Providing public goods is one role of the government which is theoretically justifiable. If it is left to the market, the supply of public goods falls less than the desired volume.

However, in Vietnam, with its hard fiscal conditions, the government cannot afford enough public investment. This leads to the poor infrastructure situation of Vietnam.

(3) Externality, Economies of Scale, etc.

Besides the case of public goods, there are several kinds of market failures including externality, economies of scale, etc. With such market failures the equilibrium acquired in the market does not guarantee efficient resource allocation. In such a case, the government has to take some measures to correct the market failure. Theoretically speaking, price measures like subsidies or taxes are preferable to quantitative measures, since the latter discourages competition.

However, in the case of Vietnam, it does not seem that the government is taking into account such market failures when determining economic policies.

## 4 -2-2 Dynamic Market Mechanism

## (1) Undeveloped Market

As discussed previously, it is difficult to say that the situation in Vietnam secures efficient resource allocation among different points in time. The capital market is undeveloped and it is difficult for individual economic actors to have a clear perspective on future development.

In such a situation, it would be beneficial if the government could provide information on the future perspective of the economy and the direction of future development policies in the form of indicative economic plans or in other forms, since the government should have a better access to information about future development from the reference cases (in Vietnamese case it could be Thailand, Malaysia, Korea, Japan, etc.).

Since the factor markets in Vietnam are still undeveloped, the government should play some role in resource allocation. In this the government should enhance the flow of production factors into the sectors which will lead economic development. This relates to the argument of infant industry.

## (2) Infant Industry

Industries which do not have international competitive power at present but will in the future through dynamic scale merit are called “infant industries.” In other words, infant industries are the industries which do not have “static comparative advantage” but have “dynamic comparative advantage.”

If the factor market is perfect and there are no market failures in those industries, infant industries can develop without government intervention through the market mechanism of dynamic resource allocation. However, we cannot expect perfect factor markets in most developing economies. In addition, infant industries are often accompanied by market failures like externality. In such cases government intervention is required to promote those infant industries. In particular, infant industries with external economic effects, such as spillover effects to related industries, should be promoted as target industries.

As for the measures of promotion, theoretically speaking, production promotion measures like production subsidies or preferential loans are preferable to protection measures