Topic 3 - the South Korea and Taiwanese political economy since 1945

1. Military and economic aid

$12.6bn 1946-1976 helping South Korea finance the government budget and capital formation case, balance of payments deficits and reduce the inflationary pressure associated to its monetary emission

Governments role in South Korea

+ formulates economic development plans + designs and implements appropriate development strategies + allocates budgetary and financial resources in support of economic development + provides leadership and guidance for the private sector with respect to the direction of industrialisation + conducts a vigorous industrial policy + relies on market mechanisms providing the space for the private sector to play a central role in the economy

Economic policy relied on an export led growth model with:

- Economies of scale based on exporting production until recently - indirect taxes - small expenditure on social services until recently - high expenditure on education - increasing then high public savings - use of significant resources for industrial development and expert growth

South Korean economic development strategy

- authoritarian government until 1992 - government plays strong role in South Korean economic development - previously faced strong authoritarian control placed by Japan - gov. protects small industries against export targets - benefits from economies of scale: gov. encourages monopolistic production, promotes chaebol (large enterprises I.e. Samsung) at the expense of small and medium sized companies - once industries were developed, government promoted competition - gov. focuses on labour intensive industry - however, heavy industrialisation in 70s fails and government moves out of it in due time

Taiwanese regional economic relations

- from a tight economic relation with Japan in the past war years to a global player - still, Taiwan relies on Japan for the import range of equipment and capital goods - China gains importance in Taiwanese exports and outward FDI in the last 20 years and this is expected to continue growing as China continued growing and have different comparative advantages

Taiwanese economic development policy

- gov. intervenes in economic development by using executive orders controlling credit and finance running public corporations -gov. guides and designs economic development through economic plans, forecasting and advice for farmers, small and medium sized companies and business leaders -gov. strategy changes,mstarting with agriculture, then import substitution, export economic growth based on the country's comparative advantages - economic structure matures: gov. introduces liberalisation and weakens its role in economic system - Taiwan has essentially s free market economy today

South Korean relations with the region

- in 1965 relations normalise with Japan whose government indemnify South Korea for the harsh colonial rule 1910-45 ($300m) - Japan provides South Korea with official development assistance (ODA) in the form of grants and loans. South Korea buys Japanese equipment - overtime, Japan replaces UK as South Koreas main source of imports and US replaces Japan as its main export market. In 2003, China becomes main export market for south Korea - specific goods flowing from Japan to South Korea and vice versa, change over time but the structure remains relatively high, value added goods floe from South Korea to Japan - from 1990, South Korea diversifies its economic relations, including the Soviet Union in 1990 and China in 1992. Economic ties with China expanded rapidly, particularly exports to China. South Koreas FDI in China reaches $8bn 2003

South Korea in figures

- outstanding economic growth ($2bn 1962 - $688bn 2002) despite Asian financial crisis (1997-98) - outstanding per capita income growth ($87 to $14,162 same period) - rapid export growth (2000: $171.8bn) - structural transformation of its economy: producing hi tech, value added goods such as semi conductors, electronics and automobiles - "Miracle on the Han River", an economic power in the world with global position: 11th in terms of economic size, 12th in terms of exports, 2nd largest memory chip, 3rd largest semiconductor producer - large FDI outflows ($39.3bn 2004) - accessed OECD status (1996)

Taiwan's rise in figures

- rapid economic growth: 8.2% 50s, 9.2% 60s, 10.2% 70s, 6.4% 90s, 3.3% 2000-06. GDP jumps 217 times in 5 decades from $1.7bn 1952 to $364.4 2006 - per capita GNP from $197 to $16,471 in same period - low unemployment, low inflation, relative equitable income distribution, healthy balance of payments surplus - high export growth: $166mil 1952, $224bn 2006 i.e. Export growth rate of 35.8% per year. The ratio of international trade to GDP is 1.14 (2006) - structural transformation with industry's share in GDP around 27% services around 72% and a tiny agricultural sector, with similar figures in terms of employment shares (though a bit larger, employment share of agricultural sector) - Taiwan positioned high in global rankings: 17th largest economy (2005), 13th largest trading nation (2003), 3rd largest holder of foreign exchange reserves (after China and Japan)

US influence in South Korea

- the Cold War split Korea into Communist North Korea and Capitalist South Korea. North Korea aligned with Soviet Forces, South Korea aligned with the US - communist containment policy frames the influence of US in South Korea (also devastated in the war) - Japan also plays a role in its economic development proving capital, technology and a market fir South Korean exports - in 80's and 90s increasingly conflictive relationship between US and South Korea - US sees South Korea as economic competition

Understanding the case for industrial protection in Asia PART ONE

1. Learning by doing 2. Knowledge spillovers 3. Positive externalities 4. Imperfect capital market 5. Increasing returns to scale 6. Prebisch-Singer hypothesis

The US provides South Korea with:

1. MILITARY AND ECONOMIC AID 2. HUMAN CAPITAL 3. ABSORBING SOUTH KOREA GOODS 4. TOLERATING SOUTH KOREAN HIGHLY PROTECTIVE POLICIES OF ITS INDUSTRIES 5. BRINGING IT IN LIBERAL INTERNATIONAL TRADE REGIME 6. SUPPORTING SOUTH KOREA'S MEMBERSHIP TO THE WORLD BANK 7. FLOWS OF FOREIGN CAPITAL 8. AID 9. MILITARY PROTECTION

Tool 1: an import tariff

A country imports good A if the domestic demand for good A exceeds the domestic supply of Good A at the existing tariff-inclusive world price for good A. If as a result of a tariff-inclusive world price the domestic producers will expand supply and import demand will fall. If at the tariff inclusive world price the domestic supply is enough to satisfy domestic demand, import becomes zero. A tariff increases the consumer price of the imported good by t%, e.g. A 10% tariff would increase the consumer price of the imported good by 10%

Tool 2: an import quota

A quota aims at limiting the imports of goods by explicitly putting a limit on the quantity that can be imported. A quota is also expected to raise the price fixed by consumers. What are the differences between a tariff and a quota? The government does not gain any revenue but someone gets extra revenue since prices paid by consumers is actually higher after the quota. The holders of the import licences get the extra revenue, so welfare is redistributed from the consumers to the import quantity, which may be valuable information for the domestic producers

7. Flows of foreign capital

Bringing in a flow of foreign capital into the country in the form of FDI, associated with a technology transfer, FDI first public then private.

5. Increasing returns to scale

Either at firm or industry level

3. Positive externalities

Establishment of one industry may have positive spillover effects for others in the economy

8. Aid

For the creation of the Korean Institute of Science and Technology (KIST) in 1966, which will be key in the adoption and adaption of modern technology and the Korean Development a institute (KDI) in 2974 to conduct research and analysis of critical economic policy and planning problems

4. Imperfect capital market

If the capital market does not work in the sense that firms cannot borrow for new investment then low initial profits in new industries would restrict investments

Tools: Purpose

Increase domestic production at the cost of increasing at the price that domestic consumers pay for the goods that they buy and the social price that the domestic economy pays for its goods.

6. Prebisch-Singer hypothesis

Net barter terms of trade between primary products and manufacturers will decline in the long run. Net barter terms of trade: the ration if the export unit value to the import unit value of a country. This may be because of Engels law: income elasticity of primary products (food) is low. As income rises, the demand for primary products will not rise proportionately. Supply of food rises and prices fall

9. Military protection

Reducing the military expenditure burden of South Korea

Taiwan's economic development after 1945

Taiwan is also influenced by the US containment policy and receives massive economic and military aid, advice, markets, capital, technology, training and education and political support from the US.

2. Knowledge spillovers

The first entrepreneur in an economy who develops or adapts foreign technology to produce a certain good incurs a cost but then followers may easily access knowledge

Understanding the case for industrial protection in Asia PART TWO

The intended effects of some industrial protection tools - basic idea: protection is given so that the consumer price of imported goods become greater or equal to the consumer price of the locally produced goods. The protection is typically temporary. - Tool 1: an import tariff - Tool 2: an import quota - Tool 3: a devalued exchange rate

Tool 3: a devalued exchange rate

The nominal exchange rate is the price of the foreign prices, if more LCU are needed to buy a dollar (real devaluation of the domestic currency), the price of the dollar measured in LCU increased, the foreign goods become relatively more expensive and the domestic demand for foreign goods shrinks and hence imports of foreign goods from the home economy decrease. In addition, as the domestic goods relatively become less expensive compared to foreign goods, foreign demand for domestic goods increase and hence exports of the home country increase. In summary, a devaluation of the exchange rate, in the presence of fixed domestic and foreign prices i.e. A real devaluation, tends to increase exports of the domestic economy and hence increasing the net exports and in the presence of unemployed domestic economy

2. Human capital

Via training South Korea military personnel in organisation, management and technical skills, which then spreads to industrial

1. Learning by doing

When local costs of production exceed the domestic import prices, protection can allow local industry to get competitive i.e. Reduce costs over time. The appropriate of new techniques are used