The preceding chapters were devoted to building a case for the existence of systematic incompleteness in certain markets in LDCs. One important implication of such a case is that the debate in development economics may have to change from “whether governments hould intervene in the process of development” to “how can governments intervene appropriately for development success.”

In what follows, the reinterpretation of the Japanese development success since World War II will focus on state intervention that resulted in systematically overriding certain crucial incomplete markets, especially the labor market and the foreign exchange/trade markets. The analysis will examine specific policy packages that allowed Japan to find shortcuts to the long road from underdevelopment to development.

The discussion of the new development economics in Chapter 3 emphasized the importance of leapfrogging the process of economic development. The empirical handle used in this book to make operational the concept of leapfrogging is the Ricardo Principle and the relative prices of tradables and nontradables at various stages of development. At the two extremes of the continuum of economic development that the Ricardo Principle maps, we can distinguish two stages. Stage I, underdevelopment, is characterized by cheap labor and expensive capital, and implies a comparative advantage for an opene-conomy LDC of specializing in labor-intensive, low-value added exports. Low wages, absence of significant technological rents, and low living standards follow. Stage II, development, is characterized by expensive labor and relatively cheap capital, and implies specialization in capital- and technologyintensive exports with high value added, and significant technological rents associated with products that have high income elasticity of demand and, conceivably, low price elasticity. High wages and high living standards follow.