1. East and South East Asian NICs: class 3

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

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

4. The KOREAN example q Late 1950s-early 1960s q exports low: stress on reconstruction q 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 q Early 1970s: 75% of all exports to U.S. and Japan q 1992: only 39%

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

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

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

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

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

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

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

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

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

16. Capital Misallocation q Relevant indicators q capacity use rates q 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 q Inflation: exceeded 20% 1978-80 q was restricted availability of labor and capital to light mfg. and non-tradeables q trade deficit: 7% of GDP in 1981 q abrupt slowdownof GDP growth q 1968-73: 10% per year q 1980-83: 4.5% per year

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

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