The Review of Austrian Economics, 18:3/4, 305–323, 2005.
2005 Springer Science + Business Media, Inc. Manufactured in The Netherlands.
State Development Planning: Did it Create an East
BENJAMIN POWELL email@example.com
Assistant Professor of Economics, San Jose State University, San Jose, CA 95192-0114; Director, Center on
Entrepreneurial Innovation, The Independent Institute 100 Swan Way Oakland, CA 94621
Abstract. East Asian countries have recorded large increases in per capita GDP over the last ﬁfty years. Some
observers have referred to this growth as an “East Asian Miracle.” One popular explanation attributes the rapid
growth to state led industrial development planning. This paper critically assesses the arguments surrounding state
development planning and East Asia’s growth. Whether the state can acquire the knowledge necessary to calculate
which industries it should promote and how state development planning can deal with political incentive problems
faced by planners are both examined. When we look at the development record of East Asian countries we ﬁnd that
to the extent development planning did exist, it could not calculate which industries would promote development,
so it instead promoted industrialization. We also ﬁnd that what rapid growth in living standards did occur can be
better explained by free markets than state planning because, as measured in economic freedom indexes, these
countries were some of the most free market in the world.
KeyWords: East Asia, industrial planning, economic calculation, economic freedom, development planning
JEL classiﬁcation: O200, O170, O530, B530, P170
East Asian countries have experienced dramatic economic development since the end of
World War II. First Japan, then Taiwan, South Korea, Hong Kong, Singapore, and others,
recorded large and rapid increases in per capita GDP (see Figure 1). Many attribute this
success to a unique “Asian Model” of economic development (Johnson 1982, Amsden 1989,
Wade 1990, Evans 1995, Stiglitz 1996, 2001, Woo-Cumings 1999). This model maintains
some international market forces, but also involves heavy direction of the economy by state
industrial development planning agencies.
The East Asian ﬁnancial crisis of the late 1990s did not change the views of those who
claim East Asia’s success resulted from developmental planning. In fact, Wade (1998, 2000)
attributes much of the blame for the crises to departures from the state directed model.
Stiglitz and Furman (1998) and Stiglitz (1999) largely agree with Wade that rapid ﬁnancial
and capital market liberalization in East Asia combined with other factors to cause the
These authors still believe that state industrial planning played a major role in East
Asia’s success prior to the crisis.
This paper critically examines the standard account of East Asia’s success by questioning
whether a model of state development planning could have created East Asia’s miracle
Economic development that enhances consumers’ standard of living is not simply about
industrialization. It is about creating the right industries. If state planning is to lead to higher