The role of government is one of the essential questions that economists and policy makers try to answer. There are three dominant theories that describe the extent and role of government in a nation’s economic decisions. They are: Neoclassical, Revisionist and Market- Friendly. “The governments in newly industrializing economies were actively involved in the economic development of their nations.” By defining the three theories and looking at the industrializing economy’s government’s policies, we can determine which theory they followed.
To determine which theory the industrializing nations were following, it is important to understand what each theory entails. The Neoclassical model is where governments tend to step away and let the markets act naturally. They use limited policy to provide a stable economic environment in terms of inflation or exchange rate, and to promote productivity and a comparative advantage. The revisionist method is significantly different in that it argues in favor or government intervention due to the potential for market failure. It even allows for the complete decision making to be done on a government level for which industries to succeed or fail, and which will be promoted. The final theory, the Market-Friendly Theory is similar to the neoclassical model in that it is heavily market oriented versus a government orientation. The government has a limited role to ensure competition, investment and a stable macroeconomic environment. Asian newly industrializing nations tended to primarily follow one of these.
The Asian industrializing nation’s governments tended to commit to low inflation, as history has shown that rates below 20% can be maintained without causing instability. To do so, they put self-imposed constraints on fiscal policies and started off with fixed exchange rates. The neoclassical model the model in which a government tries to provide a stable macro-environment through inflation and a stable exchange rate policy, suggesting they followed this model. Hong Kong, Malaysia, Taiwan and Singapore however, all floated their exchange rates in the 1970’s, depreciating their currencies when needed. This non-stable activism suggests the market-friendly theory. Indonesia and Korea both traded based on comparative advantage but were hit by declining oil prices, leading to worsening terms of trade for both of them. This diminished their comparative advantage and the reduced export demand was felt by both nations. As the market-friendly model states, it is the government’s role to have a limited role, but provide a stable environment, so after Indonesia’s recession in 1985 it promoted stabilization policies which renewed growth (25% growth from 1985-1991) by devaluing the rupiah and cutting spending. Korea, while it suffered a temporary trade deficit due to a worsening terms of trade recovered due to its own structural advantages and an activist stabilization package that continued their high investments, suggesting again, by definition, the Market-Friendly Model. Thailand was also hit by the oil shock. While they tried for a neoclassical attempt of maintaining a fixed exchange rate, it led to fewer monetary policy options, leading the government to take expenditure and revenue activist roles. It cut expenditures and increased revenue. Singapore also
hit a recession in 1985 caused by a lack of investments. The Market-Friendly model states that the government should use activist measures to promote investments, so it cut income taxes, allowed employers to keep more of their money and reduced corporate taxes.
These actions all suggest a Market-Friendly approach towards government intervention in Asian Industrializing Nations. The government allowed the markets to generally act on their own, but did promote limited government activism, when trade fell it implemented policies to keep their market open for international trade and to maintain competition- while not determining how resources would be allocated, and provided stable macroeconomic management. “This approach captures important aspects of East Asian growth.”
There were some indications of the Neoclassical model showing up in the industrializing nations, but in the end the level of activism suggested that the Market-Friendly view dominated and won out. The Revisionist Model was not implemented in any of the nations, as resource allocation tends to lead to government failure and inefficiencies. It is through these facts that the Market-Friendly Theory can be determined as the dominant theory in Asian Newly Industrialized Nations.