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Understanding the Korean Miracle E. Young Song Sogang University Summer, 2011 Asian Miracle Sachs and Warner (1995) 2 Google Map 3 II. Asian Model – the Origin Korean Model of Development Strong and stable government Dictatorship of Chung Hee Park Stable and consistent policy State-led development Government plans and private enterprise executes plans Symbiosis between politics and business Export-oriented growth vs. import substitution Chaebols a family controlled network of big conglomerates 4 Japanese Model of Growth Prototype of the Asian Model of Growth - Miraculous post-war recovery in Japan (1945-1960) Government Interventions -MITI and Monster Sahashi Administrative Guidance – MITI – industrial policy (industry targeting) – Ministry of Finance (Bank of Japan) and Bank of Development provides low-cost loans to targeted industries Development of heavy industries Tight cooperation between government and Keiretsu(系列) export-led growth 5 Japanese Model of Growth Debate – Myth or Reality? Was the Administrative Guidance of the MITI essential to Japanese Growth? Was the industrial targeting of the MITI successful? Were the Japanese industries heavily protected? State vs. entrepreneurship Sony, Airplanes and Robots 6 III. Asian Values 1. Ideology Market vs. State Prosperity of the Western Europe and the US in the 19th century Liberalism : free market, free trade, small government Rapid expansion of industry and international trade World war I, the Great Depression of 1929 Shattered belief in liberalism Statism : experimenting with state-led systems in less developed regions Socialism in Russia Fascism in Germany, Italy and Spain Newly liberated countries after World War II Statism was a popular choice 7 Liberalism vs. Statism WW I Great Depression Classical Liberalism Statism Socialism Fascism WW II 1980s Modern (Roosevelt) Liberalism Neoliberalism 8 Economic 2 –Growth Theory Should be separated from economic fluctuations Real GDP per capita = A*F(h, K/L) – – – – A: scientific knowledge, institutional efficacy h: human capital, skill level of labor K: physical capital L: physical labor Three forces of economic growth – Technological progress (A increases through institutional reforms, imitations and R&D) – Education (h increases) – Capital accumulation (K/L increases through saving or borrowing from abroad) Economic 2 –Growth Theory Which economic policies are conducive to growth? (technological progress, education and capital accumulation?) – stable macroeconomic policy (low inflation and low budget deficits) – trade openness (low tariffs on capital goods and low taxes on exports) – low taxes? Which institutions are conducive to growth? – – – – – civil laws and protection of property rights political stability democracy or dictatorship? low level of corruption and nepotism? temperature? culture and people? 2. Culture and Economic Development Asian countries started with high level of education (for their income level) known for parents’ dedication to children’s education Many Asian countries are high savers. Japan, Korea, Taiwan, Singapore, China Asians known for hard work and self-discipline Confucian Influence? • Max Weber The Protestant Ethics and the Spirit of Capitalism salvation anxiety => hard work, discipline and thrift • Morishima Why has Japan Succeeded? Parallel between Protestant ethics and Confucian ethics • Is Confucianism conducive to economic growth? • Why did the Asian countries remain so poor until recently? 12 West East individualism society over the individual (finding the proper place of an individual in a social order) legalistic contracts family-like relationship checks and balance virtue and benevolence of the ruling class - sage(君子) 13 West individualism profit motive and creative efforts legalistic contracts property rights and conflict resolution through legal process competition between buyers and sellers democracy checks and balance 14 East society over the individual social harmony and consensus family-like relationship collective ownership virtue and benevolence virtuous ruler discipline and thrift 15 East society over the individual suppression of freedom and creativity family-like relationship cronyism and corruption virtue and benevolence authoritarian ruler 16 • Have to be careful about cultural determinism. Q) Is it a dominant force in economic growth? Japan, Korea, China in the past Malaysia and Indonesia (Islam) India (Hindu) Korean households once high savers, now low savers • Confucianism may generate some synergy when combined with capitalistic environment. • It has to be adapted and transformed to progress into a mature market economy. 17 3. Democracy, People and Economic Development • Authoritarian regimes in miracle economies (Japan – long rule of the Liberal Democratic Party) Korea – Park, Chung Hee Park Taiwan – Chiang, Kai Shek Singapore – Lee, Kuan Yew Malaysia – Mahathir Indonesia – Suharuto China – Communist Party • Benevolent dictator – Confucian legacy? Korea – Park, Chung Hee Singapore – Lee, Kuan Yew China – Deng, Xiaoping 18 • Advantages of authoritarian regime – national level coordination of development strategies (big-push) – quick and efficient decision making – policy consistency (vs. left-right swings in a democracy) Q) Why did Communist countries not grow in 70s? Q) How explain Hong Kong and India? • Disadvantages of authoritarian regime – Hidden political instability wealth now, representation later growing dissatisfaction of middle class as the economy develops could explode with an economic crisis – Suppression of free sprits and entrepreneurialism 19 • Does democracy promote growth? No strong empirical evidence • Debate Lee, Kuan Yew Western democracy is neither necessary nor suitable in the Asian model of development. Needs to guard against cultural imperialism. Dae Jung, Kim Asia has a long tradition of democracy. Petty apology for dictatorship. • Korea, Singapore and China Model Korea and Singapore – rapid growth as a means of justifying the authoritarian rule and defending capitalism against communism. China– rapid growth as a means of justifying the sustained rule of the Communist Party 20 4. Korean Values Brief History • Long tradition of centralism – Chosun Dynasty (1392-1910) No feudal or local powers. King and bureaucratic scholars dominate in political power and distribution of economic resources. • Colonial rule of Japan (1910-1945) Modernization under the Japanese colonial rule. Debate – Was the Japanese rule asset or liability for the Korean Miracle? • US Army Military Government (1945-1948) – South Korea Some efforts to implant democracy and capitalism Period of political and economic chaos • Syngman Rhee (1948-1960) – first president of the Republic of Korea Korean War (1950-1953) justifying dictatorship for anti-communism campaigns inefficient and corrupt distribution of Japanese enterprises and US aids failed to lay foundation for future economic development 21 4. Korean Culture Brief History • Long tradition of centralism – Chosun Dynasty (1392-1910) No feudal or local powers. King and bureaucratic scholars dominate in political power and distribution of economic resources. • Colonial rule of Japan (1910-1945) Modernization under the Japanese colonial rule. Was the Japanese rule asset or liability for the Korean Miracle? • US Army Military Government (1945-1948) – South Korea Some efforts to implant democracy and capitalism Period of political and economic chaos • Syngman Rhee (1948-1960) – first president of the Republic of Korea Korean War (1950-1953) justifying dictatorship for anti-communism campaigns inefficient and corrupt distribution of Japanese enterprises and US aids failed to lay foundation for future economic development 22 Distinctive characteristics of Korean culture (Song) • Fusion and flexibility + risk-taking resilience • Ethnic homogeneity • Strong influence of Christianity – channel for importing Western individualism? • New Confucian ethics – the breakdown of traditional social hierarchy scholars (bureaucrats) – farmers - artisans – merchants • Communitarianism – family, clan, region, school, nation Social harmony in business, government, labor relationship Life-long employment and patriarchic corporate culture Business group maintained by family ties 23 Economic 3 Gains from Trade Comparative advantage and gains from trade QA unit labor requirement Textile Auto Labor 1 1 200 400 PT/PA = 2 200 +1 100 -1 C 100 200 QT Economic 4 Development Strategy Export Promotion vs. Import Substitution QA unit labor requirement Textile Auto Labor 1 1 200 400 PT/PA = 2 200 QT 200 Development Strategies • Laissez-faire • Government Interventions • Export-Promotion Both exports and imports increase outward-oriented • Import-Substitution Both exports and imports decrease inward-looking self-sufficiency 26 Chung Hee Park (1961-1980) Period of authoritarian politics and rapid economic development Anti-communist Threatened by the economic success of the North Korea Economic development has all the priorities political freedom and reunification put aside • State-led economic development Economic Planning Board created – 5 year plans Nationalized commercial banks Put the Bank of Korea under the control of the Ministry of Finance • Initial plan – import substitution development a la Latin American countries exporting primary products and developing steel and machinery industries 27 • Switch to Export-led growth Export drives of labor-intensive products Historical accidents - Lim US tried to manipulate Park with US aids. Park, fierce nationalist, tried to be independent of US pressures by developing dollar-generating industries. US pressures US preferred market-oriented outward-looking growth strategy. • Nationalism and anti-FDI policy Compare with Singapore Development of local technologies and companies to lead growth Similarity with the Japanese model Heavily relied on foreign loans Government directly borrowed from the world and distributed to the private sector Government guaranteed foreign loans of private businesses • Development based on private entrepreneurship -backed by foreign loan guarantees and low interest rate loans -closely monitored by the government in export performance 28