Not surprisingly, perhaps, the Latin American countries and also some of the South Asian countries followed suit, and accorded high priority to government in the realm of resource allocation for industrial development. The governments in these countries owned and managed dominant industries and pursued highly protective industrial policy to promote domestic industrial base. Private sector initiatives were hardly encouraged on the heels of various types of market failures. The command economies of the erstwhile Soviet Union and the East European countries are, of course, extreme examples of state-led industrialization.

Yujiro Hayami and Yoshihisa Godo gave a succinct summary of the successes and failures of government interventions in industrialization in their book: Development Economics -- from the Poverty to the Wealth of Nations (Oxford University Press 2005). I reckon that the book could be a good recipe for reassessing the role of the state. The real question is why state intervention succeeded in some countries and not in others. In other words, despite a wider area under government control in Japan and East Asia compared to Latin America, why was the system not afflicted by a high incidence of government failure in the former cases? There is a volley of factors but we shall highlight few of them

Government and big business
Yujiro Hayami and Yoshihisa Godo believe that despite different organizational styles, Japan, Korea, and Taiwan developed a cooperative relationship between government and big business. "To outsiders, this relationship looks like a corporative state or 'quasi-internal organization' in which the elite bureaucracy staffed by the best managerial talent guides business activities through formal and personal networks to an agreed-upon strategic plan."

Productive protection
The system of protection, introduced to help infant industries, was simple and transparent compared to the complex and the non-transparent treatment to infants in Latin America and South Asian countries, including Bangladesh. For example, the tariff rates adopted by both Japan and Germany hovered around a modest rate of 20 per cent or less, which was substantially less than 50 to 100 per cent or more in developing countries with import-substitutions industrialization policy.

It is, perhaps, not true that Japan succeeded in industrialization through subsidies. In fact, as argued by the authors, the dramatic development of the Japanese cotton textile industry, outstripping those of India and Britain, was achieved with virtually no protection or subsidy from the government. This contests the assertion that government subsidies are indispensable for late-industrializing economies. While the scope of bureaucrats' discretion was pervasive, incentives to private producers were less seriously distorted than in Latin America or South Asian countries. Export incentives were applied across the board and rather than distorting prices, exporters were encouraged through other means.

Less moral hazard
"The more important factors were strong nationalism and the disciplined bureaucracy built for achieving the nationalistic goal. Economic development was valued equally or even more highly as a means to build a strong army for achieving national supremacy than to increase consumers' utility." Under this narrow but strong nationalism, government officials and politicians could hardly exercise moral hazards, observed elsewhere, to hinder development.

Government's goals
Large public investments were undertaken in building physical and human capital, highway networks and modernization of railways (e.g. bullet trains in Japan). The infrastructure so built reduced transaction costs, enhanced information base, and attracted investments. "Government intervention in the private sector was not limited to such rent-generating regulations as entry control and cartelization, but also included provision of external market information and guidance and persuasion of private firms to form R&D cooperatives for high technology products." Moreover, export oriented industrialization constituted the core of industrial insights compared to the countries of Latin America and South Asia with import substitution strategy on board. "If the industrial policies in Japan contributed to economic growth, the contributions came less from implementation of specific targeting policies than from sharing of information between government and the private sector, which was promoted through dialogues in various committees and councils in the process of making indicative plans”.

Credibility is public good
Government regulations also contributed to increased credibility of the financial system and thereby contributed to mobilization of household savings for industrial development.

Banks' credibility enhanced by those regulations served as public good in the early stage of development. "This mechanism would not have worked effectively, however, unless macroeconomic management had been successful in curbing inflation to a moderate rate and thus preventing deposit rates from becoming negative in real terms. Otherwise, heavy 'financial repression' would have seriously undermined banks' capacity of mobilizing household savings for industrial development."

Inward vs. outward
In analyzing the success stories of East Asian countries, export-led growth is adduced to be the anchor of rapid development. Competition in the international market compelled producers to reduce costs and increase product quality. "Export promotion policies necessarily entail government budget costs, whereas costs of import substitution can be passed on to consumers and unprotected industries. These merits of the export-oriented system are said to have underlain the high rates of economic growth in East Asia as compared with the autarky-oriented import substitution system practiced in Latin America and elsewhere."

Conditionality
In delineating the role of government in industrial development, grandiose generalization is difficult to make. The experiences of Japan and East Asian countries, as documented by the economists I mentioned before, seem to provide some lessons for us. First, government should strive to make markets work for the private sector. Both physical and human capital development assume capital importance. Second, government should create sufficient space for export-oriented industrialization. Third, the financial sector should be made sound and sustainable through regulatory framework. And finally, the bureaucracy should remain above politics and resistant to rent-seeking pressures from vested interest groups. Unfortunately, few of the conditions are satisfied in developing countries that suffer under severe government control. The sooner the lessons learnt, the better it is. Government should be for the market but not in the market.

Abdul Bayes is a Professor of Economics at Jahangirnagar University.