2010 Public Disclosure Authorized ABCDE Annual World Bank Conference on Development Economics Global Public Disclosure Authorized
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2010 Public Disclosure Authorized ABCDE Annual World Bank Conference on Development Economics Global Public Disclosure Authorized Lessons from East Asia and the Global Financial Crisis Public Disclosure Authorized Edited by Justin Yifu Lin and Boris Pleskovic Public Disclosure Authorized Lessons from East Asia and the Global Financial Crisis ANNUAL WORLD BANK CONFERENCE ON DEVELOPMENT ECONOMICS Previous titles in this series: ABCDE 2009, Global: People, Politics, and Globalization ABCDE 2008, Global: Private Sector and Development ABCDE 2008, Regional: Higher Education and Development ABCDE 2007, Global: Rethinking Infrastructure for Development ABCDE 2007, Regional: Beyond Transition ABCDE 2006, Europe: Securing Development in an Unstable World ABCDE 2006: Growth and Integration ABCDE 2005, Europe: Are We on Track to Achieve the Millennium Development Goals? ABCDE 2005: Lessons of Experience ABCDE 2004, Europe: Economic Integration and Social Responsibility ABCDE 2004: Accelerating Development ABCDE 2003, Europe: Toward Pro-Poor Policies—Aid, Institutions, and Globalization ABCDE 2003: The New Reform Agenda Annual World Bank Conference on Development Economics—Global 2010 Lessons from East Asia and the Global Financial Crisis Edited by Justin Yifu Lin and Boris Pleskovic THE WORLD BANK Washington, D.C. © 2011 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved 1 2 3 4 14 13 12 11 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. Edited by Justin Yifu Lin and Boris Pleskovic Professional affiliations identified in this volume, unless otherwise noted, are as of the time of the conference, June 22–24, 2009. ISBN: 978-0-8213-8060-4 eISBN: 978-0-8213-8402-2 DOI: 10.1596/978-0-8213-8060-4 ISSN: 1813-9477 Contents ABOUT THIS BOOK ix INTRODUCTION 1 Justin Yifu Lin and Boris Pleskovic OPENING ADDRESS 15 Jeung-Hyun Yoon OPENING ADDRESS Learning from the Past to Reinvent the Future 19 Justin Yifu Lin KEYNOTE ADDRESS The Global Financial Crisis: Causes and Policy Responses 31 Il SaKong KEYNOTE ADDRESS Development Prospects in Light of the Global Financial Crisis 37 Anne O. Krueger KEYNOTE ADDRESS The Global Crisis: Is It Over Yet? 47 Simon Johnson Industrial Policy and Development Industrial Policy and Development: A Political Economy Perspective 61 James A. Robinson COMMENT 80 Bert Hofman V VI | CONTENTS Industrial Policy: Can We Go Beyond an Unproductive Confrontation? 83 Ha-Joon Chang COMMENT 110 Karen R. Polenske Social Capital, Institutions, and Development A Matter of Trust: Social Capital and Economic Development 119 Partha Dasgupta “Individual” Social Capital, “Social” Networks, and Their Linkages to Economic Game 157 Masahiko Aoki COMMENT 174 Mariano Tommasi Financial Crisis and Regulation Reform of the Global Regulatory System: Perspectives of East Asia’s Emerging Economies 187 Yung Chul Park Financial Crisis and the Paradox of Underregulation and Overregulation 213 Joshua Aizenman COMMENT 235 Jong-Wha Lee The Road Ahead to a Sustainable Global Economic System Lessons from the Recent Financial Crisis for Reforming National and International Financial Systems: The Road Ahead to a Sustainable Global Economic System 241 Stijn Claessens COMMENT 275 Yoon Je Cho A Sustainable Global Economic System after the “Great Recession”? Some Lessons from History 281 Giovanni Zanalda COMMENT 301 Jeromin Zettelmeyer CONTENTS | VII Innovation and Competition Innovation and Financial Globalization 309 Philip R. Lane Innovation, Competitiveness, and Growth: Korean Experiences 333 Sungchul Chung COMMENT 358 Jean-Jacques Dethier CLOSING SUMMARY 367 Alan Gelb and Shahrokh Fardoust CLOSING REMARKS 373 Young Geol Lee About This Book The Annual World Bank Conference on Development Economics (ABCDE) is a forum for discussion and debate of important policy issues facing developing coun- tries. The conferences emphasize the contribution that empirical economic research can make to understanding development processes and to formulating sound devel- opment policies. Conference papers are written by researchers in and outside the World Bank. The conference series was started in 1989. Conference papers are reviewed by the editors and are also subject to internal and external peer review. Some papers were revised after the conference, to reflect the comments made by dis- cussants or from the floor, while most discussants’ comments were not revised. As a result, discussants’ comments may refer to elements of the paper that no longer exist in their original form. Unless otherwise noted, participants’ affiliations identified in this volume are as of the time of the conference, June 22–24, 2009. The planning and organization of the June 2009 conference was a joint effort by the Government of the Republic of Korea, the Korea Development Institute (KDI), and the World Bank. We gratefully acknowledge timely and valuable contributions made by all the members of the Steering Committee and several anonymous reviewers. We would also like to thank Alan Gelb and Aehyung Kim for their insightful advice and Leita Jones, conference organizer, whose excellent organizational skills helped to ensure a successful conference. Finally, we thank the editorial staff from the World Bank’s Office of the Publisher for their efforts in pulling this volume together. IX Introduction JUSTIN YIFU LIN AND BORIS PLESKOVIC The Annual Bank Conference on Development Economics (ABCDE) brings together leading policy makers, academics, and researchers to advance the debate on key problems on development. The 2010 ABCDE was held in Seoul, Republic of Korea (June 22–24, 2009), in the midst of the deepest and longest world recession since the Great Depression. This year’s ABCDE included sessions on the following themes: industrial policy and development; social capital, institutions, and development; financial crisis and regulation; the road to a sustainable global economic system; and innovation and competition. In light of the global financial crisis, speakers touched on fundamental questions: What caused the current crisis, and how can the world economy recover? Are the standard prescriptions of development economics adequate to the task? Should developing countries alter their basic growth strategies? What is the proper role of the state? Should developing countries reexamine their commitment to free trade? How can global imbalances be rectified (especially between China and the United States)? Within the globalized financial system, how can regulation be improved? In attempting to answer these questions, many of the speakers searched for solutions in the lessons offered by the experience of Korea and other East Asian countries, which reacted with varying degrees of success to the financial crisis of the late 1990s. This volume includes selected papers from the conference as well as keynote addresses by Il SaKong, chairman of the Korean G-20 Summit Coordinating Commit- tee, and two distinguished economists: Anne Krueger, Stanford University and Johns Hopkins University, and Simon Johnson, Massachusetts Institute of Technology. Justin Yifu Lin is senior vice president and chief economist of the World Bank. Boris Pleskovic was (at the time of the conference) research manager for development economics at the World Bank. Annual World Bank Conference on Development Economics 2010, Global © 2011 The International Bank for Reconstruction and Development / The World Bank 1 2 | JUSTIN YIFU LIN AND BORIS PLESKOVIC In their opening remarks Jeung-Hyun Yoon, minister of strategy and finance of the Republic of Korea, and Justin Yifu Lin, senior vice president and chief economist of the World Bank, emphasize the development experience of East Asia, especially Korea’s rapid growth over the past half century. Yoon underscores that the global economy is still in the midst of crisis and that at this historic moment it is imperative to set a new direction for the world economy. Yoon recalls a crucial lesson of the Great Depression: international coordination is of the highest importance in overcoming a global financial crisis. He states that the two recent G-20 summits were a turning point in facing the challenges posed by the cur- rent crisis, and next year, when Korea assumes