Comparison of South Korea & Taiwan

1. Comparison of South Korea & Taiwan NIE development model reconsidered

2. Comparison • Population • South Korea:49million • Taiwan: 23 million • land area • South Korea:96,920km2 • Taiwan: 32,260 km2

3. 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 2010-2012 • South Korea: 6.3%, 3.6%, 2% • Taiwan: 10.8%, 4.1%, 1.3%

4. 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

5. 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?

6. 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

7. South Korea and Taiwan • Military strongman rule from 1960s to 1970s • South Korea • Park Chung Hee (1962-79) • Taiwan • Chiang Kai-Shek (1945-75)

8. 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

10. 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

11. Financial sector • Foreign Capital Inducement Law • control private sector’s access to foreign capital • business activities were directed by the state

12. 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

14. 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 • 1974 15.1% of GNP • 1978 30.1% of GNP • 1981 55.7% of GNP

15. South Korea’s foreign debts • 1962 157 million US$ • 1979 20.5 billion US$ • government preferred foreign borrowing over foreign direct investment • maintain domestic ownership of industries • in 1990s private sector borrowed heavily • 1994 56.9 billion US$ • 1997 154.4 billion US$

17. Top chaebol • Debt to equity ratio of top chaebol

18. 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

19. 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

20. 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