Industrial Targeting: Lessons from Past Errors and Successes of Hong Kong and Taiwan Erik Thorbecke, An-Chi Tung and Henry Wan, Jr. 1. INTRODUCTION W E review here the roles of the government and the market 1 in Taiwan and Hong Kong over the period, 1950–1990. This exercise has two purposes. First, since all Chinese economies now operate under World Trade Organisation (WTO) rules, these episodes show that some (but not all) of Taiwan’s industry targeting is not only effective but compatible with both WTO rules and free trade, quite contrary to popular belief. Second, a comparison between Hong Kong and Taiwan over these 40 years provides fresh insight: industrial policy appears to be unnecessary in early industrialisation, but essential later. Such a discussion is relevant to the proposed re-industrialisation of Hong Kong today. We believe re-industrialisation is both feasible and desirable. It also has some historical precedents. The Dutch economy had once shifted focus from industry to high-valued agriculture in the early nineteenth century, only to be re- industrialised again toward the end of that century. 2 Living standards rose in each stage. We regard the feasibility as quite certain with government leadership. Some practices effective in Taiwan appear to be compatible with WTO rules. We define desirability here as a win-win game, beneficial to both Hong Kong and the Chinese Mainland. In the next section, we explore the compatibility between free trade and industrial policy. The following two sections compare the records of Hong Kong and Taiwan over two periods, (a) in the 1950s, and (b) for the period of 1960– 1990. After that, we comment about what we view as the long-term interests of ß Blackwell Publishers Ltd 2002, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA. 1047 ERIK THORBECKE is from Cornell University. AN-CHI TUNG is from Academia Sinica. HENRY WAN, JR. is from Cornell University. While the authors are responsible for all the residual imperfections, the professional editorial assistance of Andrea Wan-Williams is deeply appreciated. 1 More specifically, the industrial policy or its absence. 2 See Mokyr (1976).