Japan Urges World Bank to Change Course : Trade: Tokyo’s approach to helping Third World nations is at odds with the current U.S.-backed strategy.

WASHINGTON — Japan is pressing the World Bank to shift its strategy for promoting economic development in the Third World--a move that could put Tokyo at loggerheads with the United States, bank sources say.

They said the Japanese approach, which stresses a bigger role for government in the economy, is a direct challenge to the Western-oriented, market-driven strategy pursued by the bank in the late 1980s and championed by the United States.

The argument between the two economic superpowers is not only academic. Its outcome will go a long way in determining how the bank hands out tens of billions of dollars in loans each year and which developing countries get the money.

Japanese officials say the bank has put too much faith in “market mechanisms” in its efforts to help the developing world. They mean that it has placed excessive reliance on deregulation and liberalization.

They call that approach “simple-minded” and say it is based on outmoded Western concepts that fail to take into account the successful strategy that Japan and some of its Asian neighbors pursued in developing their economies.

“Experience in Asia has shown that although development strategies require a healthy respect for market mechanisms, the role of government cannot be forgotten,” Bank of Japan Gov. Yasushi Mieno told the annual meeting of the World Bank and International Monetary Fund in October.

Japanese officials said developing countries should be encouraged to target certain industries for development and should be allowed to shelter those “infant industries” from foreign competition until they can stand on their own.

That is the approach Tokyo followed with great success after World War II in building world-class steel and automobile industries.

“Bank economists put too much emphasis on trade liberalization and not enough on the importance of a sustainable balance of payments,” a Japanese official said.

In rebuilding from the ravages of the war, Tokyo also used the state-owned Japan Development Bank to funnel government-subsidized credits to smaller companies that would have otherwise had to pay sky-high interest rates on loans.

The World Bank has followed that “two-step” loan strategy in some developing nations, but the United States has criticized the approach as wasteful.

Japan is also urging changes in the bank’s structural adjustment loan program, under which developing countries are able to borrow money.