Moving directly on from the general overview offered by the first chapter, this chapter looks closely at the issue of the appropriate role for government in promoting sustainable private sector-led economic development. Defining the role of the government in economic management will depend upon what line is drawn between the government's role and that of the economy's private sector. This contentious issue is traced back to the discussion over the feasibility of the socialist economic calculation during the early twentieth century (originally initiated by Ludwig von Mises and Oscar Lange) and has continued right through to the more recent debate on the desirability of a government-led economic development strategy in the 1990s. In spite of the innumerable works of economists with radically varying viewpoints, the ongoing debate can ultimately be reduced down to the simple issues of market failure or government failure. Traditionally, market failures have been seen as the most justifiable reason for active government intervention. However, it should also be emphasized that market failures are in most cases a reflection of Institutional failure -which is in essence a form of government failure.
The chapter outlines some 'lessons' to be learned from the Korean experiences of government-led economic development over the past thirty years by examining the policy patterns, defining their characteristics, and suggesting the desirable role of the government in a globalizing world. Korea's experiences suggest that active and protracted governmental Intervention in properly allocating resources might achieve some short-term goals, but only at the expense of some long-lasting adverse side-effects. For example, the distorted relative price system and incentive structure resulting from such interventionist policies has meant that the private sector has been reluctant to economize. After the government utilized them as credit distribution stations for over three decades, Korean banks paid more attention to the volume of deposits than to their overall profitability. In other words, Korean banks considered a corporation in terms of how much it borrowed rather than its profitability. It has been argued that although government Intervention In resource allocation enjoyed some success in the 1960s and 1970s, this is no longer the case because the size and com plexity of the Korean economy have already reached a point where the informational superiority of the government over the private sector can no longer be guaranteed.
Finally, this chapter provides a basic framework within which we discuss the optimal role of the government in a general context. We invoke the oriental philosophy of Taoism being natural without coercion' and the Hayekian philosophy of interpreting market competition as a discovery procedure of the optimal solutions to the resource allocation problems. This chapter concludes that the government's role should be confined to preserving the spontaneity and endogeneity of the market order and cultivating an economic environment conducive to the proper functioning of the market. In other words, while the government concentrates on determining variables for the exogenous market order, the determination of endogenous variables should be left to the market.