Economic Development and Economic Catch-Up

1. Economic Development and Economic Catch-Up Two different models of economic development

2. Agrarian Epoch • Economy engaging in agriculture with low degree of social division of labor. • Per capita GDP lingering around subsistence level. • Absolute poverty

3. 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

4. Industrial Revolution and Industrialization 1 AD11000150016001700182019002000 4674535665966156661,261 6,038 230 270 9006,100 Table : Trend of world per capita GDP and population In 1990 International Geary-Khamis Dollars In millions # Angus Maddison 2010

5. Industrial Revolution and Industrialization 2 11820 2000 Trend of World Per Capita GDP - Graph

6. 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.

7. Growth by Epochs per capita income (in thousand) US$30.- low growth rate high growth rate US$1.- no growth 0 agrarian transition post-industrial T (catch-up)

8. 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.

9. 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.

10. 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.

11. 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.

12. 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 minimaltrade with CENTER was recommended. Import Substituting Industrialization.

13. 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).

14. 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.

15. Nature of Catch-Up • Trade-led growth - Export-oriented growth of South Korea and Taiwan was successful, while import-substituting Latin America failed. • Authoritarian government - Japan, South Korea, Taiwan, and Singapore were authoritarian, with tight regulations. - Only colonial Hong Kong was liberal!

16. Nature of Catch-Up 2 • Government of LDC derives a “development path”, which is proven by industrialization experienced by first-movers (advanced economies) – “Late-comer’s Advantage” • Then tightly regulates all the economic activities to abide by the “path”, in order to minimize wastes.

17. 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.

18. 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.

19. 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!

20. 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.

21. 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.

22. 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.

23. 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

24. 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.

25. 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)

26. 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)

27. 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.

28. 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.