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By Justin Yifu Lin

In financial improvement and Transition, popular improvement economist Justin Yifu Lin argues that monetary functionality in constructing nations relies principally on govt approach. If the govt. performs a facilitating position, permitting businesses to take advantage of the economy's comparative merits, its financial system will advance effectively. besides the fact that, governments in such a lot constructing international locations try to advertise industries that move opposed to their comparative merits by means of growing different types of distortion to guard nonviable companies in precedence industries. Failing to acknowledge the unique goal of many distortions, so much governments in transition economies try and do away with these distortions with no addressing businesses' viability difficulties, inflicting monetary functionality to become worse of their transition procedure. Governments in profitable transition economies undertake a realistic dual-track method that encourages organizations to go into sectors that have been suppressed formerly and provides invaluable aid to agencies in precedence industries earlier than their viability factor is addressed.

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Mao Zedong (1945) No country can be politically and economically independent, even within the framework of international interdependence, unless it is highly industrialized and has developed its power resources to the utmost. ’ In this chapter, I review the evolution of social thought regarding the role of the government in the industrialisation and transition of developing countries. Before the Industrial Revolution in the eighteenth century, China was more industrialised than the West (Cipolla, 1980; Elvin, 1973; Jones, 1981; Needham, 1969).

If, however, the government adopts a CAD strategy, it is doing too much. The government will become a dirigiste state, as criticised by Lal (1983, 1994). For a recent review of development state theory, see Fritz and Menocal (2007) and ten other articles in Development Policy Review, volume 25, number 5 (September 2007). The dynamic comparative advantage is another argument often used for the government’s industrial policy and support to firms (Redding, 1999). In my framework, however, it can be seen clearly that the argument is valid only if the government’s support is limited to overcoming information and coordination costs and the pioneering firm’s externality to other firms.

The dominant social thought about the approach for successful transition in the 1980s and 1990s was, however, again based on an incorrect understanding of the underlying causes of poor performance and constraints on developing countries. 10 In the following chapters, I analyse why the dominant social thought about developing countries’ modernisation in the 1950s and 1960s and about transition in the 1980s and 1990s was incorrect, and how it shaped government policies and the established institutions in developing countries.

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