Transcript Comparison of South Korea & Taiwan

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:
– Taiwan:
US$1.64 trillion (12th)
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
South Korea's GNP & Export Growth Rates (% )
100
80
60
40
20
0
-20
1962
1963
1964
1965
1966
1967
1968
GNP Growth
1969
1970
1971
1972
1973
1974
1975
1976
Export Growth
1977
1978
1979
1980
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
1974 15.1% of GNP
1978 30.1% of GNP
1981 55.7% of GNP
South Korea’s foreign debts
• 1962 157 million US$
• 1979 20.5 billion US$
• government preferred foreign borrowing
over foreign direct investment
– maintain domestic ownership of industries
• in 1990s private sector borrowed heavily
• 1994 56.9 billion US$
• 1997 154.4 billion US$
Debt to Equity Ratio (% ) of Manufacturing Firms
600
500
South Korea
400
300
200
Taiwan
100
0
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
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, technologyintensive 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