selectively by most countries and only under highly specific circumstances. In this way, India and Brazil may illustrate a range of theoretically optimal reactions by developing countries rather than the typical policy reactions, and through their experiences, we can learn more about the impact of different policy

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options and their implications for the prospects of developmental state actions under the condition of economic globalization. In the literature on developmental states, India and Brazil are – on a slightly different basis – often classified as ‘intermediate states’, or ‘middling performers’, mostly through a comparison with the few highly successful states such as South Korea and Taiwan (Evans 1995; Kohli 2004). The argument here is that India and Brazil may be more appropriate as ‘models’ for other developing countries rather than, for both historical and geo-political reasons, exceptional East Asian countries, and the mix of similarities and differences between the two countries (see next section) also provides for sufficient disparities to illustrate the room for action by developing countries. The study is based upon a number of assumptions, theoretical concepts and delimitations that need to be clarified in order to understand both the argument and the limitations to the conclusions of the study. However, an important assumption or clarification is that the often elusive concept of development in this study is defined as the achievement of capitalist development with some important qualifications. The first qualification is that we are only concerned with growth in productive assets, conventionally measured by growth in GDP and more specifically, in the manufacturing sector, supplemented by some indicators of the growth of post-Fordist (mental) productive activities that conventionally would be included in the service sector, as explained earlier. A second qualification concerns the ownership and control of the productive activities, where the study makes the assumption that there are important, perhaps even qualitative, differences between economic activities controlled by local business corporations and activities controlled by foreign TNCs. Foreign control is assumed to imply a degree of economic dependence, which will be much less for activities under the ownership and control of local entrepreneurs. While this assumption may be both debatable and controversial, there is little doubt that an important aim of developing states continues to be the achievement of a high degree of local control and ownership over economic assets. Economic nationalism is as widespread as ever, and it is probably well founded when viewed as a condition for sustained locally oriented economic development. A final assumption, or rather delimitation, is the virtual absence in this study of considerations over what may be termed the social side of economic development. In other words, it is outside the purpose of this study to assess the impact of economic globalization on employment, social inequality and poverty. These potential effects are of course extremely important for a general discussion on the impact of economic globalization on developing societies, and they

The Analytical Framework and the Two States 37

may be important for the sustainability of long-term economic development. The neglect of the social side of development thus points to one of the important limitations of the study. The study utilizes freely generic concepts such as ‘state’ and ‘government’, ‘business’ and ‘industry’. By state or government is meant the administrative apparatus of the central public administration, the executive arm of the state, including its political heads (the state managers). The focus, therefore, is on the central government, rather than local governments, and within the central government, the focus will be on those departments, ministries or other institutions that are in charge of economic and industrial policies, including policies for technological development and foreign trade. These are regarded as the ‘proximate’ policy institutions when explaining economic outcomes, while those parts of the state that are dealing with other issues, such as education, agriculture, defence, police and so on, are left out of consideration. In a similar fashion, the terms ‘business’ and ‘industry’ are used to denominate those private entrepreneurs (or their organized representatives) who are in charge of productive enterprises. As explained earlier, focus is on productive enterprises, and for the most part, entrepreneurs engaged in trading or commerce will not be dealt with. Finally, a word about the time period and the periodization chosen for the study is warranted. There seems to be a general agreement that the most recent phase of economic globalization has its starting point sometime in the early 1970s, and that it accelerated in the 1980s and matured during the 1990s. This general time frame for global changes is one reason for focusing the empirical study on the period from the late 1980s onwards. Another important reason for focusing on this period is that both India and Brazil around 1990 began liberalizing in earnest their economies and for this reason became more exposed to the challenges of economic globalization from that time onwards. Indeed, it can be argued that the deregulation and commercial opening initiated in a parallel fashion by the two countries represent a first important step in their attempts to deal with economic globalization.

India and Brazil – a brief introduction As indicated above, India and Brazil are both very large developing countries with economies of a broadly similar magnitude. The Brazilian economy is at the overall level the most modern and well developed, however, with a large industrial sector and – by developing country standards – relatively high average incomes. By contrast, India is still

38

Globalization, Development and the State

predominantly an agricultural economy with a huge population and very low average incomes.2 The two countries thus represent opposite ends of the continuum of income levels among developing countries. Indian industry is, however, as diversified and in many respects as developed as Brazil’s, and this fact places the two countries in the same group of industrially most advanced developing countries. Historically, both countries have followed broadly similar import-substitution strategies to achieve their industrial progress, but Brazil has a much longer history as independent nation with sovereign economic policymaking prerogatives. The variant of import-substitution policies pursued by Brazil did, however, allow for a significant – often dominant – element of foreign participation through investments and loans in the industrialization process. In contrast, the fact that India became independent much later probably influenced the implementation of import-substitution strategies allowing much less scope for foreign sources of investments and loans. One important structural consequence of these different attitudes towards foreign capital became apparent with the onset of the international debt crisis. Brazil was badly hit by the debt crisis because of its huge external borrowings, and the debt crisis resulted in a severe erosion of the country’s economic sovereignty from the early 1980s onwards. India’s more cautious attitude towards foreign capital left the country much less structurally dependent on international capital markets. In this respect, again the two countries nicely represent opposite ends of the continuum of external vulnerability among today’s developing countries. Politically the two countries have differed, especially because of the long period with authoritarian rule in Brazil since the military coup in 1964. Brazil’s gradual return to a more democratic, but politically still unstable, regime after the mid-1980s and India’s transition from a one-party-dominated democratic regime to a more unstable, multiparty regime during roughly the same period has reduced somewhat the political differences between the two countries. The authoritarian tradition in Brazil still survives in the form of a presidential system with strong executive powers compared to the parliamentary form of democracy found in India, and this difference may impact on both style and substance of state–society interactions and upon the policies that result from this. The different regional context in Latin America and South Asia, respectively, has also provided the two countries with somewhat different conditions for the formulation and implementation of developmental policies. Brazil’s location in a region that is generally peaceful and has a long history of regional economic collaboration provides for a more friendly context for economic development than India’s location

The Analytical Framework and the Two States 39

in a region – South Asia – where international relations have been dominated by hostility and wars between its major powers (India and Pakistan). As a result of this and of a general resentment in the region against India as by far the largest regional power, economic collaboration within the region has been quite limited. Despite the many differences between the two countries, they have often taken similar positions in international negotiations over general trade and development issues. During the Uruguay Round of trade negotiations, India and Brazil were closely allied, and this informal alliance has been maintained within the framework for negotiations established by the WTO. The final and – for this study – decisive similarity between the two countries is that both countries started a process of economic liberalization, including an opening towards the international economy around or shortly after 1990. This coincidence (and it probably was a coincidence) makes a comparison of their experiences with a closer relationship with an increasingly globalized international economy methodologically convenient, as it can be assumed that both countries during the 1990s have faced a set of common economic challenges arising from economic globalization. In sum, this brief introductory comparison of the two countries shows a complex pattern of similarities and differences, which makes simple predictions of their capabilities for successful management of the challenges of economic globalization unlikely.3 The many differences between the countries imply that an empirical comparison between the two countries includes a broad array of different conditions characterizing developing countries. This hopefully also makes it easier to draw general lessons from the analysis.

The analytical model The empirical analysis that follows consists of two separate chapters on Brazil and India, respectively. These chapters analyse the policies and institutions in the two countries since the late 1980s and describe the economic outcomes during the same period. The following Chapter 6 compares the experiences of the two countries and provides an analysis of business–state interactions in the two countries as a tentative explanation of the pattern of developments found. In Figure 3.1, the simple analytical model guiding the analysis is outlined. As can be seen, policies and institutions impact on economic outcomes through a first impact on private business. Secondly, economic outcomes are also seen to be influenced by the prevailing structural conditions. Finally,

40 Parliaments and political parties

Relevant social groups: Industrial workers

The state (executive): public administration (incl. political leadership)

Policies and institutions : § industry § financial sector § external trade relations

Private business:

Economic outcomes : § growth and structural changes § foreign and domestic control

industrial associations (incl. individual companies, domestic and foreign)

Structural limitations and opportunities : § economic dependency § integration in regional or world markets § financial status and so on

Figure 3.1

Model of the causal structure of the argument

Economic globalization

The Analytical Framework and the Two States 41

the interaction of state and business is regarded as the central complex interaction taken from the debate over developmental states influencing both the policies chosen and the resulting reception of the policies by those private businesses whose actions determine the economic outcomes. This complex national ensemble of actors and institutions is reacting to the external influences from the forces behind economic globalization. The figure also depicts (with dotted lines) some central elements of both the state and society whose actions are important for the working of the state– business complex, but whose specific influences will only sporadically be included in the analysis.

4 Brazil

Introduction and overview: The 1980s and 1990s Brazil came out of the 1970s possessing a relatively strong, industrially oriented and diversified economic structure. This was the result of a consistent government strategy of promoting the development of local industry through import-substitution policies combined with the establishment and expansion of a number of state-owned industrial enterprises. The policies also had included a strong promotion of exports plus an invitation to foreign enterprises to invest, especially in capitalintensive and technologically advanced industrial sectors. The foreignowned enterprises also contributed significantly to the strong export drive that marked Brazil’s economic development during the 1970s. This Brazilian model for successful growth and development became known as ‘the triple alliance’ because of its division-of-labour and collaboration between three types of industrial enterprises: (1) state-owned companies, (2) private, national companies and (3) foreign-owned transnational corporations (Evans 1979). The strong growth of both state-owned and private national firms during the 1970s had resulted in a gradual reduction in the share of the industrial economy that was controlled by foreign companies. Despite this, foreign companies were still dominant in many leading industrial sectors, the automobile industry being the most prominent example. The economic growth that resulted from this economic strategy was relatively high throughout the 1970s as can be seen in Figure 4.1, though with a declining trend in comparison with the very high growth rates obtained through the so-called miracle years 1968–73.1 The composition of the Brazilian economy changed during the 1960s, 1970s and early 1980s with a remarkable expansion of the role of the 42

Brazil

43

16 14 12 10

8.6%

Per cent

8 6 4 2.6%

2

1.6%

0 1970 1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

-2 -4 -6 Note: Dotted lines indicate decadal growth rates (own calculations). Source: IPEAdata (www.ipeadata.gov.br).

Figure 4.1

Brazil: Annual growth of GDP, 1970–2005

industrial sector, as can be seen from Table 4.1. In particular, the manufacturing sector grew in relative terms, even outpacing the services sector, and with the agricultural sector experiencing a continuation of its long-term declining trend. Internationally Brazil ranked in 1980 approximately as the ninth largest industrial economy in the world and – along with Mexico – as the largest recipient of foreign investment among developing countries.2 The industrial progress achieved during the 1970s rested, however, on a fragile financial foundation. A significant part of the economic growth was financed through international loans resulting in a steady increase in international indebtedness, especially from the late 1970s onwards. This weakness would prove to be fatal in the 1980s with the onset of the debt crisis in late 1982, that would severely limit the financial capacity Table 4.1

Brazil: Sector composition of GDP, 1960–2005 1960

1970

1980

1985

1990

1995

2000

2005

Agriculture 18.3 12.3 10.9 12.6 8.1 5.8 5.6 5.6 Industry 33.2 38.3 44.1 48.0 38.7 27.5 27.7 30.3 (-manufacturing) (26.3) (29.3) (33.7) (35.9) (26.5) (18.6) (17.2) (18.4) Services 51.5 56.2 52.7 52.9 70.3 66.7 66.7 64.0 Note: The system of national accounts statistics has been revised several times. Figures before and after 1990 are for this reason neither strictly comparable, nor fully reliable. Before 1995 figures add up to more than 100 per cent due to problems of estimating financial intermediation. Source: IPEAdata (www.ipeadata.gov.br)

44

Globalization, Development and the State

of the Brazilian state to act as a supportive ‘developmental state’ vis-àvis Brazilian industry. Politically, the Brazilian industrial growth model had been presided over by a military regime that gradually lost both its legitimacy and raison d’être and was looking for a way to hand over power to a civilian government. The 1980s thus became a decade that witnessed both economic and political change. Seen in the context of the economic success of the 1970s, the 1980s became known as ‘the lost decade’ marked by perennial economic crisis including deep downturns at the beginning and at the end of the decade (see Figure 4.1), perennial negotiations over the management of the debt crisis and a string of successive but largely unsuccessful economic stabilization plans.3 The decade, however, also marked the beginning of a transition to a new economic strategy that would culminate during the 1990s. Politically, the 1980s witnessed a remarkably peaceful, controlled and successful transition from authoritarian rule to a constitutionally guaranteed presidential democracy. Transition and change then became the main features of the decade, before economic globalization in the 1990s began in earnest to set the economic and political agenda. During the 1980s the earlier policies on trade, foreign investment and industrial development came under attack from both domestic and international forces and a number of modest reforms were initiated that would be forerunners to the more dramatic changes in the 1990s. The main challenge that policymakers had to cope with was the stabilization of the domestic economy, especially the increasingly uncontrolled hyperinflation4 and, simultaneously, they had to constantly negotiate with foreign creditors for rescheduling of the mounting debt payments and in the process implementing various austerity measures demanded by the IMF. The twin challenges of stabilization and debt management led to a climate of constant uncertainty illustrated by the fact that between 1980 and 1990 Brazil would experience eight different inflation stabilization plans, fifteen different policies towards wages, eighteen changes in the rules regarding foreign exchange, fifty-four changes in the rules controlling prices, twentyone different proposals on the negotiation of foreign debt, four different currencies, nineteen decrees related to cuts in public expenditure, eleven separate indexes for calculating the devaluation of local currency, and, last but not least, five wage and price freezes. (Ferraz et al. 1992, pp. 58–9, citing the business paper Gazeta Mercantil)

Brazil

45

Adding to the economic crisis and uncertainty, Brazil in the same period experienced a political transition that in 1985 led to the instalment of a civilian president, the introduction of a new democratic constitution in 1988 and, in late 1989, the direct election of a new civilian president, Fernando Collor de Mello, who would assume office in 1990. Despite the overall climate of economic and political crisis and uncertainty, the policies on industrial development, trade and foreign investment were generally characterized by a continuation of the import-substituting policies of the earlier decades, but there were also important changes that pointed to the reforms of economic policies that would be carried through in the subsequent decade. In most industries, public policies continued like before, and in the emerging industrial sector of computers, electronics and information technology (informatics) efforts to establish a locally controlled industry through protection against imports were even intensified.5 In 1977, the Brazilian government had sought to reserve the local production of small computers to Brazilian companies, including an important state-owned company. In 1984 the policy was further strengthened with the creation of the so-called market reserve policy, which was destined to remain in force for eight years. According to this policy, imports of a wide range of electronic products including small computers were restricted, local production was reserved for companies under Brazilian control and national companies were given favourable financial assistance – all this administered strictly by a powerful government agency. This strongly protectionist policy did succeed in creating an impressive array of Brazilian-controlled companies manufacturing a range of relatively advanced computers and electronic products, increasing considerably the country’s degree of technological self-sufficiency. While the achievements were impressive, the industry nevertheless could not match international developments in this highly dynamic sector, and concerns among local industrial users of computers and microelectronics over being barred from access to the latest international innovations and products increased. In addition, the US government acting on behalf of disgruntled American companies also pushed for a change in the policy through the threat of and actual use of trade sanctions (Bastos 1994). One example of a particular successful outcome of the ‘informatics’ policy was in banking related information technologies. Several of the very large Brazilian banking corporations had entered the informatics sector and through their banking operations, they simultaneously provided a large market for products based on the use of information technology (automatic teller machines and so on). As a result,

46

Globalization, Development and the State

the use of information technology in the banking sector increased tremendously during the 1980s resulting in impressive productivity gains (Cassiolato 1992; Frischtak 1992). While the IT policy represented the most prominent example of a continuation and intensification of an import-substitution model of industrial development, it was not the only example of such a policy during the 1980s. Most important, the new constitution of 1988 came to include a substantial number of clauses that codified key elements of the import substitution industrialization (ISI) strategy. The constitution codified the legal distinction between national and foreign companies providing a green light for a continuation of the general policy of giving preference to national companies. It also reserved important economic sectors for state-owned companies – mostly state monopolies.6 These provisions made future changes in industrial policies dependent upon hard-to-make constitutional changes. Beside these examples of a continuation and intensification of the ISI policies, in other areas of importance, changes in economic policies were beginning to crystallize during the 1980s. In 1981, the military government started a modest programme of privatization of stateowned enterprises that in 1989 had resulted in the privatization of 39, mostly small enterprises (Cysne 2000, p. 57). In 1986, the new civilian government appointed an inter-ministerial group of civil servants to propose a new industrial policy and the end of the import-substitution policies was officially announced in 1988 as part of the new policy (Fritsch and Franco 1991, p. 74). These were only declarations of intent, however, and in terms of actual policy changes, only little was achieved. A gradual opening of the Brazilian economy was initiated in 1987–8, however, through reductions in import tariffs that brought average rates down from 34.7 per cent in 1988 to 25.4 per cent in 1990 (Cysne 2000, p. 62). During the same period regulations covering foreign investments were relaxed, allowing for conversion of foreign debt into direct investments and for the entry of certain types of foreign portfolio investments (Hermann 2002, p. 91). While not important enough to warrant a characterization as a decisive change in economic strategy these new policies did indicate a growing recognition in government circles of the need for a revision of the economic strategy. The new civilian government’s first national economic development plan from 1986 had already acknowledged that the prospects for future industrial growth based upon import substitution policies were limited and that future growth had to come through a general increase in competitiveness and the transformation to a more technology-intensive pattern of industrial

Brazil

47

development.7 The debate within the government’s large development bank and think tank, Banco Nacional de Desenvolvimento Econômico e Social (BNDES), also began to coalesce around the notion of ‘competitive integration’ of Brazil into the global economy (Diniz 1997, p. 144). The 1990s then became ‘the decade of reforms’ (Bauman 2000, p. 18) exposing Brazil more strongly to the challenges of economic globalization. Starting with the abertura comercial (commercial opening) in 1990, a whole string of new economic policy reforms were implemented aiming at a general deregulation of the economy, privatization of state enterprises, easing restrictions on the inflow of foreign capital and combining this with renewed efforts to enhance the technological capabilities and competitiveness of domestic enterprises. Economic stabilization and the end of hyperinflation was finally achieved through the Real Plan in 1994 that linked yet another new currency (the Real) to the US dollars, and in the area of international economic strategies the 1990s also became a decisive turning point with the coming into force of the Mercado Común del Sur (Mercosur) regional trade area in 1995, Brazil’s acceptance of the WTO final agreement in 1994 and the increased diplomatic efforts to establish a hemispheric free trade area and to conclude a trade agreement with the European Union (EU). Shortly after coming to power President Collor in March 1990 announced a dramatic economic stabilization plan and introduced wide-ranging changes in import (and export) policies effectively abandoning all non-tariff barriers, most important the lei do similar and the institution, Carteira de Comércio Exterior (CACEX), that had administered the law. The ‘law of similars’ had protected domestic industry against imports of ‘similar goods’ since the 1950s.8 Immediately after, a programme for a phased reduction in import tariffs was introduced. The programme would within a brief period of four years bring the average import tariff down to 14 per cent in 1994 besides reducing somewhat the large variation in tariff rates (Moreira and Correa 1998, p. 1860). The implementation of the tariff reduction programme meant an immediate exposure of local companies to competition from imported goods and led to a dramatic increase in imports and a negative trade balance for the rest of the decade, cf. Figure 4.2. Contributing to the deterioration of the trade balance was the maintenance of a stable but gradually overvalued exchange rate after the introduction of the Real in 1994 (Baer 2001, p. 204). Also in 1990, a new programme for privatization of state-owned enterprises, Programa Nacional de Desestatição (PND), was introduced leading most notably to the privatization of the large state-owned steel

48

Globalization, Development and the State 120000

100000

Mio. US $

80000

60000

40000

20000

0 1980

1982

1984

1986

1988

1990 1992 Import

1994 1996 Export

1998

2000

2002

2004

Source: Banco Central do Brasil, Annual Report, various years.

Figure 4.2

Brazil: Imports and exports, 1980–2005 (FOB values)

companies.9 Most other economic reform programmes were stalled, however, because of the political uncertainty surrounding the dramatic impeachment of President Collor in 1992, and his replacement by the former vice-president, Itamar Franco, who for a while managed to halt the privatization process (Valença 1998, p. 36). It was only after the election in late 1994 of a new president, Fernando Henrique Cardoso, who as Finance Minister under President Franco had introduced the Real Plan in early 1994, that a new round of economic reforms were introduced in the now much more stable macroeconomic environment. In 1995, constitutional revisions were introduced that resulted in the abandonment of the concept of ‘national companies’ (literally ‘Brazilian companies of national capital’) and of the provisions giving these companies preferential treatment. In addition, most of the areas previously reserved for the public sector were opened for private investors with the partial exception of the petroleum sector (exploration, import/export, transportation). The largest state-owned company, the Petrobrás oil company, thus managed to retain most of its former privileges. These constitutional amendments allowed for an accelerated privatization policy and they opened new sectors for foreign investments. After 1996, the privatization programme accelerated through the sale of some of the largest companies owned by the central government, most

Brazil

49

notably the sale of the huge Compania Vale do Rio Doce in 1997 to a group of Brazilian investors, and the sale of banks owned by the various federal states like the large BANESPA bank (originally owned by the state of São Paulo) to the Spanish banking group Santander. The partial privatization of existing telecommunication companies, the Telebrás system, and the opening of the telecommunications sector for new entrants later led to substantial revenues, the total revenue from privatizations in the 1990s being over 100 billion US dollars.10 The economic and political stabilization and the new opportunities for investments in former state-controlled sectors of the economy greatly stimulated the inflow of foreign investment. As Figure 4.3 shows, the annual inflow of foreign direct investments virtually exploded in the second half of the 1990s. A very substantial part of these new investments were investments in newly privatized, former state-owned companies. The most active investors were Spanish companies who for a period after 1998 overtook US companies as the largest group of investors.11 Measured in terms of growth rates, the economic policy reforms probably did contribute to a slight increase and improvement compared to the situation in the 1980s, but the growth rates achieved during the 1990s were far from impressive, especially compared to the 1970s (see Figure 4.1). The average growth during the 1990s has been 2.6 per cent,

35000

30000

25000

Million US $

20000

15000

10000

5000

0 1980

1982

1984

1986

Total FDI (of which:)

1988

1990

1992

Privatization related

1994

1996

1998

2000

2002

Source: Banco Central do Brasil.

Figure 4.3

2004

Conversions, primarily of foreign debt

Brazil: Net inflow of foreign direct investments, 1980–2005

50

Globalization, Development and the State

which is an improvement compared to the 1.6 per cent growth rate achieved during the 1980s, but hardly impressive when compared to the 8.6 per cent average annual growth during the 1970s.12 The external economic balances (trade- and current-account balances) continued to be in a precarious state throughout the decade despite the huge inflows of investments and the increasing export, largely because – as we shall see later – of the persistence of the excessively large foreign debt burden. In the context of the challenges of economic globalization discussed earlier it needs, however, to be investigated how Brazilian industry has managed the challenge from the new techno-economic paradigm, how the financial challenges have been managed and how Brazil has managed its role in negotiations on global economic regulation and in the new, more open world economy.

Managing the industrial challenges The emergence of a new techno-economic paradigm for industrial production (or a new – third – industrial revolution) and the possibilities and challenges this would pose to Brazilian industry was intensely debated in the country in the latter half of the 1980s. Both among researchers and in business and government circles, including the allimportant BNDES, concepts such as ‘flexible specialization’, ‘systemic competitiveness’ or ‘competitive restructuring’ began to figure prominently in the discussion.13 As a practical result of these discussions, some programmes of fiscal and financial assistance for technological upgrading of industrial enterprises were also included in the industrial policy introduced in 1988. It was only after the coming to power of President Collor and his introduction of the commercial opening (Abertura Comercial) from 1990 onwards, however, that Brazilian industry became seriously involved with the international economy and was directly exposed to the forces of economic globalization. The commercial opening had in one stroke abolished the most important protectionist instruments that had formed the core of the old industrial policies. This forced both industry and government to seriously contemplate how industrial policies and company strategies could be formed in this new context. The need for new policy instruments became even more obvious when the Informatics Law, as planned, expired in 1992 leaving the IT sector largely unprotected against foreign competitors. The policy response to the new situation came mainly in the form of an intensified support for Brazilian companies’ efforts in technological upgrading.

Brazil

51

In late 1990 and early 1991 the government initiated three separate programmes to strengthen the technological capacity of Brazilian industry (Programa de Apoio à Capacitacão Tecnológica da Industria Brasileira, PACTI), increase productivity (Programa Brasileiro de Qualidade e Productividade, PBQP) and increase competitiveness in general (Programa de Competitividade Industrial, PCI) (Erber and Vermulm 1993, pp. 48–54; Rua and Aguilar 1995, p. 260). These programmes were not backed by financial resources to any significant degree, however, and only PBQP and some actions under PACTI were eventually implemented (Meyer-Stamer 1997, pp. 263–5). In 1993 the range of fiscal incentives introduced as part of the 1988 industrial policy (tax deductions and so on) for companies engaged in research and development (R&D) or other forms of investments in technological upgrading was greatly expanded (Matesco and Tafner 1996; Amann 1999, pp. 331–4).14 In addition to these new policies with a general scope, the BNDES administered several policies providing fiscal incentives and direct financial support for specific sectors, including the IT sector (Bonelli 2001). One immediate result of the new policy initiatives was the commissioning and completion of an impressive study of the competitiveness of Brazilian industry, including a long list of policy recommendations (ECIB 1993).15 Adopting a ‘systemic’ view of competitiveness, the recommendations offered by the report encompassed the whole range of activities of virtually all actors that one could think of: central and local government, private enterprises, civil society, even academia. Overall, the report stressed the need for macroeconomic stabilization, reforms of the fiscal system, availability of long-term financing for industrial development and the need for institutional reforms and new investments in infrastructure (ECIB 1993, p. 44). The wide-ranging nature of the proposals probably meant that they – the proposals – simply entered into the overall policymaking framework as part of the overall developmental vision of the government, and the Estudo da Competitividade da Indústria Brasileira (ECIB) report was a strong indication of the felt need among policymakers for a different type of industrial policy to manage the new economic situation with open exposure to the global economy. No significant action could, however, be envisaged before the successful economic stabilization package, the Real Plan, had taken effect, and political stability had been achieved through the election of President Cardoso. In 1998, after the re-election of the president, efforts to assist Brazilian enterprises in enhancing their competitiveness were intensified with the creation of a new combined ministry for development, industry and external trade (Ministério do Desinvolvimento, Indústria e do Comercio,

52

Globalization, Development and the State

MDIC) (Bonelli 2001, p. 28). In addition, the BNDES started new programmes and disbursed increasing financial resources as loans to enterprises, including loans for export promotion activities (Bonelli 2001, pp. 27, 32–5). In 1998, the president’s office formulated a new industrial policy under the heading of ‘development and competitiveness’ (Presidência da República 1998). The policy did not, however, include new operational industrial policy instruments, but it did reiterate the existing emphasis on industrial competitiveness, macroeconomic stability and the importance of efforts to enhance the quality of the working force through education. It also emphasized that the state would be confined largely to assist and stimulate the restructuring efforts of the private sector and that the immediate need was to reduce what was seen as the excessive cost of doing business in Brazil, the Custo Brasil.16 The government’s economic development plan for 2000–3 ambitiously titled Avança Brasil also strongly emphasized the importance of transforming Brazil into an ‘information society’ based upon the application of ‘science, technology and innovation’.17 While policies to enhance the competitiveness of local companies through financial assistance and fiscal concessions became the mainstay of industrial policies in the 1990s, in a few important instances more traditional policy measures were taken.18 The most important example of this was in the automobile industry. Import restrictions on automobiles had been abolished and import tariffs reduced giving rise to a dramatic surge in imports.19 In 1995, the government introduced a special automobile regime that allowed for tariff concessions on imports of auto parts and machinery to production units in Brazil conditional on the fulfilment of certain local content and export-performance requirements. In addition, there were special incentives for establishing plants in less developed regions of the country. The sector also benefited from the Mercosur trade agreements allowing duty-free Brazilian exports to Mercosur partners, most important to Argentina. The aim of this special regime was to encourage new investment, technological modernization and increased export in this sector, given its strategic importance for the industrial sector as a whole.20 In conclusion, policies with relevance for the industrial development were throughout the 1990s dominated by the general abandonment of traditional interventionist measures, except for their partial re-emergence in the automobile sector. A gradual consolidation of new policy instruments took place with an increase in activities aiming at a technological upgrading of Brazilian industrial companies and assistance in export promotion, mainly through financial means, including fiscal concessions

Brazil

53

18 16 14 12 10

9.0%

Per cent

8 6 4 2 -0.2%

0 -2

1.8%

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

-4 -6 -8 -10 -12 Dotted lines indicate decadal growth rates (own calculations). Note: Source: IPEAdata (www.ipeadata.gov.br).

Figure 4.4

Brazil: Annual growth of manufacturing production, 1970–2005

and technical assistance. These measures came to be regarded as the primary means to achieve a level of competitiveness among private companies deemed necessary to insert Brazilian industry successfully into the global economy.21 A survey of the results of the changes in policies and an evaluation of how Brazilian business managed the challenges of the exposure to economic globalization in the form of international competition and the new techno-economic paradigm reveals a highly differentiated picture. At the overall level, industrial growth has followed GDP growth closely, as can be seen in Figure 4.4, and growth rates only improved slightly compared to the situation during the turbulent 1980s. As can be seen from Table 4.2, the overall pattern of industrial production only changed marginally since the late 1980s. The gradual decline in the share of machinery, electrical equipment and chemicals whose development was a major achievement of the previous decades is noteworthy. The period also saw, however, a slight increase in the importance of some relatively technology-intensive sectors like transport equipment. More detailed information reveals that those industries that have been classified by the OECD as high technology industries during the same period saw a slight decline in their share from 7.0 per cent in 1996 to 6.6 per cent of the total value of industrial production in 2005.22 The relative decline in the machinery sector was probably

54

Globalization, Development and the State

Table 4.2

Brazil: Manufacturing production by selected industrial sectors (%) Old series

Metal products* Machinery Electrical equipment† Transport equipment Paper Chemicals Food and beverages Textiles

New series

1988

1995

1996

2005

14.2 7.4 7.1 9.5 3.2 18.8 15.0 5.0

10.3 5.4 6.8 13.7 4.1 15.6 18.9 3.8

9.7 6.3 6.3 10.5 3.8 12.5 20.4 3.7

12.0 5.6 6.3 13.0 3.2 12.5 18.9 2.2

* Includes the category ‘basic metals’ under new series † Includes electronic and communications equipment industries Note: From 1996 a new series of annual industrial surveys were introduced with slightly different categories and enhanced coverage. To facilitate comparison, some categories from 1996 onwards have been combined, but data for the two periods are still not fully comparable. Source: IBGE – Pesquisa Industrial Anual (PIA) (www.ibge.gov.br)

caused by the liberalization of imports, which resulted in a significant erosion of the market share of domestic producers. In 1990, domestic producers supplied approximately 80 per cent of the demand for equipment and machinery, a share that had dropped to under 50 per cent seven years later.23 The increased import of industrial equipment did, however, contribute significantly to the modernization of existing industries, and it was most likely an important factor behind the impressive gain in productivity that was achieved during the 1990s (Bonelli and Fonseca 1998). While the structure of the industrial sector only saw minor changes during the 1990s, the situation was dramatically different in terms of control and ownership of industrial assets. Increased competition from imports combined with the privatization of state enterprises and a general increase in foreign investments directed, among other things, towards acquisitions of domestic companies significantly changed the balance in industrial ownership between private national, state-owned and foreign-controlled companies. As Table 4.3 demonstrates, the 1990s saw a reduction in the overall share of nationally controlled companies in sharp contrast to developments during the 1980s. While it is less surprising to see the reduction in the share of state-owned companies because of the widespread privatization, the drop in the share of private Brazilian companies is more remarkable.24 The increase in numbers and the doubling of the share of foreign companies is indeed remarkable

Brazil Table 4.3

55

Brazil: Distribution of net sales of non-financial companies (%) 1983

Private national companies State-owned companies Foreign companies

53.4 26.4 20.2

(7547) (407) (526)

1989 59.1 23.8 17.1

(6674) (306) (500)

2000 50.2 15.2 34.6

(6441) (340) (756)

Source: ‘Quem e quem na economia brasileira’, Visão (1986, 1990), Gazeta Mercantil (2001). Note: Figures in parenthesis indicate number of companies included in the surveys.

and it demonstrates the dramatic character of the ‘internationalization of the domestic market’ that took place after the change in industrial and economic strategy and the increased exposure to economic globalization. More detailed information shows that foreign companies increased their presence in almost all branches, both in their traditional strongholds in the capital-intensive industrial sectors and significantly also in many labour-intensive branches (Moreira 1999, Table 9, p. 21). The growing strength of foreign companies within Brazilian industry has been particularly evident in Brazilian export, including manufacturing exports. The share of manufacturing export originating in foreign-controlled enterprises increased from around 30 per cent in 1990 to 38 per cent in 1999, with even larger shares of the manufactured exports to Mercosur member countries (Pinheiro and Moreira 2000, pp. 15–6).25 Finally, figures from a recent census of all foreignaffiliated companies in the country show a dramatic increase in the importance of these companies in total Brazilian export. In 1995, foreign-affiliated companies in all sectors of the economy accounted for 46.9 per cent of total export, a figure that in 2000 had increased to an unprecedented 60.4 per cent.26 The relative decline in the domestic position of nationally controlled industry confirms what earlier research has shown about the competitive strength and adjustment strategies adopted by Brazilian industries. A study from 1990 demonstrated the existence of a considerable gap between internationally accepted manufacturing standards and the practice of Brazilian companies although some of the large manufacturing companies did invest in R&D in order to keep international standards of production (Ferraz et al. 1992, pp. 66–76).27 The situation with a very heterogeneous industrial sector in terms of application of modern technology and resulting degree of competitiveness was confirmed in the large study on industrial competitiveness from 1993 (ECIB 1993). The study demonstrated that most companies had reacted defensively

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Globalization, Development and the State

to the crisis of the 1980s and had reduced their R&D expenditure. A perceived lack of financial resources led companies to emphasize short-term survival and to direct their efforts into less risky, non-innovative activities with a lack of international competitiveness as a result (ECIB 1993, pp. 198–203). The study found only a handful of sectors to be internationally competitive, like agro-industry (soya, coffee, orange juice), paper, chemicals and metals – all sectors exploiting Brazil’s abundant natural resource endowment (ibid., pp. 204ff). The initial reaction of Brazilian enterprises (that is before the Real Plan) to the new economic policies of the 1990s seems only to confirm the picture from the 1980s. While a few companies were reported to have reacted to the commercial opening by offensively restructuring their activities with an emphasis on technological upgrading, most companies reacted defensively by retreating from costly (and risky) ventures in new business areas and instead concentrating their efforts on sectors considered to be more stable. This cautious reaction also implied a movement away from technologyintensive activities (Erber and Vermulm 1993; Ruiz 1997). The defensive reaction by the private business sector may in addition to some problems in the organization of the government’s support programmes have been an important reason for the lack of entrepreneurial response to the new policy initiatives from 1990–1 (Matesco and Tafner 1996). After 1994, with the achievement of economic stabilization and the implementation of the new 1993 incentives for technological investments, the expenditure of companies devoted to R&D and other innovation-oriented activities increased significantly. The largest increase in expenditures was, however, directed towards imports of technology and this increase in imports of technology resulted in a rapid deterioration of Brazil’s ‘technological trade balance’ after 1993 (MCT 2001, pp. 128–9). The import of technology was equally divided among domestic and foreign companies with state-owned companies apparently less inclined to import technology. Most agreements for import of technology covered various forms of technical assistance or delivery of technology and payments for the use of foreign trademarks.28 Reversing the trends since the 1980s, R&D expenditure of companies included in the official statistics started to rise in the late 1990s. In 1997, companies spent about 1.06 per cent of sales turnover on R&D, a figure that had increased to 1.73 per cent in 2000, large and mediumsized companies being most research-intensive (ANPEI 2002).29 Not surprisingly, given their dominant position in the technologically more advanced sectors, foreign-controlled companies have had higher expenditures on R&D than domestic companies (OECD 2001b, p. 42). Foreign

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companies also captured a significant share of the fiscal and financial incentives offered to companies doing R&D by the government, but the large domestic companies like Petrobrás and Embraer continued to be the main beneficiaries.30 The central role of ‘informatics’ in the new industrial paradigm and the prominent role attached to this particular sector during the 1980s makes it important to assess separately developments in this sector during the 1990s exposure to economic globalization. As mentioned earlier the market reserve policy for information technologies, including computers, had caused the rise of a vigorous domestic industry, especially in computer hardware. The policy had also created conflicts between these new producers and the increasing number of users of informatics, and as mentioned earlier the policy was formally ended in 1992.31 Most of the private Brazilian producers of hardware that had emerged during the 1980s went bankrupt, sold out to foreign competitors or shifted away from hardware production. As a result, foreign companies quickly acquired a dominant position as local producers, exporters and suppliers to the large and growing Brazilian market for information technology. While imports of information technology products32 rose fourfold from 1992 to 1997, exports stagnated, resulting in a steadily rising trade deficit (Tigre and Botelho 2001, p. 99). Those large Brazilian companies that were closely linked to the banking sector (Itautec and SID among others) have, however, managed to maintain their position among the leading firms in the sector, and as intended by the government’s incentives policy there has been a gradual increase in the expenditure on R&D within the industry. The abandonment of the market reserve policy has indeed increased the access of Brazilian companies to new information technologies, and the diffusion of information technologies throughout the Brazilian economy and society has increased tremendously. The diffusion has been highly uneven, however, with large firms, advanced industrial sectors and key government agencies advancing rapidly while smaller firms, peripheral regions and most government services have remained marginal users of information technologies. The large and illegal imports of ‘grey’ personal computers may, however, have mitigated some of the inequalities in the use of computers, but the evidence for this is scanty. A remaining key lacuna in the overall IT sector has been in computer software. During the period of market reserve policy 1984–92, most efforts were concentrated in the manufacture of hardware, and when markets were suddenly opened the few and small local software firms were quickly marginalized. The government has tried to support the

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sector and promote the export of software, but while the software sector has been growing in recent years, exports achieved so far are way below the expected level.33 The general development pattern within the Brazilian industry after the introduction of the economic reforms and the opening towards international markets is one of a significant technological upgrading, but an upgrading that has mainly happened through imports of technology, while local technological efforts have declined leading to a lack of competitiveness of Brazilian-owned companies in high technology sectors and an increased emphasis on traditional resource-based industries. There are, however, exceptions to this trend and high technology industries have increased their domestic position marginally as indicated earlier. The most prominent exception to the general trend during the 1990s has been the large aircraft manufacturer, Embraer. It was the military government who established Embraer in 1969 as part of an overall effort to promote an indigenous defence industry.34 The company received a whole range of special preferences by the government in terms of finance, import concessions, favourable supply contracts with the military and so on, and it achieved impressive technological successes in designing its own aircraft and in exporting both civilian and military aircrafts. Commercially the company encountered difficulties, and in the following years, with successive losses, it was privatized in 1994. The privatization was, however, accompanied by an injection of fresh capital by the government who also kept a minority share and important veto powers in the management of the company. Under the new management, the company was modernized thoroughly and it successfully introduced a new civilian jet aiming at the international market for medium-range passenger planes. By the end of the 1990s, the company had returned to profitability and it claimed to be the world leader in its segment of the market for civilian airplanes in sharp competition with the Canadian company Bombardier.35 While the success of Embraer in a technologically demanding industry is indisputable, there are caveats. The success has been costly in terms of state support and while the company has become the country’s single largest exporter, its production is also highly dependent upon import of strategic components and parts. Nevertheless, in terms of obtaining commercial success in a technologically advanced and highly globalized industry that clearly represents an example of future knowledge-intensive production, the case of Embraer is truly remarkable. As mentioned in Chapter 1, the advent of the new techno-economic paradigm does not only involve new and emerging high-tech industries.

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It may also involve changes in the organizational and technological structure of more traditional industries and much of the technological upgrading in Brazil seems to have happened precisely in the traditional industries. One example of a technological upgrading following the commercial opening has been the shoe industry (Schmitz 1999). The commercial opening and deregulation during the 1990s in this exportoriented industry led to technological upgrading and significantly better product quality, but the accompanying increase in competition in important export markets meant that domestic producers only succeeded in maintaining the market position they had achieved before the policy reforms. Some of the attempted collaborative actions that may have improved their competitive position have met with failure because of their position in the global supply chain which exposed them to strong influence from large international buyers. The available evidence thus seems to illustrate some of the dilemmas that Brazilian industry has faced during the exposure to economic globalization in the 1990s. Although the opening up of the Brazilian economy has led to a significant technological upgrading, it has also in many cases led to a withdrawal from high-tech segments or to a sell-out to foreign competitors. Brazilian industry, understood as industries controlled by Brazilian nationals and headquartered in Brazil, has as a result experienced a relative decline in the 1990s. While optimists can point to a few sectors of the economy that have potentials for competing in the future and may see Brazil as standing at the threshold of the ‘knowledge-based economy’ (OECD 2001b, p. 9), pessimists can point out that those sectors where Brazil seems to possess significant potentials are precisely sectors dominated by foreign companies (TNCs). The increasingly dominant role transnational companies’ play in the Brazilian export seems to confirm this.

Managing the financial challenges For developing countries in general, and no less for Brazil, the ability to obtain sufficient economic resources at attractive costs to finance developmental expenditures, and economic development and growth, has always been crucial. As mentioned in Chapter 1, developing countries have at least four aims for their policies in the financial area: (1) to attract financial resources from abroad on the best possible terms, to maximize resource flows, (2) to avoid or minimize risks associated with this, including risks inherent in the fluctuations and instability of global financial flows, (3) to mobilize domestic resources to a degree sufficient

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to avoid excessive dependence on external resources and (4) to ensure stability in the financial system, that is, avoid high inflation, through suitable institutional arrangements, including a strong central bank. In a world characterized by increasing flows of volatile financial resources, these goals remain important. The minimization of the risks associated with an increased openness towards global markets has probably also increased its salience as an important goal. A key requirement in order to mitigate financial risks is to develop proper institutions and instruments to regulate the flows of finance, the terms and prices of financial resources and to mobilize domestic resources. For Brazil these challenges have proved to be of paramount importance, and increasingly so, as the country has opened itself to the global economy. However, important legacies of the past continue to haunt the present, and Brazil’s legacy of dealing with the international financial markets in particular remains serious as the continuing debt crisis demonstrates. Brazil’s financial system and its main institutions were consolidated relatively late. It was only in the 1960s that the financial system reached the institutional structure that has remained in place until today. The most important institutional reform was the establishment of a central bank in 1964. Before that many of the key functions of a central bank had been performed by the government-owned Banco do Brasil, which otherwise functioned like a commercial bank, together with the Superintendency of Money and Credit (SUMOC) and the Ministry of Finance.36 In 1964 the military government established a central bank, Banco Central do Brasil, and a national monetary council, Conselho Monetário Nacional, to supervise the national financial system. With this reform the financial system consisted of the following institutions. At the centre of the system stood the central bank and the monetary council. In the next layer were the banks and savings institutions, with a clear dominance of state-owned banks. Banco do Brasil and the government savings bank, Caixa Econômica Federal, were the largest institutions together with the special financial institutions for long-term development financing, most important of which was the BNDES. Each of the different states in the Brazilian federation also had their own publicly owned bank. More peripheral to the system were a number of smaller specialized non-banking financial institutions, insurance companies, pension funds and the like.37 A capital market in the form of private stock exchanges did exist in the form of regional stock exchanges, dominated by the stock exchanges in São Paulo (Bolsa de Valores de São Paulo, BOVESPA) and Rio de Janeiro (Bolsa de Valores de Rio de Janeiro, BVRJ). The amount of capital raised by companies on stock markets was limited,

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however, and only the very large companies, mainly the state-owned companies, had their shares traded there (Armijo 1993; 1996; 1997). This situation did not change despite attempts in the mid-1960s by the government to stimulate this form of providing long-term finance to private business. In 1988, a separate Securities and Exchange Commission (Comissão de Valores Mobiliários, CVM) was established to oversee and regulate the private capital markets. The 1988 constitution had also codified the practice of strong state supervision of the financial system including the stipulation that the participation of foreign capital in the financial sector required the government’s permission (Article 192). Throughout the 1970s and 1980s the banking sector, and especially the state-owned banks, remained the dominant institutions in the intermediation of financial resources. Only a few foreign banks were allowed to operate in the country and their activities were of limited size, although it kept increasing over time.38 The banking system was also the preferred channel for those fast expanding external financial resources (loans) during the late 1970s that would provide the basis for the debt crisis in the 1980s. During the 1980s debt crisis and the many failed attempts to stabilize the economy and reduce the rampant inflation, the financial system expanded dramatically. Financial institutions, mainly the large private banks, diversified their activities and through their abilities to deftly manage financial resources in a high-inflation economy, they secured above-average profits and in the process greatly expanded their share of the overall economy (Armijo 1996; Baer 2001, pp. 304–6).39 The economic reforms of the 1990s changed the institutional set-up of the financial sector in three different ways. First, the financial system was opened towards the international financial market allowing access for foreign institutions to the domestic market and access for domestic institutions to the international markets. Second, the privatization of state-owned companies was extended to the financial sector resulting in a gradually reduced role for the state in the sector. And third, the government implemented a number of reforms that changed the ‘rules of the game’, through the establishment of new regulatory instruments and through attempts to strengthen the supervisory role of the Central Bank.40 In 1991 the domestic capital market was opened for foreign institutional investors. The aim of this move was twofold: (1) to increase the flow of portfolio investment from abroad and (2) to develop and deepen the local capital markets, in particular the stock markets. While the first objective was achieved with some success (cf. Figure 4.7), the second aim

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was not met (see p. 67). The lack of success in developing local capital markets later led to a merger (in 2000) by BOVESPA and BVRJ, creating a single national stock market and to other initiatives to stimulate the issuing of and trading in stocks (OECD 2001a; CVM 2001). The conduct of capital account transactions was further liberalized from 1995 onwards and in 1999, Brazil formally accepted Article VIII obligations of the IMF for liberalizing its current accounts.41 The importance of these liberalizations was quite modest as restrictions on inward and outward payments generally have been limited and easily circumvented by the sophisticated financial market agents in Brazil (OECD 2001a, p. 241). In 1994, the success of the anti-inflationary Real Plan meant a dramatic change in the situation for banks and financial institutions which saw a major source of revenue disappear. The resulting banking crisis forced the government to intervene.42 In 1995, the Central Bank initiated a set of special programmes for restructuring and strengthening the banking system, the most important being the PROER programme (Programa de Estimulo à Restruração e ao Fortalecimento do Sistema Financeiro Nacional) and the Brazilian president through a presidential decree allowed for acquisition of Brazilian banks by foreign banks (Freitas 1999). The aim was to create a set of economically viable private banks through the promotion of restructuring, mergers, liquidation or recapitalization; a substantial amount of government financial resources was mobilized to assist in reaching that goal. In 1997, the programme was supplemented by a special programme for the privatization of banks owned by the federal states, Programa de Incentivo à Redução do Setor Público Estadual na Atividade (PROES). The policy also included liberal access for foreign banks to invest in domestic financial institutions. At the same time, the system for Central Bank monitoring of banks and other financial institutions was considerably strengthened through the adoption of internationally accepted standards.43 As a result of these efforts, the banking system underwent substantial changes, especially during the late 1990s. The most visible changes have been the reduction in the size of the financial system as a whole, the increased presence of foreign banks and the overall increase in the efficiency of the financial institutions. In 1990, the activities of financial institutions contributed 13 per cent to GDP. In 1993, this share had risen to almost 16 per cent, but after the Real Plan the share declined dramatically and stabilized at a level of around 6 per cent of GDP from 1995 onwards (Baer 2001, p. 307; Banco Central website). A clear evidence of the dramatic decline was the substantial reduction in the number of banks, bank offices and bank employees, and these reductions alone have probably contributed significantly to the increase in overall

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efficiency in the sector (Puga 1999). Restructuring and mergers of banks and the privatization of many state-owned banks resulted in a dramatic rise in the share of the banking sector controlled by foreigners after the mid-1990s. In 1988, foreign banks controlled less than 10 per cent of the financial assets in the banking sector. This share remained constant until the restructuring of the banking sector from 1995 onwards increased it to more than 33 per cent after 2000.44 The shares of both private Brazilian banks and state-owned banks were reduced in almost the same proportion to make room for the foreign banks. By 2000, foreign financial institutions controlled one-fourth of the total financial sector, and foreign banks managed close to 50 per cent of the flow of foreign resources into the sector. The entry of several foreign banks did not, however, reduce the already very high degree of concentration in the banking sector and although they may have contributed to technological progress in terms of electronic banking services, foreign banks have apparently not been more efficient than domestic banks (Carvalho 2001), thus belying both the expectations voiced by government officials at the time of the opening of the financial sector and the subsequent claims from the Central Bank (Freitas 1999, Banco Central, Annual Report 1999, p. 72). With regard to the key institution in the financial system, the Central Bank, it has seen some reforms, but its overall character remains largely the same. It is usually assumed that a high degree of central bank independence is required in order to install confidence among international investors and traders in foreign currency (Maxfield 1997). A certain degree of independence from on the one hand the political system, and on the other the financial system, is normally considered imperative for the bank to fulfil its functions as both a lender of last resort and supervisor of the financial system, and in particular to install confidence in international investors. When the Central Bank was established in 1964, the intention was to partly isolate it from government influence, in particular from the influences of the Ministry of Finance.45 The military government, however, quickly managed to subordinate the bank to the policies of the government primarily through its power to appoint the central bank governor, an authority which was used extensively. A good indicator of the Central Bank’s lack of independence is the fact that during the economic and financial turbulent 1980s the average tenure of a central bank governor was only 15 months! In 1986, after the return of the civilian government, attempts were made to dissociate the Central Bank from the government, at least with regard to its direct financing of the government’s fiscal deficit. Legally, the Central Bank’s accounts became separated from those

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of the government, and the bank was prevented from indirectly financing the public sector through its management of public debt. This small, but significant increase in legal autonomy was undermined, however, by the Central Bank’s subsequent operations in the secondary market for government securities (Luporini 2000). Throughout the 1990s, shifting governments have continued to use their power to appoint the Central Bank governor with alarming frequency46 and the policy of the bank has continued to function as an extension to the policy of the Ministry of Finance. Besides the obvious collusion with the government, the Central Bank has also been accused of colluding with private interests within the financial system. The credibility of these accusations has been strengthened by frequent appointments of governors with a career background from institutions operating in the private capital market and through the employment of former bank governors by private financial institutions.47 A bill to create a truly independent central bank was introduced in the late 1990s, but Congress has as yet (2007) not approved it. While there are clear signs of an improvement in the administrative working and international reputation of the Central Bank, the bank is still a long way from obtaining a degree of institutional autonomy that is sufficient to enable it to manage both the financial system and its international relations in a manner that would convince foreign investors that it would not be used as a direct instrument for whatever economic policy the government of the day may chose.48 If we then turn to developments with regard to mobilization of financial resources for domestic economic development that has occurred before, during and after the changes in the financial sector, the overall picture is quite complex. With respect to the mobilization of domestic savings, Figure 4.5 shows that the overall savings rate fluctuated during the turbulent 1980s and early 1990s, but stabilized somewhat after the successful economic stabilization in the mid-1990s. The level of domestic savings has not increased, however, and from the mid-1990s the savings rate declined to a level below 20 per cent, similar to that of the early 1960s. However, after the turn of the century, savings have recovered slightly. The decline in the savings rate has made it important to attract financial resources from abroad. Brazil has indeed attracted large financial resources from abroad, but at the same time the payments on the large foreign debt has resulted in a significant drain of financial resources. The story of the Brazilian debt crisis need not be told here, but as can be seen from Figure 4.6, debt payments had reached alarming proportions of annual export earnings (debt-service ratio) by the early 1980s.

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Brazil: Gross domestic savings/GDP ratio, 1980–2005

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Brazil: Selected external debt indicators, 1980–2005

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Successive rounds of negotiations with creditors and international financial institutions (primarily the IMF) combined with strong efforts to increase export earnings had led to a certain degree of stability of the debt situation by the early 1990s, culminating in the negotiation of a long-term debt restructuring deal in 1992–4 (Chossudovsky 1997, Ch. 9). Developments in the debt area since the commercial opening in 1990 and the economic stabilization in 1994 have not been unambiguously positive, however. In absolute terms, total debt has increased during the 1990s, although less so as a share of the national product, but it is a cause of concern that the annual debt payments in some years have been much higher in relation to annual export earnings than they were in the time of the severe debt crisis in the early 1980s. One reason for the still-manageable situation in the area of external financial resource flows has been the increased inflows of foreign investment since the early 1990s. As can be seen from Figure 4.7, annual debt payments have, to a large degree, been financed through inflows of foreign investments. In the mid-1990s, inflows of portfolio investments, mostly from foreign institutional investors, had contributed significantly to debt payments, while the explosion in foreign direct investments since 1995 helped finance the debt payments. The inflows also contributed to a healthy increase in the reserves of foreign exchange. By

80000 70000 60000

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Figure 4.7

Selected resource flows to/from Brazil, 1980–2005

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the end of the 1990s, Brazil remained extremely dependent on very large annual inflows of foreign financial resources, not only to service past debts, but also before 2001 to finance persistent trade deficits and to finance domestic investments. This constant need for foreign financial resources has made the Brazilian economy vulnerable to external financial shocks and has limited the financial resources available to the government for its policies for industrial and economic revival. The need for maintaining investor confidence abroad may also have limited the range of policy measures to those deemed acceptable by foreign investors and international financial institutions such as the IMF. Seen from the perspective of private industrial companies, the changes in the financial system and in the inflow of financial resources have not resulted in any significant change in the pattern of corporate financing. The stock market has grown as a source of financing of companies, bolstered by the inflows of portfolio investments, the privatization of large state-owned enterprises and by the new possibilities for raising capital abroad. Despite these innovations, the overall financing of private industrial companies is still dominated by internal sources and by loans from the banking sector, primarily the state-owned BNDES, while the role of the private capital market is still quite limited. This is an indication of the continued existence of financial constraints for Brazilian companies (Moreira and Puga 2000; Hermann 2002). These constraints have probably impeded the expansion of Brazilian companies, thus belying the hope that the opening up for foreign financial resources would stimulate an expansion of local business. On the other hand, Brazilian companies have largely avoided becoming vulnerable to external financial crisis due to the insulation of their sources of financing. The many instances of externally induced financial crisis have thus not resulted in corporate bankruptcies similar to those experienced by East Asian countries during the Asian financial crisis. While there are no clear signs of any perceptible improvement in the availability of domestic financial resources and the inflows of financial resources still have to be used to service the foreign debt, the prices of financial resources – interest rates and exchange rates – have stabilized somewhat during the 1990s. With the successful reduction of domestic inflation following the implementation of the Real Plan, including the linking of the real (currency) to the US dollar within a certain bandwidth, the Central Bank has managed to slowly reduce real interest rates. (OECD 2001a, pp. 47, 51). Interest rates have remained well-above international rates.. The monetary policy has, however, been committed to the maintenance of price stability which has made interest rate

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manipulation the key policy instrument of the Central Bank. In times of externally induced crisis, the bank has typically responded by raising interest rates, thus to a large extent sacrificing the goal of economic growth for the sake of maintaining monetary stability. The advent of two externally induced crises has tested the stability of the financial policy framework put in place during the 1990s. In late 1994, the Mexican peso crisis threatened to unsettle the economic stability recently achieved by the Real Plan. The crisis in Mexico led some foreign investors to immediately withdraw their portfolio investments in Brazil and led to speculation against the real. The Central Bank quickly responded by raising interest rates and by initiating a slow and controlled devaluation of the real (Garcia and Valpassos 1998; Baer 2001, pp. 204–5, 308; de Paula and Alves 2000, p. 21). As a result, the crisis was overcome and investment inflows were resumed by mid-1995. The next crisis occurred in the wake of the Asian financial crisis of 1997. Once again international investments fled the country (in October) and the real came under heavy attack, but a combination of raising interest rates, use of currency reserves and the announcement of strong fiscal adjustment measures succeeded in averting a crisis (de Paula and Alves 2000). The external pressure returned, however, after the Russian debt moratorium in August 1998; in October the government had to repeat the exercise, this time supported by a 42 billion US dollars support package arranged by the IMF and including a three-year IMF standby arrangement.49 This time these actions proved to be inadequate, however, and in January 1999, the Central Bank decided to allow the currency to float, resulting in an immediate devaluation of about 22 per cent rising to over 40 per cent during the following period. At the time, many observers predicted that the devaluation would result in a return to high domestic inflation and economic instability, but these expectations were belied by subsequent events. The currency stabilized at the new lower level, financial flows returned, and inflation was kept in check. Contrary to the situation in other countries experiencing financial crisis there were no major bankruptcies in the private sector largely due to the low reliance on external financing in Brazilian companies, as mentioned above. Many saw this as a definitive proof that the economic reforms of the 1990s had succeeded in creating a more robust financial system capable of managing externally induced crisis. The measures taken by the government to mitigate the crisis had been costly for the public finances, however. The lack of fiscal reforms that could reduce the mounting public domestic debt contributed to a situation with continued in-built systemic weaknesses. The external fragility noted above also

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remained, and the IMF programme had to be extended, thus keeping Brazil under continuing tight policy supervision.50 One indicator of the vulnerability of Brazil to financial crisis is the ratio between the available international reserves and the short-term international debt. While far from being perfect, this ratio gives a good impression of the situation or the level of comfort with which the Central Bank has faced the danger of a rapid withdrawal of liquid funds by foreign investors. Figure 4.8 shows the low level of reserves and by implication high level of vulnerability that Brazil had attained in the early 1980s before the onset of the debt crisis. After a significant increase, the reserves again fell in the late 1980s. The 1990s initially saw a major improvement, but after the mid-1990s the level of reserves again declined, thus making Brazil vulnerable once more. However, the overall level has improved compared to the fragile situation in the 1980s, and after 2000, the situation saw a further improvement. In conclusion, Brazil has responded to the challenges of financial globalization with an opening up and restructuring of its financial system. This has resulted in a significant increase in the control over the domestic financial system by foreign financial institutions, mostly international banks. The results in terms of access for domestic companies to 70000

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Figure 4.8

Brazil: International reserves and short-term debt, 1980–2005

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financial resources have been disappointing, and interest rates have remained at a high level. Neither the reforms of stock markets nor the increased access to foreign resources have made any significant positive impact on the financial situation of domestic enterprises. Brazilian companies still rely on internal financing and loans from government banks, and this may well have acted as an important constraint on their expansion. In terms of financial stability, improvements have been evident, though. The foreign debt situation has stabilized, albeit at a level of indebtedness that has made it necessary to constantly rely on financial rescue packages from the IMF. This has clearly reduced the ‘room for manoeuvre’ of Brazilian governments, but the robustness of the overall management of the financial system has been increased to a degree that has enabled successive governments and Central Bank managers to steer clear of major negative effects from the turbulent international financial system. The reverberations from two major international crisis – the Mexican ‘peso crisis’ and the Asian financial crisis – were thus successfully managed, albeit not without some costs in terms of economic growth. After more than a decade of reforms, the structural–financial vulnerability in the form of the continuing debt crisis and the increased influence from international banks on the domestic financial sector remains high.

Managing the new international economic arena A third type of challenge from economic globalization that the Brazilian state faced during the 1990s was the management of its participation in the process of establishing a new framework for international economic exchange, primarily in the Uruguay Round between 1986 and 1994 and the subsequent negotiations within the WTO framework. Parallel to this process at the global level, Brazil has also been engaged in negotiations to promote new arrangements at the regional level through its participation in the establishment of the Mercosur free trade area51 and its participation in the negotiations over the establishment of a future hemispheric free trade area, Free Trade Area of the Americas (FTAA). Both global and regional negotiations have challenged the abilities of the Brazilian state to manage a greatly expanded agenda for international commercial negotiations. The parallel conduct of regional and global trade negotiations has had both conflicting and complementary elements. It can be argued that the pursuit of an agenda of regionalization, that is of promotion of regional trade agreements, could be part of a strategy that would strengthen the

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position of Brazil in the global negotiations. But it may be equally true, that the pursuit of a regional strategy constitutes an alternative to the vastly more complex global agenda where specific Brazilian interest would stand a much less chance of being taken into consideration.52 Complementing the global and regional arrangements, Brazil has been engaged in a process of establishing new transatlantic cooperation agreements between the EU and Mercosur. Brazil considers its links with the EU to be both a useful instrument in its own right and a way of balancing against too heavy a reliance on the United States. Thus, the 1990s has for Brazil been a period with a highly complex scene of parallel and multilayered trade negotiations that have greatly challenged the capacity of the Brazilian state to conduct international negotiations. Traditionally, Brazil has in international negotiations on economic issues assumed a position somewhere in between those of the developed and the developing countries (Selcher 1978). While the ultimate ambition always was to join the developed world, pragmatic considerations over Brazil’s economic interest have often dictated a stand close to that of most other developing countries without leading to a firm ideological commitment to the cause of this group of countries.53 The debt crisis of the 1980s, however, led Brazil to reconsider its policies resulting in a renewed emphasis on regional economic integration and a toning down of the ‘go it alone’ position. The parallel political transition away from authoritarian rule in Brazil and in neighbouring Argentina also acted as a stimulant to the search for regional economic collaboration. The process that led to the formation of Mercosur started in the mid1980s with a series of meetings between the new presidents of Argentina and Brazil. Based upon a number of agreements resulting from these meetings between the two countries, the formal decision to establish a common market from January 1995 was taken at a meeting in Asunción in 1991 between the presidents of Argentina, Brazil, Paraguay and Uruguay. Technically, Mercosur was established within the existing general framework for trade cooperation in Latin America, the Latin American Integration Association (LAIA).54 By January 1995 most of the goals set for the establishment of a free trade area with a common external tariff were accomplished and Mercosur could from then on be regarded as a relatively well-established regional cooperation agreement organized around a set of loosely organized common institutions within which regional negotiations on a variety of economic issues have taken place.55 As the largest member state Brazil has played a dominant role in the working of the Mercosur, but its policy within Mercosur has been rather defensive and closely aligned to both its

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domestic industrial policy and to its general policies towards international trade, most important the general trade liberalization during the 1990s (Motta Veiga 1999). Brazil–Argentina relations have for obvious reasons continued to constitute the main axis in Mercosur, and the close collaboration between the two large member countries has survived the economic turbulence in both countries during the 1990s reflecting a combination of strong political commitment to the project with increasing economic stakes in the continuation of the economic cooperation. Mercosur has also gradually extended its scope through association agreements with Bolivia, Chile and Venezuela. In addition to its role as a framework for trade negotiations at the regional level, Mercosur has also provided member countries with an alternative road to international trade negotiations. Mercosur has thus been the preferred forum for negotiations with the EU, and Brazil has tried to use Mercosur as an instrument for collective action in the negotiations with the United States and other hemispheric partners in the FTAA negotiations (Bouzas 1999). The most far reaching and challenging international economic negotiations for Brazil have, however, been the Uruguay Round negotiations 1986–94 and the subsequent negotiations within the WTO. Brazil was among the contracting parties when the GATT was established in 1948, but it was also among those developing nations within the UN, which in 1964 established United Nations Conference on Trade and Development (UNCTAD) as an alternative to GATT as a forum for discussion of international trade issues.56 When the discussion of a new round of trade negotiations came up in the early 1980s and new issues for negotiation were suggested by the United States, it was not surprising that Brazil together with other key developing countries, including India, argued strongly against these proposals. The new issues included TRIPS, TRIMS and the vast and complex field of ‘services’. Like most other developing countries, Brazil wanted the new round of trade negotiations to concentrate primarily on the inclusion of trade in agriculture and in textiles under the liberal GATT rules. Strong efforts especially by India and Brazil against the inclusion of services in the negotiations succeeded only, however, in relegating the negotiations to a formally separate track of negotiations when the Uruguay Round was launched in 1986.57 In reality, the issue of international trade in services were for all practical purposes considered a part of the overall negotiating agenda. One of the reasons for Brazil having to give in on the question of inclusion of the new issues in the negotiations was of course the recognition of the country’s weak financial position vis-à-vis the international

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73

financial institutions and the United States. Another reason was the gradual change within the country away from its traditional protectionist stance towards more open and liberal policies which culminated with the commercial opening in 1990. The changes in the Brazilian attitude were apparent in the negotiating process during the Uruguay Round. After a period of open resistance to serious negotiations on both services and TRIPS, Brazil changed its strategy from around 1988, when a new chief negotiator was appointed (Caldas 1998, p. 118). From this time onwards, Brazil negotiated in a more positive spirit trying to maximize its benefits and minimize the costs from the Uruguay Round. When the GATT general secretary Arthur Dunkel presented the draft agreement in 1991, Brazil thus stood firmly behind it. And when the final agreement establishing the WTO was agreed upon in 1994, it included all the new issues that Brazil had initially been against, but had later accepted. From a Brazilian perspective, the new framework for international economic negotiations that the agreement represented was probably seen as the best possible deal under the given circumstances, but it is hard to see it as an example of successful management by Brazil of its international economic interest. Rather, the process leading to the establishment of the WTO must be seen as a first test for Brazil of what would become the norm in its international economic relations, namely the need to establish, defend and develop a much more comprehensive strategy for dealing with the international economy. During the Uruguay Round, it had become apparent that the capacity of the Brazilian state to deal successfully with the new comprehensive trade agenda was not sufficient. In continuation of a well-established tradition the Ministry of External Affairs (Itamaraty) had been almost exclusively in charge of the negotiations, and while diplomatically highly competent, the Itamaraty was not fully prepared for negotiating such a broad agenda of often highly technical economic issues. Brazil had thus failed to prepare its negotiating position through studies of the new issue areas, notably the services sector, thus leaving it to the discretion of individual officers in Itamaraty to establish the initial negotiating strategy. In the later phase of the negotiations, however, negotiators had apparently established much closer contact with representatives of Brazilian business, thereby getting a better grasp of Brazilian interests in the negotiating issues.58 The establishment of the WTO also led to new efforts to strengthen the capacity of the Brazilian state to manage both a more open economy and the ongoing negotiations in the WTO and in the regional foras.

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At the domestic level, the commercial opening in 1990 was accompanied by an abolishment of some of the regulatory agencies that had been established under the era of import-substitution policies.59 In 1995, a new institution, Câmara de Comércio Exterior (The Chamber of Foreign Trade, CAMEX), was created with the task of formulating and coordinating foreign trade policies.60 CAMEX was organizationally placed under the president’s office and it included representatives from all important ministries, including finance, industry and trade. The Central Bank and Itamaraty was also represented but there were no representatives from private business. In addition, the accession to the WTO led to the establishment of several new offices, among them an office in the Ministry of Industry and Foreign Trade dealing exclusively with ‘commercial defence’. The number of cases in which Brazil used its anti-dumping and other forms of protective measures increased dramatically during the 1990s, especially after 1996, indicating an active or more aggressive new trade policy.61 Itamaraty remained in charge of international trade negotiations, however, but in its work it has become linked much more closely to the other ministries through the CAMEX and through other forms of mechanisms for consultations and coordination. Within the ministry itself, new offices have been established to deal with negotiations on TRIPS and services (Motta Veiga and Iglesias 2002). In addition to these institutional changes within the Brazilian state apparatus, there has also been an intensification of the dialogue between state organs and the private business sector and this dialogue is today much more institutionalized than earlier (see Chapter 6). This change in state–society relations was motivated by the increasingly intense negotiations on FTAA from 1998 onwards, but the collaboration between state and business was extended to cover negotiations within Mercosur, negotiations with the EU and and the negotiation processes within the WTO. Inside Itamaraty, new thematic groups dealing with the issues negotiated within the WTO have been created (i.e., services, market access, commercial defence and safeguards, intellectual property rights, trade-related investments and so on). And of specific interest for the negotiations within WTO, the Brazilian representation in Geneva was expanded from four persons in 1982, to six in 1987 during the Uruguay Round of negotiations, and to eleven in 1997 after the establishment of the WTO (Michalopoulos 1998, p. 30). This makes the Brazilian delegation the fifth largest in Geneva, surpassed only by the EU, Japan, Korea and Thailand. While there remain many deficiencies in the system for managing those new challenges, that the changes in international arena for trade negotiations have given rise to, there is no doubt that the changes in

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the institutional set-up that have been implemented have vastly increased the capacity of the Brazilian state to respond to these challenges.62 According to some observers, there is still a lack of ‘technical and human’ resources within the ministries concerned, especially the Itamaraty. To compensate this, there has in recent years been an increase in the interaction between the ministry and experts from specialized research centres as well as from the universities.63 One indication of the increased Brazilian capacity to manage the new set of rules for international economic interaction is the growing use of antidumping measures, countervailing measures and other forms of ‘commercial defence’ by Brazil in the period since 1994 (WTO 2002, p. 45). Brazil has also been a part in several trade disputes brought to the WTO dispute settlement mechanism, and it has been able to win important concessions in some cases, most notably a case involving a give-andtake dispute with Canada over export subsidies to Embraer and Canadian subsidies to its aircraft manufacturer, Bombardier (ibid., pp. 128–31).64 The overall impact on Brazil’s interaction with the international economy since the early 1990s has been mixed. In Figure 4.2, we saw that Brazil’s export expanded in the early 1990s, but due to an even stronger rise in imports, the trade balance quickly became negative. In the second half of the 1990s, both exports and imports stagnated resulting in a modest trade deficit, and it was only after the turn of the century that exports started to grow again. The resulting trade surplus before 2003 was also a result of the continuing stagnation of imports. Despite the recent positive developments in Brazilian export, it is difficult in the overall trade figures to find any definitive improvement in Brazil’s external trade relations. The nature of Brazil’s trade relations with the international economy did change, however, in some important respect after 1990. As can be seen in Table 4.4, the trade/GDP ratios increased slowly during the 1990s reaching a level slightly above that obtained before the debt crisis of the 1980s and accelerating further after 2000. This reflects a slowly increasing integration with the international economy. The greatest change has been in the geographical orientation of trade, with a rise in regional trade, including trade within the Mercosur. This seems to have been a result of developments in the years before or closely after entering into the Mercosur agreement in 1995, but the higher level has been maintained throughout the 1990s, only to decline somewhat in the wake of the collapse of the Argentinean economy in 2001. It is remarkable that trade with Latin America now figures almost on par with large traditional trade partners in the United States and the EU.

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Table 4.4

Brazil: Foreign trade orientation, 1980–2005 1980 1985 1990 1995 2000 2005

Trade/GDP ratio (1) Export/GDP (2) Import/GDP Trade by area USA (3) Export (4) Import EU (15) (5) Export (6) Import Latin America (Mercosur) (7) Export (8) Import

(%) 9.1 11.3

8.2 7.0

7.3 8.8

10.0 11.7

15.1 11.5

(%) 17.4 18.6

27.1 19.7

24.6 19.8

18.9 21.2

22.4 23.1

19.2 17.5

30.8 17.3

28.4 15.7

32.5 23.2

27.7 27.7

25.9 25.9

22.4 24.7

18.1 9.6 11.6 (9.0) (3.9) (4.2) 12.5 12.5 17.1 (4.6) (5.0) (10.8)

Export composition (9) Primary products 46.6 (10) Semi-manufactured products 10.4 (11) Manufactured products 41.7 Export as share of: (12) Total export from Latin America (manufactures) (13) World export (manufactures)

12.2 7.1

35.1 10.6 53.2

27.8 16.3 54.2

23.0 (13.2) 20.6 (13.8)

(%) 23.5 19.7 54.9

29.7 25.4 (13.2) (9.9) 21.0 16.2 (13.9) (9.6) 22.8 15.4 59.0

29.2 13.6 55.2

(%) 18.1 23.5 21.8 20.4 15.3 20.9 (45.6) (42.6) (31.9) (20.4) (15.6) (21.1) 1.00 1.30 0.90 0.90 0.85 1.13 (0.60) (0.91) (0.65) (0.63) (0.66) (0.81)

Note: Figures in parentheses in rows 7–8 are for trade with Mercosur partners. Figures for export products do not add up to 100% due to exclusion of small amounts of ‘special treatment’ products. Figures in parentheses in row 12–13 are for manufacturing products. Source: IMF, Direction of Trade Statistics Yearbook, various (trade by area); World Bank, World Development Indicators, (online) (trade/GDP, export of manufactures – own calculation); Banco Central do Brasil, Annual Report, various years (export composition); UNCTAD, Handbook of Statistics (online) (total export shares).

The 1990s also witnessed a continuation of the gradual decline in the share of primary products in Brazilian export and an increase in the share of manufactured goods. The export surge in the years after 2000 has mainly been based on exports of primary products, thus in this respect reversing the general trend of increased sophistication of export products. Finally, it is worth noting that in the period after the economic reforms and the commercial opening, Brazil neither succeeded in the regional nor the global perspective in decisively increasing its international share of exports. This implies that despite the many reform efforts and the efforts to increase the country’s global competitiveness,

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Brazil has only barely managed to maintain its international economic position. The overall picture of how Brazil has managed the complex challenges in the arena for international trade during the 1990s is one of a small, but significant increase in the ability and capacity of the Brazilian state to deal with international trade negotiations and in its ability to manage the new ‘rules of the game’ for international trade. Brazil has had to accept the changes taking place through the establishment of the WTO, but it has increasingly been able to play by the new ‘rules of the game’. In terms of real changes in the integration of Brazil into the international economy, only little of significance has changed, however, especially when compared to the changes effected during the prereform period of the 1980s. It is clearly important, though, that the trade orientation has shifted somewhat towards regional partners in Latin America and Mercosur, but it is less encouraging that Brazil’s importance in the international (and regional) economic sphere has stagnated or even declined during a period that has witnessed some of the most significant changes of the rules in international trade. This points to the fact that, while the Brazilian state may have increased its capacity to negotiate and manage its affairs in the area of international trade, Brazilian business has not yet been in a position to benefit from this, and as a result the export performance has been somewhat disappointing, although positive changes may be under way.

Summing up: How Brazil managed the challenges of economic globalization in the 1990s The 1990s was a decade of change and reorientation for Brazil. After the economic crisis and political transformation in the 1980s, the 1990s became a period when Brazil had to face the challenges of economic globalization. This was also how the period was seen by policymakers in Brazil, and the many reforms initiated during the decade all sought to prepare Brazil for an advantageous integration into the global economy. Following the commercial opening in 1990, the Brazilian government took several initiatives to increase the competitive strength of Brazilian companies. New programmes for technological upgrading were established, but due to the unstable economic situation, little could be accomplished before economic stabilization was achieved in 1994. The success of the Real Plan and the political stabilization that followed the election – and subsequent re-election – first of President Cardoso and later President Lula, made it possible to continue and intensify the economic

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reform process. The support for industrial restructuring and renewal was increased, an aggressive policy of privatization of public enterprises was introduced, and the financial sector was restructured. The results of these new initiatives were contradictory, though. There is little doubt that a significant technological upgrading of industrial enterprises did take place during the 1990s, but at the same time, many Brazilian enterprises withdrew from high technology activities. This was probably a result of both an increased competition and the strengthening of locally operating foreign companies as a result of the new, open policies. Denationalization thus became a distinctive feature of the Brazilian industrial economy during the 1990s (Rocha 2002). While there are some examples of Brazilian companies operating successfully in the new economic environment, the overall impression is one of a tremendous strengthening of the position of foreign-controlled companies, especially in the dynamic, often high-tech, sectors. Brazilian companies within the computer industry thus largely vanished, nothing much happened in the important software sector and many local companies within relatively advanced industrial sectors were taken over by larger foreign companies. However, the local Brazilian industry remained strong in many branches. The financial sector also saw an increase in the role of foreign companies, although the position of both state-owned financial institutions and Brazilian private banking corporations remained strong. The financial system as a whole became institutionally stabilized; its overall size reduced relative to the overall economy, and operational efficiency increased. Economic stability was thus the main achievement during the period with inflation under control and the currency maintained at a relatively stable level. The financial system also proved its basic stability when it came under external pressure during the two major crisis of the period. Maintaining stability had its price, however, in terms of high interest rates and restrictive loan agreements with the IMF. The stabilization of the financial system did not lead to increased access to financial resources. The domestic savings ratio stagnated and the continuous drain of financial resources to service the huge external debt reduced the growth stimulus that might have been expected from the large inflows of foreign capital during the latter half of the 1990s. Brazil thus succeeded in managing the threat of instability from financial globalization, but it did not succeed in benefiting from the potential for accessing global financial resources. The structural dependency caused by the continuing debt crisis effectively limited this opportunity.

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In terms of managing the relationship with the new global trading system and its evolving new set of rules, Brazil also experienced some improvements during the 1990s. Brazil did not succeed in preventing the establishment of new and more comprehensive arrangements in the WTO, but the capacity of the Brazilian state to take part in the management of the system and the continuing negotiations did improve somewhat. At the regional level, the establishment of the Mercosur free trade area was successful in increasing regional trade links, and Mercosur survived throughout the different crisis situations of the 1990s. In the overall assessment of how Brazil managed the challenges posed by economic globalization during the 1990s, special emphasis must be placed on the overall economic growth and on the relative position of Brazil in the world economy. Economic growth did resume in the 1990s, but seen in the light of (or perhaps because of) the quite dramatic and strong reform initiatives, economic growth was disappointing. In the international economic arena, Brazil even experienced a slight decline or stagnation in its relative position. Part of the explanation for this may be that the strongest elements of the policy changes were those that reduced and removed state interventions, while the attempt to increase state activities as in support for technological upgrading or in the strengthening of the capacity for international negotiations, despite being necessary and called for, were generally quite modest. Lack of financial resources on the part of the state seems to have been a major reason for the feebleness of the supportive and necessary actions. Despite the mixed overall picture that one is forced to portray of Brazil in the period after the initiation of the economic reforms, it is clear that when President Lula took office in 2002, the Brazilian economy was in a much better situation than when his predecessors in the 1990s had taken charge. This partly successful, partly failed attempt at managing the economy in a new and globalizing world economy, may, also be explained by a reference to some of the qualities that were said to be possessed by the earlier, so-called developmental states of East Asia. We shall return to this in Chapter 6, but before that, we turn to India to see how the challenges of economic globalization have been met during the same period, since the early 1990s.

5 India

Introduction and overview: The 1980s and the 1990s The 1970s saw the culmination of India’s quest for economic selfreliance.1 The long-term ambition of the Indian planners and politicians from the early 1950s onwards had been to develop an indigenous and independent industrial sector as the foundation for sustained economic growth. The economic strategy pursued by policymakers had emphasized strong state intervention, a policy of import-substitution and a largely restrictive policy towards foreign investments with the aim of promoting national control over the country’s economic assets. The Indian state had, on the one hand, put in place an impressive system of controls over private industrial investments, its core being the industrial licensing system. This system implied that practically all industrial investments required government approval in the form of an investment licence. On the other hand, the state had directly engaged itself in industrial development through public enterprises. Some of these were former private companies that were nationalized; others were enterprises established by the state in those economic sectors that were deemed strategic and in many instances reserved exclusively for stateowned enterprises. These policies had by the late 1970s resulted in relatively high degrees of self-sufficiency in a large variety of industrial products. The advances in import-substitution were particularly impressive in capital goods and durable consumer goods (Ahluwalia 1985, pp. 119–20). A good part of the industrial expansion had come about through the expansion of state-owned companies in sectors said to be of strategic importance for overall industrial development. The state had also expanded through the acquisition of private companies in many sectors. The culmination 80

India 81

of this expansionist policy came with the nationalization of private banks in 1969, the nationalization of general insurance companies in 1972 and the take over of a number of ‘sick’ coal mines and textile companies in the following years.2 In the policies towards foreign investments, the goal of self-reliance meant an emphasis on securing national control over economic assets and minimizing the extent of foreign control. This restrictive policy towards foreign investments culminated in 1974 with the implementation of the Foreign Exchange Regulation Act (FERA).3 Before FERA, most restrictions on foreign investments had been confined to sectoral restrictions, that is, foreign investments had been banned in certain sectors that were considered strategic and were reserved for public enterprises or were considered sufficiently serviced by domestic enterprises so that only technical collaboration with foreign companies was allowed. The overall policy by the government was to limit the participation of foreign enterprises to sectors where they were considered to be a necessity. With the enactment of FERA, conditions for foreign investors were tightened further. Foreign companies were now required to dilute their equity participation to 40 per cent with the exception of investments in a few selected (‘core’) areas and in specific export-oriented industries. The restrictive policies towards foreign investment had, in combination with the expansion of public enterprises and a variety of support measures for domestic companies, succeeded in increasing the level of domestic control over the industrial economy. In most industrial sectors, domestic enterprises, both private and public, increased their control significantly during the 1970s. The exceptions to this general trend were mostly found in a few consumer goods industries and in capitaland technology-intensive sectors like transport equipment.4 However, the possession of industrial technology probably ensured foreign companies a level of actual control over domestic enterprises that exceeded the levels indicated by ownership figures. Among both domestic and foreign companies, large conglomerates (‘Industrial Houses’) had tended to dominate, in sharp contrast to the declared policy aim of all governments since independence (Goyal 1979; Sandesara 1992). Parallel to the increasing self-reliance within the industrial sector, the policies of technological modernization – the so-called green revolution – had in combination with other policies succeeded in making India largely self-sufficient in agricultural products, notably in food grains. While quite successful in raising the level of economic self-reliance and national control in all economic spheres, the policies did not produce the expected higher rates of economic growth. As can be seen from

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Percent

6

5.6% 4 3.1%

2 0 -2 -4 -6

1970- 1972- 1974- 1976- 1978- 1980- 1982- 1984- 1986- 1988- 1990- 1992- 1994- 1996- 1998- 2000- 2002- 200471 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05

Note: Dotted lines indicate decennial growth rates. Source: Government of India, Economic Survey, various years, New Delhi.

Figure 5.1

India: Annual growth of GDP, 1970–1 to 2005–6

Figure 5.1, overall growth rates fluctuated sharply throughout the 1970s and the average growth during the decade was only slightly above 3 per cent. Given the increase in population, this was clearly not satisfactory, and the expression ‘Hindu Rate of Growth’ gained some popularity as a designation of the apparently permanent growth rate of about 3.5 per cent.5 The combination of rising international oil prices and a disastrous harvest even drove the economy into a deep recession in 1979. This led the government to approach the IMF in 1981 for an unprecedented large emergency loan (Joshi and Little 1994, Ch. 6).6 Despite the progress in industrial development, the Indian economy was still a predominantly agrarian economy well into the 1970s (see Table 5.1). The role of the agricultural sector started to decline from the

Table 5.1

India: Sector composition of gross value added, 1960–2005

Agriculture Industry (Manufacturing) Services

1960

1970

1980

1990

1995

2000

2005

45.5 19.4 (13.7) 34.2

46.1 20.7 (13.8) 33.3

38.9 24.5 (16.3) 36.6

31.3 27.6 (17.1) 41.1

28.2 28.1 (18.1) 43.6

23.5 26.2 (15.6) 50.5

18.3 27.3 (15.7) 54.4

Source: World Bank, World Development Indicators (online).

India 83

1980s, however, while both the industrial and services sectors expanded. The manufacturing sector expanded significantly, but by 1980 it still accounted for only one-eighth of the total economy. The low economic growth had resulted in a steady decline since the 1950s in the global position of Indian economy as measured by conventional standards. In terms of total production, industrial production, exports and imports, India’s share of both the world economy and that of developing countries had declined, and the country’s international standing was significantly lower than could have been expected from the second most populous country on earth. Only in one area had India progressed significantly, in higher education (Patel 1985). Part of the explanation for the low growth could be found in the relatively conservative policy of successive governments towards taking foreign loans. Unlike most developing countries, including Brazil, India did not accumulate large international debts during the 1970s, primarily because it had relied on domestic financing and on whatever concessional aid official donors would provide for. The positive side of this was, however, that after the economic crisis that started in 1979 and ended in the early 1980s, India was in an advantageous position to borrow funds from those investors abroad who had stopped giving loans to debt-ridden countries and were looking for safer destinations. Politically, the 1970s had been a period of crisis and change. The brief period with Emergency Rule during 1975–7 resulted in the loss of power for the Congress Party at the national level for the first time since independence, but by 1980, the loose alliance of non-Congress parties had disintegrated, and the Congress Party was back as a dominant and ruling party. This apparent restoration of political stability could not, however, conceal two decisive changes: (1) the erosion and deinstitutionalization of political power within the Congress party and (2) the rise of new, regionally based political forces.7 The 1980s thus started with an economic crisis that forced the Indian government to approach the IMF for a loan, conditional on the usual policy measures. These measures were, nevertheless, in accordance with what the government had already planned, so the conditions were not regarded as being particularly harsh. In any case, the economic situation soon improved and the government decided in 1984 not to draw on the last instalment of the loan (Joshi and Little 1994, pp. 59–60, 150–1, 167–8). In terms of economic policy, the 1980s became known for two distinct types of policy changes. The first was the decision to enter the international markets for commercial loans, partly as an alternative to the conditionality-based IMF loans. The second type of policy

84

Globalization, Development and the State 10000

8000

Million US$

6000

4000

2000

0

-2000 1970 1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

-4000 Aggregate net flows

Official net flows

Source: World Bank, Global Development Finance (online).

Figure 5.2

Net flows of external financial resources to India, 1970–2003

change consisted in a series of decisions that slowly began to liberalize the previous dirigiste economic policies. The changes in the magnitude and composition of external financial resources reflect the new policies towards international loans (see Figure 5.2). Total external flows to India increased rapidly during the 1980s, and the increase came from the growth in borrowing from private sources, mainly commercial bank loans. In contrast, loans from official sources, mostly on concessional terms, became less important during the 1980s. The result was a rapid increase in external indebtedness and an increase in annual debt payments (see Figure 5.10). The start of the process of liberalizing state control over the economy can be traced back to the mid-1970s, when the government made some minor relaxations in the system of industrial licensing (Ahluwalia 1985, p. 149; Marathe 1986, Ch. 4). In the late 1970s and early 1980s a number of expert committees recommended reforms of the restrictive import regime, the industrial licensing system and the restrictions on foreign investments (Swamy 1994, Ch. 12; Wadhva 1994, Ch. 2), but it was only with the coming to power of a new government under Rajiv Gandhi in 1985 that reforms started to be implemented in earnest. Seen in the perspective of the policy liberalization of the 1990s, the reforms were modest, but at the time they were considered to be highly significant and controversial.8 The policy changes were announced in the

India 85

central government’s budget for 1985–6. They consisted in an almost complete elimination of regulations on private industrial investments in 25 industries, some modifications of the import and export policies, reforms in financial policies and some modifications in the taxation and exchange rate policies.9 Shortly after, a long-term fiscal policy aiming at fiscal predictability was announced. Parallel to these new policy reforms the policies regulating foreign investments were also gradually being relaxed (Kumar 1994, pp. 29–31). The expectations at the time from both supporters and critics were that these policy initiatives would constitute the beginning of more comprehensive economic liberalization measures. These expectations were belied, however, as the expected follow-up on reforms did not materialize. Many observers found the reason for this failure in pursuing a consistent reform policy in the resistance from powerful social interests (Kochanek 1986; Manor 1987; Harriss 1987; Kohli 1989). One sector that was left untouched by the reform policies during the 1980s was the public sector enterprises. The new policies had resulted in enlarging the room for private investments, which indirectly meant a curtailment of the scope for public sector investments, but there had been no serious plans for privatizing state-owned companies. Apart from one isolated instance in 1988 of a government decision to sell a small public sector company manufacturing scooters to a large private Indian company, the public sector was only subjected to reforms whose aim it was to make these companies more efficient and more inclined to collaborate with partners from the private sector (Nayar 1990, pp. 63–71). The structure of the industrial economy in terms of ownership and control, that is, foreign control, private Indian control and control by state-owned companies respectively, consequently remained largely as it had been at the start of the 1980s, with only a possible slight increase in the importance of foreign companies.10 Similarly, the dominant position of the large industrial houses remained intact during the 1980s, although there were some changes in the relative ranking of the large companies and a small increase in the importance of medium and small enterprises (Swamy 1994, pp. 207–11). Despite these economic policy changes, the industrial policy regime of the 1980s was basically a continuation of the established model for industrial development (Degnbol-Martinussen 2001). Two important industrial sectors, however, did experience a significant liberalization of their policy regimes during the 1980s. Each industry represents what in this book has been conceptualized as different paradigms of industrial production. The textile industry represents the old, traditional ‘Fordist’ mass production industry, while the electronics and software industry

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represents the new ‘post-Fordist’ knowledge-intensive industrial paradigm. Each industry also represents a different aspect of India’s industrial development – the textile industry representing the old, traditional industrial sector, which started the industrialization process in the nineteenth century, and the electronics, computer and software industry represents a new and upcoming face of Indian industry. For the textile industry, policy changes in the 1980s meant a gradual lifting of the restrictions that had been imposed upon the industry because of its importance for employment opportunities for thousands of poor workers. To ensure employment opportunities, the government had put in place a variety of mechanisms that protected the labourintensive decentralized handloom sector (Uchikawa 1998, pp. 30–1). This policy was one of the main reasons for the growing ‘sickness’ of large textile mills that had led to the take over of many of these mills by the government. In June 1985, however, the government changed its policy (Lok Sabha Secretariat 1985a; Uchikawa 1998, Ch. 6). The policy change came in the wake of the partial delicensing announced in March 1985, which had included the textile industry. The new textile policy allowed for unlimited expansion of large mills, for unrestricted imports of modern textile machinery, and it made it easier to close down unprofitable mills. These new policies resulted in a renewed growth in textile production and textile export during the late years of the 1980s, and a much-needed process of modernization was initiated. On the other hand, the same policy changes also resulted in a significant decrease in the organized employment and to an increase in the use of ‘casual’ labour (ibid.). For most observers, the outcomes of the new policy in terms of production and modernization, exports and employment were clearly below expectations, however.11 Until the 1980s, the government, in conformity with the overall industrial strategy, had promoted the information technology (IT) industry in India. Private industry had been protected from imports and had been heavily regulated by the government, and the government had reserved certain areas in electronics and in the computer industry for public sector companies (Grieco 1984; Evans 1995). This policy had been quite successful in establishing a domestic industry producing a wide array of electronic products, but by the early 1980s some of the dilemmas associated with the unique position of this particular industry had surfaced. First, there was the problem of keeping abreast with the rapid technological developments in the international electronics industry. Second, the availability of imported components became more and more crucial for the development of new products. Third and

India 87

most important, end-users, including users from other industries, were increasingly demanding access to the latest international technology in order to maintain their own competitive position. In the early 1980s, the government therefore began to change policy.12 With the 1984 Computer Policy, imports of both electronic components and of computers were liberalized, and in the following years restrictions on private investments, including foreign investments, and foreign technology collaboration were relaxed, and the sectors that had previously been reserved for state enterprises were opened for private investments. Local R&D was encouraged as was software development and software export, and education facilities for software engineers were expanded. These policy changes amounted to a decisive shift towards a more market-oriented and open strategy, and an abandonment of the goal of comprehensive self-reliance. From then on computer production became dominated by assembly operations based upon imported components.13 Another result of the new policies was that production of IT goods, including software, expanded rapidly, as did exports, but imports of critical components also increased. The industry furthermore became highly competitive with many new entrants, both foreign and domestic companies, being established.14 Much of the growth was intimately linked to the rising import of components, however, and the development of locally designed computers was virtually put to a halt. Instead, both the new private computer manufacturers and the remaining public sector companies relied heavily on collaboration agreements with foreign producers and on assembling of imported components. In terms of access to technology the result was an almost immediate access to the latest internationally available technology. Prices also started to decline and to approach international levels. The result of the policies was in this sense a success, but one in which technological self-reliance was sacrificed and the ability to generate employment decreased. Another success came in software export, but before the 1990s, the rate of increase in software export was modest and closely matched the export growth of electronic goods (Joseph 1997, p. 194). Overall, the 1980s did see a marked improvement in India’s economic performance. The rate of economic growth increased, and in contrast to many other developing countries (including Brazil) India escaped being involved in any major economic crisis. Industry and services increased their share of the economy, and the manufacturing industries also continued to increase their importance for the Indian economy (Table 5.1). However, the trade deficit that had emerged in the late 1970s persisted (see Figure 5.3). The persistent deficit and the increasing external

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indebtedness were two indications of the economic problems that were slowly accumulating. The unsustainability of the economic growth pattern would become apparent just after the entry into the new decade. In political terms, the 1980s marked the resurrection of the political dominance of the Congress Party, especially under the leadership of Rajiv Gandhi, but by the end of the decade, it became clear that the Congress dominance rested on a fragile basis. In the 1989 election, a new minority coalition government came to power, ushering in a period with increased political instability (Fickett 1993). At the same time the orderly change of parties in power demonstrated the remarkable stability of the democratic political framework. Like the 1980s, the 1990s started with an economic crisis, whose immediate causes were a combination of several external events, that impacted negatively on the Indian economy. The Gulf war of 1990–1 led to rising prices on oil imports and a decline in remittances from Indian guest workers based in the region. When foreign investors, mainly Non-Resident Indians (NRIs), began to withdraw their investments from the country and the international credit agencies downgraded India’s credit ratings, the economic situation approached a full-scale crisis.15 Along with the deepening of the economic crisis, a political crisis saw two minority governments fall, and new elections were called for in June 1991, precisely at the time when the economic problems became most acute. The new Congress Party minority government thus had little choice but to initiate drastic economic policy measures. Given the nature of the economic crisis, the policy package that the new government put forward in the Finance Minister’s budget speech on 24 July 1991 had to concentrate on stabilization measures, but in addition a comprehensive set of new policies aimed at structural reforms were announced (Government of India 1991a, 1991b). The stabilization measures took the form of a devaluation of the currency (Indian rupee) of around 20 per cent and expenditure cuts in the budget of the central government. The structural reforms included a number of measures aimed at reducing state controls over the economy. The licensing system was abolished for the large majority of industrial sectors; formal restrictions on the growth of large companies were removed, as were most restrictions on foreign investments and foreign technology collaboration. Some foreign trade restrictions were also relaxed, and it was announced that the portfolio of public sector enterprises would be reviewed, that is, privatization was envisaged. Later, a partial liberalization of capital flows was initiated with the intended aim of achieving

India 89

full currency convertibility at a later stage and reforms of the financial sector and of the labour market were announced. The reforms were supported by loans from both the IMF and the World Bank.16 The new policies were subjected to heavy criticism in India, but despite this, the liberalization policies were continued and gradually extended throughout the 1990s.17 To many this continuity was surprising considering the fragile parliamentary position of the government. That the new policies were indeed firmly established was further demonstrated by the fact that they were upheld and consolidated despite changes in the political shade of the government, first to a leftist coalition of political parties in 1996–8, and then to a new coalition dominated by the right-wing nationalist party, the Bharatiya Janata Party (BJP), from 1998 onwards (Thakur 1998). The reform process also survived the ending of the economic crisis and its associated need for high-conditionality loans from the IMF and the World Bank. In 1994, the government thus decided to end its engagement with the IMF and even made an advance repayment on the standby loan (Government of India, Economic Survey 1994–5). Compared to Brazil, the implementation of the economic reforms in India since 1991 was relatively slow, but remarkably steady in its overall direction although the degree of change varied considerably between policy areas.18 The foreign trade area saw a gradual reduction in tariffs and a movement away from quantitative restrictions, culminating in April 2001 with the complete elimination of all restrictions.19 Import tariffs declined gradually until around 1996–7, but rose slightly in the late 1990s.20 In a similar fashion, the policies towards FDI became gradually more and more oriented towards actively attracting investments through a reduction of the bureaucratic hurdles and an extension of the areas open for investments. One area where the external policy reforms were quite cautious, however, was in currency convertibility. Current account accountability was fully achieved in 1994, but capital account convertibility was postponed and is still not fully achieved (by 2008), thus to some extent shielding India against international financial speculation. The trade balance did improve during the early part of the 1990s (see Figure 5.3), but the improvement was mainly caused by an import compression resulting from the stabilization policies. In the last part of the 1990s, the trade deficit emerged again in roughly the same proportions as during the 1980s.21 Foreign investments experienced rapid growth up until 1997, dropped slightly in the late 1990s only to reach new heights after the turn of the century (see Figure 5.4). While most investments

90

Globalization, Development and the State 160000 140000

Million US $

120000 100000

80000 60000 40000 20000

2004/2005

2000

2002/2003

2000/2001

1998

1996/97

1998/99

Export

1994/95

1992/93

1990/91

1988/89

1986/87

1984/85

19082/83

1980/81

0

Import

Source: Government of India, Economic Survey, various years.

Figure 5.3

India: Exports and imports, 1980–1 to 2005–6

9000 8000 7000

Mill US$

6000 5000 4000 3000 2000 1000 0

1980

1982

1984

1986

1988

1990

1992

OECD-DAC

1994

1996

RBI data

Source: OECD/DAC (various years); Reserve Bank of India (www.rbi.gov.in).

Figure 5.4

Foreign direct investments into India, 1980–2005

2002

2004

India 91

came from traditional OECD sources, many were routed through the tax haven of Mauritius, because of its special tax arrangement with India.22 It should be noted, in addition, that the figures for FDI in India might significantly underestimate the level of foreign investments before 2000, when IMF standards, including reinvested earnings, were introduced. In contrast to the changes in industrial regulations and in foreign trade and investment policies, the privatization policy hardly progressed at all during the 1990s. Some shares in government companies were sold, but the government retained majority control in all the companies concerned. In addition, attempts were made to give more operational independence to the largest state-owned enterprises. Before 2000, the government had sold minority shares in more than one hundred companies, including shares in the highly profitable state-owned oil companies.23 The first company to be fully privatized was a bread factory in Delhi that was acquired by the Indian arm of Unilever (Hindustan Lever) in January 2000. However, most of the subsequently privatized government companies were sold to Indian companies. The relatively slow pace reflected the politically controversial nature of the privatization process, but the rapid growth of private companies ensured that the relative weight of public enterprises in the corporate sector continued to decline (Pedersen 2000). Overall, the 1990s became a decade of economic reforms in which the Indian economy, despite the initial crisis, managed to grow at a pace similar to that achieved during the 1980s.24 This points to a relatively successful management of the challenges of economic globalization, but before this conclusion can be confirmed, we need to look closer at how the reactions in India have been to the emerging new paradigm for industrial production, to financial globalization and to the challenges arising from the negotiations over a new international framework for economic exchange.

Managing the industrial challenges The Indian government had, ever since the strategy for a self-reliant economic development was devised in the 1950s, been of the opinion that this kind of development would require an increased application of science and technology. As a consequence of this, the development of an infrastructure for technological development in the form of institutions for higher education and a range of government-financed research institutions and government-owned companies in high-tech areas, often related to national defence purposes, became an important part of

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the industrial strategy.25 It was only in 1983, however, that the government issued a formal Technology Policy Statement.26 The main purpose of the policy was consistent with the general economic strategy and its aim of achieving technological self-reliance. In addition, it was acknowledged that the promotion of especially new and emerging technologies (IT, electronics, biotechnology) and engineering consultancy would require selective technological collaborations with foreign partners and outright imports of technology. Two years later, in 1985, the government, in recognition of the beneficial effects of this particular sector on productivity and efficiency for the whole economy, had decided to do away with all restrictions on foreign investments and imports of technology in the electronics industry.27 At the general level, the Indian government has since the 1970s sought to encourage private companies to increase their R&D activities through financial support for selective technology imports and a variety of fiscal concessions to promote local R&D activities. It was officially recognized, however, that while the technological infrastructure erected throughout the five year plans had in many respects performed satisfactorily, the activities of private industrial companies were far from satisfactory. In addition, there had been very little interaction between public research institutes and the private industrial sector.28 In order to remedy this and provide financial support for indigenous technology development, the government had in 1986 introduced an R&D Cess (tax) on all payments made for import of technology. The proceeds of this tax were directed through state-owned development banks into a venture capital fund that would finance upstart activities of new high-tech companies (Mani and Kumar 2001, p. 27). The new industrial policy announced in July 1991 changed the whole setting for the policies supporting technological development. The main instruments for direct intervention in the government’s previous industrial policies – industrial licensing, import controls, regulations on foreign investments – were abolished, leaving the government with the more indirect policy instruments – fiscal instruments, public infrastructure and state-controlled development banks – at its disposal. The basic philosophy behind the reforms was that an increased use of market mechanisms would enable Indian industry to develop and modernize. The liberalization of the policies governing collaboration agreements with foreign companies would thus give Indian companies immediate access to foreign technology, and it was expected that this would induce Indian companies to increase their own R&D activities.29 In the light of these expectations, it is little wonder that the Indian government did

India 93

not take active steps to encourage technological development in the early years of the 1990s. A new Technology Policy Statement was, however, prepared in 1993, but it was never formally issued. The statement had envisaged an increase in national R&D expenditure to 2 per cent of GDP by the year 2000 and an increase in the share of private sector enterprises.30 The same objective of a general increase in R&D expenditure, particularly in the private sector, was repeated in the relevant statements in the Ninth Five Year Plan document (Planning Commission 1997; Mani and Kumar 2001, pp. 28–31). The need for closer collaboration between government research institutions and private industry, the need for improving and modernizing the government-owned technological infrastructure and the need for a reduction of bureaucratic controls over research and development activities were also emphasized in these statements. When a new statement on Technology Policy was finally issued in 2003 it consisted only of a reiteration of the same general formulations, including a strong appeal to private industry to invest more in R&D. The aim of a national R&D spending of 2 per cent of GDP was also repeated but was now only expected to be reached by the year 2007 (Department of Science and Technology 2003). The policy initiatives in this area have thus been quite limited. In terms of implemented policies, only limited actions to strengthen the knowledge intensity of Indian manufacturing have been taken. The financial resources spent on investment in the technological infrastructure in the public sector have risen in monetary terms, but despite the officially declared intentions public spending has only experienced a minor increase in its share of resources allocated through the planning system.31 Part of the increase has gone into what has all along constituted half of all public expenditure for research and development: Defence, Space and Atomic Energy (Chandrashekar and Basvarajappa 2001). A few initiatives specifically directed at promoting R&D in private industry were taken, however, in the latter half of the 1990s. One was the decision in 1996 to create a Technology Development Board to provide equity support or soft loans for technological efforts in private enterprises. Another was the restructuring in 1996 of the Council of Scientific and Industrial Research (CSIR) with the aim of strengthening its orientation towards obtaining patents and improving ties between the research laboratories under the Council and private industrial companies. In addition, the government took some smaller initiatives to provide financial support for specific research projects or technological adaptations (Mani and Kumar 2001, pp. 46–9). The most important support for technological development in the private sector has come

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through fiscal incentives, in particular through tax deductions for R&D spending incurred by private companies. Since 1980, private companies have been offered a tax deduction of 100 per cent of their expenditure on R&D. In 1997, the deduction was raised to 125 per cent, and in 2000, it was further increased to 150 per cent (ibid., pp. 52–4; Ministry of Commerce and Industry 2002, p. 289). In the IT industry, especially in the software segment, the 1990s saw an intensified supportive role by the government although the key supportive policies had been initiated earlier. The early liberalization policies in the sector meant that the 1991 change-of-policy regime had less direct impact on the sector, but the success of especially software exports made the government increasingly eager to provide additional support for the industry. Government support for the IT sector has come through the supply of a highly educated labour force, provision of physical infrastructure, in particular communication facilities, and through the government’s role as the largest domestic buyer of IT hardware and software. In addition, fiscal and financial support mechanisms have been used. While the initial policies during the 1980s had focused mostly on developing a local hardware (electronics) industry, the prospects for developing software production and export became increasingly obvious. In 1986, the government issued a new separate software policy, supplemented in 1988 by the establishment of an Electronics and Software Export Promotion Council under the Ministry of Commerce (Heeks 1996, p. 47).32 In continuation of the emphasis on export activities, it was decided to establish a number of export-oriented software technology parks in 1990, supplemented in 1993 by a similar scheme for electronic hardware.33 The number of software technology parks has increased from the first 3 set up in 1990 to 11 in 1998, 27 in 2002 and the present (2007) number of 48. Companies set up in these locations have been offered excellent international communication facilities plus a host of other fiscal, procedural and infrastructural incentives normally associated with export processing zones (Joseph and Harilal 2001, pp. 8–10). The enthusiasm for the development of the IT industry was also evident when the new BJP government in 1998 set up a special task force for IT directly under the Prime Minister’s Office.34 The task force included prominent industrialists besides government bureaucrats and scientists. Its reports came out the same year with a large number of recommendations for government action to support the IT industry. Most of the recommendations reflected the viewpoints of businessmen and were concerned with relaxation of government regulations, improvements in the IT infrastructure, lowering the tax burden, easing import

India 95

restrictions, preferential access to finance and so on. The recommendations also included an emphasis on supporting the development of the hardware IT industry. The recommendations added up to a significant further liberalization of the sector and a policy of preferential support for the industry as the government is reported to have accepted and implemented the majority of the recommendations.35 In addition to the support provided for the development of the private software and hardware industry, the Indian government has continued its own quite impressive list of development and research programmes in various fields within electronics, from development (successful) of supercomputers to microelectronic components and initiatives seeking to assist in spreading the use of IT in both civil and commercial life.36 One example of the efforts to increase the commercial use of IT is found in the textile industry, where a similar IT task force was set up in 1998, and in 2000 a new National Textile Policy was formulated, which emphasized the application of IT for the technological upgrading of the industry.37 Moving from policies and policy changes to actual developments in the industrial sector, it is noteworthy that Indian industry in the period after the initiation of the economic reforms has been characterized by relatively high, but also fluctuating, rates of growth (see Figure 5.5). 20

Percent

15

10 7.6% 6.0% 5 4.0%

0

2004−05

2002−03

2000−01

1998−99

1996−97

1994−95

1992−93

1990−91

1988−89

1986−87

1984−85

1982−83

1980−81

1978−79

1976−77

1974−75

1972−73

1970−71

-5

Note: Dotted lines indicate decennial growth rates. Source: EPW Research Foundation (2004), Table 3A, p. 36; and Government of India, Central Statistical Organisation (mospi.nic.in/cso).

Figure 5.5 India: Annual growth of manufacturing production, 1970–1 to 2005–6

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Globalization, Development and the State

Table 5.2

India: Value of output from registered manufacturing major sectors

Per cent share Food products Textiles (cotton, jute, wool, textile products) Chemicals Basic metals industries Non-electrical machinery Electrical machinery Transport Equipment

1980–1

1990–1

1995–6

2000–1

2005–6

13.6 16.0

13.6 12.0

13.6 12.3

14.6 11.6

13.8 8.8

13.8 12.3 6.1 6.2 5.7

13.3 13.1 5.8 6.7 6.2

14.8 12.7 5.8 6.7 7.9

17.1 10.2 7.7 5.9 6.7

16.0 13.8 7.2 6.4 7.0

Note: Data are from the national accounts statistics based on a revision of original data from the Annual Survey of Industries. From 2000–1 data on non-electrical machinery include metal products. Source: EPW Research Foundation (2004), Table 31B and Government of India, Central Statistical Organisation (mospi.nic.in/cso).

Growth rates reached record levels in the immediate aftermath of the 1991 policy changes but declined in the latter half of the 1990s. As a result, the manufacturing sector only barely managed to maintain its relative position in the Indian economy throughout the decade (see Table 5.1). While industrial growth during the 1990s has been reasonably good, but slightly lower than in the 1980s, the growth has not led to any major change in the sectoral composition of industrial production (see Table 5.2). Apart from a small increase in the share of chemical industry and a somewhat larger decline in the share of textile and machinery industries, very little seems to have changed in the overall structure of Indian manufacturing. Using a different sub-division, industries producing consumer goods appear to have grown more rapidly than intermediate and capital goods industries and industries producing durable consumer goods have expanded (Chaudhuri 2002; Ramaswamy 2002). If we look at those particular industrial sub-sectors that the OECD has classified as being high-technology industries, the share of production in these sectors increased from 4.3 per cent in 1990–1 to 6.1 per cent in 1999–2000 and an estimated share of 6.2 per cent in 2002–3.38 While these data indicate that only small changes have occurred in the structure of Indian industry during the 1990s, the data are not well suited to show possible technological and organizational transformations. The liberalization of the policies guiding foreign investment and the import of industrial technology have apparently led to a significant rise in the import and use of new technologies. Figure 5.6 shows that

India 97 3000

2500

Number

2000

1500

1000

500

Financial

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

0

Technical

Source: SIA Newsletter, various (siadipp.nic.in/publicat); Kumar (1994, p. 46). From October 2004 most agreements get automatically approved by the Reserve Bank of India and are no longer listed by the Secretariat for Industrial Assistance (SIA).

Figure 5.6 India: Approved financial and technical collaboration agreements, 1970–2004

there has been a dramatic increase in the number of collaboration agreements with foreign companies, but it also shows that the number of pure technical agreements has declined. As most financial collaboration agreements include some form of technological collaboration, the figures indicate that the import of foreign technology has increasingly taken place under the financial control of the foreign supplier.39 More than 20 per cent of all collaboration agreements have been in electrical equipment, including its largest sub-sector, the computer software industry.40 There are thus indications that the Indian industry during the 1990s has experienced increasing technological upgrading, primarily through the import and use of foreign technology. In contrast to this, the expected increase in the production and use of locally developed technologies has apparently not materialized. The government had expected (see note 29 above) that the increased international competition would encourage Indian companies to spend more on local R&D, and the policy initiatives listed above all had the same objective. All

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indications are, however, that this did not happen. The number of inhouse R&D units recognized by the government that had experienced a continuous increase since the early 1970s stagnated throughout the 1990s at a level of around 1100–1200 (Department of Scientific and Industrial Research 2002, p. 41). Reliable data on R&D activities of all industrial companies are not available, but data on R&D expenditure for selected groups of companies point in the same direction, namely, that there has been no decisive increase in R&D activities, when conventionally measured as the ratio between R&D expenditure and sales.41 Given the nature of the company samples (see Figure 5.7), it is not surprising that the companies with registered R&D units have had the highest level of R&D expenditure. The best indication of the overall technological efforts in Indian industry is, however, the Reserve Bank of India (RBI) figures for public limited companies, which include many companies with no R&D activities.42 According to these data, the efforts

0.8 0.7 0.6

Percent

0.5 0.4 0.3 0.2 0.1

PULC

FDIC

DST private

2005−06

2004−05

2003−04

2002−03

2001−02

2000−01

1999−00

1998−99

1997−98

1996−97

1995−96

1994−95

1993−94

1992−93

1991−92

0

DST public

Note:

PULC= public limited companies, FDIC= foreign direct investment companies, DST private= private companies with R&D units registered by the Department of Science & Technology, DST public= public sector companies with R&D units registered by the Department of Science & Technology. Source: Data for PULC and FDIC are calculated as average ratios for all companies included in Reserve Bank of India’s annual surveys on company finances published in Reserve Bank of India Bulletin. Data for DST private and DST public are average ratios from the Department of Science & Technology’s biannual survey of registered R&D units published in Research and Development Statistics. Both surveys give information for three years for the selected companies. This procedure leads to overlapping figures for every single year (except the first and last year), hence the need to use average values.

Figure 5.7

India: R&D/Sales ratio for selected groups of companies

India 99

to develop local technologies systematically have remained at a very low level throughout the 1990s and only increased in the most recent years. It is worth noting, however, that foreign companies have invested a somewhat higher share of their income in research activities, while research activities within public sector companies seem to have declined significantly.43 The overall impression that these data give on technological changes within Indian industry since the early 1990s is that some technological upgrading has taken place, but the increase in R&D oriented activities has happened mainly through the import of foreign technology. Other indicators also show some increases in activities. Most measures of industrial productivity over the 1990s show a gradual increase, and the increase in the number of patent applications points to an increase in the technological activities and use of modern technologies.44 Patent applications have been concentrated on relatively few companies, however, and many foreign companies have taken out patents locally. This again points to an increase in the use of imported technologies. While the macro-level structure of Indian industry has seen little change, the 1990s has been a decade of important changes in the organization of industrial enterprises. In addition to the technological changes mentioned above, there have been major changes in the pattern of ownership within the corporate sector. Table 5.3 shows the distribution of ownership to a large sample of Indian companies. Between 1991 and 1997, the share of government companies in industrial assets declined dramatically from 46.6 per cent to only 27.5 per cent, reflecting the rapid growth of the private sector and the stagnation of public sector enterprises.45 Within the private sector, the ownership pattern remained relatively constant. Despite the increased inflow of foreign investment, the

Table 5.3

Distribution by ownership of corporate sector assets

Per cent share Total corporate sector *Government sector *Private sector - Indian private sector - Top 50 Indian business houses - Foreign private sector

1991 100.0 46.6 53.4 46.0 26.2 7.3

100.0 86.2 49.1 13.8

1994 100.0 35.3 64.7 57.2 30.5 7.5

100.0 88.4 47.2 11.6

1997 100.0 27.5 72.5 64.3 33.8 8.3

100.0 88.6 46.7 11.4

Source: Centre for Monitoring the Indian Economy, Corporate Sector, April 1998 (www. cmie.com, accessed 12/5 1999). Own calculation. The sample comprises more than 7000 companies.

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Globalization, Development and the State

30

25

Percent

20

15

10

5

Production

2004−05

2003−04

2002−03

2001−02

2000−01

1999−00

1998−99

1997−98

1996−97

1995−96

1994−95

1993−94

1992−93

1991−92

0

Paid-up capital

Note:

The shares are calculated for each year as the share of the average value for the sample of foreign direct investment companies in the combined average value for the samples of public limited companies and private limited companies. Each annual sample provides information for three subsequent years. This result in three different values for each year (except the first and last two years), hence the need to use average values. As the samples are of varying size every year, the estimates provided here are only indicative of changes in the corporate sector as a whole. The coverage of FDI companies is probably better than the coverage of the public and private limited companies in the total corporate sector leading to a certain overestimation of the share of foreign companies. Source: Own calculations based on three series of company surveys published in Reserve Bank of India Bulletin, various issues

Figure 5.8 India: FDI companies: Estimated share of production and paid-up capital in the corporate sector

share of foreign companies declined slightly. A similar small decline happened to the 50 largest Indian business houses, while independent Indian companies increased their share. The decline in the share of foreign companies has been reversed since the mid-1990s (see the estimates reproduced in Figure 5.8) and has returned to the same level as in the early 1990s. The impression of a relatively stable relationship between Indian and foreign companies is confirmed by an analysis of ‘winners and losers’ in the ranking of the 100 largest companies. According to this study, there was an equal number of foreign companies among both winners and losers during the 1990s (Forbes 2002). One mechanism behind the possible increase in the share of foreign companies in the latter part of the 1990s may have been the increase in mergers and acquisitions since 1996 (Kumar 2000). Foreign companies have used the more liberal rules for foreign investment to

India 101

(1) increase their investment in companies in which they earlier were only allowed minority positions and (2) use their financial strength to take over companies belonging to domestic competitors.46 Domestic companies have also tried, however, to consolidate their position in the market through similar actions (Roy 1999; Basant 2000). The restructuring of Indian business has also meant a gradual change away from exclusively family-owned and family-run diversified business houses towards more narrowly product-focused companies run by professional managers.47 In the small enterprise sector, recent years have also seen the emergence of industrial clustering and flexible specialization that may constitute a way for these companies to thrive in an open, globalized economy (Cadène and Holmström 1998). This general impression of important changes in the way Indian companies are being managed is confirmed by a recent unique study of the reorganization of a large Indian company, Crompton Greaves Ltd., an electrical engineering company (Humphrey et al. 1998). The company had started as a British company before Independence but was later taken over by one of the large Indian business houses (Thapar group). The company had lived a quiet life under the protection of the old policy regime. The liberalization of the trade and industrial control regime during the 1980s and especially after 1991 put new competitive pressures upon the company. In response the company underwent a reorganization of its internal functioning and of its relationship with suppliers and customers, much along the lines envisioned in the new industrial production paradigm and with the self-professed ambition of being a ‘world class producer’ (ibid., p. 46).48 While the company may not yet have achieved its ambitious goal, there has nevertheless been significant and rapid progress towards that goal. There are undoubtedly many other examples of Indian companies being relatively successful in coping with the challenges of globalization, both in the IT, pharmaceutical and biotechnology sectors that can be considered central for the emerging new industrial paradigm, and, like Crompton Greaves, among companies in more traditional industrial sectors (Ghoshal, Piramal and Budhiraja 2001).49 One sector in particular has been noteworthy for its development during the 1990s, namely, the software industry. Although not traditionally regarded as an industry but as part of the service sector, the production of software in many ways epitomizes the new knowledge-intensive production paradigm. The software sector, especially the export-oriented activities, grew at a rapid rate throughout the 1990s.50 Since the mid1990s, revenues in the software sector have grown at an annual rate of close to 50 per cent measured in US$ and with software export growing

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even more rapidly. While some of the global software companies have invested in India, the large majority, as well as the largest producers, has been Indian companies often started by new entrepreneurs.51 Names like Infosys, Wipro and Satyam and their high-profile promoters have risen to entrepreneurial stardom in India, in stark contrast to the situation in the computer hardware sector, which has been heavily dominated by foreign producers.52 Overall, the software sector is still small compared to the industrial sector, as a whole, but a comparison of the total revenues earned in software with the value of industrial output would place it approximately as the eleventh-largest industry group.53 The software sector is only the most conspicuous of the new knowledge-intensive industries that have grown so rapidly during the 1990s. Another rapidly growing, knowledge-oriented sector is the pharmaceutical industry, which has expanded both in the domestic market and in the export markets (Lalitha 2002; Kumar 2003), and the strongly knowledge-based consultancy services sector has also expanded rapidly during the 1990s.54 A recent attempt to estimate the size of the so-called IT Economy (mostly IT, telecommunication and ‘infotainment’) concluded that its output only constituted 1.7 per cent of aggregate GDP in 1997–8, but that it was rapidly expanding, reaching about 3.7 per cent of GDP in 2000–1 (Raipuria 2002).55 In conclusion, India seems to have managed the opening of its industrial sector to foreign competition and to the challenges of the movement towards a new paradigm for industrial production reasonably well. Growth rates have been satisfactory, domestic companies have managed to maintain their overall position in the market and there has been progress in key areas associated with the new knowledge-intensive economy, most notably in the development of the software industry, but also in the restructuring and upgrading of domestic companies in many other sectors. However, there have been problems. Most important, domestic technological efforts have been relatively modest and the dependence on imported technologies has increased. The long-term effects of the neglect of domestic technological development could pose the most serious future challenge for Indian industry.

Managing the financial challenges The change of the economic policy regime in India during the 1990s resulted in a substantial opening of the Indian economy towards the international financial system and a decisive turn towards marketbased operations. This created new challenges to the government’s

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management of both the domestic financial system and this system’s relations with the international financial system, requiring changes in both institutions and policies. India’s financial system has developed over three relatively distinct periods: (1) 1947 to 1969, (2) 1969 to 1991 and (3) 1991 onwards.56 The first period saw the consolidation of the RBI as the key institution for managing the financial system, the establishment of a string of publicly owned financial institutions providing medium- and long-term financial resources primarily for industrial development, the nationalization of the largest private commercial bank and the creation of a single stateowned life insurance company through the nationalizing and subsequent merger of several private companies. The second phase started in 1969 with the nationalization of the 14 largest private commercial banks supplemented in 1972 by the nationalization of all private general insurance companies. This gave the Indian state almost complete dominance over the entire financial sector, in the process wresting banks away from the control of large private industrial conglomerates.57 The nationalization marked the beginning of an era characterized by a substantial expansion of the financial system, notably the expansion of the banking system into rural areas and the channelling of financial resources to socalled priority sectors, that is, sectors that were hitherto not reached, or only insufficiently so, by the formal banking system. In addition, the strong grip of the Indian state over the financial sector was utilized to direct financial resources along the lines of the sector-wise priorities of the five-year plans in the 1970s and 1980s. In the 1980s, stock markets began gradually to develop, reducing somewhat the state-owned financial institutions’ dominant role in financial intermediation. The third phase came with the reforms in the 1990s. This phase has been marked by a gradual reduction in the direct role of the government and the entry and expansion of private financial institutions, including foreign banks. It has also seen a strengthening of the role of the RBI as the key regulator of the financial sector and the creation of new regulatory institutions and a new set of regulatory policies. The reforms of the domestic financial system in the 1990s can be described in two steps. The first step will focus on the domestic changes in the financial institutions and in the financial markets. This includes the evolution of new policy instruments and thus changes in the role and function of the RBI. Among the financial institutions, commercial banks and development banks have dominated, supplemented by insurance companies, unit trusts and other non-banking institutions.58 The following account will for that reason focus on developments of the

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banking sector and of the stock markets and on the role of the RBI (and the new regulatory agencies). The second step will analyse the changes in the relationship between the national and the international financial system, that is, the management of external financial flows. In his 1991 budget speech outlining the economic reforms, Finance Minister Manmohan Singh had announced the appointment of a committee to consider possible reforms of the financial sector (Government of India 1991a). In November 1991 the committee under the chairmanship of M. Narasimham submitted its report on reforms of the financial system (RBI 1991, First Narasimham Committee Report). The recommendations of this committee and, later in the decade, of its successor (RBI 1998, Second Narasimham Committee Report) plus reports from similar committees investigating other aspects of the financial system have provided the foundation for those reforms that gradually changed the financial system, its institutional features and regulatory instruments during the 1990s.59 In the banking sector, the reforms meant a gradual opening for the establishment of new private banks, including foreign banks, a liberalization of interest rate policies and efforts to improve efficiency and to reduce the burden of non-performing assets. To support the transition to increasingly market-based financial transactions, public banks received substantial financial recapitalization support from the Indian state. Despite suggestions from both committees for a substantial reorganization in the form of mergers of public sector banks, the structure of the banking sector has remained largely intact, however, and during the 1990s there has only been a limited sale of shares of public sector banks. Privatization of public sector banks has not been seriously considered. The situation for the large state-owned development banks has been similar, with some attempts to increase efficiency and autonomy, but no significant change in the overall structure, despite suggestions to transform these banks into ordinary commercial banks. The gradual and cautious manner in which reforms of the banking sector have progressed in India has meant that the overall structural changes in the banking sector have been modest. The number of foreign banks has increased and new private Indian banks have been established, mostly in the profitable urban areas. This may have increased competition in the sector somewhat, but the overwhelming dominance of public sector banks has not been seriously challenged.60 The operations of the banks have, however, been made more efficient, with increasing profits and declining incidents of non-performing assets as a result. The implementation of international norms of capital adequacy, asset classification and so on

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(Basel Committee Norms) has also led to improved performance of banks, but has probably also contributed to a certain depression of the overall flow of credit.61 This depression has mostly been felt in agriculture and services sectors, while the industrial sector by increasing its overall share of credit flows has been in a better position. Interest rates have declined, but the decline has been less than the decline in inflation rates, resulting in a slight increase in real interest rates, especially for small and medium enterprises (Mohan 2003). A key element in the reforms of the financial sector has been the attempt to develop the stock markets as a supplementary channel for obtaining industrial finance. Under the old policy regime, the issuing of shares by private companies required the consent of the Office of the Controller of Capital Issues, who would also determine the price of an eventual share issue. This office was abolished in 1992 and regulation of stock markets transferred to the Securities and Exchange Board of India (SEBI), originally set up in 1988. SEBI has since been the prime regulator of stock markets and has struggled to develop and implement a set of rules and regulations that would permit both the expansion of the market and the protection of investors.62 Another institutional innovation was the establishment in 1992 of a new National Stock Exchange (NSE), which began operating in 1994 (Sen and Vaidya 1997, p. 85). Through its pioneering effort in electronic trading the NSE has probably been the most important institutional innovation in terms of promoting the rapid development of stock markets in India (Dalal 1999).63 Finally, the stock markets have been gradually opened for foreign institutional investors since 1992. The immediate impact of the reforms was a dramatic increase in the mobilization of financial resources through the stock market, but since 1997 there has only been very little activity in the primary market.64 In the process, the NSE has established itself as the dominant stock market, replacing the Bombay Stock Exchange (BSE). However, the BSE still has the largest number of companies registered. One reason for the decline in the importance of stock markets probably lies in the many examples of fraud, insider dealings, price manipulations and other forms of irregularities that have occurred in the financial markets during the 1990s.65 Another reason could well be the way in which stock market trading has worked in practice. A study of the working of the BSE has shown that large private companies have used trading in stock markets to increase the promoters’ control over companies, while trading by the general public has played a very limited role.66 Many companies, in particular foreign companies, have even decided to withdraw their registration from the stock markets.67 This kind of behaviour

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is indicative of a lack of interest by companies in using stock markets as a way of raising additional capital and probably also indicative of a widespread fear by company promoters of losing control over companies through stock market operations. While there is little doubt that the Indian stock markets have become institutionally well developed and professionalized during the 1990s, their importance for the financing of companies has only increased moderately (Joseph et al. 1999; Chalapati Rao 2002, p. 111; RBI 2003, p. III–38). The still moderate place of stock markets in corporate financing combined with strong corporate growth during the 1990s is an indication that companies apparently have seen the financial resources provided through internal resources and through commercial banks and state-owned development banks in combination as being adequate to meet their needs despite the prevailing relatively high interest rates.68 The key institution overseeing the domestic reforms in the financial sector has been the RBI. The aim of the RBI as a domestic monetary and financial regulatory authority has always been ‘to promote economic growth with price stability’, that is, to secure an adequate volume of credit to industry, agriculture and trade and to keep inflation under check (RBI 1983, pp. 53–4). In the 1990s, the role of the RBI gradually expanded with its direct regulatory activities being increased and supplemented with the task of developing an orderly institutional framework for the increasingly market-based system of financial activities.69 In 1994, a separate Board for Financial Supervision was created within the RBI in an effort to consolidate and strengthen banking supervision and to isolate banking supervision from the Ministry of Finance. In addition, the RBI has since 1996 been a member of the Bank for International Settlements (BIS) in Basel, and it has since been instrumental in introducing those international norms for banking operations that have been produced through consultations between BIS members. Furthermore, the relationship between the RBI and the central government has during the 1990s moved in the direction of greater operational autonomy for the Bank, while formal autonomy is still absent. One aspect of this movement towards greater autonomy has been the agreement reached in 1994 and implemented from 1997 to end the RBI’s obligation to finance the government’s deficit through the issuing of treasury bills. Along with the domestic financial sector reforms, the opening of the Indian economy to the international financial system has posed new challenges to the RBI in its role as regulator of India’s external financial links. The aim of the policies of the RBI in this area has always been to maintain a stable exchange rate at a ‘realistic’ level and to secure ‘orderly

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exchange rate arrangements’.70 This also implies a policy of conserving a sufficient amount of foreign currency reserves in order to ensure stability in the external transactions and in the value of the rupee. The reforms of the external sector after the initial changes in 1991 were largely guided by two reports prepared for the RBI: The Report of the High-Level Committee on Balance of Payments submitted in 1992 (RBI 1993, Rangarajan Committee Report) and The Report of the Committee on Capital Account Convertibility (RBI 1997, Tarapore Committee Report). A new legal framework for the RBI’s management of the external financial flows, replacing FERA 1973 , only came in 2000 with the introduction of the Foreign Exchange Management Act 1999 (FEMA).71 The Rangarajan Committee had recommended a gradual and careful liberalization of external financial transactions starting with a transition to a market-based foreign exchange rate and a liberalization of the current accounts. At the same time, it also emphasized the need to keep the exchange rate at a realistic level and the need to maintain effective control over capital transactions and ensure adequate reserves of foreign currency (RBI 1993). This recommended policy of cautious liberalization has been followed closely. As part of the 1991 crisis measures, the rupee was devaluated with more than 20 per cent against the dollar. This marked the beginning of a gradual transition to a market-based determination of the exchange rate that became effective from 1993.72 The working of the foreign exchange market was, however, closely monitored by the RBI, and the Bank has intervened strongly in the market in order to maintain stability (Kohli 2000). In August 1994, the rupee was made fully convertible for current account transactions and many of the former restrictions on financial transactions with the outside world have subsequently been liberalized, including many capital account transactions.73 The policy on FDI was almost totally liberalized during the 1990s, giving foreign investors the freedom to establish new companies or to buy into existing companies in almost any sphere of economic activity. The previously quite restrictive policy for Indian companies seeking to invest abroad has also been made more liberal and some large Indian companies have been given permission to raise capital on international capital markets. The Indian stock markets have since late 1992 – as mentioned above – gradually been opened for Foreign Institutional Investors (FIIs) and the special investment norms for NRIs have been further liberalized. A transition to full capital account convertibility was recommended by the Tarapore Committee (RBI 1997), but only after certain preconditions had been achieved.74 The onset of the Asian financial crisis later in 1997 initially put a halt

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to the liberalization of the capital account, but later the process of gradually opening the external accounts has continued.75 As a result of the gradual policy reforms, the financial system has become significantly more open, but without leaving much room for short-term speculative financial transactions as yet. The Indian policymakers have clearly emphasized stability over immediate access to international financial resources. The results of the changes in institutions, policies and regulatory instruments can be assessed in terms of the mobilization of domestic and international financial resources and in terms of the stability and the avoidance of excessive risks associated with the working of the financial system. One of the most important aims of the financial system has always been to secure an increase in the domestic financial resources available for investments, that is, an increase in the rate of domestic savings. The expansion of the banking system since its nationalization in 1969 was a key factor behind the remarkable rise in domestic savings achieved during the 1970s.76 From a savings rate of around 15 per cent of GDP in the late 1960s, savings rose to more than 20 per cent of GDP in the late 1970s. During the early 1980s, however, the economic crisis and the rise in government deficits reduced the savings rate somewhat (Joshi and Little 1994, Chs. 6 and 12). From the mid-1980s onwards, savings rose again, largely because of increased saving in private households (see Figure 5.9). Along with the economic reforms in 40 35 30

Percent

25 20 15 10 5 0 1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05

-5 Public Sector

Corporate sector

Households

Total savings

Source: Reserve Bank of India, Handbook of Statistics (www.rbi.gov.in).

Figure 5.9

India: Domestic savings/GDP ratio, 1980–1 to 2005–6

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the 1990s, the savings rate stabilized around 25 per cent. After the mid1990s household savings started slowly to rise and helped by an upturn in both public and private sector savings this produced an impressive increase from 2002–3. One obvious reason for the stagnating savings rate during the 1990s has been the decline in government savings due to persistent fiscal deficits that turned the government into a negative saver for some years. The growth of savings during the highly state-managed financial regime of the 1970s and 1980s was apparently sufficient to fulfill the financial needs of industrial companies.77 A high and increasing share of the financial resources employed by private companies was provided by the specialized state-owned financial institutions who also came to own a substantial share of especially the large industrial companies (Sen and Vaidya 1997, pp. 29–37). In the 1990s, the financial liberalization initially increased companies’ reliance on equity financing from the stock markets, culminating with the stock market boom in the mid1990s. The inflows of portfolio investments also played a major role for the boom in the stock trading. There are even indications that the foreign investors have acted as market leaders in the secondary market (Chalapati Rao et al. 1999). The state-owned financial institutions did, however, maintain a significant role in the financing of private companies (Sen and Vaidya 1997, pp. 130–41; Chalapati Rao 2002, p. 111). The stock market later declined as a source of financial resources for private companies – as mentioned above – but the resources channeled through the state-owned financial institutions have probably still been sufficient to satisfy the needs of private companies. The development of stock markets may, however, have played a crucial role in financing the growth of the new software companies, who initially had difficulty in obtaining loans from the banks (Murthy 2000). Interest rates declined in the early years of the 1990s and have since remained relatively stable at a not excessively high level – and certainly much lower than Brazil’s.78 In its management of external financial resources, India has traditionally been very careful, preferring to rely on concessional inflows in the form of foreign aid rather than on commercial borrowings. This prudential policy meant that India managed to avoid the debt crisis of the 1980s that ruined so many other developing countries. To some extent, India even took advantage of the debt crisis, because it made international lending agencies search for borrowers – like India – that were considered safe. In this situation the Indian government decided to increase its commercial borrowings and as a result such inflows reached almost the same proportions as concessional aid flows during the 1980s

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40 35 30

Percent

25 20 15 10 5 0 1980

1982

1984

1986

1988 1990 1992 Debt-service ratio

1994 1996 1998 Debt/GNP ratio

2000

2002

2004

Source: World Bank, Global Development Finance (online). Debt service data are not available after 2003.

Figure 5.10

India: External debt indicators, 1980–2005

(see Figure 5.2). A natural outcome of this reliance on foreign borrowings was that India’s external debt rose dramatically, and debt payments came to absorb close to one-third of export earnings (see Figure 5.10). The economic policy reforms of the 1990s were among other things aimed at avoiding an emerging debt crisis, and as can be seen from the figure the debt burden gradually eased over the 1990s as indicated by the decline in both the debt/Gross National Product (GNP) and the debt service ratio. Another significant result of the external liberalization during the 1990s has been a diversification of the types of foreign financial resources available to India and an increased emphasis on market-based resources. As can be seen from Table 5.4, external assistance has declined and both FDI and portfolio investments have increased, the latter reflecting the opening of stock markets to foreign investors. Deposits from NRIs and commercial borrowings have continued to contribute significantly to net inflows during the 1990s, but both types of financial flows turn negative in some years. These financial inflows remain modest, however, in comparison with the private remittances from Indian workers abroad and increasingly also in comparison with the new rapidly growing source of foreign income, software exports. Overall, the 1990s witnessed a large increase in financial inflows resulting in a dramatic rise

Table 5.4

Selected items on India’s balance of payment, 1990–1 to 2005–6

US $ million 1. FDI 2. Portfolio investment 3. External assistance 4. Commercial borrowing 5. NRI deposits 6. Private transfers 7. Export of software

1990– 1991– 1992– 1993– 1994– 1995– 1996– 1997– 1998– 1999– 2000– 2001– 2002– 2003– 2004– 2005– 1 2 3 4 5 6 7 8 9 2000 2001 2002 2003 2004 2005 2006 97 6

129 4

315 244

586 3567

1343 3824

2144 2748

2821 3312

3557 1828

2462 61

2155 3026

4029 2760

2210

3037

1859

1901

1526

883

1109

907

820

901

427

2248 1536

1456 358 290 2001

607 1205

1030 172

1275 1103

2848 3350

3999 1125

4362 960

313 1540

2068

3783

3852

5265

8093

8506 12367 11830 10280 12256 12854 15398 16387 21608 20525 24102

0

0

0

325

489

747

1099

1537

2278

3878

6130 2021

5035 4322 979 11377

1204 3096 2754

6051 7722 9315 12492 2027

1766

4308 1588 1701 2928 5426 2316 2754 2978 3642 964

2963 2789

5750

6884

8863 12342 16900 22262

Note: All figures are net inflows except software data before 1997–8. Item 1–5 are from the capital account; item 6–7 are from the ‘invisibles’ category on the current account. All balance of payment data are subject to frequent minor revisions. Source: Reserve Bank of India, Handbook of Statistics (www.rbi.gov.in). Net inflows from software export before 2000–1 are estimated in three special surveys published in Reserve Bank of India Bulletin, April 1999, January 2001 and May 2003.

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200000 180000 160000

Million US $

140000 120000 100000 80000 60000 40000 20000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Short term debt

Currency reserves

Source: World Bank, Global Development Finance (online).

Figure 5.11 India: International currency reserves and short-term foreign debt, 1980–2005

of the foreign exchange reserves. From a level of around 5–7 billion dollars in the 1980s reserves rose exponentially during the 1990s to reach unprecedented heights after the turn of the millennium.79 The accumulation of foreign reserves also resulted in a dramatic reduction in India’s vulnerability to financial crisis as indicated by the ratio between foreign reserves and short-term foreign debt (see Figure 5.11). Because of this, India has since the early 1990s been much better prepared to withstand any short-term withdrawal of resources by foreign investors and has thus become more resilient to international financial crises. The gradual change to a system of partial currency convertibility has meant that market forces have impacted more on the exchange rate of the Indian rupee. During the highly controlled regime in the 1970s the nominal dollar–rupee rate had remained steady, while the more flexible policies during the 1980s had allowed the rupee to slowly depreciate. With the devaluation in 1991 and the subsequent moves towards a market-based exchange rate, the rupee has declined further. However, if one measures the ‘real effective exchange rate’ of the rupee, the situation is quite different. The 1970s and 1980s were periods with effective devaluation of the rupee while the 1990s has been a period where the real value of the rupee has been steadily maintained.80 This stabilization is probably the result of the combination of an overall improvement of

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the economic situation in the country and an interventionist policy by the RBI. The developments during the 1990s have undoubtedly, and despite several shortcomings and weaknesses, worked to prepare the Indian financial system to better manage potential threats from financial globalization. An indication of this came in 1997 with the advent of the Asian financial crisis. While the contagion effect of the crisis did make its way to India, the RBI through its use of interventions in the foreign exchange market and through monetary policy measures (raising interest rates among other things) managed to protect the economy from any direct impact.81 FIIs and NRIs withdrew some of their investments in 1997 and 1998 as a result of the crisis and because of the economic sanctions imposed after India’s nuclear tests in May 1998. The overall impact was, however, short-lived and mitigated by an increase in other inflows (see Table 5.4).82 An often-neglected result of the liberalization of the external financial accounts has been the growing presence of Indian companies abroad. While outward investments are still small compared to the inflow of foreign investments, investments abroad by Indian companies have grown rapidly during the 1990s and especially after 2000. The government had always set limits on the amount individual companies were allowed to invest abroad and in later years also on the aggregate total amount invested abroad, but these investment limits were continually revised upwards during the 1990s and from 1 April 2003 they have been abolished.83 The increased overseas investments by Indian companies reflect these policy changes and bear witness to the increased financial strength of many companies. In conclusion, India seems to have managed quite well during the period of economic reforms and increasing exposure to financial globalization. The reforms of the domestic financial sector have been cautious and they have not changed the overall structure of the sector with its overwhelming dominance of state-owned institutions. The financial sector thus has remained firmly under national control and foreign players have only increased their position marginally. However, some private Indian and foreign banks have entered the Indian market, and the overall efficiency of the financial institutions has improved. The development of stock markets was initially a success, but despite new regulatory initiatives there have been occasional problems, and the stock market’s importance as a mechanism for mobilizing financial resources for private companies has only increased modestly. The financial sector has, on the whole, been marked by institutional stability and stable or slightly

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declining interest rates. The overall savings rate has also been stabilized at a decent level and there are hopeful signs of increasing savings. For private industry, the developments in the financial sector have probably been satisfactory with a sufficient provision of financial resources to finance its expansion. Overall, the importance of the RBI as the regulator of the financial system has been strengthened and it has maintained a degree of operational autonomy from the government. The most remarkable changes during the 1990s have been in India’s relationship with the international financial system. The opening of the financial system has resulted in an increased access to a variety of international financial resources, and financial inflows have been both diverse and rapidly growing. The capital account has gradually been opened and as a result the exposure to adverse international events has increased. The careful management of the external accounts and the build-up of foreign exchange reserves by the RBI have, however, worked successfully to reduce the risks inherent in financial globalization. The most serious challenge to the stability of the financial system came in the period following the Asian financial crisis in 1997, which was combined with the adverse reactions by international lenders to the 1998 nuclear tests. The quick reactions to these potential crisis-inducing events by the RBI, the generally good performance of the Indian economy and the modest exposure to short-term flows combined to soften the impact on the Indian economy. A modest decline in the exchange rate of the rupee and a temporary rise in domestic interest rates were the only impacts on the Indian economy.84

Managing the new international economic arena For India – in contrast to Brazil – the international economic agenda in the 1990s contained only one important set of challenges. The international trade negotiations under the Uruguay Round leading to the establishment of the WTO and the subsequent negotiations within this new framework have clearly been of primary importance.85 While there has been a parallel process of regional trade negotiations under the umbrella of the South Asian Association for Regional Cooperation (SAARC), these negotiations have been largely ceremonious. In 1993, the South Asia Preferential Trade Arrangement (SAPTA) was negotiated, entering into force in December 1995, and having as its ultimate aim the establishment of a South Asia Free Trade Area (SAFTA). The negotiations for the free trade area have made very little progress, however, and regional trade has continued to be very limited. Similarly, India has had negotiations with

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some south-east Asian and African nations, mostly on a bilateral basis, but increasingly also with the Association of Southeast Asian Nations (ASEAN) and other multilateral organizations. The results of these initiatives in trade diplomacy have also been modest.86 As a result, Indian trade authorities have concentrated most of their efforts to participate in and influence the nature of the global, multilateral framework for international exchange, whose construction has constituted the core agenda of the WTO. Traditionally, India has in its international economic diplomacy followed a policy that complemented its overall aim of achieving economic self-reliance. In combination with the general policy of non-alignment, India has in international negotiations over economic issues been one of the most prominent leaders of the international coalition of developing countries striving to achieve a new international economic order. India’s leadership has been demonstrated in its engagement in the Non-Aligned Movement and in the establishment of UNCTAD and the Group of 77. Within other important organizations like the GATT, India had always followed a policy of promoting what it perceived to be the general interests of developing countries given the highly unequal world economy and the dominant position of developed countries. This position of leadership and pursuit of the general interests of developing countries has meant that India’s policies in international negotiations have not always aimed at exclusively serving what would arguably be India’s narrow national interests.87 In the run-up to the Uruguay Round, India had actively opposed the inclusion of new issues in the new trade negotiations. This position was fully in line with its traditional policy.88 One example of this was the inclusion of services in the negotiations. India was strongly against this broadening of the agenda although the government did not possess much solid information on the consequences for the Indian economy of a possible opening up to international trade in services. After the Indian Institute of Foreign Trade (IIFT) had concluded some research into the matter, the arguments against the inclusion of services were gradually formed. The initial Indian arguments against the inclusion were based on (1) the perception that the whole issue was imposed by the US to serve its own narrow interests and that it could not legally be discussed within the GATT trade regime and (2) the perception that developing countries would stand to lose in a situation with free trade in services were they not to include the only area with a clear perceived advantage for developing countries, that is, the free movement of labour. With relatively few allies among developing countries, most

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important Brazil, behind her, India felt forced to agree to a compromise formula that would open negotiations on services, but in a separate forum parallel to the ordinary trade negotiations. India’s position in the formal negotiations maintained the sceptical approach to liberalization of trade in services and to the other new issues, but from the 1988 ministerial meeting in Toronto the attitude began to change. The change came about partly because of the slow disintegration of developing country solidarity on the issue, including the changing stand of Brazil, combined with stronger US pressure on individual countries, partly as a result of new perceptions of India’s own interests resulting from a changing configuration of domestic interests. The change in negotiating stance also coincided with a change of chief negotiator and a change of key officials in the Department of Commerce in New Delhi (Kumar 1993b, p. 220). In 1985, the new government of Rajiv Gandhi had begun a process of economic liberalization, and among key decision makers within the Indian state, a change of mind towards a more open economic strategy had gained strength. The end result was a realization that India had to participate actively in the negotiations with the aim of obtaining the best possible deal within the limits set by the overall framework for the negotiations. Indeed, it was now argued that there was a considerable export potential for India in a more open international regime in some parts of the services sector. In the draft to a new multilateral trade agreement that emerged in 1991, India had, together with some other developing countries, managed to get incorporated some of their concerns.89 Among these were the move to a positive list of the types of services that would be included and the recognition of the legitimacy of taking into account the level of development of countries in the implementation of any agreement.90 While India thus became one of the founding members of the WTO, it was clear that the new agreement would put strong pressure on India’s capacity for negotiating the broad range of issues included under the WTO and its capacity to manage the implementation of the new WTO rules. In order to strengthen these capacities, a number of institutional changes were initiated after the conclusion of the WTO agreement. International trade negotiations have always been the prerogative of the Department of Commerce, which has tried to coordinate policy inputs from other ministries. The enlarged agenda for negotiations under the WTO has prompted the department to try to increase its capacity to negotiate through several measures. In contrast to the general stagnation in the size of staff employed in the various ministries in New Delhi,

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the Department of Commerce has been able to expand its number of officers, especially from the mid-1990s onwards.91 The number of officials working on WTO negotiations in New Delhi is quite limited, though.92 The Indian permanent delegation in Geneva has also been expanded, although not very much. In the 1980s, during the Uruguay Round negotiations only 3 persons were working on GATT issues. This number was raised to 5 in 1997, after the establishment of the WTO (Michalopoulos 1998, p. 30). Compared to other countries, India’s representation in Geneva has been about average size, but it may have benefited somewhat from the fact that there has been a fair share of Indians working inside the WTO.93 In 1998, a new office dealing with anti-dumping and other forms of trade defence measures was created within the department to administer the WTO-conforming anti-dumping legislation that had been in force since 1995. As a result, the number of anti-dumping cases initiated by India increased significantly, reaching an annual level of more than 60 cases (WTO 1998, pp. 77–80; WTO 2002, pp. 40–4). Next to the US, India has been the most active user of anti-dumping measures since the establishment of the WTO, and it has also (together with Brazil) been among the most active users of WTO’s dispute settlement mechanism (WTO, Annual Report 2003). Besides its increased use of WTO-compatible trade instruments, the Department of Commerce has also raised its capacity to take part in the increasingly complex negotiations within the WTO. During the Uruguay Round, the department had maintained very few contacts outside the government bureaucracy, but especially since 1998 the department has tried to expand its links to outside stakeholders and experts. The department now holds regular meetings with industry associations, professional organizations, and academic research organizations, and it has started to sponsor research on specific issues in order to develop India’s negotiation position in WTO negotiations.94 In order to stimulate the interest in WTO issues and to make the Indian position transparent, the Department has since January 1999 issued a monthly newsletter available to all through the Internet.95 While India thus has been actively engaged in working within the WTO regime, it has maintained a certain ambivalence and continued its traditional Third World policy of supporting UNCTAD as a parallel forum for trade discussions.96 In the ongoing negotiations within the WTO framework India has continued to be a central and influential player and has continued its policy of trying to establish and maintain coalitions of developing countries. At the 1999 Seattle, 2001 Doha and especially at the 2003 Cancun Ministerial meeting, India was at the forefront, in coalition

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with Brazil and other large developing countries and recently joined by China (Page 2002; Narlikar and Wilkinson 2004). While the provisions of the WTO agreement have been antithetical to the way in which India’s foreign and domestic economic strategy had been designed prior to 1991 this does not necessarily imply a wholesale defeat of India’s attempts to influence the global rules for international economic interaction. The new WTO provisions have been much more in line with the overall direction of the new economic policies since the 1991 reforms and should rather be seen as a reinforcement of the new policies. The changes in India’s previous policies on trade, investment regulations, intellectual property rights legislation and so on were thus only to some extent prompted by its membership of the WTO. The specific policy changes have been regularly monitored by the WTO through its regular trade policy reviews. According to these reviews, India has managed fairly well to implement the WTO regulations, in particular the reduction of tariffs and abolishment of quantitative restrictions on imports. Problems with implementing WTO obligations have been mainly confined to the implementation of a new intellectual property rights regime, especially new patent rules, and some minor issues related to the complexities of import regulations (WTO 1998; 2002).97 The changes in India’s international economic relations that have happened since the early 1990s must be seen as the combined effect of domestic reforms, the implementation of specific WTO regulations and – of course – international developments independent of policies pursued by the Indian government. The integration of India into the global economy since the early 1990s and since the WTO was formed in 1994 has changed in ways that are both important and remarkable. First of all, India has increased significantly its trade integration with the global economy. Both import/ GDP and export/GDP ratios have more than doubled since the early 1990s, as is evident from the selected evidence presented in Table 5.5. The almost parallel movement of exports and imports has continued, however, resulting in a more or less constant trade deficit, as mentioned earlier in this chapter. In broad terms, India’s foreign trade has remained dependent on relations with the EU and the US. A significant change has been the dramatic expansion of trade with the rest of Asia, mostly the east and south-east Asian nations (including China recently) in its own way compensating for the equally dramatic collapse of the traditional trade links to the Soviet Union and the East European countries. An interesting change has been the rising importance of the US as an export destination and its reduced importance as an import supplier.98

India 119 Table 5.5

India: Foreign trade orientation, 1980–2005

Trade/GDP ratio (%) (1) Export/GDP (2) Import/GDP Trade by area -USA (3) Export (4) Import -EU (15) (5) Export (6) Import -Developing Asia (7) Export (8) Import

1980

1985

6.3 9.5

5.4 7.8

1990

1995

Per cent 7.2 11.0 8.6 12.2

2000

2005

13.2 14.2

20.3 23.3

Per cent 11.5 12.6

18.9 10.8

15.1 11.0

17.4 9.7

21.3 6.3

16.7 5.6

23.4 22.6

19.1 27.0

27.7 32.7

27.0 25.9

24.3 21.8

22.3 16.3

11.5 8.9

9.3 9.1

12.1 11.2

21.9 13.9

20.6 17.2

28.9 21.5

(1995– 6)

(2000– 2001)

(2005– 2006)

Export composition

(1980– 1)

(1985– 6)

(1990– 1)

(9) Agricultural and allied products (10) Ores, minerals, fuels (11) Manufactured goods

30.7

27.7

Per cent 19.4 19.9

14.0

10.2

6.6 55.8

13.2 58.5

7.5 72.9

6.4 79.0

16.7 72.0

3.27 (6.7) 0.66 (0.66)

4.18 (6.6) 0.95 (0.89)

Export as share of: (12) Total export from Asia (manufactures) (13) World export (manufactures)

4.87 (n.a.) 0.42 (0.40)

4.12 (18.2) 0.46 (0.43)

4.5 75.4

Per cent 3.81 3.23 (11.2) (7.6) 0.52 0.59 (0.50) (0.57)

Note: Figures for export products do not add up to 100 per cent due to exclusion of ‘other products’ that except for 1980–1 account for only small amounts. In 1980–1 other products accounted for 6.9 per cent of total exports. Figures for 2005–6 include a sizeable oil export (11.3 per cent). Figures in parenthesis in row 12–13 are for manufacturing products. Asia is the sum of East Asia and Pacific plus South Asia. Source: IMF, Direction of Trade Statistics Yearbook, various years (trade by area); World Bank, World Development Indicators, online version (trade/GDP, export of manufactures – own calculation); Government of India, Economic Survey, various years (export composition); UNCTAD, Handbook of Statistics (online) (total export shares).

More generally, India has maintained its diversity in trading partners, and there are signs also that it has diversified further its investment and technical collaboration links with foreign partners.99 India’s exports have continued its gradual change towards industrial products, which in 2000 constituted almost 80 per cent of all exports. Adding the rising export of software services, it seems clear that there

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has been a significant change in India’s export of tangible and intangible ‘goods’ towards more technologically sophisticated items. The expansion of India’s export during the 1990s has resulted in a substantial increase in the country’s share of global trade, including global trade in manufactures, but despite this India remains a marginal player in international trade. In comparison with the strong exporters of Asia, mostly China, India has fallen behind, both in overall export and in manufactured export. Compared to the fate of many other poor developing countries, India has avoided being marginalized and its progress must be seen as quite remarkable. The overall picture of how India has managed the challenges of developments in the international arena for trade and trade negotiations is one of a qualified success.100 India has managed to gradually change its previous policies and increase significantly its integration with the global economy. The changing policies formed a part of the overall change in economic strategy initiated in 1991, but it was also in conformity with India’s obligation as a member of the new international trade organization, the WTO. The domestic policy changes during the 1990s has meant that the establishment of the WTO and the commitment to economic liberalization and a more open world economy, which India had resisted in the early negotiations during the Uruguay Round, could not be seen as an ultimate defeat for India. Since 1995, India has increased its efforts to participate in the negotiations within the WTO and has become a prominent player, especially after the Seattle Ministerial Conference in 1999. In its domestic management of the new trade regime, India has been increasingly active in its commercial defensive activities. The increased capacity of the Indian state to manage its external trade relations have combined with a reformed and quite robust domestic economic performance (including a turn towards high-end economic activities) and resulted in a perceptible increase in India’s position in the international economy. The trade balance has, however, continued to be negative, and some of the improvements may equally be credited to the successful management of the external financial relations evident from the avoidance of externally induced crises, a stable exchange rate and accumulation of foreign currency reserves.

Summing up: How India managed the challenges of economic globalization in the 1990s The period since 1990 has witnessed significant, but gradually implemented, economic policy changes in India. The decade started with a serious economic crisis, the response to which became a broad-based

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turnaround of economic policies. The new policies were introduced in a dramatic fashion in 1991, but most of the implementation has been gradual throughout the 1990s. The cautious implementation of the new policies has probably ensured that despite political changes there have been no policy reversals. On the contrary, the process of liberalizing and opening up the economy has progressed steadily, although some of the announced policy measures, in particular the privatization of stateowned enterprises, have been extremely slow in implementation. There is little doubt, however, that the new policies have meant that the Indian economy and Indian business enterprises have been increasingly exposed to the challenges of economic globalization. The industrial sector has witnessed a satisfactory growth performance during the 1990s, and there have been signs of a successful transformation towards a more knowledge-intensive form of production. Most conspicuous in the rapid advancement of the IT sector and in particular the software segment, but some of the traditional industrial sectors have also witnessed significant technological upgrading. These changes have so far not resulted in major changes in the sectoral composition of the industrial sector, but there have been changes within the existing sectors. A remarkable feature of the developments in the industrial sector has been the continued dominance of private Indian business enterprises. The opening of the economy did result in a significant rise in FDI, but despite several examples of foreign companies taking over local enterprises, most industrial assets have remained firmly in Indian hands. In addition, Indian entrepreneurs have had the lead in the expansion of new economic activities in the software sector (like in pharmaceuticals and in biotechnology). The most disturbing development within the industrial sector has been the stagnation of domestic research activities. Contrary to what the authorities had hoped for, most of the expansion in the use of new technologies has apparently come about through import of foreign technology rather than through the creation of domestic technologies. In this respect, economic globalization has led to increased dependency on imported technology, despite some government efforts to the contrary. In the financial sector, the policy changes during the 1990s resulted in a gradual opening towards international financial markets. At the same time, the domestic financial system was cautiously reformed. Both the external opening and the domestic reforms have been carefully planned and the reforms were guided by the government and, especially, by the RBI. The domestic financial system had been heavily dominated by the state-owned commercial banks and development banks, and this basic structure has not been changed. The working of the

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financial institutions has been improved, however, and the supervision by the RBI has been intensified and new supervisory institutions have been created. Reforms of stock markets and stock market regulations did succeed in increasing the importance of this channel of corporate financing, but the markets are still of minor importance compared to the state-owned financial institutions. The opening towards international financial markets has been implemented with considerable caution, and the risks of externally induced crisis have been largely avoided. As a result, financial inflows have increased and foreign reserves enlarged substantially. The burden of foreign debt has consequently been reduced and the reforms have thus not resulted in an increased vulnerability, on the contrary. In sum, the financial sector has been characterized by institutional stability, consolidation of domestic financial resources and increase and diversification of foreign inflows. The increase in domestic savings among households and companies has to some extent been offset by the decline in government savings, but overall the resources seem to have been sufficient to finance industrial development at reasonable costs while simultaneously ensuring external stability. In this sense, India has managed the challenges of financial globalization extremely well. In the negotiations over the global rules for international economic relations, India has concentrated on trade negotiations under the Uruguay Round and later on the on-going negotiations within the WTO. While India only managed to influence Uruguay Round negotiations at the margin, partly because its alliance with Brazil in the early stages of the negotiations broke down, its influence on WTO matters has later increased somewhat. However, the wide-ranging nature of the issues included in WTO negotiations have put a great strain on India’s negotiation capacity. As a response, the government has made a number of institutional changes in order to strengthen its capacity to respond to the new trade agendas. There has been an increase in the staff dealing with negotiations in both New Delhi and in Geneva, the coordinating mechanisms between different ministries have been strengthened and regular interactions with outside experts and representations for a variety of organizations of different affected interests have been established, primarily business organizations. Another aspect of this strengthening of its capacity to deal with the new rules of the game in international trade has been the intensification of antidumping measures, that is, a form of legal trade warfare. In these ways, India has managed quite well under the new WTO regime, and it has been able to implement those changes in domestic regulations that

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have been required under the WTO. Most of the regulatory changes required by the WTO have furthermore been broadly in harmony with the government’s economic reform policies. The overall impression of how India has managed the challenges of economic globalization during the 1990s is quite favourable. The Indian economy has continued to grow at the same respectable pace as in the 1980s and despite some slowing of the industrial economy, growth rates have been high in sectors that can be seen as representative for the new industrial paradigm. India has also improved its general standing in the international economic arena. India’s participation in international trade has increased, not the least in high-technology areas, and its relative position in world trade has improved, although not at a pace comparable to the East Asian nations. The drawbacks in terms of handling globalization challenges are mainly to be found in the still limited ability to foster independent research and development. The 1990s have seen a reversal of the trend towards technological independence and a return to technology imports and reliance on foreign partners as technological collaborators. One commentator saw India’s development in the 1990s as a move from ‘cautious self-reliance’ to ‘dynamic self-reliance’ (Reddy 2000b, p. 891), which nicely captures the changes in the financial area. At the same time, it seems clear that self-reliance with respect to technology has been reduced rather than transformed during the 1990s and that this may pose a challenge for the future growth prospects. It remains a question, whether India has managed comparatively better than Brazil, and how the differences between the two countries can be explained. To this we turn to the next chapter.

6 Comparison and Explanation: New Developmental States

Comparison A comparison of the performance of Brazil and India under the intensified exposure to economic globalization, which both counties experienced from the early 1990s onwards, reveals both interesting parallels and remarkable differences. Brazil clearly made the most dramatic policy changes with a rapid commercial opening, extensive privatization of state-owned enterprises and an opening up for foreign investors in almost all sectors of the economy. In comparison, the Indian policy of economic liberalization was slower and more careful, while maintaining the overall momentum in the policy reforms despite several changes in political leadership. The commercial opening and the easing of restrictions on foreign investments came only gradually in India, and the privatization of state-owned companies had hardly begun after more than ten years of economic reforms. In the financial sector, the policy changes in India were also much more cautious than in Brazil, with the Indian public sector banks retaining their dominant position and with a limited role for foreign banks. While both countries moved towards convertibility on the foreign accounts, India’s liberalization was again much slower and stopped short of full capital account liberalization allowing its Reserve Bank to continue regulating flows of foreign capital. Apart from those policy changes associated with the liberalization of state control over the economy, both countries did take new industrial policy initiatives in an attempt to influence the capabilities of domestic companies to manage the new situation. Most significant were the Brazilian government’s attempts to support and promote technological changes within the Brazilian industry, while the Indian government only took few new initiatives to promote indigenous research and 124

Comparison and Explanation: New Developmental States 125

development among domestic companies. Instead, the Indian government relied on the new opportunities for importing technologies through collaboration with foreign companies and through imports of machinery from abroad. A similar open policy of technology imports had long been followed in Brazil, and the policy became near universal after the abolishment of the protection of the IT industry. While there were some signs in Brazil of an increasing independence from the government of the key financial regulator, the Banco Central, it did not obtain the level of operational independence that had been achieved de facto by the RBI. This fact may have contributed to a lower degree of confidence of external financial market agents in the stability of the financial system in Brazil than in India. An important parallel is that for both countries, the liberalization policies that were enacted during the 1990s represented an intensification of the more modest policy changes that were initiated in the 1980s with the backing of domestic social forces while simultaneously being encouraged by external agencies. The reform policies in both cases rested on solid domestic political foundations. In their management of the new international economic negotiations India and Brazil had initially very similar experiences and it was not accidental that the two countries became closely allied during the Uruguay Round negotiations. Their combined efforts in promoting what was then perceived to be their best interests were not successful, and both countries moved to change their stance at approximately the same time in the late 1980s.1 Both countries had to adapt to the new situation after the establishment of the WTO, but while Brazil had more options for different regional trade arrangements, most prominently through the simultaneously established Mercosur free trade area, India was in a position where the WTO negotiations were the only serious item on the agenda for its international trade and economic policy. Both countries reacted to the establishment of the WTO, and to the broad negotiating agenda within the WTO, by trying to improve their capacity to negotiate internationally and their domestic capacity to manage complex trade regulations. They both established anti-dumping institutions and became active in conducting ‘trade defence’, that is, active policing of the conduct of their trading partners. At the same time, both countries strengthened their negotiating capacities through an increase in the number of officials working on these issues, in their foreign or commerce ministries and in their representations in Geneva. Before assessing and comparing the outcomes of the economic reform policies in the two countries and the increased economic openness

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towards the global economy that was the immediate result, we need to briefly recapitulate the initial settings for both countries. India entered the 1990s in a situation of economic crisis, but the 1980s had been a decade of significant economic growth and the country’s external debt problems were comparatively limited, thus giving it more scope for independent policymaking. Brazil, on the contrary, had experienced an economic recession since the early 1980s; economic volatility was very high and the level of foreign indebtedness severe, leaving the country heavily dependent on the goodwill of international financial institutions. The initial situation in the late 1980s and early 1990s was thus more favourable in India than in Brazil, but it is important to bear in mind that Brazil possessed a much more prosperous and structurally advanced economy than India. With average per capita income more than ten times that of India in 1990 (in US dollars), Brazil was an infinitely more prosperous country, although its skewed income distribution ensured poverty levels similar to those of India in many parts of the country.2 Brazil was also more industrialized, especially when one takes into account the modern and industrialized agricultural sector found in the southern parts of the country. In terms of industrial development both countries were quite similar, however, the main difference being the much larger role played by foreign enterprises in Brazil compared to the much less dominant role of foreign companies in India. In combination with the external financial problems, this structural reality made the Brazilian economy much more dependent on global economic developments than the Indian economy. When comparing the outcomes in terms of parameters relevant to the policy changes and the challenges of economic globalization, it is quite clear that India on most accounts has outperformed Brazil since the early 1990s. This difference in performance continues the pattern from the previous decade, the 1980s. In terms of both overall and manufacturing growth, the Indian economy grew at rates that were nearly double those achieved by Brazil. Neither country experienced major changes in the overall structure of their manufacturing sector, but both countries saw major improvements in productivity and significant increases in the share of high-tech industrial activities, although there have been signs in both countries of a stagnation in the indigenous R&D efforts. Instead, imports of technology from abroad have increased, and in particular in Brazil increasing foreign investments and the takeover of local companies have led to a significant ‘denationalization’ of the industrial sector. India received significantly less foreign investments and local companies managed with support from the government to maintain their dominant

Comparison and Explanation: New Developmental States 127 25000

US $ million

20000

15000

10000

5000

0 1993

1994

1995

1996

1997

1998

Aircraft from Brazil

1999

2000

2001

2002

2003

2004

2005

Software from India

Source: Reserve Bank of India (net export of software); Banco Central do Brasil (gross export sales).

Figure 6.1

Brazil and India: High technology exports, 1993–2005

position in the manufacturing sector. Both countries did achieve some remarkable successes within nationally controlled knowledge-intensive activities. The Brazilian success in production and export of commercial aircrafts and India’s success in the development and export of computer software both had their origin in policies pursued by the national governments. An illustrative comparison between the export performance of these two technology-intensive sectors reveal, that the Indian success has been greater and in all likelihood both more sustainable and commercially promising (see. Figure 6.1). Indian export of software accelerated in the late 1990s and while the Brazilian export of aircraft had experienced an almost equally impressive growth during the 1990s, it stagnated after the turn of the century, most likely because of a decline in the international demand for new aircrafts. In the financial sector, the reforms in Brazil resulted in dramatic changes. Most significant was the decline in the role of state-owned banks and the rise in the role of foreign banks. The changes in India were more modest, and the state-owned banks retained their dominant role. Both countries tried to develop viable capital markets, but despite institutional reforms, the stock markets have not been successful in establishing themselves as a significant source for industrial investments. India was more successful than Brazil in raising the domestic savings rate and through this increasing the available financial resources. Brazil even experienced a decline in savings during the 1990s.

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Globalization, Development and the State

In comparison, India managed to increase the level of private and corporate savings, but the decrease in government savings to some extent neutralized the gains. For both countries the policy reforms and the increased economic openness resulted in rising inflows of financial resources, most dramatically in Brazil’s success in attracting FDIs in the late 1990s. Many of these investments were used to purchase former state-owned companies and also to take over some private Brazilian manufacturing companies. In India, inflows of foreign investments were much smaller, and while some investments went into the takeovers of local companies, this did not result in any major change in the overall foreign control over the manufacturing or financial sector, as happened in both sectors in Brazil. The Indian economy has as a consequence not been ‘denationalized’ to the extent that took place in Brazil. The large annual payments on Brazil’s foreign debt also meant a sizeable reduction in net inflows, and in this regard, India was much less exposed to a drain of financial resources. In addition, India managed to diversify its sources of foreign finance during the 1990s, and through this reducing its vulnerability. India also escaped any major impact from international financial crisis during the 1990s, whereas Brazil had to struggle hard to avoid severe impacts from both the Mexican crisis of 1994 and the Asian crisis of 1997, and it eventually had to concede to a major devaluation of the real in 1999 and accept the conditions associated with a new IMF stabilization programme. But as the limited domestic consequences of the 1999 devaluation episode also demonstrated, Brazil had significantly improved its ability to manage internationally induced crises. The domestic policy changes in India and Brazil combined with the changes in both countries’ external commercial policies to affect their commercial integration with the global economy. As mentioned earlier, both countries had under slightly different international circumstances taken almost identical position and they were close allies in the international trade negotiations under the Uruguay Round and in negotiations within the WTO framework. Brazil has had the additional task of conducting parallel negotiations with its closest regional partners within Mercosur and with the US and others over a future Free Trade Area of the Americas (FTAA). These negotiations have of course constituted a burden on the negotiating capacity of Brazil, but at the same time, they have constituted an opportunity to pursue parallel trade agendas that India lacked (and envied) throughout the 1990s. The actual involvement with the global economy seems, mostly to be a reflection of the impacts of the domestic reforms, as the different performance of the two countries indicates.

Comparison and Explanation: New Developmental States 129

Both countries increased their trade integration into the global economy, but the increase was most remarkable in the traditionally inwardoriented India. During the 1990s, Brazil only managed to restore its trade/GDP ratios to the level of the early 1980s, but it did see a rapid rise after the turn of the century. India more than doubled its trade/GDP ratios and through most of the 1990s it surpassed the integration levels achieved by the traditionally more outward-oriented Brazil. Trade with regional partners increased the most – Brazil increasing its trade within Mercosur and India increasing its commercial ties with East Asia. In relation to global trade developments, India managed to increase its (low) share of world export, although not as much as other Asian nations, while Brazil saw its share of world trade decline slightly. The overall conclusion on the economic performance of the two countries is that India has managed the challenges of economic globalization remarkably well, while Brazil, despite several improvements, only barely managed to maintain its global position. Judged in relation to its initial situation, Brazil managed surprisingly well, but it continued to be constantly hampered by the effects of the debt crisis and the financial dependency this imposed. The level of external dependency and the considerable industrial and financial ‘de-nationalization’ that Brazil – contrary to India – experienced have probably constituted the main impediment to industrial progress during the 1990s. India has in comparison been more successful in beginning a transition to a nationally controlled knowledge-intensive development path, although the Indian economy is still dominated by the ‘old economy’ (Fordist) type of industrial activities. Brazil did try to develop in a similar direction, but it was less successful and its economy operated under much stricter control by foreign TNCs.

A first explanation The experience outlined above of India and Brazil with managing the challenges of economic globalization since the early 1990s can be interpreted in several ways. One obvious interpretation would focus on the nature of the economic reform policies in the two countries and notice that the gradual and more cautious nature of the Indian reforms apparently have worked better for economic development than have the more sudden and dramatic policy changes in Brazil. The rapid commercial opening and the comprehensive privatizations of Brazilian state enterprises led to the takeover of an important share of the Brazilian economy by foreign companies, who have neither been able to set off a sustained process of economic growth nor to expand export earnings

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sufficiently. The Indian reform policies only slowly liberalized external trade and upheld the significant or dominant role of state-owned companies in both the manufacturing and the financial sector, and this gradualism seems to have been better able to simultaneously ensure a dominant position for domestic companies and to encourage significant growth and export expansion. In addition, India has been able to initiate and expand some of those activities that are associated with the new paradigm for a knowledge-intensive economy. Brazil did try to do the same, but it was less successful, especially when measured on those economic activities that have been controlled and managed by Brazilian companies. As mentioned above, it would be wrong, to see the Brazilian economic reform policies as failures to respond to the challenges of economic globalization. Brazil has managed sufficiently well under the given circumstances to justify a closer look for an explanation to its relative success. This necessitates a closer look at the processes through which economic policies have been selected and implemented in both India and in Brazil. As mentioned earlier, in Chapter 2, the most powerful argument for why states were able to select and implement successful policies has focused on the existence of a ‘developmental state’ or, more precisely, a development promoting relationship between state and private business. A close and institutionalized relationship between strong and well-organized domestic industrial interests and a cohesive bureaucratic state has been seen as an ideal type of relationship working for industrial success. We now turn to see whether a movement towards such a relationship can be found in the two countries and to discuss if changes in business–state relations may explain their differences in economic performance.

India: Changes in state–business relations Developments before the late 1980s An account of the nature of state–business interaction in India must take into account its specific historical origin in colonial times and the subsequent changes after the achievement of political independence. Indian business started organizing in the 1920s in strong opposition to both the British colonial government and to the dominance of British commercial interests. As a consequence, Indian business aligned itself closely with the struggle for political independence led by those politicians in the Indian National Congress who would later come to power in independent India.3 The most prominent apex organization for

Comparison and Explanation: New Developmental States 131

Indian business was Federation of Indian Chambers of Industry and Commerce (FICCI), while most foreign business enterprises were organized in Associated Chambers of Commerce and Industry (Assocham).4 With the strengthening of the Indian-controlled section of industry after independence and the gradual erosion of the antagonisms between India and the remaining foreign business interests, FICCI became the most influential representative of private industry, while Assocham experienced a decline although the organization continued to represent selected, often older, foreign enterprises. FICCI was still being dominated by traditional Indian industrial interests, originating mainly from the Eastern part of the country and from the influential business community of the Marwaris. The counterpoint to business, the Indian state that emerged after independence, was – first of all – marked by a continuation of elements from the British colonial rule. It possessed a tradition of a strong bureaucratic organization held together by an elite corps of competent, generalist high-level bureaucrats, the Indian Civil Service, from 1946 rechristened the Indian Administrative Service (IAS). When the new political leaders laid their plans for the economic development of the country, the IAS became the most important element in the administrative machinery established to implement them.5 For the bureaucracy this meant an expansion of its tasks, supplementing the functions of political and social control (and a modest element of economic regulation) of the colonial state with an expanding array of developmentoriented activities of the newly independent state. Starting in the 1950s, the changes in the functions of the administration resulted in an expansion and a reorganization of the central administration. The number of central government departments increased and through an intensified recruitment drive, the number of civil servants was raised considerably, in particular during the 1950s and 1960s. The expansion came mostly in departments engaged in the management of economic development, in particular economic planning. One might have expected the increase in the economic and technical functions of the state to have resulted in a greatly changed pattern of staffing. A number of new specialized services were indeed established, including some specializing in economic and technical matters. The number of persons in these services and their importance has slowly increased within the administration, but at the top administrative level, their influence remained limited due to the monopoly-like position of the IAS at this level, with the exception of only a few ministries and departments.6 The need for continuous training of generalist administrators was recognized, and several new training

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institutions were established for this purpose.7 Despite the growth in technical and economic functions, the Indian state as it developed after independence must be described as a state characterized by the dominance of a competent corps of generalist ‘Weberian’ bureaucrats, giving it a relatively coherent and administratively strong character (Evans 1995, pp. 66ff). The Indian state had grown tremendously, but by the end of the 1980s, the size of the central government bureaucracy had stabilized as had the size of the IAS elite (Pedersen 1992). The interaction between state and business became important with the initiation of economic planning in the early 1950s. The idea of planning had taken root both in the nationalist movement and among Indian businessmen well before independence, and the close links between businessmen and politicians had given rise to a largely congruent vision of the strategy for economic development.8 Under the overall umbrella of the successive five-year plans which from 1950 onwards came to guide economic and social development, private industry was to be controlled through a policy of industrial licensing (investment permits) in conjunction with a host of other regulations. Most regulations were, however, to be administered in collaboration with representatives of the private industrial sector. To administer the industrial licensing system a Central Advisory Council with strong representation of private business interests was established, supplemented by separate Development Councils for a range of important individual industries.9 The industrial licensing policy thus included the establishment of a comprehensive, institutionalized system for consultation with private industry, encouraging private business to organize itself in a number of industry-specific associations (Kochanek 1974, p. 88). In addition to the industrial licensing system, private business became represented in almost all spheres of economic regulation, from the board of the RBI and the boards of large state-owned companies to advisory councils on trade, infrastructure development, financial credit and scientific research among many others.10 Apart from these institutionalized forms of interaction with economic regulators, private industry had established multiple forms of interaction with both politicians and high-level bureaucrats. Individual large business houses established ‘embassies’ in New Delhi to follow up on their individual applications for licenses and other forms of government permissions and through their direct and personal interactions with party politicians and government ministers, businessmen in general had excellent access to key decision-makers (Kochanek 1974, pp. 265ff). This system of very close interaction between state and industry lasted until sometime in the late 1960s,

Comparison and Explanation: New Developmental States 133

and the period from the early 1950s to the late 1960s has by one observer been termed the ‘golden age of private sector development based on business-government cooperation’.11 From around the late 1960s and early 1970s the system of close and institutionalized interaction between business and government started to erode. Official studies of the working of the licensing system had documented that the system – contrary to its intentions – had worked to the benefit of the large Indian business houses that had been sheltered from both domestic and foreign competition in those industrial sectors where they had obtained licenses.12 As a consequence of these findings, the rules of the licensing system were changed, making it more difficult for large Indian and foreign companies to obtain industrial licences.13 At the same time, from the mid-1960s, the Indian economy and consequently the planning system came into crisis and to many observers the era of strong and autonomous state intervention came to an end.14 Other observers noted, somewhat in contradiction to the notion of declining autonomy, that business influence on government policies was reduced and that the role of the Central Advisory Council, and probably also many development councils, became largely defunct (Kochanek 1985, p. 203; Marathe 1986, p. 76). An official commission investigating the industrial policy in the late 1970s thus deplored the decline in the working of development councils and recommended their revitalization.15 The government apparently did not implement the recommended changes, but there seems nevertheless to have been some improvements in the working of the development councils during the 1980s. By the end of the 1980s many development councils were thus known to be still in operation.16 The decline in the role of the institutionalized consultative mechanisms through the development councils does not mean, that there was less contact between businessmen, bureaucrats and politicians in the period after the late 1960s. What probably happened was that informal contacts were increasingly established between individual business houses, key bureaucrats and key politicians, including the prime minister, while the institutionalized contacts only remained in place at the level of overall policy formulation, for example, between FICCI and the Ministry of Finance. There are furthermore indications that individuallevel contacts between business and bureaucrats and politicians increasingly came to involve various forms of illegal payments (‘briefcase politics’) (Kochanek 1985, 1987). Interactions between private industry and the parliament – the legislative arm of the state – has generally been of limited importance in

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India, partly reflecting the strong and important relationship with the central bureaucracy and with its political masters (the ministers), partly reflecting the importance of bureaucratic regulations in areas of interest to private industry and the generally limited impact of the legislative process (Kochanek 1974). The composition of the parliament also shows a low and declining share of parliamentarians with a background as ‘traders and industrialists’, possibly a reflection of the same (Kashyap 1990).17 This pattern of relationship between private business and parliament described here for the period before the 1990s does not appear to have changed in any significant way since. From the late 1980s onwards Parallel to the erosion of the institutionalized contacts between business and state, changes began to happen in the way Indian business organized itself. The neat pattern of organization with FICCI at the top (and Assocham in decline) came increasingly under strain. The strains became especially visible within FICCI during the 1980s. Industrial progress had brought new small- and medium-scale industries into membership of FICCI and enterprises based in the Western parts of India grew in importance while the established industrial interests based in Eastern India continued to dominate decision-making within the organization. The tensions came out into the open when a group of Bombay-based members broke out of the organization.18 The failure of FICCI to accommodate the new upcoming industrialists and some of the organization’s existing members made these companies look for other ways to have their interests served. One of their options obviously was to join Assocham – and the Bombay breakaways eventually did that – but increasingly many companies seemed to favour the existing association for the important engineering industry. The Association of Indian Engineering Industry (AIEI) possessed many of the features that were in demand among the new type of Indian industrialists. The AIEI had emerged in 1974 as a fusion between two organizations representing foreign and Indian engineering companies, respectively.19 This feature made it unique in the Indian context. It was also unusual because of its representation of both public- and private-sector companies and smalland large-scale industries. Furthermore, it was reputed for its strong professional orientation and its internal organization seemed free from the favouritism of sectional interests that had been so controversial within FICCI. The evolution of AIEI itself indicated the shift towards a new organizational pattern. In 1986, the AIEI changed its name to Confederation of Engineering Industry (CEI), and in 1992, the organization was again

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renamed giving it its present name, Confederation of Indian Industry (CII) reflecting its new, self-proclaimed role as ‘the apex organization for the industry in India’ (CII 1992, p. vi). This self-definition does indeed reflect the fact that since the early 1990s CII has become the dominant organization representing Indian industry. The changing pattern of organization within Indian industry represents not only the rise of new elements within the sector but also a change in the convictions and interests of private industry with a new outlook coming to the forefront, different from the traditional outlook of Indian industry. It is thus a stated objective of the CII to work towards a globalization of Indian industry; it claims to have a philosophy in favour of deregulation, decontrol and delicensing in all areas and it claims to possess a more activist role vis-à-vis the central government. It also purports a strong professionalism in its work. In addition, the CII claims to have a ‘partnership approach’ in its working with the Indian government and its various agencies – a claim that seems to be confirmed by its close collaboration with many government agencies.20 By the late 1990s, the CII membership had expanded to close to 4000 companies – a rise of 50 per cent during the 1990s. Its membership profile reflects its foundation in a broad cross section of Indian industrial enterprises, with a bias towards the modern, high technology industrial sectors, including electronics and software. Included among its members are most of the large companies in India.21 In contrast, FICCI still mostly organizes companies engaged in traditional industrial sectors, the best example being the large textile industry, and FICCI membership has stagnated throughout the 1990s.22 Today both organizations have foreign companies as important members, but the majority of foreign companies are represented in the CII because of its strong presence in those modern sectors where foreign investments have been concentrated. The rise of the CII and the new economic policy regime in the 1990s has, however, led to a certain reinvigoration of FICCI.23 The federation changed its general secretary in the mid-1990s, reorganized its secretariat, and has since become more proactive in its contacts with government and much more professional in its preparation of various policy proposals. It still cannot match the CII in terms of professionalism and overall scope of its policy proposals, but it has clearly increased its capacity to interact with the government.24 Contrary to what happened to the Indian business class, the changes since the late 1980s in the way the Indian state and its permanent bureaucracy functions have been modest. Along with the overall impression of continuity and absence of change, the 1990s did, however,

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witness a few significant changes in the central government’s administrative set-up. First of all, the economic reforms halted the expansion of the central bureaucracy. From more than 3.4 million employees in the early 1990s, central government employment fell to less than 3.1 million in 2003.25 This marked the first reduction in public sector employment in independent India. Similarly, the size of the IAS also stagnated, if not declined during the 1990s.26 The new economic policies, especially the abolishment of several regulations, most important the virtual abolishment of industrial licensing, also resulted in the closure of some government agencies and a change in the workings of several ministries (Degnbol-Martinussen 2001, pp. 171ff). One result of this has been a further centralization of ministerial power. It is thus a common observation that the economic reforms have increased the importance of the Ministry of Finance, the Prime Minister’s Office, the RBI and possibly the Ministry of Commerce, while the Ministry of Industry and many industry-specific ministries involved in the regulatory regime have lost the powers they possessed earlier. Another change has been the increasing importance of investment promotion and facilitation and a reduction in the regulatory functions. The situation of the Ministry of Industry is illustrative of this change. Its Department of Industrial Development was reorganized in 1995, including a change of name to Department of Industrial Policy and Promotion and in concordance with its new name a number of offices for promotional activities were established.27 Indicative of the Ministry’s reduced importance was also the transfer of its important Foreign Investment Promotion Board (FIPB), which deals with those large foreign investment proposals that are still subject to government approval, to the Ministry of Finance in 2003.28 While the absence of reforms has been the dominant trait in the central bureaucracy, the 1990s did, however, witness one sincere attempt to initiate comprehensive changes. In January 1997, the Fifth Pay Commission released its report recommending, among other things, a reduction of 30 per cent in the strength of the central administration, including the IAS, implemented over a period of ten years and accompanied by substantial increases in payments. The aim was to increase efficiency and generally to modernize the administration.29 The report’s suggestions, especially on downsizing, were strongly resisted by the trade unions organizing public employees, and in the end the government agreed to raise wages without reducing staff numbers ignoring the implications for the fiscal deficit. The fate of the Pay Commission’s proposals illustrate the difficulties in implementing major changes in a well-established institution like the Indian central bureaucracy, but

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smaller changes in attitudes do, however, seem to have taken place during the 1990s. An important one is the increased awareness in especially the economic ministries of the need for more specialized expertise (Ghate 1998). This need has apparently been met through the hiring of external consultants or through allowing IAS officers to specialize in certain areas, including those relevant to international trade negotiations in the Ministry of Commerce.30 The pattern of interaction between Indian business and the Indian state also changed during the 1990s parallel to the changes in the organization of business and – to a lesser degree – the changes of the Indian state. Some of the institutionalized channels that had been established to oversee the industrial licensing system had eroded as mentioned above, but even after the virtual abolishment of the licensing system in the early 1990s, the process of periodic constitution of both the Central Advisory Council and some of the development councils continued.31 A report from one of the large industrial corporations even noted a certain resurrection of the advisory councils during the 1990s (Birla Economic Research Foundation 1996, p. 52). One illustration of this survival of the institutionalized mechanisms for government–industry dialogue is the development council for the paper industry, which has continued to function despite the industry being delicensed in 1997.32 The survival and possible resurrection of some of the institutionalized channels for business–government interaction has provided scope for continued mutual exchange of information and policy advice to the government. However, the dominant form of business-state interaction continued to be through informal contacts. The rise of the CII has probably even led to an intensification of these informal but regular links between business organizations and the relevant parts of the Indian central bureaucracy.33 In addition, informal contacts between individual companies and bureaucrats or politicians have remained a prominent feature of business–state interactions, especially for the large private companies.34 These companies have had several channels of influence at their disposal: individual contacts, contacts through sector-specific industrial associations and contacts through the all-industry associations, CII and FICCI. The individualistic pattern of business–state interaction became partly formalized in 1998 with the formation of the Prime Minister’s Council on Trade and Industry.35 The ten corporate members of this advisory council were appointed in their personal capacities and the selected members constituted a virtual Top Ten among Indian industrialists. While the Council has produced several reports on selected reform issues including suggestions for policy changes, critics have

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argued that too little action has followed these suggestions and that the influence of the council therefore must be seen as being quite limited.36 A similar approach with the selection of key individual entrepreneurs was used with the setting up of the IT task force, also placed directly under the Prime Minister’s Office in 1998 (see Chapter 5 above). The work of the task force did result in some specific policy changes, but the regular interaction between the large and increasingly professional industrial associations and various government ministries has probably been much more effective in producing overall policy changes. One indication for a renewed emphasis on the collective voices of Indian business can be found in the reconstituted Council on Trade and Industry in 2001 in which the presidents of the three apex business organizations (CII, FICCI, Assocham) have been nominated as new members. While Indian industry in general has supported the government’s liberalizing policies since the early 1990s, some concerns have been voiced over the danger posed by foreign competitors. In late 1993, an informal group of prominent industrialists – the ‘Bombay Club’ – issued a statement demanding ‘a level playing field’ in their new competition with foreign companies.37 The demands were subsequently supported by different business associations. In March 1996, the Secretary General of CII created a stir, when he published a statement highly critical of multinational companies for their ‘cowboy approach’ to dealing with their Indian partners.38 Despite the government’s initial condemnation of this outburst of hostility against foreign investors, it quietly changed the rules governing foreign takeovers and in 1998 formalized the protective measures.39 These episodes clearly demonstrate the ability of Indian business to react to unforeseen consequences of the open policies and their influence on the government and will to protect their interests. The public nature of the reactions at the same time demonstrates both the still-existing weakness of the domestic industry vis-à-vis foreign companies in the mid-1990s and the fact that the relationship between government and business at the time had not yet reached a level, where policies and their effects were scrutinized carefully before being implemented. One particular area which has seen a strengthening of the administrative capacity of the Indian state and an increase in the interaction between business and government has been in the management of foreign trade. The administrative changes were described in detail in Chapter 5 and they have been supplemented by the establishment of close relations to private industrial interests. During the Uruguay Round

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of trade negotiations, there was only little interaction between negotiators and private business despite the existence of a Central Advisory Council of Trade.40 In May 1989, however, a new advisory body, the Board of Trade, was established in order to strengthen the dialogue between the government and private business. Private industry was represented on the board through the three top organizations (FICCI, Assocham and CII) and through selected individuals (Department of Commerce, Annual Report, various years). The establishment of the board has probably increased the level of interaction between government and business, but according to sources in both industry and in the department, it was only after the establishment of the WTO and the beginning of regular negotiations on the large variety of issues included in the WTO agenda, that a much closer interaction was established.41 The Indian delegations to the WTO negotiations in Seattle in 1999 and Doha in 2003 thus saw a significant participation from Indian business including both CII and FICCI, who also assisted in the preparation of the Indian negotiating position.42 The initiative to this much closer interaction with private business came from the Department of Commerce and was prompted by its need for more specific knowledge of the situation within the Indian industry, given the enlarged agenda in WTO negotiations. A similar need for more expertise motivated the establishment of new links to academic research institutions and individual experts, leading to the establishment of a new kind of government-industryacademia partnership.43 Similar forms of triangular partnership have also been established during the 1990s in other policy areas closely related to new technology paradigm.44 Summing up The 1990s, then, have seen the gradual emergence of renewed and changed forms of interaction between private industry, the Indian state and, in some areas, including intellectual expertise located in different research institutions. These new forms of interaction have been stimulated by the emergence of the CII as the most prominent representative for industrial interests and as an organization that also has established intimate contacts to research institutions, especially those working in areas included in the WTO negotiating agenda.45 Despite some instances of criticism, the CII – and to a lesser extent FICCI – have both been driving forces behind the liberalization policies throughout the 1990s. Especially the CII has been a much more active partner to the government during the 1990s than any previous industry association.46 The erosion of the close relationship between Indian industry and the

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Indian state that happened since the late 1960s thus seems to have been reversed since the late 1980s and early 1990s leading to a renewed and partly changed form of government–business relationship arguably more suited to meet the development challenges inherent in the new paradigm for industrial production and a globalized world economy. A precursor to this general pattern of business–government partnership can be seen in the development within the computer and computer software industry, which has grown exponentially as shown earlier, and which has been characterized by an intimate relationship between a bureaucracy that included a substantial element of technical expertise and an entrepreneurial private sector (Evans 1995; Pinglé 2000).

Brazil: Changes in state–business relations Developments before the late 1980s An account of business–state interactions in Brazil has to start with the system of interaction established during the Estado Nôvo under President Vargas in the 1930s. This was a period that witnessed rapid industrial development and the establishment of an independent private business class. Parallel to these economic changes the Brazilian state expanded, in the process establishing its supremacy over the regional economic and political power configurations (Schmitter 1971; Diniz 1989). Brazilian industry had been sporadically organized in small associations since the 1880s, but it was only during the 1920s that more professional organizations were established (Scmitter 1971, pp. 145ff; Boschi 1979, pp. 58ff). Not surprisingly, it was industrialists in São Paulo who, in 1928, formed the largest and strongest association, the Centro da Indústrias do Estado de São Paulo (CIESP) with the large and growing industrial corporations owned by emigrant businessmen at its core membership. Like the other associations representing industrial interests, the CIESP had as its primary aim to promote industrialization through pressure on the government for tariff protection against foreign competition and against the commercial interest of the strong trading community. An early attempt to form a nationwide industry association was the creation in 1902 of the Centro Industrial do Brasil, which was transformed into the Confederaçao Nacional do Brasil in 1933,on the initiative of the four largest state-based industry associations (Boschi 1979, p. 64). These attempts to form independent industry associations at both state and federal level were, however,

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completely changed under the authoritarian rule of President Vargas (1930–45). Vargas created a new, all-encompassing ‘corporatist’ system of state-controlled interest representation that would fundamentally shape the future organization of business interest and the interaction between state and industry.47 At the behest of the state, a whole range of societal interests, including industrial and commercial interests, became organized in statesupported and state-regulated organizations (sindicatos). Sector-specific industrial sindicatos were normally organized at the state level and aggregated into state-level federations, the most important being the Federaçao da Indústrias do Estado de São Paulo (FIESP). FIESP was created out of the existing organization CIESP to represent industries in the state of São Paulo, but CIESP continued to exist as a parallel, but independent organization (Schmitter 1971; Kingstone 1999, Ch. 4). At the federal level and on top of the organizational pyramid a national industrial confederation, Confederaçao Nacional da Indústria (CNI), was created in 1938 with the regional and sectorial organizations as the basis of its membership.48 This state-dominated system of interest representation remained in place both during the industrial expansion of the 1950s and under the military dictatorship after 1964. The industrial expansion in the 1950s diversified the industrial sector with increasing emphasis on consumer durables and capital goods. Foreign companies, who also became members of the corporatist associations dominated these new industrial sectors. The corporatist system thus united domestic and foreign owned industries within the same organizations while industrial and commercial interests remained separately organized. The Vargas era in Brazil also resulted in the creation and gradual expansion of a modern state oriented towards promotion of industrial expansion. A separate department was created to change civil service recruitment away from the existing system of recruitment based largely on political patronage and towards a merit-based system with an elite corps of civil servants at its core (Graham 1968; Geddes 1990; Geddes 1994, Ch. 3). In addition, new state institutions were created in the 1930s, and in particular in the 1950s, to promote and manage the industrial expansion. In 1930 a separate Ministry of Labour, Industry and Commerce was created, as the state partner to the societal interests included in the corporatist system (Schmitter 1971, pp. 112ff). Later, new financial institutions and large state-owned companies such as Petrobrás, the oil company, were established.49 These state institutions became insulated from the ordinary public bureaucracy (see their name: autarquias) and recruitment to them was largely merit-based.

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However, the strong drive to create a meritocratic Weberian civil service did not outlive the Vargas era. In the expanding central administrative structures, staffing continued to be influenced by political patronage and some of the formally independent institutions lost their meritocratic recruitment qualities. There is nevertheless little doubt that the period from the 1930s until the early 1960s witnessed a significant increase in the bureaucratic qualities of the Brazilian state. A fairly stable group of highly experienced administrators thus occupied the central bureaucratic positions of the state (Sikkink 1991, pp. 25, 193). Contradictory tendencies co-existed within the overall structure of the Brazilian state, however, giving it a peculiar dual or fragmented nature, with a large, inefficient and clientilistic administrative apparatus coexisting with what became known as pockets of bureaucratic efficiency, not only in those parts of the state that were associated with the promotion and regulation of economic activities, but also including the Ministry of Foreign Affairs (Itamaraty) and the central financial authority, SUMOC, later the Central Bank (Geddes 1994, p. 65). The professional staff of the autarquias, mostly economists in the financial institutions and engineers in state-owned companies, became known as técnicos and constituted a stable and highly influential segment of the state (Leff 1968, pp. 144ff; Schmitter 1971, Sikkink 1991; Roett 1999, pp. 91ff). The corporatist system created under the Vargas regime had a contradictory impact upon business–state relationship. On the one hand, the intricate system of interest representation did significantly increase the overall level of organization of industrial enterprises and through the inclusion of the formal associations, as partners in economic policymaking enabled private businessmen to influence government decisions. On the other hand, the government was clearly dominant in the relationship due to its extensive financial and organisational control over the formal associations. The dominance by the state in the interaction between state and organized industry was to some extent modified by the growing strength and importance of industrial interests in the 1950s and by the establishment of new forms of cooperation between businessmen and state institutions outside the formalized corporatist system. One important form of cooperation was through separate and independently working executive groups (grupos executivos). These groups were formed during the 1950s each having responsibility for the development of a specific industry, and they were composed of select businessmen and civil servants dedicated to the promotion of specific industries, bypassing or speeding up the normal ministerial procedures (UNIDO 1979,

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pp. 14–15; Geddes 1994, pp. 64ff). The best-known example is the executive group for the automobile industry who successfully promoted the automobile industry (Shapiro 1994).50 Another form of interaction between business and state was much less formal in nature. The generally weak bureaucratic nature of the Brazilian state and the close contacts between business associations and the administrative personnel resulted in a frequent sharing of personnel, where economists, engineers, accountants, lawyers and other técnicos employed by business associations simultaneously worked for state agencies thus making interactions between the associations and the bureaucracy very intimate.51 The state-dominated nature of the formal business associations in combination with the fragmented nature of Brazilian business meant that the most intense and widespread form of interaction between state and business probably happened through informal, personal contacts between individual businessmen and individual bureaucrats or politicians (Weyland 1998). Overall, the period before 1964 saw the establishment of a system of interest representation and consultation between industry and state, which despite being created and dominated by the state clearly expanded the influence of business over policymaking, especially when taking into account the variety of informal interactions.52 Brazilian business remained fragmented, and business associations did not fully succeed in representing the collective interests of Brazilian industry. The military coup in 1964 that ushered in two decades of authoritarian rule in Brazil altered the political setting for the business–state interaction. The overall system of corporatist organization and statemanaged interaction between state and business remained in place, but some significant changes did take place to modify the working of the system. The new regime had as its immediate ambition the strengthening of the capacity of the state to direct industrial development and a number of initiatives were taken with this intention. A new Industrial Development Commission was established in 1964 to coordinate the activities of the executive groups and in 1969 a new Industrial Development Council (CDI) in the Ministry of Industry and Commerce replaced the Commission and the executive groups were replaced by new Sectorial Groups. These changes were clearly intended to strengthen government coordination of industrial policies, in the form of fiscal incentives and financial support, and they were, from 1974, supplemented by the establishment of an Economic Development Council (CDE) responsible for overall national development plans

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(Mendes 1979; Martins 1985). There is little doubt that these changes strengthened government técnicos, while reducing the formal participation and direct influence of business associations and private industry in general. In addition to the centralization of the regulatory agencies, the Brazilian state expanded rapidly under the military regime through the proliferation of ‘autarquias’ and in particular through the establishment of large state-owned companies. This expansion also served to increase the level of fragmentation within the state thus reducing the ability of the state to act in a coordinated fashion and increasing the opportunities and incentives for business interests to interact with the relevant sections of the state (Boschi 1979, p. 152). In practice, however, the CDI never became the authoritative centre for industrial policies the formal structure indicated. One reason was that the distribution of many of the incentives for industrial development remained the jurisdiction of individual financial institutions and fiscal agencies within the state. Another was that the CDI never succeeded in controlling and coordinating the independent-minded sectorial groups (Martins 1985). The Brazilian state – in its economic apparatus – remained dominated by an elite group of technically competent officials. In their individual postings there were high turnover rates giving them a fluid career pattern, but they retained a high degree of continuity as a group. A significant subgroup remained, however, deeply dependent upon political connections for their postings (Schneider 1991). For its part, private industry continued to be organized through the existing corporatist industry sindicatos and new syndicates were added in particular in the important and growing capital goods sector during the 1960s and 1970s. Increasingly, and probably as a reaction to their exclusion from the formal decision-making process on economic development, industrialists began to establish independent sector-specific associations parallel to the official syndicates and federations.53 As mentioned earlier, this dual pattern of organization had existed all along for the largest industry federation, FIESP, which had its parallel organization CIESP, but during the 1960s and 1970s many other industry associations established their own parallel, independent organizations with the purpose of being independent of government directives. One of the first and increasingly important parallel organizations, Associação Brasileira para o Desinvolvimento das Indústrias de Base (ABDIB), was established within the capital goods industry as early as 1955. An additional purpose of this organization was to support and expand a domestic and locally controlled – in contrast to foreign controlled – capital goods industry, capable of supplying capital goods to the expanding state-owned

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companies (Schmitter 1971; Boschi 1979). This purpose was also high on the government’s industrial policy agenda, and in tandem with the growth of the industry ABDIB became one of the most influential parallel and independent organizations, who would even gain formal acceptance and participate in consultations by various industrial development councils. Though many of its largest members were multinational companies operating in Brazil, these companies were deliberately kept out of the organization’s leadership. Overall, the organization of Brazilian industry was considerably improved during the military regime through the creation and growth of the parallel associations, but at the same time, these new organizations mirrored the sector-wise fragmentation established under the corporatist system. Some of the most important sector associations established during the 1960s and 1970s were found within the capital goods sector in São Paulo (Sindicato da Indústria de Máquinas do Estado de São Paulo (SIMESP) and Sindicato Nacional da Indústria de Componentes para Veículos Automotores (SINDIPEÇAS) among others) reflecting the dominance of this region. FIESP remained by far the strongest and most influential regional organization followed by its sister organization in Rio de Janeiro (FIRJAN). On top of the organizational pyramid resided the national industry confederation (CNI) with the regional and sectorial organizations as members. The federal structure and voting rules in CNI gave a proportionally larger influence to representatives from the less industrialized region and this fact together with the formal dependence on the state made the CNI a less powerful influence.54 This fact and the sheer economic size of Sao Paulo left FIESP/ CIESP as the most powerful voice of the Brazilian industry.55 In a final assessment of the interrelationship between industry and government during the military regime, it is important to notice, that one of the major initiatives taken by the new regime was the exclusion and suppression of labour, including the formal representation of labour through the corporatist system (Mericle 1977; Diniz 1989, p. 113). By default, this class-biased policy worked to increase the influence of the industrialist class, but at the same time the strengthening of the executive state organs and their exclusion from formal participation in decision-making, diminished the direct influence of industrialists.56 These developments led to an overall increase in the autonomy of the state, probably culminating under President Geisel (1974–9), when parts of the business class also campaigned openly against what they saw as a state-dominated economic strategy.57 From the late 1970s there seems, however, to have occurred a gradual opening of the regime and a movement towards closer consultation with private business, but it is

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important to remember that the general attitude of the government all along remained pro-business.58 The economic crisis of the early 1980s brought open criticism of the government from both FIESP and CNI and a demand for more influence over the general economic policy (Boschi 1979, pp. 151ff; Dreifuss 1989, p. 41; Lal and Maxfield 1993, pp. 45–6).59 The overall pattern of fragmentation of both the state and the organized industry resulted in the establishment of informal, but close relations between individual leaders of private companies and government técnicos in the relevant organizations, the so-called bureaucratic rings (Diniz and Boschi 1978, pp. 170–1), significantly influencing industrial policies within different sectors (UNIDO 1979, p. 18). The corporatist system of interaction between private industry and the state thus became more flexible through the involvement of the parallel associations, more fragmented into industry-specific negotiations and through the increase in informal, personalized contacts.60 The lack of strong industrywide aggregation of industrial interests together with the growth of the technical bureaucracy (técnicos) meant that state supremacy remained the dominant feature of state–business interaction. In the assessment of Peter Evans, by the end of the 1980s the relationship between state and business in Brazil represented a situation with a fragmented state with only ‘pockets of efficiency’ having a quite close but mainly informally organized relationship with a similarly fragmented business community (Evans 1995, pp. 60–6). This situation did not qualify, in Evans’s opinion, to classify Brazil as a developmental state, but rather an intermediary situation between a predatory and a developmental state. From the late 1980s onwards The gradual transition to a democratic regime and the changes in the economic strategy challenged the existing state–business relationship from the latter half of the 1980s. Attempts were increasingly made to effect changes in the state, in business organizations and in the interaction between state and business. Although actual changes were modest, they did bring Brazil much closer to an ideal-type developmental state situation and they included some of the features that would be more appropriate for developmental state activities under new global economic circumstances. The changes in the Brazilian state from the late 1980s onwards fell within three main areas. The first important change was caused by the change of political regime. The transition to democracy and the enactment of the new constitution in 1988 meant that the Brazilian Congress – the legislature – became a new important centre of policymaking.

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Secondly, the 1990s new liberalizing policies implied a change in the size and functions of the state. Thirdly, there were new attempts to implement internal reforms of the state apparatus, in particular in the public bureaucracy of the federal state.61 The increased importance of the Congress had important implications for the interactions between the state and the business community and will be discussed in that context. The two other changes concern the size, function and administrative structure of the state apparatus itself. The economic reforms initiated under President Collor dramatically reduced some of the regulatory powers of the state. They were accompanied by a reorganization and centralization of the key economic ministries and a reduction in the overall number of ministries. Some of the ministries were recreated after the fall of Collor, but the overall result of the reforms was that some of the former key economic institutions lost their earlier importance while others gained in influence (Diniz 1997, Ch. 4; Kingstone 1999, pp. 162ff). This meant a decline in the role and importance of the Planning Ministry and the National Development Bank (BNDES), the abolishment of the huge office administering the foreign trade regime (CACEX), and an increased importance for primarily the Ministry of Finance and the Central Bank. The general pattern of change was a relative decline of those state institutions most committed to ‘development’ (meaning an active development policy, including industrial policy, by the state) and a relative rise of those state institutions committed to ‘efficiency and growth’ (meaning less state intervention and more market-oriented policies).62 As a result of the policies during the Collor presidency, the number of civil servants declined, primarily because of a decline in the employment in the autarquias. However, it was only after the election of President Cardoso that the number of civil servants in the different government ministries was reduced.63 From more than 700,000 in the late 1980s, the total number of active public employees had by the end of the 1990s gone down to 500,000.64 This reduction in the size of the state was primarily driven by the need to reduce the large fiscal deficit as negotiated with the IMF.65 By contrast, the number of occupants of top administrative positions – consisting of specially commissioned officers – remained constant, and the number of those in the absolute top increased slightly.66 An important stumbling block in the process was the secure tenure and pension benefits that the 1988 Constitution had provided for public employees (Font 2003, p. 63). One of the priorities of the Cardoso presidency was therefore to amend the Constitution to allow changes in rules governing pensions, retirement benefits and

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employment in the public sector. The amendments were approved by the Congress in 1998, and by the year 2000, a new Fiscal Responsibility Act made it mandatory to limit public payroll expenditure to a specified level (Font 2003, pp. 64ff).67 Along with the reduction in the size of the state, President Cardoso decided to initiate an administrative reform. Administrative reforms aimed at modernizing the bureaucracy had been on the political agenda earlier during the period of military rule. In 1981, a new National School of Public Administration was created to provide training to top administrative personnel, and its training activities expanded significantly in the late 1990s.68 This may have contributed to gradually raising the technical capabilities of the administration, but otherwise little seems to have been achieved in terms of administrative reform, and the provisions of the 1988 Constitution had worked against the implementation of reforms. The Constitution’s introduction of entry exams and tenure for public officials could be seen as modest initiatives to create a state with stronger bureaucratic features, but these provisions also made it difficult to effect administrative changes. However, in 1995, as a clear sign of high priority, a separate ministry for administrative reform (Ministério da Administração Federal e da Reforma do Estado) was created. The ministry elaborated a master plan which in broad terms outlined the reforms deemed necessary to modernize the central administration and making it more efficient. The implementation of reform projects was delegated to the different ministries (Brasil 1995).69 After the end of the first term of President Cardoso and the constitutional changes, the ministry for administrative reform was dissolved, and its functions allocated to other ministries (Font 2003, p. 65). Too little is known about the fate of the administrative reforms in the different ministries to make firm conclusions about the effects of the recent reform efforts in terms of increased efficiency and administrative capability. However, according to some commentators, the changes in the state since the 1980s have had contradictory effects, with the initial period following democratization seeing a decline in state capacity and the reforms of the 1990s contributing to modernizing and increasing state capacity (Weyland 1998, 2000). A negative impact of the reductions in the number of civil servants may have been that many capable civil servants and técnicos left public service for more gainful private sector employment.70 Most likely the net effect has been an increase in the expertise and competence among civil servants (Font 2003, p. 145), and it is well known that the Brazilian state due to its porous and non-bureaucratic nature has been under strong influence from outside experts, mostly economic

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experts, recruited at different times from different academic institutions, often reflecting competing economic approaches (Loureiro 1997). Despite these changes and reforms, the general characteristics of the Brazilian state did not change fundamentally during the 1990s. The fragmentation of the state remains and recruitment to especially top bureaucratic positions are, to a considerable degree, still subject to political patronage. It has been estimated that any incoming president can and will still appoint thousands of civil servants on a patronage basis.71 ‘Pockets of efficiency’ still exist, however, and the reforms of the 1990s may well have worked to enlarge those pockets, make the state leaner and make recruitment and promotion processes more meritocratic, thus increasing its overall administrative capabilities. One segment of the state, the Ministry of Foreign Affairs (Itamaraty), which has been important in Brazil’s management of external challenges, succeeded all along in guarding its strong bureaucratic professionalism. It has always been characterized by separate entrance exams, a separate academy for training its civil servants, and even during the military regime, it had maintained its character of a separate elite corps (Barros 1984). This alone has provided Brazil with an important modicum of state capability relevant to the globalization challenges. The transition from an authoritarian to a democratic political system combined with the economic crisis and the proposals for new policy reforms to motivate changes in the way Brazilian business organized itself from mid- to late-1980s. The establishment of the Congress in Brasilia as a new centre for political decision-making made it necessary for business organizations to establish their presence here in order to lobby for, or, against government policies. The negotiations over the new constitution during 1986–8 thus saw the emergence of several new forms of organizing Brazilian business in order to be able to lobby with members of the Constituent Assembly. These new forms ranged from individual businessmen elected to the assembly for the establishment of a new lobbying organization that for the occasion united business associations from many different sectors (Schneider 1997–8; Diniz and Boschi 2000). The most important new organization was União Brasileira de Empresários (UBE), created in 1986, which united many of the official ‘corporatist’ industrial employers organizations, including FIESP and CNI, but also organizations representing agriculture, commerce and finance (Dreifuss 1989, pp. 58ff).72 The UBE never succeeded in fully uniting the diverse interests of its constituents, however, but it did succeed in exerting influence on the constitution-making process, although the extent of this influence is disputed.73

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The attempts to influence the new constitution became the start of a new form of activity of business organizations that led to the establishment of lobbying ‘embassies’ in Brazil by practically all the larger business organizations, including FIESP and CNI. In the mid-1990s when constitutional changes came on the agenda, business organizations were again actively lobbying in the Congress. Like before, different business associations collaborated in an ad hoc and informal way, but the frustrations among businessmen over their perceived lack of political influence also led to a quite spectacular form of business lobbying (Schneider 1997–8, pp. 112ff; Kingstone 1999, pp. 215ff). In May 1996, CNI and FIESP organized a ‘March to Brasília’ which assembled several thousand businessmen in an impressive public demonstration in front of the Congress. While this unorthodox action by industrialists did not immediately result in the constitutional changes they wanted, the event nevertheless marked a reinvigoration of business organizations and marked the start of a closer collaboration between the two main organizations. The process of change within the business community, in particular within the important São Paulo segment, had started in the late 1980s when new independent organizations began to emerge. Among the new organizations, the most influential ones were established by industrialists critical of the functioning of the FIESP. In 1987, an opposition group representing smaller firms and younger businessmen was formed within FIESP and shortly after, in 1989, this group broke away under the name Pensamento Nacional das Bases Empresariais (PNBE).74 Members of PNBE were frustrated with what they regarded as the elitist dominance of large companies within FIESP and with its syndicalist and corporatist structure (Diniz and Boschi 1993; Schneider 1997–8; Kingstone 1999, pp. 132ff). In contrast, the PNBE offered open membership, a more democratic internal structure and a more activist attitude towards the government. In 1989–90, yet another alternative to FIESP was formed when 30 of the most powerful members broke away and formed what officially was just a think tank, Instituto de Estudos para o Desinvolvimento Industrial (IEDI).75 The formation of IEDI was a sign of dissatisfaction by a significant part of FIESP’s members – a ‘revolt of big business’ in the words of Kingstone (1999) – with its lack of vision and leadership. The vision of IEDI – a democratic, competitive and strong Brazil based on national enterprises – would require the elaboration of a coherent economic strategy by the government, and in particular an activist industrial policy.76 To further that goal IEDI funded a range of detailed studies of the Brazilian economy, which were meant to influence both business and

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official decision-makers with the hope of building coalitions around the organization’s policy proposals. IEDI was quite influential in the early 1990s by first supporting the economic reforms of President Collor and later opposing the president and some of the policies of the new liberalized economic regime. According to some observers, IEDIs influence declined under President Cardoso from the mid-1990s and the prospect for its revival was then seen as very bleak (Schneider 1997–8; Kingstone 1998, 1999). The organization has – despite these predictions – continued its role as an eager proponent of more active policies of the government through the publication of an impressive number of high-quality reports on the Brazilian economy.77 No other business organization has to date been able to develop a similar coherent and all-encompassing response to the government’s economic policy combining both a national and a global economic perspective. The creation of PNBE and IEDI was probably instrumental in starting a process of modernization and reinvigoration in business associations, including both FIESP and CNI. Both organizations were restructured, their analytical capabilities expanded and their interactions with the political system intensified through their ‘embassies’ in Brasília (Diniz and Boschi 2003). CNI, in particular, has been strengthened through the expansion of its role as articulator of Brazilian business interests vis-à-vis the legislature and through its role of coordinator of the participation of Brazilian business in international trade negotiations.78 Brazil’s participation in regional, hemispheric, transatlantic and global trade negotiations has prompted Brazilian business to become much more active in negotiations. Since 1996, CNI has been the organizer of Brazilian Business Coalition with the aim of presenting a unified position for Brazilian business in international trade negotiations.79 The restructuring and modernization of FIESP under a new leadership since mid1990s and a more active policy towards the government has brought the organization much closer to IEDI.80 The result of these recent changes is a significant strengthening and coordination in the political organization of Brazilian business. The interactions between business and government since the late 1980s have been characterized both by attempts to resurrect old types of relationships and by attempts to establish new types of relations that reflect the changes in both business and state structures and the nature of the new challenges posed by economic globalization. In 1988, as part of the new industrial policy, the new civilian government had created a number of groups for sector-wise negotiations between state and private industry under the CDI. When President

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Collor assumed power in 1990, new groups were appointed, but in 1991 this structure of interest representation was changed with the creation of new sectoral chambers, Câmeras Setoriais, that would in some cases include also representatives from trade unions (Diniz 1997; Martin 1997). The creation of the chambers came shortly after the government, as part of its drastic reorganization of the key economic ministries, had abolished the CDI and several other institutions meant to oversee the implementation of industrial policies in collaboration with private industry. The new chambers were seen as institutional means of ensuring collaboration between private industry and the relevant parts of the state with the purpose of developing new growth strategies for a range of different industrial sectors. The most important chamber was the chamber for the auto industry, which succeeded in reaching a comprehensive tripartite agreement for modernizing the industry. More than 25 chambers (assisted by around 100 working groups) were functioning in the early 1990s, all with the explicit purpose of achieving ‘competitive modernization’, and they were supplemented by a central consultative commission (Conselho Consultivo Empresarial de Competividade).81 Private industry was represented in the chambers through the various industry organizations, including both those from the corporatist structures and the independent associations. In contrast to this, the central consultative commission included only individual private industrialists with no formal positions within the business organizations (Diniz 1997, p. 167). The establishment of the sectoral chambers represented a major attempt to initiate a much closer pattern of collaboration between state and private industry (and occasionally labour), but with the advent of the Real Plan and its focus on economic stabilization, the chambers were deactivated (Diniz 2000, p. 83).82 Despite an impressive range of activities, the chambers in their short period of existence achieved only few results in terms of policy changes, the most important ones being the new policies for the auto industry. They did, however, indicate a political will to create a new partnership between private business and the state. In this respect, they constituted a first and positive answer to one of IEDI’s early demands, the creation of an Industrial Policy Council to link up state and society interests (Kingstone 1998, p. 82). The early 1990s also saw a singularly successful attempt by a coalition of business associations to modify the Brazilian port legislation through lobbying in the Congress, although the same business interests at a later stage delayed the implementation of the new legislation (Doctor 2002). In contrast to the new initiatives in linking state and business during the early 1990s, the developments after 1994 under President Cardoso

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clearly went in the direction of a more insulated state apparatus and a partial closure of the formal channels of business influence (Diniz 2000, pp. 91ff). When IEDI in 2001 celebrated its twelfth anniversary, it could with some bitterness look back on a decade that it considered a ‘lost decade’ with a government that would not listen to (its version of) business interests (IEDI 2001). The modernization and reinvigoration of business associations had meant a new activism, including much better preparation for a dialogue with the government on economic policy issues, including industrial policies. This may have independently worked to increase the influence of business on government policies. When the Cardoso government in 1998 formulated a new industrial policy, both IEDI and the CNI had prepared elaborate proposals for an industrial policy.83 Both representatives for private industry were in agreement about the need for an active industrial policy, the need for closer institutionalized collaboration between government and industry, but IEDI was clearly more in favour of a policy that would directly benefit nationally owned enterprises and thus ‘development’, while the CNI argued for general policies that would increase ‘competitiveness’.84 The government’s policy was a compromise, indicated by the title of the policy document – “Development and Competitiveness” – but the policy included only few initiatives specifically targeted at national enterprises, and the proposals for closer institutionalized collaboration between business and government were ignored. During the Cardoso regime it seemed that the São Paulo–based organizations – FIESP and IEDI – met a less responsive government compared to Rio-based organizations – CNI and FIRJAN – whose arguments were more in line with the government’s priority of macroeconomic stabilization (Diniz 2000, pp. 96–100). This situation would change, however, a few years later, when the new President Lula assumed power. In 2002, before the presidential election, FIESP, IEDI and CNI had all issued elaborate proposals for industrial policies.85 IEDI and FIESP once again emphasized the need for an active industrial policy that could provide the support needed for Brazilian industry to be able to compete internationally, including in technologically advanced sectors. Both organizations also adopted more conciliatory tone towards foreign-owned companies, whom they now saw as providing potentially positive spin-offs in terms of exports and technology transfers.86 This more conciliatory tone towards foreign investments brought the two organizations closer to the CNI, who in its very elaborate proposal offered a mild criticism of the recessionary effects of the macroeconomic stabilization policies, in particular the high interest rates and the currency regime. The CNI also strongly

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emphasized the need for export growth, for close consultations with business over international trade negotiations and for attracting foreign investments. There is little doubt, that the São Paulo businessmen had cultivated close relations with Lula before his election as president.87 The industrial policy proposal of the new government in 2003 was rather vague and did not contain any specific concessions to the wishes of the industry organizations, but it did signal a clear commitment to technological development (Brasil 2003). More important, however, was the decision in 2004 to establish a national council for industrial development (Conselho Nacional de Desinvolviment Industrial) and an implementing agency (Agência Brasileira de Desinvolvimento Industrial) connected to the Ministry for Development, Industry and Commerce. These initiatives are very similar to the specific suggestions made by IEDI at least since 1998, and IEDI is along with the CNI represented in both the council and the agency.88 In the conduct of foreign economic policy, especially international trade negotiations, the interrelations between the Itamaraty and the private business interests have also become much closer during the latter part of the 1990s. Closer consultations started in 1993 during the preparatory work leading to the establishment of Mercosur, and it was expanded from around 1996, when the negotiations for FTAA intensified. Once again, it was the start of the FTAA negotiations that prompted both the Ministry and the business community to establish closer contacts.89 Formal business–government interactions were largely absent during the Uruguay Round negotiations, but from the late 1990s they have become much closer in relation to the WTO negotiations and also in the Mercosur–EU negotiations. Itamaraty has, however, maintained its exclusive control over international trade negotiations. Business representatives are not included in the official delegations, but are today ‘sitting next door’.90 The need to include advice over negotiation issues from experts outside the ministry has also been felt, and the ministry increasingly orders studies from universities and other academic institutions on relevant topics. One new development in state–business relations after the return to democracy has been the increase in business interactions with the legislature, the Brazilian Congress. It was mentioned above how industry associations had established ‘embassies’ in Brazil, and how business representatives were active in relation to constitutional changes and how, especially the CNI since the mid-1990s systematically tried to promote industry viewpoints on the issues on the legislative agenda. Economist and other experts within the CNI analyse these issues, and propose

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changes or alternatives after consultations with members of the organization.91 The effects of these new interrelations with the legislative arm of the Brazilian state have not been fully analysed, but according to one analysis, the CNI has been quite successful in supporting legislative actions preferred by private industry and blocking legislation deemed to be against industry interests (Mancuso 2004).92 While being reactive rather than proactive in nature, the results of this systematic lobbying must be regarded as a major improvement from the point of view of private industry, especially when taking account of the many additional formal and informal ways that Brazilian business normally uses to influence state behaviour. Summing up The 1990s have seen important changes in the organization of Brazilian business, the beginning of a reorganization of the Brazilian state, and a few, but significant, changes in the relationship between industry and government. In the organization of the business sector, the wellestablished pattern of formal corporatist organizations has been challenged by the emergence of new forms of association and by the adoption of a more activist orientation towards the state. These changes have led to a modernization of some of the important organizations, including both FIESP and the CNI. While Brazilian business is still fragmented regionally and sector-wise, the strengthening of especially the CNI has reduced the effects of this fragmentation and has increased the overall capacity of the business sector to articulate its demands towards the state, including its legislative arm, the Brazilian Congress. While some sections of Brazilian industry have been hurt by the new more open and marketoriented policies enacted since the early 1990s, Brazilian business has generally been supportive of the overall direction of policies.93 The Brazilian state has been subject to several attempts to both administrative reforms and a general policy of shrinking the state apparatus. The results of these policies have been visible, but modest. The overall capacity of the central state in its economic regulatory organs has probably been strengthened, not the least through the intensified training activities for key officials and the continued use of externally recruited experts, mostly economists. The overall fragmentation and lack of strong bureaucratic coherence has, however, not been remedied. A new kind of fragmentation has, in addition, come about through the increased importance of policymaking within the Congress. However, the strong executive power of the presidency to some extent still modifies the independent influence of the legislature.94

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The interaction between business and the state that is seen as being so valuable for industrial development in the theories of developmental states has changed, but in different directions during the 1990s. The moves in the early 1990s to re-establish a form of new era corporatist system of consultations in different industrial sectors did not last long, and instead the mid-to-late 1990s were characterized by a general lack of institutionalized consultations between industry and government. This does not imply, however, that informal contacts were interrupted, or that the viewpoints of businessmen were ignored.95 In particular in relation to international trade negotiations the links between government and business have been strengthened. By the late 1990s, Brazilian business entered into a much closer dialogue with the government over economic policies, and under President Lula the process of consultation has been formalized with representatives of Brazilian business participating in key policymaking organs. Thus the overall direction of changes in business–state relations have clearly made Brazil come much closer to the kind of embeddedness, that characterizes the ideal-type developmental state, and although there remain strong elements from the old state-dominated corporatist system of interaction between business and government, changes are clearly underway.96

State–business relationship as an explanatory factor Writing in the early 1990s, Peter Evans concluded his discussion of the nature of state–business links in India and Brazil thus: ‘Less internal capacity, more difficult environments, and less carefully defined agendas of involvement combined to put embedded autonomy of the sort that characterizes the developmental state out of reach’ (Evans 1995, p. 70). This assessment may have been true for the start of the period under scrutiny here, but as should be clear by now, developments since the late 1980s and early 1990s indicate significant moves in a direction which has brought both the Indian and the Brazilian state closer to an ideal type of ‘embedded’ developmental state. These changes in business–state relations has happened alongside the introduction of the new and more open economic policies and this alone makes it plausible that the enactment of the new policies have been both influenced by and implemented in close collaboration with local business. The immediate result of the new policies was an increased exposure to globalization challenges and it is similarly plausible that these new challenges have been a strong motivation for the ongoing changes in business–state relations. Thus in both countries a dialectical relationship seems to have evolved between

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economic globalization and increasing collaboration between business and state, that is, the growth of developmental state characteristics. The argument here is that the evolvement of a closer collaboration between government and business has contributed to the relatively successful management of the globalization challenges since the early 1990s that this study found in both countries. The differences in the degree to which India and Brazil have approached the ideal type of business–state interaction may further explain both the variation in policies pursued and the resulting outcomes. Brazil’s more decisive turn towards an open and market-oriented economic policy, and also its more erratic (shifting) pattern of policy change, may thus be a consequence of the more autonomous nature of the Brazilian state and the state’s predominance in business–state relations that characterized the early period of the 1990s. The change towards a more stable and close pattern of interaction with a stronger role for private business that gradually emerged from the late 1990s may explain the stability of the economic policies pursued from about this time and also constitute a significant part of the explanation for the improved economic performance. Today, Brazil seems to have achieved a relatively stable balance in its business–state interactions – a stability that ensures both a certain degree of steadiness in economic policies and also ensures, that the policies pursued will work with, not against, the private business sector, in particular the private Brazilian companies. This may not produce very high economic growth rates in the near future because of the persistent financial burden from the large (and growing) foreign debt, but it does provide a sound basis for avoiding future economic crisis. An additional impediment for a sustained process of economic growth is the still insufficient transition to new paradigm, high-tech industrial activities, but both government and private industry seems well aware of the need for both public and private initiatives in research and development as well as in higher education. The question is only whether public financial means can be found in the future to promote these activities. A final question is how much and in what direction the large and, during the 1990s, increasing presence of transnational companies in the Brazilian economy has affected and will affect the prospects for economic growth. Foreign companies and the competitive pressure they have exerted on local companies may have contributed significantly to the modernization and technological upgrading of the industrial sector. They have, however, also contributed to the erosion of important indigenous technological capabilities – one example being the computer industry – and through their market power they may prevent the

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emergence of new local companies and a crowding out of resources needed to finance the growth of local companies. Their economic dispositions may possibly also result in a drain of financial resources from the country.97 Finally, it remains an open question whether the situation with a large and growing segment of foreign companies have influenced the possibilities for effective organization of business interests and for both the nature and strength of business representation vis-à-vis the government. The less dominant role of foreign companies in the Indian economy may constitute an instructive example of a different situation on these accounts. India’s much more cautious process of introducing an open and market-oriented economic policy can be explained by the better organization and stronger influence of the Indian business class already from the start of the 1990s. This strong position for domestic private industry ensured that policies implemented took into account the capabilities of the domestic business class and made sure that this class did not face unmediated foreign competition, including foreign takeovers, to the same degree as happened in Brazil. As a consequence, India was able to preserve and strengthen its domestic entrepreneurs and thus ensure a solid base for those higher economic growth rates that have characterized the period as a whole. While financial dependency and a strong role for foreign companies have not been as important factors as in Brazil, problems similar to those found in Brazil have emerged in India also. The lack of indigenous research and development efforts by local companies does present formidable problems for the strategy of basing a significant part of the future industrial growth on new, high-tech activities. So far, lack of educated manpower has not been a bottleneck. It has rather been the insufficient public and private emphasis of using existing scientific manpower in more advanced technological fields and the reliance on imported technologies that may pose some dangers to the present optimistic scenario for future economic growth. A common element for both countries has been the gradually emerging attempts to incorporate new elements into the dialogue and collaboration between business and government. In both countries it was acknowledged that the conditions for successful economic performance had changed in a way that makes knowledge-intensive economic activities more important, and this also included the form of knowledge relevant to a successful participation in international negotiations over the rules of the global economic game. Experts from (mostly) independent academic institutions have increasingly been drawn into the policy discussing fora at the initiative of both state

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bureaucrats and business associations. This is hardly accidental, but points to a new need for intellectual capabilities to deal with situations of extreme complexity as in international negotiations, and also to deal with complex financial issues or new technological challenges in traditional industrial production as well as in new types of productive enterprises. The impact from the transition to a more knowledge-intensive form of capitalist development thus also seems to have been felt in the relationship between business and state. From being a relationship between bureaucrats and businessmen, the relationship characterizing developmental state settings today has moved in the direction of a bureaucrat-businessmen-scientist/experts triangular relationship. In both India and Brazil, it has been possible to draw upon available local expertise. This points to the importance of previous state activities in both countries in establishing state-financed education systems of a sufficiently high quality and of the importance of state-financed research centres and research and development activities in general.

Conclusion

Conclusion and general lessons Economic outcomes are the result of a historically developed complex set of interrelations between the state, its evolving policies and institutions as well as private business under local or foreign control. These interrelations operate under the constraints and opportunities offered by prevailing structural conditions (see Figure 3.1), for developing countries, mostly internationally given economic conditions. They also depend on the historically given preconditions, including state structures, some of which may be traced back to colonial times as argued by Atul Kohli (2004). The approach chosen here to illuminate these complex interactions for developing countries as they have unfolded in this time of evolving economic globalization was to study closely two selected cases, India and Brazil, guided by open-ended questions inspired by the theoretical debates on developmental states and on the changing nature of world capitalism. One cannot expect to achieve a comprehensive and fully satisfactory picture of how the two countries have managed the challenges of economic globalization from this exercise alone, and other approaches may lead to different interpretations, but the claim here is, nevertheless, that important and significant conclusions can be drawn. With this caveat, I will, in this final chapter, draw out the conclusions, discuss some of the implications and point to some areas for future research. From the analysis, it is apparent that compared to India, Brazil has since the early 1990s experienced the most severe constraints for economic advancement, primarily because of the constraints set by the debt burden. But it also seems plausible that the stronger position of foreign companies, combined with a more dramatic opening up and a stronger privatization drive, including both the manufacturing and the financial 160

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sectors, has provided local companies with less scope for advancement. In addition, domestic Brazilian companies have been less well organized and have not improved their interaction with state officials as much as has India. This has resulted in economic policies that were less protective of domestic business and more oriented towards achieving the financial stability necessary to placate foreign investors. Despite the problems encountered in Brazil, this study claims that the experiences of both India and Brazil since the early 1990s demonstrate that it has been possible to achieve economic progress under the conditions of an economic globalization which increasingly includes knowledge-intensive economic activities, volatile and dramatically increased financial flows and complex new rules for international economic engagement. Much of the changes that have taken place in the two countries have furthermore been the result of the active management by the two states, thus demonstrating the continued relevance of state developmental activities. It even seems, contrary to what one would expect from a Washington Consensus-inspired viewpoint that the country with the most consistent and active state interventions – India – has managed most challenges significantly better than Brazil, whose policies moved much closer to the ideal neoliberal recipe. It seems plausible that the closer relationship between state and private business that gradually emerged in India in combination with the fact that India’s democratic regime is not particularly conducive to dramatic policy shifts accounts for the much more gradual nature of the policy changes there. Policy gradualism in India resulted in the avoidance of grave economic chocks and ensured sufficient time for domestic economic actors to adapt to the new policy environment, whereas the faster opening of the Brazilian economy resulted in severe weakening of many domestic companies and a strengthening of the control by foreign companies over many sectors of the industrial economy. The position and strength of a domestic class of industrial entrepreneurs seem to have been important for both the nature and the speed of the policy reforms and for the subsequent economic outcome. While the domestic origin and ownership of the reforms was a common element in both countries, the domestic element was more prominent in the Indian case. The Brazilian policy changes were under much stronger influence of external compulsions and international actors and institutions, most importantly the IMF. A final conclusion concerns the problems encountered in both countries with regard to technological advancement. The emergence of a new techno-economic paradigm would seem to raise the demand on companies for technological prowess, and in both countries the authorities seemed to acknowledge the need for

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continuous technological upgrading, but met with little success in their policies towards that end. Domestic companies used the new opportunities to import technologies from abroad, and local development and research activities stagnated or even declined in many companies and started to increase again only from the late 1990s onwards. Overall, the experience of both countries shows the continued importance of the state as a manager of economic challenges, but it also shows that new and closer forms of state–business interactions have emerged and seems to have been instrumental in producing growth-enhancing policies. It can be argued that the changes in state–business relations have been prompted by challenges of economic globalization, but the external compulsions were probably less important than those posed by the external security threats in the East Asian cases. All the changes in the state–business relations mentioned above emerged through the complex processes of domestic change including reorganizations of business associations in both countries that were clearly driven by domestic considerations. It is obviously not possible to transfer the lessons directly from the two countries into general lessons for developing countries. To assess the implications for other developing countries of the experiences of India and Brazil, it is necessary to specify more precisely the conditions under which the two countries have – albeit to different degrees – successfully managed the challenges of globalization. This brings us back to the methodological issues and the selection of the two countries. The argument for selecting the two countries for closer study was that both possessed well-established states capable of reacting to the challenges arising from economic globalization. On this dimension, they represent the better-positioned developing countries whose experience may show what under the best (domestic) circumstances is possible to achieve for less well-endowed countries. On the other hand, there were important differences between the two countries in terms of level of income, degrees of economic dependency, character of political institutions and the regional context. Brazil’s external compulsions were roughly similar to those of other debt-ridden, poor countries, and its experience of a gradual economic improvement makes it a highly relevant example for many of those countries. Similarly, India’s position as a low-income country puts it in a position similar to the majority of other developing countries making its experience relevant to draw lessons from. In both cases, however, differences on other relevant societal dimensions are too great to warrant a direct transfer of their respective experiences into valid policy advice for other countries. In addition, the commonalities between the experiences of India and Brazil found in this study are probably too specific to the two countries so as to constitute a solid basis for formulating both general and

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concrete lessons, especially concerning the specific policy measures utilized. Thus, the general lessons for other developing countries seeking to manage the challenges of economic globalization can probably be found only in common experiences at a more abstract level. One precondition for developing adequate domestic responses to the challenges of economic globalization seems to be a movement towards a kind of productive relationship between states and the local business communities, but not necessarily identical to the embedded autonomy relationship envisioned in the literature on the East Asian developmental states. There are also indications that this relationship today must include an element of independent intellectual expertise in order to produce policy changes adequate to manage the new forms of global challenges and probably also to adapt policies sufficiently to match the conditions prevailing in the country in question. The availability of such domestic expertise would require the prior existence of a functioning educational system and facilities for independent research, conditions that are seldom fully present in most developing countries. Finally, the historically given structural impediments for the emergence of such a state–business relationship both domestically – states and local businesses are mostly underdeveloped – and internationally, where TNCs dominate and international institutions rule, suggest that the chances for a repetition of either the experience of Brazil or that of India are not great for most poor countries. The fact that both India and Brazil has managed much better than predicted earlier demonstrates, however, that one should be careful not to exclude new ways of obtaining similar development promoting relationships between domestic social forces, in particular between the state and whatever domestic business groups are available. What does seem certain is that it will not be possible in advance to point to specific policies that, if enacted by the state in isolation, will produce economic progress.

Broader implications In a broader perspective, the results from comparing the experiences of India and Brazil since the early 1990s raise a number of interesting questions. First, the broad development trajectories of the two countries seem to go against a number of standard expectations as to which explanatory societal variables might reasonably be expected to influence economic growth processes. It is in this context intriguing that it was low-income India – the poorest and most underdeveloped country – that was able to manage globalization challenges the best compared to middle-income Brazil with its much better endowments of

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both economic and human resources.1 The higher rates of economic growth in India were also achieved despite the fact that the country received significantly less foreign investments than Brazil, and despite it being situated in a region where political obstacles meant that economic interactions with neighbouring countries were at a minimum level. In addition, India is significantly more ethnically, religiously and culturally heterogeneous and segmented than the more homogeneous ‘melting pot’, Brazil, and this would in the eyes of many speak against India’s progress. While both countries have had democratic political regimes during the period, India’s parliamentary democracy has been better consolidated and less sprinkled with authoritarian elements than the newly created presidential democracy in Brazil. This difference in political regime characteristics would not lead to a prediction of stronger economic growth in India, and certainly not if the reference point was the highly authoritarian, early developmental states of East Asia. On all these counts, the outcome has been contrary to what different traditions of theoretical thought would have predicted. In contrast, the explanation offered here with its emphasis on the existence of a strong domestic business class in India, with increasing links to the state and being less constrained than Brazil by especially international financial structures, seems to be better. At the same time, though, it confirms key observations on the nature of ‘embedded autonomy’ from the debate on developmental states. The emphasis on changing state–business relations as a key element in the explanation for the degree of success in the management of the globalization challenges does, however, raise important questions about the sustainability of the advances made in both India and Brazil in the period under consideration. An economic strategy based on a comparatively narrow social foundation cannot be expected to be politically sustainable, especially not in a democratic setting. It should be noted, however, that although the policy areas selected for special study in both countries were strongly dominated by evolving state–business coalitions, they have also been influenced by other social forces, and in other important policy areas the influence of a broader spectrum of social forces has been stronger, thus providing an element of political legitimacy to the overall policymaking of shifting governments in both countries. In India, the continued strong position of state enterprises within both the manufacturing and financial sectors was to a significant degree due to the influence of public sector employees, and the reluctance to enact labour market reforms was also caused by opposition from labour unions, leftist political parties and a variety of political

Conclusion 165

commentators. In general, the policy reforms in India have been under constant and critical public scrutiny from many vocal critics, and since 2004, leftist political parties have played a role as the parliamentary safety net under a government committed to continuing the economic policy reforms.2 In Brazil, the voices of labour have been less vocal, but the criticism from the left of the policies of the Cardoso administration paved the way for the victory for the Worker’s Party presidential candidate, Lula, in the 2002 elections. The Lula administration has since 2003 demonstrated that a state–business alliance can indeed be both strengthened and combined with a situation with labour representatives being politically in charge of the state. These recent developments in both India and Brazil demonstrate that a political consolidation of the new economic policy regimes based upon state–business coalitions is indeed possible. In the long run, it remains to be seen whether this broadening of the social foundations of the new economic policies will ensure a continuation of the economic growth process, and whether the coalitions will be able to manage the contradictions arising from the large and possibly increasing social inequalities that the growth process has also resulted in. One way of doing this would be to work towards a broader distribution of the benefits of the growth process in terms of income-generating jobs, a process that has so far proved difficult to initiate in both countries. A different, but related challenge to the sustainability of the new policy regimes and their underlying social coalitions will be to ensure the availability of what according to this analysis in the longer run will be of crucial significance, namely, a well-educated labour force of sufficient size. If knowledge-intensive economic activities are those that will determine the degree of success of individual countries, it calls for an enormous expansion of the research and educational system in the two countries. In the empirical analysis, we observed that the need for technological development was indeed noted by the respective governments, but also that it proved difficult to entice private companies to engage further in independent and expensive research activities. Similarly, one must envisage that it may prove difficult to commit sufficient public resources to the educational infrastructure and to a broad variety of research institutions in a situation with persistent fiscal difficulties. If (or when) the deficiencies in the ‘intellectual infrastructure’ will constitute a barrier for further economic advancement, ways will have to be found to dismantle this barrier, and it is hard to imagine this happening without significant and controversial increases in public investments.

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Theoretical perspectives and future research agenda To end this book, it is appropriate to make a few remarks of a theoretical nature and to speculate on some questions for future research. In a return to the theoretical debate on developmental states, one observation arising from the empirical studies presented here concerns the balance between state and private business in the ‘embedded autonomy’ relationship. It has been a common consensual point in the debate that for this relationship to constitute a developmental state, the state itself has to possess a Weberian bureaucracy.3 Similarly, it has been emphasized frequently that a ‘strong state’ was a necessary precondition for the disciplining of business in order to insure against predatory and rent-seeking behaviour of private capitalists (Evans 1997a). Some even held that authoritarian features would be necessary for the disciplining of both capitalists and industrial workers so as to ensure high growth rates (Kohli 2004). The recent experience of especially India, but also Brazil, challenges these beliefs. As noted in Chapter 6, there have been some attempts to reform the state itself in both countries, but the actual changes effectuated have been minor and do not amount to the creation of strong states. The major changes in both countries have occurred within the business sector itself in the form of new or reformed companies emerging and in the form of new business organizations with new agendas and with a keen interest in seeking improved relations to the state. Similarly, both India and Brazil have been democratic reformers. The consolidated democracy in India has always allowed for societal influences through parliamentary channels, but the most important channel of business influence continues to go through the state bureaucracy. In Brazil, the new democracy opened up new possibilities for influencing policies through the elected Congress in Brazil, and business organizations have actively pursued this new channel, but as in India the most important influence has been through regular consultations with the state bureaucracy. The democratic regimes may have made it easier for organized business to establish links with the state, but at the same time they have excluded the more coercive policies towards the business community of the kind found in the East Asian states. At this stage one can only speculate whether the relative success of the two countries is a result of the cooperative nature of the relationship between state and private business or whether a stronger state ‘dirigisme’ would have provided even better results. One line of argument that may deserve further

Conclusion 167

research in the future is that the authoritarian economic policies followed by the earlier developmental states are no longer appropriate or productive under the economic conditions of post-Fordism and those forms of knowledge-intensive economic activities that characterize the present stage of global capitalism. The increased use of academic expertise and intellectual deliberations in the state–business interactions would also work against the state from imposing different policy solutions in an authoritarian manner. In short, one lesson from the recent experience of India and Brazil might well be that developmental states today have to be democratic states. The results of this study also have implications for the debate on the impact of economic globalization on the role of the state. Both India and Brazil have introduced economic policies that would imply a retreat of the state on the surface, but on closer inspection, it would be more appropriate to characterize what has happened in both countries as a reorientation of the states in their developmental activities. This is very similar to what Linda Weiss (2003), in different settings, has coined the new role for the state or a transformation of the role for the state. In addition, the new role for the state seems, not only in India but also – given the more difficult circumstances – in Brazil, to have been quite successful in producing economic growth. It bears remembering, however, that the successes have been premised on the existence of an increasingly strong and well-organized private entrepreneurial sector. Thus, the proper hypothesis that this study offers for testing in future research could be formulated like this: economic progress for poor countries is indeed possible under economic globalization if guided by a democratic state in collaboration with a well-organized local business community. The policies that result from this combination may be selectively market-oriented as in India or in Brazil, but their main characteristic will be that they conform to the abilities and interests of the local entrepreneurs.

Notes Introduction 1. Goldman Sachs (2003). 2. In a more recent analysis of their industrialization experiences till the end of the 1980s, Atul Kohli (2004) also places both India and Brazil in an intermediate position – designated ‘fragmented-multiclass states’ – that would not lead to a prediction of successful developmental state policies in the two countries. 3. Riordan Roett (1992, p. 179) argued in a similar fashion in the early 1990s that it was most likely that the traditional elements of the Brazilian society would continue to thwart modernization and development. 4. One could also mention Alice Amsden’s study (2001) of the ‘rise of the rest’ which includes both India and Brazil, but is much broader in scope.

1 Globalization, Contemporary Capitalism and Its Challenges for Developing Countries 1. An alternative view which sees globalization as being a policy of liberalization or opening (see discussion in Sumner 2004) is ignored here, as the main concern of this book is precisely the effects of such a policy in selected developing countries under the condition of globalization (defined as interconnectedness). 2. Another argument holds that if international activities (trade, investments and so on) are measured against domestic material production in contrast to domestic production including services and the transactions of today’s large public sector, the degree of globalization measured in conventional ways is far higher than 100 years ago. 3. The revival of Karl Polanyi’s book The Great Transformation (1957) points to an increasing feeling among social scientists of epochal changes taking place. See also Arrighi (1994) for a treatment of epochal changes in the history of capitalism, and Burbach and Robinson (1999) for a recent assessment. 4. More generally, Robert Cox has noted that the internationalization of the state tends to give precedence to certain state agencies. He mentions here, as examples, ministries of finance and prime ministers’ offices (Cox 1981, p. 146). 5. This focus on states and domestic business does not mean that other social groups, most obviously industrial and agricultural workers, are not immediately affected by economic globalization. The priority given to states and business is only a recognition of the fact that they constitute the dominant actors that are most likely to possess a capacity to react strategically to challenges of economic globalization (see the next chapter). 6. For a competent discussion of dependency theory, see Hettne (1990). 7. FDI shares for developing countries in 2000 are relatively low because of the exceptionally high level of FDI flows among developed countries this year. 168

Notes 169 8. It should be noted that FDI stocks are difficult to estimate and are, in a number of cases, not available. 9. Since 1995, UNCTAD has included the 50 largest TNCs from developing countries in their annual World Investment Report. 10. Note that these economic benefits are only potential benefits that require intelligent government regulations to materialize (see Kumar 2002). 11. UNCTAD has estimated that in 1993 about 1/3 of world trade is intra-TNC trade, another 1/3 is export by TNCs to other parties and the last 1/3 of world trade is conducted between unrelated parties (UNCTAD 1995, p. 193). The increase in global network structures controlled by large TNCs indicates that their control over world trade has probably increased during the 1990s (Dicken 2003, Ch. 8). 12. For examples of the breadth of themes discussed, see the collections of papers in Amin (1994), Hollingsworth and Boyer (1997) and Boyer and Saillard (2002). Key works in the regulation school include Aglietta (1979), Lipietz (1987), Boyer and Durand (1997) and Boyer and Saillard (2002). Hoogvelt (1997) has been a key source of inspiration for this section. 13. The genealogy of the regulation theory includes far more than Marxism although the concept of Fordism comes from the Italian Marxist Antonio Gramsci (Boyer 2002). A fundamental conception is that economic activities always are embedded in crucial social, political and legal relations and must be understood in this totality of relations. 14. An overview of the early discussion within the regulation approach over Fordism and post-Fordism can be found in Noël (1987) and Jessop (1990). A recent critique is Grahl and Teague (2000). 15. Tickell and Peck (1995) argue that for a workable post-Fordist ‘solution’ to work, a new institutional fix will have to be developed at the global scale, in contrast to national level institutions under Fordism. 16. Boyer and Saillard (2002) give a number of illustrations of this. 17. The following presentation is inspired by Hoogvelt (1997, especially Ch. 5). 18. For an overview of different, but nevertheless quite similar, approaches, see Dicken (2003, Ch. 4). 19. I prefer to use the term ‘mental or intellectual labour’ instead of the term ‘knowledge’ as preferred by the OECD because of its emphasis on the productive use of knowledge, rather than the mere possession of knowledge. 20. Boyer and Durand (1997, p. 144) have also emphasized the increased importance of mental productive activities and call it ‘the most profound transformation’. Oman (1999, p. 51) also notes the increasing importance of ‘human intelligence, creativity, flexibility, and knowledge’. 21. Some of the statistical problems involved in measuring up a knowledgebased economy are dealt with in OECD (1996). Perez (1985, p. 451) also notes that the new techno-economic paradigm tends to make irrelevant traditional statistical concepts, the distinction between manufacturing and services being one example. 22. Oman (1999, p. 53) also notes that in important respects flexible production is well suited to developing countries. 23. The debate had started with the publication of Fröbel, Heinrichs and Kreye (1977). See also, Kaplinsky (1989).

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24. Lipietz’s theory was strongly (and somewhat unfairly) criticized by Alice Amsden (1990) for not being able to provide a coherent and full explanation for the process of industrialization in the periphery (which was clearly not its aim). 25. One aspect that has not been mentioned here is the locational aspect, where geographical location close to the larger markets arguably has a separate and independent influence on the choice of industrial strategy. 26. Lall (2004, p. 25). Further indications to support this claim exist in the literature dealing with technology transfers from TNCs to developing countries. For a brief introduction, see Lall (1993) and Freeman and Hagedorn (1994). 27. The links between the ‘third industrial revolution’ and finance have also been noted by Philip Cerny (1994, p. 329): ‘... finance embodies, reinforces, and catalyses all of the other characteristics of the Third Industrial Revolution ...’. 28. Yaghmaian (1998) regards the structural adjustment policies and the establishment of the WTO as elements of a new post-Fordist international regulatory regime. 29. Apart from the lowering of trade barriers and the abolishment of national support measures, the WTO now requires member countries to adhere to specific domestic regulations concerning protection of intellectual property rights, and potentially also the whole organization of the services sector. 30. Official rhetoric naturally sees the implementation of the common set of WTO rules as conducive to economic growth, while critics point to the impediments to growth due to the restrictive and biased nature of the rules (see Wade 2003).

2 The State and Economic Development in Developing Countries 1. The state will here be defined as a public organization capable of being a social actor. This means that the state seen as an arena of social conflicts will be largely ignored, although conflicts within the state may occasionally be included in the empirical analysis. Being concerned mostly with economic policies that are the prerogatives of the central government (in contrast to local governments), the focus will be on central government organs responsible for economic policies. 2. To separate late-developers such as Germany and France from today’s developing countries, the more awkward term ‘late-late-developers’ is sometimes used. 3. It should be noted how the discussion is framed within an overall modernization perspective (in contrast to a dependency perspective), where developing countries are expected to be able to follow in the footsteps of developed countries. This also opens up for comparisons across the divide between developing and developed countries. 4. It should be noted that the discussion has moved away from a debate over the identification of a ‘correct economic policy’ (liked by many economist) towards a discussion of the social, political and institutional conditions under which successful policies are likely to emerge. The implication, on which I agree, is that there is no universally fixed formula for a successful policy. One can only hope to be able to identify broader parameters necessary for developmental success.

Notes 171 5. As late as in 1997 it was still possible for die-hard economic liberals, acknowledging the important role of state dirigisme, to maintain that the economic success of East Asia would have been even greater had the states not interfered with the market mechanism (see Deepak Lal’s essay from this year, reprinted in Lal 2000, pp. 156–7). 6. The concept ‘embedded autonomy’ had been briefly introduced earlier (see Evans 1989). 7. Evans (1995) listed four different but slightly overlapping role states can choose among in their interventions vis-à-vis private business and the economy in general: custodian, demiurge (state as entrepreneur), midwife and husbandry. 8. A separate argument for taking business seriously is the ‘capital votes twice’ argument (Haggard, Maxfield and Schneider 1997, p. 38). Private business not only exerts influence on the formulation of state policies, it also influences the outcomes of such policies through its investment decisions. 9. In short jargon, this distinction is between ‘forcible Fordism’ and ‘participatory post-Fordism’. 10. It could be added, that the part of the Indian bureaucracy dealing with the electronics industry was perhaps the least ‘bureaucratic’. Many of the key ‘bureaucrats’ were in fact scientists and technocrats, not Weberian generalist civil servants (Pinglé 2000, p. 126). 11. Critics of the Irish economic ‘miracle’ have pointed at the heavy reliance on foreign investments and the growing social inequalities as questionable features of the ‘miracle’ (see Kirby 2005). 12. This is very much in line with the emphasis in Haggard (2004) on the variety of possible institutional arrangements associated with developmental states. 13. Wade (1990, pp. 145–8), however, mentions briefly the Taiwanese government’s efforts to assist private companies with export marketing.

3 The Analytical Framework and the Two States 1. This argument is of course reminiscent of the famous Marx-dictum: ‘The country that is more developed industrially only shows, to the less developed, the image of its own future’ (Marx 1969, p. 87). 2. Comparisons based on economic data between different countries are difficult to make, and they are highly dependent upon the choice of currency conversion. I base my remarks here on comparisons based on international market prices (in constant 2000 US$) as indicated in the World Bank, World Development Indicators (online). Income differentials between the two countries would be less and India’s total GDP larger than Brazil’s if based on Purchasing Power Parity measures as is evident from the long-term data presented in Maddison (2001). 3. It is interesting to note the perception of the other country in the public debate in the two countries. In Brazil, critics of the country’s extreme social inequalities have used the term ‘Belindia’, meaning that Brazil can be seen as a combination of rich (and small) Belgium and poor (and large) India. References to India are thus mostly associated with the country’s extreme poverty. In India, observers sometime refer to the danger of ‘Brazilianization’, meaning a combination of authoritarian rule and social inequality, which are

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Notes seen as the most prominent features of the country (while its higher-income level is ignored).

4 Brazil 1. A good survey of the economic and industrial development during the 1970s is found in World Bank (1983) and for the 1980s: Fritsch and Franco (1991). A general survey of Brazil’s economic development is found in Baer (2001). Incidentally, Brazil nicely illustrates how strategies of import substitution and export orientation may be combined in a kind of ‘outward-looking import-substitution strategy’ see also Fritsch and Franco (1991, p. 67). 2. According to World Development Indicators (WDI), Brazil’s industrial economy (measured in industrial value added) was in 1980 only surpassed by the US, UK, Germany, Japan, France, Italy, Canada and probably the USSR. Foreign direct investments were of similar magnitude in Mexico and Brazil in the early 1980s. 3. One indication of ‘the lost decade’ was that per capita income was estimated to be lower in 1990 than in 1980 (Banco Central, Annual Report 1999, Table 1.1, p. 15). Other estimates indicate, however, that the 1980 level of real income was regained in 1986 or 1987. 4. Annual inflation rates climbed from the already high 110 per cent in 1980 to 1476 per cent in 1990 (Erber and Vermulm 1993, Table 1.2, p. 13). 5. The computer and informatics policy in Brazil attracted considerable academic interest during the 1980s (Tigre 1983; Evans 1986; Evans and Tigre 1989; and contributions in Schmitz and Cassiolato (eds) 1992). See also Evans (1995, pp. 160–8) for a brief overview. 6. These provisions were codified in articles 170 to 177 of the constitution. See República Federativa do Brasil (1988). 7. República Federativa do Brasil (1986, pp. 133–43). The approach to industrial development differed sharply from the previous government’s approach that had emphasized investments in state-owned companies in strategic sectors, República Federativa do Brasil (1980, pp. 74–6). 8. For some imports from state enterprises and enterprises receiving specific tax exemptions or subsidized credit lines a formal ‘similarity test’ still exists, but there is no surveillance mechanism established to implement it (OEDC 2001a, p. 151). CACEX was replaced with a much smaller office and the staff was reduced from around 1500 to 300 (GATT 1993, p. 67). 9. The progress of privatization is reported in the annual report of Banco Central and is organized and monitored by BNDES. See also OECD (2001a, pp. 158ff). 10. Two-thirds of this amount came from the sale of companies belonging to the federal government, one half of this from telecommunications alone. The last third came from the sale of state government companies (BNDES website). 11. Data on the origin of foreign investments can be found at the Banco Central website. 12. Decennial growth rates differ slightly from those calculated in OECD (2001a, p. 30). It should be emphasized once again, that this book does not touch upon the question of the social impact of the policies in the 1990s. For

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13.

14. 15.

16.

17.

18.

19.

20.

21.

22.

a brief examination of the impact on poverty, income distribution and employment, see Amann and Baer (2002). The BNDES published a report on ‘competitive integration’ in 1989 (Kingstone 1998, p. 76), the national business chamber, Confederacão Nacional da Indústria (CNI), published a report on industrial competitiveness in 1988 (Fritsch and Franco 1991, pp. 77, 147), and the academic debate on competitiveness had been going on for some time during the latter part of the 1980s. See, for example, Ferraz et al. (1992). The value of fiscal incentives increased more than threefold between 1994 and 1999 (MCT 2001: Table 4, p. 28). The report was backed by 85 separate reports on different industries and economic sectors, and included reports on national and international institutional factors. All reports are accessible on the internet (www.mct.gov.br/ publi/Compet/Default.htm) The ‘Custo Brasil’ is an expression originally coined by the national industry federation, the CNI, to indicate the large and complicated system of domestic taxes that business faces in Brazil, the bureaucratic procedural impediments and the deteriorating physical infrastructure, most importantly, the transport system. ‘Avança Brasil’ has its own website (www.abrasil.gov.br) and as a part of the programme, two ‘green books’ on information society and on science, technology and innovation, respectively, have been produced by the Ministry of Science and Technology (MCT 2000a, MCT 2001). During the 1990s, the term ‘industrial policy’ was changed to ‘competition policy’ and those critical of the policies of the government argued precisely for the need for an industrial policy. A stylized presentation of the two idealtype positions, developmentalism versus monetarism/neo-liberalism, is found in Bonelli (2001). Note also the politically adroit combination of the terms ‘development’ and ‘competitiveness’ in the title of the 1998 industrial policy, which in practice contained very little of ‘development’ thinking. Brazil has traditionally been a large exporter of automobiles, but in 1993 the value of imported cars exceeded export values for the first time, a pattern that remained during the rest of the 1990s, despite the export incentives included in the special automobile regime. A similar emergence of a trade deficit happened in the important and related auto-part industry during the 1990s when the Brazilian companies became dominated by foreign companies. The automobile regime is described in Tigre et al. (2000 pp. 206–9) and in WTO (1997, p. 49). The regime was terminated by the end of 1999, and import tariffs were fixed at a relatively high level, around 35 per cent (Banco Central, Annual Report 1999, p. 117). The resulting increase in domestic prices led to a sharp reduction in imports. The decline in traditional central-government policy interventions also made the relevant policy instruments, mostly fiscal incentives, managed by individual state governments in Brazil more important. Before 1996, the industrial classification was not detailed enough to make possible the identification of the sectors selected by the OECD. The OECD classification is taken from Hatzichronoglou (1997, p. 6) and covers aerospace, office equipment (data processing equipment), electronics and pharmaceuticals. In 2000, the share of these industries topped at 8.7 per cent.

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23. Moreira and Correa (1998, p. 1863) give the figures for 1989–96, while Laplane and Sarte (1999, p. 9) provide data for 1997. 24. Rocha and Kupfer (2002) report similar findings on the basis of a smaller sample of leading companies. 25. Moreira (1999, p. 29) reports the same trend, but even higher foreign shares (43.4 per cent in 1997). Export by foreign companies to Mercosur involves mainly export from the 100 per cent foreign dominated Brazilian automobile sector. 26. Data from the census of foreign investment (Census 1995 and Census 2000) can be found at the Banco Central website (www.bcb.gov.br). Most of the included companies had majority foreign ownership. 27. Interestingly, companies interviewed during 1988–9 expressed optimism concerning the future. Besides expecting rising sales and rising exports they also expected the presence of foreign competitors to remain at a constant level (Ferraz et al. 1992, pp. 80–4). 28. Data on importers of technology for 1998–9 show nationally controlled private enterprises accounting for 46 per cent of technology agreements; foreigncontrolled enterprises accounted for 42 per cent while state-owned enterprises accounted for 12 per cent. Data accessed at the website of the Brazilian industrial property office, INPI, www.inpi.gov.br. Note that the data only give the number of agreements. It does not take into account the different nature and size of the technology transfers in each agreement. There were very few agreements for collaborative research and development. 29. Estimates from 1993 put the R&D expenditure/sales ratio of companies at 0.66 per cent (Matesco and Tafner 1996, p. 24). A recent survey by the IBGE (Pesquisa Industrial de Inovação Tecnológia) shows that in 2000, 56 per cent of large enterprises had R&D activities, against 10 per cent for all enterprises, and the large enterprises accounted for 67 per cent of all full-time research personnel (www.ibge.gov.br). 30. A government report on the utilization of the fiscal benefits offered as part of the 1993–policy gives the complete list of companies with supported programmes (MCT 2000b). The list is topped by Petrobras and Embraer who received 40 per cent of the total value of fiscal incentives offered in the 1994–2000 period. The list includes well-known transnational corporations such as Fiat, Volkswagen, Electrolux, Mercedes-Benz, Nestlé, Dow Chemicals, Robert Bosch and Pirelli, and foreign subsidiaries probably received onethird of total incentives offered. 31. The story of the development of the ‘informatics’ sector in the 1990s is based upon Tigre and Botelho (2001). 32. Data-processing equipment, consumer electronics, telecommunication equipment and electronic components. 33. The government’s 1993 SOFTEX programme aimed at increasing software export to an annual 2 billion US$ in the year 2000 and obtaining a 50 per cent domestic market share for local companies. Preliminary data show software exports in 2000 at a level around 100 million US dollars only (MCT 2001, p. 147). A sector with an experience similar to the informatics sector is the automobile parts industry which is now almost fully controlled by foreign companies, as mentioned earlier. 34. The story of Embraer is told in Goldstein (2001).

Notes 175 35. The competition with Bombardier included disputes that were referred to the WTO dispute settlement mechanism over allegedly unfair state support. 36. Superintendência da Moeda e do Crédito (SUMOC) was established in 1945. The historical development of Brazil’s financial system is well described in Goldsmith (1986), Maxfield (1997, Ch. 8) and in Puga (1999). The reforms since 1964 are described in Hermann (2002). 37. Goldsmith (1986, p. 374) provides an overview over the financial institutions and their relative size in terms of financial assets in 1980. The abovementioned institutions (Banco Central, Banco do Brasil, Caixa Econômica Federal, private banks and the state-owned development banks) managed two-thirds of all financial assets in the country. 38. Foreign banks increased their share of deposits in private banks from 11.6 per cent in 1970 to 15.2 per cent in 1980, and their share of loans increased even more, possibly because of their strong role in channelling foreign funds into Brazil (Baer 1986, p. 28). Private banks were, however, dwarfed by the huge state-owned banking sector. 39. According to data on company finances published in the Brazilian magazine Visão, companies operating in the financial sector consistently obtained higher profits than all other companies throughout the 1980s (Visão 1990). 40. A brief summary of the financial sector reforms can be found in Cysne (2000), OECD (2001a) and Hermann (2002). 41. Article VIII of the IMF obliges subscribing countries to avoid restrictions on current account payments and to maintain currency convertibility. 42. The changes in the banking system are described in Puga (1999), OECD (2001a) and Baer (2001, pp. 301–22). 43. The so-called Basel Accord 1988. 44. Data on the development of the banking sector has been collected from Freitas (1999), Puga (1999) and from Banco Central (www.bcb.gov.br, section on Evolução do Sistema Financeiro Nacional). 45. The development of the Central Bank is described in Maxfield (1997, pp. 133–6) and Luporini (2000). 46. In the months around the financial crisis of 1999, three central bank governors came and went. The fourth, Armínio Fraga Neto, who came directly from a job in New York with the international financier George Soros, retained his position and was subsequently hailed by many as the saviour of both Brazil and of the reputation of its Central Bank (Newsweek, 3/9, 2001). When President Lula took office in 2003, he also appointed a new governor as part of his new economic team. It was clear from his inaugural speech that the new governor saw himself as a part of the new government (‘Henrique de Campos Meirelles: Inauguration speech’, BIS Review 3, 2002, www.bis.org). 47. The alleged symbiotic relationship with private financial institutions was emphasized by Paulo Nogueira Batista, Jr., in connection with the bank crisis of 1995 (reprinted in Batista Jr. 2000a, pp. 263–5) and reiterated in an interview with the journal JB online in December 2000 (Batista Jr. 2000b). 48. Using Maxfield’s distinction the bank has probably increased its discretion over the tools with which it tries to reach those goals that are still mainly set by the government (Maxfield 1997, pp. 19–22). OECD (2001a, p. 63) reports an increased investor confidence in the Central Bank.

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49. The story of the 1997–9 crises is told in Flynn (1999), Averbug and Giambiagi (2000) and OECD (2001a). 50. Details of the IMF programmes can be found on the IMF website. 51. In Brazil the Portuguese acronym Mercosul is used, while the Spanish acronym Mercosur is commonly used internationally. 52. On the conflicts and complementarities between globalization and regionalization, see Oman (1994, pp. 35–6). 53. ‘No automatic alignments’ became a catch phrase of Brazilian diplomacy during the 1970s. See also Schneider (1976). 54. The early history of Argentine–Brazilian cooperation and of the establishment and development of Mercosur is told in Manzetti (1990) and in Pereira (1999). A good survey of Mercosur objectives and institutions is found in Laird (1997). 55. For more information on the working of Mercosur, see the contributions in Roett (ed.) (1999). 56. The story of Brazil in GATT is told in Abreu (1993, 1998) and in Caldas (1998). The following account is based on Caldas (1998). 57. A detailed story of the Uruguay Round of negotiations is found in Croome (1995). One important reason for Brazil’s reluctance to include services in the negotiations can be found in the informatics policy mentioned earlier that was aimed at creating a nationally owned IT service industry (Caldas 1998). 58. The relative isolation of the Itamaraty and the strong influence on the negotiations from individual officers is a key critique raised in Caldas (1998). 59. As mentioned earlier, the most important office, CACEX, was abolished and its remaining functions transferred to another agency. The staff was reduced from 1500 to 300, GATT (1992, p. 67). 60. The changes in the organizational structure throughout the 1990s and the policies implemented to conform to WTO regulations can be seen in GATT (1992), WTO (1996; 2000; 2004). 61. Anti-dumping cases and other forms of restrictive measures initiated by Brazil are listed in the GATT/WTO trade policy reviews. (See sources cited in note 60 above. Before 1991: 4 cases, 1992–6: 66 cases, 1996–9: 72 cases initiated, 2000–4: 37 cases.) 62. Motta Veiga and Iglesias (2002, p. 89) present a long list of problems and lacunas in the institutional set-up for dealing with the international economy. 63. Information obtained through interviews with officials in Itamaraty and with researchers at various universities conducted in January 2001. 64. The dispute with Canada is still going on. Updated information on the dispute can be found on the WTO website.

5 India 1. There are many surveys (employing different types of periodization) of India’s economic policies and performance over the years. I have used here Sandesara (1992), Swamy (1994), Joshi and Little (1994), DegnbolMartinussen (2001). The goal of economic self-reliance was officially proclaimed in the Third Five Year Plan (1961), but the various more specific

Notes 177

2.

3.

4.

5. 6. 7.

8.

9. 10.

11. 12.

goals were present from the early to mid-1950s. See Nayar (1972) and Singh (1974). Nayar (1989) designated the period 1969–73 as ‘The Grand Era of Nationalization’. In addition to the above-mentioned, a steel mill and some engineering companies were also taken over by the state. As a result of the wave of nationalization, private companies’ share of corporate sector’s total paid-up capital declined from around 50 per cent in the early 1970s to 30 per cent by the end of the decade (Pedersen 2000, p. 269). India’s policy towards foreign investments is well described in Encarnation (1989) and Kumar (1994) who designates the 1968–79 period ‘the restrictive phase’ (ibid., p. 25). Kumar (1994, pp. 56–7) provides detailed data for 1975–6 to 1980–1. Encarnation (1989, p. 158) provides a broader picture of the changes between 1966 and 1982. He also notes that the level of foreign control was significantly lower in India than in Brazil (ibid., p. 6). The expression is attributed to the economist Raj Krishna, see Rudolph and Rudolph (1987, p. 223). The loan of 5 billion, Special Drawing Rights (SDR), was the largest issued by the IMF at the time. There is a vast literature on Indian politics. For broad analysis of the decline of Congress dominance, see Rudolph and Rudolph (1987, pp. 178–207). An early assessment of the ‘decay’ of the political system is Manor (1983). As an illustration, the policy changes were on the one hand publicly denounced by several groups of eminent Indian economists (their manifestos were reported in the Indian magazine Mainstream, 7 September and 16 October, 1985), and on the other hand the reforms were praised as ushering in an ‘Indian miracle’ in both local media and in the US (Gwin and Veit 1985). Reactions by local media are listed in Kohli (1989). The policy changes are summarized in Joshi and Little (1994, pp. 62–3) and Swamy (1994, pp. 189–91). The share of foreign controlled companies in total sales and production of a large sample of non-government, non-financial public limited companies was 17–18 per cent in 1982–3. This share rose to 20–1 per cent in 1990–1. Own calculation based upon RBI studies on Foreign Controlled Rupee Companies and Public Limited Companies, respectively (Reserve Bank of India Bulletin, May 1987, June 1988, December 1993 and November 1994). The share of foreign companies is probably overstated, as some private limited companies are included in samples of foreign controlled companies. The relationship between the size of the government and the size of the nongovernment corporate sector remained largely constant during the 1980s (Pedersen 2000, p. 269). Athreye and Kapur (1999), however, report an overall decline in the share of foreign companies from 31.1 per cent to 25.6 per cent of sales in the manufacturing sector between 1980–1 and 1990–1 on the basis of samples of large companies. A discussion of the new textile policy can be found in UNIDO (1995) and in Roy Chowdhury (1995). The policy changes are listed in Lok Sabha Secretariat (1985b) and in Joseph (1997, p. 26).

178

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13. India did, however, with remarkable success maintain its ambition of achieving technological self-reliance in large mainframe computers. 14. There is a huge literature dealing with the early development of the Indian electronics and software industry. I have relied on Evans (1995), Subramaniam (1992), Heeks (1996), Brunner (1995) and Joseph (1997). 15. The events leading to the crisis is well described in a large number of works on the Indian economy. In my opinion, the best account of the immediate events is given in Government of India, Economic Survey 1991–2 (Part I – General Review), New Delhi. See also the introductory chapter in Jalan (1991). There are still discussions over the importance of the increasing fiscal crisis of the Indian state during the 1980s for the onset of the crisis. Some even see the fiscal problems as the core of the crisis with the external shocks being of marginal importance. See Joshi and Little (1996, pp. 14–15) and Degnbol-Martinussen (2001, pp. 138–40). In addition to the abovementioned factors the demise of the Soviet Union around the same time impacted negatively on India’s external trade position. 16. There has been an intense debate on the role of the two institutions in promoting – even dictating – the new policies. For a discussion of possible explanations for the initiation of the reforms, see Pedersen (2000). 17. From 1992–3 onwards, Indian critics of the liberalization policies organized in Public Interest Research Group/Delhi Science Forum and Alternative Survey Group (1999; 2002) have voiced their opposition by publishing annual Economic Surveys as alternatives to the survey published by the government. 18. It is possible to trace the successive reform elements through the government’s annual Economic Survey. A useful overview of over ten years of economic reform was provided by The Economic Times, 23 February 2001 (‘The 10 years that changed India’). A detailed year by year evaluation of the economic reforms based upon the Indian government’s annual economic survey is found in Desai (1999). 19. Government of India, Economic Survey (2001–2, p. 142), gives a summary of the removal of quantitative restrictions on imports. 20. According to the RBI (2003) Report on Currency and Finance (2001–2, p. VII-5), weighted average import duties fell from more than 70 per cent in the early 1990s to around 25 per cent in 1996–7. The aim of the government is to end with a 10 per cent tariff on raw materials and intermediates and 20 per cent on final products. 21. Government of India, Economic Survey (1990–1 to 2001–2). The trade deficit was 3–4 per cent of GDP in the 1980s and returned to that level after 1995–6. 22. FDI figures were not available from the RBI for a period in the 1980s, but figures published by OECD investor countries can safely be assumed to cover actual inflows before the 1990s. The special status of Mauritius and investments from non-OECD countries explain part of the gap between the two sets of figures in the 1990s (‘An Investors Haven’, India Today, 30 November 1995). Mauritius alone has accounted for close to 40 per cent of all FDI inflows after 1991. 23. Information of the privatization (or ‘disinvestment’) programme can be found on the website of the Department (now: Ministry) of Disinvestment (www.divest.nic.in), which was created in December 1999. See also Baijal (2002).

Notes 179 24. A good overview of India’s macroeconomic performance during the 1990s is given in Acharya (2002). 25. The strategy for technological development from the early 1950s to the early 1980s is described in detail in Nayar (1983). 26. The statement is reprinted in Lok Sabha (1985c). 27. The policy statement to this effect is reprinted in Lok Sabha (1985b). 28. This diagnosis of technological developments was made in the Seventh Five Year Plan document. See Planning Commission (1985, pp. 357–8). 29. The relevant passage of the industrial policy statement is worth quoting, ‘Indian companies will be free to negotiate the terms of technology transfer with their foreign counterparts according to their own commercial judgment. The predictability and independence of action that this measure is providing to Indian industry will induce them to develop indigenous competence for the efficient absorption of foreign technology. Greater competitive pressure will also induce our industry to invest much more in research and development than they have been doing in the past’ (Government of India 1991b, p. 6). 30. A brief summary of the 1993 statement is provided in UNIDO (1995, p. 84). 31. In the Seventh Plan (1985–90), resources allocated to Science, Technology and Environment constituted 1.4 per cent of total plan outlay. In the Eighth (1992–7) and Ninth Plan (1997–2002), the proportion reached 2.1 per cent, and the Tenth Plan (2002–7) only envisages a 2.0 per cent share of total outlay (Government of India, Economic Survey 2004–2005). 32. The first software export promotion policy goes back to 1972 and a revised policy was formulated in 1981 (Heeks 1996, pp. 41–3). 33. Apart from the sources indicated, I have had access to the annual reports from the Department of Electronics, later Department of IT, for the years 1988–9, 1993–4, 1998–9 and 2001–2 onwards. 34. The task force has its own website (http://it-taskforce.nic.in) from where its reports can be downloaded. 35. Of the 108 recommendations concerning software the government is reported by 2002 to have implemented 64 and rejected 3. The rest is under consideration (Department of IT, Annual Report 2001–2002, p. 8). 36. The list of activities can be found in the annual reports (see note 33). An illustrative list is given in McDowell (1997, p. 188). 37. Information on this can be found at the home page of the Ministry of Textiles (http://texmin.nic.in). See also Lal (2001). 38. The OECD classification is found in Hatzichronoglou (1997, p. 6). This classification is applied on Indian data taken from the Annual Survey of Industries for the relevant years as reprinted in EPW Research Foundation 2002 and in Government of India, Statistical Abstract of India 2001, New Delhi. The estimate for 2002–3 is based on data available at mospi.nic.in/mospi_asi. 39. A study of firm behaviour before and after liberalization has shown that foreign firms have been more active importers of technology after 1991 than local Indian firms (Vishwasrao and Bosshardt 2001). 40. Information on approved collaboration agreements is available from the Secretariat of Industrial Assistance (SIA), whose publication SIA Newsletter is available online (http://siadipp.nic.in/publicat/newslttr). The figures

180

41.

42.

43.

44.

45. 46.

47.

48.

49.

50. 51. 52.

Notes referred to cover the period from 1 August 1991 to 31 December 2001, published in SIA Newsletter, January 2002. This conclusion is probably only valid at the macro level. Some individual industries may have experienced increasing R&D expenditure. The private Indian pharmaceutical industry is thus known to have increased its research activities (Pradhan 2003). The RBI studies of public limited companies include around 2000 companies, and this sample covers around 20 per cent of the assets of the total corporate sector. The decline in the level of research expenditure of public sector companies in the mid-1990s may have been caused by the non-inclusion of a few research-intensive enterprises in the 1996–7 and 1998–9 samples. I also calculated the R&D/sales ratio for all public sector enterprises owned by the central government and this ratio has remained largely constant at a lowlevel throughout the 1990s (see Government of India, Public Enterprises Survey, various years). On productivity measures, see Development Research Group (2001) and Unel (2003). Data on patent applications are found in Ramanna (2002). Patent applications rose sharply after India changed its patents policy in the mid-1990s. The same pattern is found for paid-up capital of the total corporate sector (see Pedersen 2000). In 1998 the inflow of investments for acquisitions of shares reached a level of 30 per cent of all FDI inflows: This share declined, however, in the following years. SIA Newsletter, January 2003. There are no comprehensive studies of these changes, but they are widely reported in the Indian business press and figure in many case studies of individual business houses and independent companies. The move away from diversified conglomerates is relatively strong, while the move away from family-dominated companies has been much slower. Many young familymembers now receive a professional managerial training. See Piramal (1996), Chandrasekhar (1999), Goswami (2000) and Rao (2001). The study of the reorganization of the firm focused upon the development of ‘just in time’ and ‘total quality management’ systems plus the development of a closer relationship with supplier firms. One irony: the relative economic performance of Crompton Greaves deteriorated sharply in the years after the completion of the above-mentioned study. Its ranking in the Business Standard Top 1000 list declined from 37 in 1994 and 41 in 1995 to 52 in 2000, 80 in 2001 before advancing to 61 in 2002. See Business Standard, January 1996, March 2002 and January 2003. A good survey is found in Kumar (2001). One important exception is the largest exporter of software, Tata Consultancy Services, part of the largest industrial empire in India, Tata. Rankings of companies in the software and computer sector are regularly published by Dataquest (www.dgindia.com). I have used the lists published on 4 August 2001 and 11 September 2002. The activities of the foreign software companies may, however, have contributed significantly to the rapid development of the industry (Patibandla and Petersen 2002).

Notes 181 53. In 1993–4, software would have been placed as the twenty-second largest industry below ‘manufacture of electrical equipment’ and above ‘manufacture of other transport equipment’. Industry figures are taken from the two digit industry data published in the Annual Survey of Industries. Software revenues are published in the annual reports from the Department of IT. (EPW Research Foundation 2002 and relevant websites: www.mospi.nic.in/ asi og www.mit.gov.in.) 54. Data on consultancy companies, including consultancy exports can be found at the website of Federation of Indian Export Organisations (FIEO): www.fieo.com. 55. While this number seems small, it is quite impressive when compared to the size of the IT economy in the US, which has been estimated to about 10 per cent of GDP (Raipuria 2002, p. 1064). 56. The development of the financial system is described in great detail in Goldsmith (1983); RBI (1983); Morris (1985); Sen and Vaidya (1997). 57. A subsequent nationalization of 6 smaller private banks in 1980 made public control over total banking deposits exceed 90 per cent (Sen and Vaidya 1997, p. 14). 58. The structure of the financial institutions is given in Sen and Vadya (1997, p. 38). The insurance sector was largely untouched by the economic reforms, being opened to private investments only in 2000. 59. There are many accounts of the reforms of the financial sector. A good summary and assessment of the reforms is found in RBI’s Report on Currency and Finance 2001–2 (RBI 2003, Part VI). The following account is largely based on this source. Statistical information can be found at the RBI website (www.rbi.gov.in). 60. At the end of March 2002 there were 8 new private banks established and 40 foreign banks, up from 26 six years earlier (RBI 2003, p. VI-7). 61. See Bhattacharya and Sivasubramaniam (2001) and RBI (2003, pp. III-35, III-39). Higher investments in government securities used to finance large fiscal deficits may also have acted to depress credit flows. 62. Details are available on SEBI’s website: www.sebi.gov.in. 63. In addition to SEBI and NSE, a National Securities Clearing Corporation and a National Securities Depository have been established (Shah 1999). 64. See RBI (2003. Chart VI-21, p.VI-40) and Chalapati Rao (2002, p. 111). 65. These ‘scams’ have figured prominently in the criticism of the liberalization policy. See Kabra and Upadhyay (1999). 66. Chalapati Rao (2002). The strong promoter control over large Indian firms is confirmed in a recent study of corporate governance (Banaji and Mody 2001). 67. See ‘Capital Flight’, India Today (25 March 2002, pp. 36–7) and Nagaraj (2003). 68. This conclusion fits well with the reservation expressed by Ajit Singh about the policy of relying on stock markets to finance industrial development (Singh 1997; 1998). 69. Reddy (2000a) and Reddy (2002) discusses the changes in the role of the RBI in the 1990s. 70. RBI (1983, p. 279). In the words of its own official publication, the exchange rate policy of the RBI is aimed at ‘maintaining the external value of the rupee’. RBI (1983, p. 278).

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Notes

71. See detailed accounts in Reddy (2000b; 2002). 72. Before 1991, the RBI had administratively determined the exchange rate. In the transition period 1992–3, a system with dual exchange rates was introduced (Pattnaik et al. 2003). 73. In technical terms this means that India has accepted the obligations in IMF (Article VIII) since 20 August 1994. 74. The preconditions mentioned in the report was: (1) fiscal consolidation, (2) a lowering of inflation and (3) a strengthening of the financial system. In addition the report mentioned movements in the exchange rate, the balance of payments and foreign exchange reserves as being important for the decision to move towards capital account convertibility (RBI 1997, p. 59). 75. RBI (2003) and Government of India, Economic Survey (various years) give recent updates on the liberalization process. 76. The expansion of the banking system has almost universally been credited as being the cause of this rise. See Morris (1985, p. 36); Joshi and Little (1994, p. 300); Sen and Vaidya (1997, p. 38). 77. This was the conclusion in Morris (1985, p. 48) based on information from the early 1980s. 78. Data on interest rates and overall price-inflation can be found at the RBI website. 79. Reserves reached US $ 40 billion in December 2000, 50 billion in February 2002, 75 billion in March 2003 and crossed the 100 billion mark in December 2003 (www.rbi.gov.in). 80. Kohli (2000) concludes that the movements during the 1990s have meant an approximation of the exchange rate to its purchasing power parity. The movements in exchange rates during the 1990s are shown in RBI (2003, p. VII-31). 81. See RBI, Annual Report 1997–8, pp. 3–4. Indirectly the crisis affected the economy through the decline in affected countries’ imports from India. 82. RBI, Annual Report 1998–9 gives the details. 83. On 31 March 2002 India’s stock of FDI abroad was 3 billion $, which compares well with the 21 billion $ stock of FDI in India. Data and current policies can be found on websites of the RBI (http://www.rbi.gov.in) and Ministry of Finance (http://finmin.nic.in). 84. The response to the Asian crisis and the events of 1998 is described in RBI, Annual Report 1998–9. See also Reddy (2000b). 85. In a report for the Prime Ministers Council on Trade and Industry on the pitfalls of globalization, the challenges of the WTO were labelled ‘the biggest challenge of globalisation’. See Prime Ministers Council on Trade and Industry (2000, p. 26). 86. A review of India’s trade arrangements can be found in WTO (1998), WTO (2002) and GATT (1994). 87. India’s traditional policies and their rationale are dealt with in Chakrabarti (1982), Lall (1983) and Kumar (1993a). 88. The following account is based on Desai (1989), McDowell (1994) and McDowell (1997). 89. It should be noted that the draft agreement (The Dunkel draft) did arouse considerable debate and opposition in India, probably more than anywhere

Notes 183

90.

91.

92.

93.

94.

95. 96.

97.

98.

99.

100.

else. Most of the opposition was directed against the proposed intellectual property rights regime. The variations in the Indian evaluation of the Uruguay Round by different sections are nicely captured by the opposite views of two of India’s central trade negotiators. See Ganesan (1994) for a positive view and Dubey (1996) for a negative evaluation. Figures in the annual report of the department show the number of highranking officers (Class A) in the early 1990s to be 71, declining to around 626 in the mid-1990s and rising to 81 in 2001 and 95 in 2004. Department of Commerce, Annual Report (for the years 1992–3, 1993–4, 1995–6, 1998–9, 2001–2, 2004–5), New Delhi. During interviews in the department in 1999, just before the Seattle Ministerial Meeting, I was informed that only six officers were working to prepare India’s negotiating position. The number has since increased, though. 27 countries had larger representation in Geneva than India in 1997 and 14 countries had similar size of representation. The number of Indians employed among the regular staff of the WTO increased from 10 in 2000 to 13 in 2003 (WTO, various years, Annual Report). I owe this information to interviews with people in the Department of Commerce, in industrial associations and in research institutions conducted in 1999 and 2002. A list of external contacts of the department is provided in Department of Commerce, Annual Report 1998–9, pp. 125–6. See India & The WTO, available at http://commerce.nic.in. ‘India perceives UNCTAD as the most visible symbol of the United Nations assurance to promote the economic and social advancement of all people and this remains equally relevant in the changing world economic order. UNCTAD continues to be an important resource base for the South and it provides a forum for us to network and form issue based coalitions with like-minded countries specially the developing countries. We see UNCTAD’s educative, early warning and watch-dog role vis-à-vis developing countries interests in the working of WTO as very valuable’. Department of Commerce, Annual Report 2001–2, p. 108. The detailed comments by members of the Trade Policy Review Body in the 1998 and 2002 reviews are available on the WTO website (documents WT/TPR/M/33 and WT/TPR/M/100). Import shares of most non-oil exporting countries have declined from the late 1990s because of rapidly rising oil import. More detailed information on India’s foreign trade is given in Government of India, Economic Survey, annual. In 1991, the Indian authorities had approved financial or technical agreements between Indian companies and foreign partners from 32 different countries. This number increased to 72 in 2002 (SIA Newsletter, various years (siadipp.nic.in/publicat)). One of the Indian government’s key economic advisors during the 1990s has commented that ‘external sector reforms have been the most successful of all the reforms that were undertaken in the nineties’ (Virmani 2003, p. 3380).

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Notes

6 Comparison and explanation: New developmental states? 1. As indicated earlier, Brazil was probably the first to change its stand thus prompting India to make similar policy changes. 2. Figures for per capita incomes can be found in World Bank, World Development Indicators (online). The highly skewed income distribution led some commentators to coin the phrase ‘Bel-India’ as a characterization for the ‘two Brazils’: a combination of rich Belgium and poor India (Fleischer 2005). 3. For a history of Indian business and its links to the political movement for independence, see Kochanek (1974). 4. See Sabade and Namjoshi (1977) and Kochanek (1974) for details on the organizational pattern of Indian industry. Assocham was established in 1920 and FICCI in 1927. 5. For the following see Hanson (1966, Ch. 8), Misra (1986, Ch. 4), Potter (1996, Ch. 4). 6. One exception was the Department of Electronics, see Pinglé (2000, p. 126). 7. The National Academy of Administration, the Indian Institute of Public Administration and the Administrative Staff College were the most important training institutions (Misra 1986, Ch. 5). 8. The history of the early thinking on economic development is given in Marathe (1986, Ch. 1). 9. The system is described in Kochanek (1974, pp. 81ff) and in Marathe (1986, Ch. 3). Initially, 27 development councils were established covering the most important industries at the time. 10. A comprehensive, but not exhaustive, list of advisory bodies with business representation is given in Malyarov (1983, p. 300ff). Kidron (1965, pp. 233ff) lists 34 advisory bodies in which foreign companies were represented. See also Bettelheim (1968: 235) and Kochanek (1974, pp. 274ff). 11. Kochanek (1987, p. 1285; 1996, p. 159). 12. See MIC (1966), Hazari (1967) and ILPIC (1969). The studies are briefly summarized in Degnbol-Martinussen (2001, pp. 90–1). 13. According to a study of the subsequent functioning of the industrial licensing system, these changes did not, make it more effective in guiding the behaviour of large private companies, see Corporate Studies Group (1983). 14. See the title of a contemporary book: ‘The Crisis of Indian Planning’ by Streeten and Lipton (1968). See also Frankel (1979, Ch.8). Bardhan (1998) also notices the declining autonomy of the state. 15. See Ministry of Industry (1978, pp. 16–18) and Marathe (1986, pp. 118–23). 16. DGTD (1990) lists ten councils in operation in 1989–90. 17. Lawyers are often seen as potential representatives of private business, but their (relatively high) share of parliamentarians has also declined. 18. For a detailed diagnosis of the conflict see Kochanek (1995–6) and reports in India Today, 31 May and 15 June 1985. 19. The early story of the associations of engineering industry is told in Sabade and Namjoshi (1977). The authors also stress the uniqueness of the organization. 20. These objectives and claims are taken from the CII’s own declaration of objectives and principles as they can be found in CII (1992, p. vii.) Many formulations are obviously meant to mark a break with the older pattern of organization that was so intimately connected with the working of FICCI.

Notes 185

21.

22. 23.

24. 25.

26.

27.

28. 29. 30. 31.

32.

33. 34.

The element of professionalism is confirmed by the author’s personal experience having visited the CII and its precursors several times. I have had access to printed AIEI/CII membership lists from 1977, 1992, 1995 and 1998. In 1977, the then AIEI had 1175 members and by 1992 membership reached 2600, see AIEI (1977) and CII (1992). By 2000, membership had grown to more than 3900 (CII 2000). The rise of the CII is told in detail in Kochanek (1995–6). In the late 1990s, 33 out of the top 50 companies listed by Business Standard (‘India’s Corporate Giants’, January 1996) were members of CII. The non-members were mainly oil and petrochemical companies. Data on current membership can be found at the CII website (www.cii-online.org) Based on membership figures given in FICCI (1990) and FICCI (2001). Interviews conducted with officials in the CII and FICCI in 1999 and 2002 supplementing and updating the information from Kochanek (1995–6) and Kochanek (1996). See also Sinha (2005). For a comprehensive analysis, see Sinha (2005). Government of India, Economic Survey 2004–5, p. S49. Total public sector employment increased in the early 1990s but fell after 1997. Most of this increase took place in the states and in public enterprises. In 1990 the authorized strength of the IAS was 5262 and the actual number of officers was 4849 according to the ‘Civil List’ published by the Department of Personnel and Training (1990). The online version of this list contained 4790 officers in early 2004 (www.persmin.nic.in). See Ministry of Industry, Annual Report 1993–4, 1997–8, 2002–3. The department’s Secretariat for Industrial Approvals (SIA) changed its name (and its functions) to Secretariat for Industrial Assistance. Business Standard, 31 January 2003. FIPB had earlier for a period been transferred to the Prime Minister’s Office. See Nayar (1999) and India Today, 28 February, 16 June and 4 August 1997. I was told of the increase in opportunities for IAS officers to specialize during interviews in economic ministries in both 1999 and 2002. The Ministry of Industry (1994, p. 12) notes the reconstitution of the Central Advisory Council and the establishment of some new Development Councils. The development council for the electronics industry also seems to have continued its activities in the 1990s, see Department of Electronics, Annual Report 1994–5, p. 106. Ministry of Commerce and Industry, Annual Report 2002–3 (New Delhi 2003, pp. 63, 122, 128) mentions activities of the development councils for the tyre, cement and paper industries. The development council for the paper industry was last reconstituted on 8 October 2003 under the chairmanship of Gautam Thapar, managing director of Ballarpur Industries, the largest private company in the industry and with a substantial representation from industry associations. Department of Industrial Policy & Promotion website (http://dipp.nic.in, accessed 4 November 2003). Sinha (2005). In April 2001, the president of CII deplored the persistent lobbying done by individual companies. ‘I am sorry to say that we still have players in the industry who believe that they must be granted special rights and special conditions’, Times of India (New Delhi), 23 April 2001.

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Notes

35. See the website of the council: www.nic.in/pmcouncils/itc. 36. See reports in India Today, 28 December 1998 and 3 September 2001. 37. India Today, 15 November 1993, pp. 60–5. See also Kochanek (1996, pp. 168–9). 38. See Nayar (1998, p. 2454) and the cover feature in Business India, 8–21 April 1996, pp. 54–60. 39. Economic Times, 30 September 1997. The new rules (Press Note no. 18, 1998) required the foreign investor to obtain permission from its Indian partner in case of a change in their joint venture or establishment of new ventures. 40. The information on government–business interaction on trade issues comes from interviews conducted in the Ministry of Commerce in 1999 and in FICCI and CII in 2002. 41. Sources in both FICCI and CII indicated the 1998 Geneva Ministerial meeting as the starting point for closer interaction. The interaction with industry is specifically mentioned in Department of Commerce, Annual Report 1998–9. A complete list of ‘stakeholders’ consulted by the Department of Commerce in the period 1999–2001 shows the wide range of consultations, including consultations with state governments, NGOs, journalists, farmers organizations, political parties, parliamentarians in addition to the experts and industrialists mentioned in the text. (India & The WTO 3, pp. 6–7, June–July 2001). 42. Interviews with CII, FICCI and Ministry of Commerce. 43. Among academic institutions, the Department of Commerce mentions Research and Information Systems for Non-Aligned Countries (RIS), Indian Council for Research on International Economic Relations (ICRIER) and Rajiv Gandhi Centre for Contemporary Studies, all New Delhi based and highly reputed research institutes. In addition, the Department affiliated Indian Institute of Foreign Trade (IIFT) has established a new centre for research in WTO related trade issues. Ibid., p. 126. 44. See Srivastave and Gehlaut (2003). In my own interviews in the Department of Industrial Policy and Promotion I found a similar triangular partnership being established since 1997 around intellectual property rights issues. 45. One example: The CII has collaborated closely with researchers from the Rajiv Gandhi Institute for Contemporary Studies producing joint publications meant both to raise the awareness of WTO issues among industrialists and to establish India’s negotiating position (see Debroy and Kaushik 1999; Debroy 1999). 46. For an account of some of the criticism voiced by Indian business against certain aspects of the economic reforms, see Nayar (1998). The activities of CII are listed on the organizations’ website: www.ciionline.org. 47. I use the term ‘corporatist’ in a slightly more loose manner than Schmitter (1974, pp. 93–4). It denotes an institutionalized system of interest representation in formal state organs, but without necessarily being compulsory or monopolistic in its interest representation. 48. The most important source of funding for the syndicates, federations and confederations came from a compulsory tax on industrial companies. Voting in this intricate system for organizing business was ‘one company/syndicate/ federation – one vote’ thus favouring smaller companies, smaller syndicates and smaller federations.

Notes 187 49. The establishment and expansion of state-owned enterprises is described in Trebat (1983) 50. In contrast to most other groups, the executive group for the automobile industry did not formally include representatives from the industry, but industry leaders were frequently consulted by the group (Shapiro 1994, p. 49). 51. According to Schmitter (1971, pp 297–8) leaders of business associations referred to this practice as infiltração. 52. Contrary to most other authors dealing with the period before 1964, Nathaniel Leff (1968, Ch. 7) argues that industry representatives had only little influence on the policies of a largely autonomous state. His assessment can partly be explained by his focus on the influence of industrialists on politicians (legislators and the president), while most other authors put the emphasis on the interaction with government bureaucrats. 53. During the 1970s, industrialists frequently complained about their exclusion from the various decision-making councils established by the military governments (Diniz and Boschi 1978; Boschi 1979). Diniz (1989) reports that close to two-thirds of the existing parallel associations were established after 1964. 54. In the words of Schmitter (1971, p. 233), the CNI (and other confederations) were ‘so far from their clients and so near the regime’. 55. São Paulo accounted for around 40 per cent of the country’s industrial GDP. 56. Representatives of private industry were included in some of the consultative councils that occasionally were established during the military regime, but only to be excluded later. For examples, see Martins (1985, pp. 126, 136). 57. The so-called anti-estatização campaign (Diniz 1989, p. 115). 58. In the words of a prominent expert on Brazil (but not on India), ‘Brazil’s tradition of consultation, informal arrangements, and the basic probusiness attitude contrasts sharply with (at another extreme) a case such as India, which suffers all the abuses of capitalism along with all the inefficiencies generated by detailed government control of imports and investments’ UNIDO (1979, p. 22). 59. Weyland (1998, pp. 526) interprets this opening as an erosion of state capacity and the capture of parts of the state by private interests. 60. This is the conclusion in Boschi (1979). 61. Another important aspect is the change in the federal structure towards more powers and financial resources being devolved to the states. The focus here is exclusively on the central government. 62. It is quite common in Brazil to ascribe different developmental ‘ideologies’ to different state institutions. 63. Data on the number of civil servant in the ministries, the autarquias and different foundations of the federal government can be found in Boletim Estatístico de Pessoal (2004), Table 2.1. and Table 2.24. According to data from the Ministry of Labour and Employment, 5.9 million people were employed nationwide in ‘public administration’ in 2000, increasing to 7.0 million in 2003 (data found on the ministry’s website: www.mte.gov.br). 64. With few exceptions the reductions covered all ministries. The most noticeable exception was the ministry for science and technology. Boletim Estastíco de Pessoal (2004), Table 2.4. 65. Much of the fiscal deficit was caused by the state’s obligation to pay pensions to a large and increasing number of former public employees.

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66. Data on these top positions – Direção e Assessoramento Superior (DAS) – are also found in Boletim Estastíco de Pessoal (2004). 67. Details of the reform legislation can be found in the relevant issues of Banco Central do Brasil, Annual Report, section on public finance. 68. See Escola Nacional de Administração Pública (www.enap.gov.br). The annual intake of persons for training increased from less than 2000 in 1995 to more than 20,000 from 1998 onwards. These training activities complement those organized by the Brazilian School of Public Administration under the Fundação Getulia Vargas (Sikkink 1991, pp. 191ff). 69. The chief architect of the reform proposals and minister-in-charge – Luiz Carlos Bresser Pereira – conceptualized the change as one from bureaucratic state to a new ‘managerial’ state, see Bresser Pereira (1999, 2000, 2004). It is doubtful, however, whether the existing administrative set-up deserved the title ‘bureaucratic’ in the strict Weberian sense. 70. Weyland (1998, p. 63, note 22). My personal experience, upon my return to Brazil in 2001 after more than ten years, was that many competent persons working in different organs of the state, whom I had met earlier, had indeed left for more gainful private employment. 71. Writing in the late 1990s, Schneider estimates that roughly 1000 top civil servants are appointed through political appointments, while about 50,000 positions country-wide are distributed in the same manner. He still sees the bureaucracy as being characterized by ‘overcentralization, fragmentation, low professional ethics, high turnover, corruption, low salaries, and poor training’ (Schneider 1999, p. 291). 72. In total, UBE included 6 national confederations and more than 100 employers’ associations. 73. Dreifuss (1989) sees the influence as being somewhat larger than does Schneider (1997–98). 74. Pensamento Nacional das Bases Empresariais (The National Thought of the Business Base) (www.pnbe.br). 75. Instituto de Estudos para o Desinvolvimento Industrial (Institute for Studies of Industrial Development) (www.iedi.br). 76. See IEDI (1989). In Brazil, the debate over economic strategy at the time was often framed as a choice between ‘stabilization’ and ‘development’ and in this context, IEDI clearly supported ‘development’. 77. The latest reports are available on the organization’s website: www.iedi.org.br. 78. Since 1996, CNI has annually published ‘industry views’ on relevant legislative proposals. For an analysis, see Mancuso (2004). In 2002, CNI produced a proposal for a new economic policy based on direct consultations with more than 2000 enterprises. Compared to similar proposals from both FIESP and IEDI, this was by far the most elaborate and comprehensive (CNI 2002). In 1996, CNI moved its headquarters to Brazil. 79. See CNI (1998a) and Brazilian Business Coalition (2000). According to interviews, it was especially the start of the FTAA negotiations in 1996 that prompted the organization of business. (Interviews, CNI, January 2001). 80. One indication is the fact that the first vice-president of FIESP (2004–7), Benjamin Steinbruch, is now also member of IEDI’s governing council.

Notes 189 81. Interestingly, a special group for foreign investors was also created (Diniz 1997, p. 150) 82. Powerful criticism came from the Ministry of Finance and from a future Central Bank director, who saw the chambers as a continuation of the old corporatist system that created privileges instead of promoting market-based development (Martin 1997, p. 55; Diniz 1997, pp. 159–60; Diniz 2000, p. 84). 83. The three relevant documents are Presidência da República (1998), IEDI (1998) and CNI (1998b). 84. IEDI (and FIESP) can be seen as representing the core of the national industry, while the CNI probably also represented companies closely allied with and dependent upon multinational companies. 85. FIESP (2002), IEDI (2002) and CNI (2002). 86. Based upon studies of industrially advanced countries, IEDI had earlier (in 1998) argued that no country had achieved industrial development without possessing a strong domestic industrial class and without regulating foreign investment. This argument was absent in 2002. Another sign of a more conciliatory attitude towards foreign companies was the change in the rules of one of the institutional bastions of the national industry, ABDIB, allowing foreign companies seats in its governing council. 87. This was made clear to me during interviews in FIESP in January 2001. 88. Information on the establishment of the council (informally in April 2004) and the agency (in 2005) can be found at the website of the ministry (www.desenvolvimento.gov.br). 89. CNI (1998a) describes some of the new activities. 90. Interviews in Itamaraty, CNI and Fundaçao Getualia Vargas, Rio, January 2001. 91. This process is described in Mancuso (2004). 92. Mancuso (2004) analysed the fate of 216 proposals on which industry reactions were known through the CNI publication Agenda Legislativa da Indústria. In two-third of these cases industry viewpoints seem to have prevailed. 93. In the words of Mauricio Font ‘though ambivalent and perplexed, business supported the reform process’ (Font 2003, p. 124). 94. The president can, and has increasingly done throughout the 1990s, use temporary decrees to circumvent the Congress. 95. The privileged position of business was underlined by a former minister of finance in this way: ‘In Brazil it is possible to be elected without the support of the business community, but it is not possible to govern without that support’, Bresser Pereira (1996, p. 132). 96. In 2004, President Lula decided to establish a National Forum to suggest reforms of the system of representation of both employers and employees. 97. The issue here refers to a long-standing discussion of profit remittances and other forms of reverse financial flows from foreign investors. It should of course be noted that many Brazilian companies have been accused of channelling funds abroad through dubious financial channels.

Conclusion 1.

When the first human development index was compiled by the UNDP for the year 1987, India was classified as having low human development, ranking as

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Notes number 37 (from the bottom), close to Tanzania (at 35). On the same scale, Brazil was ranked as having medium human development occupying position number 80, close to Thailand (at 78). UNDP (1990, pp. 128–9). Measured from the top, India was ranked 134 in 1990, while Brazil ranked as number 70 (UNDP 1993, pp. 135–6). This is one reason why I find it hard to accept Jenkins’s (1999) characterization of the Indian reform process as ‘reforms by stealth’. ‘The virtues of Weberian bureaucracy are one of the few points of consensus among students of development’ (Schneider and Maxfield 1997, p. 21).

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Index abertura comercial, 47, 50 administrative reform, 148, 155 Africa, 13–5 AIEI, 134, 185 Amsden, Alice, 27, 30, 168, 170 anti-dumping, 74–5, 125, 182 Argentina, 52, 71–2 Asia, 118–20, 129 East Asia, 1, 4, 13–5, 26–8, 30–1, 36, 67, 79, 118–9, 123, 129, 162–4, 166–7 South Asia, 13–5, 38–9, 114, 119 South East Asia, 115, 118 Asian financial crisis, 67–8, 70, 107, 113–4, 182 Assocham, 131, 134, 138–9, 184 autarquias, 141, 142, 144, 147, 187 authoritarian rule, 6, 27–8, 30, 38, 44, 71, 141, 143, 149, 164, 166–8 automobile industry, 42, 52, 143, 152, 173–4, 187 autonomy of the state, embedded autonomy, 6, 29–31, 133, 145, 156, 163–4, 166, 171, 184

Brazilian companies, 45, 48, 50, 54–5, 57, 67–8, 70, 77–8, 130, 157, 161, 173, 189 Brazilian Congress, 64, 146–50, 152, 154, 155 BRIC countries, 1 bureaucracy, 28–9, 32, 117, 131–2, 134–7, 140–1, 143, 146–8, 166, 171, 188, 190 business (local, domestic, private), 5–7, 10, 25–30, 32–41, 50, 52, 56, 61, 67, 74, 94, 99, 101, 122, 130–4, 137–46, 149–56, 158–64, 166–8, 171, 173, 180, 184, 186–9 business associations/organizations, 4, 122, 130–2, 135, 137–9, 141, 143, 146–7, 149–55, 158–9, 162, 166–7, 173, 187–8 business communities, 5, 131, 146–7 business-state, state-business relations, 4–7, 25–9, 31–4, 39–41, 74, 130, 132–4, 137, 139–43, 146–7, 150–9, 161–7, 171, 184, 186–7

Banco Central do Brasil, 60, 62–3, 125, 172, 174–5, 188 Bank for International Settlements (BIS), 23, 106 bank supervision, 60–1, 63, 106, 122 Basel accord/norms, 105, 175 Bharatiya Janata Party (BJP), 7, 89, 94 BNDES, 47, 51–2, 60, 67, 147, 172–3 Board of Trade, 139 Bombay Club, 138 Bombay Stock Exchange (BSE), 105 BOVESPA, 60, 62 Boyer, Robert, 17–8 Brazilian business, 53, 73, 77, 143, 149, 151, 155–6 Brazilian Business Coalition, 151, 188

Canada, 75, 172, 176 capital account, 62, 89, 107–8, 111, 114, 124, 182 capital goods, 80, 96, 141, 144–5 CDI, 143–4, 151–2 CEI, 134 central administration/government, 37, 48, 51, 85, 88, 106, 131–2, 134–7, 142, 148, 155, 170, 173, 180, 187 Central Advisory Council, 132–3, 137, 139 central bank, 11, 23, 60–4, 67–70, 74, 142, 147, 175, 189 China, 1, 118, 120 CIESP, 140–1, 144–5 212

Index 213 CII, 135, 137–8, 184–6 CNI, 141, 145–6, 149–51, 153–5, 173, 187–9 collaboration (technical, technology, technological), 81, 87–8, 92–3, 97, 119, 125 competitiveness, 21, 46–7, 50–6, 58, 76, 153, 173 computer industry, 6, 30, 45, 57, 78, 86–7, 95, 102, 140, 157, 172, 178, 180 Congress Party, 83, 88 corporatism/corporatist system, 141–6, 149–52, 155–6, 186, 189 Custo Brasil, 52, 173 debt crisis, 24, 38, 43–4, 60–1, 64, 66, 69–71, 75, 78, 83, 109–10, 126, 128–9, 160, 162 democracy, democratic regime, 38, 44–5, 88, 146, 149–50, 154, 161, 164, 166–7 Department of Commerce/Ministry of Commerce, 94, 116–7, 125, 136–7, 139, 141, 143, 154, 183, 186 developing countries, 1–4, 7–8, 11–8, 20–6, 29, 31–8, 43, 59, 71–2, 83, 87, 109, 115–8, 120, 168–9, 170, 183 development banks, 47, 92, 103–4, 106, 121, 147, 175 development councils, 132–3, 137, 143, 145, 184–5 developmental state, 1–2, 4–7, 25–36, 41, 44, 79, 124, 130, 146, 156–7, 159–60, 163–4, 166–8, 171 Doha, 117, 139 economic globalization, 1–4, 7–13, 15–9, 22–3, 25, 31–2, 34–7, 39–41, 44, 47, 50, 53, 55, 57, 59, 70, 77, 79, 91, 120–1, 123–4, 126, 129–30, 151, 157, 160–3, 167–8 Embraer, 57–8, 75, 174

Estado Novo, 140 Evans, Peter, 6, 28–31, 146, 156, 171, 178 executive groups, 142–3, 187 FICCI, 131, 133–5, 137–9, 184–6 FIESP, 141, 144–6, 149–51, 153, 155, 188–9 finance-led growth regime, 17 financial globalization, 11, 22, 69, 78, 91, 113, 114, 122 financial institutions, 4, 23–4, 60–4, 66–7, 69, 73, 78, 103, 109, 113, 122, 126, 141–2, 144, 175, 181 financial markets, 7, 10, 23, 31, 60–2, 103, 105, 121–2, 125 financial sector, 22, 40, 61, 63–4, 70, 78, 89, 103–6, 113–4, 121–2, 124, 127–8, 130, 164, 175, 181 FIRJAN, 145, 153 five year plans, 92–3, 176, 179 Fordism, 2, 16–21, 24–5, 30, 85, 129, 169, 171 foreign aid, 15, 83, 109 foreign banks, 61–3, 103–4, 113, 124, 127, 175, 181 foreign companies, 5, 15, 21, 42, 46, 54–7, 59, 78, 81, 85, 92, 97, 99–100, 105, 121, 125–6, 129, 133, 135, 138, 141, 157–8, 160–1, 173–4, 177, 184, 189 see also transnational corporations foreign currency reserves, 68–9, 107, 112, 120 foreign direct investments (FDI), 14–5, 20–1, 24, 30, 38, 43–6, 48–9, 54, 61, 66, 80–1, 84–5, 87–92, 96, 98–100, 107, 110–1, 113, 121, 124, 126, 128, 135–6, 153–4, 164, 168–9, 171–2, 174, 177–8, 180, 182, 186, 189 Foreign Exchange Regulation Act (FERA), 81, 107 Foreign institutional investors (FIIs), 61, 66, 105, 107, 113 Free Trade Area of the Americas (FTAA), 72, 74, 128, 154, 188

214

Index

Gandhi, Rajiv, 84, 88, 116 Geneva, 74, 117, 122, 125, 183, 186 Gershenkron, Alexander, 26 global capitalism, 2, 4, 7, 16, 18, 26, 167 globalization, 1–9, 12, 15–6, 18–20, 24, 34, 101, 123, 135, 149, 156–7, 162–4, 168, 176, 182 see also economic globalization high-technology industries/high-tech, 21, 25, 30, 53, 58–9, 78, 91–2, 96, 123, 126–7, 135, 157–8 Hobson, John, 32 Indian Administrative service (IAS), 131–2, 136–7, 185 IEDI, 150–4, 188–9 IMF, 5, 11, 24, 44, 66–70, 78, 82–3, 89, 91, 128, 147, 161, 176–7 Article VIII, 62, 175, 182 import-substitution, 28, 38, 42, 45–6, 74, 80, 172 Indian business, 99–101, 121, 130–5, 137–9, 158, 180, 184, 186 Indian companies, 5, 85, 91–2, 97, 99–102, 107, 113, 179, 183 Indian Civil Service, 131 industrial development councils, 143, 145 industrial licensing, 80, 84, 86, 88, 92, 132–3, 135–7, 184 industrial policy, 27, 37, 46, 50–2, 72, 85, 92, 124, 133, 136, 143–7, 150–4, 173, 179, 185–6 industry associations, 40, 117, 132, 134, 137–46, 149–55, 159, 162, 183–5, 187–8 see also business organizations informatics, 45, 50, 57, 172, 174, 176 information technology (IT), 10, 18, 45–6, 50–1, 57, 86–7, 92, 94–5, 101–2, 121, 125, 138, 176, 179, 181 insurance companies, 60, 81, 103, 181 intellectual labour/expertise, 19, 139, 159, 163, 167, 169

intellectual property rights, 24, 74, 118, 170, 183, 186 see also TRIPS Itamaraty, 73–5, 142, 149, 154, 176, 189 Japan, 1, 2, 17, 27, 74, 172 Johnson, Chalmers, 27 Keynesianism, 16 Kohli, Atul, 6, 117, 160, 166, 168, 182 Korea, 1, 6, 27–8, 36, 74 Latin America, 13–5, 38, 71, 75–7 Mauritius, 91 mental labour, 19, 21, 24–5, 36, 169 Mercosur, 47, 52, 55, 70–2, 74–7, 79, 125, 128–9, 154, 174, 176 Mexican crisis (peso crisis), 68, 70, 128 military (coup, government, regime), 38, 44, 46, 58, 60, 63, 141, 143–5, 148–9, 187 National Stock Exchange (NSE), 105 new industrial policy, 46, 52, 92, 124, 151, 153 Non-Resident Indians (NRIs), 88, 107, 110–1, 113 parallel associations, 145–6, 187 Perez, Carlota, 20–2, 169 Petrobras, 48, 57, 141, 174 PNBE, 150–1, 188 pockets of efficiency, 142, 146, 149 portfolio investments, 46, 61, 66–8, 109–11 post-Fordism, 16–21, 30–1, 36, 86, 167, 169–71 president Cardoso, 48, 51, 77, 147–8, 151–3 president Collor, 45, 47–8, 50, 147, 151–2 president Geisel, 145 president Lula, 153–4, 156, 175, 189 president Vargas, 140–2 Prime Minister’s Council on Trade and Industry, 137, 182

Index 215 Prime Ministers Office, 94, 136, 138, 168, 185 privatization, 5, 46–9, 54, 58, 61–3, 67, 78, 88, 91, 104, 121, 124, 129, 160, 172, 178 Rangarajan Committee, 107 Real Plan, 47–8, 51, 56, 62, 67–8, 77, 152 regional collaboration, 24–5, 31, 33, 38, 70–3, 87, 114, 128–9, 151 regional trade, 47, 75, 79, 114, 125 regulation (approach, school, theory), 16–8, 25, 169 research and development (R&D), 22, 51, 55–7, 87, 92–5, 97–9, 123–6, 158–9, 174, 179–80 research institutions, 75, 91–3, 117, 139, 159, 165, 183, 186 Reserve Bank of India (RBI), 97–8, 103–4, 106–7, 113–4, 121–2, 124–5, 132, 136, 178, 180–2 São Paulo, 7, 49, 60, 140–1, 145, 150, 153–4, 187 savings rate, 64, 108–9, 114, 127 Seattle, 117, 120, 139, 183 SEBI, 105, 181 sector associations, 145 sectoral chambers, 152 self-reliance, 81, 87, 92, 115, 123, 176, 178 sindicatos, 141, 144–5 Singh, Manmohan, 104 software, 19, 21, 30, 57–8, 78, 85–7, 94–5, 97, 101–2, 109–11, 119, 121, 127, 135, 140, 174, 178–81 South Asian Association for Regional Cooperation (SAARC), 114 Sridharan, Eswaran, 6 state-owned banks, 60–1, 63, 67, 78, 92, 103–4, 106, 109, 113, 121–2, 127, 175

state-owned companies/enterprises, 5, 42, 45–9, 54–6, 61, 67, 80, 85, 91, 124, 128, 130, 132, 141–2, 144–5, 172, 174, 187 stock markets, 60–2, 67, 70, 103–7, 109, 113, 122, 127, 181 Taiwan, 27–8, 30, 36, 171 Tarapore Committee, 107 Taylorism, 16–7, 19–21, 25 techno-economic paradigm, 18–20, 22–5, 50, 53, 58, 161, 169 técnicos, 142–4, 146, 148 trade defence, trade warfare, 117, 122, 125 transnational corporations (TNCs), 3–4, 10, 15, 21, 24, 36, 42, 59, 129, 157, 163, 169–70, 174 see also foreign companies triangular partnership, 139, 159, 186 TRIPS, 24, 72–4 see also intellectual property rights UNCTAD, 72, 115, 117, 169, 183 Uruguay Round, 23, 39, 70–4, 114–5, 117, 120, 122, 125, 128, 138, 154, 176, 183 Wade, Robert, 3, 27, 30–1 Washington Consensus, 4, 161 Weber, Max, 28 Weberian bureaucracy, 29, 132, 142, 166 Weiss, Linda, 29–31, 167 World Bank, 11, 24, 28, 31, 89 world trade, 14, 123, 129, 169 World Trade Organization (WTO), 3, 7, 23–5, 39, 47, 70, 72–5, 77, 79, 114–8, 120, 122–3, 125, 128, 139, 154, 170, 173, 175–6, 182–3, 186