What are the reasons of market failures? According to Joseph Stiglitz (2009), an economist, they are the result of excessively lax monetary policies and weak regulation. Then the next question is, why are the regulations so lax? Stiglitz (2009) argues that one of the reasons was the belief in the misguided economic philosophy that contended unfettered markets as the best way of running an economy, because markets are self-adjusting. Here I agree with Stiglitz’s argument of the important role played by the government to maintain the good functioning of the market economy. Markets of course play a central role in a well-functioning economy, but so is the government. The roles of government and market must be in good balance, and the limitations of the two must be acknowledged by the two. Especially, the government has the responsibility to acknowledge when markets work and when they do not and subsequently develop appropriate policy framework. This article aims at justifying this argument by using China’s Reform and Opening-up policy and Japan’s post-war economic measures as examples.

Before the implementation of the Reform and Opening-up policy of 1978, China had undergone a period of economic devastation. But after the policy of Reform and Opening up was introduced, a new age of socialist modernization had begun in China. Before the reform, China was practicing public ownership with a planned economy. As a result, the state-owned enterprises were ill-managed and state-controlled. Since their performance had no effect on wages, the enterprises lacked any incentive to work hard. Therefore, reforms were carried out in the management of the state-run enterprises. At the beginning stage, enterprises were given a degree of independence and profit concessions as incentives for them to work harder for higher productivity. And subsequently the enterprises had started to introduce different kinds of incentives to their employees to raise productivity, such as increasing wages and issuing bonuses. Soon the proportion of the mandatory planning for state-owned enterprises was gradually reduced. As time went by, the state had expanded the autonomy of the enterprises by controlling the enterprises indirectly through macroeconomic adjustment. The Reform and Opening up policy of China has successfully transformed China from a weak economy into the world’s second largest economy. This glorious success must attribute to the government economic policy of maintaining a balance between the role of government and the role of the market, as Stiglitz has suggested.

Like China, Japan’s economic success during the post-war period was also attribute to their government guidance. After the Second World War, the Japanese government was committed to reconstructing their economy. The Japanese government had set up many departments to promote economic growth. For instance, the Economic Planning Agency was set up in 1949 to develop strategies for improving economic productivity and expanding foreign trade. Moreover, the government also had a protectionist policy to eliminate foreign competition. After the 1973 Oil Crisis, the Japanese government encouraged enterprises to focus on knowledge-based industries, such as household appliance production, as that consumes less energy. The Japanese government also provided the industries with financial incentives and tax reduction. Furthermore, the Japanese government had carried out measures to help the Japanese companies to greatly expand their sale of products to overseas markets. Thanks to the guidance of the Japanese government, Japan’s economy was not badly affected when the Second Oil Crisis broke out in 1979, whereas many other countries were in recession. And now, Japan is still the fourth largest economy in the world.

Both China’s and Japan’s economy were able to triumph after severe setbacks. Their currently ranking second and fourth largest economy in the world should undeniably attribute to the guidance of their government. Of course, one should not emphasize too much of the importance of government in the functioning of economy and overlook that of the markets. That said, the above-mentioned examples have illustrated clearly the significance of having the government and markets working in harmony in order for an economy to flourish. If they fail to strike a balance, market failures are likely to happen.

Venus Chan


Joseph Stiglitz (2009), ‘The Global crisis, social protection and jobs’ International Labour Review 148 (1-2) pp. 1 – 13

Hsu, Immanuel C. Y., The Rise of Modern China (6th ed.), Oxford, 2000, pp. 684 – 700

Conrad Totman, A history of Japan (2nd ed.), Blackwell Pub., 2005, pp. 146 – 152


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