east and south east asian nics: class 3
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East and South East Asian NICs: class 3. Advantages of Export-Oriented Industrialization. Forces country to capitalize on its comparative advantage exposes economic activity to international competition generates foreign exchange earnings - PowerPoint PPT PresentationTRANSCRIPT
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East and South East Asian NICs: class 3
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Advantages of Export-Oriented
IndustrializationForces country to capitalize on its comparative advantage
exposes economic activity to international competition
generates foreign exchange earningsgenerates employment, particularly
when based on labor-intensive manufacturing
improves income distribution
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Commonalities to policies used to promote EOI
Ensure exporter access to imports needed
programs to ensure credit, often at subsidized rates
help exporters crack foreign markets
policies are applied flexibly
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The KOREAN example
Late 1950s-early 1960sexports low: stress on reconstructionimport substitution policy
Value of exports
1965 $0.2 B
1971 $1 B
1977 $10 B
1992 $77 B
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Changing composition of exports and imports
% DISTRIBUTION1973 1990
EXPORTS IMPORTS EXPORTSIMPORTS
FOOD, LIVE ANIMALS 7.6 13.4 3.0 4.7CRUDE MATERIALS 6.1 21.5 1.5 12.4MINERAL FUELS 1.1 7.4 1.1 15.8CHEMICALS 1.5 8.1 3.8 10.7MFERS. BY MATERIAL 34.2 18.2 22.0 15.2MACH., TRANSP. EQUIP. 12.3 27.3 36.3 34.3MISC. MFERS. 36.3 3.1 24.0 6.1OTHERTOTAL 100.0 100.0 100.0 100.0
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Trading partners: diversification trend
Early 1970s: 75% of all exports to U.S. and Japan
1992: only 39%
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What accounts for rapid export growth?
Policy changesother factors
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Other factors
Favorable external conditionslow labor costsexpansion of chaebollarge networks of marketing
institutions
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Policy change: early to mid 1960s as critical
periodHeavy dependence on U.S. aid
late 1950s: financed 70% of of imports and accounted for 8% of GNP
currency overvaluation created excess demand for imports; suppressed by import controls
essentially: import substitution industrialization (ISI)
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Policy changes
Economic stabilization: devaluation; fiscal reforms; interest rate increases to reduce inflation; increase savings; encourage exports
direct export promotion effortscredit incentivesexporters’ associations to provide
marketing and quality control services
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Why were these policy reforms implemented?
U.S. used foreign aid as a policy weapon
Korean government needs alternative sources of foreign exchange to gain economic independence.
Most controversial element: normalization of economic relations with Japan.
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1970s policy change Heavy and Chemical
Industries PushTargeted: steel, petrochemicals,
nonferrous metals, shipbuilding, electronics, machineryto increase self-sufficiency in
industrial raw materialsto become technology-intensive
exports
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The issue of risk
Tried to reduce by: best available technologydiversifying investment among
the six sectorsBut risk was increased by:
bunching investments in time (80% of total mfg. investment 1977-81)
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So why bunch???
To achieve internal and external economies of scale in complementary projects
availability of low interest rates for equipment purchases
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Alternative perspectives
Critics: misallocated scarce capital; triggered negative spillover effects that slowed economic growth
Supporters: good idea but unfortunate timing
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Capital Misallocation
Relevant indicatorscapacity use ratesrates of return on capital
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Capacity use rates: 1976-85 for 4 HCI
sectors
0
20
40
60
80
100
120
Non-metallic minerals
Chemicals
Basic metals
machinery
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Capacity use rates, 1976-85 for 4 light industrial sectors
0
20
40
60
80
100
1976
1977
1978
1979
1980
1981
1982
*
1983
*
1984
*
1985
*
Textiles & leather
Food & beverages
Wood products
Paper products
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Average returns on capital by sector, 1980-
82
0
2
4
6
8
10
12
1980* 1981* 1982*
Textiles & leather
Food & beverages
Wood products
Paper products
Non-metallic minerals
Chemicals
Basic metals
Machinery
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Negative spillover argument/Possible
indicatorsInflation: exceeded 20% 1978-80
was restricted availability of labor and capital to light mfg. and non-tradeables
trade deficit: 7% of GDP in 1981abrupt slowdownof GDP growth
1968-73: 10% per year1980-83: 4.5% per year
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But remember
Impact on inflation of 1970s oil shocksMiddle East construction boom
300,000 Korean workers went overseas 1977-1979
real currency appreciation in late 1970s (16-20%) generated an import surge
slowdown of global economic growth
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1980s economic rebound
Growth 1980-92 = 8,5% per year
steel, electronics, shipbuilding, petrochemicals, automobiles led the rebound