The “institutional theory” suggests that by establishing property rights, free and open markets, and the rule of law, a country will create the incentives necessary for markets to develop and the economy to grow without much other government intervention. Describe how evidence from South Korea and China suggests that, in some cases, the government must play a larger role.
(Answer in 2-3 points with clear examples from China and South Korea)
1. State-led industrial policy: In South Korea, the government played a significant role in developing the country's economy by implementing state-led industrial policies. For instance, the government provided subsidies, preferential access to credit, and tax incentives to specific industries such as shipbuilding, steel, and electronics. This led to the growth of companies like Samsung, Hyundai, and LG, which became globally dominant players in their respective industries. Similarly, in China, the government implemented its 12th Five-Year Plan, which included policies aimed at developing strategic high-tech industries such as green energy, biotechnology, and next-generation IT. Government support and investment in these sectors played a key role in China's rapid economic development.
2. Market failures and externalities: The institutional theory assumes that markets are efficient and always allocate resources optimally. However, in some cases, markets fail to allocate resources efficiently, resulting in externalities that require government intervention. For example, in China, pollution has become a major problem as a result of rapid industrialization. The government had to intervene by implementing strict environmental regulations to limit pollution levels. Similarly, in South Korea, the government intervened to protect the agriculture sector by implementing import tariffs on agricultural products to prevent them from being undercut by cheaper imports. These examples illustrate that government intervention is sometimes necessary to address market failures and externalities and ensure sustainable economic growth.
1. In the case of China, evidence suggests that the government has played a larger role in promoting economic growth through state-led industrial policies. The Chinese government has actively intervened in its economy by selecting strategic industries to support and providing them with subsidies, credit, and other forms of assistance. For instance, the government's "Made in China 2025" plan aims to enhance China's presence in advanced manufacturing sectors such as robotics, aerospace, and biotechnology. This active role of the government is necessary to promote the development of industries that may not have emerged or grown organically in a purely market-driven system.
2. Similarly, in the case of South Korea, evidence also supports the idea that government intervention has played a significant role in economic development. The South Korean government implemented a series of industrial policies, collectively known as the "Miracle on the Han River," to guide the country's economic growth. For example, during the 1960s and 1970s, the government provided financial support and preferential treatment to specific industries, such as heavy and chemical industries, steel, and shipbuilding. These targeted interventions were crucial in accelerating industrialization and transforming South Korea into a major global player in these sectors.
In both China and South Korea, the evidence suggests that government intervention has been instrumental in creating the conditions necessary for sustained economic growth. These interventions have helped shape and nurture industries, provide necessary infrastructure and resources, and overcome market failures. Although the institutional theory emphasizes the importance of free markets and property rights, the experiences of these countries highlight the need for government intervention in certain cases to foster economic development.