Alternative Models of Development

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The current dominant model of economic development is "market-friendly development". This model urges policy-makers to pursue policies that promote macroeconomic stability, human capital formation, openness to international trade, markets, competition, and the private sector. Such policies may require significant state intervention at particular economic junctures, and consistently and effectively pursuing such policies requires a technically competent, politically insulated state bureaucracy. This model emphasizes the danger of undisciplined growth of state bureaucracy, and the cost of policy-induced price distortions.

Alternative interpretations of the experience of the high performance East Asian economies emphasize state-led mobilization of investment and state-directed industrial development. There are many examples of these types of policies in the East Asian experience. The Japanese government in the early post-World War II years nutured the steel, automobile, textile, shipbuilding, and aluminum industries, and in later years targeted the electronics and semi-conductor industries for support. The Japanese government directed foreign exchange and domestic credit to large firms to foster investment and also protected the domestic market to help firms realize static and dynamic economies of scale. One result was a low level of manufactured imports.

Other high performance East Asian economies attempted similar policies. In Korea, the heavy industries (iron and steel, metal products, and machinery) and the chemical industires were favored with credit, import protection, and constraints on new domestic competitors. The state-owned Heavy Industries Corporation of Malaysia was formed in the early 1980s to focus public investment on a heavy industrialization push. Both these efforts had a high budgetary cost, and when the costs threatened macroeconomic stability, both Korea and Malaysia scaled back the programs. Indonesia in 1979 set up a domestic aircraft producer, P.T. Industri Pesawar Terbang Nusantara (PTN). While it has absorbed $1 billion in government funds since its establishment, it has not become profitable or internationally competitive.

The high performance East Asian economies do not provide a clear, common model of successful state-directed industrial development. Nonetheless, industrial policies in these economies share at least two important general features. First, industrial policies in these economies fostered, or at least allowed, rapid export growth and integration into the world economy. Integration into the world economy is a key factor for economic growth. Moreover, the high performance East Asian economies used international competition as a yardstick for evaluating the performance of their firms. This external measure played an important role in credit-allocation contests and in disciplining firms.

Second, industrial policies in these economies fostered the flow of economic and technical information among interested parties. For example, formal deliberation councils in Hong Kong, Japan, Korea, Malaysia, and Singapore included government officials, journalists, labor representatives, and academics. A market economy requires a wide range of shared understandings as well as an ability to cooperate to carry out many different and complicated transactions. The role of cooperation and consensus in the high perfomance East Asian economies emphasizes the importance of these factors to economic growth.

Topic Economic Growth in East Asia