Transcript Economic Development and Economic Catch-Up

Economic Development and
Economic Catch-Up
Two different models of
economic development
Agrarian Epoch
• Economy engaging in agriculture with
low degree of social division of labor.
• Per capita GDP lingering around
subsistence level.
• Absolute poverty
Epoch of Modern Growth(Kuznets)
• Rising population
• Capital deepening – rising per capita
capital
• Rising per capita income due to rising
labor productivity
• Relative decline of agriculture with rise of
manufacturing industry
Industrial Revolution and
Industrialization 1
AD1 1000 1500 1600 1700 1820 1900 2000
467 453 566 596 615 666 1,261 6,038
230 270
900
6,100
Table : Trend of world per capita GDP and
population
In 1990 International Geary-Khamis Dollars
In millions
# Angus Maddison 2010
Industrial Revolution and
Industrialization 2
7000
6000
5000
4000
3000
2000
1000
0
1820 2000
1
Trend of World Per Capita GDP - Graph
Transition Growth
• Transition from agrarian growth to
modern growth.
• Industrial revolution and subsequent
industrialization of Western Europe –
innovation/benchmarking driven.
• Industrialization of late 20th century –
economic catch-up.
Growth by Epochs
per capita income (in thousand)
US$30.-
low growth rate
high growth rate
US$1.-
no growth
0
agrarian
transition
(catch-up)
post-industrial T
Growth by Epochs 2
• Stagnant agrarian growth (Solow)
• Rapid transition growth (Kuznets and
catch-up)
• Slow post-industrial growth (Kuznets)
• The gap between rich (industrialized)
countries and poor (agrarian) countries is
ever widening.
Economic ‘Catch-Up’ in East Asia
• Japan started ‘catch-up’ right after Meiji
Restoration.
• South Korean and Taiwanese agrarian
epochs, exporting primary goods
(agricultural products and natural
resources) and importing industrial
products, overlapped with colonial age.
• Their transition growth followed
liberation.
Raul Prebisch Thesis
• Divided world
- CENTER : Group of industrialized
countries
- PERIPHERY : Agrarian countries
• CENTER exports industrial products to
PERIPHERY, and PERIPHERY exports
agricultural products and natural
resources to CENTER.
Raul Prebisch Thesis 2
• International prices of industrial products
were ever rising, while those of
agricultural products and resources had
remained stagnant and volatile.
• Trade between CENTER and PERIPHERY
had been siphoning PERYPHERY’s surplus
to CENTER.
Raul Prebisch Thesis 3
• The implication of Prebisch Thesis :
“Trade with CENTER will deprive
PERIPHERY of their every surplus that is
essential for their own industrialization.”
• Industrialization with a minimal trade
with CENTER was recommended.
Import Substituting Industrialization.
Import Substituting
Industrialization
• Industrialization effort begins with trying
to produce domestically the industrial
products, which used to be imported
from CENTER.
• Quantity target of production is limited
by the size of local market.
• In order to protect domestic production,
competing foreign products are not
allowed to import (protective trade).
East Asian Development
• South Korea and Taiwan started their
industrialization with import substituting
activities initially to sell at local market.
• They increased production beyond their
domestic demands later, and expanded
scope of production items, promoting
export of their products.
• On the other hand, Latin Americans
stayed stubbornly in import substitution.
Nature of Catch-Up
• Trade-led growth
- Export-oriented growth of South Korea
and Taiwan was successful, while importsubstituting Latin America failed.
• Authoritarian government
- Japan, South Korea, Taiwan, and
Singapore were authoritarian, with tight
regulations.
- Only colonial Hong Kong was liberal!
Nature of Catch-Up 2
• Government of LDC derives a
“development path”, which is proven by
industrialization experienced by firstmovers (advanced economies) – “Latecomer’s Advantage”
• Then tightly regulates all the economic
activities to abide by the “path”, in order
to minimize wastes.
Trade-led Growth
• Industrial production is viable only when
its products find market.
• Import substituting production limits its
sales by thin and small local market for
most developing economies.
• Consumers of advanced economies
command major purchasing power in the
world market.
Trade-led Growth 2
• Industrial producer of LDC will be
successful only when he can produce
sellable products to consumers of
advanced economies.
• Cheap labor of LDCs can compete with
workers of advanced economies in global
market for simple labor-intensive
products. So trade-led growth.
Strategy of Catch-Up
• Core of the catch-up strategy lies in
learning from industrialized economies
for their experiences of industrialization.
• Trade with CENTER provides PERIPHERY
with most valuable lessons on
industrialization and industrial society.
• No lesson is free in economic world!
Authoritarian Regime
• Catch-up aims at industrialization as
soon as possible with minimal waste.
• Controversies such as ‘import
substitution vs export promotion’ will
cause indecision or delay in decision on
key strategy.
• Authoritarian regime rather than
democracy.
Normalization of S. Korea-Japan
Diplomatic Relation : Example
• Two national goals of S. Korea in 1960s :
Industrialization and Democratization.
• S. Korean government noted the
importance of cooperation with Japan
for Korea’s industrialization.
• S. Korean people resented over meager
amount of reparation for atrocities which
Japan inflicted on colonial Koreans.
continued
• Absolute majority of Koreans demanded
renegotiation, which Japan would not
accept.
• Democracy complying to people’s will
would virtually emasculate all attempts
to industrialization.
• S. Korean government chose
industrialization over democracy.
State Capitalism : Profit Motivation
under State Initiatives
• Authoritarian catch-up system : License
and Regulation (State Initiatives)
• Business profit was protected and
promoted as proper reward for the
contribution to industrialization.
★Corruption (Rent-seeking) problem
• State Capitalism = Profit Motivation +
State Initiatives
Heading for full-fledged market
economy
• What after catch-up?
• From high (7-10%) to low growth (2-3%).
From free-riding on first-movers’
experience to own innovation with trial
and errors. From waste minimization to
experiment maximization.
• To the age of Deregulation and
Liberalization of selfish individuals.
Cooperation among Selfish
Individuals
• Give me that which I want, and you shall
have this which you want …. It is not
from the benevolence of the butcher, the
brewer, or the baker, that we expect our
dinner, but from their regard to their
own interest. (Adam Smith’s The Wealth
of Nations)
Cooperation Must Be Based on
Selfishness
• In civilized society [man] stands at all
times in need of cooperation and
assistance of great multitudes, while his
whole life is scarce sufficient to gain the
friendship of a few persons. (Adam
Smith’s The Wealth of Nations)
Equalitarian vs Egalitarian,
A Caveat
• Equalitarian : give ex ante equal chance
to everybody.
• Egalitarian : guarantee ex poste equal
distribution of income.
• Equalitarianism would encourage selfish
motivation, but egalitarianism would ruin
it.
Toward Well-Functioning Market
• Profit motivation will drive cooperation
among selfish individuals, under
(1) Protection of property right
(2) Enforcement of contract
(3) Fair dispute resolution mechanism.
• High-powered protection of property
right contrives many markets into reality
such as financial market.