The neo-classical ascendancy: the Australian Economic Policy Community and Northeast Asian Economic Growth

The Australian economic policy community has vigorously championed an interpretation of Northeast Asia's economic success that sees that success through the prism of conventional neo-classical economics. The leading voices in that policy community have argued that selective governmental assistance to targeted industries has been neither a necessary nor a sufficient condition for the economic success of the Northeast Asian market economies (Japan, South Korea and Taiwan); that in cases where targeting could be considered to have been successful, the targeting was 'market conforming'; and that where governments have attempted to promote and assist particular industries the results have been as harmful as they have been beneficial. This paper critically examines these claims. It questions the evidence used by the policy community, particularly its excessive reliance on a small number of studies based on econometric modelling and its marked reluctance to acknowledge and confront empirical evidence that challenges a neo-classical interpretation. It also highlights the inadequate treatment of externalities and technology in the neo-classical approach. The paper presents evidence, much of it from industrial case studies, to show that none of the Northeast Asian governments has been content to trust the course of economic development exclusively to the market. Intervention to facilitate the acquisition, adaptation and diffusion of technology has been pervasive. All three countries have consciously targeted industries that were perceived to be strategic for the economy's future growth - industries that were skill- and capital-intensive, industries that were expected to generate technological spillovers and other externalities, and industries whose products were identified as having high elasticities of demand. This evidence fits better the interventionist rationales of strategic trade theory and new growth theories than it does the so-called market-conforming rationale of neo-classical economic theory. Northeast Asian governments have used trade and industrial policies to achieve two ends: (i) to assist domestic firms to become internationally competitively enabling them to realise scale and learning economies; and (ii) to generate externalities that benefit a wide range of leading-edge industrie