East and South East Asian NICs: class 3

1. East and South East Asian NICs: class 3

2. Advantages of Export-Oriented Industrialization • Forces country to capitalize on its comparative advantage • exposes economic activity to international competition • generates foreign exchange earnings • generates employment, particularly when based on labor-intensive manufacturing • improves income distribution

3. Commonalities to policies used to promote EOI • Ensure exporter access to imports needed • programs to ensure credit, often at subsidized rates • help exporters crack foreign markets • policies are applied flexibly

4. The KOREAN example • Late 1950s-early 1960s • exports low: stress on reconstruction • import substitution policy Value of exports 1965 $0.2 B 1971 $1 B 1977 $10 B 1992 $77 B

5. Changing composition of exports and imports

6. Trading partners: diversification trend • Early 1970s: 75% of all exports to U.S. and Japan • 1992: only 39%

7. What accounts for rapid export growth? • Policy changes • other factors

8. Other factors • Favorable external conditions • low labor costs • expansion of chaebol • large networks of marketing institutions

9. Policy change: early to mid 1960s as critical period • Heavy dependence on U.S. aid • late 1950s: financed 70% of of imports and accounted for 8% of GNP • currency overvaluation created excess demand for imports; suppressed by import controls • essentially: import substitution industrialization (ISI)

10. Policy changes • Economic stabilization: devaluation; fiscal reforms; interest rate increases to reduce inflation; increase savings; encourage exports • direct export promotion efforts • credit incentives • exporters’ associations to provide marketing and quality control services

11. Why were these policy reforms implemented? • U.S. used foreign aid as a policy weapon • Korean government needs alternative sources of foreign exchange to gain economic independence. • Most controversial element: normalization of economic relations with Japan.

12. 1970s policy change Heavy and Chemical Industries Push • Targeted: steel, petrochemicals, nonferrous metals, shipbuilding, electronics, machinery • to increase self-sufficiency in industrial raw materials • to become technology-intensive exports

13. The issue of risk • Tried to reduce by: • best available technology • diversifying investment among the six sectors • But risk was increased by: • bunching investments in time (80% of total mfg. investment 1977-81)

14. So why bunch??? • To achieve internal and external economies of scale in complementary projects • availability of low interest rates for equipment purchases

15. Alternative perspectives • Critics: misallocated scarce capital; triggered negative spillover effects that slowed economic growth • Supporters: good idea but unfortunate timing

16. Capital Misallocation • Relevant indicators • capacity use rates • rates of return on capital

17. Capacity use rates: 1976-85 for 4 HCI sectors

18. Capacity use rates, 1976-85 for 4 light industrial sectors

19. Average returns on capital by sector, 1980-82

20. Negative spillover argument/Possible indicators • Inflation: exceeded 20% 1978-80 • was restricted availability of labor and capital to light mfg. and non-tradeables • trade deficit: 7% of GDP in 1981 • abrupt slowdownof GDP growth • 1968-73: 10% per year • 1980-83: 4.5% per year

21. But remember • Impact on inflation of 1970s oil shocks • Middle East construction boom • 300,000 Korean workers went overseas 1977-1979 • real currency appreciation in late 1970s (16-20%) generated an import surge • slowdown of global economic growth

22. 1980s economic rebound • Growth 1980-92 = 8,5% per year • steel, electronics, shipbuilding, petrochemicals, automobiles led the rebound