Comparison of South Korea & Taiwan NIE development model reconsidered

Comparison Population –South Korea:49 million –Taiwan:23 million land area –South Korea:96,920 km 2 –Taiwan:32,260 km 2

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 –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 ( ) Taiwan –Chiang Kai-Shek ( )

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

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 % of GNP % of GNP % of GNP

South Korea’s foreign debts million US$ billion US$ government preferred foreign borrowing over foreign direct investment –maintain domestic ownership of industries in 1990s private sector borrowed heavily billion US$ billion US$

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