The Role of Government in Industrial Development

Chapter 1 Introduction

1.1 Purpose

In what way should government contribute to the economic development? How can be the development achieved?@ These have been the main questions since after war period, especially concerning with less developing countries (LDCs). It is not too much to say that industrialisation is the kernel of national development because how much national industry develops directly links with how much national economy develops. The study of the role of government for industrial development is evolving by the rapid economic development in East Asia as good empirical information. In what respects is it essentially differentiated from the other industrialising countries? The full study of these questions is beyond the scope of this dissertation, but I will address some of them.

The previous studies on industrial development have been classified into three types. One is the neoclassical view, which insists that open policy will eliminate inefficiency and that it will achieve the desirable resource reallocation by foreign direct investment, in spite of government intervention. Another school, called revisionist or development oriented state view alleges that owing to strong leadership of the states and its market control, infant market function has been well substituted. In other words, the government should substitute the immature market. There is another view that compromises these two arguments, called market friendly approach and functional approach in the World Development Report in 1991 and "the East Asian Miracle" (1993). These approaches require government to satisfy the fundamental conditions regarding the active behaviour to the fundamental conditions as harmless. However, it still disagreed with special treatment to specific industry. These days, the point at issue has levelled up from the confrontational relation of the government and the market to the mutual complement relation of the government and the market, because LDCs with weak government has not succeeded in industrialisation, whereas other LDCs with strong governments have not been successful, either. The highly performanced Asian Economies (HPAEs) are exceptional case and cannot be explained

The purpose of this dissertation is to discuss what the industrialisation is and how the industrial power is strengthened even though the role of government varies. Of course national development includes not only industrial development but social development, educational progress and so on. Population explosion, educational reformation, gender problem are also issues to be solved by the government leadership. Moreover, even macroeconomic stability, social condition stability, maintenance of reliance on political decision, desirable international political relationship are also crucial factors which influence national industrial development. However, as space is limited, this dissertation cannot touch to whole range of development study. Thus, in this dissertation , I will mainly focus on the discussion the kernel of industrialisation and the system, which strengthen the industrial power.

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  1. Methodology

Before moving onto the discussion, I have to briefly outline the method how to expand this discussion. First, the term of 'Industrialisation' is to be redefined, because the current studies of industrialisation do not hold the same definition in common as to what the kernel of industrialisation is and what yardstick judges industrialisation level. Next, according to the revised definition, some essence of industrialisation will be extracted. Of course some of them are externalities to be given, while others are internal to be important variable factors. Then, the relation between the variable essence and the role of government will be investigated. However, the government does not necessarily need to be charged with strong leadership only because of the existence of such essence. Thus, the reasons why only government can undertake to satisfy the essence should be explained at the same time. During the process, some orthodox explanations are to be reassessed. Especially, some explanations by both the markets oriented approach and the active government behaviour approach might contain inconsistency and should be reviewed from the point of new understanding. Lastly, classifying the role of government, its procedures will be argued. Generally, the government intervention is criticised for the creation of inefficiency and rent seeking behaviour, according to neoclassical approach. It is true that government failures are common, but it still possible to avoid this by some conditions and policies. This can show the part of reason why there are performance differences even between countries with strong government similarly.

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1.3 The Application of Example

The paper develops the discussion with some examples of East Asian economies including Japan, because they are exceptional examples that have succeeded in industrialisation from LDCs. However, it needs to include some qualifications.

Firstly, each of HPAEs has shown surprisingly high economic growth, but they cannot be regarded as a single entity, because each country has its unique background __ produced natural resource, population or historical background __, and the size of government authority or the government attitude are affected by these factors. In fact, Hong Kong and Taiwan are not inferior to other HPAEs in the economic performance but the size of government and the range of government intervention are smaller than others. It means that government intervention is necessary not to be as same size, but as same degree of appropriateness in the size and quality suitable to each country is essential. In other words, in HPAEs, the governments intervene in deferent level and the level has varied from the lowest degree of Hong Kong to the highest level of Japan or Korea. Particularly, Japanese industrial policy was strongly influenced by central planned regime, and completely deferent from the policies of Hong Kong and Taiwan which are based on free market regimes. The purpose of this dissertation is to clarify the role of government in industrial development as mentioned above. In order to clarify the policy result, it is effective to use not the low-level intervention but rather the high level intervention with strong government leadership. Therefore, this dissertation will apply to Japanese and Korean case, mainly.

Repeatedly, every country does not require high level intervention as strong as Japan and Korea. According to the unique background, the level of intervention has to be different. Some countries may need more than that of Japan whereas other need less than Hong Kong. However, the contents are common. This discussion is trying to investigate the contents. The question of the criteria, which defines the level of intervention, is also critical problem but it is too involved matter to be fully dealt in this dissertation. If the role of government is defined as wide meaning of the correction of coordination problem, accordingly developed countries with matured market function may need less government intervention, while LDCs with immature market function may do more.

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1.4 The Structure

In the following chapter 2, various theories since post-war period will be outlined. The main stream of industrial development study has been various and evolved thorough a great deal of controversy. Structuralism raised consensus among scholars post- war to the 1960's, but it became the comment target by neoclassical group for the failure of ISI strategy. Then, the main current has been the no-classical view in the World Bank and IMF. In order to explain the East Asian miracle, orthodox neoclassical view, represented by Balassa, understood that trade liberalisation and open policy have been the reason. On the other hand, there has been strong argument from development state view, which Amsden or Wade is supporting. They pay attention at the strong leadership of the state and they found the reason of rapid development at the point.

The World Bank Development Report in 1991 and 1997, and the East Asian Miracle (EAM) in 1993, are thought to be the watershed of the argument between neoclassical view and development state view. That is, the state action is allowed if it is harmless to the market function, which is called by market friendly approach.

However, these arguments terminate the question whether market failure weigh to government failure or the opposite. To level up the discussion, a new approach is arriving, which is called as market-enhancing approach proposed by Aoki, etc. It suggests that the government should not substitute for the market function but complement. According to Aoki, ordinarily there are both of the market failure and the government failure as well as coordination failure. This approach has contributed to suggest new relationship between state and market, as well as to level up the discussion point. This approach, however, does not tell what is the appropriate state behaviour for the industrial development of LDCs, what behaviour complement the coordination problem, and how the state involves with market. These answers are indispensable to give the prescription of industrial development.

In Chapter 3, the meaning of "Industrialisation" is redefined. Then, deductively, the kernels of industrialisation are to be argued. This discussion follows by the argument of the elements pushing up industrialisation. Lastly, it examines that industrialisation requires "technological innovation" and "new market" as the possibility to improve entrepreneursf productivity.

Chapter 4 focus on the importance of technology innovation, the importance of technology capability advancement and the appropriate involvement by government to push up them. First, I will mention some studies on the importance of technology transfer and technology assimilation. Then, I will examines what technological matters and systems strengthen and accelerate the industrialisation process, and how.

In chapter 5, I will purpose to clear the proper government action concerning to the "new market possibility" based on the definition revised in chapter 3. Once the government ensures some market, domestic enterprises enthuse to it and stimulate its business effort. Because trans national companies (TNCs) are threat for fragile domestic enterprises, the existence of foreign company is a negative incentive. Both of succeeded ISI and EOI can be explained this approach. At the same time, it coerces to re-assess the open policy of the East Asian Miracle.

The argument of new involvement between the government and the market will be discussed in Chapter 6. Any government intervention has been criticised by neoclassical view for the creation of inefficiency and rent-seeking behaviour. However, as discussed above, the government intervention results better than natural market does in some cases. Moreover, LDCs have immature market, thus, much coordination failure to considerable extent. Therefore, the role of government can not help being large. Here it is crucial to note how the government deals with such coordination failure and how it acts as appropriately. There is "contingent rent" (Aoki, Murdock and Okuno-Fujiwara, 1996), as well as orthodox rent creating inefficiency. The contingent rent does not make rent seeking, rather, it create competitions among enterprises. Here, we have to re-assess the argument World Development Report 1993, because it does not touch that contingent rent creates competition and grade up stimulation for enterprise.

Finally, chapter 7 concludes the dissertation. The definition of industrialisation the role of government as well as the relationship between the market will be summarised.

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