The Role of the State in Economic Development: Theory, the East Asian Experience, and the Malaysian Case

Abstract

The proper role of the state in promoting economic development is an issue that has attracted the attention of an unusually broad range of individuals and institutions with a professional interest in economics. At the theoretical level, the neoclassical orthodoxy has long established a presumption in favor of the non-interventionist state, largely based upon the ability of freely functioning markets to achieve Pareto efficiency in general equilibrium. More recently, however, the neoclassical paradigm has come under assault from a variety of new theoretical departures. The most important of these have been the so-called new growth and new trade theories. Among the more empirically minded economists and those with an interest in economic history, a fierce debate has developed concerning the appropriate classification (relatively tree-market or relatively dirigist) for the small sample of success stories in economic development. This discussion has been dominated by- analyses of Japan and the bast Asian newly industrializing economies (NIEs). This paper provides an up-to-date and practical analysis of the free markets versus state intervention debate, with particular reference to the East Asian experience, and argues for the importance of the state's role in promoting economic development. It begins with a brief theoretical survey aimed at highlighting, and contrasting, policy recommendations inherent in the dominant neoclassical model and the more recent departures from it. The paper then summarizes and discusses the economic performance of Korea and Taipei, China from the early 1960s to the early 1980s Analysis of these two countries confirms that intervention can be effective in practice. Although there have been several differences in the economic policies adopted by Korea and Taipei, China, both nations have pursued interventionist trade and industrial policies predicated upon a consistent development strategy. Moreover, the states designed other areas of microeconomic and macroeconomic policy in support of this strategy. The special nature of the two East Asian states minimized the risk of government failure and ensured that intervention was managed successfully. While it may be possible to replicate the economic policies adopted by Korea and Taipei, China, it is not clear that the same strategy would be productive elsewhere: political economy factors and, less significantly, a number of historical and cultural influences were also important in accounting for the NIEs success. The question of replicating the NIEs' strategy is considered by examining another, more recent, case of a rapidly developing Asian economy: Malaysia.