Governments ought not to give more incentives to some industries than to others, except to overcome inherent market failure. Inherent market failure is uncommon, even in developing countries. Most apparent market failures are policy induced; they arise from government action or inaction – action to restrict market access, or failure to establish a capital market, for example. The appropriate role of government is therefore to help create and sustain an economic environment in which price signals drive industrial change. This it can do by adopting a neutral policy regime, the core of which is a free trade (or almost free trade) regime and a small public sector, unable to impose ‘political’ prices.

Powerful empirical evidence for the validity of this proposition comes from the contrast between the East Asian developing countries and Japan, on the one hand, and most of the rest of the developing world, on the other. The superior economic performance of the East Asian capitalist countries has gone with a relatively neutral policy regime; the inferior economic performance elsewhere went with varying degrees of distortions. The causality is from distortions, or lack of them, to results.

That, I believe, is a fair summary of the central interpretation of the East Asian experience by neo-classical development economics. While it is correct in some respects, it is also, I argue, wrong in others. In particular, Japan, Taiwan and the Republic of Korea have not maintained a close approximation to a neutral policy regime over the post-war period.