Economic nationalism and income distribution in late industrializing countries

Abstract

Economic nationalism has evaded the economist's modeling skills. This is not surprising given that nationalism has generally escaped clear theoretical exposition. When economic nationalism has been analyzed by historians, it has typically been defined in terms of militarism and self-sufficiency. With ample justification, it is conventionally regarded in the West as being negative. Nevertheless, in " the rest" - countries outside modem Europe, North America and Japan that started from behind but industrialized at break-neck speed since W odd War II - economic nationalism has taken on a different meaning. 1 In the context of late industrialization, with only weak military power, economic nationalism has referred to ownership. Public resources have been concentrated on nationally owned and controlled business enterprises to substitute for multinational firms. These national enterprises - which have typically taken the form of diversified business groups - have raised welfare by investing in people's skills and research and development. The breadth and depth of their investments in technological capabilities have tended to exceed those of the overseas branches of international firms. We define economic nationalism below in terms of national ownership (not necessarily by the state) of business organizations and investments in skill formation , rather than by reference to trade orientation or military posture. The more countries invest in their own technological capabilities, the more nationalist they are, where the "make" as opposed to "buy" technology decision is a necessary condition for the emergence of nationally owned and controlled firms that rise to prominence in global oligopolistic markets on the basis of firm-specific , proprietary skills. For our purposes, the more state policies in the form of industrial licensing and subsidy allocation "target" national leaders in industry, the more nationalistic a latecomer government is considered to be. Apart from historical circumstance (the early source of a country's manufacturing experience) , the single most important factor to facilitate or frustrate economic nationalism is income distribution. Taking the nation as an organic whole, an absence of national divisions by class, race, religion, ethnicity and region provides the most fertile soil for economic nationalism to grow. Paradoxically, equality and homogeneity leave policy makers relatively free to create inequality - To concentrate resources on priming "targeted" firms. Restricting licenses and allocating subsidies to a limited number of firms , assumed to be a necessary condition for the emergence of a national leader in most targeted industries, creates a greater concentration of resources. The more equal the income distribution is at the start of development, the more government policy can ignore distribution issues and pursue nationalist goals with respect to fi= fo=ation. In addition, income inequality influences the emergence of national champions through the alternative investment opportunities it harbors outside manufacturing. Above-normal rates of return to the exploitation of quasimonopolies in scarce natural resources may be expected to occur if a concentration in the ownership of such resources creates monopoly pricing (P > MC).2 That is, the concentration of the highest quality resources in a few producers results in their relatively high rates of return. The higher the rate of return to investments outside manufacturing is, the less incentive for firms to invest in manufacturing. Consequently, the more unequal income is distributed in " agriculture," broadly defined to include mining and ranching, the lower the probability that countries will foster national firms with a core competency in manufacturing, the epicenter of modem economic growth, the incubus of knowledge-based assets, and the generator of high wages. By way of the evidence discussed below, the incidence of national leaders in "the rest" was greatest in countries with prewar colonial manufacturing experience and relatively equal income distributions: China, India, Korea and Taiwan, in contradistinction to Argentina, Brazil and Mexico. In this chapter, we focus primarily on the post-war experience of Korea and Taiwan, on the one side, and Brazil and Argentina on the other, supplemented by reference to the experience of other states, especially India. © 2006 by Hong Kong University Press, HKU. All rights reserved.