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By Justin Yifu Lin

In financial improvement and Transition, well known improvement economist Justin Yifu Lin argues that monetary functionality in constructing international locations relies principally on govt procedure. If the govt performs a facilitating function, allowing corporations to use the economy's comparative merits, its financial system will strengthen effectively. even if, governments in so much constructing nations try and advertise industries that move opposed to their comparative benefits by way of developing 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 to cast off these distortions with out addressing corporations' viability difficulties, inflicting fiscal functionality to become worse of their transition strategy. Governments in winning transition economies undertake a realistic dual-track procedure that encourages agencies to go into sectors that have been suppressed formerly and offers useful help to enterprises in precedence industries sooner than their viability factor is addressed.

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In their model, however, the technology in each industry is assumed to be identical in the developed and developing countries, and a country is supposed to produce more goods that use its abundant factor intensively to exchange for goods that use its scarce factor intensively. More realistically, however, the technologies used in the developed and developing countries are not identical. Lin and Zhang (2007) build a dynamic model to show that a country should go into the industries and adopt the technologies that use its abundant factor intensively to produce goods.

The government has to resort to administrative measures – granting the non-viable enterprises in prioritised industries a market monopoly, suppressing interest rates,5 overvaluing domestic currency and controlling prices for raw materials – to reduce the investment and operation costs of the non-viable enterprises. Such intervention will cause widespread shortages in funds, foreign exchange and raw materials. 2 CAD strategy and its consequences Although, with the above administrative measures, a developing country can build up industries that are in conflict with the 5 6 is identical, and, therefore, that firms will be viable in an undistorted, open, competitive market once the government helps the firms overcome market failure and escape the poor equilibrium trap.

The financial repression discussed by McKinnon (1973) and Shaw (1973) is a result of this strategy. The excessive regulation and administrative control will cause many private activities to escape into informal sectors (de Soto, 1987). 32 • Economic Development and Transition comparative advantage of the economy, serious information problems arise. Under information asymmetry, because the government cannot participate directly in the management of firms, it is impossible to determine the necessary amount of protection and subsidisation.

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