Does the development experience of the newly industrialized East Asian countries hold any experience for the rest of the developing countries?
...arket. The “invisible hand” of the market is supposed to provide the efficient allocation of resources. The reality is however not that simple as Arrow and Debreu(1954) identified that several conditions have to be satisfied if markets are to yield efficient outcomes. These include the absence of externalities, presence of perfect competition, a complete set of markets covering all risks. A market failure is said to occur when these conditions are not met. Greenwald and Stiglitz (1986) showed that govt. intervention to fill in for these imperfections could make every one better off. Since developing economies have underdeveloped (missing markets) and imperfect information and because the development process is associated with acquiring new technology (new information), these reservations about the adequacy of market mechanisms is particularly relevant to developing countries( Stiglitz 1989). The modern theory of mkt. failure recognizes that govt. intervention may not improve matters. The fundamental mistake of the Soviet and other centrally planned economies was that they sought to replace the markets instead of correcting market failures. The govt. of East Asia recognized the limitations of markets but complemented the markets instead of replacing them. The policies that were used to promote the markets included creating markets where they did not exist, helping to direct investments to ensure that resources were deployed in ways that would enhance economic growth and stability and creating an atmosphere conducive to private investment and ensured political stability and macroeconomic stability. Most of the Asian economies pursued a set of industrial policies that shared three objectives: developing technological capabilities; promoting exports; and building the domestic capacity to manufacture a range of intermediate goods. To support the industries various policies were pursued. These included providing an intellectual framework by encouraging particularly engineering and scientific education that facilitated technological transfer. In many industries the govt. promoted technological programs, including science centers that offered services ranging from identifying new products to providing R&D to firms that did had no facilities of their own. Taiwan and Malaysia developed industrial parks for high-technology industries, both to allow firms to capture some of the diffuse externalities associated with these industries as well as to lower the barriers to entry. The most important of these policies was the explicit and implicit subsidies to industries it wished to support. This was done by the provision of cheap credit. The developing economies suffer from the dual problem of weak and imperfect capital markets and the problems associated with late industrialization, which further complicates the scenario as they lead to rent seeking, and corruption. The most important achievement of the Asian economies was that they managed to manipulate both of these problems to their advantage. To overcome the scarcity of capital, institutions were created to promote savings e.g. the postal savings banks and to extend the long-term credit, the development banks. Governments also tried to develop the financial infrastructure by helping to establish bond and equity markets (Stiglitz and Uly 1996). Secondly the discouragement to the allocation of capital to areas such as real estate meant that more capital was available for areas with higher technological benefits such as plants and equipment. The industrial policy of these newly industrializing economies has been criticized that the govt. intervention was heavy handed that was ineffective or distotionary. This criticism is not completely true as the firms made the decision about resource allocation influenced but not directly controlled by the government. “None of the East Asian economies is a command-and-control economy.” (J.Stiglitz 1996). Secondly there was extensive consultation btw the business and govt. with the chairmen of the chaebols often sitting on the finance and trade boards of the ministries. The East Asian government realized the importance of information and difficulty of access for the business community thus they established formal and informal councils rival firms incentives to cooperate and a way to exchange information with one and another and with the govt. The gains from cooperation are based on the perception that future gains from cooperation exceed the short run gains of pursuing policies of self-interests. The Japanese govt. used the policies of both carrot and stick to encourage cooperation. The stability of the government increased the incentives for establishing long term cooperative relations and long term relations enhanced the effectiveness of relations as the firms that performed well on one project expected to be rewarded with another one. The government especially the Japanese one encouraged the formation of recession cartels in certain cases. These cartels were an explicit way to deal with the problems that arise when there is excess capacity in the capital-intensive industry. These cartels were a way to restrict competition to enable the industry to avoid the low prices that would damage all the firms. This is in direct contrast to the industrial strategy adopted by the Latin American countries where a large number of competing firms in the same industry were not conducive in the context of late industrialization. Another important lesson that should be taken from the East Asian model is that they adopted such policies that resulted in growth without having a negative effect on the income inequality. Once ag...