Asian business and economics: introduction Professor Ari Kokko Åbo Akademi University

Schedule Why bother about East Asia? Definitions Country characteristics: diversity Miracle or crisis? Relevance for Finland

Why bother? Rapid development for several decades - “Asian Miracle” and “Pacific Century” Increasing economic and political importance - includes some of the world’s largest markets Miracle disturbed by the Asian crisis What about the future? Obvious need for Europe to understand developments in the region

East and Southeast Asia

Diversity and change Some of the richest and most advanced economies, but also some very poor countries The largest country (China), but also some of the smallest (Singapore) Rapid changes during past decades Still large differences in social structure (income distribution, health and education indicators)

Figure 1 Relative size: economy (GNP)

Figure 2 Relative size: surface area

Figure 3 Relative size: population

Table 1 General characteristics

Table 2 General characteristics

Table 3 Structure of the economy

Table 4 Income distribution

Table 5 Health indicators

Table 6 Education and technology

Roots of East Asian development: states or markets? Increasing consensus that growth has largely been export-led (although several countries exhibit periods of import substitution) Disagreement about the relative role of state intervention and market signals. Main reason: differences between countries and time periods?

Import substitution Development of domestic industry to substitute for imports Trade barriers, subsidies, and exchange controls necessary to protect domestic producers: state intervention replaces market prices Benefits: short-cut, coordination, synergies Problems: low level of competition, “inappropriate” factor inputs, administrative costs, current account deficits, interest groups

Export orientation Development based on exploitation of comparative advantages Gradual diffusion of wealth to other sectors Benefits: foreign exchange, competition, technology transfer Problems: information, incomplete markets, market access, diffusion of benefits

Asian growth model Export booms not automatic: governments have actively promoted competitiveness and exports Two policy areas: Macroeconomic stability Microeconomic measures to support industrial development

National experiences Japan South Korea Taiwan ASEAN

Japan Export promotion integral element of overall development strategy after WWII: Catching up to the West Support conditional on satisfactory export performance Competition policy and industrial rationalization Main instruments: allocation of investment capital and foreign exchange

South Korea Emphasis on exports from early 1960s, due to reduction of US aid Strong state with export success as main goal Highly successful neutral export promotion until early 1970s Targeting of heavy industries from mid-1970s to 1979, with mixed success

South Korea Instruments of export promotion Credit allocation; banking system nationalized Subsidies, tax and tariff exemptions Exchange rate policy Explicit links between domestic protection and exports Institutional incentives: presidential commendations

Taiwan Strong export orientation from early 1960s due to termination of US aid Successful targeting of light labor intensive industry until mid-1970s Focus on heavy industry from mid-1970s, with some problems Redirection to high-tech industries from early 1980s

Taiwan Instruments of export promotion Fiscal and institutional incentives. Small role for credit allocation: little subsidized capital Promotion of FDI, unlike Japan and South Korea Export processing zones SOEs producing inputs for private sector exports

Two Asian Models Model 1: South Korea –Strong government, selective intervention –Controlled capital markets, debt financing –Concentrated industry (50 large chaebols) Model 2: Taiwan –Strong government but less selective intervention –Informal capital markets, equity capital –57,000 small and medium-sized firms in industrial sector (on average ~40 employees)

Rapid development and growth... Remarkable success in both South Korea and Taiwan Growth rates have reached 8-10% most years since the early 1960s, Per capita incomes have grown from less than 200 USD in the 1950s to over 10,000 USD in the mid- 1990s.

… with some notable differences... The price of growth has been one third higher in Korea –Korea has invested 30-35% of GDP every year, while Taiwan has managed equally well with % Korea has been forced to borrow heavily while Taiwan has become a capital exporter Clear differences in vulnerability when the Asian crisis strikes in 1997

Lessons and conclusions from Big 3 Characteristics of successful export promotion programs Allocation of preferences based on markets and competition: hard budget constraints Policies target the private sector Relatively little corruption and interference from interest groups as long as policies were neutral

Lessons and conclusions for export promotion Infrastructure investment Access to inputs at world prices Preferential access to loans and foreign exchange Fiscal incentives to promote new industries Institutions for technology and market research Quality control and quality standards

The Second-Tier NICs: Southeast Asia What have Indonesia, Malaysia, and Thailand learned from East Asia? Two stages: attempts at import substitution and industrial targeting in the 1970s and early 1980s but increasing focus on export promotion since then. Differences across region emphasized during Asian crisis

Indonesia 1970s: Growing public revenue, active industrial policy, and emergence of significant SOE sector Early 1980s: Dutch disease symptoms and home market bias Mid-1980s: some trade liberalization and export promotion, but continuing targeting of ”strategic” capital-intensive sectors. High foreign debt and distorted industry structure: the wrong lessons from Korea

Malaysia 1970s: NEP. Support to bumiputra and promotion of employment and labor intensive exports. EPZs. Early 1980s: Attempt at heavy industry promotion, with little success From late 1980s: Export oriented reforms, inflows of FDI, with positive impact on growth. Surprisingly large impact of Asian crisis: political factors important?

Thailand 1970s: Import substitution. Industrial targeting not very successful because of weak political system Early 1980s: Shift to relatively neutral export promotion. Rapid export expansion, inflows of FDI, and high growth rates However, fixed exchange rate + low investment in education and infrastructure eroded competitive- ness of labor-intensive export industry. Reasonably sound industry structure after crisis

Repetition: Main elements of (export) success in East Asia Macroeconomic stability Microeconomic interventions and support Realistic exchange rates OK on first issue - mistakes on other two. Relevant for understanding impact of Asian crisis, as well as prospects for recovery

Relevance for Finland Rapid expansion of Finnish exports to Asia since early 1990s Machinery and transport equipment dominant product category East Asian share of imports and exports still less than 12% : large potential for growth

Figure 4: Development of Finnish exports to Asia

Figure 5: Country distribution of Finnish trade 1996

Foreign direct investment Modest Finnish FDI in Asia before significantly lower than Asian shares of Finnish trade Japan, China, Hong Kong, and Singapore only major investment locations Effects of crisis? Other investors have increased their investments in some of the East Asian economies (Thailand, Japan, South Korea)