Developmental Agency under the Radar: Developmental States and Coalitions in Dependent Market Economies and Low-Tech Sectors

In a recent paper co-authored with László Bruszt and published in a Special Issue of Review of International Political Economy, we identify a developmental state in the least likely  of times – the period of hegemonic neoliberalism in the 1990s and early 2000s –  and the least likely of places, namely the post-socialist Central Eastern European (CEE) economies conventionally described as FDI-dependent Dependent Market Economies (DMEs). 

We were dissatisfied with the single-minded focus of the developmental literature on high-tech “lead sectors”, which are often job-poor, capital-intensive sectors controlled by a handful of MNCs. In open emerging economies, these sectors often stopped pulling the rest of a national economy through inter-sectoral linkages as theorized by Albert O. Hirschman and now increase territorial inequalities instead. By shifting our focus to low- and medium-tech sectors, we uncovered a sectoral developmental state in a time and region usually considered a cradle of neoliberal shock therapy, while a comparative framework allowed us to consider how different actor coalitions and institutional trajectories pulled similar post-Socialist countries towards statist or neoliberal developmental projects after 1989.

Using a most-similar case research design, we compare the Polish and Hungarian strategies for restructuring their dairy industries after 1989. While both cases started from comparable positions, economic outcomes (operationalized as the value-added and export revenues of the sector) and social outcomes (the proportion of small farmers pushed out of the market) proved substantially better in Poland than in Hungary by 2010. Whereas Poland grew into one of the largest dairy exporters in the EU, Hungary’s dairy industry downgraded its portfolio to the lower value-added products and was on the verge of collapse by the 2010s. A crisis in the coordination of the supply chain, split between MNC dairy processors and supermarkets on the one hand, and atomized producers on the other contributed to the popularity of economic nationalist solutions promoted by the Fidesz government, which promised a radical break with neoliberal developmentalism in 2010. 

These outcomes reflected radically different institutional and political trajectories: In anti-Communist and starkly neoliberal Poland, a paradoxical developmental coalition emerged between farmers and politicians to save Socialist dairy cooperatives promised for privatization. Not only did the state actively resist pressures from the IMF and the EU to modernize its agro-food sectors by selling dairy processing plants to Western MNCs and open up its food retail sector to FDI, but the state utilized funds from the World Bank and the EU to upgrade its own administrative capacities in charge of managing, monitoring and financing agricultural development projects. Maintaining domestic dairy cooperatives which integrated thousands of smallholders and processing plants, allowed to maintain trust and vertical coordination in the supply chain. In Hungary by contrast, the production, processing and retail segments of the supply chain were fractured after 1989 as the Ministry of Finance sold processing plants to foreign MNCs in a bid to service foreign debt inherited from the Socialist period, while the Ministry of Agriculture oversaw the production (farming/husbandry) segment. This administrative separation immediately destroyed vertical coordination and obviated the mobilizational capacities of farmers severed from the ownership of the means of production (dairy processing plants).

Our study highlights the complex synergies of public-private developmental alliances and paradoxical recombinant institutional trajectories of state socialism and post-socialism: In Poland, the mobilizational capacities of dairy farmers were key to winning political support from a diversity of political actors at a time when the World Bank, the IMF and the EU actively promoted a neoliberal developmental agenda. The Polish sectoral developmental state emerged as an answer to these private demands, which found political support in both Left and Right-wing parties. In Hungary by contrast, the mobilizational capacities of farmers were obviated by the post-Socialist state when processing plants were sold to MNCs, which used their crushing market power to build demand for their products and kill local competition in a scorched earth strategy: once this was achieved, many shifted production abroad and left the Hungarian market, leaving behind a supply chain on the verge of collapse. 

A further twist is that in Poland, it was the failure of sovietization in the 1950s, which later empowered dairy farmers to save “Socialist” cooperatives after 1989. In Hungary by contrast, successful sovietization in the 1950s left state managers unaccountable in devising strategies to reform the dairy sector under both state socialism and after 1989. In Poland, the nationalization of independent farmer cooperatives was reversed in 1957 following a decade of social resistance to Soviet-style Socialism. In Hungary, the nationalization of agricultural land and processing units was complete by the 1960s. The consequence was that in 1989, the Polish state was forced to negotiate its modernization agenda with farmers who enjoyed control over their means of production, whereas in Hungary state managers were left largely unaccountable. 

We also paid attention to the complex role of EU integration in the two cases: the EU provided financial resources to candidate countries but also used dairy food safety standards as a non-tariff barrier to trade, protecting Western European member states from Central European dairy exports. This represented a tremendous challenge of regulatory compliance for Poland and Hungary during the EU accession process. Hungary’s solution was to outsource regulatory compliance to dairy MNCs, whose superior access to technology and finance quickly made dairy products compliant with EU standards but actively downgraded the entire sector’s overall competitiveness and social inclusiveness. Poland chose the harder route of directly financing the sector’s regulatory compliance utilizing every resource available (national funds, EU pre-accession funds and World Bank loans). Poland’s public-private developmental alliance could have devolved into pure rent-seeking: inadvertently, the EU’s stark food safety standards provided an objective sanction mechanism, which allowed the emerging alliance to use financial resources effectively to co-produce verifiable improvement in the sector’s export competitiveness. In Hungary, a nationalist alliance between the state and domestic capitalists emerged after EU accession and the GFC by 2010: short of an external sanctioning mechanism however, state interventions only served to redistribute market shares from MNCs to politically loyal entrepreneurs without an actual developmental roadmap to improve the sector’s overall competitiveness and even less concern for keeping cash-poor farmers in the sector. 

Our study contributes to the renewed literatures on developmental states, industrial policy and state capitalism, by showing that low- and medium-tech sectors are understudied sites of domestic developmental agency even in developing countries typically considered to be passive competition states reliant on foreign capital and technology. The shift from high- to low and medium tech sectors is sometimes sufficient to uncover developmental states hidden in plain sight. We show that the developmental effects of regional markets and regulatory integration projects such as the EU are always mediated by different interest coalitions of domestic and transnational actors at the national level, producing radically different developmental outcomes in comparable economies. Our paper illustrates the failures of neoliberal developmentalism as well as the continuous need for the state’s active role in providing administrative and financial support for industrial policy. On the other hand, we also depart from deterministic dependency theory, which reifies the notion of passive peripheral underdevelopment under neoliberal globalization. We show that a developmental state’s solid Weberian capacities are not a pre-requisite to kickstart industrial policies: improving public administrative capacities to steer development might co-evolve as a response to continuous demands by private actors. Finally, we don’t romanticize the capacity of domestic public-private coalitions and recognize the real danger of rent-seeking alliances: our study also shows that a disciplinary mechanism is necessary for incentivizing developmental coalitions to use financial and administrative capacities efficiently. 

David Karas is a political scientist based in Kyrgyzstan, teaching International Political Economy and International Relations in Central Asia at the OSCE Academy in Bishkek.

This post was originally published on PPE Sydney. Photo by Mehrshad Rajabi on Unsplash

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