classical economics, together with the real business cycle (RBC), exerted great influence. The Keynesian model, however, did not die; it was transformed into the so-called "New Keynesian model". Economists such as J. E. Stiglitz argued for the effectiveness of government intervention after re-examining Keynes' analysis of fundamentals at the microeconomic level. In addition, Lance Taylor used theoretical models to criticize the World Bank and the IMF, which had supported deregulation, that there are cases in which government intervention is necessary.

By what process does the shift to market economies progress? If we understand this, we will understand the major current in the world economy.

There are two major factors behind the development of the markets. One is the development and advancement of exchange markets such as the markets for futures, options or warrants. The diffusion of computers contributed greatly to the advancement of these exchanges markets. Another force is the conditionality of the IMF and the World Bank. Conditionality refers to the conditions set whenever financing is provided by the IMF or the World Bank. Normally, financing from the IMF or the World Bank is broken down into two or three tranches over time, and conditions are set for each tranche. If the recipient country cannot satisfy this conditionality, or if financing conditions worsen, disbursement is halted; so it is imperative for developing countries that they satisfy this conditionality. Essentially, this conditionality calls for introduction of market mechanisms through deregulation and economic liberalization. More specifically, it calls for the liberalization of exchange rates and of interest rates, and for the abolition of price controls.

Official development aid from the Japanese government is very closely interrelated with this conditionality of the IMF and the World Bank. In recent years, the weight of co-financing with the World Bank, etc., by institutions such as the Overseas Economic Cooperation Fund (OECF) has been escalating. This co-financing is also referred to as structural adjustment lending (SAL). In this financing, the conditionality of the World Bank applies. Consequently, in carrying out co-financing with the World Bank, it is essential to bolster penetration of the market mechanism as advocated by the World Bank.

(2) The Market Failure and Government Intervention

Structural adjustment policies based on SAL were implemented in developing countries throughout the 1980s, but very few were successful. In East Asia, on the other hand, high-level economic growth was conspicuous. It has been hypothesized that a major factor behind growth in the East Asian countries is the fact that industrial policies implemented in the past in Japan by the Ministry of International Trade and Industry (MITI) were taken as models, and in recent years a study regarding this hypothesis was conducted by the World Bank. It is suspected that industrial policies through government interventions are preferable to market mechanisms. It thus becomes a matter of choosing the optimal mix between market mechanisms and government intervention.

In Japan, there has been a shift away from industrial policy in the narrow sense to industrial policy which highlights the importance of infrastructure and of human resources in the broadest sense. Another opinion is that deregulation should be implemented in large measure. This is manifested by the fact that in Japan, reforms have had to be made in such things as politics, education and the bureaucracy. In the United States, under the Clinton