Post-Industrial Development in East Asia

Taiwan and South Korea in Comparison

Min-Hua Chiang

• Publisher: Palgrave Pivot
• Year: 2018
• Print ISBN: 9789811302732
• eBook ISBN: 9789811302749
• Topic: Business
• Subtopic: International Business
• Index: Business

This book purports to investigate and compare the economic development experiences in both Taiwan and South Korea in last two decades. Taiwan and South Korea's economic development after WWII is a well-known story. However, their development after the successful post-war industrialization has not been comprehensively studied. The book examines whether the three factors —the role of private business, government policy, and foreign influence—that had contributed to Taiwan's and Korea's post-war development, are still relevant during the post-industrial development era.

Researchers in the fields of global political economy, Asian economic development and East Asian studies will find this book a fresh and invaluable contribution to the literature. The book will also be of value to policy makers in developing countries in drafting their national development policies, diplomats conducting economic diplomacy with Taiwan and South Korea, and business people planning to expand their business interests in Asia.

© The Author(s) 2018

Min-Hua ChiangPost-Industrial Development in East Asiahttps://doi.org/10.1007/978-981-13-0274-9_1

Begin Abstract

1. Introduction

Min-Hua Chiang¹

(1)

East Asian Institute, National University of Singapore, Singapore, Singapore

Abstract

This introductory chapter sets the scene for the remainder of the book and briefly reviews the main ideas of analysis in each chapter. It compares Taiwan and South Korea’s economic conditions after World War II and after the Asian financial crisis. The problematique appears from the different economic performance of Taiwan and South Korea during these two different periods. The theoretical debates about both countries’ post-war economic development are discussed and used as references to examine Taiwan and South Korea’s economic development after they have achieved post-war industrialization.

Keywords

Post-war economic developmentPost-industrial developmentDevelopmental stateEntrepreneurshipThe US-led modernization project

End Abstract

What happened to Taiwan’s and South Korea’s economies after having achieved successful post-war industrialization? The success of economic development after World War II (WWII) in both countries is well known but their development after post-war industrialization has not yet been comprehensively recorded and compared. Did Taiwan’s and South Korea’s economies continue to grow not only in terms of quantity but also in terms of quality? If so, what are the contributing factors behind their post-industrial economic development? If not, what made these two economies stop progressing? This book purports to investigate and compare the economic development experiences in both Taiwan and South Korea in the most recent two decades. Through analyzing and comparing these two empirical cases, the book aims to incorporate additional factors into the explanatory paradigms in development theories. In the process, this book also attempts to highlight and synthesize some major features of these two economies’ development experiences in modern history.

This chapter sets the scene for the remainder of the book by providing the background information about Taiwan’s and South Korea’s development after WWII. We will firstly review the similar and different development paths in Taiwan and South Korea after WWII. Second, the major theories explaining Taiwan’s and South Korea’s post-war economic development are discussed. Third, we compare Taiwan’s and South Korea’s economic development after the Asian financial crisis (AFC) . Comparison of the major economic indicators in these two countries in the last two decades allows for subsequent summary of the main development differences after the AFC. The research questions and research methods are addressed in the final section of the chapter.

Similar Post-War Development Paths

Taiwan and South Korea are widely considered as two successful economic development models after WWII. In less than two decades after the war, both had transformed from agricultural nations to major global manufacturers. Their successful industrialization from light to heavy industries supported their high economic growth rates for more than three decades since the 1960s except during the oil crises in 1973 and 1979 (Fig. 1.1). The gross domestic product (GDP) per capita in Taiwan increased from a mere US$152 in 1961 to US$9092 by 1991. During the same period, South Korea’s GDP per capita also augmented from a mere US$91.5 to US$7523 (IMF 2015). In addition, the successful industrialization allowed the manufacturing sector to provide job opportunities for the mass of laborers released from the agricultural sector. As a result, tens of millions of people were quickly pulled out of poverty. With the economic advancement, these two US-aid recipients in the 1950s and 1960s quickly transformed into aid donors and important investors, particularly in Asia since the early 1990s.

Fig. 1.1

Taiwan and South Korea’s annual economic growth rates 1961–1991. Source: IMF (2015)

Taiwan and South Korea had similar conditions for development at the initial stage. Both had been colonized by Japan before and during the WWII, and had very limited natural resources and endowment for development. After WWII, both faced potential armed conflict with Communist regimes. In general, the evolution of these two countries’ post-war development paths can be categorized into three major stages. First, US aid played an important role in Taiwan’s and South Korea’s post-war economic recovery during the 1950s. The aid financed their imports of food and consumption goods after the war as well as the governments’ fiscal deficits. Domestic economy would not be easily stabilized without US aid. Although defense expenditure was large, it would be even larger if there had not been for US military aid. The US military intervention in both the Taiwan Strait and the Korean Peninsula further helped Taiwan and South Korea prevent military invasion from the communist regimes. The sense of security encouraged private investment and bolstered confidence of the two populations.

Second, the governments in these two economies were strongly committed to economic development as a national goal. Both had engaged in a short period of import-substitute industrialization before the implementation of the export expansion strategy that successfully drove their post-war industrialization. Import-substitute industrialization was carried out through strict quantitative restrictions on imports. The industrialization was further promoted by highly subsidized credit and selective foreign exchange licensing allocations. However, the industrial output was not competitive on the world market and domestic demand for the industrial output was exhausted few years later. Import substitution was soon replaced by the export-led growth in labor-intensive consumer goods manufacturing (Adelman 1999). The US and Japan were the two essential pillars in supporting Taiwan’s and Korea’s export expansion. Japan acted as the key supplier of capital equipment to Taiwanese and South Korean manufacturers while the US was the largest destination market for manufactured final goods in both countries.

Finally, both countries have embarked on a broad range of economic liberalization measures since the 1980s. In response to the growing protectionism from the Western countries, import tariffs were substantially reduced in Taiwan and South Korea. Control over financial sectors, foreign exchange rates, interest rates, and investment were progressively deregulated. The market liberalization did not result in economic volatility as some conservative politicians had expected. Instead, both economies continued to expand at remarkable rates until the AFC in 1997.

Some Differences

Despite their similarities in economic performance and policy measures, macroeconomic figures reveal some differences between the two countries as indicated in Table 1.1. First of all, Taiwan’s GDP per capita was higher than that of South Korea after the war. This could be reasoned by South Korea’s lag in industrialization at the initial stage of post-war development (Hattori and Sato 1997). Indeed, Taiwan’s head start in industrialization can be traced back to the Japanese colonial period, in its provision of military goods for Japanese armed forces during WWII. Taiwan’s industrial capacity accumulated during the war facilitated its post-war economic recovery. Although Japan also industrialized Korea during the colonial period, most of the factories were located in the North. South Korea lost its industrial power after the Korean Peninsula was divided after 1945.

Table 1.1

Selected macroeconomic indicators in Taiwan and South Korea 1980–1995

		Taiwan	South Korea
Economic growth rates (%)	1980	7.3	−1.7
	1985	4.8	7.8
	1990	5.6	9.8
	1995	6.5	9.6
Per capita GDP (US$)	1980	2367.4	1710.8
	1985	3295.1	2457.7
	1990	8178.2	6513.2
	1995	13,076.0	12,340.0
Inflation (%)	1980	19.0	28.7
	1985	−0.2	2.5
	1990	4.1	8.6
	1995	3.7	4.5
Unemployment rate (%)	1980	1.2	5.2
	1985	2.9	4.0
	1990	1.7	2.5
	1995	1.8	2.0
Current account balance (US$ billion)	1980	n/a	−5.3
	1985	9.2	−2.1
	1990	10.9	−2.4
	1995	5.5	−9.8

Source: International Monetary Fund (2015)

Second, while Taiwan’s economy grew rapidly after the war, it managed to improve income distribution with a fairly stable price level. Korea also improved its income distribution in the course of drastic economic growth before 1970. Nonetheless, its income distribution has been worsening since the 1970s. The low interest rate policy, rapid development of urbanization, and large companies’ dominance in business are considered responsible for the enlarging income inequality in South Korea (Yoo 1990). In particular, in order to attain economies of scale, the government deliberately concentrated economic power in the hands of a small number of conglomerates. Korea’s high inflation rate is also considered an important reason for the wider income inequality (Byun 1993). Unlike South Korea, it was small and medium entreprises (SMEs) that drove Taiwan’s export-oriented economic development. Taiwan’s SMEs-dominated economic structure was considered indispensable in equalizing income distribution.

Third, although the unemployment rate in South Korea had clearly declined from 7.7 percent in 1964 to 5.2 percent by 1980, it was still relatively higher compared to that in Taiwan. The stability of employment is another contributor to the equal income distribution. Taiwan’s low unemployment rates showed that its industrialization successfully absorbed the large labor force from the agricultural sector. In South Korea, its unemployment rates were clearly decreased only after the latter half of the 1980s. One explanation for its relatively higher unemployment rates before the mid-1980s was that South Korea’s po...

Table of contents

• Cover
• Front Matter
• 1. Introduction
• 2. Sustaining Taiwan’s and South Korea’s Post-Industrial Economic Growth: The China Factor
• 3. The Changing Role of SMEs in Taiwan’s and South Korea’s Economies
• 4. Comparing Governments’ Policies in Promoting Economic Growth (I): Industrial Upgrading Policies
• 5. Comparing Governments’ Policies in Promoting the Economic Growth (II): Free Trade Policy
• 6. New Challenges Ahead (I): Growing Income Inequality
• 7. New Challenges Ahead (II): Aging Population
• 8. Conclusion
• Back Matter