Economic orthodoxy would have it that the path to prosperity (how countries become rich) is for governments to ensure law and order; provide basic public goods like schools, public health, roads, electricity, water, and sewerage; and deregulate and liberalise enabling environment for the private sector. In other words, apart from providing the basic ingredients, governments have no active role to play in economic growth. Governments have to just get out of the way and allow the markets to work their magic and usher in economic prosperity.
The problem is that there is no evidence of this having been the historical development trajectory for any country. Instead, the uniform theme across the historical development trajectories of countries is the active role played by governments in promoting economic growth. This has been well documented in serious literature on economic history. In recent times, the likes of Ha Joon Chang, Joe Studwell, and Robert Allen have popularised this historical reality.
Robert Allen summarises the big-push industrialisation strategy
The only way large countries have been able to grow so fast is by constructing all of the elements of an advanced economy – steel mills, power plants, vehicle factories, cities, and so on – simultaneously. This is Big Push industrialization. It raises difficult problems since everything is built ahead of supply and demand. The steel mills are built before the auto factories that will use their rolled sheets. The auto plants are built before the steel they will fabricate is available and, indeed, before there is effective demand for their products. Every investment depends on faith that the complementary investments will materialize. The success of the grand design requires a planning authority to coordinate the activities and ensure that they are carried out. The large economies that have broken out of poverty in the 20th century have managed to do this, although they varied considerably in their planning apparatus.
He explains Japan's success in some detail. The first thing was to acknowledge the requirements for economic growth.
Japan accomplished this advance by reversing the technology policy that it had pursued in the Meiji and Imperial periods. Instead of adjusting modern technology to its factor prices, Japan adopted the most modern, capital-intensive technology on a vast scale. The investment rate reached about one-third of national income in the 1970s. The capital stock grew so rapidly that a high-wage economy was created within a generation. Factor prices adjusted to the new technological environment, rather than the other way around.
He describes the four co-ordination problems that Japan's government addressed,
Japanese industrialization in the post-war period required planning, and the key agency was the Ministry of International Trade and Industry (MITI)... Steel was one of Japan’s great successes... A key feature of steel production is that costs are minimized with large-scale, capital-intensive mills... MITI’s objective in the 1950s was to restructure Japan’s industry so that all steel was produced in mills of efficient size. MITI’s power came from its control of the banking system and its authority to allocate foreign exchange, which was needed to import coking coal and iron ore... Despite a large increase in wages, Japan was the world’s low-cost steel producer due to its commitment to modern capital-intensive technology. Over 100 million tons were produced in 1975.
Who was going to buy all that steel? Shipbuilding, automobiles, machinery, and construction were major domestic purchasers. Those industries had to expand in step with the steel industry. Ensuring that result was a second planning problem. Their technologies also had to be decided, and a large-scale, capital-intensive approach was taken with these as with steel. In the case of automobiles, for instance, Japanese firms had more capital per worker than their US counterparts, and the Japanese capital was more effective since ‘just in time’ delivery meant that much less of it consisted of unfinished components... the scale of production was larger in Japan. In the 1950s, the minimum efficient size of assembly plants was close to 200,000 vehicles per year. Ford, Chrysler, and General Motors annually produced 150,000–200,000 vehicles per plant. In the 1960s, new Japanese auto plants incorporated on site stamping and multiple assembly lines to push the minimum efficient size above 400,000 units per year. All Japanese manufacturers produced at this level, and the most efficient, like Honda and Toyota, could reach 800,000 vehicles per plant per year. Japan’s move to highly capital-intensive methods created the most efficient industry in the world, and one which could price its products competitively and still pay high wages.A third planning problem was to ensure an expansion of consumer demand in Japan to purchase these consumer durables. Japan’s distinctive industrial relations institutions made a contribution: among large firms, company unions, seniority wages, and lifetime employment meant that some of the surplus of successful firms was shared with their employees. Small firms, however, provided many jobs in Japan, and in the 1950s (as in the interwar period), they paid low wages. During the 1960s and 1970s, the vast expansion of industry ended the labour surplus, and the dual economy disappeared, as wages in the small firm sector rose rapidly. Rising incomes from the expansion of employment led to a revolution in lifestyle as Japanese bought refrigerators and automobiles made with the enlarged supply of steel...A final planning problem related to the international market. This problem had ramifications far beyond MITI. In the mid-1970s, the Japanese steel industry was exporting almost one-third of its output, mainly to the USA. Similar percentages of automobiles and consumer durables were also shipped there. The US production of steel and autos collapsed under the impact of Japanese competition; indeed, the decline of the American Rust Belt was the counterpart to Japan’s Economic Miracle. The USA could easily have prevented these imports by continuing the high tariff policy it had followed since 1816. So-called ‘voluntary export restraints’ were negotiated, but they were only temporary expedients. Instead, the USA elected to cut tariffs but only if other countries did likewise (multilateral trade liberalisation). One reason was that the USA emerged from the Second World War as the world's most competitive economy, so expanding its export opportunities seemed more rewarding than necessarily protecting its home market.
Japan grew rapidly by closing three gaps with the West – in capital per worker, education per worker, and productivity. This was done by 1990, and Japan was then like any other advanced country: it could grow only as fast as the world’s technology frontier expanded – a per cent or two each year... South Korea, in particular, followed the Japanese Big Push model closely. Advanced technology was imported and mastered by Korean firms since foreign firms were excluded from the country. The state planned investment and restricted imports to protect the Korean manufacturers it promoted. As in Japan, high quality and performance were advanced by requiring these firms to export large fractions of their production. Korea established the heavy industries like steel, shipbuilding, and autos that were Japan’s successes, and, a decade or two later, they became Korea’s successes as well.
There may be several instances of government intervention having not only failed to achieve economic prosperity but also having left their countries worse off. But this does not imply that government intervention is uniformly bad. Instead, given the near uniformity in the strategies of economic growth employed by western countries as well China and North East Asian economies, a more accurate inference is that government intervention works well under certain circumstances. The challenge then is to get those conditions right.
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