Economics of Catch-up: country, industry and firm levels Keun Lee 李根 Prof. of Economics, Seoul Nat’l University Director, Center for Economic Catch-up Committee for Dev’t Policy, UN-ECOSOC   www.keunlee.com

What is catch-up? cf) catch up, forging ahead, and falling behind (Abramovitz 1986) 1) national level: per capita income , market share in world, Global Fortune 500 2) firm-level: productivity, market share, sales growth => rise and decline of nations

usa China Korea 세계60조; 60억인; 일인 만$; 미국,유럽 15조, 중,일5조, 한,인 1조 * IMF, World Economic Outlook database, April, 2009 * Estimates start after 2008 * World : composed of 173 countries * Euro Area: composed of 16 countries 세계60조; 60억인; 일인 만$; 미국,유럽 15조, 중,일5조, 한,인 1조

China * IMF, World Economic Outlook database, April, 2009 * Estimates start after 2008 * World : composed of 173 countries * Euro Area: composed of 16 countries

Thinking on Econ. Development 1st Generation: capital stock and that investment for fixed asset is most important 2nd: (Open door) Policies matter -> Washington Consensus 3rd: Institutions matters -> post-Washington Consensus => Debates: Human capital; Institution; location; WC is dead: Binding constraints (Rodrik) BeST (Beijing-Seoul-Tokyo) Consensus Barcelona Consensus: Stiglitz

1st Question: Recent Debates on Long Run Economic Growth Institution vs. Policies vs. Geography 1) Not policies but Institutions matter: Reversal of fortunes by colonizers (Acemoglu, Johnson & Robinson 2001, 2002; Rodrik et al 2004) Institution as a savior of the Washington Consensus 2) Geography matter: A destiny? ( J. Sachs) 3) Does institution matter? -> Human capital ( Glaeser, La Porta, Lopez-de-Silanes & Shleifer, 2004)

Competing Paradigms Washington Consensus, East Asian Consensus Beijing Consensus 북경共識 (Dragon) BeST Consensus Hindu Model (Elephant)

Washington Consensus vs. East Asian Consensus A. Elements of Consensus South Korea Taiwan China A1. Macroeconomic Stabilization 1. Fiscal Discipline Yes, generally Yes 2. Pub. Expenditure to Health, Edu, Infra 3. Tax Reform, broadening the Tax Base Yes since 1994 4. Unified & Competitive Exchange Rates Yes, except early time Yes, since 1994 5. Secure Property Rights Yes, except early prd. Mixed A2. Privatization, Deregulation and Liberalization 6. Deregulation Limited 7. Trade Liberalization Limited until the 80's Limited until 2002 8. Privatization many SOEs in 50, 60s Many SOEs in 50, 60s No, still SOEs dominant 9. Elimination of Barriers to FDI Heavily restricted subject to control some sector restricted 10. Financial Liberalization B. Missing Elements from the Washington Consensus 11. Export Promotion + Tariffs Yes, very strong yes, very strong 12. Technology Policy for Upgrading Yes, since 1970 Yes, since the 1980s priority since 90s 13. Higher Education Revolution Yes, since the mid 1990s

Acemoglu and Robinson, Why Nations Fail Bill Gates’ book review “Never explain how to move to more “inclusive” institutions” Keun Lee Inclusive vs. extractive : -> relevant more in low income or pre-modern economy b/c less difference among middle income countries => Why Nations Fail at Middle Income Stage: Inclusive vs. Innovative systems

constraints on executives) Quality of Institutions constraints on executives) 1965 1980 2000 Korea 3 1 6 Taiwan 2 Philippines 5 Thailand 7 Malaysia 4 China India Brazil Argentina Chile Mexico Source: Polity IV Dataset; from Lee and Kim 2009 table 1

Record of Catching-up / Falling behind: As % of the US per capita Income ( in 2005 Constant PPP)

Trend of the Income Levels as Percentage of that of Japan: => Korea, Taiwan: No catching up in 60s, 70s:-> only from 1980s

Middle- and Low-income Traps: connected

Middle income country trap: Per capita in 2000 Dollars, 1980-95 Income Groups 1980 1995 Annual growth High Income 14985 20593 2.14 Lower Middle Income 958 1,280 1.95 Upper Middle Income 5001 4616 -0.53 Asian 4: Korea, Taiwan, Hong Kong, and Singapore   1980 1995 7041.5 15560.0

Flat R&D/GDP as source of MIT (middle income trap)

Lee, Keun & B. Kim (2009, World Development) Confirms importance of Innovation and high education for middle and higher income countries; cf) Institution and basic human capital matter for low and lower middle C’s This book beyond just patent counts (innovation measure) => more details of the NIS (national innovation systems) Eg) cycle time of tech. localization of knowledge creation,

Cambridge Univ. Press 2013 Schumpeterian Analysis of Economic Catch-up: Knowledge, Path-creation, & the Middle Income Trap Keun Lee 李根 Prof. of Economics, Seoul Nat’l University Director, Center for Economic Catch-up Committee for Dev’t Policy, UN-ECOSOC   www.keunlee.com

Analysis at 3 levels Country: What determines catching-up growth: -> per capita income growth->NIS Sector: Why easy to catch up in some sectors; why not in others ? => SSI -> Country’s US Patent share in sectors 3) Which the CIS (corporate innovation system) a good fit for catching up; sales growth, profitability, firm value, productivity ? Business groups, an inferior or effective forms for catch up growth => different question -> same answers = knowledge variables

Broadly, Schumpeterian Perspective: National Innovation systems Lundvall (1992): defines NIS = elements and relationships 1) which interact in the production, diffusion and use of knowledge 2) rooted inside the borders of a nation state.’ It is about efficiency in acquisition, creation, diffusion, and utilization of knowledge. -> The differences in NIS determines different levels of competitiveness of nations.

Malerba’s SSI (sectoral systems of innovation Knowledge & Technologies Networks among actors Actors 1: Firms Demand & Market Regimes Actors 2: Gov’t, GRIs Institutions IPRs, financial systems

Example Question: Sectoral difference in catch-up Answer: Example Question: Sectoral difference in catch-up Answer: . (Sectoral Systems of Innovation; Technological Regimes of Sectors) Lee & Lim (2001, Research Policy) Park and Lee (2006: Industrial & Corporate Change) Jung and Lee (2010: Industrial & corp. change)

TFP Catch-up : Korea vs Japan Rapid catch-up (about 30%) Sustain Gap (about 10%) Source: Jung and Lee (2010: Industrial & corp. change) 23

Convergence of Productivity in IT: korea vs Japan Sam. Elect.: OVER While Industry : JUST 24

“Still Gap in Autors: Hyundai vs. Toyota H.M. : Under like industry 25

References (www.keunlee.com) Lee, Keun, & BY Kim,”Both Institutions & Policies matter but differently at differnent income levels: long run economic growth,: World Development (2009) Lee, Keun, & C. Lim (2001), “Technological Regimes, Catching-up & Leapfrogging: the Findings from the Korean Industries”, Research Policy, 459-483. Lee, Keun, Chaisung Lim, and Wichin Song (2005), "Digital Technology as a Window of Opportunity and Technological Leapfrogging: Catch-up in Digital TV by the Korean Firms”, Inter.J. of Tech. Management, Vol. 29, 1/2, pp. 40-64. Lee, Keun, “Making a technological Catchup.” Asian J.of Tech. Innovation, 2005. Mu, Qing, and Keun Lee (2005), “Knowledge Diffusion, Market Segmentation and Technological Catch-up: The Case of Telecommunication Industry in China”, Research Policy. Park, K., and Keun Lee (2006), “Linking the Technological Regime to Technological Catch-up: An Empirical Analysis Using the US Patent Data,” Industrial and Corporate Change, July 2006 Jung, M & K. Lee, (2010), “Sectoral systems of Innovation and Productivity Catch-up: between the Korean and Japanese firms,” Industrial & Corporate Change.

Thank you! ありがとう! Gracias! Meu Amigo! Obrigado! 謝謝大家 Danke Shon 감사합니다