China Rising: East Asian Responses China Rising: East Asian Responses Copyright 2006 by Park Bun Soon et al. All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by a reviewer who may quote brief passages in a review. inquiries should be addressed to: Samsung Economic Research Institute 7-8th Fl., Kukje Center Bldg., 191 Hangangro 2-ka, Yongsan-ku Seoul, Korea 140-702 Fax: 82-2-3780-8152 ISBN 89-7633-324-1 93320 Printed in the Republic of Korea China Rising: East Asian Responses Park Bun-Soon Choi Ho-Sang C.H. Kwan Chu-Chia Lin Shin Jang-Sup SAMSUNG ECONOMIC RESEARCH INSTITUTE contents CHAPTER I INTRODUCTION: PURPOSE AND OVERVIEW Park Bun-Soon Research fellow, Samsung Economic Research Institute 1 Growth Patterns of East Asian Economies 11 2 Implications of China’s Rise for East Asia 15 3 Organization of the Book 22 CHAPTER II KOREA’S RESPONSE TO CHINA RISING Choi Ho-Sang Research fellow, Samsung Economic Research Institute 1 Introduction 33 2 The Growth Potential of Korea’s Economy Being Undermined 35 3 Economic Cooperation with China and Its Impact 43 4 Policy Suggestions: Creating a Basis for an Economic Hub in Northeast Asia 56 CHAPTER III THE RISE OF CHINA: CHALLENGES AND OPPORTUNITIES FOR JAPAN C.H. Kwan Senior fellow, Nomura Institute of Capital Markets Research 1 An Evaluation of the Chinese Economy 67 2 Complementary Relations between Japan and China 75 3 The Macroeconomic Impact on Japan of China’s Rise 84 4 Japan Coping with the Rise of China: A Microeconomic Perspective 94 5 In Search of a Win-Win Game 101 CHAPTER IV TAIWAN: INVESTMENT IN CHINA AND STRUCTURAL CHANGE Chu-Chia Lin Professor, National Chengchi University 1 Introduction 107 6 2 Bilateral Trade across the Taiwan Strait and Taiwan’s Investment in China 110 3 Economic Impact and Structural Change for Taiwan 119 4 Production Integration and International Competitiveness 130 5 Taiwan’s Economic Policy toward China 137 6 Conclusion 142 CHAPTER V RESPONSES TO THE EMERGING CHINA: SINGAPORE AND HONG KONG Shin Jang-Sup Associate Professor, National University of Singapore 1 Introduction 149 2 Singapore and Hong Kong: Different Paths of Economic Development 151 3 Embracing China’s Growing Economy 157 4 Responding to Competition from China 165 5 Conclusion 180 CHAPTER VI THE RISE OF CHINA AND THE ECONOMIC INTEGRATION CHAPTER VI OF EAST ASIA Park Bun-Soon Research fellow, Samsung Economic Research Institute 1 Introduction 189 2 Japan and Economic Cooperation in East Asia 191 3 The Collapse of Existing Order 196 4 The “Lily–Pad” Model of Regional Development 207 5 Conclusion 214 7 CHAPTER I INTRODUCTION: PURPOSE AND OVERVIEW Park Bun-Soon, Samsung Economic Research Institute 1 Growth Pattern of East Asian Economies Since the 1960s the economy of East Asia has grown at an unprecedented rate. The growth in the region differs from that in other countries in several respects. First, East Asian countries have grown in a sequential manner. Japan was first to achieve dramatic growth, in the 1950s and 1960s, followed by the newly industrializing economies in the 1970s, some early-developing Southeast Asian countries in the mid-1980s, and China in the 1990s. Second, East Asia has accumulated capital for accelerated growth, pursued industrialization, and advanced into overseas markets. Even though East Asia, a monsoon region, was until the 1960s heavily dependent on agriculture, the countries there transformed themselves rapidly into global production bases. Third, East Asian governments have played a pivotal role, developing their economies through various policies that have been both practical and flexible. Behind these policies have stood the goals of improving market functions and increasing competitiveness.1 With the dramatic growth in East Asian economies, the region’s economic 1 The World Bank describes the East Asian approach to rapid economic growth as functional. High- performing Asian economies have used a variety of policies to achieve accumulation, allocation, and productivity growth. Stable macroeconomic management, human-resource development, limited price distortion, and acquisition of foreign technology have provided the basis for growth. Careful policy intervention, including financial controls (lower real interest rates), support of selected industries, and nonconventional trade policy to strengthen exports, has been used to achieve the integration and adjustment of economies. East Asian countries have, in other words, coordinated competitiveness with government intervention. Such policies have in turn contributed to sustainable rapid growth and a fair distribution of income, as well as accumulation, allocation, and productivity growth. (World Bank, The East Asian Miracle: Economic Growth and Public Policy, New York, Oxford University Press, 1993.) 1 Growth Pattern of East Asian Economies 11 structure has also changed rapidly. The agriculture industries of East Asian countries have shrunken, while urban sectors have grown and other industries have expanded. Since a disguised unemployment rate has decreased in rural areas, the income discrepancy between rural and urban areas have narrowed, and the benefits of growth have been distributed relatively fairly. In other words, quality of life has improved drastically in East Asia in a short time span. According to the headcount index, which identifies the percentage of a population living below the poverty line,2 in 1975 around 60% of East Asian population lived on the same amount of money. In 1995, however, only two of every ten people lived on less than one dollar per day. Thanks to income growth and improvements in medical services, life expectancy has also increased in the region. While Indonesians born in 1970 have an average life expectancy of 47.9, those born in 1995 a life expectancy fully 15 years longer. The rapidly growing economies of East Asia faced a crisis in 1997 and 1998. East Asian currencies depreciated drastically against the US dollar, and most East Asian countries saw their economies fail to grow during these two years, though China and Hong Kong were spared the devastation because they had pegged their currencies to the US dollar. Between 1996 and 2000, the economic growth rate of all East Asian countries except the Philippines was lower than that between 1990 and 1995. Only Taiwan, Malaysia, and China recorded more than 5% annual economic growth from 1996 to 2000; the growth rate in Thailand and Indonesia stayed at around 1% during the same period. The East Asian economies have not recovered their pre-crisis momentum. Though Southeast Asian countries witnessed a mild economic recovery in 2003, they remained dissatisfied with their growth rates, which were much lower than that between 1990 and 1995. While it may be premature to say that the countries of East Asia have left the currency crisis behind, it is clear they have survived it, and that their economies have at least stabilized. Japan’s economy has recovered dramatically since 2003. As for NIEs, despite lower economic growth rates, their foreign exchange market has 2 The poverty line is based on the 1985 purchasing power parity of US$1. People who live on less than US$1 per day are defined as living below the poverty line. 12 CHAPTER I Introduction: Purpose and Overview Table 1-1 Growth Rates of East Asian Countries (Unit: %) 1960-69 1970-79 1980-89 1990-95 1996-2000 2001 2002 2003 Japan 10.5 5.1 4.0 2.1 1.4 0.4 -0.3 2.4 Korea 7.6 9.3 7.8 7.8 4.6 3.8 7.0 3.1 China - 9.6 9.5 10.7 8.2 7.3 8.0 9.4 Taiwan 9.1 10.2 8.1 6.4 5.7 -2.2 3.6 3.2 Hong Kong 8.7 8.9 7.3 5.0 3.2 0.5 1.9 3.2 Singapore 8.7 9.4 7.3 8.6 4.8 -1.9 2.2 1.1 Malaysia - 8.0 5.8 8.9 6.7 0.3 4.2 5.3 Thailand 8.0 7.3 7.3 9.0 0.7 2.1 5.4 6.8 Indonesia 3.0 7.7 5.3 8.0 1.0 3.8 4.3 4.5 Philippines 4.8 6.1 1.9 2.3 4.0 3.0 3.1 4.7 Note: Growth rates are simple average of annual rates. Source: Statistical bureaus of each country, Asian Development Bank. stabilized, and foreign reserves have surged. Southeast Asian countries made their way out of the crisis through financial restructuring measures such as the injection of public funds. Though they have neither fully recovered their growth momentum nor reduced their heavy dependence on foreign markets, some early-developing Southeast Asian countries have also succeeded in stabilizing their economies. Entering the twenty-first century, however, East Asia was confronted by a new and unexpected challenge: the rise of China. China, which has affected East Asia’s economy since the mid-1990s, joined the World Trade Organization in 2001. This landmark event has been called the second opening of China—the first being the opening of the 1970s. In fact, until the nineteenth century, China had been arguably the most advanced country in the world for over 2000 years. Its per capita income was higher than that of Western countries until the twelfth century, and higher than the world’s per capita income until the eighteenth century. It was in China that printing technology and gunpowder were invented and unrivalled shipbuilding skills developed.3 In 1820, China accounted for around 33% of global 3 Carl J.