A Comparative Study of Development Mechanisms in Korea and Taiwan: Introductory Analysis
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The Developing Economies, XXXV-4 (December 1997): 341–57 A COMPARATIVE STUDY OF DEVELOPMENT MECHANISMS IN KOREA AND TAIWAN: INTRODUCTORY ANALYSIS TAMIO HATTORI YUKIHITO SATO$ INTRODUCTION HE extremely rare type of high-level, sustained postwar economic growth experienced by the Republic of Korea (hereafter Korea) and Taiwan has T drawn the attention of many scholars interested in economic development. Many have also attempted to analyze the two economies as examples of identical economic phenomena. Since both economies’ development pattern can be charac- terized by export-led industrialization depending on the Japanese and U.S. mar- kets, such views are not at all surprising. However, having a common development pattern does not necessarily guarantee the existence of a common mechanism by which development was achieved. In fact, there is a heated debate in progress con- cerning the way in which Korea and Taiwan achieved development between those who support a market-led development hypothesis and those who support a gov- ernment-led development hypothesis. In the present paper, we aim to rid ourselves of such a debate by suggesting that there were different mechanisms by which the two economies developed and dis- cussing the reasons why these mechanisms are different. In Section I, we will de- fine what we mean by “development pattern” and “development mechanism.” In Section II we will verify the similarity of Korea and Taiwan with respect to high- level economic growth and their development patterns. Then in Section III, we will review the research to date concerning development mechanism, show that both the market-led and government-led development hypotheses have been built upon strong a priori assumptions, and argue that the similarities and differences between development mechanisms in the two economies should be reexamined after re- moving such assumptions from consideration. This is one important aim of this paper. In Section IV, we will attempt to show through a comparison of trade bal- ances, growth of total factor productivity (TFP), enterprise and business-group scale, and the development processes of individual industries in the two economies that it is impossible to imagine that Korea and Taiwan developed by the same 342 THE DEVELOPING ECONOMIES Fig. 1. Development Pattern and Development Mechanism Political factors, Development Development Economic Social factors mechanism pattern, development (narrow meaning), Industrialization / Government / Agricultural Market development, etc. Development mechanism (broader meaning) Source: Prepared by the authors. mechanism. Okuda’s paper in this special issue shows us the difference in TFP growth between two economies. In our investigation of enterprise scale, we will rely on the results of the research done by Abe and Kawakami, and with respect to our industrial analysis, we will rely on Sato$’s research on the machine-tool and electronics industries and Abe and Kawakami’s research on synthetic fiber indus- try. Studies of enterprise scale and the electronics industry are also contained in this issue. Section V lays out the other important aim of this paper: to discuss the reasons why the development mechanisms in the two economies differ, by offering three explanatory hypotheses based on accumulation at the starting point of post- war industrialization, the relationship between government and society, and the mechanism of social network formation. We will rely on the paper written for this special issue by Wakabayashi concerning the relationship between government and society and on the papers written by Hattori and Numazaki on social network formation. A concluding section will outline the implications of our study. I. DEVELOPMENT PATTERN AND DEVELOPMENT MECHANISM We will consider the reasons for high-level economic growth in Korea and Taiwan as multifaceted like Figure 1. Here we would like to define two elements of such a logical structure: “pattern” and “mechanism.”1 To begin with, there are theoretically several number of paths economies can take in order to achieve economic development. The first step involves a choice between industrialization and agricultural development: the industrialization pat- tern may be of a domestic market-led or export-led type.2 In addition, there is also 1 Lewis (1984, p. 4) has classified the problem of development into “pattern” and “mechanism” (even though he used the term “engine of growth” instead of “mechanism”). However, the discus- sion in this paper does not necessarily agree with the content of Lewis’s research. 2 These two types of industrialization pattern are not related to government policy directions, but are rather classifications based on high or low levels of reliance by manufacturers on overseas markets measured in actual economic performance figures. INTRODUCTORY ANALYSIS 343 a choice between whether final, intermediate, and capital-goods markets will be developed together or in some sort of time succession. These kinds of path we will call “development patterns.” If there is no one to decide which of the above paths to take and no one lead the economy along the path, no economic development can be realized. In the present paper, we will compare differences and similarities in “development mechanism” by comparing who chose a certain path to development and on the basis of what kind of principles such a choice was made. Therefore, we consider the market-led development hypothesis and the government-led development hypothesis as points of debate over “development mechanism.” Under a market-led development mechanism, households and private enterprises make economic decisions based on the principles of market-based competition; while under a government-led devel- opment mechanism, political leaders make the choice of which path they will take and attempt to directly and indirectly mobilize resources to the cause of develop- ment and growth. As we will argue in Section V, the kind of “development mechanism” that will result is determined by various factors, in particular political and social factors. The ways in which such determinative factors are regarded are a “development mechanisms” in the broader sense, while the way in which a certain “development pattern” is chosen is “a development mechanism” in the narrow sense. II. SIMILARITIES IN DEVELOPMENT PATTERNS: EXPORT-LED INDUSTRIALIZATION RELYING ON U.S. AND JAPANESE MARKETS In this section, we will discuss the fact that the high levels of economic growth recorded by Korea and Taiwan were achieved through extremely similar develop- ment patterns. Yearly growth rates in the two economies’ respective per capita GNPs between 1965 and 1990 averaged 7.1 per cent (Table I). Only the country of Botswana performed better (World Bank 1992; ROC 1994). Also the fact that such high economic growth rates were accompanied by improvements in income distri- bution was one more characteristic feature of economic development in both economies (World Bank 1993, pp. 29–32). As to the actual pattern, first, it is clear that high-level economic growth was achieved through industrialization; that is, the growth of the manufacturing sector. The importance of manufacturing sectors in the GDP of both economies since the 1960s has increased by more than 10 per cent and reached peaks of 33 per cent in 1988 (Korea) and 40 per cent in 1986 (Taiwan). Both the speed and the high levels characterizing these two growth processes are indeed rare cases in the history of developing economies. Moreover, the structural features of the manufacturing sec- tors in the both economies are similar. That is to say, labor-intensive industries, 344 THE DEVELOPING ECONOMIES TABLE I ECONOMIC PERFORMANCE IN KOREA AND TAIWAN Korea Taiwan Per capital GNP (U.S.$) 1961 83 152 1990 5,659 7,954 Average growth rate of 1960–90 7.1 7.1 per capita GNP (%) Manufacturing output / GDP (%) 1961 9.1 18.9 Peak 33.2 (1988) 39.7 (1986) 1990 28.9 34.4 Exports / GDP (%) 1961 5.4 14.0 Peak 41.5 (1987) 56.7 (1986) 1990 31.0 46.5 Imports / GDP (%) 1961 14.9 21.1 Peak 41.5 (1981) 53.8 (1980) 1990 31.5 41.2 U.S. share of exports (%) Peak in 40.0 (1986) 48.8 (1984) the 1980s Japan share of imports (%) Peak in 34.4 (1986) 34.1 (1986) the 1980s Sources: Figures for Korea are from the Republic of Korea, National Statistical Office, Ma- jor Statistics of Korean Economy, various years; for Taiwan from the Republic of China, Council for Economic Planning and Development, Taiwan Statistical Data Book, various years. Note: Taiwan’s dependence on trade in terms of GNP. represented by textiles, developed during the early stages, while from the 1970s on both capital-intensive and technology-intensive industries evolved. Secondly, reliance on foreign trade rapidly grew in importance. While small economies like Korea and Taiwan are inclined to depend more on trade, exception- ally high-peak reliance levels of 42 per cent (Korea) and 54 per cent (Taiwan) were reached as to export share in 1980s. This phenomenon is very different from the situation in the newly industrializing countries of Latin America. Finally, Korea and Taiwan possessed similar trading partners. On the export side, they both sold their manufactured goods mainly to the United States, the world’s largest market, while on the import side, Japan was their main source of supply. At the peak years during the 1980s, both economies relied on the United States to consume 40 per cent or more of their exports, while over 30 per cent of the goods and services imported into the two economies came from Japan. Summing up the above three characteristics of development in Korea and Tai- wan, it is clear that both economies can be similarly described as developing INTRODUCTORY ANALYSIS 345 through “export-led industrialization with heavy reliance on the United States and Japan.” In other words, both economies achieved high-level growth by first import- ing intermediate and capital goods from Japan, processing them by utilizing rich sources of inexpensive labor, then exporting the finished goods to consumers in the United States.