The document discusses the economic growth of South Korea and Taiwan from the 1960s. It argues that their growth was not solely due to export promotion as conventional economics believes. While exports increased, profits from exports alone did not account for the aggregate economic performance. Rather, the main drivers were government intervention to remove coordination failures, investment-stimulating policies, and efficient industrial development. The governments coordinated private investments, encouraged exports through exchange rate policies, and imported capital goods which increased investment and exports together in a virtuous cycle. Initial conditions like education levels and equitable wealth distribution also contributed significantly to the countries' growth trajectories.

1. Getting Intervention Right:
How South Korea and Taiwan Grew Rich
by Dani Rodrik
Miae Hwang
Govinda Shah
Ly Sievleang
Taejun (TJ) Cha
Titus Obiezue

2. Introduction
 In 1960s – The two countries was poorer than many sub-Saharan countries
 But increase in average per capita income of South Korea and Taiwan – 6.8% and
6.2% respectively since then.
 Which left not only African Countries but also Mexico and Argentina far behind.
 Orthodox economics believes the miraculous growth happens due to export
promotion
 But is it true? Need to think again.
 Because profitability of exports during 1960s too insignificant for aggregate
economic performance
 The main reason of economic take off is investment boom under sound investment
environment and the government efficient intervention in industrial development
and market

3. Main Discussion of the paper
 The shortcomings of the export-based explanations
 Distinct initial conditions – relative abundance of human
capital and equitable income and wealth distribution
 Role of government in removing Coordination failure
 Investment stimulating policies
 Detailed interventions carried out efficiently by both
governments

4. Chapter 2:
THE CONTOURS OF A MIRACLE

5. 1. Per-capita growth rate, 1954-1960
2. Export/GDP ratios, 1952-90
This sections contains statistics only
3. Investment/GDP ratio, 1951-90
4. Comparative Productivity Growth
Statistics(1966-1970)

6. Chapter 3:
WHAT IS WRONG WITH THE EXPORT-LED
GROWTH HYPOTHESIS?

7. What is Wrong with the Export-Led Growth Hypothesis ?
• Message from Ian Little :
• The outstanding success of Korea and Taiwan from the early 1960s to
the mid-1970s was based on:
• Phenomenal growth of labor-intensive manufactures
• Exports were profitable
• Well-educated hard working docile labor force
• High profits and increased earnings for recruits to the industrial
labor force led to a very rapid in savings.
• The Switch in relative incentives towards exports in the early 1960s was not
significant enough to account for the export boom
• Both South Korea and Taiwan, most of the important export
incentives had already been in place for several years before the
export started.

8. KOREA
• Under the Rhee government of the 1950s:
• Korean was preoccupied by largely political considerations, and the
government attached no particular importance to either economic
growth or exports ( Jones and Sakong, 1980)
• There were multiple exchange rates and a haphazard, ineffective
programme of export subsidies ( Frank et al., 1975).
• After 1958, export incentives were increased :
• exporters were given tariff exemption on imports of raw materials and
spare parts in 1959.
• Subsidized credit was made available to exporters for up to 75% of
their production cost.
• Devaluation of the currency in 1961 brought the official exchange rate
close to the free-market rate.

9. • Under President Park, 1961 :
• The scope of export subsidization was greatly enlarged.
• The income tax on export earnings was reduced.
• There were also direct cash grants on export, but phased out
in 1965.
• Rising of inflation in 1962-3 and a renewed gap between
official and parallel exchange rates in 1963.
• The large devaluation in 1964 served once again to unify the
currency
• After 1965, export subsidy programs were expanded further.
• Giving priority to exporters in acquiring the import license
• Exporters were allowed to automatic access to duty-free imports
of raw material and intermediate inputs
• Wastage allowance
KOREA

10. Export-oriented policies were responsible
for the increase in exports ?
Trade and exchange rate policies in
the 1960s were not overtly
discriminate against exports.
 Frank et al. 1975, calculated the
ratio of the effective exchange rate
for imports and noticing that the
resulting number is around 1 or
somewhat larger during 1960s; thus,
the export spurt was not associated
with a significant increase in the
relative profitability of exports.
Malson et al. :
 The industrial policy changes
that took place in first half of
the 1960s did not clearly
result in a significant increase
in the measurable incentive to
export.

11. Taiwan
• The export incentives were put in place in the mid-1950s
• The currency was unified during 1958-61.
• 1954-1955, the system of import duty and commodity tax
rebates for exportable production had already been
implemented.
• The multiple exchange rate system was unified during
1958-1961 in :
• April, 1958, the multiple buying rates were consolidated into
two buying rates, in parallel with two selling rates
• November, 1958, exports and imports under the lower rate
were brought up into the higher rate,
• Further minor devaluations and simplifications were
undertaken during 1958-61

12. Taiwan

13. The Rising Share of Exports in GDP is Consistent with
Investment-Led Growth

14. The Rising Share of Exports in GDP is Consistent with
Investment-Led Growth

15. The Role of Savings
• In both countries saving rose alongside investment and
therefore enabled growth to proceed without hitting
balance of payments constraints.
• Most accounts view the increase in savings in Korea and
Taiwan as having been the result of economic growth
itself and of a comparatively early demographic transition
( Collins and Park, 1989; Collins 1991; World Bank, 1993)
• Government policy was helpful. Real interest rates were
raised for deposit, Taiwan in 1950s, Korea 1960s.
• An increase in public savings made an important
contribution to total savings in both countries. Korea was
rapidly increasing contribution of government savings
enabled Korea to achieve very high rate of investment.

16. Recapitulation
•The switch towards export-oriented policies cannot
account for the sustained export boom since the
mid-1960s, and even less for the equally impressive
and sustained investment boom.
•The increasing share of exports in GDP is quite
consistent with a story of investment rather than
export-led growth.

17. Chapter 4:
Importance of Initial Conditions

18. Initial Condition #1 - High Social Indicators
Initial Condition #1 - High
Social Indicators:
1.Extent of dualism
2.Urbanization
3.Indigenous middle class
4.Social mobility
5.Literacy
6.Mass communications
7.Cultural and ethnic
homogeneity
8.Fertility
9.National integration
10. Sense of national unity
11. Modernization of outlook

19. Socioeconomic Development and Income
Index of socioeconomic
development (1960s)
Per-capita GNP, 1961 ($)
South Korea 0.85 73
Taiwan 1.05 145
Brazil 0.79 186
Cambodia -0.55 101
Ivory Coast -0.98 184
Morocco -0.57 150
Cyprus 1.08 416
Jamaica 1.06 436
Sources: Adelman and Morris, 1967
Initial Condition #1 - High Social Indicators

20. Initial Condition #2
Considerably Better Educated Labor Force
• Universal primary school enrolment (almost 100%,
whilst the norm was around 60%)
• Double the literacy rates and secondary school
enrolment ratios

21. Educational Indicators
Primary School
Enrolment Ratio
Secondary School
Enrolment Ratio
Literacy Rate
Korea
Predicted = 0.57
Actual = 0.94
Predicted = 0.10
Actual = 0.27
Predicted = 0.31
Actual = 0.71
Taiwan
Predicted = 0.62
Actual = 0.96
Predicted = 0.12
Actual = 0.28
Predicted = 0.36
Actual = 0.54
Sources: Adelman and Morris, 1967
Initial Condition #2
Considerably Better Educated Labor Force

22. Initial Condition #3
Equal Distribution of Income and Wealth
• Korea and Taiwan both had exceptionally equal
distributions of income and wealth that were due
to:
1. Long-standing historical reasons
2. Serious land reforms

23. Sources: Alesina and Rodrik, 1994
Measures of Income and Land Distribution
Initial Condition #3
Equal Distribution of Income and Wealth

24. Importance of the Initial Conditions
• These initial conditions account, in a statistical sense, for a
large part of the two countries’ economic performance
since 1960.
• The primary enrolment rate has a positive and statistically
significant coefficient.
• There is also a strong negative association between
inequality and subsequent growth.

25. Growth Regressions
Note that investment as an explanatory variable is excluded
Importance of the Initial Conditions

26. Proportion of Growth Explained by Initial Conditions
• In a statistical sense, there is nothing “miraculous” about the experience.
• In fact, the real outliers are countries such as Argentina and India (whose actual growth is
vastly overpredicted) or Brazil (whose growth is vastly underpredicted).
Importance of the Initial Conditions

27. Chapter 5:
The Coordination Failure Interpretation

28. The Argument
• Explanations to account for the economic performance.
• Explanations are constructed along the following lines:
1. Advantageous social infrastructure
2. Under decentralised market conditions, a situation of coordination failure occurred
3. Government interventions since the late 1950s
4. Private investors and entrepreneurs responded well to the government measures and
brought about profits (both financial and social).
5. Favourable initial conditions for the leadership and government
6. Investment as a share of GDP and imports of capital goods rose, and with appropriate
macroeconomic and exchange rate policies, exports rose alongside
7. Increase in exports compensated the increase in imports of capital goods. Nonetheless,
the increase in exports was a consequence of the increase in investments

29. A Framework of Analysis
• Two claims in the explanation:
1.Both countries were ready for an economic take-off but was hindered by
coordination failure.
2.Government intervention was critical in overcoming the coordination failure
problem.
• Prerequisites for the problem of coordination failure to become a critical issue:
• Some degree of non-tradability in the technologies and goods associated with
the modern sector
• Economies of scale
• Skilled labor force
• Low physical capital

30. Case Studies: Hyundai and Lucky-Goldstar
• The cases of both Hyundai and Lucky-Goldstar illustrate the
following:
• The importance of specialised labor skills
• Korean government policies were highly partial to
conglomerates
• Imperfect tradability of technology and its interaction with
scale economies
• Korean policy-makers viewed the economy and their role in
it has parallels with the logic of the coordination failure

31. Chapter 6:
GOVERNMENT POLICIES TO SUBSIDIZE AND
COORDINATE PRIVATE INVESTMENT

32. GOVERNMENT POLICIES TO SUBSIDIZE AND COORDINATE PRIVATE
INVESTMENT (TO INCREASE THE PROFITABILITY OF INVESTMENT)
1. Improving the investment climate
2. Investment subsidies
3. Direct co-ordination of investment decisions
4. Use of public investment and public enterprise

33.  the Nineteen-Point Reform Programme simplified
administrative procedures and liberalized the regulative
measures.
 Locking Up Strategy; the episode served to underline the
expectation that entrepreneurs were to invest in productive
activities rather than rent seeking.
1. Improving the investment climate

34. 2. Investment subsidies (Korea)

35.  The most important direct subsidies in Taiwan came in the form of tax
incentives.
 The maximum business income tax paid by enterprises was reduced to
18% of annual income (from a previous maximum of 32.5%);
 the tax holiday for new investments was extended from three to five
years;
 tax exemption was given to undistributed dividends for reinvestment, to
2% of foreign exchange earnings, and to proceeds of export sales;
 'productive' real estate was made either exempt from stamp tax and
deed tax, or taxable at reduced rates;
Investment subsidies (Taiwan)

37. 3. Direct co-ordination of investment decisions
 In addition to providing subsidies, the Korean and Taiwanese
governments played a much more direct, hands-on role by organizing
private entrepreneurs into investments that they may not otherwise have
made.
'Mr Kim [the founder of Daewoo] found himself in shipbuilding in 1978,
when the government twisted his arm to take over a near-bankrupt project
to build a giant shipyard at Okpo, on Koje island near the southern port of
Pusan. The Okpo Shipyard is now 'at the heart of... [Korea's] achievement'
in shipbuilding.

38. 4. Use of public investment and public enterprise

39. Why interventions have been successful in
Taiwan and Korea and not elsewhere?
 The availability of relatively skilled labor,
enabling the formation of a competent
bureaucracy.
 An exceptionally high degree of equality in
income and wealth

40. 8. SOME FREQUENTLY ASKED QUESTIONS

41. ■Korean and Taiwan governments
both exports and investment
None of this is very helpful in understanding what made these countries take off
Investment booms would not have been possible in the presence of gross
policy biases against exports, but that these booms were compatible with a
wide range of trade policy options.
1. Can we really distinguish between export and investment strategies?
However
Why did investment and exports respond so vigorously to government
policies, and which of these served as the driving force behind economic
growth?

42. 2. Doesn't the experience of many other countries show that investment is not
enough for sustained growth?
■Comparing with the Soviet Union & Soviet-type economies is not good
Because..
Economic systems lacking markets and private property, and in which both the level
and allocation of investment are determined by central planners, to market systems
where investment decisions are made on the basis of profitability.
all theories of growth are
based at least in part on
capital accumulation

43. First, There is nothing implausible about the presence of these conditions in the
South Korea and Taiwan of the 1960s.
Second, The framework I have proposed here helps us make sense of the findings
of this case study literature, something that is hard to do with the
conventional approach. This approach also clarifies why 'picking
winners' was not so difficult in the early years of the Korean and
Taiwanese experience.
Third, Hong Kong was already a high-investment country by 1960 (20% of GDP)
→double the figure for Korea and Taiwan at the time.
And the absence of government policy in this regard reveals itself in an
investment ratio that has remained virtually flat since 1960.
3. Isn't the evidence on coordination failures too weak in view of failed
government interventions elsewhere?
How is it possible for governments to 'pick the winners'?
-And what about the example of free-market, yet successful, Hong Kong?
A
Q

44. 4. Doesn't the initial imbalance between human and physical capital suggest an even
simpler story of catch-up, with little role for government policy?
■ Growth show that an initial imbalance between human and physical capital
speeds up growth
It would seem plausible that the difference in outcomes has much to do with
differing government policies in the two sets of countries.

45. Conclusion

46. 1. Government policy was a hindrance, but this
countries overcame it nonetheless
2. It was irrelevant, not helping growth but not
hindering it either
3. It was helpful, though not essential
4. It was necessary for the growth experience of these
countries
Proposition

47. 1. Government policy was a hindrance, but this
countries overcame it nonetheless
2. It was irrelevant, not helping growth but not
hindering it either
3. It was helpful, though not essential
4. It was necessary for the growth experience of these
countries
The experience of Taiwan and South Korea was
far from exemplary throughout the 1950s
Proposition

48. What they were doing is Important
 Coordinating and encouraging private investments with a
high degree of linkage within the modern sector.
 Export-oriented policies
(and chief among them exchange rate policies)
→steady rise in imported capital goods
Having high payoff because they helped remove coordination
failures in economies where the latent return to investment
was already high

49. OPINION
The reason for the beginning of rapid export expansion
was (1) the reform of foreign exchange system from
multiple exchange rates to unified exchange rate, and (2)
won overvaluation was almost eliminated
the rapid export expansion in the early 1960s was
followed by the big surge in investment in the second half
of the 1960s. The investment surge was as a result of the
repayment guarantee of foreign loans and financial
reform in 1965.
Exports do not automatically increase simply because
imports increase. Korea’s rapid growth was export-led,
not investment-led.

50. Thank you 