5 The role of the state in Asian countries where partnership between state and private sector and between labor and capital has been a distinctive feature of their development strategy may also be advanced as 'the dominant' factor that impinges on the performance of these countries. Govemnient intervention is essential for development, but what makes the difference in the outcome is whether this intervention is likely to help rather than hinder economic growth. In East Asian countries, these interventions were, by and large, beneficial and conducive ar A took the forrn of simple, transparent rules and policies rather than discretionary controls. The complementarity of a sound policy environment and market-friendly interventions is one of the most encouraging lessons of the development experience that has been amply documented in the forthcoming World Development Report. 7 The role of the State cannot, however, be separated from the strategy and the policies they pursue or the response they make to the external shocks or the way the external poitfolio i **uimuiageu.** Our hypothesis is that even after taking account of the differences in the structure and institutions, the most dominant factors in explaining Asia's impressive growth performance in the 1970s and 1980s, have been the orientation of the development strategy, mode of adjustment to external shocks, the nature of macroeconomic policies, the efficiency of investment and portfolio management and finally the domestic saving efforts.

# (1) Outward Orientation

First, the Asian countries were generally less affected from recession in part due to the outwsrd-oriented policies that they pursued. When the global recovery began in 1982, they were able to take advantage of the rapid expansion of manufactured goods exports, raising export earnings sufficiently rapidly to reduce their debt/export ratios and escape the debt crisis. By outward orientation it is generally meant a combination of two factors: first, that the level of protection, especially for inputs into the production process, was relatively low (resulting in a sustainable level _of_ a real exchange rate favorable to exporters); and second, that there is relatively little variability in the real exchange rates, so that incentives are stable over time.

The evidence regarding the differences in econornic performance arising out of outward or inward orientation of the developing economies has recently been presented in a major study of 95 LDCs for the period 1976-85! The study uses an index of outward orientation on the basis of real exchange rate distortion and variability. This measure was tound to be highly correlated with per capita GDP growth in this large sample. The most open quantile of countries which included twelve out of sixteen Asian countries had a per capita growth rate of 2.9%; the next quantile which included the remaining four Asian countries, 0.9%; the third quantile, 0.2% and the most closed quantile, 1.3%. These results strongly imply that trade liberalization, devaluation of the real exchange rate, and maintenan^e of a 'ompetitive real exchange rate could dramatically improve growth performance in many poor countries. The study estimates that the gains from shifting to an 'Asian level" of cutwaid ouieniation ai.d real exchange rate stability are increases of 1.5 percentage points per year in Latin America's per capita growth and 2.1 percentage points per year in Africa's. The outward orientation of Asian countries can be clearly discerned by examining trade openness and price distortion measures in Table 5.

Edwards (1990) has used a modified neoclassical growth model to test the same proposition. Using cross section data from 30 coumtries, he found strong support for the hypotheses that there exists a negative **aliaiituuship** boiweun the degree of restriction on internationai trade and econormc pertormance In the developing countries. After taking into account the roles of capital accumulation, growth in the labor force and technological gap, countries with higher degrees of trade intervention tend to grow, on average, slower than

> 7 Vorld Development Report, 1991 (forthcoming).

SD. Dollar (1990), 'Outward-oriented Developing Economies Really Do Grow More Rapidly: Evidence for 95 LDCr, 197685." Economic Development and Cultural Change (forthcoming).