East and South East Asian NICs: class 3

Advantages of Export-Oriented

IndustrializationForces country to capitalize on its comparative advantage

exposes economic activity to international competition

generates foreign exchange earningsgenerates employment, particularly

when based on labor-intensive manufacturing

improves income distribution

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

The KOREAN example

Late 1950s-early 1960sexports low: stress on reconstructionimport substitution policy

Value of exports

1965 $0.2 B

1971 $1 B

1977 $10 B

1992 $77 B

Changing composition of exports and imports

% DISTRIBUTION1973 1990

EXPORTS IMPORTS EXPORTSIMPORTS

FOOD, LIVE ANIMALS 7.6 13.4 3.0 4.7CRUDE MATERIALS 6.1 21.5 1.5 12.4MINERAL FUELS 1.1 7.4 1.1 15.8CHEMICALS 1.5 8.1 3.8 10.7MFERS. BY MATERIAL 34.2 18.2 22.0 15.2MACH., TRANSP. EQUIP. 12.3 27.3 36.3 34.3MISC. MFERS. 36.3 3.1 24.0 6.1OTHERTOTAL 100.0 100.0 100.0 100.0

Trading partners: diversification trend

Early 1970s: 75% of all exports to U.S. and Japan

1992: only 39%

What accounts for rapid export growth?

Policy changesother factors

Other factors

Favorable external conditionslow labor costsexpansion of chaebollarge networks of marketing

institutions

Policy change: early to mid 1960s as critical

periodHeavy 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)

Policy changes

Economic stabilization: devaluation; fiscal reforms; interest rate increases to reduce inflation; increase savings; encourage exports

direct export promotion effortscredit incentivesexporters’ associations to provide

marketing and quality control services

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.

1970s policy change Heavy and Chemical

Industries PushTargeted: steel, petrochemicals,

nonferrous metals, shipbuilding, electronics, machineryto increase self-sufficiency in

industrial raw materialsto become technology-intensive

exports

The issue of risk

Tried to reduce by: best available technologydiversifying investment among

the six sectorsBut risk was increased by:

bunching investments in time (80% of total mfg. investment 1977-81)

So why bunch???

To achieve internal and external economies of scale in complementary projects

availability of low interest rates for equipment purchases

Alternative perspectives

Critics: misallocated scarce capital; triggered negative spillover effects that slowed economic growth

Supporters: good idea but unfortunate timing

Capital Misallocation

Relevant indicatorscapacity use ratesrates of return on capital

Capacity use rates: 1976-85 for 4 HCI

sectors

0

20

40

60

80

100

120

Non-metallic minerals

Chemicals

Basic metals

machinery

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

0

20

40

60

80

100

1976

1977

1978

1979

1980

1981

1982

*

1983

*

1984

*

1985

*

Textiles & leather

Food & beverages

Wood products

Paper products

Average returns on capital by sector, 1980-

82

0

2

4

6

8

10

12

1980* 1981* 1982*

Textiles & leather

Food & beverages

Wood products

Paper products

Non-metallic minerals

Chemicals

Basic metals

Machinery

Negative spillover argument/Possible

indicatorsInflation: exceeded 20% 1978-80

was restricted availability of labor and capital to light mfg. and non-tradeables

trade deficit: 7% of GDP in 1981abrupt slowdownof GDP growth

1968-73: 10% per year1980-83: 4.5% per year

But remember

Impact on inflation of 1970s oil shocksMiddle 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

1980s economic rebound

Growth 1980-92 = 8,5% per year

steel, electronics, shipbuilding, petrochemicals, automobiles led the rebound