Industrial Policy after the East Asian Crisis: From Outward Orientation to New Internal Capabilities?

Abstract

Before East Asia's financial meltdown in 1997, many believed that the entrepreneurial state contributed to the East Asian miracle by accelerating industrial development in a market-friendly way. The now-evolving international consensus on industrial policy emphasizes a hands-off approach, with activist government playing a reduced role and competition policy playing an important role. But implementing such a policy will require sophisticated new skills in public administration. Before East Asia's financial meltdown in the second half of 1997, there appeared to be prospects for an uneasy consensus on the East Asian miracle, a consensus that recognized the role of the entrepreneurial state in accelerating industrial development but emphasized the market-friendly nature of the state's interventions.

After the financial crisis, East Asian policies and institutions are once again under scrutiny - for their failures rather than for their miracles. Mody finds that the prospects for a consensus that incorporated the East Asian experience were ill founded. East Asian policymakers emphasized growth through quantitative targets; price signals played a significant but secondary role.

Mody illustrates these propositions by examining trade policy, industrial conglomerates, and the provision of physical infrastructure. The evolving international consensus on industrial policy, which predates the Asian crisis, emphasizes a hands-off approach in which an activist government plays a reduced role and competition policy plays an important role. But policies emphasizing greater competition and a level playing field - implicitly thought to require less government action - may require more government expertise, not less. If implementing a 10 percent export subsidy is difficult, consider the difficulty of determining whether a firm is exercising market power or restraining trade.

So the prospect of governments stepping back may be unrealistic. The new consensus also proposes deep integration, or the adoption of uniform standards in such areas as competition policy and labor and environmental standards. For East Asia, the shift to the international consensus may be appropriate because government-driven growth has declined in intellectual respectability. Also, it may be time to consolidate the gains from the rapid trade-led growth by focusing on creating a stronger incentive structure for efficiently using resources. The current consensus is based on strong priors rather than on solid empirical evidence, however, and the dangers of international uniformity in policy are evident.

This paper - a product of the Development Prospects Group - is part of a larger effort in the group to analyze trends in the global economy.