Problems faced by developing & transition economies, in which more markets are lacking, the markets that do exist may function less effectively, and information problems are more severe than in industrial countries simply because of the rapid change in the economic environment. While markets failures loom larger over this developing and transition economies, the capacity of the government to correct these market failures is often weaker. So the question arises is what should have been the role of the government in the past two decades. Assessing the appropriate role of the government requires the recognition of both the need for and the limitation of the government action.
Successful governments have helped create markets such as bond and stock markets and long- term credit institution. They have established and enforced laws and regulations that have financial markets more stable and increased competition in all sectors. In many cases government has acted as a surrogate entrepreneur, encouraging the firms to enter the certain markets. Especially in export markets governments have provided firms with strong incentives. Some econometric evidences suggest that many of these interventions were quite effective. For instance, an analysis of the mild financial restraint evidenced in most East Asian economies suggest that it did lead to more rapid economic growth, but it can not be inferred that all governments are infallible. Even in the East Asian economies governments have made mistakes. The Japanese government for example initially prevented Honda from entering the automobile industry. Government cannot fix every problem. Government definitely has a place, but it should know its place.
Economic growth in the last 20 years has shown a very clear decline in progress for some countries as compared with the previous two decades (1960 - 1980). The poorest group of countries went from a per capita GDP growth rate of 1.9 percent annually in 1960-80, to a decline of 0.5 percent per year (1980-2000). For the middle group (which includes mostly poor countries), there was a sharp decline from an annual per capita growth rate of 3.6 percent to just less than 1 percent Progress in education also slowed in the last two decades. The rate of growth of primary, secondary, and tertiary (post-secondary) school enrollment was slower for most groups of countries. There are some exceptions, but these tend to be concentrated among the better performing groups of countries. By almost every measure of education, including literacy rates, the middle and poorer performing groups saw less rapid progress in the period of globalization than in the prior two decades. The rate of growth of public spending on education, as a share of GDP, also slowed across many countries.
Over the past few years the persistent economic crisis in Asia has called into question much of the received wisdom that liberalization has enhanced the economic contribution of international capital markets. The Asian crisis is but the most recent example of other similar episodes: the