Industrial Policy after the East Asian crisis

Prior to East Asia’s financial meltdown in the second half of 1997, there appeared the prospect of an uneasy consensus on the East Asian “miracle” that recognized the role of the entrepreneurial state in accelerating industrial development but emphasized the “market-friendly” nature of the state’s interventions. Following the financial crisis, East Asian policies and institutions are once again under scrutiny for their failures rather than the miracles they achieved. In this review, I find that 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. I illustrate these propositions through the examination of trade policy, industrial conglomerates, and provision of physical infrastructure. The evolving international consensus on industrial policy, which predates the Asian crisis, emphasizes a hands-off approach in which competition policy plays an important role. But the new consensus also proposes “deep integration” or the adoption of uniform standards in areas such 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 and also because it may be time to consolidate the gains from the rapid trade-led growth by focusing on creating a stronger incentive structure for the efficient utilization of resources. However, implementing the new set of policies will require sophisticated new skills in the public administration. Moreover, since the current consensus is based on strong priors rather than on solid empirical evidence, the dangers of international uniformity in policy are evident.