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Bringing the local state back into development: the 'local developmental state' and the promotion of sustainable economic development and growth from the bottom-up


After having banned all discussion of the ‘developmental state’ concept during the high period of global neoliberalism (1980-2008), the Great Recession that began in 2008 forced the international development community to begin to urgently reassess the concept in order to deal with the mounting economic, social and political crises (see Crespi, Fernández-Arias and Stein 2014; Salazar-Xirinachs, Nubler and Kozul-Wright, 2014; UNCTAD, 2016a). Most attention in this revival of interest in the developmental state has followed the line that began with Johnson’s (1982) pioneering work on Japan, through to the seminal work on South Korea by Amsden (1989) and Chang (1994) and on Taiwan by Wade (1990), which is to say that it has overwhelmingly emphasized the role of (suitably redesigned) national-level developmental state institutions. This approach is misleading, however, because a great part of the historic success attributed to the ‘developmental state’ model was actually brought about thanks to the intervention of sub-national state institutions – that is, thanks to what we now call the ‘local developmental state’ (Bateman 2000, 2001, 2005, 2010: 166-2010, 2015, 2016; Bateman and Chang, 2012; UNCTAD, 2016b: 117-119). This revised understanding highlights the ‘bottom-up’ institutional push provided for structural transformation and industrial development imparted by sub-national governments. Important examples of such ‘local developmental state’-type pro-activity include experiences from post-war West Germany, northern Italy, the Basque country of Spain and Japan, followed by many East Asian states from the 1950s onwards (Malaysia, Thailand, Vietnam), and also by several Latin American countries (Argentina, Brazil, Chile, Colombia and Mexico). Finally there is China, which provides perhaps the most impressive example of the ‘local developmental state’ in action (see Thun, 2006: Ou, 2013), and might even constitute a ‘Beijing/Shanghai consensus’ model to replace the failed ‘top-down’ market-driven ‘Washington consensus’ neoliberal model of development. This paper assesses the historical experience, core capabilities and potential transferability of the local developmental state model. In the context of the ongoing intellectual and material collapse of the global neoliberal model, but especially in view of the failure of low productivity market-driven individual entrepreneurship and self-employment projects to act as the source of value and development progress (Bateman, 2010; Nightingale and Coad, 2014; Naudé, 2016), the argument is made that the local developmental state model should become a key foundation of local-level policy efforts and the judicious promotion of the ‘right type’ of high productivity enterprise development projects, in both the developed and developing countries, required to bring about a sustainable and equitable development trajectory ‘from the bottom-up’.
Bringing the local state back into development:
thelocal developmental state’ and the promotion of sustainable
economic development and growth from the bottom-up
Milford Bateman
Faculty of Economics and Tourism, Juraj Dobrila University at Pula, Croatia;
International Development Studies, St Marys University, Halifax, Canada.
JEL Classifications: L16, L25, L26, L53, O14, O17, O25, O38
Keywords: local developmental state, productivity, industrial policy, SMEs,
Paper presented at the 29th Annual Conference of the
European Association for Evolutionary Political Economy (EAEPE),
The role of the State in Economic Development:
State Capacity, State Autonomy and Economic Development’,
Corvinus University of Budapest, Budapest, Hungary, 19-21 October 2017.
During the high period of global neoliberalism (1980-2008) the ‘developmental state’
concept, along with the term ‘neoliberalism’ itself, was effectively banned from policy
discussions and program support in the international development community. However,
thanks to the global financial crisis and the Great Recession that ensued after 2008, events
that proved to be the destructive crescendo of a failed neoliberal model of structural
transformation and development (Chang and Grabel, 2014), an important rethink has come
about. With a mountain of inter-locking economic, social, political and ecological crises to
deal with before and after the events of 2008, some of the more progressive individuals and
institutions within the international development community have taken the lead in
reviving the developmental state concept from its enforced hibernation. The hope behind
this move is that modified developmental state structures and related industrial policies
might help to drive forward the needed global economic recovery based on the accelerated
deployment of technological advances and innovation in enterprise development (Crespi,
Fernández-Arias and Stein 2014; Salazar-Xirinachs, Nubler and Kozul-Wright, 2014;
UNCTAD, 2016a).
Most attention in this revival of interest in the developmental state has predictably
followed the line that began with Chalmers Johnson’s (1982) pioneering work on the
Japanese developmental state, which continued on through the seminal work on South
Korea by Alice Amsden (1989) and on Taiwan by Robert Wade (1990). This is to say that
the recent revival of interest in the developmental state has overwhelmingly emphasized the
role of national-level developmental state institutions (for example, Stiglitz and Lin, 2013).
However, I would argue that this understanding is somewhat incomplete, if not misleading.
This is because a great part of the historic economic development success attributed to the
developmental state model, especially in the more recent post-Second World War times, is
actually success brought about thanks to the innovative activities not so much of national-
level developmental state institutions but of sub-national developmental state institutions
that is, thanks to what is now called the ‘local developmental state’ (Bateman, 2000). If
leading developmental state theorist Ha-Joon Chang (2010a: 3) defines a developmental
state as “a state that intervenes to promote economic development by explicitly favouring
1 This is a slightly revised version of the paper presented at the EAEPE conference. Thanks to all those who
gave comments at the presentation and afterwards via email. Naturally all remaining errors of fact and
interpretation are mine alone. A modified version of this paper focusing on South Africa was given as the
keynote presentation at the conferenceEconomic Development for Employment: Sub-national Strategies’,
Gauteng, South Africa, 14-15 November, 2016.
certain sectors over others’ then here we may simply add the epithet ‘local’ to define the
local developmental state as ‘a local state that intervenes to promote local economic
development by explicitly favouring certain sectors over others’.
This revised understanding of the developmental state is meant to bring out into the
open the historically important, but often disguised and overlooked, ‘bottom-up’
institutional push for structural transformation and industrial development provided by pro-
active sub-national governments. This task is all the more important in the light of the fact
that the recent move to Post-Fordist forms of industrial development and sources of
innovation which has seen a transition from heavy-industry-led development to light
industry and services-led development as the source of growth (Piore and Sabel, 1984;
Amin, 1994). Pro-active sub-national governments are thus not only increasingly open
about their pro-active development activities, but are now in a much better position than
central government to drive sustainable development and growth. Importantly also, in
contradistinction to the national developmental state, the local developmental state is much
more intimately associated with democratic and responsive (local) government operations
than central government ones that are distant from their citizens. Accordingly, without
appreciating just how much of the developmental state involves a specifically local
dynamic and content, the reemerging analysis and promotion of the developmental state
risks being incomplete and, crucially, many of its most important advantages might be
overlooked if the emphasis remains stuck at the national level.
The purpose of this paper, then, is to rehearse the important differences that exist
between a national and a local developmental state. The paper will first outline the
historical experience pointing to the role of the local developmental state in facilitating
‘bottom-up’ economic development and growth in many countries. The argument is
outlined that the local developmental state (hereafter LDS) model has been a key
foundation of the overall economic development effort since 1945 (but even before this)
both in cooperation with the national-level developmental state, but also quite
independently, and even in the face of determined resistance from the central government.
I show that the LDS model’s central, but certainly not only, attribute is its ability to
judiciously promote the ‘right’ enterprises that are most intimately associated with driving
forward structural transformation, diversification and sustainable growth. The paper then
contrasts the LDS model to the local economic development model that emerged
worldwide in the neoliberal era after 1980, which is a local development model based on
the ‘pure’ textbook spontaneous proliferation of individual entrepreneurship and informal
self-employment ventures. Finally, to provide some further indications of the institutional
content of the LDS model, I briefly outline several of the most successful functional
examples that emerged and which can be directly contrasted, both temporally and spatially,
to their direct ‘local neoliberal’ counterparts that abjectly failed. The paper concludes that
in the post-neoliberal world the LDS model is now required more than ever to contribute to
bringing about a sustainable and equitable local economic and social development
In his inaugural speech made on January 20th 1981, US President Ronald Reagan famously
declared that “Government is not the solution to our problem; government is the problem”.2
This proclamation summed up what a new generation of neoliberal economists and
international development community policymakers, especially in the World Bank and
IMF, very firmly believed was both economic history and the then current reality: the
‘invisible hand’ of free markets and individual entrepreneurs drives forward economic
development, and the very best thing the state can do to help is to simply ‘get out of the
way’. However, Ronald Reagan’s inauguration took place at almost exactly the same time
as it was being confirmed elsewhere that a wildly successful exercise in state intervention
was behind the rise to power and wealth of the three ‘miracle’ economies of East Asia -
Japan, South Korea and Taiwan. These three quite astonishing economic development
success stories were essentially founded upon the prior construction of a comprehensive
raft of state coordinated and inter-connected institutional vehicles, an institutional matrix
that very productively combined to bring about a dynamic process of industrial upgrading
and structural transformation. That is, the three East Asian ‘miracle’ countries succeeded
because they had established and deployed what we now call a ‘developmental state’.
Fearful of the implications arising from this state-led development, right from the
beginning neoliberal economists took enormous liberties in attempting to misrepresent the
causes of Asia’s historic success. In the 1980s when East Asia’s success was first raising
interest in western economic circles, Milton Friedman (Freidman and Friedman, 1980)
2 SeeReagan’s First Inaugural: “Government is not the solution to our problem; government is the
problem.”’ Heritage Foundation, January 21st, 1981.
not-the-solution-to-our-problem-government-is-the-problem (retrieved on October 12th, 2016).
went on record to claim it was all down to the power of free markets and untrammelled
individual entrepreneurship, a claim that had no actual basis in reality.
But perhaps nowhere was this misrepresentation more in evidence than with regard
to the World Bank and its publication in 1993 of what became known as the ‘Miracle
Report’ (World Bank, 1993). The Miracle Report argued that there was nothing about East
Asia’s rapid transformation that could not be explained by the region’s supposed adoption
of ‘market-friendly’ policies and ‘getting the fundamentals right’, especially with regard to
the promotion of high savings rates and ensuring substantial spending on quality
infrastructure. A major assumption was that key enterprises and sectors supported by the
state, which in the long run turned out to be growth-oriented and profitable, would anyway
have been identified and supported by private finance. The World Bank’s market
fundamentalist position was therefore adjudged to remain solid in the light of East Asia’s
obvious success.
Important pushback to this seriously flawed study was immediately forthcoming,
Notably this came from the world’s leading scholars on East Asia’s development
experience (for examples, see Amsden, 1994; Lall, 1994 and Chang, 1999 [pointedly none
of whom were invited to participate in the preparation of the Miracle Report]). Their
combined analysis showed that almost all of the Miracle Report’s key statements were
simply wrong, being based on flawed analysis, illogicality and misunderstanding. Worse,
the study was revealed to be have been about deliberately rather than unintentionally
attempting to mislead the policy community and general public (on this crucially important
distinction and for a brilliant account of the Miracle Report’s preparation, see Wade, 1996).
Inevitably, the Miracle Report was welcomed by the neoliberal policy-making community
as a whole, and in particular by the most fanatical neoliberal-oriented governments, media
outlets and academic economists (especially in the USA). It allowed, as intended, for the
ongoing but false narrative – the market and some market-friendly interventions were
responsible for East Asia’s success – to be defended and retained in the face of the mass of
historical evidence that these countries all deliberately went about ‘getting the prices wrong
systematically’ (Amsden, 1989). The World Bank’s muddying the waters goal was thus
achieved: many economists did indeed come around to thinking (wrongly) that East Asia’s
remarkable success was mainly a market-driven outcome rather than a state institution-
driven one. Sadly, this also included many progressive economists who got it entirely
wrong about East Asia’s rapid development, most notably future Nobel Economics Prize
winner Paul Krugman.3
By the 2000s it became clear that the developmental state approach had helped yet
another even larger set of poor Asian countries escape poverty and very rapidly develop;
Malaysia, Indonesia, Thailand, Vietnam and then, towering over all of them, China (Lall,
1996; Amsden, 2001; Studwell, 2013). Moreover, in parallel it also became clear why those
Asian countries that (initially at least) opted-out of building their own developmental state -
India and Bangladesh are the obvious examples – began to fall far behind their rapidly
growing Asian neighbors.4 And, finally, as for those neoliberals still arguing along the lines
of Anne Krueger (1990) that the occasional failures of the developmental state were the
supposed proof that free trade and free markets would have worked better, this argument
too fell into disrepute. As Ha-Joon Chang (2002, 2007) has pointed out, although not all
individual developmental state experiments in history have worked, by far the most
important fact to register here is that in recent times no country anywhere has achieved
successful development without some form of a developmental state. Importantly, Chang’s
argument (especially Chang, 2002) was built on an analysis of the crucial but long hidden
role of development state institutions in creating and sustaining the world’s most advanced
countries – the UK, Germany, France, Italy, the Scandinavian countries and the USA. The
same argument applied to Latin America too, as the cases of accelerated development
achieved in Chile, Brazil, Mexico and Argentina conclusively show (Amsden, 2001;
Devlin and Moguillansky, 2011).
By the 2000s, the case in favor of the developmental state appeared to have been
proven beyond all reasonable doubt.5 As Peter Evans (2010:37) summed up the state of
3 Krugman (1994) famously argued at the time that East Asia’s success was entirely down to nothing more
than ‘the extraordinary mobilization of resources’ and that it would all come to an inglorious end very soon.
4 The reason for this, as Vivek Chibber (2014) points out, is that the business elites in both countries feared
that their power and wealth would inevitably be compromised at some stage.
5 Predictably, however, neoliberal-oriented economists and the World Bank, thoroughly uncomfortable with
the degree of state intervention and successful deployment of ‘collective capabilities’, continue to offer
resistance to the developmental state concept wherever they can. A typical recent example is a 2017 book on
building state capability authored by two former World Bank economists (Matt Andrews and Lant Pritchett)
and one current World Bank sociologist (Michael Woolcock) (see Andrews, Pritchett and Woolcock, 2017).
In spite of the obvious lessons to be learned from the developmental state model across many countries, the
authors refuse in their book to even reference the ‘developmental state’ model and its manifest successes in
recent history in building and operationalizing state capability, while the path-breaking insights and outputs
of its key proponents (for example, Amsden, Chang, Evans, Johnson, Wade, Weiss, et al) are not even
mentioned in passing. Instead, the authors focus upon finding ways to build the sort of state capability that
might find approval in the neoliberal policy-making community, and especially in the World Bankthat is,
state capability that can be used to undergird wider neoliberal policy prescriptions. For example, the World
Bank’s ‘Doing Business’ project is predictably highlighted across several sections in the book as an example
knowledge, “Neither theorists nor practising policy-makers can ignore the crucial role of
state institutions in producing developmental success. History and development theory
support the proposition ‘no developmental state, no development’”. The World Bank, IMF
and a generation of neoliberal economists - and Ronald Reagan - had been very seriously
wrong: the key to achieving sustainable development and growth, and to go from
developing to developed country status, was to build, deploy, adjust and sustain the
institutions of a developmental state. The burning question for any developing country in
the global south was thus no longer whether or not it ought to build its own developmental
state, but how best to do so.
But even as the developmental state model began to gain widespread acceptance, it
also became apparent that, as leading developmental state analyst Ben Fine (2006: 114) put
it, it had ‘shifting content’ and that there was not just one model of the developmental state.
I would argue the most important aspect of differentiation here is the significant degree of
‘localness’ embodied in the developmental state model but not generally recognized as
such. There is a growing amount of evidence to show that sub-national governments have
very often acted as ‘local’ developmental states (Bateman 2000, 2001, 2005, 2010: 166-
201, 2015a, 2016; UNCTAD, 2016b: 117-119). Sometimes this sub-national government
pro-activity has been undertaken in cooperation with the national state, but oftentimes not.
In some extreme cases, as we will see below, the central government has gone out of its
way to frustrate and block the actions of ‘local’ developmental state institutions. Most
importantly, this element of ‘localness’ appears to have been very successful in many
locations, so much so that in several cases it constitutes the primary reason why the
developmental state model has been as effective as it has. All of this points to the existence
of a specifically ‘local’ developmental state model of development standing somewhat
apart from the conventional developmental state model first outlined in relation to Japan,
South Korea and Taiwan.
of a policy intervention that supports market-driven development. This project was raised even though there
exists no meaningful independent evidence of it having enjoyed any broad-based developmental success and
that there is very much accumulated evidence that the real (neoliberal) goal is simply to further empower
business elites at the expense of the poor (for example, seeWorld Bank business rankings obscure poverty
and corruption, critics argue’, The Guardian, 26th October, 2012. Retrieved from:
corruption ; see alsoA bad business: Bank divisions on Doing Business revealed’, Bretton Woods Project,
2nd October, 2013. Retrieved from:
As is well known, the initial narrative of the developmental state in East Asia focused on
the contribution of national-level developmental state institutions promoting development
‘from the top down’, such as MITI in Japan and the Economic Planning Board in South
Korea. One important initial reason for this emphasis was that only national government
institutions had the scale and scope to successfully build large industrial enterprises and
industries and endow them with the most advanced technologies, which was initially seen
as the main route to structural transformation and economic growth. However, when
drilling further down to identify the root causes of many of the most successful
development experiences since World War II it is found that much, and in some cases most,
of the impetus for development was actually coming not from ‘top-down’ national state
institutions, but from ‘bottom-up’ sub-national state institutions. Not least because they
were more flexible than central governments with regard to changing markets,
technologies, innovations and consumer tastes, it began to become clear that sub-national
governments had taken on the responsibility for building their own developmental state
institutions, sometimes with and sometimes without the support of central government, and
they were achieving major development successes as a result.
A crucial reason for this change is undoubtedly related to the fact that in more
recent Post-Fordist times (see Amin, 1994) it became clear that the key driver of
development was no longer the large enterprise or heavy industry based on mass
production serving large mass markets. Instead, not least thanks to new flexible
technologies that could reap economies of scale at low levels of output as well as ensure
the very highest quality and specification, the main driver of development was identified in
more and more cases as the technology-based and vertically and horizontally inter-
connected micro, small and medium enterprise (MSME) sector. This very much came
across in the literature on the flexible specialization thesis (Piore and Sabel, 1984), in the
work on the role of innovation and technology in SME development (Acs and Audretsch,
1990) and, especially, in the rediscovery of ultra-efficient Marshallian ‘industrial districts’
in northern Italy and beyond (see Best, 1990; Sengenberger, Loveman and Piore, 1990;
Pyke and Sengenberger, 1992; Saxenian, 1994).
This transition from heavy-industry-led development to light industry and services-
led development thus had a major policy implication: pro-active sub-national governments
were actually in a very much better position than central government to provide a range of
institutional support structures, programs and other stimuli that could support the most
important of these MSMEs get firmly established, sustainably grow, train employees,
identify and deploy state-of-the-art technologies, innovate with regard to their product and
process, and connect together to find ‘collective’ economies of scale and scope in clusters,
networks and subcontracting chains. Providing the right impetus for development was thus
increasingly being reconfigured as a local responsibility.
There are two aspects to this local activity. First, there is LDS activity undertaken in
cooperation with the central state, creating a hybrid ‘bottom up and top-down’ form of an
LDS model. Second, there is LDS activity that is undertaken largely autonomously of
central state operations and strategies, and may even be forced to function in the face of
determined resistance from the central state. This constitutes what might be called the
‘pure’ LDS model. Let me sketch out some most important aspects and examples of both
models in what follows.
3.1. ‘Hybrid’ central-local developmental state models
The first indication that the original developmental state model was seriously under-
registering the element of ‘localness’ came, pointedly, from all three of the pioneering East
Asian ‘top-down’ developmental states. Among other things, all three countries had
established their developmental state structures incorporating significant elements of
‘bottom-up’ activity and institutional impetus geared up to MSME development. So, while
the role of the Ministry of International Trade and Industry (MITI) was quite central to
post-war Japan’s recovery and rapid development through the rebirth of heavy industry, as
Johnson (1982) documents, of equal importance in many respects was the myriad of
dedicated LDS institutions operating at the municipal and prefectural level that proved
capable of promoting a flexible, dynamic, risk-sharing and technologically-advanced
MSME sector ‘from the bottom-up’. This highly efficient MSME sector was hugely
valuable to Japan’s economic development because it became the core component in its
world-beating industrial subcontracting chains, seen most of all in its motor vehicle,
engineering, shipbuilding and electronics industries (Womack, Jones and Roos, 1990;
Nishiguchi, 1994; Whittaker, 1997). Particularly after a new regionalism approach and the
upgrading of sub-national government capacity was mandated in the mid-1980s as the
‘bottom-up’ response to growing regional inequality (Abe, 1998: 312), Japan’s dense local
tissue of LDS institutions began to play even more of a role in providing the local MSME
sector with sophisticated industrial services, network-building advice and support, access to
new technologies, and financial support on affordable terms and maturities. Key
technology development institutions were brought to bear on this issue. Notably this
included the Public Experiment Stations (Kohsetsushi) that were established by prefectural
governments from the 1950s onwards, and which went on to become important
decentralized vehicles through which local technologies were modernized and
technological innovation in SMEs promoted (Abe, 1998: 302).
Alongside support for increasing the technological competence of its MSME
population, local and regional governments were also extremely active in ensuring that
MSMEs with the potential to grow also had access to financial support on affordable terms
and maturities. This involved, first of all, the establishment of an array of city, regional and
long-term credit banks which offered large volumes of longer-term, affordable credit. The
resources for these measures came partly from central government, but also partly from
local savings mobilization achieved through local state-owned banks. And, as Toshiya
Kitayama (1995, 2001) has pointed out, it greatly helped that local governments were quick
to develop a wide variety of their own support programs and ‘soft’ measures to support the
most growth-oriented locally based MSMEs. Special policy-based loans were also provided
if this involved equipment upgrading or the introduction to the locality of new
technologies. Alongside these efforts, local and regional government also provided support
to large numbers of credit unions, financial cooperatives and other forms of small-scale
non-state mutual association that were getting re-established after 1945. Two local financial
institutions were particularly important to microenterprise development – the mutual (sogo)
banks and the credit banks (shinkin) formed out of the larger pre-war credit unions.
Crucially, as Eric Girardin and Xie Ping (1997) note, oversight by local governments and
by the central Zenshiren Bank helped establish local trust and ensured minimal fraud and
speculative activity associated with depositors’ money, which was one of the main features
behind the high local savings rates experienced in Japan for most of the 1950s and 1960s.
Thus, as David Friedman (1988) usefully concluded,
“In effect, the Japanese created an industrial equivalent of the American savings
and loan system for the US housing market. In Japan, however, the thrift
institutions funded not home ownership but independent factories. This redirection
of capital markets toward small firms nurtured the independent expansion of small
companies during the high-growth period”
Summing up the reasons for its post-war success, the iconic MITI (1980: 14) itself accepted
that Japan’s great success was derived from two key factors: national export policy and
local economic development policy involving the extensive promotion of SMEs, which it
described as the “two major pillars of Japanese economic development policy since the
Second World War”. In many respects, therefore, the original developmental state can thus
be better described as very much a combined ‘top-down’ and ‘bottom-up’ operation.
Consider also the important case of the former West Germany. In the post-war
period, while quite unfairly downplayed and seriously misrepresented by many of its
politicians, 6 the former West Germany was also famously quick to establish a
comprehensive set of developmental state institutions that proved capable of rapidly
driving forward its post-war reconstruction and development. As in Japan, some important
national institutions were established by the central government, most notably the state-
owned development bank, Kreditanstalt für Wiederaufbau (KfW). At times the Federal
government was very pro-active in mobilizing sub-national institutions to help create new
products and processes of national importance, notably in the bio-technology sector for
example (see Adelberger, 1999).
However, local and regional (Länder) governments more often took the lead in
establishing whole swathes of sub-national institutions that were to prove crucial in
promoting industrial development and structural transformation ‘from the bottom-up’
(Weiss, 1998; Meyer-Stamer and Wältring, 2000). Again as in Japan, key local institutions
were those promoting technology development and transfer, which was seen as the most
important way to promote industrial development and upgrading in technology-savvy
SMEs, as well as high skilled jobs. These institutions variously included the Max Plank
Institutes, Steinbeis Technology Transfer Centres and Fraunhofer Institutes, all of which
have played a major role in assisting local SMEs to find and adopt new technologies and
innovate with regard to both products and processes. Thereafter many of the SMEs were
able to productively integrate into the supply chains of the major industrial enterprises in
6 Although the former West Germany’s ordo-liberalism ideology accepted state intervention as necessary to
ensure the market worked as close as possible to the theory (Wren-Lewis, 2014), as Linda Weiss (1998
chapter 5) has shown many politicians and economists were extremely reluctant to go any further and admit
the developmental state origins of its Wirtschaftswunder”. This reluctance was grounded in the fear that
accepting such a fact publicly would give succor to the planned economies of the East (including the former
German Democratic Republic [East Germany]) during the long years of the Cold War, and to their
ideological opponents in the western economies. Bolstered also by US government pressure, many neoliberal
politicians in West Germany thus cynically agreed to publicly celebrate the (false) view that ‘the market’ and
‘private enterprise’ were mainly responsible for the stunning post-war success the country enjoyed.
their locality motor vehicles, machine tools, electronics, and so on - while many other
SMEs became high quality suppliers of final goods (including for export).
The region of Baden-Württemberg is the iconic example of ‘bottom-up’ success
achieved in post-war West Germany (Heidenreich and Krauss, 1998). It was very much
driven forward by its dense networks of local institutions that provided quality technical
and other forms of support to its local industrial SMEs. Many of the industrial SMEs
supported were the famously efficient family-owned mittelstand (medium-sized
enterprises), which many analysts (notably Simon, 1996) argue provided the crucial
impetus for a very large part of post-war Germany’s industrial success. The mittelstand
became particularly adept at servicing the domestic and global final niche demand for
many high specification industrial products, as well as the demand for high quality and
specification intermediate items for local large industrial companies involved in the
automobile manufacturing and machine tools (Schmitz, 1992; Simon, 1996). Supporting
the(ir) mittelstand in their quest to deliver higher quality and rising productivity was very
much deemed a responsibility of local and regional governments and the various LDS
institutions under their purview.
The other country that mounted a major effort in the post-war period to
(re)construct a developmental state, which might be perhaps surprising to some, was the
USA.7 Already enjoying rapid growth and economic development, the US government
came out of World War II as the world’s dominant economy. Importantly, it began to
approach this exalted position in the pre-war period thanks to major programs of state
support for various new technologies, including many which played a major role in
building up its famous ‘military-industrial complex’. Many of the most important
technologies, such as in electrical engineering, were developed and promoted as part of the
New Deal program in the 1930s that began pulling the US economy out of the Great
Depression (Tobey, 1996).
In the post-war period, the US retained many developmental state programs, but
there was less immediate urgency to expand such a form of intervention. After all, the US
had very many large enterprises reaping economies of scale and colonizing export markets
worldwide, especially in Europe as a result of Marshal Plan funding, so there appeared to
7 It is notable that the other victorious western country after World War II, the UK, largely rejected the idea to
build a raft of developmental state institutions in the post-war period. Many analysts argue that this decision
accounts for the UK’s post-war decline as an industrial power and its eventual over-reliance on a short-termist
London-based elite financial sector as the source of the country’s wealth and employment (Hutton, 1995).
be no real reason to worry. However, as Peter Eisinger (1989) and Fred Block and Matthew
Keller (2011) extensively document, the US soon began to build a very significant de-
centralised developmental state. One crucial push factor in the 1970s was the growing
competition from Japan and the former West Germany that began to challenge many of the
technology-based industrial areas long held as the preserve of US companies. In order to
retain or take back the lead in many of the most important technology areas, the US
government began to construct a larger and more sophisticated developmental state
structure. This structure was often funded centrally though not centrally directed or
planned. It was mainly operated on a decentralized basis and largely autonomously driven
forward by individual states and cities. Building up such a structure was done quietly,
however, in order not to raise too many ideological objections from neoliberals in politics.8
As Block (2008) further points out (on this, see also Lazonick, 2011; Mazzucato,
2013), this decentralized developmental state structure was to go on to fund, develop, risk-
take and establish many of the USA’s most important technological innovations, world-
leading SME clusters, and innovative ICT hubs that were to aid the US industrial and
services sectors to once more attain a leading global position. By far the most iconic
example of such success is from northern California with regard to what we now call
Silicon Valley, a phenomenon that, as Robert Wade (2014) points out, was created thanks
to a raft of major state-coordinated and funded projects that were established at Stanford
University, the University of California at Berkeley and at the Lawrence Livermore
National Laboratory. These cutting edge and hugely risky projects allowed researchers
within these organizations to develop a host of new technologies and innovative product
and process applications. Rather than retain such advances in the host institutions that gave
rise to them, the peculiarities of US capitalism were such that the leading researchers were
allowed, if not encouraged, to privatize these advances and establish their own private
companies to exploit them. The growing number of such technology-based SMEs formed
in this way, some eventually getting much larger, evolved into the Silicon Valley cluster.
The end results of developmental state-type investment programs and risk-taking were thus
essentially privatized without the offer of any direct financial payback to the state, nor
8As in the former West Germany (see footnote 6), the USA’s ultimately very extensive decentralized
development state structures had to be carefully misrepresented and relabeled as being involved in R&D or
else in ‘promoting competition’. As Block (2008:15) summarized it, “the hidden developmental state is
hidden in plain view. But it has been rendered invisible by the success of market fundamentalist ideology.
Since that ideology insists that the private sector is efficient and dynamic while the state is wasteful and
unproductive, there is simply no conceptual space for the idea that government plays a critical role in
maintaining and expanding the private sector’s dynamism.”
indeed any real recognition of the crucial role of the state. It certainly did not have to be
this way in terms of recouping some of the financial outlay.9 Even worse, as Mariana
Mazzucato (2013) shows, this unequal situation of ‘state pain and private gain’ was to
extend and intensify into the new millennium with the now very largest companies that had
extensively tapping into state funded R&D adamantly refusing to pay anything back into
the system in return. Perhaps the most notable case raised by Mazzucato is that of Apple
and the IPhone.10
The next big step in the emergence of the developmental state concept took place in
East Asia from the 1950s onwards, where both South Korea and Taiwan were driven to
reflect hard on Japan’s runaway success in reconstructing after World War II. The result
was major economic success, forging the notion (along with Japan) of there being a set of
East Asian ‘miracle’ economies. In both cases, however, several important local aspects of
the developmental state model were adopted, particularly involving the pro-active role of
township and village governments. For example, initially there was a focus in South Korea
on providing quality extension services for farmers to ensure food self-sufficiency was
achieved early on, but thereafter this provided a suitable foundation for a rural
industrialization trajectory, which was aided by a raft of support structures established by
township and village governments. Initially basing its growth on the SME sector, especially
to produce the light industrial goods required as part of its import substitution goals,
required local financial and non-financial support structures. These were created from the
top-down but operated in conjunction with (and providing funding for) township and
village governments. This early but still only partial local state institution-building
experience then proved vital when, in the 1970s, South Korea’s development policy shifted
9 There is generally no problem for the state to obtain a return on its investment and risk-taking if it wants
to. This return can be easily secured by retaining spin-offs in state hands and enjoying the revenue and
dividends directly. Later on windfall gains can be made by an eventual sale of the company. The state can
also take an equity stake in any new private company formed by researchers in state R&D bodies or by
individuals greatly assisted by the state to establish a particular enterprise, and release the shares to the market
later on. The latter method has been a very successful adjunct to developmental state-type programs in Ireland
for example, where the state investment body for new and early stage SMEs, Enterprise Ireland, took major
equity stakes in the high technology companies it supported in the 1990s. When these stakes were unwound
several years later, the funds generated essentially covered the entire running costs of the institution since its
establishment (Bary, O’Mahony and Sax, 2012).
10 As Mazzucato (2013) documents at length, almost all of the technology used in Apple’s hugely successful
IPhone was state-funded and US university sector developed. Apple simply tapped into and commercialized
these path-breaking technologies when they were proved to work. However, by a variety of problematic and
unethical mechanisms, for many years Apple has been able to avoid paying tax on a very large part of its
operations, which might have helped fund the next generation of technologies developed under state auspices
see footnote 13.
to a focus on developing large enterprises (chaebols). As in Japan, the South Korean state
realized that there was an urgent need to develop efficient local subcontracting networks to
service the input needs of the chaebols. Accordingly, many new local state institutions
were established, funded and then vectored together in order to support the most
appropriate technology-based and high specification MSMEs as they sought to integrate
ultimately very successfully - into the chaebolssupply chains (Lall, 1996: 19). From the
1980s onwards, South Korea’s MSME sector began to play an increasingly important and
independent role in the country’s development, requiring the local state institutions that
supported this sector to upgrade their own scale and scope (Nugent and Yhee, 2001). As
the country rapidly changed in the late 1980s, however, much of its pioneering national
developmental state structures were dismantled on the recommendation of a new
generation of Korean economists and policy advisors educated in the USA, very
unwisely,11 leaving even more to be done by local MSME support institutions.
As in South Korea, the Taiwanese government sought to rapidly reconstruct its
economy and society in the 1950s after its break with mainland China. This effort began
with measures to increase rural agricultural productivity in order to achieve food self-
sufficiency. One key institutional innovation here was the large number of agricultural
extension services workers provided by local and village administrative units, which was
far and away above that in other East Asian countries. The initial emphasis on food later on
gave way to a desire to industrialize and develop exports in order to generate foreign
capital. A technologically sophisticated SME sector was quickly developed in Taiwan
thanks to a comprehensive state venture capital industry able to provide long-term support
alongside a dense network of technology development programs, business incubators and
science and technology parks, all of which led Sanjaya Lall (1996: 207) to describe it as
‘perhaps the developing world’s most advanced system of technology support for small and
medium enterprises’.
Further important elements of ‘bottom-up’ LDS-type activity were then found in the
next wave of East Asia’s economic success cases, beginning with Malaysia, Indonesia and
Thailand (Meyanathan, 1994; Lall, 1996; Hutchinson, 2013). At least until the late 1990s,12
11 As Chang (2000) makes clear, it was the dismantling of the South Korean developmental state from the late
1980s onwards, especially thanks to growing influence of an inflow of returning US-trained neoliberal
economists, that played a key role in giving rise to the de-supervision and deregulation that precipitated the
Asian crisis of 1997.
12 The neoliberal revolution that swept the world in the 1980s enforced a much more market-driven economic
policy in all three countries, most notably in terms of insisting that the financial sector be significantly
thanks to their respective ‘part central and part local’ adapted versions of the original
developmental state model, much success was registered in promoting industrial upgrading,
technological deepening and exports.
More recently, there is Vietnam’s stunning economic success, which some attribute
to its national developmental state structures (Beeson and Pham, 2012). But also of crucial
importance were the sub-national elements of its developmental state model that were able
to drive forward development ‘from the bottom-up’. Notably this involved a wide variety
of sophisticated development and financial institutions established by township and village
administrations. Vietnam’s sub-national governments were incentivized by the central
government to engage in local developmental activities because for up to five years they
enjoyed a large share of any additional tax revenues generated by new enterprise activities
(ibid: 546). The rural agricultural sector, in particular, was greatly supported by local state
infrastructure (notably irrigation), technical advice bodies, agricultural extension services,
business advisory support agencies and credit institutions, which helped a great number of
small family farms to move into such as coffee, aquaculture products and rice (Bateman,
2010: 191-198). Crucially, this support enabled many farming units to quickly scale-up to
become much more productive semi-commercial family farming units, which was
important to them accumulating further financial resources to begin to invest in off-farm
enterprise development (Kerbo, 2011: 145). Building upon this base, pro-active village and
township administrations and a growing range of local technology development agencies
then began to initiate and coordinate a large number of pro-active enterprise development
programs and support for production-based SMEs operating in a variety of fast growing
business and sub-contracting areas, including through backward links to agriculture. This
institutional base then turned to support a rural industrialization and industrial SME
development trajectory, which created the core of the industrial economy that exists today.
Many Latin American countries also have a rich but largely hidden history of sub-
national government LDS-type activity that assisted them in their determination to escape
their colonial roots and assigned role as primary product producer and exporter. With many
central governments converted, sometimes forcibly, over to ‘Washington consensus’ free
market policies in the 1980s, one of the fallback responses was to devolve greater
deregulated and state direction of financial resources be largely ended. With the private sector put in almost
full control of finance once more, the stage was inevitably set for the Asian crisis that erupted in 1997, and
from which all three countries have yet to make a real recovery (see Studwell, 2013; 155: see also footnote
responsibility for actually directly promoting development down to the regions and cities.
With both the Washington consensus policies and centralised government now receding
into the past, the LDS model is being seen as holding out the potential to strengthen and
diversify local economies at the same time as underpinning local democracy and
In Brazil, for example, as Boniface (2002:1) pointed out, decentralization and local
autonomy were very much put on the agenda in the 1960s, which meant that “state
governors and city mayors (.) increasingly displaced the national government as the critical
brokers in the pursuit of developmental needs”. Brazil’s cities and regions (and also their
local elites) used the new freedoms to introduce a wide-range of LDS-type initiatives to
develop the sub-national economy ‘from the bottom-up’ (as noted, for example, by
Tendler, 1997). The adoption of new technologies and innovations was a key goal of this
activity involving a wider variety of local industrial policies, with the state of Minas Gerais
probably the most active participant here (Montero, 2001). In addition, there is Brazil’s
state development bank, BNDES, to factor in. BNDES has achieved very visible success
promoting national projects (the aircraft manufacturer Embraer is the most famous success
story), but it has also very much had a local persona. BNDES’s de-centralised locally-
managed offices working in partnership with local governments have excelled at
identifying and providing the best potential technology-driven SME projects with
affordable loans, while also indirectly supporting SME sector development through the
design of local content agreements that they have been able to attach to head office large
company investments.
Even more so than in Brazil, Chile’s impressive post-1973 coup economic
performance is also very much directly attributable, not to the free market, but to a
comprehensive set of decentralized state-led enterprise development and technology-
upgrading institutions (Casaburi, 1999; Kurtz 2001; Negoita and Block, 2012). The most
important of these bodies is the powerful CORFO (Corporación de Fomento de la
Producción de Chile). Established as early as 1939, in spite of it being a state body with a
mandate to intervene, CORFO was allowed to continue even after the 1973 coup ushered in
‘Chicago-school’ neoliberal policies. CORFO was urgently needed to continue its
impressive industrial and agricultural development work. CORFO has mainly worked
below the main Ministries through its network of regional offices that work horizontally
with sub-national governments and other actors in order to patiently develop and finance
new enterprises, SME clusters, and entire export sectors from scratch. The most famous
examples of CORFO’s success are probably farmed salmon and soft fruits (Schrank and
Kurtz 2005, 686–88). More recently, the LDS-approach has been boosted by the Chilean
government’s decision to establish an innovation fund to support SMEs. This new project
is designed and managed almost entirely locally, albeit financed by the revenues from
CODELCO, the world’s largest and most profitable copper producer (CODELCO also
happens to be state-owned and, as such, the revenues paid to the state have been used to
provide a major impetus behind sustainable development in the country [Gobierno de
Chile, 2016]).
Mexico has also achieved much impetus for development and growth thanks to
central government encouraging a range of sub-national government institutions geared up
to technology development and the promotion of innovation through a local industrial
policy and local consensus-building (Devlin and Pietrobelli, 2016). In the case of
Colombia, however, very much as in the Basque region of Spain in the 1960s (see above)
the LDS model emerged in spite of an antagonistic central government, one that was in
thrall to Washington consensus policies and US government military imperatives. Many of
the cities and regions experiencing rapid economic decline and rising social violence
(especially narcotics related), outcomes that were largely attributable to Washington
consensus policies, began to initiate a ‘bottom-up’ response of their own. They began to
build and deploy their own institutional capacities and resources in order to more directly
and immediately pursue local economic and social development objectives. The city of
Medellin is perhaps the best example of a city in a region (Antioquia) in Colombia that has
been able to pioneer its own pro-active LDS-type model based on enterprise development,
technology transfer, foreign investment and local innovation. Crucially, its LDS-type
strategy has been funded in most part by the profits generated by the municipality’s
ownership of EPM (Empresas Publicas de Medellín), a utility company the municipality
founded and, through constant investment and strong management, helped turn into one of
the largest and most profitable utility companies in Latin America (valued in 2014 at $US8
billion). Through a variety of means, including a range of innovative SME development
programs, business incubators and technology transfers schemes, and all the time with
EPM’s funding, the city of Medellin has been able to achieve impressive local economic
development outcomes (see Bateman, Duran Ortĩz and Maclean, 2011). Not unimportantly,
this economic progress has, in turn, helped to strengthen the inter-class accommodation
that in the mid-1990s brought the infamous local narco-war to an end (see Maclean, 2015).
Finally, consider the important example of a small country attempting to develop;
that of Ireland. Ireland’s historic poverty, unemployment and migration appeared to have
been resolved in the 1970s thanks to major inward FDI flows encouraged by the Industrial
Development Authority (IDA). But this centrally directed ‘top down’ effort to industrialize
Ireland began to suffer in the 1980s. Among other problems, few of the big US
multinationals developed any functional links to local SMEs, and also the level of
repatriated profits began to soar. The industrial sector thus remained weak and produced
few sustainable decent jobs, migration to the USA of the highly skilled boomed once more,
and Ireland found itself heading back into poverty again. In the 1990s, attempting to take a
new path toward resetting the economy on an upward trajectory, the Irish government
sought to ‘get the institutions right’. It did this by building what Seán Ó Riain (2011)
describes as a decentralized Developmental Network State (DNS) of some considerable
sophistication and complexity.
The DNS involved central government as one key partner, through Enterprise
Ireland founded in 1994. But it also included a very wide variety of sub-national public
development agencies, Universities and local innovation and technology institutions that
did most of the real work. The DNS was designed to push hard to establish new
technology-based SMEs and integrate these into the operations of the multinational
companies based in Ireland, such as Google, Apple, Microsoft and Intel. Very low taxation
rates (perhaps way too low13) was the obvious unstated sweetener that the Irish government
used to get the big multinationals to agree to significantly increase the level of local content
in their supply chains. Grants were provided to new starts and growth-oriented technology-
based SMEs, alongside access to a wide variety of support services (R&D, training,
mentoring, and so on). Numerous sectoral associations, networks and technology centres
were sponsored by the state, especially with regard to burgeoning pharmaceutical
applications. Massive state (and EU-funded) spending on R&D by a new Science
Foundation Ireland (SFI) and other local bodies, including Universities, also produced
major advances on many fronts that were taken up by local SMEs. The hugely successful
13 The European Commission is of the opinion that Ireland offered not just low tax rates to foreign
multinationals, but a way for them to avoid taxes almost completely, and it has therefore sought to get the
worst (mainly US-based) offenders to repay this tax. One of the very worst offenders in this regard is the
Apple Corporation, which used a combination of subsidiaries in Ireland, the Netherlands and Bermuda to cut
its tax burden substantially. In 2014, for example, the corporate tax paid out on its European profits was
reduced down to just 0.005 per cent. SeeApple Owes $14.5 Billion in Back Taxes to Ireland, E.U. Says’,
New York Times, August 30th 2016.
ireland.html (accessed on November 5th, 2016).
Irish software industry that emerged in the 1990s, with Irish enterprises world-leaders in
several sub-sectors (credit card technology, educational software) (Breathnach, 2007), is
just the most high-profile of the many areas where technology-development policies and
support created value in the economy.
Importantly, however, and a parallel to what happened to South Korea,14 we also
need to understand why much of this developmental success was destroyed in more recent
times thanks to the abandonment of its developmental state model. In the early 2000s the
neoliberal-oriented political elite based in the capital city of Dublin began the process of
dismantling and side-lining key elements of the DNS structure, driven by their dogmatic
view that everything would go even better if only ‘the market’ and individual
entrepreneurship were once more allowed completely free reign. Among other changes,
deregulation took hold and key institutions within the DNS were instructed to become
financially self-sustaining. As Ó Riain (2011: 207) emphasizes, this was a bad move
because it inevitably began to destroy the developmental role of the DNS. Technology-
driven development was shifted aside and replaced by financial entrepreneurship as the
driver of development and decent work creation – that is, the DNS was progressively
dismantled and replaced by Wall Street-style financial and real estate speculation as the
main drivers of growth. Not coincidentally, the closest friends and associates of the Dublin-
based political elite became the primary beneficiaries of this switch in policy. The end
result of this move was quick in coming, however. Now very heavily into speculation, in
2008 Ireland suffered the largest financial crash in its history, and one of the largest in
world history, requiring the entire banking system to be bailed out by the Irish government
and its international partners (the EU, IMF). In the aftermath of Ireland’s deregulation-
driven financial crash, lessons appear to have been learned. Technology-based SME
development has returned once more as the main force behind economic development and
decent jobs creation in Ireland (especially via increased exports). However, the massive
debts accumulated by the state bail-out of the private banking system will take many years
for the general public to repay.
3.2. ‘Pure’ local development state models
14 Cf. footnote 11.
Another set of country examples highlight where successful developmental statism was
very much driven by ‘bottom-up’ LDS activity. Indeed, in some cases, for political, ethnic
and religious reasons, there was initial central government opposition to the LDS effort
underway by sub-national governments, which makes its eventual success all the more
astonishing. These are the types of LDS model that most closely approximate to what we
might call a ‘pure’ version of the LDS model.
One the most important examples of LDS success of this kind is that of Italy’s ‘red’
northern regions, especially with regard to the ‘reddest’ region of all, Emilia-Romagna.
Although the very large literature has all too often tended to carefully skate over and
downplay the very definite local state-driven origins of what became known as the ‘Third
Italy’ model,15 the evidence that pro-active (local) state institutions were absolutely
decisive in the development success achieved is actually quite clear and unambiguous.
Against a post-war background of economic destruction, raging poverty and
unemployment, and an antagonistic central government in Rome,16 the northern regions set
about constructing a ‘consensus-driven’ economic model that reflected their desire, among
other things, to create a much fairer society that might repair the bitter class divisions that
allowed Fascism to emerge in the northern regions (as right across Italy). To achieve this
end, the ‘red’ regions wanted to extend the power and activities of local and regional
15 One reason for this is that from the 1980s onwards both academic researchers, international development
community staff and private consultants came under very serious pressure to conform to the new neoliberal
framework and refrain from making any conclusions that there was any sort of positive development role for
state intervention (cf. footnotes 6 and 8; see also Haering and Douglas, 2012; Bateman, 2014). Much of the
work promoting the northern Italian local development model in the 1980s and 1990s was undertaken and/or
sponsored by the ILO (for example, Pyke, Becattini and Sengenberger, 1990) at a time when the ILO was
under very serious pressure from the US government to conform to the neoliberal narrative. Openly praising
state intervention in any ILO related publication was guaranteed to generate internal resistance from US
nationals that had been elevated into key positions at the ILO precisely in order to ‘neoliberalize’ the
institution. It would also have invited external political intervention by the US government representatives to
the ILO who were pushing the new neoliberal ideology from the outside (on these political issues in general,
see Standing, 2008). Understandably, therefore, there was much pressure on all researchers at the ILO
working on local economic development, and other researchers in general, to explain their results as much as
possible in terms of a more ideologically acceptable narrative, notably such as ‘public-private partner-
shipping’. Some researchers working on Northern Italy went even further by simply omitting the decisive role
that local and regional state institutions played after 1945 in facilitating that region’s stunning economic and
social success. The most notable example of this is Putnam (1993), who famously claimed that northern
Italy’s success was pretty much all down to its high reserves ofsocial capital’ leaving out the crucial role of
local and regional government intervention in actually creating the social capital and the economic miracle in
general. As a result of such fundamental flaws, Putnam’s work on the causes of northern Italy’s success has in
many respects been debunked (for example, see Harriss, 2002; 33-37; Fine, 2001).
16 For political and religious reasons the ‘red’ northern regions were disliked by the newly elected Christian
Democratic central government in Rome, which was also very close to the US government. Among other
things, Marshall Plan reconstruction and development funding meant to be made available to all of Italy after
1945 was, at least initially, almost entirely steered away from the ‘red’ northern regions (Capecchi, 1990:27).
governments. The result was the establishment of a very sophisticated set of LDS
institutions geared up to supporting ‘solidarity-driven’ enterprise development. The nature
and functioning of many of these LDS institutions in northern Italy have been quite
extensively documented across a range of over-lapping literatures, including those focusing
upon Marshallian ‘Industrial Districts’ (Pyke, Becattini and Sengenberger, 1990), the
flexible specialization thesis proposed by Michael Piore and Charles Sabel (1984) that
drew heavily from northern Italian experience, and the development role of cooperatives
(Zamagni and Zamagni, 2010). While not conveying the argument under the specific
conventions of the ‘developmental state’ concept, there is no doubt that these literatures are
cognizant of the fact that sub-national state institutions very much took the lead in
promoting development through their own direct actions, and also by galvanising into
action a range of non-state institutions, such as trade unions, entrepreneurs associations, the
cooperative sector and so on (see also below).
One of the most important institutions deployed as part of northern Italy’s LDS
approach were its ‘servizi reali’. These are local economic development agencies geared up
to promoting the enterprises and enterprise structures most associated with a sustainable
local economic development trajectory: technology-based SMEs, enterprise clusters, and
the famous heavily-networked ‘industrial districts’ (Pyke, 1992). With a total of forty
‘servizi reali’ by the mid-1990s, a third of Italy’s total, and with ‘red’ Emilia-Romagna
alone possessing fifteen per cent of the Italian total, the northern regions were the best
placed in all of Italy to bring about sustainable development.
As Linda Weiss (1988) vividly showed, northern Italy also took the lead in
operating Special Credit Institutes and Artisan Funds to complement the non-financial
institutions supporting enterprise development efforts after 1945. Operating alongside
northern Italy’s famous networks of independent cooperative banks and financial
cooperatives (see Di Salvo and Lopez, 2010), this dense layer of community-embedded
financial institutions proved decisive in quickly generating an atmosphere of trust and
reciprocity. And by quickly mobilizing savings and then judiciously recycling these
savings into long-term investments in the most sustainable local business projects, the local
economy was able to recover fast and thereafter sustainably develop and grow.
The LDS model in northern Italy also played a major role in helping construct the
world’s most powerful regional network of cooperative enterprises (see Zamagni and
Zamagni 2010). The first post-war elected governments saw the cooperative sector as an
ideologically preferable middle ground between, on the one hand, the large capitalist
companies (mainly based in Milan and Turin) which had strongly supported the rise of
Fascism, and, on the other hand, the old class of small private entrepreneurial ventures,
which were also early supporters of Fascism and reflexively hostile to any form of local
collectivism and solidarity. Apart from providing a suitable ambience for cooperative
development, the local and regional governments also stimulated new cooperatives through
the various financial and non-financial support structures. Regional and local governments
were also key supporters of the cooperative movement’s own membership bodies, such as
LEGACOOP, which received substantial funding to undertake promotional, training and
development work on their behalf. Not surprisingly, local cooperative banks and financial
cooperatives also went out of their way to offer support to non-financial cooperatives. The
result was that by 2003 the region of Emilia-Romagna had both the highest number of co-
operatives in Italy and the highest proportion of economic activity (40 percent of its GDP)
in the co-operative sector. Partly as a result of its successful cooperative sector activity, the
regional capital city of Bologna became the richest city in Italy, while once poor and under-
developed Emilia-Romagna became the second richest region in Italy and the tenth richest
region in the EU (Birchall, 1997).
The Basque region of Spain also provides a very important example of the LDS
model arising from inauspicious origins in the form of a civil war that then led to
determined resistance to Basque nationalism from the central government. The world-
famous Cooperative Complex (MCC) headquartered in the town of Mondragon in the
Basque region of northern Spain is an example of a successful institution-driven
development model. But it is a development model with a difference: the institutions that
started the ball rolling in the 1960s were non-governmental. The reason for this was the
extreme opposition to the Basque community by the Madrid government (a dictatorship),
which forced the Mondragon community to develop its own institutions to promote local
economic development (Bateman, Girard and McIntyre, 2006). Beginning as a way of
creating employment in one of the poorest and most deprived regions of Spain, the MCC
went on to create over 100 cooperatives and over 80,000 decent industrial jobs under its
own structure. Crucially, it achieved this result thanks to two dedicated developmental
institutions within the nascent cooperative complex. The first was the Working Peoples
Bank (Caja Laboral Popular) that was set up to provide financial support for new and
emerging cooperative enterprises on affordable terms and maturities. The second was the
Entrepreneurial Division (División Empresarial) that was designed to provide promotional
and technical support for new cooperatives. Both institutions proved to be extremely adept
at developing methodologies of support that helped many new industrial cooperatives into
existence and to grow sustainably, eventually creating the most important cooperative
complex in the world.
Crucially, Mondragon’s stunning success in stimulating endogenous growth in an
otherwise declining ‘rustbelt’ region was to prove the inspiration for many other local and
regional governments in the Basque region to develop an equally sophisticated set of their
own LDS capabilities operating along the same functional lines (Cooke and Morgan, 1998:
162-192). Above all, the pro-active Basque regional government went on to construct an
industrial policy framework that drew heavily upon the institutional architecture and
operating methodology of Mondragon’s División Empresarial. After some setbacks, this
new institutional model contributed greatly to the processes of new enterprise formation
and growth, industrial upgrading and structural transformation. Once a famously
‘institution-thin’ and poverty-wracked region, the Basque regional government became
highly active in terms of establishing a range of public institutions to promote both new
cooperative enterprises and traditional investor-driven enterprises. Success was registered
in many technical areas requiring long-term financial support, notably in cluster-formation
and development (Konstantynova, 2017).
Just a few examples of the LDS-type structures created in the Basque region would
include Siaolan, Garais and Elker-Lan (for further details, see Bateman, Gerard and
McIntyre, 2006). Siaolan is an independent company that has provided significant support
to help the unemployed back into work, particularly into cooperatives. Garaia is a
sophisticated business incubator project (i.e., a so-called ‘Technopole’) that supports new
technology-intensive businesses, again especially cooperative businesses. As with Siaolan,
there is no specific stipulation that its tenants must become cooperatives, but most choose
to do so of their own volition (as of 2006, 80 per cent of Garaia’s tenants were
cooperatives). The personnel making use of these facilities are generally highly skilled
and/or technically trained. Finally, there is Elkar-Lan, established in 2003 to specifically
provide support for new start and conversion cooperatives in the Basque region. The
combined result of the Basque region’s LDS model, very much as in Northern Italy, was
that over a thirty or so year period it facilitated a major episode of industrial upgrading and
structural transformation. The Basque region was transformed from one of Spain’s poorest
regions in the 1960s into one of its richest regions. Perhaps of even more importance is the
fact that the Basque region was from the 1990s onwards regularly declared by the European
Commission to be among the very top regions in Europe in terms of achieving high all-
round living standards for its citizens (see Bateman, 2007).
Most recently, however, it is China’s stunning success, perhaps above all other
examples, that demonstrates the important role that the LDS model can play in promoting
economic development ‘from the bottom-up’. The story starts with China’s major
decentralisation moves in the early 1980s under Deng Xiao Ping that gave significant - at
times, complete - strategic and operational freedom to provinces, counties, cities, townships
and village administrations to introduce and manage their own industrial, innovation, labor
market, financial and technology development policies (Blecher, 1991; Oi, 1995; Duckett,
1998). Providing the right incentives in China were two important factors: that a much
larger percentage of business and employee tax revenues were retained locally, and also
that senior officials in the fastest growing regions had an expanded range of promotion
possibilities. These freedoms and incentives gave rise to an historically unparalleled
‘bottom-up’ development process promoted by sub-national governments, especially cities,
that essentially created what we now know today as China’s economic ‘miracle’.
China’s development success began in the 1980s with the establishment of so-called
Township and Village Enterprises (TVEs). The TVEs were overwhelmingly local
government-owned enterprises, operated to hard budget constraints and, crucially, they
were pushed to deploy as much state-of-the-art technology as possible in order to keep
costs down whilst keeping quality and specification high, the better to create export
opportunities. By 1996 there were some 7.6 million industrial TVEs (O’Connor, 1998),
with a major export drive routed through Hong Kong, representing probably the most
successful experience of “municipal entrepreneurship” of all time (Qian, 1999). One of the
key positive aspects of local government ownership of the TVEs was that profits were
recycled back into further development of the local economy, such as into establishing
incubator units, business parks, training and vocational education schemes, special
development funds, and so on.
By the 1990s, beginning with the mass privatization and sale of many of the best
TVEs to their own management (Buck, 2007), some of the largest and most successful
local governments stepped away, perhaps ill-advisedly,17 from the original parameters of
17 Thanks to asset-stripping, self-awarding of high salaries and bonuses, profits taken out as dividends by new
non-local owners and outright fraud, very many of the best TVEs were looted and then forced into bankruptcy
by their new private owners (Lee, 2014: 107). This spasm of private enrichment was one of the main reasons
that inequality in China began to shoot up quite dramatically around this time.
the TVE experiment. The new focus of the LDS was on establishing dynamic enterprises
and enterprise clusters under sub-national state ownership, and even whole industries, from
scratch. Indeed, having learned well from the now-foreclosed TVE experiment, many sub-
national governments were soon building world-beating industrial sectors ‘from the
bottom-up’, initially centred on such important areas as shipbuilding, electronics,
automobiles (see below) and engineering, before branching out into other higher
technology areas in the 2000s. With a national strategic industrial policy framework that
increasingly recognized the need to promote higher value added products and technology-
based products and processes through ‘technological leap-frogging’, enormous effort was
invested at the local level almost everywhere in China into advancing the level of
technology and commercializing these advances where appropriate.
One of the most popular ways for cities and provinces to do this was via an
incubator project, which most sub-national governments had independently established by
the early 2000s. While central government still plays a role in promoting, funding and
coordinating basic research across China, sub-national governments have taken it upon
themselves to tap into and help quickly push through all sources of basic research into
commercial application (Appelbaum et al, 2011: 232), thereby creating quality local
industrial jobs and rising incomes. In fact, probably nowhere is the LDS model as well-
developed as it is with regard to developing and commercializing important technologies.
All of China’s major cities have established incubator programs specializing in particular
areas of R&D and commercialization activities that they feel are most appropriate to their
location and local comparative advantage. Importantly, the private sector is reluctant to
invest in advancing the level of technology, a problem everywhere around the world. But
this problem is resolved in China by pro-active LDS institutions that offer appropriate
forms of financial support to local businesses that are willing to adapt and adopt important
new technologies and applications.
Such was the success achieved right across China with its LDS model, operating
across many industries, that it can plausibly be argued (see Rithmire, 2014) that there exists
a sort of a ‘Beijing/Shanghai consensus’ – a sub-national government-driven economic
development model that serves as an emerging substitute for the failed Washington
consensus market-driven model of development (see also below).
The central aspect of the developmental state model beginning with its origin in Japan was
the way that it was able to successfully nurture the most productively efficient and
developmentally effective structure of individual enterprises, enterprise clusters and
entirely new industrial sectors. Importantly, the market stood as the background feature, but
it was not the driving force behind the process. As Alice Amsden (1989) famously
remarked in the context of explaining the South Korean economic miracle, the South
Korean developmental state actually succeeded on the basis of ‘getting the prices wrong’
that is, creatively and flexibly nurturing the enterprises that would in the longer run help
the country to develop and grow, and not those that in the short run would simply cover
their costs and make a profit as per a market-driven model of development.
The initial focus of the developmental state model on promoting large-scale
industrial enterprises ‘from the top-down’ has been mentioned, and also that it quickly gave
way to a focus on promoting ‘from the bottom-up’ a much wider range of ‘the right’ micro-
small and medium enterprises (MSME), the combination of which in clusters, ‘industrial
districts’, networks, subcontracting chains and so on was to go on to define, I would argue,
the essence of the LDS model. But what is the ‘right’ type of enterprise to support?
Neoliberals in particular (Friedman, 1962), and neoclassical economists in general,
argue and teach that development and growth are always and everywhere a function of
whatever combination of enterprises emerges in response to free market forces. That is,
Adam Smith’s ‘invisible hand’ is all that is required to catalyse into existence the ‘right’
type and quantity of enterprises. The developmental state narrative rejects this simplistic
view, however, for at least two very important and empirically-based reasons. One, that
only particular types of enterprise drive growth and economic development and, two, that
the developmental state narrative emerged out of the understanding that the state can play a
major role in nurturing precisely these ‘right’ types of enterprise. Let me start this section
by first considering the issue of what are the ‘right’ type of enterprises.
The developmental state literature is very rich on what types of enterprises lie
behind sustainable development and growth. This has been augmented by path-breaking
work associated with several other fields of enquiry: Nelson and Winter’s (1982) theory of
evolutionary change that argued the most efficient enterprises are those that can innovate
and create new organisational routines; the ‘flexible specialization’ thesis of Michael Piore
and Charles Sabel (1984); the analysis and surveys of ‘Industrial Districts’ (Pyke, Becattini
and Sengenberger, 1990); the theories of innovation and inter-firm connections (Audretsch,
1988; Audretsch and Acs, 1990; Castells and Hall, 1994); the important developmental role
of cooperatives in Northern Italy and elsewhere (Zamagni and Zamagni, 2010); and
William Baumol’s (1990) challenge to the conventional wisdom with his assertion that not
all forms of entrepreneurship generate a positive outcome, and that some forms are actually
positively destructive (see also Baumol et al, 2007).
What we can distil from all of this important historical evidence is a very rough set
of indicators as to what we might define as the ‘right’ type of enterprise that is most closely
associated with growth and development. These would be small, medium or large
enterprises that have the following characteristics:
are formally registered and operating according to all legal requirements;
are operating at, or well above, or with the capacity to go above, minimum efficient
are as much as possible operating on the technology frontier;
are innovation and skills-driven rather than (just) low labour cost-driven;
are horizontally (clusters, networks) and vertically (sub-contracting, supply chains,
public procurement) productively inter-connected with other organisations;
are able to continually learn, adapt and facilitate the creation of new organisational
routines, institutions and capabilities.
The LDS model thus emerged out of its historic ability to successfully promote a critical
mass of the ‘right’ types of development and growth-oriented enterprises. At the same time,
the generation of a typology of the ‘right’ enterprises necessarily means we must also have
a broad typology of the ‘wrong’ enterprises. Indeed, as the next section illustrates, it is
important to consider this issue because the alternative local development model to the
LDS one is precisely a development model that focused on promoting the ‘wrong’ type of
In the 1980s as the global neoliberal project gained traction, a new local development
model began to emerge in the UK and USA, one that was based on the long-held belief
within neoliberal circles (for example, see Hayek, 1944) that individual entrepreneurship
and self-help are essentially the font of all economic growth. The key to local development
and growth, it was argued, was to secure the activities of as many individual entrepreneurs
as possible. In practice, starting in the UK under the ‘enterprise culture’ rubric
(Blanchflower and Oswald, 1991) and in the USA under the term ‘workfare’ (Jurik, 1995:
Servon, 1997), this pivotal policy goal was translated into a global movement that
essentially sought to create as many informal microenterprises and self-employment
ventures as possible (De Soto, 1986: Levitsky, 1989). This model of ‘local neoliberalism’
thus essentially celebrated and massively extended the promotion of the ‘wrong’
enterprises (Davis, 2006; Bateman, 2010) and it provided a direct challenge to the LDS
model. In many countries (such as the UK and also China – see below) the two local
development models were actually in competition with each other for validation and
We can broadly define the ‘wrong’ type of enterprises as those enterprises that are:
typically simple microenterprises or one-person self-employment ventures;
unregistered or, worse, illegal;
in possession of few functional productivity-raising links to other local enterprises
(subcontracting, clustering) or to the community (e.g., taxation, adherence to health
and safety legislation);
operating at below minimum efficient scale;
low/no technology-based;
driven more by low wages rather than innovation or skills upgrading;
in possession of almost no concern for the environment;
very often petty trade-based.
One important problem remained to be resolved here, however. By definition the poor
everywhere generally lack the capital to get any business idea off the ground. The
important answer to this conundrum in the USA and UK was found in the capitalisation of
welfare payments. This released a small sum of money that could then be used by the
unemployed to establish a job through a tiny business. In the UK, for instance, the Thatcher
government introduced the Enterprise Allowance Scheme (EAS), a scheme that paid out a
monthly sum of money to the unemployed roughly equal to the value of the welfare
payment foregone (Bateman, 2017a). Similar welfare-into-entrepreneurship programs were
introduced in the USA, accelerating under President Clinton (Frank, 2016).
This local neoliberal model of development reverberated even more powerfully
with regard to the global south. With the ‘discovery’ of the importance of the informal
sector in terms of what the poor actually did for a living in the global south (see Hart,
1973), the international development community felt that it had found a brilliant new
instrument – the informal microenterprise - through which is could radically transform the
lives of the poor for the better. Defined by extreme poverty, unemployment and under-
employment, informality and deprivation, it was thought that accelerated informal
microenterprise development would address all of these problems in turn. The international
development community thus effectively anointed informal low-productivity individual
entrepreneurship and self-employment to be the solution to poverty, unemployment and
deprivation almost everywhere in the global south. Growing numbers of business
practitioners and business school gurus quickly bought into the argument that the large
populations in some countries of the global south were virtually all ‘entrepreneurs in
waiting’, more even as a percentage of the total population than in the advanced economies,
and that if they could only be activated they would collectively grow the economy from the
‘bottom-up’ (Smith and Thurman, 2007; Khanna, 2008).
Crucially, the assumed main barrier in the global south to the entry and expansion
of individual enterprises and self-employment – a lack of capital was very creatively
addressed by the not unconnected rise of the global microcredit movement (Bateman,
2010). The concept of microfinance - tiny loans to support informal sector activities - was
famously propagated by such as the US-trained economist and 2006 Nobel Peace Prize
recipient, Dr Muhammad Yunus. Initially provided in the 1980s through non-profit bodies,
such as Yunus’s own Grameen Bank, in the 1990s the microfinance movement was
extensively commercialized, deregulated and de-supervised (one might say
‘neoliberalised’) and turned into a for-profit business opportunity. The global microfinance
movement would go on to supply huge amounts of capital in the form of tiny microloans to
very large numbers of the poor, helping kick-start, as intended, many hundreds of millions
of informal microenterprises and self-employment ventures (Bateman, 2010).
Thus, by the 2000s all the conditions seemed to be in place for a major boost to
global development and growth prospects everywhere through a massive expansion in the
number of informal microenterprises and self-employment ventures. Even if it supported
what might be called the ‘wrong’ enterprises, many still thought that the local neoliberal
model appeared to be the ‘right’ one to establish.
But local neoliberalism failed
However, the envisaged spurt to development and growth not only did not take place, the
eventual impact of the global policy shift into supporting informal microenterprises and
self-employment ventures was actually to undermine and destroy the chances of
development and growth in the average local economy.
In terms of the developed economies first, it is now increasingly accepted that the
‘enterprise culture’ experiment begun in the 1980s has almost entirely failed to lead on to
the type of economic development and innovation that was actually envisaged by those
promoting the concept (Drakopoulou-Dodd and Anderson, 2002; Naudé, 2016). One early
problem pointed out by Chris Hasluck (1990) and David Storey (1992) was that was most
new micro- and small enterprise entry projects established as part of the enterprise culture
experiment achieved nothing other than to create high rates of exit and displacement in the
raft of incumbent enterprises already operating in the same market sub-sector. Generally
much fewer than anticipated net jobs or incomes (still less innovative products and
processes) were therefore created. The problem here is an assumption that one can base an
impact analysis on the outcome experienced by an individual client when the dominant
outcomes are actually created by the interactions of individual clients. Thus, new clients
established with the aid of microcredit inevitably take demand from existing
microenterprises, and so also destroy jobs and income in existing microenterprises, thereby
creating a near zero-sum outcome in the short-term.18
Going further, let us also recall the words provided by the Canadian economist John
Kenneth Galbraith (1967) who reminded us that it is only in the world of small enterprises
where we find that ‘pure’ textbook market competition conditions exist. In the real world
that is the experience of the poor, Galbraith pointed out, completely free entry and exit of
small enterprises is a very harsh force indeed, into the longer term competing normal
profits in small enterprises down to zero and pushing wages down to the very barest
subsistence level. And such conditions are simply not conducive to long-term sustainable
development. Even worse, inevitably, as such as Will Hutton (1996) and Richard Sennett
(1998) have vividly recounted, working conditions in such modern informal
18 This is one of the principal reasons why the supposedly more accurate randomized Control Trial (RCT)
methodology increasingly used to assess impact in the world of microcredit (see Banerjee et al, 2015) is
actually far less accurate than its advocates contend, if not thoroughly misleading.
microenterprises and self-employment are beginning to emulate the appalling conditions
found in the late 1800s and early 1900s.
More recently, Rafael La Porta and Andrei Shleifer (2008) and Scott Shane (2009)
also effectively disproved the long-running myth that the informal microenterprise sector
could serve as the foundation, or ‘breeding ground’, for larger and higher productivity
SMEs. Instead, as David Storey (1992; see also Storey and Johnson, 1987) argued, only a
very small number of enterprises possess growth-potential and they must, and can, be
identified and very actively supported in preference to supporting the vast bulk of no-
growth new start enterprises.
Usefully summing up the evidence are Paul Nightingale and Alex Coad (2014:136).
Describing what I have called the ‘wrong’ type of enterprises as ‘muppets’ –‘marginal
undersized poor performance enterprises’, they argue that these ‘muppets’ have achieved
almost nothing for the local community in terms of development. Understandably,
therefore, they argue that the global policy emphasis upon supporting such ‘muppet’
enterprises, including major investments in start-ups, incubators and other enterprise
development program, has been unwise and a waste of resources. Their conclusion was that
“(A)cross the board policy enthusiasm for entrepreneurial start-ups, no matter their quality,
might be seen as another policy fad.”.
Notwithstanding many off-the-cuff claims of development effectiveness, 19 this
programmed support for the ‘wrong’ type of enterprises through the local neoliberal model
of development has, in fact, turned out to be even more of a failure in the global south.
There is actually very solid evidence to show that the strategic choice to programmatically
support informal microenterprise and self-employment ventures is generally a growth-
impeding one (Chang, 2010b: 157-167). In particular, such types of enterprise serve to
‘crowd out’ far more productive and growth-oriented enterprises by absorbing (often only
temporarily) both market share and financial support that could be much better used by the
‘right’ enterprises. In particular, because the vast bulk of informal microenterprises in the
global south work in the petty retailing sector, such as in street trading and ‘mom and pop
stores’, the loss of potential productivity gains thanks to the inability to reap scale
19 One of the most astonishingly naïve examples of this evidence-free claim comes from the high-profile
Oxford University-trained and former World Bank and Goldman Sachs economist, Dambisa Moyo. She
centrally claims in her breakthrough book Dead Aid (2019: 129) that development stems from women selling
tomatoes on the street, who she argues are “the real entrepreneurs, the backbone of Zambia’s economic
future” and that they “need capital just as much as the mining company” (see the discussion in Bateman,
economies is likely to be very significant indeed (on the huge importance of the retail
sector in raising productivity, see Lewis, 2004). Across Africa, for instance, very many of
the large retail outlets and supermarkets that emerged in the post-war period were later out-
competed by ultra-low productivity informal microenterprises owned by women, and then
gradually replaced by them (Kinyanjui, 2014). This programmed reversion to primitive
forms of individualized informal distribution has some immediate upsides to it, but into the
longer-term it has very negatively impacted on the productivity of the average local
economy in Africa. All told, the programmed proliferation of such ‘wrong’ enterprises
right across the world, thanks in no small measure to the global microfinance movement,
provides one of the best possible illustrations of the immense damage that can result for an
economy seeking growth and development through informal microenterprises and self-
employment ventures (Bateman, 2010: 2013, 2017; Bateman and Chang, 2012; Bateman
and Maclean, 2017: Mader, 2015).
One of the very best summaries of how programmed support for the ‘wrong’
enterprises can actually very seriously undermine development and growth comes from a
surprising source: from a team of researchers based at the generally neoliberal-oriented
Inter-American Development Bank (IADB). The view expressed in the IADB’s 2010
edited publication The Age of Productivity(see Pagés, 2010) was that for a long time (at
least until the late 1990s) Latin America was trapped in poverty and under-development
precisely because it channeled its scarce financial resources into low-productivity informal
microenterprises and self-employment ventures, and far too little into more productive
formal small, medium and large enterprises. This inefficiency was very graphically
expressed, with claims that the last twenty years has been a disaster and nothing more than
“the pulverisation of economic activity into millions of tiny enterprises with low
productivity” (ibid: 6). That informal microenterprises and self-employment ventures are
by far the most inefficient enterprises (i.e., the ‘wrong’ enterprises) is because resources
are locked up in very small – often one-person – firms, of very low productivity” (ibid: 69).
The authors emphasize over and again the point that (ibid: 9) “When credit is granted to
unproductive enterprises, it perpetuates the misallocation of effort, work, and capital that
reduces a country’s productivity”. Finally, the extent of destruction wrought across the
continent, thanks to the intermediation of financial support into the ‘wrong’ enterprises,
was such that the authors were forced to come to a very radical (for them) conclusion (ibid:
6), that “(T)he overwhelming presence of small companies and self-employed workers (in
Latin America) is a sign of failure, not of success” (my italics).
The tiny businesses that constitute the bulk of entrepreneurship undertaken by the
poor in the global south are simply not associated with development and sustainable
growth. They are in the main simply ‘own-account workers’, as the ILO (1993) calls them
individuals who work as self-employed but are not ‘entrepreneurs’ by any conventional
definition of the term. The result of their extremely limited size, range of simple activities,
limited ability to use technology and other drawbacks means that their contribution to
development and growth has been very limited indeed, if not seriously negative when one
takes into account their use of scarce resources that could be better invested elsewhere in
the ‘right’ enterprises (Bateman and Chang, 2012). As Mike Davis (2006) points out,
pushing the poor into petty entrepreneurship and cramming more and more of them into
limited local markets is not one of the solutions to poverty in the global south, but one of
the increasingly ugliest manifestations of it.
Experience from the advanced economies and, even more so, from the global south,
pretty conclusively shows that the local neoliberal model of development has been a
markedly unsuccessful local model of development ‘from the bottom-up’ compared to the
LDS model. Two reasons account for why the local neoliberal model of development
nevertheless retains its support in the international development community (the World
Bank especially) and in key western governments (i.e., in the US government). First, it is
because of ideology. In spite of its very poor track record since 1980, and then its massive
setback in 2007-8 when it essentially piloted the global economy into a wall in the shape of
the global financial crisis, the ideology of neoliberalism very much remains alive in key
elite circles because it provides a moral justification for privilege and inequality (Mirowski,
2013). Second, financial elites have found that they can make massive profits as facilitators
of the local neoliberal model. This is especially the case with regard to the global
microfinance movement. Increasingly owned and controlled by a narrow financial elite,
engaging with the global microfinance sector has become a way to enjoy massive profit-
taking thanks to high interest rates and a range of unethical practices (Sinclair, 2012).
This final section provides a little more of the institutional content of the LDS model by
comparing three of what I see as successful examples of the LDS model that can very
usefully be directly contrasted, both temporally and spatially, to their direct ‘local
neoliberal’ counterparts.
6.1. Structural upgrading through development of the ‘right’ SMEs
As noted above, one of the most important preconditions for local and national economic
development is the existence of rafts of minimum scale, innovative, technology-based
enterprises. This especially involves the need for rafts of SMEs that can act as high
quality/low cost suppliers to large enterprises. But how to create such SME suppliers? This
was the issue facing China in the 1980s as it transitioned away from strict central planning
towards a new model of decentralised development under Deng Xiaoping. As noted above
in section 3.2, newly empowered sub-national governments starting in China’s southeast
began to create rafts of so-called Township and Village Enterprises (TVEs). These TVEs
initially flourished because they could sell cheap but still reasonable quality goods through
Hong Kong. However, it was realised by the 1990s that if China was going to compete in
world markets, it would need to follow the Japanese development model in at least two
important respects; first, establish a small number of large technology-based companies
able to penetrate global markets for higher value added goods and, second, somehow
construct a large network of MSMEs able to supply these large companies with the crucial
high quality and high technical specification yet low cost inputs.
This is where the Chinese LDS model came into being and China’s own economic
‘miracle’ also began. Perhaps the most iconic example of China’s LDS approach here is
with regard to the ability of pro-active city governments that were at the forefront of
achieving this goal by establishing world-leading motor vehicle manufacturers and, even
more so, building the cluster of industrial MSMEs that were all too often the key to
successfully running such operations (for example, see Womack, Jones and Roos, 1990).
Above all, this is the case in Shanghai. Eric Thun (2006:9) points out that in China ‘local
governments are increasingly the agents of industrial transformation at the level of the
firm’ before going on to note how the city government in Shanghai was the very best in this
regard. It was able to establish and vector a remarkable array of LDS institutional vehicles
into the task of building a motor vehicle industry in the city. This included a variety of
local enterprise development agencies, dedicated science parks, technology business
incubation units, R&D bodies and city commercial banks. This array of LDS institutions
was able to establish, fund, promote and constantly upgrade the required cluster of local
industrial subcontractors, select the foreign partners needed to work with them, train
potential future employees, and stimulate further local R&D and innovation in order to try
to keep abreast of the very latest developments and regulations (particularly with regard to
environmental standards as environmental pressures became pressing in the 2000s).
Importantly, Thun argues that the LDS model adopted by the Shanghai authorities
fared much better than the more market-driven LDS model adopted by the authorities in
other parts of China that were also keen to develop a motor vehicle industry. Beijing and
Guangzhou are the obvious examples of what Thun (ibid: 136-171) calls ‘Laissez-Faire’
models of local economic development. Both city authorities in Beijing and Guangzhou
were still interventionist and so able to establish local motor vehicle assembly operations,
but their deployment of a watered-down LDS model failed to provide anywhere near
sufficient impetus to develop the absolutely crucial SME supplier network around such
operations. In Beijing, local entrepreneurs were simply unwilling to independently invest in
developing the SME capacities to service its large motor vehicle final assembly enterprise,
meaning that the assembly operations were seriously hamstrung. The largest operations
only got around the problem by sourcing their components from abroad, or else from
Shanghai’s well-developed SME supplier base (ibid, 291). In the case of the huge Beijing
Hyundai Motor Company (BHMC), as Seung-Youn Ou (2013: 18) documents, the problem
had to be resolved (diverting around WTO rules) by allowing the Hyundai Corporation to
transplant its own suppliers from South Korea to Beijing. The local economic development
impact of the motor vehicle industry was therefore considerably reduced: Korean SMEs
brought many of their own key staff, they were reluctant to transfer key proprietary
technologies to local Chinese staff, and profits were often repatriated to Korea not invested
It is therefore abundantly clear that local governments and the LDS model (the full-
blown version as in Shanghai and the ‘watered down’ version as in Beijing) in China have
been extremely influential not just in building large industrial enterprises, but also in
building the crucial SME supplier networks that ultimately determine success or failure of
the entire sector. However, there are also important examples where sub-national
governments chose to adopt the full-blown market-driven ‘local neoliberal’ model of
development and leave the development of supplier networks entirely up to the whims and
individual motivations of local entrepreneurs. By far the most famous example of a city in
China that chose to adopt this ‘local neoliberal’ development model is the city of Wenzhou
in Zheijiang Province.
Wenzhou in the 1980s and 1990s stood out as the obvious neoliberal counter-
example to the LDS development model then being adopted across China. The city
authorities sought to provide an ‘enabling environment’ for individuals to establish and
expand whatever individual entrepreneurial ventures they wished, and even to directly
establish privately-owned TVEs (which in all other areas of China were mainly local
government-owned). Only a few limited forms of business and technology support were
provided to those who chose to go into business, on the basis that market forces would
provide whatever it was that individual entrepreneurs needed to make a business
successful. The ‘Wenzhou model’ thus stood as the local neoliberal ‘hold-out’ to the
dominant LDS model of development that was becoming embedded in China at this time.
As such, of course, it was inevitably widely feted by the global business media in the major
capitalist countries (notably the UK’s famously neoliberal-oriented Economist magazine20),
by the neoliberal-oriented international development community and by many US-based
neoliberal academics then in thrall to the ‘enterprise culture’ (see Liu, 1992; Parris, 1993).
As envisaged by supporters of the model, Wenzhou quickly gave rise to rafts of
new SMEs, many of which got their start by integrating into supplier relationships with
large companies operating in the city, province and further afield. This initial progress
clearly portended to advocates that a much deeper and technology-raising relationship with
local companies was in process, as well as the launch of new higher value added products
and services directly on to consumer markets. However, the ‘Wenzhou model’ eventually
turned to bust. After much initial success with many individuals producing a range of low
cost/low technology items that were very profitably incorporated into China’s burgeoning
industrial supply chains, the city’s new raft of private entrepreneurs began to shy away
from the risk involved in any investment-led attempt to upgrade into higher quality
products. With no willingness either to partner with a pro-active local government or with
local large state companies to facilitate such a transformation into higher value added
products and processes, or to accept the risk of investing completely independently in order
to gradually move up key supplier value chains as they saw fit, the economy in Wenzhou
became trapped in the production of low value-added products and services.
In a direct parallel with events on Wall Street, Wenzhou’s entrepreneurs wanted
above all, and almost by any means possible, to maximize their short-term rewards. Its
private entrepreneurs thus chose to invest their short-term gains into quick return and
higher-profit commodities trade activities, as well as housing and land speculation. A major
20 For example, see ‘The Wenzhou experiment’, The Economist, April 7th 2012. Retrieved from:
move was also registered into the provision of risky but high-interest rate consumer loans
to the burgeoning middle class as well as microloans to the city’s poor. With massive
amounts of money moving into the local property market, prices began to rise very fast
indeed, and this inevitably brought in even more speculative capital from outside the city
(and even from abroad). Importantly, rather than attempt to pop the bubble clearly
emerging in Wenzhou, the central government effectively sanctioned its trajectory and this
gave rise to similar local speculation-driven financial bubbles all across China. In Wenzhou
itself, the boom turned into a spectacular bust. The earlier poverty reduction and
employment gains in the city were wiped out, corruption exploded as entrepreneurs were
forced to compete more aggressively in saturated local consumer markets, and serious out-
migration began. The local neoliberal ‘Wenzhou model’ was quietly and without fuss
consigned to history.21
6.2. Developing new technologies and industries out of old technologies and industries
A major benefit of the LDS model is its capability to build entirely new comparative
advantages at the local level as well as, if not more than, exploiting existing ones. A good
example is that of Germany’s ‘clean technology’ SME cluster in the former coal-mining
region of the Ruhr. This SME cluster was given life from the late 1980s onwards by bold
restructuring plans developed and funded by regional and local governments that, first and
foremost, created a variety of linked institutional vehicles, or what Schepelmann et al,
(2013) refer to as “institutional entrepreneurs”. As Taylor (2015; 9) describes it, this
network of sub-national institutions represented the “beginning of new bottom-up
development approaches, guided by regional planning and key NRW State institutions, but
designed and implemented by local groups.” The network of regional and local state-led
institutions was able to recombine and redirect existing technologies, capacities and skills
into building a range of new products and processes associated with the ‘clean technology’
sector. A major feature of the ‘bottom-up’ effort was the launch of new technology and
innovation centres that built upon the opening in 1988 of the Dortmund Technology Park
based in the Technical University of Dortmund (ibid; 9). The Dortmund Technology Park
was decisive in helping create a wave of new entrants in the ‘clean technology’ field. With
21 For example, seeHere's Why It's A Big Deal That The 'Wenzhou Model' Is Crashing Hard”, The Business
Insider, October 18th, 2011. See
cheap-labour-to-foreign-companies-sparked-a-financial-crisis-2011-10 (retrieved on August 2nd, 2017)
long tenancy agreements (5-7 years) at modest rents, the tenants were able to reinvest any
early financial returns into their new business, and as many as three quarters continued to
benefit from local state support by simply moving to the new Technology Park constructed
nearby. Major new product and process innovations were to emerge from this process,
including (but not exclusively) important new applications in the ‘clean technology’ field.
Another important feature of the Ruhr LDS-type development model was that
historical strengths in some areas were not simply abandoned, but deliberately built upon in
order to create ultra-modern equivalents. This was the case in logistics, for example, where,
as Taylor (2015; 7) explains, long-standing knowledge and methodologies were used to
build a modern packaging and transport logistics industry. Taylor (ibid; 7) also points out
that major projects in environmental clean-up were deliberately used to build up the
capacities of local enterprises and R&D institutions in these areas, such as in environmental
diagnosis remediation project design, emission and pollutant monitoring, environmental
management and project implementation, with the ultimate outcome that “the Ruhr is now
home to one of the strongest environmental management and service industries in central
Europe.” Furthermore, other local governments across Germany tapped into the important
experience gained in the Ruhr in order to secure related energy sector changes. Perhaps the
most notable outcome of this learning exercise resulted in the now famous network of
community cooperatives that developed and manage solar and wind power facilities and
have helped Germany become almost self-sufficient in electrical energy. Local
governments were able to design effective support programs
This important progress in Germany can be compared to the parallel effort
underway in the UK in the 1980s with regard to the UK’s own declining coal and steel
regions located in the north of England, South Wales and central Scotland. Eschewing
Germany’s LDS-type model of development as too interventionist (see also the next sub-
section below), the UK government under the Thatcher administration adopted a classic
variant of the ‘local neoliberal’ development model. This envisaged the bulk of the
structural transformation to be carried out locally by market forces aided by a number of
simple deregulatory efforts to create an ‘enabling environment’. Local governments were to
be armed only with a basic plan that amounted in most cases to nothing more than an offer
to provide reduced cost land and business space and some financial grants for anyone in the
region, or willing to come to the region, to open any sort of business (Beatty and Fothergill,
1998). The new entry of enterprises, of which there has been very little, were anyway
almost all in the most basic low-skill/capital activities serving local demands, leading to
minimal returns. Already very low levels of local consumer spending (effective demand)
largely accounts for why new enterprise formation rates were way below everywhere else
in the UK. Moreover, many of the enterprises that were established in the former coal and
steel regions to tap into national demands were ultra-exploitative, involving such as call
centers and large retail and wholesale outlets. These enterprises overwhelmingly created
only no/low skill jobs at ultra-low pay and involving irregular hours (so-called ‘zero hour
contracts’). Overall, it is clear that the effort to recover and reconstruct the former coal and
steel areas on the basis of local market-driven mechanisms has failed, with the result that
these regions now represent the UK’s worst concentrations of industrial decay, real
unemployment, illness and poverty (Foden, Fothergill and Gore, 2014).
6.3. Using a resource bounty to good developmental effect
In several locations the LDS model has played a particularly appropriate developmental
role in exploiting natural resources. Perhaps the most interesting location, since it again
allows for a useful comparison to an approximation of the local neoliberal model
implemented in the UK, is the case of Norway. Discovered in the North Sea in the late
1950s, the exploitation of oil and gas began in the 1960s. While much analysis in this area
focuses on Norway’s nearly £1 trillion sovereign wealth fund capitalised by its oil and gas
receipts, now the world’s largest, the development impact of its oil and gas find has in
many respects been of equal importance. Right away the Norwegian government was clear
that it wished to maximise the development opportunities presented by the oil and gas
reserves located in its share of the North Sea region, and transition the economy away from
its long reliance on fishing and wooden shipbuilding into higher value added areas
incorporating the latest technologies. To achieve this goal, it was felt, required the state to
intervene in order to ensure that longer-term goals were not sacrificed for short term ones.
A decentralized program of enterprise, investment, technology acquisition, innovation
promotion and skills development was initiated that very much approximates to the LDS
model in many key respects.
The key overarching policy goal was to ensure the ‘Norwegianization’ of the oil
and gas industry, which it was agreed would require major institutional innovations. First
off, the important decision was taken to ‘localize’ the institutional response by locating the
Norwegian Petroleum Directorate in Stavanger – the centre of the oil and gas industry - and
ensuring by design that a central part of its activity was to oversee and fund the
construction of a raft of new sub-national institutions that would help to maximize the
local/regional economic development impact. In addition, major new investments were
made into the local University in Stavanger and the setting up of a powerful local research
body dedicated to working on oil and gas sector applications - RF-Rogaland Research
which combined with other institutions to promote local innovations and new oil and gas
sector related SMEs. A very strong local content development program instigated and
overseen by the city and regional governments saw new and existing SMEs based in the
Stavanger region, and then Norwegian SMEs as a whole (with central state assistance),
obtain a growing flow of the oil and gas industry-related business. It very much helped here
that the central governments ownership of Statoil and Norsk Hydro the two oil and gas
giants of the Norwegian oil and gas sector set up by the state in the 1960s - ensured that
they were both on board right from the start in terms of promoting local content
development programs in all of their operations.
Further helping out the local programs was the fact that the Norwegian government
awarded licenses not on the basis of maximizing revenues, but with an eye to developing
local technology applications and industrial capacities. The result within twenty years was
that the Stavanger region, and Norway as a whole, became the centre of a world-leading
supplier of oil and gas sub-sector applications. Perhaps even more importantly, many
SMEs first involved in the oil and gas sector began to diversify into new sectors using the
technologies and skills earlier perfected with oil and gas industry support. Finally, the
region saw a quite dramatic boost in the number of high-paying skilled jobs in both the oil
and gas sector, and later on in many non-oil and gas sector applications. All told, as
Hatakenaka et al (2006) conclude, Norway’s successful exploitation of its oil and gas
sector through its deployment of a range of sub-national institutions saw the country
transformed from a poor northern European state with an economy based on cod fishing
and wooden shipbuilding into one of the world’s richest, most technologically dynamic and
most equitable countries.
Unlike in the case of Norway, the UK government enjoyed no such success in
exploiting its own slightly larger share of North Sea oil and gas. By the early 1970s when
the first oil was coming ashore, the then left-wing Labour administration was of the broad
opinion that the best way to exploit this unexpected bounty was to adopt an ‘institution-
thin’ approach combining some central state direction with the application of market
forces. However, this mildly top-down interventionist approach was quickly abandoned
after 1979 when the Thatcher government came to power. A new 'hands-off' policy was
introduced with ‘the free market’ expected to coordinate and maximize the eventual
development impacts for the UK as a whole and the Scottish Grampian region in particular.
The already limited role of the state was to be reduced even further thanks to a program of
closing down what the government viewed as unnecessary market ‘second-guessing’
development institutions. The UK's two already weak state interventions established under
the previous Labour government - the Offshore Supplies Office (OSO) and the British
National Oil Corporation (BNOC) - were immediately targeted. The OSO was thereafter
instructed to focus on simply promoting FDI into the existing industry rather than actively
marshaling the resources (institutional, financial, technical, operational, etc) in order to
promote new local companies that would increase the level of local content and upgrade the
level of local technology.
The Thatcher administration also chose not to support local content agreements,
arguing that it was better that the oil and gas companies freely select their own suppliers on
the basis of their own profit-maximizing calculations. The ultimate result of this decision
was that most of the best business opportunities were taken by already leading-edge US
and European-based multinational companies and SMEs, which also applied for and
retained the patents on innovations that were actually developed out of their North Sea
operations. BNOC was closed down entirely. No other major institutional intervention was
supported, and even local Universities were ignored as R&D support locations, while the
under-funded Grampian region could only offer limited support to a few minor projects
aimed at broad-based SME development (such as supplying workers uniforms and catering
The result after forty plus years is that the UK can today point to few real industrial
spin-off successes arising from its North Sea oil. UK industry thus benefitted very little
from the North Sea bonanza in terms of technological upgrading, increased innovation and
structural transformation. And while it did undoubtedly gain oil and gas business
internationally, this was largely on the basis of lower labor costs compared to Norway and
other oil and gas hubs rather than on the much developmentally important basis of higher
quality and technical specifications (see Bateman, 1995; Hatakenaka et al, 2006; Smith,
The lessons derived from the North Sea experience point to the fact that a modified
LDS model can play a major role in exploiting the developmental potential of a major
resource such as oil and gas reserves, whereas the more market-driven local neoliberal
alternative is most likely to achieve very little (Bateman, 1995, 1998, 2015b). Interestingly,
the importance of the LDS model has now been understood in many other countries also
enjoying an oil and gas bounty. For example, Jourdan (2014) has argued that the expanding
oil and gas sector in South Africa around Cape Town needs to be built around what he calls
a ‘Democratic Developmental State’, which would centrally involve a variety of local
financial (windfall taxes) and other local state interventions (local content agreements).
This paper began by outlining how the international development community is
reconsidering the role of the developmental state as a way of kick-starting the global
economy, but that the emphasis remains on the capacity and potential outcomes of the
national-level developmental state rather than what might be achieved at the sub-national-
level. I suggested that this emphasis is mistaken, and more focus needs to be placed on the
current and potential role that the Local Developmental State (LDS) model might be able to
play in the recovery from global neoliberal policies in both the advanced economies and in
the global south. I also pointed out across several sections how the ‘local neoliberal’ model
of development has produced major setbacks everywhere in these same locations. Policy-
makers that are today (re)evaluating the developmental state model are thus recommended
to drill down to explore the specific potential of the LDS model. While development
models successful in one specific location and time are not necessarily going to be
successful elsewhere, the consistent success registered by the LDS model across
geographic locations, times, cultures and other idiosyncratic factors suggests that it success
is replicable.
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