A new and interesting debate on the role of the government in economic development has also emerged following the rapid growth of the East Asian economies. This debate focuses on somewhat different concerns from the earlier calculation debate, assessing whether or not the government in an underdeveloped capitalistic market economy can improve upon the market outcome of resource mobilization and resource allocation. This is why the debate is ultimately reduced to measuring the importance of market failure (or absent market institutions) versus government failure (or the government’s inability to assume the role of markets or to introduce market institutions).
In observing the remarkable success of economic development in East Asian countries such as Japan,Korea,and Taiwan over the past 30 years or so adherents of the neoclassical theory emphasize one important lesson that can be learned from the East Asian experiences. This is the importance of getting the basics right. They argue that the government should provide a stable macroeconomic environment and a reliable legal framework in order to create an enveironment favorable to the free play of market forces. According to this critique, minimum intervention with the lowest degree of relative price distortion is a virtue. They see that Asian economies benefited the most from a government strategy that followed the lead of the market, rather than trying to actively direct it.
On the other hand, a group of economists known as revisionists attribute greater significance to other aspects of the East Asia success story that have gone relatively unnoticed in the neoclassical analysis. They observe that the East Asian governments have taken a much more active role in the economic development process than the one envisaged by neoclassicists and thus argue that, despite efforts to do quite the opposite, the government has actually been leading the market. Revisionists even go on to argue that during the late industrialization stage, the state should deliberately set prices at market-distorting levels in order to create profitable investment opportunities. Also emphasized is the existence of market failures in developing economies due to market imperfections such as a lack of relevant markets. It is thus contended that an active role on the part of the government is necessary to guide resource allocation for the highest growth of the overall economy. Amsden, one of the staunchest revisionists, even suggests that the central bank may support the priority industries at the cost of macroeconomic stability. The World Bank (1993) answered the revisionists’ argument with the reassertion of an obvious truth : “For interventions that attempt to guide resource allocation to succeed, they must address failures in the working of markets. Otherwise, the market would perform the allocation function more efficiently”. Again, macroeconomic stability is emphasized as the most important precondition precondition for extensive economic development.
In sum, the debate on the role of the government in economic development centered around the issue of market failure versus government failure. Of course, market failure generally reflects the failure of institution, another from of governmental failure – this time the failure lies in the government’s inability to set up the right institution or, in other words, the rules of the game in the economy. Therefore, market failure on its own cannot be considered as an automatic justification for direct government intervention. Rather, the government should try to introduce “right” institution to provide an provide an optimal environment for better economic performance. Furthermore, in most cases of apparent market failures, it should not go unnoticed that government regulation or its practices of preferential treatment usually turn out to be the major causes of those failures.