Chapter 16 Export-Oriented Growth in East Asia

Chapter Objectives Understand the causes of strong and sustained economic growth in East Asia Analyze the factors underlying East Asia´s 1997 economic and financial crisis Discuss the recovery of the East Asian economies Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Introduction: The High Performance Asian Economies The High Performance Asian Economies (HPAE) as designated by the World Bank: Hong Kong, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan, Thailand The Four Tigers: the two city-states of Hong Kong and Singapore, Korea, and Taiwan The Four Tigers are also referred to as the Four Dragons or the Little Dragons Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Newly Industrializing Economies (NIE) Newly industrializing economies are a broader group of countries, not confined to East Asia Along with economies of East Asia (Indonesia, Malaysia, and Thailand) This also includes a number of Latin American countries (Argentina, Brazil, Chile, and Mexico) Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

HPAE Characteristics Maintain stable macroeconomies Strong commitment to shared economic growth through health care, education, and housing Promote exports, remaining open to imports Exports provide foreign exchange earnings Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Population, Income, and Economic Growth In contrast to Latin America, East Asia has long enjoyed the following: Macroeconomic stability Income equality Skilled workforce Export orientation Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

TABLE 16.1 Population and GDP for the HPAE, 2007 Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

TABLE 16.1 (continued) Population and GDP for the HPAE, 2007 Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

TABLE 16.2 Average Annual Growth in Real GDP per Capita, 1980–2007 Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

TABLE 16.2 (continued) Average Annual Growth in Real GDP per Capita, 1980–2007 Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

General Characteristics of Growth in the HPAE Shared growth-rising economic equality Rapid accumulation of physical and human capital Rapid growth of manufactured exports Stable macroeconomic environments Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

TABLE 16.3 Measures of Income Distribution, East Asia and Latin America Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

TABLE 16.3 (continued) Measures of Income Distribution, East Asia and Latin America Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Rapid Growth of Manufactured Exports HPAEs have high rates of investment thanks to high savings rates, which stem from: Stable macroeconomic environment of low inflation Rapid rate of income growth Demographic transition: shift to low death and birth rates Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

TABLE 16.4 The Share of HPAE in World Exports, 1965–2000 Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Stable Macroeconomic Environments HPAEs kept budget deficits and foreign debt within the limits of the ability of the government to finance without having to print money or borrow excessively Low inflation rates helped keep interest rates stable, enabled firms to take a long-term view on their investments The crisis of 1997 proves the rule: significant reduction in export earnings and growth of current account deficits in some HPAE countries Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

The Institutional Environment In the HPAEs, large flows of savings were channelled into the financial system, which lent them to businesses that used them efficiently Moreover, governmental rules fostered efficient economic outcomes Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Features of HPAEs’ Institutional Environment Reliable property rights Bureaucracies are competent Contracts are enforced Access to information is wide-spread Regulations are clear and well-publicized Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Features of HPAEs’ Institutional Environment (cont.) Fiscal Discipline Business-Government Relations -Deliberation councils: Quasi-legislative bodies set up by six HPEA governments that bring together representatives from the private and the public sectors to coordinate the information flow between businesses and policymakers Avoiding rent seeking Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Government interventions are common in three areas in HPEAs: The Institutional Environment: Fiscal Discipline and Business-Government Relations Government interventions are common in three areas in HPEAs: Targeting of specific industries Direct credit Export promotion Let’s analyze industrial policies in greater detail… Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

The Role of Industrial Policies: Targeting of Specific Industries Targeted industrial policies: Efforts to alter a country’s industrial structure and thus change its comparative advantages through channelling resources to certain industries Also seen as the government’s picking winners and losers Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Targeting of Specific Industries (cont.) Six key tools of targeting: Restrictions on imports: licensing, quotas, tariffs, export subsidies Direct credit: funds to an industry Subsidies Market information (especially foreign markets) Infrastructure construction Research and development funds Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Targeting of Specific Industries (cont.) Targeted industrial policies are distinct from other efforts to promote specific industries Resources provided only as long as the companies receiving them met specific export targets Governments placed macroeconomic stability above industrial policies Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Results of Targeting Disagreement about: World Bank: Export promotion and directed credit did boost economic growth, but industrial policies in general did not Critics: It is impossible to know what growth rates would have been without industrial policies Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Results of Targeting (cont.) Agreement that successful industrial policies have: Clear performance criteria such as export targets Institutional means to monitor and enforce compliance Low costs in order for nontargeted sectors not to suffer Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Table 16.5 Imports and Exports as a Share of GDP Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Table 16.5 (continued) Imports and Exports as a Share of GDP Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Production of exports has several advantages: The Role of Manufactured Exports: The Connections between Growth and Exports The promotion of manufactured exports played a significant role in the industrial strategies Production of exports has several advantages: Makes possible the purchase of imported inputs that can make firms more competitive In the case of HPEAs, the need to meet export targets helped encourage FDI and the acquisition of new technologies Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

The Connections between Growth and Exports (cont.) However, promotion of exports results in greater GDP growth only if: There is something in the promoted production process or its links to the rest of economy that is absent from domestic-oriented production Exports speed up the adoption of international best practices Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

The Role of Manufactured Exports: Is Export Promotion a Good Model for Other Regions? Yes: Even if all developing countries stressed export promotion, they would be unlikely to saturate the industrialized country markets No: Under the Uruguay Round rules of 1994, developing countries must eliminate any subsidies contingent on export performance Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Table 16.6 Free-Trade Areas in Asia and Oceania Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Is There an Asian Model of Economic Growth? East Asia is remarkable for its growth in per capita income and in labor productivity Labor productivity depends on additional amount of capital, education, and total factor productivity (TPF)—issues related to new technologies, innovation, and organizational improvements Research conclusion: The bulk of East Asian growth is attributable to increases in capital and education, rather than TFP Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Table 16.7 Sources of Growth, 1960–1994 (Percent) Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Copyright © 2011 Pearson Addison-Wesley. All rights reserved.