Government and Market in Economic Development

Experiences of most developing countries show that the initial stage of development has to be engineered by the government. The governments of developing countries are likely to adopt “mercantilistic†growth promotion policies, which tend to be effective during the initial phase of extensive growth. Even at this stage, it is important for developing countries to adopt market-conforming type of growth promotion policies. The policy of industrial “targeting†can achieve success in promoting the targeted sectors, but on a long term, it tends to create industrial imbalance and overall inefficiency in the economy. The real and financial sectors of a developing economy are intimately related to each other. The more interventionist a government is with respect to the real sector, the more expansionary it is with its monetary policy, and the more repressive with its financial policy. The industrial targeting policy, accompanied by a repressive financial policy, may promote the growth of priority sectors, but the benefit to the economy as a whole, particularly from a long-run point of view, is likely to be limited. This policy would bring forth chronic inflation, distortion in industrial structure, and discourage financial saving and retard the development of financial entrepreneurship. Chronic inflation, imbalance in industrial structure, retarded development of financial sector, and proliferation of bureaucratic regulations, which are commonly observable in developing countries, call for a set of policies aimed at macroeconomic stability with microeconomic reform. It is, however, extremely difficult to implement these policies in such a way as to bring beneficial results to the economy. The developing countries should conform as much as possible the basic direction of economic policies to market principle. The government is also urged to adopt those policies which can improve the quality of human resources.