Explanations of East Asian Economic Development

The frugalal success of the eastern hemisphere Asian countries has inspired umpteen economists to study the accentuate of their rapid increment. Interestingly, different economists interpret this success in entirely different counsels. During the 1970s and an important part of the 1980s advocates of the neoclassical moulding argued that ripening in eastside Asia was the result in the main of the market mechanism and the emphasis on trade promotion in these countries. Especially since the mid-1980s the neoclassical ascend was criticised by economists who evince that governing interjection compete a crucial aim in the extremity of stinting growth.This paper aims at presenting a check over of the arguments recently piece forward by the critics of the neoclassical approach to explain the voice of presidential term in the economical success of the countries in eastern United States Asia. Such a quite a little is very enforceful, since it forms a stark naked br eeding ground for the discussion on the role of the organisation in the economic development of other Developing countries and the countries in eastern United Statesern Europe. With come to the fore a doubt East Asias economic expansion during the past twenty years is one of the most unprecedented economic changes since the trice population War.Gross national product of the East Asian countries increased by more(prenominal) than five per cent per year in the occlusion 1965-1990, which is considerably givingr than that of Latin America (1. 8 per cent), sub-Saharan Africa (0. 3 per cent), or even the OECD (2. 4 per cent). Six of the seven fastest growing economies in the period 1960-1985 (measured on the home of the average growth of per capita GDP) were East Asian countries. The economic success of these countries has inspired many economists to study the background of this rapid growth.What is rather remark able in this context is the feature that different economists inte rpret this success in entirely different ways. During the 1970s and an important part of the 1980s advocates of the neoclassical fabric argued that growth in East Asia was the result generally of the market mechanism and the emphasis on export promotion in these countries. This interpretation dominated the manage for a long time. Especially since the mid-1980s the neoclassical approach was criticised by economists who stressed that organization interjection actually played a crucial role in the process of economic growth.In this paper these economists ar referred to as the upstart disturbanceists. The debate between the neoclassical economists and the new interventionists seems to concent aim on the issue concerning the role of the presidential term in the process of economic development in general and the East Asian growth miracle in particular. In this denomination East Asia includes the next countries Japan, S exposeh Korea, Taiwan, Singapore, Hong Kong, Indonesia, Th ailand, and Malaysia. A signifi arseholet part of the literature used for this article concentrates mainly on South Korea and Taiwan.This paper mainly aims at presenting a survey of the arguments recently designate forward by the critics of the neoclassical approach to explain the economic success of the countries in East Asia. In particular, it emphasises their view with respect to the role of the government in the process of economic development. Such a listing of the contributions of the new interventionists concerning the backgrounds of the Asian miracle and the possible contribution of the government is very useful The article is structured as fol measlys.Section 2 presents a survey of the contributions of development economists with respect to the role of the government in the process of economic development as put forward by them in the 1940s and 1950s. Section 3 describes the reactions of the neoclassical economists on these earlyish contributions. They emphasised that sp ecially the market mechanism played an important role in the growth of the East Asian countries. Section 4 deals with the critics of the neoclassical economists and describes their approach to the backgrounds of the Asian miracle.The discussion on the role of the government in the process of economic development originated in the 1940s and 1950s, this discussion fits into the post-war predominance of Keynesian economics. During this period some(prenominal) theoretical models contributions in the literature saddleed out that market imperfections justified government intervention. The main emphasis was on the existence and benefits of economies of scale and the external set ups of turnout. whiz of the most influential models was the model of industrialization ground on the notion of infant industry.The existence of dynamic economies of scale and dictatorial external effects of production in sure industries prompted the government to actively pose the development of these ind ustries since the cloak-and-dagger sector was thought to be incapable of assessing the long-term economic benefits of investing in these industries. gibe to this model the government would stimu posthumous the development of these industries by core of subsidies and protective measures until they were sufficiently genuine to produce without government support. Other models went further in their recommendations concerning the role of the government in development.According to several(prenominal) economists, the economic growth potential of developing countries was restricted since many of these countries mainly exported primary goods. They expected that the prices of these goods relative to prices of industrial goods would fall permanently this is as well known as export pessimism. By combining the infant industry argument with export pessimism they pointed out that a structural change in the production structure of these countries was absolutely necessary in order to obtain pos itive long-run economic growth prospects.The government ought to play an important role since lots(prenominal)(prenominal) a drastic change could neer be realised through the market mechanism due to considerably large coordination problems in the economy. The emphasis was put on improving infrastructure and education. Both these aspects were assumed to be extremely important in order to realise such a structural change. Furthermore, the plebeian dependence of industries was pointed out the development of one industry was in like manner determined by the development of other sectors, either as a producer of inputs4 or as a demander of output.This findd simultaneous support of different industries necessary. Later on, the debate in literature concentrated on the way in which the government ought to intervene. many supported simultaneous intervention in all industries essential to economic growth others stressed the modified availability of scarce resources which would hinder the execution of such a comprehensive strategy. They advocated government intervention mainly in those industries that had the most relations with other industries (unbalanced growth strategy see Hirschman, 1958).These models very practically influenced the economic policies pursued by the mixed developing countries during the 1950s, 1960s, and a large part of the 1970s. The idea of a government intervening in the process of economic growth was appealing to many politicians. It cave ind to developing models of primordial planning, and it stimulated to using trade policies, such as import quota, export subsidies, and fixed exchange rates, introducing price controls and subsidies in markets for goods and production particularors, and establishing public enterprises in important sectors like mining and strained industries.Many governments pursued policies of import substitution (and later overly export promotion). Initially, several countries appeared to be successful in achievi ng economic growth by way of government intervention. However, as increasingly more problems arose with respect to the models of planned economic growth, this approach was increasingly criticised by economists whose ideas matched the neoclassical tradition. This is the term to which they are referred to in the debate on the role of markets versus the Government in the process of growth.Mainly at the fact that the in a higher place described models primarily pointed at the imperfections of the market mechanism the models seemed not to be concerned about the possibility that government intervention in itself could also lead to an inefficient allocation of resources. The neoclassical economists rejected the implicit assumptions that allocate inefficiency due to market imperfections would always be larger than the inefficiency resulting from government disappointments.This assumption would stand for that the government has sufficient information in order to determine for which partic ular industries positive externalities and dynamic economies of scale could be expected, and to properly assess the costs and benefits of load-bearing(a) certain activities and industries. This also would imply a well-functioning apparatus of government within which this information would be translated into a insurance in the right way. Moreover, it meant that the government would also be powerful enough to resist pressure groups and to minimalize the negative effects of rent-seeking behaviour.Finally, it was anticipated that the government put maximum welfare for the country as a whole forwards maximising the individual objectives of those representing the government. The neoliberals very much doubted the fact that these conditions had been sufficiently met in developing countries. They were rather convinced of the fact that oddly such factors as lobbying, rent seeking, and a government pursuing maximisation of the individual welfare function, would negatively affect the effici ency of intervention. Therefore, they concluded that the imperfections of government intervention chiefly exceeded market imperfections.Only in some cases the government could play a role, e. g. with respect to providing physical infrastructure, macroeconomic stability, and maintaining order and upholding the law. This is all the government should do. The device of get the prices right plays a crucial role in the neoliberal view If the markets are not interfered with, scarce resources will be allocated most efficiently. Their starting points were the basis of the IMF and World assert policy. Recommendations that were part of the structural adjustment programmes presented to developing countries in the 1980s and 1990s.The neoliberal interpretation of the role of the government versus the role of the market in the process of economic development has also been use in analysing the economic success of East Asia of the past three decades. According to the neoliberals, the governments of these countries observed the limits of their capabilities, and the economic success, therefore, was caused mainly by the market which functioned quite well. They especially pointed out the emphasis governments placed on developing and touch on exports, secluded entrepreneurship, and the execution of market-oriented policy measures.Focusing on export enhanced the development of industries with a comparative advantage. The East Asian countries especially developed those industries in which they had a comparative advantage. The governments had created the right environment by providing macroeconomic stability and public investment in social and physical infrastructure in which the private sector was encouraged to invest in such a way that it, would contribute positively to economic development.The neoliberal interpretation of the economic success of the East Asian countries was supported by the observation that several African and Latin American countries, where the government h ad played a very significant role for several decades, had experienced a deep economic crisis since the 1980s. The failure of government intervention and the positive contributions of the market mechanism were elaborately discussed in studies by, among others, these studies considered the East Asian countries as examples of countries where the market mechanism had positively influenced the process of economic development.The neoliberal criticism of the models from the 1940s and 1950s was justified to a certain extent. They rightly emphasised that too much government interference in the process of economic development could lead to considerable inefficiencies. They provided a theoretical basis for the possibility and consequences of government failure (Islam, 1992). Since the early 1970s and especially during the 1980s a good deal everybody agreed on the fact that government-led economic development, with an important role for state enterprises, would lead to large inefficiencies.Ho wever, this did not automatically mean that the neoliberal alternative provided a correct interpretation of the backgrounds of the successes in East Asia. Since the mid-1980s there was increasing criticism of the neoliberal interpretation of the role of the market versus the role of the government in development. These critics can be referred to as new interventionists. This group of economists argued that the government could contribute more to economic development than just providing certain important public goods. They establish their ideas mainly on their analysis of the backgrounds of economic success in East Asia.The centre of their analysis proved to encounter rather a lot in honey oil with the analyses of and themes addressed by development economists of the 1940s and 1950s. Criticism of the Neoliberal Model and the Arguments in Favour of Government Intervention According to the new interventionists, the neoliberal interpretation could not explain satisfactorily the succes s of the East Asian countries. A growing amount of research showed that government could indeed contribute positively to growth by subject matter of comprehensive intervention in the economic process.This was not in keeping with the usual neoliberal starting points, and therefore alternative approaches were sought-after(a) after to explain for this finding. An important alternative description of the East Asian economic success was found by emphasising the extent of problems concerning coordination in little developed economies. Critics of the neoliberal interpretation pointed out that the government could play an important role in stimulating the process of economic development by reducing coordination problems, link up to the hoice of and relationship between production decisions that hinder development. These problems concerning coordination are the result of dynamic economies of scale of production and external effects resulting from the strong mutual dependence of certain i ndustries. If such circumstances do play a role, the allocation of resources on the basis of the market mechanism can quite easily become sub-optimum. To draw with, in practice market prices provide information about the current gainfulness of productive activities they contain hardly any if at all information on future profitability.Under these circumstances, if there are any activities that lead to economies of scale in the future, current market prices give the wrong signals with respect to optimal allocation. In this case, allocation will not be dynamically efficient. Moreover, investment decisions at the aim of the individual entrepreneur may be sub-optimal if the future profitability of an investment project also depends on the class to which investments are made in other sectors at the same time. In this case, too, allocation of resources based on the free market principle results in dynamically inefficient allocation.According to the new interventionists, intervention s of East Asian governments were mainly aimed at decreasing these coordination problems, thus stimulating economic growth. The interventions actually improved the economy since barriers caused by economies of scale and external effects were taken down, which probably would not befuddle happened if resource allocation was based purely on market principles. The model explaining the East Asian economic miracle as proposed by these new interventionists matches some of the central thoughts of the development economists of the 1940s and 1950s.One major difference, however, is that this model is formalised in some recent contributions. Recent theories on industrial organisation also point at the positive effect of limited competition rather than free markets and protection and co-ordination by the government. The resideder of this section will discuss in more detail several of the above called aspects of the East Asian intervention policy, such as the characteristics of industrial pol icies, the instruments that were used to stimulate specific investments, the institutional context, and the preconditions. Industrial policyThe contents and effectiveness of the industrial policies pursued in the East Asian countries is the central focus of several new interventionist studies, Focusing mainly on the analysis of the Korean experiences, this is also presents a new interventionist interpretation of the economic development of South Korea. In her analysis she shows why the Korean government policy can be considered dynamically efficient. She emphasises the fact that government intervention led to a situation of getting the prices wrong, which, according to her, precisely resulted in an optimal allocation of scarce resources.By deliberately move prices, the government was able to reduce the coordination problems that occur when allocation of resources is left to the market mechanism. Policies aiming at disturbing the market mechanism led to other priorities concerning w hat should be produced as compared to the outcomes of the market as the coordinating mechanism. The industrial policies of other rapid growers in the region have been interpreted in a similar manner in other studies characterises the process of economic development in South Korea as the process of late industrialisation.Fast growth in this country is mainly based on the implementation of breathing (Western) technologies. The aspect of learning, adopting and adjusting existing technologies is central in her analysis. Since learning processes have the characteristics of a public good and are for example, closely cerebrate to increasing economies of scale and the external effects of production, government intervention is vital in the process of late industrialisation.The government sees to it that the Western technology is copied and implemented as efficiently as possible, and that the labour force is educated sufficiently to work with the new technology. Moreover, they coordinate pr oduction decisions in different industries. Thus, the government becomes an entrepreneur who decides what, when, and how much to produce. The active intervention resulted in the industrial development of South Korea, which would not have been realised without government intervention.The government especially stimulated those industries that were thought to be of crucial importance to the long-term development of South Korea. Whereas in the 1960s mainly export-oriented industries were stimulated, in the 1970s emphasis was placed on the development of heavy and chemical industries, the electronics industry, and shipbuilding. In the 1980s the centre of prudence of industrial policies shifted towards stimulating the development of high-quality industries, the so-called sunrise industries.Due to government intervention South Korea became a leading producer of microchips, and had an important share in the world markets for consumer electronics, cars, and in shipbuilding. In this context, leading economists point out the difficulties voluminous in the development of especially heavy and chemical industries, and in electronics and shipbuilding. The relatively long time these industries require reaching maturity, and the limited profitability (or even temporary loss) during the initial phase cause these industries to be rather unattractive when it comes to private investment.This provides a legitimate reason for an active industrial policy by the government. Instruments of government intervention The East Asian governments used various instruments that enabled them to influence the organisation of production decisions and the allocation of production factors, in order to achieve that scarce resource would be applied in the areas they preferred. These instruments primarily aim at creating rents, i. e. providing subsidies for certain investments. A subsidy may be a strong instrument to influence the use and allocation of means provided that the granting meets certain conditions.A subsidy will contain a protective element on the one hand, and provide an incentive to implement specific activities on the other hand. Given these conditions, a subsidy may contribute to the fact that investors who are granted a subsidy may take into account more than short-term profitability only, and may also consider future possible profitability of the decisions. In these cases, the dynamic aspects of implementing investment decisions are taken into account, and thus granting subsidies may contribute to a better allocation of means.Initially, subsidies were granted by means of programmes for cheap credit and selective credit loans. In countries like South Korea and Taiwan, the government had a significant impact on determining the nominal deposit and loan rate in the 1960s and 1970s. Moreover, they also introduced guidelines with respect to the allocation of argot loans to the private sector. Thus, they were able to stimulate the development of specific industries and private activities by granting them access to external funding and by subsidising this Funding. The role of the export promotion policyEspecially with respect to the role of export-oriented policies as part of industrial policies, and the related specific instruments of government intervention in East Asia, the neoliberals and the new interventionists do not agree. In the neoliberal model the emphasis of government policies on export promotion is very important, since they believe that competition on world markets stimulated East Asian companies to produce efficiently. They exported especially those products for which the countries had a comparative advantage in production. According to the neoliberals, the rapid growth of exports justified this approach.Subsequently, the development of export industries was thought to have a positive effect on the production in other sectors of the economy. In this model the so-called model of export-led development the rapid growth of the e xport industries led to a growth in investment and was therefore the driving force behind the overall economic success. The new interventionists disputed the neoliberal point of view. Some of them point out the fact that the governments created comparative advantages, thus actually reversing the causal relationship between export growth and14 comparative advantages.The above mentioned industrial policies in South Korea can again be used to illustrate this view. The South Koreans developed advantages in shipbuilding, and in the electronics and car industries, all industries in which they ab initio did not have comparative advantages. Some new interventionists stressed the fact that government intervention stimulated especially those export industries for which competition in worldwide markets was fierce, in order to stimulate the building up of a competitive external sector.To a certain degree, this view resembles the neoliberal interpretation of the role of international trade, although the new interventionists put much more weight into the role of government intervention to develop such a competitive external sector. They argue that world-wide competition can be regarded as an efficiency check of interventionist policies and the policy measures used. The success or failure of export producing firms provided the government with information which enabled it to decide whether or not to continue support to particular industries, and to decide on the extent of this support.Thus, protection measures and the granting of subsidies were linked to the performance of firms with regard to the development of sales in foreign markets. Others, however, resist the argument that exports played a crucial role in stimulating the economic growth of these countries. On the one hand, they point at the limited share of the export sector in total GNP of most East Asian growing countries in the period concerned. Considered this limited share, this sector could never have been th e driving force behind the strong economic development during the 1960s and 1970s.On the other hand, the direction of the causality between exports and investments as speculate by the neoliberals is questioned. It is more likely that the explosive export growth was the result of a strong increase in domestic investments, rather than the other way round. The increase in these investments led to an increasing demand for imports, which taking into account the limited availability of foreign currencies went hand in hand with an increase in exports. This increase in exports was realised by reducing the domestic consumption of tradable goods, making them available for exports.Exports were not hampered by any unfavourable exchange rate policies, which had indeed been the case in many other developing countries in the 1960s, 1970s, and part of the 1980s. They argue that export production was actively stimulated by means of several instruments, particularly the above described systems of subsidisation. Therefore, some new interventionists argue that the explanation of economic growth in East Asian countries lies in the factors that influenced the strong growth in domestic investments, such as the creation of rents to stimulate investment behaviour.Cooperation between the state and the private sector in the previous sections it has been pointed out continuously that the East Asian governments proved to be able to reduce coordination problems, which contributed to stimulate economic growth. However, this still has not answered the question concerning the way governments were able to be given of sufficient information to efficiently coordinate investment decisions and to determine which industries were important in realising a dynamically efficient allocation of scarce resources.Several studies have examined this aspect. These studies show that very close ties existed between the government, banks, and the private sector. These ties led to frequent contacts between th e government and the private sector about the economys weaknesses and strengths. In this way, the government gained a better understanding of the nature of the coordination problems that played a role in the economy. On the basis of this information the government was better able to take decisions concerning intervention.In the case of South Korea, well-mannered servants from different ministries, bank managers, and managers of large companies regularly met on so-called deliberation councils. Apart from this there were also monthly export meetings. At these meetings, presided by the president of the country and attended by16 senior civil servants, managers of banks and companies, economic bottlenecks were directly discussed, and decisions were taken concerning the outlines of the industrial, trade, and financial policies.Specific attention would be paid to the performance of the export industries, and if necessary the export policy would be adjusted on the basis of the information available. The South Korean private sector was very much organised on the basis of conglomerate structures, the so-called Chaebols. A limited number of very large conglomerates were actively involved in various economic activities, thus controlling an important part of the total production of the private sector. The government actively stimulated the development of these large conglomerates.The idea was that this would lead to an optimal use of economies of scale and external effects due to the strong mutual dependence between industries. In this way, the conglomerates would internalise existing coordination problems. Moreover, an advantage of the existence of several large conglomerates was that there were only a small number of ties between the government and the private sector, so that a relatively small number of policy makers and managers would be responsible for making important decisions.This added to an efficient exchange of information and a reduction of coordination proble ms. Some studies describe the model of the East Asian economies as a governed market. This means that private companies competed and cooperated and were supervised by the government. Other studies especially referring to the case of South Korea characterise the relations between government and the private sector as a quasi-internal organisation. This model describes a firm as an organisation that minimalizes transaction costs by internalising certain activities, i. e. hese activities are executed within the organisation. This may cause the allocation within an internal organisation to be superior to allocation resulting from the market mechanism. The model contains a central counselling that determines the outlines of the activities of the firm and that delegates the execution and immediate accountability for the results to different divisions. The divisions are accountable to the central management and have to provide information regularly, enabling the management to change its strategy on the basis of this new information if necessary.In this way, coordination problems between the different activities can be reduced. The comparison to the characteristics of the Korean society applies to a certain extent, if the government is regarded as the central manager and the various conglomerates as the divisions. Due to the intense and informal contacts between the government and the private sector, the government had at their disposal information concerning the nature and extent of coordination problems in the economy.On the basis of this information, economic policies could be designed and choices could be made on which industries should be supported, since they were say to be of crucial importance to the growth of the country. Furthermore, economic policy programmes could constantly be adjusted on the basis of new information so that they would positively contribute to the economic development of the country. To conclude, it can be argued that the strong ties between the government and the private sector contributed to an intense exchange of information.Based on this information, the government was able to follow and if necessary adjust the activities in private industries. The new interventionists considered the combination of these ties and the nature of the way the government created rents and distributed these among firms and industrial sectors as an important explanation of the successful government intervention in the various East Asian countries. Initial conditions and policy-making factors The new interventionists also point at other factors they notion have been important in realising that the government translated the information they eceived from the private sector into a policy that contributed to the successful18 reduction of coordination problems. These factors are closely related to the initial conditions that applied at the moment this miraculous process of economic growth was started. They also point at certain specif ic political economic circumstances. To begin with, the new interventionists emphasise that in these countries the educational system and the level of education of the labour force were of a relatively high standard as early as the 1950s, especially compared to countries in Latin America and Africa.This positive initial condition had various positive consequences. To start with, this meant that labour productivity was relatively high and that the East Asian economies were at least capable of working with relatively high-grade production processes as early as the 1950s. Moreover, this meant that the copying of Western technologies is the essence of late industrialisation could be executed faster. Finally, the high level of education had a positive effect on the quality of the civil service.The latter was not to be underestimated as an aspect of the success of the East Asian intervention policy. Several authors have therefore paid special attention to the aspect of the quality of the civil service. An efficient apparatus of government was of great importance in order to translate the information on coordination problems in the economy into a policy that could contribute to increasing economic growth. Moreover, the work ethic of the average civil servant in the Eastern Asian countries was also important in explaining the efficiency of government intervention.In many developing countries civil servants seemed to be easily corrupted, whereas in most East Asian countries this was relatively slight(prenominal) common. Consequently, the abuse of, for example, the granting of subsidies and other benefits to firms could be kept rather limited. To explain this phenomenon the new interventionists argued, among other things that in such countries as South Korea and Taiwan a high degree of social responsibility had been developed and introduced through the educational system.Education very much contributed to a sense of social awareness. This led to the fact that a mark as a civil servant involved a high social status. This may be an explanation for the fact that the best students often accepted a19 position with the government whereas a similar position in the private sector would pay far more. This high status would also contribute to a lower degree of corruptness as compared to that in many other developing countries.Moreover, a career with the civil service was considered the perfect way to a high position in the private sector. Apart from these initial conditions, several authors argue that the political economic circumstances in the East Asian countries contributed to the fact that government intervention could concentrate on the efficient use of scarce resources. As is well-known from the public-choice literature, a government may implement a policy because they are cosmos pressurised by certain groups in society that are crucial to a possible re-election.In such case, in their policy the government may to a certain extent want to comply wi th the wishes of their future voters, rather than pursue a policy that contributes to economic growth as much as possible. 9 For example, they may not use subsidies to support certain important economic activities instead subsidies may be used to secure political support. In many Latin American and African countries such a populist policy has been pursued in the past with all the associated negative consequences to general economic growth.In case of a more autocratic government, the government will use part of the means available to bribe representatives of powerful lobbies who could jeopardise the governments continuity or to forcefully suppress these lobbies. In South Korea and Taiwan the government hardly ever faced lobbies of real importance so that a populist policy was not necessary. Therefore, they could develop and pursue their policies independent of any lobby and they could efficiently employ subsidies and other instruments to promote economic growth, rather than use them in order to gain political support.There were several different reasons for this particular circumstance, according to the new interventionists. Among others, for an empirical analysis of such kind of political economic processes, to start with, countries like South Korea and Taiwan were characterised by a relatively equal income distribution due to which the governments of these countries were less pressurised into taking popular measures to ravish certain lobbies. The equal income distribution was mainly the result of the land reforms of the 1950s which took place both in South Korea and Taiwan.Thus, equal income distribution had been realised before the start of the period of rapid growth. More recently, empirical support for the positive relation between equal income distribution and economic growth has been found. Moreover, some mention the fact that both the South Korean and the Taiwanese society were characterised by a relatively cultural unity, This meant that this potentia l source of political instability was less strong than it often was in other developing countries and that this made it easier to develop a solid nation state.Some authors also mention the fact that the Japanese oppression of South Korea before 1945 drastically reduced the role of lobbies in this country. With respect to Taiwan, the flight of political leaders and their supporters from China had actually decimated the differences between the various political lobbies. Finally, there was no elite based on the ownership of natural resources, since these countries hardly had any natural resources. In several Latin American countries this elite was an important opponent of the government.The new interventionists offer an alternative explanation for the economic success of the East Asian countries during the past few decades. They point at the existence of coordination problems and argue that these problems are the main obstacle for economic development. For this reason the government sh ould play an active role. The analysis of the role of the government in East Asia shows under which circumstances government intervention may have a positive impact on the economic growth of a country.The contributions by the new interventionists appear to resemble those by the development economists21 from the 1940s and 1950s. The difference, however, is that the new interventionists have provided the understandings of the development economists with a more solid theoretical and empirical basis. Some questions remain unanswered, however. For example, the new interventionist analysis of the role of the government in the East Asian success has not convincingly shown why the efforts of the governments of these countries seemed to have been explicitly concentrated on promoting long-term economic development.This paper has described all conditions that must be met in order for government intervention to contribute positively to economic growth, as was the case in East Asia. Another star ting point for future research refers to the empirical foundation of the existence, nature and importance of coordination problems in a less developed economy. Although the new interventionists have frequently and convincingly described the existence of these failures, until now their empirical proof has been scarcely provided. Therefore, micro-level research i. e. t the industrial level into the significance of these coordination problems in economic development is vital. Related to this, more empirical research ought to be conducted into the importance of dynamic efficiency in a less developed economy. This requires more analysis of the nature of the possible economies of scale, the external effects in such economies, and the way in which they could be exploited by government intervention. The debate on the role of the government was quite explicit after the World Bank had published a study in 1993 which contained an in-depth analysis of the backgrounds of the East Asian success .The new interventionists criticised the World Bank for the contents of this report ,the analysis in this report builds on an earlier World Bank report (World Bank, 1991) in which the neoliberal view on the role of the government is somewhat changed with respect to their previous attitude on this subject. Both the 1991 and 1993 reports assign a more positive role to government intervention. The reports argue that interventions may add to economic growth, provided that these interventions are market friendly.The market friendly nature of interventions means that markets ought to function freely, unless the results are understandably better in case of government intervention. Furthermore, checks and balances have to be introduced interventions must always be subject to the discipline of the domestic and foreign markets as much as possible. Finally, intervention must be straightforward and transparent, based on clear regulations, so that the contents and consequences can be monitored b y anyone. The 1991 World Bank report introduces the market friendly approach of government policy as the alternative road between market and government.Starting from this analysis framework, the 1993 report studies the economic development of East Asia and endorse the positive role of the government in the process of economic development of these countries. Furthermore, the report argues that the distortions that were a result of government interventions were small, especially as compared to those in other developing countries. Government policies were often embedded in a competitive environment, all according to the market friendly approach.At the same time, however, the analysis shows that government intervention was by no means always successful. The market is considered to remain the most efficient coordinating mechanism. Therefore, the reports advice is to get the prices right. The final conclusion is that the most important positive contributions of government intervention ref erred to creating a stable macroeconomic environment in the form of low inflation and government deficits, and a stable exchange rate and investment in the development of human capital.The government created the right environment within which private initiative could optimally contribute to economic growth. Economic policies should concentrate on these factors, the World Bank argues. The recent World Bank report does only part do justice to the new interventionists criticism. The policy recommendations still seem to be rather neoliberal. Although the World Bank report initially appears to lead to a synthesis of the neoliberal model and the new interventionist understandings, the policy implications of the analysis of the two camps differ very much.The new interventionists point at the importance of government intervention and set great store by industrial policies and the use of subsidies and other instruments in order to realise a dynamically efficient allocation of resources, w hereas the World Bank continues to argue that the government ought to aim mainly at creating macroeconomic stability and should aim solely at creating the right conditions for private initiative.Conclusion To conclude, since the early 1990s there appears to be some general agreement concerning the debate on the role of the government in the process of economic development in East Asian countries. The World Bank being the main representative of the neoliberal point of view and its critics agree on the fact that the governments of these countries severely intervened in the economic process.Thus, it would make great sense for developing nations in Africa, South America and south East Asia to place prodigious importance of state intervention to economic development and to dismay the western liberal model as useless and deceptive. As they themselves (western countries, including Japan) all at some point in their economic development guided their economy towards what they thought was su itable and progressive, which is called industrialisation.