There has been considerable focus on the selective intervention of industrial policies in accelerating economic growth in the East Asian countries. The role of industrial policy in the growth process of these economies was particularly recognised in the 1970s and the 1980s. A number of questions have been raised in the backdrop of the role of industrial policy in the East Asian economies. Whether the selective intervention policies pursued were an important part of their economic success? Whether the changes in international economic environment inhibit developing countries to implement similar industrial policies? The East Asian experience of industrial growth has been, thus, debated for choosing alternative policy options for attaining rapid industrial growth, higher employment and exports as witnessed by these economies.

Japan implemented sectoral industrial policy in the post-1950 period through direct subsidies; tax policy and off-budget finance through Fiscal Investment and Loan Programme; subsidised credit, including the channelling of capital to specified sectors; and controls on international trade, investment and technology imports. The focus of these efforts was aimed at rebuilding heavy industries such as steel and transportation equipment. The trade protection provided to Japanese industry, as measured by effective rate of protection, is argued to be associated with lower than the expected performance of exports, contradicting the notion that infant industries were promoted (Noland, 1997). The research and development (R&D) financed by the Government, however, had favourable impact on trade competitiveness during the 1970s and 1980s. The role of direct subsidies in fostering changes in Japan's industrial composition was minimal. Indirect subsidies such as low interest loans were, however, found to be associated with expansion of output and improved trade performance. Industrial policies were effective in the sense that market interventions appeared to have impacted on resource flows and composition of output

The orientation of industrial policy in Korea had changed drastically in the mid-1960s with an emphasis on exports. There was a drive towards heavy and chemical industry in order to alter the composition of industrial output with more technology and engineering intensive products. It also aimed at upgrading export profile and reducing reliance on imports. The policies for channelling capital through interest subsidy were augmented by extensive tax incentives for priority industries. However, the era of protection to industries came to an end in 1979 when the Government announced a comprehensive stabilisation plan. Policies undertaken during this period are, however, found to be unsuccessful on the ground of creation of excess capacity in favoured sectors while starving non-favoured sectors of resources. It is also observed that during the heavy and chemical industry drive, the establishment of oligopolistic positions by the Chaebol retarded technological change. Further, Lee (1996) finds that trade protections were negatively associated with the growth rate of labour and total factor productivity, while tax incentives and subsidised credit were uncorrelated with sectoral productivity growth. The labour productivity growth is found to be slower in protected sectors. Nevertheless, inter-industry externalities of industrial policies emanating from domestic production of intermediate goods, movements of workers from protected sectors to other sectors and direct interaction on equipment design between producers and local buyers would have potentially increased total factor productivity (TFP) growth in other sectors (Pack, 2000).

A critical component of Taiwan's success was that its industrial policies helped to establish new and successful manufacturing sector. The industrial growth was facilitated by low level of trade protection, availability of inputs at international prices, conservative macroeconomic policy, and competitive factor markets. The basic fiscal incentive programme for industry from 1961 to 1990 provided for participating firms to choose tax exemptions or accelerated depreciation on capital equipment. Such fiscal incentives targeted specific industries, though the focus shifted over time from labour intensive exports in the 1960s to capital-intensive sectors in the 1970s to technology intensive sectors in the 1980s. In the 1990s, the Government discontinued such fiscal concessions and replaced them with the system where firms were eligible for tax relief based on expenditure on activities such as R&D expenditure or pollution control. A second industrial policy tool was subsidised credit for export financing and import of raw materials. The third major tool of industrial policy was trade controls. However, since 1989 the Government undertook far reaching trade liberalisation that brought the level of trade protection down to developed country levels, at least in the manufacturing. Besides these standard tools of selective intervention, there was also another set of policy conducive to the development of manufacturing sector viz., establishment of a large number of institutions that were designed to identify, transfer, defuse and efficiently absorb foreign industrial technologies and then to undertake innovation. These latter policies were largely introduced in the late 1970s and 1980s. These efforts reflected the fact that Taiwan's policies were more neutral than those of Korea and Japan with respect to firm size. Much of its industrial development was in firms with fewer than 100 employees. Pack and Lin (2001) find that industrial policy could have added 1 percentage point to TFP growth in manufacturing.

Much of the early growth in Japan, Korea and Taiwan consisted of simple, labour intensive products such as clothing, toys, sporting goods and simple electronics. Perhaps, the main miracle in these countries was maintenance of a high rate of investment and relatively efficient absorption. After the oil price shocks in the 1970s, Japan, Korea and Taiwan were able to pursue a policy of reducing domestic absorption and altering the real exchange rate between tradables and non-tradables for exports to respond to the new price structure. De Mello (1985), using the standard input-output based demand decomposition, found that rapid expansion of exports than of other components of final demand accounted for about three-quarters of the rise in growth of manufacturing sector. The phenomenal expansion of exports generated rapid employment growth in these sectors.

Despite ambiguity on the role of industrial policy in causing TFP growth, favourable impact of industrial policy was that investment ratio and TFP growth did not fall in the face of phenomenal rates of capital accumulation (Noland and Pack, 2003). An important factor that contributed to the high marginal product of capital especially in Korea and Taiwan was the considerable flexibility of labour and the efforts of firms to improve their productivity. Workers moved without impediment to expanding areas rather than sticking to the sectors under increasing competitive pressure. Measures at enhancing industrial growth in the East Asian countries also focused on building large and efficient social infrastructure, favourable attitude towards international technology transfer and substantial investment in public technology institutions. The difference in performance of these countries is also attributed to more competitive pressure that resulted from reliance on exports as a measure of performance. In addition, a critical difference was the relative openness of these countries to disembodied technology imports obtained through technology licenses where as Latin American countries and India were restrictive.

In the above backdrop, the relevant lesson for contemporary developing countries is that the differences in the nature of policy and its implementation are critical for robust industrial growth. Japan, Korea and Taiwan undertook continuous monitoring of progress of firms where the protection was provided. Subsidised credit and protection in the domestic market in Korea were contingent on export performance of firms. Firms were, thus, forced to improve productivity which led to intensive efforts to import and assimilate foreign technology. Consequently, Korea and Taiwan experienced high TFP growth rate compared with other developing countries, although much of this might have accrued without selective intervention.