Comparison of South Korea & Taiwan NIE development model reconsidered

Comparison Population land area South Korea:51 million Taiwan: 23.5 million land area South Korea:96,920 km2 Taiwan: 32,260 km2

Lowest Fertility Rates in World Ranking Country Total Fertility Rate 219 South Korea 1.26 220 Puerto Rico 1.22 221 Hong Kong 1.19 222 Taiwan 1.13 223 Macau 0.95 224 Singapore 0.83

South Korea and Taiwan Purchasing power parity GDP South Korea: US$2 trillion (14th) Taiwan: US$1 trillion (22nd) GDP growth rate 2015-2017 South Korea: 2.8-3.1% Taiwan: 0.8-2.8%

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

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?

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

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

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

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

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

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

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

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$

Top chaebol Debt to equity ratio of top chaebol

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

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

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