Comparison of South Korea & Taiwan

NIE development model reconsidered

Comparison

• Population– South Korea:49 million– Taiwan: 23 million

• land area– South Korea:96,920 km2

– Taiwan: 32,260 km2

South Korea and Taiwan

• Purchasing power parity GDP of 2012– South Korea: US$1.64 trillion (12th)– Taiwan: US$0.92 trillion (20th)

• GDP growth rate 2010-2012– South Korea: 6.3%, 3.6%, 2%– Taiwan: 10.8%, 4.1%, 1.3%

NIE development models

• Singapore, Hong Kong, Taiwan, and South Korea

• export-oriented industrialization

• state guidance

• state involvement in economic development

• high investment in human capital formation

NIE development model dead?

• South Korea in 1997– negative growth for the 1st time in 2 decades– unemployment rate rose from 3% to 7%– per capita GNP almost shrank by half

• Taiwan in 1997– economic growth slowed down– still robust

• Is the NIE development model in crisis?

South Korea and Taiwan

• development becomes state’s priority

• commitment to private property & market– government’s strategic industrial policy

• state agencies formulate and implement strategic policies (e.g. Japan’s MITI)

• sound macroeconomic management

• bureaucratic autonomy from interest groups

South Korea and Taiwan

• Military strongman rule from 1960s to 1970s

• South Korea– Park Chung Hee (1962-79)

• Taiwan– Chiang Kai-Shek (1945-75)

Park Chung Hee

• Experience with Japan’s wartime economic management in Northeast China

• Economic Planning Board

• Ministry of Trade and Industry

• Ministry of Finance

• import substitution => export orientation– normalization with Japan– Vietnam War

-20

0

20

40

60

80

100

1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

South Korea's GNP & Export Growth Rates (% )

GNP Growth Export Growth

Financial sector

• Government owned and controlled

• all 5 commercial banks– including the central bank (Bank of Korea)

• all 6 special banks

• 2 of the 3 non-bank financial institutions

Financial sector

• Foreign Capital Inducement Law– control private sector’s access to foreign

capital

• business activities were directed by the state

Growth-first goal

• Low interest rate to induce firms to grow– favored large firms– firms compliant with state policies and plans

• excessive demand for capital– inflation favored large debtors

• inflation discouraged domestic savings– reliance on foreign debts

• vulnerable to external shocks

Heavy Chemical Industrialization

• HCI plan in 1970s– heavy and capital-intensive industries

• strengthening of state intervention

• foundation for the emergence of chaebol

• combined net sales of the top 10 chaebol

• 197415.1% of GNP

• 197830.1% of GNP

• 198155.7% of GNP

South Korea’s foreign debts

• 1962157 million US$

• 197920.5 billion US$

• government preferred foreign borrowing over foreign direct investment– maintain domestic ownership of industries

• in 1990s private sector borrowed heavily

• 199456.9 billion US$

• 1997154.4 billion US$

Debt to Equity Ratio (% ) of Manufacturing Firms

0

100

200

300

400

500

600

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

South Korea

Taiwan

Top chaebol

• Debt to equity ratio of top chaebol

Taiwan’s financial sector

• Control inflation and maintain stability

• Central Bank of China ultra-conservative

• government controlled financial sector– nationalized the banking system– private commercial banks were not allowed to

operate until 1991– 71.3% of the assets of all financial institutions

were in government-owned banks

Result of financial control

• Traditional family networks became the major source of capital

• limited the size of Taiwan’s companies– small and medium-sized firms

• limited the expansion of firms

• limited the debt-equity ratio of firms

• most large, capital-intensive, technology-intensive industries were state-owned

Equity-first versus growth-first

• Government’s anti-inflation policy– encouraged savings

• Government avoided concentration of economic power

• Government promoted equitable distribution of income

• Government’s reluctant to use preferential financial treatment to large firms