Rapid Economic Growth in South Korea and Taiwan – Economics Essay

Rapid Economic Growth in South Korea and Taiwan – Economics Essay
In 1960, South Korea and Taiwan were as poor as many present African countries. However, from 1960 to 1989, South Korea and Taiwan increased their per-capital GDP by 6.82% and 6.17%, which compare to other less developed

countries is significantly high. The outstanding transformation of South Korea and Taiwan in these 30 years is often seen as an example of what export-led growth. But Rodrik (1995) argues that the rapid economic growth and ‘take off’ in South Korea and Taiwan was a result of an investment boom rather than an export oriented strategy. This essay will discuss this theory.

Rodrik shows 6 reasons to reject the export-led growth hypothesis. His first point is “Relative Profitability of Export”. In this point, he raises a counter argument. He says that Ian Little (1994) states that the success of Korea and Taiwan was related to exports. Little uses three points to support his statement. First of all, he finds that Korea and Taiwan succeeded on the growth of labour-intensive manufactures. Then, he claims that the manufactures were based on the exports. Also, he discovers that the bias against manufacturing for export was removed. However, Rodrik indicates that the economics of Korea was related to the politics in the 1950s. The government of Korea, which was quite different from now, paid no attention to economic growth and exports at that time. According to Rodrik’s opinion, the incentive effects of export seem to be unsuccessful. In Taiwan, there seems to be no incentive effects of export.

Rodrik analyses the differences between “export orientation” and “investment boom”. He mentions that export orientation may not obviously lead to an investment boom. Rodrik raises two examples, Turkey and Chile, to prove that even more massive increases in the profitability of exports did not lead to investment boom. He concludes that the success in export may not lead to a success in investment.

Rodrik discusses “the contribution of exports” in the third point of his argument. He mentions that since the export base was so small early on (especially in Korea), until the mid-1970s at least, the contribution of export to the growth of GDP could not have been very high. There were only over 10% in Taiwan, and in Korea, exports were less than 5% of GDP around 1960. So, exports were barely a small part of the initial growth spurt in both countries.

Rodrik talks about “Productivity Spillovers from Exports”. In this part, he shows a counter argument that it is given top billing in its exposition of the dynamic benefits outward orientation by the World Bank. He analyses that the common presumption is that the contribution of exports to growth was from technological spillovers and cumulative productivity benefits deriving from export performance, but not from the demand side or through investment. There is no evidence to prove that technological externalities associated with outward orientation or exports. In fact, it is easy to find both developing countries and developed whose efficiency performance over 20 years or more has coordinated that of the NIEs.

In Rodrik’s article, he discusses “the rising share of exports in GDP is consistent with investment led growth”. He mentions that it is quite clear that the investment boom, which requires increase in imports, is caused by a comparative shortage in producing capital products. Exports increase as share of GDP will pay for imports if international borrowing is restrained. The reason why it became profitable to invest should cause the reason of the fast growth.

Rodrik discusses the role of savings in the last point of his argument. He finds that alongside investment was risen by saving in both South Korea and Taiwan. A large number of accounts report that the economic growth has caused the increase in saving in both countries. Interest rates were increased to deposit, and government policy is helpful to raise savings in both countries.

The rapid growth in export and GDP ratios is the proof for the export led growth hypothesis. On the other hand, investment and GDP also speedily grew. In the 1980s, investment increased from 10% of GDP in the 1950s to 30% in South Korea and Taiwan. The growth of Taiwan and South Korea was explained by the massive increase in investment demand in the early 1960s.

The technical progress in South Korea and Taiwan has essentially become null. It reflects the fact that there is very irrelevant growth residual left over to explain, once the phenomenal rate of factor accumulation is taken into account. Therefore, the rapid growth caused by capital accumulation rather than the increasing in industrial factor productivity (Rodrik, 1995).

Rodrik indicates that governments managed the growth in the private return to capital. He lists six parts of the causes, and they are “removing impediments to investment”, “establishing a sound investment climate”, “alleviating a coordination failure, which had blocked economic take-off”, “investment subsides”, “administrative guidance” and “use of public enterprise”. All these six elements help governments to manage the increase.

It is not quite sure that export orientation was a significant causal role in South Korea and Taiwan’s economic growth. The increase of exports during the 1960s is too small to calculate for the phenomenal export boom. Furthermore, exports were initially too small to have a main effect on aggregate economic performance. A presumption claimed that the growth of South Korea and Taiwan is brought by the investment boom is more acceptable.

Rodrik, D. 1995. “Getting Interventions Right: How South Korea and Taiwan Grew Rich”. Economic Policy, Pp 55- 107.