Nuanced neoclassical school of thought.

The growth of East Asia has been reviewed by both mainstream neoclassical school of
thought and revisionist on the context of the role of government intervention in achieving rapid
and equitable growth (Chu, 1997).
World Bank (1993), on its paper the East Asia miracle, a representation of neoclassical
view, argues that the success of East Asia economies was due to a stable macroeconomic
environment and a trustworthy legal framework to encourage both domestic and international
competition. The neoclassicals further argued that East Asia involvement in international trade
and absence of price controls and government intervention led to low inflation rates. They further
argued that the governments role was to investment in education, people and health as human
capital was important in High performing Asia economies.
Amsden (1989) stated that the revisionist view, which argued that East Asia success was
due to government intervention. Contrarily to the neoclassical view that constant policies were
used, they argued that East Asia used various policy mixes which were diverse and flexible. They
further argued that market failures were consistent as opposed to the neoclassicals who stated
that occurrence of market failures was rare. According to the revisionist market failures guided
investment to industries that were likely to generate the highest growth in the economy.
Therefore, government in East Asia deliberately got the prices wrong to alter the incentives in the
economy so as to boost industries that would not have thrived.
World Bank (1991), stated that neither neoclassical nor revisionist views accounted fully
the growth of East Asia economies. World Bank therefore expanded the neoclassical view by
stating that rapid growth in developing countries was due to effective and limited government
intervention. Government role was therefore to; ensure ample investments in people, provide a
conducive environment for private investments, ensure international trade and to maintain a
stable macroeconomy. If governments went beyond this role they were likely to do more harm
than good if the intervention is not market friendly.
According to World Bank, East Asia economies; were stable macro-economically, had a
high level of GDP from international trade, had invested heavily in people and they also had high
competition between firms. In addition to macroeconomic stability the high performing Asia

economies; accumulated resources, ensured efficient allocation of resources and technological

catch up. This was done by use of various policies that were either market oriented or led by the
state. However, these policies varied across different economies and over time, (World Bank,
1993). Policies were therefore divided into fundamental policies and selective policies.
Fundamental policies are policies that encourage macroeconomic stability, investment in human
capital, a financial system that is stable, limited price fluctuations and advanced technology.
Selective intervention on the other hand involved mild financial suppression, direct credit,
industrial targeting and policies that push exports of non-traditional goods.
The bank further went on and emphasized that government interventions aimed at
allocating resources efficiently should address market failures. Else, markets would allocate
resources efficiently. According to the Bank, East Asia experienced coordination externalities as
a market failure in the early stages of development which they corrected by enhancing
cooperative behavior between private firms and setting performance standards.
Competitiveness and coordination disciplines were also encouraged in East Asia
according to the Bank. In addition some economies created contests that combined competitive
spirit while encouraging cooperation among firms, government and the private sector. The
contests involved non market allocation rules such as provision of rationed credit for exporters
and coordination of private investment with the government. The government therefore rewarded
firms based on their performance by giving them access to credit or foreign exchange. Both the
government and competing firms monitored the performance of various firms. Government
intervention were therefore displaced by competition through markets or contest. This process is
known the use of contingent rents, (Aoki, Murdock and Okuno-Fujiwara ,1996). East Asia used
these contests to discourage unproductive rent seeking behavior as it was transparent. Lau
(1996), argued that the if the government allocates various rents such as tax and subsides ,
franchise, preferential loans and lend grants at the early stage of economic development when
markets are uncompetitive competition may be created artificially.
World Bank (1993), paper went further to recognize the role of government intervention in
growth especially in Northern Asia. However, they argued that selective intervention succeeded
because; the policies addressed problems in the market, the policies took place within the setting
of good, vital policies and the government had the ability to establish and monitor suitable

economic performance criteria in relation to the policies. The report concluded by stating that,
success or failure of a policy depends on the institution base in which the policies are
implemented.
After this publication, Young (1994b) and Kim and Lau (1994) challenged the views of World
Bank. According to them total factor production did not make a significant impact in the growth
of East Asia. They argued that the growth was due to the growth of inputs, capital and labour
based on Krugmans perspiration variables. Young findings led to investigations on the sources
of East Asia growth.
Crafts (1998), argued that East Asia growth had three different aspects. The first aspect was
accumulation which was important than total factor production. He further argued that increase
in investments was due to policies used by high performing Asia economies in relation to human
and physical capital. The second aspect was that the rapid change in population in East Asia gave
a boost to economic growth as East Asia economies had an advantage of increase in labour
provision. The third aspect was that economic development created a legacy of financial and
various institutions which provided negative and positive implications for future growth
opportunities.
Felipe (1999), on the other hand, argued that East Asia growth was due to increase of inputs in
growth and technical efficiency however, technological progress did not play a role in the
increase in total factor productivity. However, Krugman (1994), on his paper the myth of East
Asia miracle argued that the growth of East Asia was driven by growth in inputs such as labour
and capital rather than increase in efficiency. He explained by stating that Singapore grew
because of mobilization of resources, increase in population, high stands of the education system
and increase in investment on physical capital. He further argued that the changes in behavior
such as doubling of population could not occur again hence the high growth rates experienced in
Singapore are unlikely to occur in the future.
Han (2003) relaxed the postulates of full technical efficiency and considered the possibility that
East Asia economies were inside the best practice production frontier. He justified this by stating
that the production process did not only include the relationship between inputs and outputs but
it was an outcome of a series of economic decisions based on different non-price as well as

organizational factors which determined the allocation of inputs. Therefore, economic

institutions also determined the output in the economy.
Studies conducted by Singh and Trieu (1996), supported Youngs conclusion on East Asia
growth. According to him the contribution of total factor productivity to output was significant.
Hence the newly industrialized economies relied on accumulation of factors of production.
Reference
Aoki, Masahiko/Hyung-Ki Kim/Masahiro Okuno-Fujiwara (eds.): The Role of Government in
East Asian Economic Development. Comparative Institutional Analysis, Oxford: Clarendon
Press 1997