York oxford university press 1989 and robert wade

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York: Oxford University Press, 1989); and Robert Wade, Governing the Market: Eco-nomic Theory and the Role of Government in East Asian Industrialization (Princeton: Princeton University Press, 1990). 317
C HAP T E R TWELVE behavior of firms; they also used nonprice means to alter firm behav-ior. Scholars argue that this state-led industrialization strategy worked by using the price mechanism to encourage private entrepre-neurs to take actions that the government considered to be in the interest of rapid industrialization. The industrial, protectionist, and other policies employed by the developmental state were based on the assumption (which had been shared by members of the first generation of development theorists) that these economies suffered from the consequences of "late, late industrialization." Market failure was assumed to be prevalent among these less developed economies, and market failure necessi-tated an active role for the state. Governing elites believed that their societies faced "collective action problems"; that is, they had to find a way to motivate members of their societies to work together. State policies were needed to bring private returns in line with public re-turns. States had to create an incentive structure to ensure that private entrepreneurs invested in those economic activities that would be the most socially beneficial. In addition to trade protection and govern-ment subsidies, their industrial policies included such "financial re-pression" policies as selective credit allocation and deliberate distor-tion of interest rates in order to channel cheap credit to favored economic sectors. Elites also believed that government policies should anticipate the future comparative advantage of the economy and that industrial policy should lead rather than follow the market.21 Although proponents of the developmental state agree with neo-classical economists that the strategy of export-led growth was a key factor in the economic success of the East Asian economies, they ar-gue that neoclassical analysis is not sufficiently comprehensive. For example, they ask why business firms selected particular products for export.22 As Amsden points out in her study of South Korean industri-alization, that government used a number of mechanisms to promote particular industrial sectors and encourage export drives, including export contests to promote rapid industrialization of those sectors considered of strategic importance to the overall economy. Those in-dustries that performed best in export markets were especially favored by government industrial policies and programs of financial assistance. 21 Richard Auty makes the interesting point that industrial policy was a consequence of the uncertain political situation after the defeat of the United States in Vietnam.

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