Definition
A developmental state is one in which the state takes the lead role in directing economic transformation — choosing strategic industries, allocating credit, protecting nascent sectors from foreign competition, coordinating exports, and disciplining firms that fail to perform. The term, coined by Chalmers Johnson in MITI and the Japanese Miracle (1982), describes Japan and was extended to South Korea, Taiwan, Singapore, and elements of contemporary China.
It sits awkwardly within the LME/CME varieties-of-capitalism framework: developmental states are coordinated, but the coordination runs primarily through the state and its bureaucracy rather than through industry associations or banking networks. They are capitalist — firms are private, profits private, markets pervasive — but they are also state-led in a way no LME or classic CME is.
Why it matters
How it works
A developmental state typically owns or controls the banking system, which it uses to direct credit toward strategic industries. It maintains an undervalued exchange rate to favour exports. It protects domestic industries through tariffs and non-tariff barriers while exposing them to international competition gradually. And it cultivates close working relationships between bureaucrats and a small number of large industrial firms — the zaibatsu / keiretsu in Japan, the chaebol in Korea.
Crucially, this is not socialism: ownership is private, and the discipline of export markets — selling abroad against international competition — is what keeps firms efficient. The state's role is to channel resources and absorb risk, not to abolish markets.