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Models of development: A comparative study of economic growth in South Korea and Taiwan
JOURNAL
OF COMPARATIVE
ECONOMICS
12,296-297
(1988)
LAWRENCE J. LAU, ed., Models of Development:A ComparativeStudy of EconomicGrowthin SouthKoreaand Taiwan.San Francisco: ICS Press, 1986. xv + 217 pp., index. $10.95. South Korea and Taiwan achieved remarkably high rates of economic growth during the last 25 years. The three essays in this volume analyze the policies that led to this result. The first, by Ramon H. Myers, deals with Taiwan; the second, by Sung Yueng Kwack, with South Korea. Tibor Scitovsky’s concluding essay compares the two countries. There is already available a substantial body of literature dealing with South Korea and Taiwan individually, so that Myers and Kwack are traversing welltraveled territory. However, anyone who wants a brief and accurate summary of the recent economic history of these countries will find their papers useful. The Scitovsky essay offers something new: a penetrating analysis of the sharply different policy paths to development that led to successful growth in both countries. Comparative international studies are most interesting when they deal with countries that are fairly similar in some fundamental respects. South Korea and Taiwan are well suited to this purpose. They are middle-sized countries on the eastern fringe of Asia, densely populated, with little in the way of natural resources. Their main assets have been an industrious and well-educated population. They have been obliged by force of circumstance to maintain expensive defense establishments. Both were Japanese colonies until after World War II, and carried the imprint of the Japanese occupation. For the period 1965 to 198 1, the average annual rate of GNP increase was 8.7% for Korea and 9.4% for Taiwan, yet the economic policies they pursued differed in many respects. Both invested heavily in capital formation-26.5% of GNP in Korea and 28.4% in Taiwan-but the sources of investment funds were quite different. Taiwan financed its entire investment out of domestic savings, while Korea secured one-third of its investment funds from foreign sources. As a result, by the end of the period Taiwan’s foreign public debt as a proportion of its export earnings was only a third as great as that of Korea. Scitovsky’s careful analysis of the causes of this discrepancy is one of the most interesting parts of his essay. Neither country followed pure free-market policies, but government intervention and control were considerably less in Taiwan than in Korea. Scitovsky points out that in Taiwan, “government does not have the strong ascendancy 0147-5967/M
$3.00
Copyrieht 0 1988 by Academic Press, Inc. AlI rights of reproduction in any form mewed.
296
BOOK REVIEWS
29-l
over private business it still has in Korea, and economic controls tend to be moderate and often make use of the market in a selective and quite sophisticated way.” The Korean government forced the growth of favored manufacturing sectors by tax relief and concessional interest rates, among other things, while Taiwan tended to rely on private entrepreneurial decisions based upon market signals. Larger enterprises were singled out for special government support in Korea, with the result that firm size is much greater in Korea than in Taiwan. For example, in 1981, the gross receipts of Hyundai, Korea’s largest firm, were three times greater than the combined receipts of the 10 largest private enterprises in Taiwan. Scitovsky finds that the pattern of large firms contributed to income inequality as well as to a lesser degree of economic resiliency in Korea. Since average rates of economic growth were so close to one another for the two countries over the period 1965-198 1, did it make any difference which policy menu was adopted? Scitovsky does not tackle this crucial question head on, but it is clear from his analysis that it did. The development road followed by Korea was more arduous and less smooth than that chosen by Taiwan. A few examples may serve to illustrate this point. Taiwan consistently maintained interest rates at relatively high market equilibrium levels, while Korea kept them well below market levels. Among the consequences for Korea were occasional large bouts of price inflation, with an average annual rate of 15% over the period compared with 8% for Taiwan. Household savings were discouraged and the necessity for government rationing of investment funds led to some misallocation of resources, particularly from 1977 to 1979. Korean unemployment, though moderate by international standards, was double that in Taiwan, and its income distribution was less egalitarian. The Gini coefficients in 1976 were 0.289 for Taiwan and 0.381 for Korea. The Koreans had to work harder than the Taiwanese to obtain similar growth rates. The average work week in manufacturing in 1980 was 59 hours in Korea compared with 5 1 hours in Taiwan. Living standards were considerably higher in Taiwan, and the lower income groups in that country in particular were better off because of the more equal income distribution. While a developing country that modeled itself on Korea would do quite well, it would do even better and with less strain if it looked to the Taiwan model for guidance. Scitovsky’s essay is mandatory reading for anyone interested in development economics. It is an elegantly written piece, closely argued throughout, with just the right amount of supporting quantitative data. This is comparative economic analysis at its best. WALTERGALENSON Cornell University Ithaca, New York 14853
OF COMPARATIVE
ECONOMICS
12,296-297
(1988)
LAWRENCE J. LAU, ed., Models of Development:A ComparativeStudy of EconomicGrowthin SouthKoreaand Taiwan.San Francisco: ICS Press, 1986. xv + 217 pp., index. $10.95. South Korea and Taiwan achieved remarkably high rates of economic growth during the last 25 years. The three essays in this volume analyze the policies that led to this result. The first, by Ramon H. Myers, deals with Taiwan; the second, by Sung Yueng Kwack, with South Korea. Tibor Scitovsky’s concluding essay compares the two countries. There is already available a substantial body of literature dealing with South Korea and Taiwan individually, so that Myers and Kwack are traversing welltraveled territory. However, anyone who wants a brief and accurate summary of the recent economic history of these countries will find their papers useful. The Scitovsky essay offers something new: a penetrating analysis of the sharply different policy paths to development that led to successful growth in both countries. Comparative international studies are most interesting when they deal with countries that are fairly similar in some fundamental respects. South Korea and Taiwan are well suited to this purpose. They are middle-sized countries on the eastern fringe of Asia, densely populated, with little in the way of natural resources. Their main assets have been an industrious and well-educated population. They have been obliged by force of circumstance to maintain expensive defense establishments. Both were Japanese colonies until after World War II, and carried the imprint of the Japanese occupation. For the period 1965 to 198 1, the average annual rate of GNP increase was 8.7% for Korea and 9.4% for Taiwan, yet the economic policies they pursued differed in many respects. Both invested heavily in capital formation-26.5% of GNP in Korea and 28.4% in Taiwan-but the sources of investment funds were quite different. Taiwan financed its entire investment out of domestic savings, while Korea secured one-third of its investment funds from foreign sources. As a result, by the end of the period Taiwan’s foreign public debt as a proportion of its export earnings was only a third as great as that of Korea. Scitovsky’s careful analysis of the causes of this discrepancy is one of the most interesting parts of his essay. Neither country followed pure free-market policies, but government intervention and control were considerably less in Taiwan than in Korea. Scitovsky points out that in Taiwan, “government does not have the strong ascendancy 0147-5967/M
$3.00
Copyrieht 0 1988 by Academic Press, Inc. AlI rights of reproduction in any form mewed.
296
BOOK REVIEWS
29-l
over private business it still has in Korea, and economic controls tend to be moderate and often make use of the market in a selective and quite sophisticated way.” The Korean government forced the growth of favored manufacturing sectors by tax relief and concessional interest rates, among other things, while Taiwan tended to rely on private entrepreneurial decisions based upon market signals. Larger enterprises were singled out for special government support in Korea, with the result that firm size is much greater in Korea than in Taiwan. For example, in 1981, the gross receipts of Hyundai, Korea’s largest firm, were three times greater than the combined receipts of the 10 largest private enterprises in Taiwan. Scitovsky finds that the pattern of large firms contributed to income inequality as well as to a lesser degree of economic resiliency in Korea. Since average rates of economic growth were so close to one another for the two countries over the period 1965-198 1, did it make any difference which policy menu was adopted? Scitovsky does not tackle this crucial question head on, but it is clear from his analysis that it did. The development road followed by Korea was more arduous and less smooth than that chosen by Taiwan. A few examples may serve to illustrate this point. Taiwan consistently maintained interest rates at relatively high market equilibrium levels, while Korea kept them well below market levels. Among the consequences for Korea were occasional large bouts of price inflation, with an average annual rate of 15% over the period compared with 8% for Taiwan. Household savings were discouraged and the necessity for government rationing of investment funds led to some misallocation of resources, particularly from 1977 to 1979. Korean unemployment, though moderate by international standards, was double that in Taiwan, and its income distribution was less egalitarian. The Gini coefficients in 1976 were 0.289 for Taiwan and 0.381 for Korea. The Koreans had to work harder than the Taiwanese to obtain similar growth rates. The average work week in manufacturing in 1980 was 59 hours in Korea compared with 5 1 hours in Taiwan. Living standards were considerably higher in Taiwan, and the lower income groups in that country in particular were better off because of the more equal income distribution. While a developing country that modeled itself on Korea would do quite well, it would do even better and with less strain if it looked to the Taiwan model for guidance. Scitovsky’s essay is mandatory reading for anyone interested in development economics. It is an elegantly written piece, closely argued throughout, with just the right amount of supporting quantitative data. This is comparative economic analysis at its best. WALTERGALENSON Cornell University Ithaca, New York 14853