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Q1
60 Points
Make sure that your answers are brief, clear, and to the point. Avoid discussing
aspects of the readings that are not directly related to the questions.
According to classical development theory, a fundamental obstacle to the
development of poor economies is the weakness of individual incentives for
undertaking activities that enhance productivity, such as the adoption of modern,
capital-intensive industrial technologies.
Q1.1
20 Points
What role does market size play in determining the profitability of operating these
technologies? Be sure to discuss the role of fixed costs and increasing returns to
scale
Q1.2
20 Points
Consider Rosenstein-Rodan’s (1943) discussion of an individual entrepreneur’s
decision to adopt a modern technology to produce a consumer good for the
domestic market (see, esp. pp. 205-206). In light of the author’s analysis and
your answer to part 1, briefly explain why, in a poor economy, these technologies
may appear unprofitable for individual entrepreneurs investing in isolation.
Q1.3
20 Points
Now consider Bateman and Ros’s (2009) discussion of the role of infrastructure
(e.g. transportation networks, energy production and distribution, etc.) in
development (see pp. 311-312 and 315-317). Could the problem of low
profitability you identified in part 2 remain even in poor economies that are open
to international trade (i.e. economies in which individual entrepreneurs can
access global markets and export their output)? If so, why? Be sure to consider
the role of increasing returns to scale and of non-tradability in infrastructure.
Q2
40 Points
Consider Rodrik’s (1995) analysis of the industrial promotion strategies used by
South Korea and Taiwan.
Q2.1
20 Points
Consider, specifically, the use of credit subsidies by the South Korean
government (see, esp, p. 86). Starting with the Park Chung-hee administration
(1961-1979), what were the main criteria for allocating these credit subsidies?
What do these criteria suggest regarding the technological characteristics of the
sectors — in terms of scale of production, use of intermediate inputs, etc. — that
were the main targets of the subsidies?
Q2.2
20 Points
Now consider Gerschenkron’s (1961) analysis of the industrialization of relatively
backward countries. On p. 7, the author writes:
“[…] industrialization processes, when launched at length
in a backward country, showed considerable differences, as
compared with more advanced countries […] with regard to
the productive and organizational structures of industry
which emerged from those processes. Furthermore, these
differences in the speed and character of industrial
development were to a considerable extent the result of
application of institutional instruments for which there was
little or no counterpart in an established industrial
country.”
Briefly comment on how the subsidy policies described by Rodrik and discussed
above may be characterized as examples of such innovative “institutional
instruments”. Be sure to discuss: (i) the main problem these policies were
designed to address; and (ii) how they led to a departure from a scenario in
which capital markets are free to determine the cost of capital to private
entrepreneurs.
Centre for Economic Policy Research
Center for Economic Studies
Maison des Sciences de l’Homme
Getting Interventions Right: How South Korea and Taiwan Grew Rich
Author(s): Dani Rodrik, Gene Grossman and Victor Norman
Source: Economic Policy, Vol. 10, No. 20 (Apr., 1995), pp. 53-107
Published by: Wiley on behalf of the Centre for Economic Policy Research , Center for
Economic Studies , and the Maison des Sciences de l’Homme
Stable URL: http://www.jstor.org/stable/1344538
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GROWIH
POLICY
GROWTH POLICY
55
55
Gettinginterventions
right:
howSouthKoreaand Taiwan
grewrich
DaniRodrik
Columbia University
1. INTRODUCTION
To any economistinterestedin growth,the East Asian experiencesince the early
1960s poses enduringchallenges.In 1960, South Korea was poorer than many
sub-Saharan Africancountries,and Taiwan not all that much richer(Table 1).
Since then,these two countrieshave experiencedaverage increasesin per-capita
income of 6.8% and 6.2% respectively,
with the resultthat they have leftfar
behindnot onlytheseAfricancountries,but also otherslikeMexico and Argentina
which had been much richer.How these two countriesmanaged to transform
themselvesfrom economic basket cases into economic powerhouses remains
somethingof an enigma.
The standard storyto which most orthodox economistssubscribeis one of
export-ledgrowth(see, forexample, Tsiang, 1984; Kreuger, 1985; World Bank,
1993; Little, 1994). During the 1950s, the storygoes, both of these countries
engaged in traditionalimportsubstitution
policies,withmultipleexchange rates,
levels
of
trade
and
high
protection,
repressedfinancialmarkets.By the late 1950s,
each countryhad exhaustedthe ‘easy stage’ of importsubstitution.
This, together
with the impendingreductionin US aid – which had been the main source of
I am grateful
Andr6sRodriguez-Clare,
Paul de Grauwe,AnnHarrison,
ArvindPanagariya,
toJagdish
Bhagwati,
RobertWade,AdrianWood,AlwynYoung,Panelmembers
GeneGrossman
andCharlesWyplosz
and especially
forhelpfulcomments,
and the CEPR MIRAGE projectfor
EytsungKim forexcellentresearchassistance,
financial
assistance.
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1.:
OI
,G*
SUMMARY
Most explanationsof Korea’s and Taiwan’s economic growth
since the early 1960s place heavy emphasis on export
orientation. However, it is difficultto see how export
causal role in these
orientationcould have played a significant
countries’ growth. The measured increase in the relative
to
of exportsdurringthe 1960s is too insignificant
profitability
account for the phenomenal export boom that ensued.
Moreover,exportswere initiallytoo smallto have a significant
effecton aggregateeconomic performance.A more plausible
storyfocuseson the investmentboom that took place in both
countries.In the early 1960s both economieshad an extremely
well-educatedlabour force relative to their physical capital
stock,renderingthe latent returnto capital quite high. By
decisions,government
subsidizingand coordinatinginvestment
increasein theprivate
policymanaged to engineera significant
returnto capital. An exceptionaldegree of equalityin income
and wealth helped by rendering governmentintervention
effectiveand keeping it free of rent seeking. The outward
orientationof the economy was the resultof the increase in
demand forimportedcapital goods.
DaniRodrik
EconomicPolicyApril1995 Printedin GreatBritain
? CEPR, CES, MSH, 1995.
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DANIRODRIK
DAM
56
Table 1. Comparative growthexperience
Per-capitaGDP,
1960
(1985 dollars)
Per-capitaGDP,
1989
(1985 dollars)
Per-capitaGDP,
growth,
1960-89(%)
SouthKorea
Taiwan
883
1359
6206
8207
6.82
6.17
Ghana
Senegal
Mozambique
Brazil
Mexico
Argentina
873
1017
1128
1745
2798
3294
815
1082
756
4138
5163
3608
-0.54
0.16
-2.29
3.58
2.36
0.63
Country
Source:
PennWorldTable 5.5.
in the two countriesto
foreignexchange forboth economies- led policy-makers
alter theireconomic strategyand adopt export-oriented
policies. These policies
included the unificationof exchange rates accompanied by devaluations,various
othermeasuresto stimulateexports(includingmost significantly
access
duty-free
forexportersto importedinputs),higherinterestrates,and some liberalizationof
the importregime. As a consequence of these measures, as well as a broadly
supportivepolicyenvironment(encompassingmacroeconomicstabilityand public
investmentin infrastructure
and in human capital), exportstook offin the mid1960s. Export orientation led both economies to specialize according to
comparative advantage, resultingin rising incomes, investment,savings and
productivity.
This orthodoxaccount has been criticizedfor downplayingthe active role of
governmentsin Taiwan and South Korea in shapingthe allocation of resources.
Observerslike Amsden (1989) and Wade (1990) have argued thatthe reformsof
the 1960s went considerablybeyond givingmarketsand comparativeadvantage
free rein. Accordingto these authors,governmentsin both countrieshad clear
industrialprioritiesand theydid not hesitateto intervene(throughsubsidies,trade
administrativeguidance, public enterprisesor credit allocation) to
restrictions,
however,
reshape comparativeadvantage in the desired direction.Interestingly,
the orthodoxand revisionistaccountsconvergeon the importanceof the exportorientedstrategyin having disciplinedfirmsand enhanced productivity
growth.
The World Bank’s detailed recent study, The East Asian Miracle (1993), has
on therole
attemptedto incorporatesome oftherevisionist
objections(particularly
of directedcredit)into the standardaccount.
I will argue in this paper that the standard story,as sketched above, is
incompleteand quite misleadingon theimportanceit attachesto therole ofexport
orientation in the growth performance. It also has backward the causal
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GROWL’H
GROWTHPOLICY
57
betweenexports,
on theone hand,and investment
and growth
on the
relationship
other.As I willshow,theincreaseintherelative
of
aroundthe
profitabilityexports
mid-1960swas modestin bothcountries,
and can accountfullyneitherforthe
initialjump in theexport-GDPratioat thattimenorforthesubsequent
steady
increasein thisratio.
A much more plausibleexplanationforthe economictake-off
is the sharp
increasein investment
demandthattookplace in theearly1960s.The reasonfor
thisinvestment
boom is thekeyissueaddressedin thispaper.I willarguethatin
theearly1960sand thereafter
theKoreanand Taiwanesegovernments
managed
to engineera significant
increasein theprivatereturnto capital.Theydid so not
to investment
and establishing
a
onlyby removinga numberof impediments
soundinvestment
a coordination
climate,but more importantly
by alleviating
failurewhichhad blockedeconomictake-off.
The latterrequireda rangeof
– includinginvestment
interventions
administrative
subsidies,
strategic
guidance
and theuse ofpublicenterprisewhichwentconsiderably
beyondthosediscussed
in the standardaccount.That government
intervention
could play such a
inturnbya setofadvantageous
rolewasconditioned
initialconditions:
productive
a
favourable
human
endowment
and
relatively
namely,
capital
equal distribution
ofincomeand wealth.
I willelaborateon thesearguments
below.It is usefulto setthestagefirst
by
some
of
the
elements
of
the
Taiwanese
and
Korean
miracles
(section
reviewing
key
of the export-based
of these
2). Next,I discussthe shortcomings
explanations
miracles(section3). I thenturnto some of the distinctive
initialconditions
relative
abundanceofhumancapitaland equitableincomeandwealthdistribution
– whichappearto have playeda rolein bothcountries’
economicperformance
on coordination
failure
(section
4). Section5 laysoutthepaper’scentralarguments
role in removingit. Section6 discussesthe investmentand the governments’
in lightof the preceding
stimulating
policiesfollowedby the two governments
framework.
Section
7
asks
how
it
became
analytical
possiblefor detailed
to be carriedout efficiently
and withlittlerentseeking.In section
interventions
a
number
of
to
the
Section9 closesthepaperby
discuss
I
8,
objections
arguments.
someconcluding
remarks.
The formal
modelproviding
thefoundation
for
offering
in theappendix.
is presented
thecentralargument
2. THE CONTOURS OF A MIRACLE
someofthekeyfactsaboutthetwocountries’
We beginby reviewing
economic
over
the
last
three
decades.
shows
their
1
Figure
growth
performance
spectacular
We
since
the
1960s.
note
that
economic
has
fluctuated
early
performance
growth
wereparticularly
hardhitbythetwo
widelyarounda highmean.Botheconomies
oil shocksofthe 1970s,butin each case outputrecovered
remarkably
quickly.
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58
DAM
DANIRODRIK
Korea……-
[
-2 1
I
I
I I I
i
I
Ii
iI
I
Taiwan|
I IiI
I
I
I
1954 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90
Figure 1. Per-capita growthrates (three-yearmoving averages), 1954-90
Source:
PennWorldTable 5.5.
Figure 2 is the chief exhibit for the export-led growth hypothesis.The
export-GDP ratio rose fromvirtuallyzero in Korea to more than 30% by the
early 1980s,and fromaround 10% in Taiwan to over 40%. In both countries,the
increasein exportorientationwas particularlyrapid in the decade fromthe mid1960s to the mid-1970s,and has abated somewhatsince then.
I
……
Korea
Taiwan
I
%30
ti
i -T rII – ,–t lI
I I I I
0
l i I I I I
1952 54 56 58 60 62 64 66 68 70 72 74 76 78 80
82
Ii I t I I I I
84 86 88 90
Figure 2. Export/GDP ratios, 1952-90
TaiwanStatistical
Sources:
CouncilforEconomicPlanningand Development,
Data Book,1982 and
variousissues;IMF, International
1992;EconomicPlanningBoard,MajorStatistics
oftheKorean
Economy,
Financial
Statistics.
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GROWTHPOLICY
59
*Taiwan|
Korea –.
I40
35
30
25
20
15
10
5
0
I I
I tI
I I I I
I Itt
I
I
I
1951 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89
I
Figure 3. Investment/GDP ratios, 1951-90
Source:
PennWorldTable 5.5.
Less discussedbut certainlymore importantis the spectacularincrease in the
investment
shownin Figure3. Investmentrose fromaround 10% of GDP in
effort,
the late 1950s in both countriesto 30% in 1980. Since 1980, investmenthas
continueditsupward trendin Korea, but has declinedsomewhatin Taiwan. This
investmentefforthas been matched by a roughlyequivalentincrease in savings.
Table 2. Comparative productivitygrowthstatistics
Country
Period
Total factorproductivity
growth(% peryear)
Economy
Manufacturing
SouthKorea
Taiwan
1966-90
1966-90
1.2*
1.8
2.7
1.4
Argentina
Brazil
1940-80
1950-80
1960-80
1940-80
1940-80
1940-80
1940-70
1950-70
1.0
2.0
n.a.
1.2
0.9
1.7
n.a.
n.a.
n.a.
n.a.
1.0
n.a.
n.a.
n.a.
1.3
2.6
Chile
Colombia
Mexico
Venezuela
* Non-agricultural
economy.
Source:
are originally
fromElias (1990).
Young(1994).LatinAmericanstatistics
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60
DAM
DANI RODRIK
Consequently, the net resource transferfrom abroad has been either small
(Taiwan) or moderatebut manageable (Korea).
Finally,to round out our discussionof the main outlinesof the Korean and
Taiwanese experience,productivityperformancehas been respectablein both
countries,but hardly spectacular.Table 2 shows the resultsof Young’s (1994)
carefulcalculationsof changes in total factorproductivity(TFP) for Korea and
Taiwan, along withsimilarnumbersforLatin Americancountries.The East Asian
TFP figuresdo not stand out in comparison with those for Latin American
countries.A paper by Kim and Lau (1992), based on an econometricestimationof
a ‘meta-productionfunction’across countries,presentsan even more dramatic
finding:the rate of technical progressin South Korea and Taiwan has been
essentiallynil.1 Surprisingas these resultsmay seem, theyreflectthe simplefact
that once the phenomenal rate of factoraccumulation (primarilyin capital) is
taken into account, thereis verylittlegrowth’residual’ leftover to explain. The
oftheEast Asian miracle
inescapableconclusionis thattheproximatedeterminant
is capital accumulationratherthan an increasein industrialfactorproductivity.2
3. WHAT IS WRONG WITH THE EXPORT-LED GROWTH HYPOTHESIS?
As pointedout in the introduction,
the standardaccount givespriorityto the role
of exportorientationin explainingthe economic performancesummarizedin the
previoussection.A particularlyclear statementcomes fromIan Little(1994):
the outstandingsuccessof Korea and Taiwan fromthe early 1960s to the mid1970s was based on a phenomenal growthof labour-intensive
manufactures.
This branch of manufacturing
took offbecause exportswere highlyprofitable
once the bias against manufacturingfor export was removed. The high
also depended on a relativelywell-educatedhard workingdocile
profitability
labour forcewhichwas, apart fromthe naturalrate of increase,fed by a large
movement out of agriculture… High profitsand increased earnings for
recruitsto the industriallabour forceled to a veryrapid rise in savings.There
was thusa virtuouscircle.
Upon a closerlook, however,thisaccount is not quite convincingfora numberof
reasons discussedbelow.
1The WorldBank(1993)
abovereports
in thesecountries,
butitsanalysis
has
studymentioned
highTFP growth
been seriously
and Little(1994).
challenged
by
communication)
Young
(personal
2 This statement
does not contradictthe factthatboth countrieshave managedto increasegreatlythe
of the manufactured
and
sophistication
goods theyproduce,fromtoysand apparelto consumerelectronics
inphysical
and
semiconductors.
Whatitsuggests
is thatthistransformation
hasbeenfully
paid forbyinvestments
humancapital.
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GROWI7H
POLICY
GROWTH POLICY
61
3.1.Theswitchinrelative
incentives
towardsexportsintheearly1960swas not
enoughto accountfortheexportboom
significant
Countries
thathaveexperienced
sustained
outsideofEastAsiahave
exportgrowth
almostalwaysdone so as a consequenceof a sharpincreasein the relative
ofexports.
Whatis striking
abouttheexperience
ofSouthKorea and
profitability
Taiwanis howstabletherelative
of
their
was
price
exportables aroundthetimeof
In bothcountries,
mostof the important
had
exporttake-off.
exportincentives
in
been
for
several
before
the
boom
started.
Once
the
years
already
place
export
boomgotunderway,itpickedup speed,eventhoughthemeasuredprofitability
of
did
not
increase
further.
continued
their
inexorable
Moreover,exports
exports
incentives
forexporting
activities.
The
rise,oftenin thecontextof deteriorating
elaborate
on
these
in
detail.
following
paragraphs
points greater
3.1.1. Korea. Under the Rhee government
of the 1950s, Korean policywas
and thegovernment
attachedno
preoccupiedby largelypoliticalconsiderations,
to eithereconomicgrowthor exportsJonesand Sakong,
particular
importance
There
were
1980).
multipleexchange rates and a haphazard,ineffective
of exportsubsidies(Franket al., 1975). However,exporters
could
programme
retaina share of theirexportearningsto importcertainitemsfor home
a system
whichtranslated
intoa largeexportsubsidy
whenever
the
consumption,
free-market
from
the
official
rate.
After
1958,export
exchangedivergedgreatly
incentives
wereincreased.
weregiventariff
on imports
ofraw
Exporters
exemption
materialsand spare partsin 1959. Subsidizedcreditwas made availableto
forup to 75% oftheirproduction
costs,alsoin 1959.Anda devaluation
exporters
ofthecurrency
in 1961brought
theofficial
exchangeratecloseto thefree-market
rate.
Parktookoverin a military
Later,afterPresident
coup on 16 May 1961,the
was greatly
scopeofexportsubsidization
enlarged.The subsidyon exportcredits
was increasedand exporters
were exemptedfromthe commodity
tax and the
tax.The incometaxon exportearnings
businessactivity
wasreduced.Therewere
also directcashgrantson exports,
butthesewerephasedoutby 1965(Franketal.,
the
incentive
effects
ofthedevaluations
and thecashgrants
were
However,
1975).
erodedby expansionary
macroeconomic
in
policiesthatled to risinginflation
andparallelexchangeratesin 1963.A
1962-3and a renewedgap betweenofficial
After
largedevaluationin May 1964 servedonce again to unifythe currency.
were expandedfurther.
In thatyear,the
1965, exportsubsidyprogrammes
in acquiringimportlicenceswas
to exporters
existing
practiceof givingpriority
and expanded.Exporters
wereallowedautomaticaccessto duty-free
formalized
of
raw
materials
and
intermediate
inputsup to a limit.This limitwas
imports
determined
on thebasis of firms’and industries’
administratively,
input-output
a
of
coefficients
plus margin ‘wastageallowance'(Franketal., 1975). Since the
importsacquiredunderthe wastageallowancecould be sold in the domestic
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62
62
DAM RODRIK
DANI
market,thiswas a significant
subsidyand was consciouslyused as such. Subsidized
creditto exportersbecame particularlyimportantafter1966. Franketal estimate
thatthe wastage allowance alone providedan exportsubsidyof 4.6% in 1968 on
average, and up to 17-21% in certain fabricsand footwear.Bureaucratshad
discretionin settingwastage allowances,and theirgenerosity
virtuallyunrestricted
varied fromtime to time.
There is no doubt that these measures increased the relativeprofitability
of
to
the
situation
that
had
most
of
the
1950s.
exportingcompared
prevailedduring
However, it also seems clear that the greatestimpact of the incentiveswas felt
around 1959-60, ratherthanin themid-1960swhen theexportboom began. This
is largelydue to two reasons:(1) the exportsubsidyimplicitin the export-import
link systemwas particularlysignificantin 1959-60 when the gap between the
officialand parallelexchangerateswas large;3and (2) inflationeroded manyofthe
export incentivesbetween 1961 and 1964. The devaluation of 1964 and the
wideningscope of exportsubsidiescould offsetthedeteriorationof incentivessince
1960 onlypartially.
This can be seen in Figure 4, which plots the real effective
exchange rate for
Korean exports.This is a measure of the real exchange rate which includesthe
monetaryequivalent of all the subsidieson exports(exportpremia throughthe
imports,exportcreditsand the
importlink,cash grants,tax incentives,duty-free
of exporting
like),and whichis thereforean appropriateindex of the profitability
relativeto other activitiesin the Korean economy.4As the denominatorof this
index is the domesticprice level,subsidiesor protectionof non-exportactivitiesis
to
captured to the extentthat such policies raise the domesticprice level relative
of
activities.
prices export
We note that,even withthedevaluationof 1964, thelevelofexportincentivesin
1964-5 was no more than 10% higherthan in the precedingcouple of years,and
actuallybelowthe level attained in 1959-60. Even thoughexportsrose veryfast
from 1964 onward, theywere not to regain their 1959-60 level of profitability
until the early 1970s, and then again only briefly.By the mid-1970s, the
export-GDP ratio was nearlyten timeslarger than in the early 1960s, yet the
relativeprofitability
of exportswas lower! The argumentthat export-oriented
were
policies
responsibleforthe increase in exportsis oftenmade in a different
for
guise (see,
example,Page, 1994) by pointingout thattrade and exchangerate
in
the
1960s were not overtlydiscriminatory
policies
against exports (as they
3
thata multiple
Atfirst
withan overvalued
official
sightitmayseemstrange
exchangeratesystem,
exchangerate,
wouldact as an exportsubsidy.But theimport-export
link(i.e. theabilityofexporters
to retainsomeoftheir
dollarearnings
toimport
forthehomemarket)
meantthatexporters
receivedsomeofthescarcity
rentscreatedby
thesystem.
4 The
are takenfromKim (1988).This,and theearlierFranketal.
subsidyequivalentoftheexportincentives
are based,are the mostauthoritative
and widelycitedsourceson the
(1975) studyon whichtheseestimates
quantitative
aspectsofKorea’s traderegime.
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63
GROWTHPOLICY
30
120
Relativepriceofexports
25-
– 100
20
80 .
15-
-60
a
n
w
10 –
Exports/GDP-

ct,
0
8
Q.
-40
-4
5-
-20
0 n n
55
57
,
, ,
59
61
,n,
,
63
65
,
, , , ,
67
69
71
73
,I
75
o
Figure 4. Relative price of exports: Korea, 1955-76
Franketal. (1975),Kim (1988)and BankofKorea.
Source:
commonlyhave been in otherdevelopingcountries).The evidenceforthiscomes
fromtakingthe ratio of the effectiveexchange rate for exportsto the effective
exchange rate for imports(both calculated by Frank et al., 1975), and noticing
that the resultingnumber is around 1 or somewhat larger during the 1960s.
However,it turnsout thatthecomparablenumberforthesecond halfofthe 1950s
is much larger, suggesting(if the numbers are to be believed) a much greater
exportbias in the earlierperiod (see Franketal., 1975, Tables 5-10, 8-1OD, 8-10E,
8-10C).
Hence the export spurtwas not associated with a significantincrease in the
relative profitabilityof exports. This has been noted by others. In their
authoritativestudyof Korean development,Mason etal. explicitlystatethat ‘the
industrialpolicychangesthattookplace in thefirsthalfofthe 1960s did not clearly
resultin a significant
increasein the measurable incentiveto export’.Frank etal.
to
estimate
the sensitivity
of Korean exportsto exchangeratesand
(1975) attempt
[in doing so is] thatfrom1955
exportsubsidies,and note that’the main difficulty
to 1970 the effective
rate
for
remained
remarkablysteady’.The
exchange
exports
same point is noted byJones and Sakong (1980) as well.
In resolvingthe apparent paradox, these authorsresortto argumentsthat are
not entirelysatisfactory.
Mason etal. suggestthatit was the stabilityof incentives
thatwas responsibleforthe exportboom (see also Franketal., 1975). But sincethe
incentivein questionis the profitability
of exportsrelativeto otheractivities,there
is no clear reason whyenhanced stabilityshould have favouredexportsover other
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64
DANI RODRIK
activities.5
Jonesand Sakong(1980) resortto a rangeof explanations,
including
inrent-seeking
reduction
greater
stability,
opportunities,
simpler
inputacquisition,
clearpoliticalleadership,
a morefavourable
‘business
climate’,and non-pecuniary
incentives
suchas presidential
awardsforsuccessful
Once again,the
exporters.
morecompelling
are notspecific
to exporting
and
amongthesefactors
activities,
therefore
cannotaccountforwhyexportsincreasedfasterthanotheractivities.6
Withregardto theimportregime,
therewas no significant
liberalization
import
until 1967, when the switchfroma positivelist to the negativelist was
Underthenewregime,theregulations
implemented.
beganto specify
onlythose
itemsthatwereprohibited,
ratherthanthosethatcouldbe importedsubjectto
in
restrictions
the
In
(as
past). theperiod1961-3,thenumberofitemspositively
listedas importables
subjectto government
licensing,
quotas,foreigncurrency
allocationand otherregulations
rangedbetween1000 and 1600.Underpressure
fromthebalanceof payments,
thegovernment
actuallyreducedthenumberof
itemstofewerthan500 inlate 1964.The 1961-3levelwasrestored
in
importable
and
further
increased
until
1967
when
the
switch
occurred
1965,
later,
(Hong,
1993).
3.1.2. Taiwan. In Taiwanmostoftheexportincentives
wereputinplaceinthemidto late-1950s,evenearlierthanin Korea, and thecurrency
was unifiedduring
1958-61.By 1954-5,thesystem
of importdutyand commodity
tax rebatesfor
had
been
In
exportableproduction already
implemented. 1956,manufacturers
were allowedto retainup to 80% of the foreignexchangetheyearnedfrom
exportsand use it fortheirownimportneeds.(Thisratiowas raisedto 100% of
formostitemsaftertheexchangeratereform
of 1958.)In 1957,a
exportearnings
was started.Finally,the multiple
relatively
generousexportcreditprogramme
rate
was
unified
1958-61
in severalstages:(1) in April
exchange
system
during
intotwobuyingrates,inparallel
1958,themultiple
buyingrateswereconsolidated
withtwosellingrates;(2) inNovember1958,exportsand imports
underthelower
ratewerebroughtup to thehigherrate;and (3) further
minordevaluations
and
wereundertaken
twoyears(Hong,1993;Lin,
simplifications
duringthefollowing
5 It is true
in thepre-1964periodmay
that,in thepresenceofsunkcostsassociatedwithexporting,
uncertainty
have preventedentrepreneurs
fromswitching
existing
productionfromthe home marketto worldmarkets.
ofswitching
itentailedtheestablishment
However,theexportboomthattookplacewasnota matter
production:
ofnewcapacityspecifically
oriented
towards
markets.
Withgreater
in relative
thefirstincentives,
foreign
stability
ordereffect
shouldhavebeento enhancetheprofitability
ofinvesting
in newcapacityforbothforeign
andhome
markets.
6 In discussing
thesame issue,Franketal. (1975) drawwhatis in myjudgementthecorrectconclusion:’it is
thatSouthKoreanexports
wereconstrained
morebythecapacitytoproducegoodsthan
plausibleto hypothesize
of producingforexportinsteadof domesticmarkets’.
To extendthisto itslogical
by therelativeprofitability
searchforexplanations
forwhyit became profitable
to investand expand
conclusion,we musttherefore
productive
capacity.
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65
GROWTHPOLICY
130
50
45^
-120
.
40
-110
40J-\
Real exchange rate
L 35
-0
-100 1
30-
-90
g 25x
W 20 –
Exports/GDP
-80
_
0
o
c
– 70 t0
a:
15 10 –60
-50
50
I
1960
I1 I
62
1
64
66
68
I
70
72
74
I
76
78
I
80
40
Figure 5. Real oxchsnge rates and exports: Taiwan, 1960-81
Sources:
Kuo (1983, Table 14.4) and CouncilforEconomicPlanningand Development,Taiwan
Data Book,1982 and 1991.
Statistical
1973). By July 1960, the differencebetween the officialexchange rate and the
marketprice of foreigncurrencyhad become insignificant.
Unlike in Korea, we do not have a synthetic
measure of an effective
exchange
rate forexporters.So we have to contentourselveswith a simplereal exchange
rate index (not inclusive of export subsidies),which is plotted in Figure 5.
However,as discussedabove, we knowthatall the significant
exportsubsidieshad
alreadybeen deployedby thelate 1950s. ThereforeFigure5 shouldgiveus a fairly
of exportssince 1960. The
accurate idea of the trendin the relativeprofitability
diagramshowsthattheinitialexportspurt(in 1963-4) was actuallyassociatedwith
a decrease in exportincentives,indicatedby a real appreciationof around 10%
of
(the product of a fixed exchange rate). After 1964, the relativeprofitability
exports increased steadily until 1973. But it was not until 1969 that the
export-GDP ratio resumedits climb. By the early 1980s, the relativeprofitability
of exportsstood roughlyat itslevel of 1961, yetthe export-GDP ratio was more
than four times as large. It is a safe guess that no internationaleconomist,
presentedwitha real exchangerate chartsuch as the one in Figure5, would have
predicteda fourfoldincreasein the exports-GDP ratio.(The real exchangerate in
exportables,relative
question is the domesticprice of tradables,more specifically
to the price of non-tradables.This ratio can change considerablyeven in a ‘small’
countrywithno marketpower in internationaltrade.)
With regardto importliberalization,the Taiwanese patternis again similarto
Korea’s. There is a trendtowardsliberalizationafter1964, but thisis verymuch
the consequence of the increasein exportsand the improvementof the balance of
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66
RODRIK
DAM RODRIK
DANI
paymentsposition.In any case, the openingup is hardlydrastic.As in Ko