Notes on South Korea, Taiwan and the myth of the "East Asian
miracle"( by Róbinson Rojas Sandford)(January 1996)
------------------------------------------------------------
The notion of "guided capitalism" was put forward by scholars studying
the post 1945 process of industrialization in three societies: Japan,
South Korea and Taiwan. The three cases had in common a "singularity",
which was
-special access to United States' domestic market,
-heavy protectionist economic policies accepted by transnational
corporations,
-special flows of grants and aid from the United States,
-special flows of aid in food from the United States when land reform
was in progress, and
-special military treaties, which boosted sectors of the domestic
economies in the three societies.
The above five components of this singularity made possible an economic
system which was accurately described as
a "close liaison between government and business, in which
the government picked industrial winners, promoted them with cheap
bank loans, and pushed them down the path of exporting, transformed
Korea into an industrial powerhouse". (Financial Times, Nov. 7, 1995)
or,
"the alliance between strong leaders and strong bureaucracies is a
common feature...In Korea, a symbiotic relationship between business
and government was formed, a link that had some real costs but one
that also helped produce the successful 'chaebol', or conglomerates,
of today" ( "The East Asian Miracle. Economic growth and public
policy", A World Bank Policy Research Report, Cambridge
University Press, 1993)
Going to the details of the "symbiotic relationship", the World Bank
stated:
1.-the..."East Asian economies thrived because governments used a
combination of fundamental and interventionist policies to
(1) accumulate physical and human capital;
(2) allocate this capital to highly productive investments, and
(3) acquire and master technology and achieve rapid productivity
growth".
2.-"The East Asian economies encouraged investment by several means.
First, they did a better job than most developing economies of
creating infrastructure complementary to private investment.
Second, they created an investment-friendly environment through
a combination of tax policies and measures that kept the
relative prices of capital goods low, largely by maintaining
low tariffs on imported capital goods. These fundamental
policies had an important impact on private investment.
Third, and more controversial, most of these economies kept
deposit and lending rates below market clearing levels, a
practice known as financial repression".
3.-"...these economies used a combination of market mechanisms and
government intervention to guide allocative decisions in both the
labor and capital markets"..."Japan and Korea have at various times
used credit as a tool of industrial policy to promote the
shipbuilding, chemical, and automobile industries".
4.-"Japan, Korea, and, to a lesser extent, Taiwan restricted foreign
direct investment but offset this disadvantage by aggresively
acquiring foreign knowledge through licenses, overseas education,
and capital goods imports".
5.-"Most East Asian governments have pursued sector-specific industrial
policies to some degree. The best known instances include Japan's
policies to promote heavy industry in the 1950s and the subsequent
imitation of these policies in Korea. These policies included import
protection as well as subsidies for capital and other imported
inputs".
6.-"Although all of them except Hong Kong passed through an import-
substitution phase, with high and variable protection of domestic
import substitutes, these periods ended earlier than in other
economies"..."Japan, Korea, and Taiwan halted import liberalization,
often for extended periods, and heavily promoted exports. Thus,
while incentives were largely equal, they were the result of
countervailing subsidies rather than of trade neutrality".
7.-"Korea and Taiwan carried out comprehensive land reform programs".
(from "The East Asian Miracle...." (1993)
In none of the 384 pages of the World Bank book on the "miracle" there
is a single mention of the "singularity". There is not a single mention
of that those economies were successful in protecting themselves
from the predatory activities of transnational corporations because
of political considerations coming from the White House's foreign policy
to contain the expansion of the socialist camp during the cold war.
No mention either that successful land reforms had their foundation
on irrestricted flows of food from the United States.
No mention of special trade agreements, which made possible that Japan,
Taiwan and South Korea had special irrestricted access to the United
States domestic market, even in detriment of some North American
domestic industries. (See
R.Rojas: MAKING SENSE OF DEVELOPMENT STUDIES (notes))
THE MAKING OF A "MIRACLE"
The most obvious missing factor in the account of Korean-Taiwanese-
Japanese development described by the World Bank, International
Monetary Fund and echoed by second and third rate scholars in Western
Europe and the United States is the state of the world economy between
1950 and 1979, when the so called "East Asian miracle" was in the making.
Fuelled by the military-industrial economic alliance during the
hottest stage of the Cold War, that was a period of unparalleled
expansion of the world trade and of growth in the developed
countries which made possible the "financing" of the
industrialization and re-industrialization of countries like West
Germany, Northern Italy and France, in the Western border with
Soviet Union, and of Japan, South Korea and Taiwan in the Eastern
border with Soviet Union.
Another important factor was the US military aid. In the case of
Korea and Taiwan, it released government funds for investment in
infrastructure, industry and other important areas of the economy
without any need of exacting high levels of taxation, etc.
From Maddison, 1970:
"In Greece, Israel, Korea, and Taiwan, external finance was so
large that governments did not need to make the effort to
increase savings. In fact, they reduced private savings below
their normal 'autonomous' level and devoted the resources
instead to large military programmes"..."Foreign resources not
only financed investment, but also had indirect beneficial
effects. They greatly eased balance of payments constraints and
the domestic adjustments which would otherwise have been necessary
when demand exceeded domestic resources"..."They provided
governments with additional revenue and made it easier to promote
development without squeezing consumption and inhibiting production
incentives"..."They enabled countries to be more open to
international trade, and thus contributed to the productivity
benefits of increased specialization..." (see Box 1 to Box 4)
...This specific historical experience and geographical location
gave rise to dependent fast industrialization in East Asia, where
tha armies saw economic growth as a defense against a real external
threat (China for Taiwan, North Korea and China for South Korea)
which called for large military machines ( about 4-5% of the
labour force in the military apparatus).
To make the above possible, United States first, and Japan, next,
led the financing and the profiting:
--massive supplies of foodstuff from the U.S.A. in the 1950s and
the 1960s enabled food prices to be kept low while a land reform
was in progress.
--massive transfers (aid and grants) accounting for 50-90 %
of non residential investment in the first twenty years of
the "miracle" (see Boxes 2 and 4) made possible a development
planning protected from transnational corporations and foreign
indebtness
--Korea's two major markets were United States and Japan, and those
markets, because of political reasons, were open to Korean (and
Taiwanese) manufactured goods in favourable conditions until well
into the 1990s.
--From the 1950s to the 1960s, Korean and Taiwanese "miracles" were
United States' responsibility, from the 1970s onwards, they have
been Japanese responsibility. In 1969, in the well known Nixon-Sato
communique on Asian international relations, the US made it clear
that it was Japan's responsibility to safeguard American interests
as well as Japanese interests in South Korea. In september 1969,
Nagano Shigeo, president of the Fuji Iron and Steel Corporation,
when delivering a loan of US$ 140 million to finance South Korea's
Pohang Steel Mill, said:
"The fate of Japanese industry will be decided by the Indian
working forces of 500 million, the rich mineral resources of
Indonesia, and the prosperity of the Republic of Korea as the
anti-communist bulwark for the rest of free Asia. The Republic
of Korea indeed stands on the forefront of the free Asia".
And, of course, on the forefront of the Japanese economic colonies
in the region:
On May 9, 1995, the Financial Times published a piece under the
heading "South Korean exports ride the yen wave", saying that:
"...Another serious threat is the ballooning trade deficit caused
by higher prices for both Japanese capital imports and raw
materials and oil from elsewhere. The ministry of trade and
industry says the trade deficit could climb from its earlier
estimate of $9.5 bn (£5.9bn) to $20bn this year".
"...Almost every Korean industry, from consumer electronics to
cars, relies on Japanese capital imports. Some Korean
manufacturers, such as textile companies and producers of
camcorders and facsimile machines, are particularly dependent on
Japanese parts and equipment. Small and medium-sized Korean
companies also tend to base most of their imports and exports on
Japan, creating new problems for this vulnerable sector"...
(and still there are some writers, otherwise known as "experts in
development studies" who use South Korea as an example 'to disprove'
the validity of Latin American dependency theory!)
As early as in the late 1970s, the following was happening:
---South Korea produced less than half the grain it needed and only
a fifth of its energy. It had had to import technology and
components from Japan...more than half of Japan's exports to South
Korea were machinery for making chips, cars and cameras...Another
38% were parts and raw materials for those machines to
process...Japanese capital and technology dominated Korean
industry: between 40-100% of plate glass, chemicals, textiles,
aluminium, heavy chemical, locomotive wheels, electronics, steel
plates, cement, refrigerator and fertilizer. By and large, the
Japanese dominated 85% of South Korean export-oriented plants.
Then, firstly, South Korea IS NOT an example of export-led,
neo-liberal, free-market "healthy" development. South Korea is an
example of a rural society being "industrialized" by the United
States and Japan with the purpose of fighting against the communist
threat globally. Taiwan is the other example in the same region.
Secondly, South Korea's economic achievement is totally
a negation of neo-liberal, free-market myth. I quote from the Financial
Times, main editorial "Learning from South Korea", on November 7
1995:
"Few would deny that the South Korean model of "guided
capitalism" has proved a remarkable success in propelling that
country into the forefront of Asian economies over the past three
decades. Close liaison between government and business, in which
the government picked industrial winners, promoted them with cheap
bank loans, and pushed them down the path of exporting, transformed
Korea into an industrial powerhouse".
Of course, the Financial Times, following some academic
tradition of intellectual dishonesty, does not address the issues
of external financing, Japanese domination, and the Cold War, which
makes of the "East Asian miracle" a unique politically led economic
experiment which other less developed countries cannot copy in the
"post Cold War" times.
Thirdly, the "newly industrialized economies", "tigers" or
"miracles" are relying on international credit whose size is unrelated
to the real strength of their productive systems, creating an unhealthy
boom in flows of speculative capitals.
-------------------------------------------end of Notes 1996-----------
-BOX 1=====================================================
The empirical evidence
The most crucial stage in South Korea industrialization was
the period 1960-1970 (the building of infrastructure, land
reform and proto-industrialization). For that period,
Bienefeld and Godfrey (eds.), 1985, give the following
figures for savings and investment:
As % of GDP
Country Gross Domestic Gross Domestic
Saving Investment
Brazil 21 7.0
Costa Rica 13 7.1
India 14 5.6
Ireland 11 8.8
Kenya 17 7.0
South Korea 1 23.6
Tanzania 19 9.8
============================================================
-BOX 2======================================================
EXTERNAL FINANCE AS PERCENTAGE OF NON-RESIDENTIAL INVESTMENT
(1950 - 1967)
Israel 100.0 %
South Korea 94.3 %
Greece 68.5 %
Taiwan 44.3 %
Egypt 29.6 %
.....
.....
India 17.0 %
Chile 16.2 %
Mexico 12.1 %
Brazil 8.8 %
......
......
Average for 22 LDCs 24. 3 %
---------------------------------------
CONTRIBUTION OF EXTERNAL FINANCE TO ANNUAL GROWTH OF GDP
(1950 - 1967 )
Israel 61.3 %
South Korea 49.3 %
Greece 38.6 %
Taiwan 29.5 %
Egypt 30.6 %
.......
.......
India 17.7 %
Chile 12.5 %
Mexico 11.4 %
Brazil 8.3 %
.......
.......
Average for 22 LDCs 23.1 %
===========================================================
-BOX 3=====================================================
U.S. GRANTS AND SOFT CREDITS DURING THE PERIOD 1945-1965
US$ million
Marshall Plan Asia
France 8,639 South Korea 6,165
United Kingdom 7,600 India 5,289
Italy 5,422 Taiwan 3,948
West Germany 3.907 Japan 4,593
Turkey 4,315 Viet Nam 3,810
Greece 3,408 Pakistan 3,281
-----------------------------------------------------
TOTAL 33,291 TOTAL 27,086
source: Statistical Abstract of the United States, 1987
============================================================
-BOX 4======================================================
EXTERNAL COMPONENT OF NON-RESIDENTIAL FIXED INVESTMENT (NRFI)
(in percentages)
-----External financing------
Foreign Other TOTAL TOTAL
U.S. Aid Direct Long-term External Domestic
country NRFI + Grants Investment Capital Financing Financing
South Korea
1950-1965 100.0 87.6 0.6 8.3 96.6 3.5
1966-1975 100.0 19.3 2.7 26.5 48.5 51.5
1976-1981 100.0 2.4 0.4 19.2 22.0 78.0
1982-1985 100.0 1.2 0.4 12.1 13.7 86.3
Brazil
1950-1965 100.0 3.1 3.7 0.5 7.3 82.7
1966-1975 100.0 1.1 7.1 21.9 30.1 69.9
1976-1981 100.0 0.007 5.4 17.3 22.7 77.3
1982-1985 100.0 0.2 5.7 15.7 21.4 78.6
Mexico
1950-1965 100.0
1966-1975 100.0 0.3 5.4 14.3 20.0 80.0
1976-1981 100.0 0.2 5.1 20.4 25.7 74.3
1982-1985 100.0 0.6 3.0 21.5 25.1 74.9
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The most reliable figures for Taiwan are for the period
1950-1965, when U.S. Aid and Grants accounted for 95.8%
of total NRFI. During the period 1966-1975, the percentage
decreased to 6.9 %, but foreign direct investment and other
long-term capital increased far more than in the South
Korean case. Therefore, by and large, the figures for Taiwan
must be very similar to the figures for South Korea.
--Other long-term capital includes short and long-term
loans (the main component of the foreign debt)
NOTE: This table includes only U.S. Aid and Grants, and not
aid and grants from Japan, Germany, France, United
Kingdom, and international organizations. From official
Korean sources, foreign financial support was shared as
follows during the period 1959-1973:
United States 37%
Japan 20%
United Kingdom 11%
France 10%
West Germany 7%
ADB/IBRD 15%
Therefore is accurate to assume a much higher percentage
of foreign financing of Korean and Taiwanese "industrial
miracle". The same does not apply for Brazil and Mexico, where,
apart from U.S. Aid and Grants, the participation of the other
countries and agencies was negligible.
----------------------------
sources: World Bank, Statistical Abstract of the U.S.,
International Monetary Fund, and RRojas Research Unit.
==================================================================
sources:
WORLD TABLES 1980, 1983, 1987, 1993
WORLD DEVELOPMENT REPORT 1979, 1994
Journal of Contemporary Asia, Vol 8, No. 3, 1978
Statistical Abstract of the United States, 1987
TNCs in world development, 1983, UNCTC
International Financial Statistics Yearbook, 1985, IMF
"Economic Progress and Policy in Developing Countries", A.
Maddison, Unwin University Books, 1970
"The Struggle for Development. National Strategies
in an International Context", M. Bienefeld and M. Godfrey (eds.),
John Wiley and Sons Limited, 1985
Calculations and analysis by Dr. Robinson Rojas ---end of Box 4--------
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