Global Economy

Growth of the Global Economy - Reconstruction and Liberalisation

Reconstruction
● Postwar economic reconstruction entailed the repair of damaged agrarian and industrial
infrastructure so that the production process could be jump-started. The problems of
shortages of food and basic necessities, inflation and unemployment could subsequently
be alleviated. Globally, reconstruction was fuelled by aid, loans and investments.
● USA (Aid)
- USA held half the world’s capital stock and had the capacity to produce half the
world’s agricultural and industrial goods post-WW2 as it was largely unscathed.
- Marshall Plan provided $13b in aid to Western Europe from 1948 to 1952. Britain,
France and West Germany received most of this. From 1948 to 1952, industrial
production in Europe increased by 35% and the productive capacity of the West
greatly exceeded pre-war levels within a decade.
- About $6b went to Asia, with Japan getting more than $2b. Japan’s
manufacturing output doubled between 1949 and 1953 and her standard of living
returned to pre-war levels by 1952. Within a generation, it became America’s
major commercial and financial competitor in the world.
- US foreign aid programmes totalled $73b by 1960 and the economies which
grew the fastest were the greatest aid recipients.
● BWS and BWI
- BWS fixed gold at $35 an ounce, which was dependent on the US, who held at
least half of the world’s gold reserves up till the 1960s. This brought about
financial stability and predictability, thereby encouraging fixed capital formation,
foreign direct investments and trade.
- The IMF provided short term loans on stringent conditions to help countries tide
over difficult years when they faced trade deficits. In just 3 years from 1967 to
1970, $9b of loans were provided by the IMF.
- The World Bank helped to provide long-term, low-interest loans (which
commercial banks would not provide) to finance developmental projects such as
transport and education. It acted as an intermediary between borrowing countries
and providers of credit. Shortly after WW2, France received $250m to finance its
infrastructure products, while the Netherlands received $195m to import the
materials needed for reindustrialisation. It also developed agencies such as the
International Development Association in 1960 to provide long-term loans to the
poorest members at concessional rates. Poverty eradication also gained more
attention, with World Bank assistance provided for development projects in
Thailand and Indonesia. In the 1960s, World Bank commitments rose from
$600m to $1.7b within a decade.

Copyright ©2018 by CW Tan

 ● MNCs
- US firms’ investment in Europe and Japan rose from $2b in 1950 to over $40b in
the 1970s. These investments pumped in much needed capital to stimulate the
recovering economies of Western Europe and Japan and the transfer of skills
and technology from MNCs like General Motors, Ford and even Coca Cola
helped to grow the various industrial sectors, from the automobile industry to
consumer products.

Liberalisation / Trade
● Lifting of government control and restrictions and allowing for greater private
participation in the economy would promote development as the profit-driven interests of
private businesses would result in more rational economic decision-making. It also
opened up economies to foreign capital, investments and foreign export markets.
● USA
- Insatiable US market was an important driver of economic growth for
industrialising and industrialised countries. From 1950 to 1970, the US accounted
for 15% of world trade. Countries could sell what they produced to the US then
buy the most advanced capital goods from them.
- By 1967, the US imported more cars than they exported. This helped to grow
major car manufacturers from Asia and Europe. For example, Honda and Toyota
from Japan, and Audi and Mercedes from West Germany.
- In 1973, five of the top ten American corporations made 80% or more of their
profits abroad, showing that the US also benefitted from free trade.
● General Agreements on Tariffs and Trade (GATT)
- Series of legal agreements between countries to reduce trade barriers and
promote free trade.
- With the initial signing of GATT, there were tariff concessions affecting $10 billion
worth of trade and exports.
- In the 1970s, developing countries were given preferential access in markets on
developed countries.
- From the Geneva round in 1947 to the Kennedy round in the 1960s, the number
of participating countries increased from about 20 to 60 and tariff concessions
worth over $60b of trade were agreed upon. Korea joined GATT in 1967.
● MNCs
- By the mid-1970s, Western Europe and Japan were also investing in
less-developed economies. In 1967, the USA provided 50% of world FDI but only
28% in 1990, while Japan and West Germany provided 22% of FDI.
- Japanese firms were making substantial FDI into Southeast Asia in mining and
petroleum facilities, not just to secure reliable supplies of inexpensive raw
materials but also to develop new markets for Japanese manufactured products.
Average annual outflow of Japanese FDI rose from less than $4b in the 1970s to
more than $20b in the 1980s.

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 - German chemical MNCs such as Bayer and Hoechst expanded steadily since
the 1960s, by 1980s penetrated Western European and North American markets.
German car firm Volkswagen set up car factories in countries such as Argentina,
Brazil, Canada, Ecuador and Mexico.
- By 1973, MNCs had invested $200b around the world but only about a quarter
went to less developed countries; nonetheless, bringing new technology and
capital into less developed countries increased their productivity, incomes and
output. In most of Latin America, American MNCs accounted for a third to half of
industrial output. By 1975, it was estimated that 25% of FDI was made in the
Third World.
- By 1989, the largest 100 global companies were employing 12 million people
outside the borders of their home countries, boosting employment.
- Total FDI increased from about US$20 billion in 1970 to $200 billion in 1990.
- The growth and expansion of American MNCs such as Apple, Microsoft, Dell,
Disney, Amazon and Google in the 1990s allowed the US to once again regain
and cement its dominance in the economy as leaders in the areas of computer
software, popular entertainment, biotech, business services and
telecommunications. The US share of global incremental GDP in the period 1990
to 2000 was 42% of world total.
● Limitations of economic liberalisation: IMF harsh austerity measures, World Bank served
political purposes, MNCs held control over employment without social, political or
environmental responsibility.

Rise of West Europe and Japan & Decline of the USA

West Europe
- In 1949, up to 90% of Germany’s pre-war industrial capacity remained and could be
utilised. From 1946 to 1951, West German exports grew from $8b to $27b. With
American aid and a population of 52 million hungry for jobs, West German production
rose by 20% from 1957 and 1960, while it was only 9% for the USA.
- West German government kept wages low to allow German monopolies to reap
enormous profits to be used as capital for improving productivity growth.
- The US had pressured the Europeans to cooperate and integrate economically in the
early years, but Germany and France led the initiative to form the European Coal and
Steel Community (ECSC) in 1951, which abolished all trade barriers regarding coal and
steel, along with other agreements. Astonishingly rapid economic growth resulted,
leading to the idea of total economic integration of markets under the European
Economic Community formed in 1957.
- By the end of the 20th century, West Germany, France, the UK and Italy were
consistently ranked amongst the largest ten economies in the world.

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Japan
- WW2 resulted in destruction, homelessness, shortages and a need to pay reparations,
but Japan still possessed its industrial capacity left-over from the Meiji Restoration.
- During the American Occupation from 1945 to 1952, food, raw materials, capital and
new technology were brought in. By 1951, the US had poured in $2b in loans, aid and
investment into Japan. A security treaty in 1952 enabled resources to be allocated to
economic growth.
- Japanese ‘one-way street’ trade relationship with the USA.
- USA’s nuclear umbrella security (military expenditure limited to 1% of GDP) allowed
Japan to focus on economic development.
- Special Procurements deal allowed US army to spend $3.5b on Japanese supplies,
amounting to 27% of Japan’s total export trade.
- American investment was poured into oil refining and shipbuilding, which would fuel
future growth. By 1956, Japan had the world’s most modern shipyards and launched
26% of world shipping.
- Japanese government set up the Ministry of International Trade and Industry (MITI),
which formalised cooperation between the government and the private sector. When PM
Ikeda sought to double national income within ten years from 1961, it was quadrupled
instead by 1971 due to the strategic economic oversight.
- 1950s, advantage lay in low labour costs. 1960s, shift to capital-intensive sectors.
1970s, shift to technology-intensive sector.
- 1966-1970 were the peak years of Japanese growth - a staggering 14.6% per annum
- Provided Official Development Assistance (ODA) to East Asian countries to promote
regional economic cooperation. Indonesia was the largest recipient of Japanese ODA. In
1989, Japanese ODA exceeded US ODA by $500m. FDI into SEA for reliable supplies
of inexpensive raw materials and fossil fuels.

Challenges to US Dominance
- Twin Deficits - American trade balance turned negative in 1971, and a deficit of $40b by
1980. The US’ trading partners were becoming less dependent on American imports
while Americans found foreign imports less expensive and of comparable quality to
homegrown products. For example, American auto manufacturers were losing out to
Volkswagen by the 1960s and Honda and Nissan by the 1970s. In 1988, the US was
buying 2.5 times more from Japan than they sold to it. Vietnam War, which cost an
average of $2 billion a month, along with Kennedy’s ‘New Frontier’ and Lyndon
Johnson’s ‘Great Society’ social programmes cost spending on domestic programmes to
double from $100b in 1961 to $200b in 1970.
- Trade and FDI patterns shifted. From 1950 to 1970, US share of global exports in
manufactured goods shrank by 50%. In 1971, West Germany sold more manufactured
goods in the world markets than the US, while Japan’s portion of the global market rose
to 13%. Japanese FDI grew 30% per year in the 1970s, reaching $3b in March 1971.

Copyright ©2018 by CW Tan

Problems of Economic Liberalisation: Oil Crises, Protectionism, 1980s Debt Crisis

The Oil Crises of 1973 and 1979

- From 1945 to 1973, Saudi crude oil averaged less than $2 per barrel. 2,000 million
tonnes of oil were produced in 1968. Abundance and cheapness of oil made many
economies dependent on it for energy, including Japan and Germany who were totally
dependent on imported oil.
- The 1973-1974 oil shock was due to OPEC’s decision to increase oil prices in response
to the devaluation of the US dollar in 1971 (oil of price was denominated in dollars, so a
devaluation would reduce their real income) and American support for Israel in the 1973
Yom Kippur War, and America’s veto of a July 1973 UNSC resolution that deplored
Israel’s continuing occupation of Arab territory.
- Arab countries cut back production and embargoed shipments of crude oil to countries
that had supported Israel. In 1973, oil prices quadrupled to $12 a barrel. This resulted in
the worst economic crisis in the West since the Great Depression. In 1974, costs of
production went up by more than 10% in countries like the US and France, and more
than 20% in Japan, with a quarter of the inflationary surge due to the oil shock. Industrial
output dropped by 10% in the industrial world.
- In 1979, Islamic fundamentalists overthrew the Shah of Iran. The second largest oil
exporter now exported less oil at inconsistent rates. Oil prices rose from $13 a barrel in
1978 to $30 a barrel by early 1980.
- Oil importers around the world faced inflation, balance of payments deficits, recession
and shortage of consumer goods. Japanese housewives hoarded toilet paper while
American motorists had to queue for hours at gas stations.
- Resulting from both crises, the Arabs grew rich on petrodollars. Money was spent on
military weapons, building projects and official development assistance.
- However, developing countries who were oil importers had trouble paying for oil and the
higher costs of production. The first oil shock added about $30 billion to the import bill of
non-OPEC developing countries and the second oil shock added almost $50 billion.
They borrowed vast amounts for industrial purposes, setting the stage for the debt crisis.
- Short term emergency saving measures such as the halving on street lighting in the UK,
the rationing of oil and petrol and the ban on Sunday motoring in Belgium and Denmark.
- The attitude towards energy efficiency improved and more energy efficient modes of
production and transport were pursued. Alternative energy sources were also explored,
such as hydroelectric power, nuclear power and searching for oil fields in non-OPEC
countries such as South America. Through economic restructuring to move towards less
oil-intensive industries like electronics, Japan’s GDP to energy consumption coefficient
was halved in the 1980s.
- DCs formed alliances with oil-producing countries. US & Saudi Arabia; France & Algeria.
- OPEC’s share of oil supply dropped from 50% to 40% from 1970 to 1993.
- A reverse oil shock from 1985 to 1986 led prices to fall from $30 to $10.

Copyright ©2018 by CW Tan

Rise of Protectionism
- GATT was seen as a rich man’s club. By the end of the 1950s, its 37 members included
21 developed and 16 developing countries. While almost all developed countries were
present to partake in trade negotiations, most developing ones could not. Faced with
poor trade prospects, many turned to import-substitution industrialisation. This entailed
protectionist measures such as tariffs that protected domestic infant industries; yet, they
were easily out-competed and this hampered their development.
- In the developed world, the US was facing twin deficits in the 1970s and 1980s. The US
faced strong competition from Western Europe and Japan. The European Community
had an unemployment rate of 10% in 1988.
- Reasons for the rise of protectionism:
a. Increased use of non-tariff barriers - GATT had ironically increased the use of
NTBs such that 28% of all trade in industrial countries was affected by NTBs.
b. Adoption of import substitution industrialisation.
c. Economic slowdown in developed countries - largely due to oil shocks of the
1970s. US spending on imported oil rose from $4b in 1970 to $90b in 1980,
resulting in economic recessions. NTBs and retaliatory tariffs were thus
introduced, such as under the Omnibus Trade Act of 1988.
d. Competition among developed countries - as the US suffered from a $7b trade
deficit with Japan in 1980, calls emerged for the US to retaliate by introducing
anti-Japanese trade laws.
e. Competition from developing countries - Asian Newly Industrialising Economies
became major trading partners by the 1970s, thanks to their cheaper labour and
raw materials. Between the 1970s and 1990s, simple manufactures such as toys
and clothing as well as sophisticated industrial products from South Korea and
Taiwan were sold.
f. Domestic Political Pressures - Nixon promised to protect the textile industry
during his campaign for re-election. Developing Southeast Asian countries also
saw governments protecting uncompetitive big businesses for political support.
- ‘Infant industry’ argument makes sense if these would help nations become
self-sustaining and protectionist measures dropped afterwards. ‘Domestic production’
argument makes sense if it could reduce structural unemployment and increase
self-sufficiency. Most of the time, there would be misallocation of resources by the
government, complacency and inefficiency of protected industries (protection against
Japanese automobiles in the 1980s led to the deterioration of American automobiles in
the long run), higher prices and limited choices due to reluctance to share technology
and decline in diplomatic relations due to trade wars.
- The Common Agricultural Policy of the European Community had tariffs for Third World
producers to sell pineapples there. Producers faced a 9% tariff to sell pineapples, 32%
tariffs to sell tinned pineapples and 42% tariffs to sell pineapple juice.
- The protectionist policies in Thailand made foreign goods 5 times more expensive than
local goods in domestic markets, which nurtured complacency of local firms. By 1996,
Thailand’s export manufacturing growth reached 0%. (Indonesia reached 7% in 1993).

Copyright ©2018 by CW Tan

 - Trade wars between the USA and “Fortress Europe” or between the USA and Japan,
which only served to strain relations and reduce potential earnings on both sides, while
nurturing uncompetitive local industries.
- To balance free trade and protectionism, over a hundred regional trade groups were
formed by the end of 1994, partly thanks to the strengthening of multilateral trade rules
in the Uruguay round of GATT discussions. Regional blocs allowed members to
negotiate favourable terms of trade with the rest of the world. Examples include NAFTA
and AFTA, both started in 1992 with the objective of promoting free trade and
investments. Other examples include APEC and EEC.
- Protectionism only caused a slowdown in the growth of trade, not a decrease in trade.
Even following the 1997 AFC, global trade volume had grown 3.6% in 1998.

1980s Debt Crisis

- In the 1970s, easier loans were provided to the Third World by western commercial
banks. Poor investment decision, corruption and a lack of monitoring by creditors
resulted in the 1980s debt crisis when debtor nations were unable to repay the loans
they had taken.
- The colonial legacy left many Third World countries with an over-reliance on the export
of a few cash crops or low value-added primary products with minimal profits. Their
demand for manufactured goods grew faster than the developed world’s demand for raw
materials. Coupled with protectionist measures, Third World countries desperately
needed funds to sustain short-term spending and long-term industrialisation drives.
- OPEC members deposited $150b of petrodollars from the 1970s Oil Crises into global
financial markets between 1974 and 1980. Banks were quick to loan out these funds to
earn the interest needed to pay the OPEC members.
- Banks began to offer Third World governments loans at interest rates so low that they
were often negative rates when set against the rate of inflation. However, these rates
would be revised upwards over time. Banks believed that the Third World would be able
to repay the loans as it was hoped that they would use the loans to undertake
development schemes that would cause great economic growth.
- The US Federal Reserve continually raised interest rates in the early 1980s, up to
almost 20%. Interest rates around the world were pushed up as well. Between 1978 and
1983, Latin America’s total interest payments rose by 360%. By 1984, every 1%
increase in interest rates added $700m to the annual payments of Brazil. The share of
export earnings that had to be diverted to service debt in developing countries rose from
16% in 1977 to 25% in 1982, meaning less money for other uses.
- While global demand for third world exports (mainly commodities) dropped due to
recession and protectionism, their demand for imports did not. The trade deficit of
developing countries increased from $20b in 1979 to $90b in 1981. In the same period,
commodity prices dropped 28% while interest payments on loans increased by 75% in
real terms. Debts thus became harder to pay off.

Copyright ©2018 by CW Tan

- Loans were mismanaged. After the first oil crisis, up to $260b of the loans were spent on
buying oil at the new inflated prices. Between 1974 and 1985, $200b was stashed
overseas by corrupt leaders. 20% of loans were spent on military use, which did not
increase productive capacity.
- Banks had assumed that sovereign debt was a good risk and threw out elementary
precautions before providing loans. Unfortunately, external debt of developing countries
rose from $600b in 1980 to $1t in 1985. In 1990, debt and interest payments due from
the Third World was 3 times more than all the aid they received.
- Default on Loans in Latin America: Instead of cutting back on consumption in
response to the oil crises, governments simply borrowed more to maintain current levels.
Government external debt of Latin America thus rose tenfold in ten years from 1973 to
1983. Mexico, regarded as one of the safest debtor countries, defaulted on its debts in
August 1982. Brazil, the world’s largest debtor, defaulted on December 1982.
- Banks could not recall their loans or make new ones, so economic activity around the
world slowed down. Citicorp, the world’s biggest bank, announced a $2.5b loss,
reflecting that the shook ran deep in the global financial system.
- Attempted solutions: IMF helped to reschedule loans such that the repayment period
could be lengthened with reduced interest rates. In 1982, more than 20 countries were
negotiating with the IMF to find suitable repayment options. The IMF would plan a
programme of economic adjustment such as spending restraints and opening up to
foreign trade to curb deficits and inflation. IMF loans would be halted if the governments
failed to fulfill their commitments. By the end of 1983, 17 countries had adjustment plans
with the IMF.
- US tried to help through the 1989 Brady Plan (convince banks to give more loans) and
the 1985 Baker Plan (convince banks to write of debt). For example, in 1982, the US
forwarded to Mexico $2b in prepayments for oil and in credits for the purchase of US
agricultural products.
- Impact on the third world was very severe. IMF strategies that favoured liberalisation
and abandonment of ISI led to structural unemployment and lower production levels.
Real GDP growth fell in 1982 and 1983, and rose at a mere 1.9% in 1984. Education
and infrastructure developments were also reduced due to budget cuts.
- Austerity measures led to a decrease in standards of living. Food prices skyrocketed in
places like Brazil and Bolivia, leading to widespread malnourishment. Medical services
faltered due to lack of government provision; there was only one doctor for every 20,000
people in Senegal. UNICEF estimated that 1 million African children died in the 1980s as
a result of the budget cuts. Harshness of IMF austerity measures also destabilised the
social and political situation in debtor nations, with 56 major ‘IMF riots’ breaking out in
various developing countries between 1985 and 1992.
- Debt management eventually worked, with the successfully reformed debtor nations
returning to a state of creditworthiness by the 1990s. For example, Mexico’s economy
grew at an average annual rate of 3.5% between 1988 and 1992, and inflation was
reduced to 15% by 1992.

Copyright ©2018 by CW Tan

 - However, debtor nations experienced a “lost decade” which severely set back their
growth as a quarter to a third of export revenue went into servicing foreign debt such that
average growth in the Third World was less than 2% per year in the 1980s, compared to
the 6% per year in the 1970s.

Diminishing Role of the US in the Global Economy

- As the US was overwhelmed by its own economic problems, it could no longer
singlehandedly manage the BWS and coordinate the global economy. Other major
economies had to step up.
- In 1962, the 10 largest economies formed the Group of 10 (G10). The General
Agreement to Borrow signed between them lent the IMF up to $10b to loan out to
members for developmental needs. Subsequent plans set aside more than $20b for
borrowers between 1970 and 1981. The IMF thus became a reserve holder for the
developing world and played a huge role in managing the Third World Debt Crisis.
- When the US devalued its currency in 1971, the G10 swung into action to sign the
Smithsonian Agreement which replaced the world’s fixed exchange rate system with a
floating exchange rate regime.
- In September 1985, the US met with the Group of Five nations to develop the Plaza
Accords which would allow for the orderly depreciation of the dollar against other major
currencies.The G5 countries cooperated by intervening in their currency markets and
selling large amounts of dollar holdings to force its value down.

In the 1990s and beyond, however, the US continued to dominate the global economy.
USA EEC Japan

The end of the Cold War saw the
American economy rebound, as it
could lessen military commitments
and focus attention on its
domestic economy. The growth
and expansion of American MNCs
such as Apple, Microsoft, Dell,
Disney, Amazon and Google in
the 1990s allowed the US to once
again regain and cement its
dominance in the economy as
leaders in the areas of computer
software, popular entertainment,
biotech, business services and
telecommunications. The US
share of global incremental GDP
in the period 1990 to 2000 was
42% of world total.
The end of the Cold War
actually created problems
since the independent
Eastern European states
sought to join the
organisation. The richer
nations would have to
shoulder a larger burden of
the EEC budget compared
to the poorer new members.
The EEC became the EU in
1993, and since then 16
new members have joined.
The EU is beset with
internal problems and
disunity, and thus unlikely to
overshadow the US.
Japan never sought to
challenge US dominance
of the global economy,
preferring to focus on its
domestic growth. Japan
has been criticised for
contradicting international
free trade principles, such
as by subsidising its
electronics sector instead
of exposing them to
international competition.
In the 1990s, Japan was
also hit by a banking crisis
and the AFC.

Copyright ©2018 by CW Tan

 Asian Tigers
Economic Transformations
General
Korea In the early 1960s, Korea’s per capita income was about US$80, lower than Haiti and Ethiopia.
By 1990, Korea’s GNI per capita was more than US$8,000.

Taiwan In 1949, Taiwan had a GNP per capita of about US$200, an inflation rate of more than 3000%.
By 1990, Taiwan’s per capita GNP surpassed US$12,000 and she had an inflation rate of below 3%.

Agriculture to Industrial (ISI) [1950s]

Measures
1. Agricultural Development
Both Korea and Taiwan sought to improve the agricultural sector to reduce dependence on
agricultural imports. The agricultural surplus could then provide the capital for ISI.
Korea Korea banned the import of rice and established the Korea Fertilizer Corporation.

Taiwan Taiwan had a land reform program from 1949 to 1953.

2. ISI & Protectionism

For ISI, Korea and Taiwan nurtured their infant industries in the domestic market by
providing them capital from the US aid and also with protectionist measures.
Korea Direct import controls were in place where the government had an overall import quota system for
manufactured products that were considered import-substitutable and this went on until 1967.

Taiwan Taiwan too had protective tariffs, foreign exchange controls and an overall import quota system to
discourage imports of consumer goods.

Outcomes
Korea Agriculture, forestry and fishery contributed to about 45% of GNP in the 1950s.
By 1970s, it was only about 25% and in the 1980s less than 15%.
In the 1970s, consumer goods imports accounted for only 3% of total imports, with the bulk of
imports being capital goods. (crude oil and other raw materials)

Taiwan Agriculture that accounted for about 35% of the GDP in the 1950s accounted for less than 3% of the
GDP by the 2000s, while the share of industries has been increasing such that by 1958,
manufacturing output was already double that of 1950.
Import substitution in textiles, rubber and leather products, petroleum, coal and metal products.

Copyright ©2018 by CW Tan

 ISI to EOI [1960s]
Measures
1. Specific Measures
Korea The government held monthly Export Promotion Meetings and Briefings on Economic Trends chaired
by Park himself in order to allocate capital efficiently and meet global demands.

Taiwan The Nineteen Point Reform Program of 1961 moved Taiwan towards modernisation and export
expansion by removing any obstacles which tax, import duties or foreign exchange systems may
have posed to the export-oriented industrialisation process.
2. Trade Agencies
Korea The Korea Trade-Investment Promotion Agency (KOTRA) was instituted in 1962 to promote South
Korean exports in foreign markets through overseas market surveys, trade information services and
business matchmaking.

Taiwan The Taiwan External Trade Development Council (TAITRA) was founded in 1970 as Taiwan’s central
trade promotion agency. This helped Taiwanese businesses and manufacturers reinforce
international competitiveness through services such as trade, technical and managerial consultations
and international trade shows and exhibitions to promote Taiwanese exports in foreign markets.
Outcomes
Korea Foreign trade accounted for 60% of Korea’s GNP in 1975 and rose to about 67% in 1985.

Taiwan Exports accounted for less than 20% of Taiwan’s GDP in 1960 and this figure grew to about 60% in
1990 due to export-expansion.

Growth in FDI
Measures and Outcomes
Korea From 1967 to 1971, foreign investment increased 6-fold to almost US$100 million as a result of the
Foreign Capital Inducement Act amendment in 1966 that offered liberal incentives to attract FDI.
[Note that foreign loans made up 90% of foreign inflow of capital → FDI not as important]

Taiwan Total FDI increased from about US$11 million in the 1950s to about US$34 million (3-fold increase)
in the early 1960s due to the implementation of the Statute of Encouragement of Investment in 1961.

Light Industries to HCI [1970s]

Measures
1. State Enterprises
Korea The Pohang Iron and Steel Co. (state enterprise) was created in 1968 and its success spurred the
formation of other steel mills in Korea.

Taiwan China Petroleum and China Steel are largely successful state enterprises that helped the country
shift to heavy industries, in particular the steel, shipbuilding and petrochemical industries.

Copyright ©2018 by CW Tan

 2. Research
Korea The Korea Institute for Machinery and Metals (KIMM) was established in 1976.

Taiwan The Industrial Technology Research Institute (ITRI) and Institute for Information Industry (III) were
established in 1973 and 1979 respectively.
These research institutes provided the research and development (R&D) opportunities to aid in
the development of HCI and this was especially helpful to the SMEs in Taiwan that lacked the
capacity for R&D.
3. Financial Services
Korea The Korea Export-Import Bank was established in 1976 to provide medium and long-term loans for
foreign trade, especially in the export of capital goods like machinery.

Taiwan The China Export-Import Bank was established in 1979 in Taiwan to provide loans to foreign buyers
to facilitate purchase of domestically manufactured capital goods.
Outcomes
Korea Korea’s transport equipment’s share of exports increased from 1.5% in 1970 to 11.5% in 1981.
Export of iron and steel also rose from 1.6% in 1970 to 8.6% in 1981.

Taiwan Heavy industry share of manufacturing value increased from about 25% in the early 1960s to about
40% in the late 1970s.

Labour-intensive to Skills-intensive (High-tech Industries) [1980s]

Measures
1. Research
Korea The Korea Advanced Institute of Science and Technology was established in 1966 for R&D.

Taiwan The Electronic Research and Service Organisation (ERSO) was established in 1974 to bring in
foreign technology and disseminate it to local firms, besides training engineers who entered the
private sector to commercialise the technology developed by ERSO.
2. Taiwan Specific Measures
The Hsinchu Science-Based Industrial Park was established in 1980 to mimic Silicon Valley by
attracting high-tech industries in Taiwan. Generous assistance was provided to high-tech
enterprises in the park, such as tax holidays, duty-free imports of key equipment and materials,
exemption from commodity taxes on exports and also low-interest loans for research.
Outcomes
Korea Korean electronics exports accounted for about 7% of the GNP in 1983 and rose to 25% by 1988.

Taiwan By 1990, Taiwan’s share of electronics in their total exports rose to more than 22%. (while textiles
and garments represented only 15% of total exports)

Copyright ©2018 by CW Tan

Role of US/ Cold War
“American economic assistance was critical for the transformation of Korea’s/Taiwan’s/the
Asian Tigers’ economy in the period 1945 to 1990.” How far do you agree?

1. Cold War context

○ In an atmosphere of superpower competition, Korea and Taiwan proved critical in the
ideological warfare for the USA in proving the superiority of capitalism over Korea and
Taiwan’s communist counterparts, North Korea and China. There was hence an ideological
motivation for the USA’s interest in Korea and Taiwan’s economies.
○ The falling domino theory also motivated the USA to ensure adequate economic
development in the two states to ward off communism and allow these countries to act as
agents of containment in Asia.

2. US Aid → ISI
○ The USA provided massive amounts of financial aid to help Korea and Taiwan in post-war
economic reconstruction. In the 1950s, the USA financed 75% of fixed capital formation in
Korea and 40% of gross capital formation in Taiwan, allowing for land improvements, plant,
machinery and equipment purchases that contributed to the economic transformation from
an agrarian economy to an industrial one.
○ The industrialisation efforts were also propelled by the USA’s financing of imports, allowing
the governments to accumulate more capital for industrialisation. In the 1950s, the USA
financed 70% of Korea’s imports. At the same time, the USA financed 90% of Taiwan’s
trade deficit as their imports exceeded their exports by 60%. By reducing the burdens of
import costs, the governments could accumulate the much-needed capital for
reconstruction and industrialisation.
○ + “transformation stats”

3. US Markets → EOI
○ Access to American markets was important for the transformation from import-substitution
industrialisation to export-oriented industrialisation. The export booms of Korea and Taiwan
can be attributed to the great access of US markets that provided a platform for Korean and
Taiwanese enterprises to expand.
○ After opening American markets to Korean and Taiwanese enterprises in the 1960s
perhaps due to the Vietnam War, the US market share of Korean exports rose from less
than 20% in 1960 to more than 50% by 1968. For Taiwan, the US market share of its
exports was less than 5% in 1950 but remained at more than 30% in the 1980s

4. US Human Resource Training

○ The USA also provided human resource training in order to provide Korea and Taiwan with
personnel capable of leading their economic developments.
○ As part of USAID efforts, nearly 3000 Koreans were trained in US universities;
Under the “technical assistance” program, the USA trained 2700 Taiwanese technical and
managerial personnel.

Copyright ©2018 by CW Tan

5. US Military Assistance
○ The USA also gave military support to Korea and Taiwan and this contributed to their
economic transformations as their governments could spend less of defence and channel
more capital into industrialisation efforts.
○ After the Korean War, a significant American military presence was felt in Korea for
continued containment. For Taiwan, the USA sent fleets to patrol the Taiwan Strait and
even signed the Treaty of Mutual Defence with Taiwan in 1955 to commit itself to Taiwan’s
defence in case of an invasion by China.
○ This military presence brought stability to facilitate economic development, besides freeing
up the defence budget to be channelled into industrialisation efforts.

6. Limitations of US Economic Assistance (Greater Importance of Government)

○ Despite the great significance of American economic assistance, it was not as critical as it
seemed because the role of governments were more important.
○ This can clearly be seen by the meagre economic progress of Korea under Syngman
Rhee’s politically unstable and incoherent government such that Korea had a per capita
income of US$80 that was lower than Haiti and Ethiopia, despite having access to the
massive amounts of US aid. It was only until Park Chung Hee’s coup and ascension to
power that real economic transformations took place as his authoritarian control of power
allowed for greater government coherence and sounder economic strategies that made
good use of the US aid.
○ In Taiwan, it was only when the government’s goals changed that the economic
transformations took place. Before the 1960s, the Kuomintang government was still
preoccupied with the political goal of reclaiming the mainland by building up the military and
economy to be strong enough for an invasion. That is why Taiwan still had not had a
substantial economic transformation as seen from how there was still a trade deficit of
US$70 million by 1958 despite the US aid. By the 1960s, the party elders realised that
economic development was a better guarantee of the party’s survival and hence adopted
the Nineteen Point Reform Program in 1961 to push for export expansion and economic
modernisation. US aid was hence better channelled into export expansion via government
subsidies and tax incentives for strategic industries and this allowed Taiwan to have a
favourable balance of trade by 1963.
○ Hence, the USA may be less critical for the economic transformations of Korea and Taiwan
when compared with the role of their governments, but critical nonetheless as the
governments could not initiate such economic transformations without US capital.

7. Limitations of US Economic Assistance (Temporal)

○ Furthermore, the USA could only give aid in the initial years especially with its own
economic problems rising during the crisis decades with the collapse of the Bretton Woods
System and USA’s twin deficits (budget and trade)
○ US aid to Korea had ended by the early 1970s and ended even earlier by 1965 for Taiwan.
○ It is hence arguable that American assistance was no longer critical by the 1970s.

Copyright ©2018 by CW Tan

8. Limitations of US Economic Assistance (Temporal) → Rebut with impt. of foundation
○ However, even if the USA was not directly responsible for the later transformations from
more labour-intensive economies to skills-based ones or the shift to heavy and chemical
industries and high-tech industries, it was arguably the US aid used in reconstruction and
industrialisation that gave Korea and Taiwan a solid industrial base upon which future
transformations could take place.
○ It must also be noted that the access to US markets was still important for the later
transformations as it was an important market for the enterprises that specialised in heavy
and chemical industries or high-tech products to export to.

9. Limitations of US Economic Assistance (Temporal) → Rebut with USAID

○ The United States Agency for International Development (USAID) was responsible for
foreign economic development and it greatly boosted Korea and Taiwan’s economic
transformations with good economic planning.
○ In Korea, USAID was important for initiating organisations such as the Korea Development
Institute and the Investment Promotion Agency which were vital for export-expansion via
good economic planning and attracting FDI. USAID also contributed to the formation of the
Korea Institute of Science and Technology, which was crucial in Korea’s transformation
from light-industries to heavy and chemical industries later, as well as the shift from
labour-intensive industries to more skills-based electronic industries.
○ USAID was also important in pushing the Taiwanese government to adopt the policy of
export expansion in the late 1950s and in drawing the Nineteen Point Reform programme
in 1961, which was critical in Taiwan’s transformation to an export-oriented economy.
○ USAID’s contributions shaped the economic transformations to come by establishing these
organisations and pushing for these reforms, making US assistance that largely ended by
the 1970s still important for the post-1970s economic transformations.

Role of Government/ Effect of Politics

How did politics influence the Korea’s/Taiwan’s/the Asian Tigers’ economic development?

1. International Politics → Cold War

○ Cold War Context
○ US Aid → ISI
○ US Markets → EOI

2. Transition from International Politics to Domestic Politics

○ Despite favourable international political circumstances, the domestic political situation
inhibited the meteoric economic growth of Korea and Taiwan in the initial periods.
○ Korea under Rhee was desolate and backward; when the Kuomintang’s focus was still on
reclaiming the mainland before the 1960s, economic growth was not as remarkable (trade
deficit in 1958).

Copyright ©2018 by CW Tan

3. Domestic Politics → Political Coherence & Changes
○ The importance of domestic politics can be seen from the largely authoritarian and
coherent nature of the governments that facilitated economic growth.
○ As explained before, the problem of Rhee’s administration in Korea was that the
government was divided and incoherent in terms of policy-making. The ineffectiveness can
be seen from how there were 16 Ministers of Agriculture and 11 Ministers of Commerce
within the 12 year period from 1948 to 1960. This shows the lack of political coherence and
continuity to formulate effective long-term economic policies. Economic oversight was
hence lacking under the Rhee administration due to such political divisions.
○ The success of Korea and Taiwan can be explained by the great political coherence due to
the centralisation of power after Park’s coup in Korea and when the Kuomintang took over
Taiwan and imposed martial law from 1949 to 1987. In the initial years, Taiwan did not face
the same fate as Rhee’s administration because the retreat of the Kuomintang from the
mainland to Taiwan in 1949 had effectively purged most party elements that were not loyal
to Chiang Kai-Shek and this made the political coherence much better in Taiwan, explaining
the faster development of Taiwan in terms of moving from an agrarian economy to an
industrial one in the 1950s with agriculture contributing to 35% of Taiwan’s GNP while that
figure was 45% for Korea at that time.

4. Domestic Politics → Authoritarianism and Economic Oversight

○ The authoritative nature of the governments and great political coherence from the
centralisation of power was translated into effective economic oversight due to the
highly-interventionist economic adopted by the authoritarian governments.
○ In Korea, the Economic Planning Board (EPB) was established in 1961 ushered in a period
of coherent economic planning and greater oversight as the board had control over the
other economy-related ministries tasks such as managing the budget bureau from the
Ministry of Finance and managing the planning offices from the Ministry of Reconstruction.
This consolidated the ministerial tasks related to the economy to reduce bureaucratic
inefficiencies within the government and make it easier for the government to directly
control the economy and charter its growth.
○ Similarly, Taiwan had started planned economic development in 1953 with the
establishment of the Economic Stabilisation Board (ESB) to stabilise the post-war situation.
This was replaced by the Council for International Economic Cooperation and Development
(CIECD) in 1963 and the Council for Economic Planning and Development (CEPD) in
1977, which aimed to establish a coherent system of economic planning and effectively
initiate the later economic transformations to greater export-expansion and also the shift
from labour-intensive industries to skills-based ones like the high-tech or electronics
industries to adapt to the changes in the global economy.

Copyright ©2018 by CW Tan

5. Domestic Politics → Policies (Controlling Banks & Channelling Loans)
○ The interventionist stance of the authoritarian governments of Korea and Taiwan compelled
them to take control of the financial institutions and turn them into instruments of the
government to promote economic development by giving preferential loans to important
industries that the government saw to be strategic for development.
○ In Korea, Park nationalised the whole financial system and the seizure of banks allowed the
Park administration to channel capital to the desired industries by offering “policy loans”
that had low interest rates and lenient repayment terms to firms that produced products
deemed worthy of domestic production with the potential to be exported.
○ In Taiwan, the government restructured the economy and brought it under government
control such that private banking institutions only made up less than 3% of the entire
banking industry in Taiwan by the mid-1960s. Such government control allowed the
government to direct loans into strategic industries and sectors marked out for
development. In the 1960s, banks were provided with government-formulated lists of
industries that were to receive preferential access to bank loans.

6. Domestic Politics → Policies (Attracting & Channeling Investments)

○ The governments provided various incentives to attract investors.
○ In Korea, the Foreign Capital Inducement Act was amended in 1966 to encourage greater
inflow of foreign capital. Korea offered liberal incentives such as duty free import of capital
goods, “one-stop service office” to reduce bureaucratic problems and tax exemptions. In
1970, the government even passed a labour law forbidding strikes in foreign-managed
firms and gave guarantees to some American subsidiaries that they would purchase all
goods produced if not sold in the open market.
○ In Taiwan, the Statute for Encouragement of Investment was implemented in 1961. Taiwan
offered similar incentives, such as tax holidays for new investments for up to 5 years and a
maximum business income tax of 18% of annual income. The government also allowed
foreign investors unlimited repatriation of earnings.
○ + “transformation stats” for FDI
○ The great economic development of Korea and Taiwan was because of the government’s
ability to control where the investments were channeled to.
○ In Korea, the EPB announced new requirements for foreign investment in 1974 which was
targeted at moving the economy towards high-tech and heavy industries. Investment
projects had to have a minimum value of US$200,000 and be involved in the manufacturing
of machinery, metallic products or electronics such that the EPB had to cancel registrations
of 14 firms after the revision.
○ Similarly, Taiwan’s amendment of the Statute for the Encouragement of Investment
curtailed support for labour-intensive investment in the 1970s and another revision in 1977
prioritised the growth of capital and technology-intensive industries.
○ By controlling where these foreign investments were channelled to, the governments could
effectively move their economies to their chartered directions. Evidently, + “transformation
stats” (labour→ skills)

Copyright ©2018 by CW Tan

7. Domestic Politics → Policies (Accumulating Domestic Capital) [Minor for Qn]
○ The governments also instituted tax and interest rate reforms to incentivise domestic
savings and accumulate domestic capital to be channelled into industrialisation efforts.
○ In Korea, the Taxation Bureau was reorganised in 1966 to make tax collection more
effective and this was successful as seen by the rise of payable taxes collected from less
than 20% in 1964 to almost 70% in 1966. In Taiwan, there were three major tax reforms
since 1949 to increase the effectiveness of the tax collection process.
○ As for interest rates, Korea had an interest rate reform in 1965 to incentivise domestic
savings by doubling interest rates in state-owned banks to 24%. In Taiwan, interest rate
reforms were instituted as early as the 1950s and the government even launched a
nationwide campaign to convince citizens to participate in savings programs.
○ These moves were successful with domestic savings accounting for over 10% of the GNP
of Korea in the 1970s. For Taiwan, domestic savings provided about 85% of gross domestic
investment in the 1970s.
○ All this capital could be channelled to industrialisation and export-expansion efforts.

8. Domestic Politics → Policies (State Enterprises) [Minor for Qn]

○ The government also took matters into its own hands with the creation of state enterprises
to achieve certain economic goals and set a precedence for the private sector to follow.
○ State enterprises in the infrastructural sectors were established to support early
industrialisation efforts. The state enterprises took up transportation, communication and
the utilities industries. For example, the Korea Electric Company (KECO) was established
in 1961 to allow the government to control the price of electricity tariffs and optimise it for
industrialisation.
○ In the initial years when there was a lack of capital and industrial capacity for the private
sector, the government took the lead in industrialisation with the establishment of state
enterprises. In the early 1950s, state enterprises accounted for 56% of Taiwan’s industrial
output and this formed the industrial foundation for the private sector to build upon later on.
○ The pioneering role of state enterprises can also be seen during the economic
transformation from light industries to the heavy and chemical industries in the 1970s. In
Korea, Pohang Iron and Steel Co. was created in 1968 and its success spurred the
formation of other steel mills in Korea. In Taiwan, China Petroleum and China Steel are
largely successful state enterprises that helped the country shift to heavy industries.
○ Hence, the government takes matters into its own hands at times to meet the challenges of
the economy and provide keystone pieces to initiate economic transformations with the
creation of state enterprises.

9. Domestic Politics → Policies (Infrastructural Development) [Minor for Qn]

○ The government facilitated infrastructural development which was vital to support industrial
development. Transportation infrastructure allowed for smooth transport of goods for both
domestic and the international market, while communication infrastructure made Korea and
Taiwan more appealing for MNCs to invest in.

Copyright ©2018 by CW Tan

 ○ Korea built the Gyeongbu Expressway that connected the two largest cities, Seoul and
Pusan in 1970, complementing industrialisation efforts with an avenue for goods
transportation. Taiwan’s “Ten Major Construction Projects” in the 1970s included the
North-South Expressway, the new Taipei airport, harbour development and the East Coast
railway, which hastened the transportation of intermediate products for assembly and also
the rate at which products could be exported.

11. Domestic Politics → Labour Movements (Negative Influence)

○ Refer to point under “Effects of Culture”

Role of Private Sector

How important were the private businesses in explaining Korea’s/Taiwan’s/the Asian Tigers’
economic transformations? [Korea → Chaebols; Taiwan → SMEs]

Introduction
By the 2000s, the sales for the 10 largest chaebols made up over 50% of Korea’s GDP. By
1997, SMEs produced almost half of Taiwan’s output value and more than 60% of Taiwan’s
exports. Undoubtedly, this statistics alone would give us reason to believe that the private
businesses of Korea and Taiwan were of great importance in Korea and Taiwan’s economic
transformations, specifically the transformations from agriculture-based to industrial
economies, from import-substitution to export-oriented industrialisation and the move from
labour-intensive to skills-based industries. However, their importance may have been eclipsed
by the role of the government as the private businesses depended on the government at times.
Foreign investors may undermine the importance of private businesses too. However, these
alternate factors do not discount the ultimate importance of the private businesses in explaining
Korea and Taiwan’s economic transformations.

Korea Taiwan

1. Private Sector → Agrarian to Industrial (1950s)

Since the 1950s, entrepreneurs have started building
their business empires in Korea, such as Samsung and
Lucky (that formed LG later on). These entrepreneurs
had access to easy credit because of their past
achievements. This gave them the capital needed for
empire building. Korea’s private sector manifested in the
form of chaebols due to the early business environment
that was conducive for integration of various sectors
under a single conglomerate. This allowed various
different manufacturing sectors to grow under major
chaebols, helping Korea transform from an agrarian
economy to an industrial one + “transformation stats”
Small family businesses involved in agricultural
food processing grew to meet Taiwan’s post-war
demand for food. The SMEs used the revenue from
agriculture to invest in technology that improved
agricultural productivity. This helped in the
import-substitution of agricultural products as well
as providing the SMEs with capital from agricultural
surplus to enter the manufacturing sector. The
SMEs also depended on guanxi networks for
capital and this allowed the SMEs to go into the
manufacturing sector, enhancing industrialisation
efforts, + “transformation stats”

Copyright ©2018 by CW Tan

 2. Public Sector → Agrarian to Industrial (1950s)

However, the government was actually more important
as it created the conditions in which the chaebols could
grow and contribute to the transformation. After Park’s
coup, the Law for Dealing with Illicit Wealth
Accumulation was revised, allowing the government to
mobilise corrupt business leaders to national objectives.
The government directed the chaebols to expand their
manufacturing businesses for industrialisation efforts at
the time. The government also made credit available to
the chaebols on very favourable terms. Since the
government nationalised all financial institutions, the
chaebols were at the mercy of the government as they
needed the capital for the growth of their businesses
that came from government-controlled banks.
In Taiwan, the government had a hand in the rise of
the SMEs via the land reform program (1949-1953)
that allowed landowners to sell their land for
compensation, allowing them to accumulate capital
to enter manufacturing. However, the government’s
role was limited in Taiwan since they controlled the
financial sector and reserved preferential credit for
the state enterprises, forcing the SMEs to depend
on guanxi networks for capital. Even so, the role of
the government was more important in the case of
import-substitution industrialisation as it also
unintentionally imposed an overall import quota
system that protected the infant industries owned
by the SMEs, allowing them to grow and prosper.

The chaebols of Korea and the SMEs of Taiwan had not achieved their great capacity to catalyse economic
change yet during this initial period, so the government’s role was still more important.

3. Private Sector → ISI to EOI (1960s)

The industrial integration of the chaebols allowed the
chaebols to monitor the quality of individual components
of a products before assembly as well as give them
economies of scale. This enhanced the quality and
reduced the price of chaebols products, making it more
competitive in the international market such that
chaebols were instrumental in the transformation from
ISI to EOI + “transformation stats”
SMEs had the subcontracting system that allowed
each firm to specialise in producing individual
components of a product, giving each firm
significant economies of scale in a specific market
segment. This drove down the final products’ prices
and made Taiwanese goods more competitive in
the international market, contributing to Taiwan’s
export expansion + “transformation stats”

4. Public Sector → ISI to EOI (1960s)

However, the importance of chaebols may be eclipsed
by the importance of the government as the Park
administration. Having nationalised all the banks, the
government channelled capital to the desired industries
by offering “policy loans” that had low interest rates and
lenient repayment terms to firms that produced products
deemed worthy of domestic production with the potential
to be exported. These loans enabled the chaebols to
have such great success in the export-sector.
Though the government did not actively channel
resources into the development of SMEs, the
government’s export promotion policies did not
discriminate between large and small enterprises,
allowing SMEs to enjoy benefits such as the export
tax rebate scheme. However, this does not discount
the much greater importance of SMEs because of
their subcontracting system business model that
made Taiwanese products so competitive.

By the 1960s, the chaebols of Korea and SMEs of Taiwan had grown considerably such that they had the
capacity to initiate the economic transformations. Despite the government still maintaining economic oversight,
the role of the private businesses were more important as their business models ensured that their products
were competitive in the international market, thus catalysing Korea and Taiwan’s export expansions

Copyright ©2018 by CW Tan

 5. Private Sector → Labour-intensive to Skills-based Industries (1970s onwards)

The private industries were good at diversifying and adapting to changing market demands and global
economic circumstances. As the 1970s saw the rise of labour-rich economies such as China and India, the
private sector was able to overcome their loss of comparative advantage in labour by moving to more
skills-based industries such as the heavy and chemical industries and high-tech industries.

The fact that Samsung and Daewoo, which are
successful electronics and automotive chaebols today,
started out from the textile industry pays testament to
the adaptability of the chaebols and this enabled them to
venture into the heavy and chemical and electronics
industries. Hyundai Heavy Industries went into
shipbuilding in 1973 and became the world’s largest
shipbuilder a decade later, meanwhile Samsung went
into the electronics industry. These chaebols helped in
Korea’s transformation from light industries to heavy
industries and also from labour-intensive industries to
skills-based technological ones. + “transformation stats”
Large MNCS like Acer and Asus began as SMEs
and this too shows the success of SMEs in
adapting and upgrading to new industries. The
organizational flexibility of SMEs due to their firm
size allows them to adapt quickly to market
conditions and shift towards the electronics
industries. SMEs could grow into major firms like
Acer and Asus that advanced Taiwan’s high-tech
industries considerably. The efforts of the SMEs
helped to move Taiwan from labour-intensive
industries to more skills-based high tech ones.
+ “transformation stats”

6. Public Sector → Labour-intensive to Skills-based Industries (1970s onwards)

However, the government was more important as the
chaebols were reluctant to join these new industries
without government support such that the government
had to pioneer into the heavy industries with Pohang
Iron and Steel Co. before the private sector followed
suit. Besides the preferential loans, the government
even allowed for 88% of manufacturing and mining
products to be under the rule of monopoly and oligopoly
in the 1980s for chaebols to accumulate capital.
However, the government was more important as
the SMEs lacked the R&D capabilities to be
successful in upgrading to high-tech industries and
relied heavily on the government. The Electronic
Research and Service Organisation (ERSO) was
established in 1974 to bring in foreign technology
and disseminate it to SMEs. The government also
supported SMEs with the Small and Medium Sized
Business Administration in 1981.

Though the private businesses were important, the government was more important as the private businesses
depended heavily on government support such that they would be impaired without it since the chaebols
wanted guarantee for government support before venturing into the capital goods industries and the SMEs of
Taiwan relied heavily on the R&D accommodations to help them upgrade to the high-tech industries.

7. Foreign Investors → Labour-intensive to Skills-based Industries (1970s onwards)

The growth of Korea’s automobile industry was because
of the Hyundai tie-up with Mitsubishi (Japan) and
Daewoo with General Motors (USA). The success of
Korea’s shipbuilding industry can also be attributed to
the collaboration of Hyundai Heavy Industries with A&P
Appledore (Scotland) for dockyard design and Kawasaki
Shipbuilding (Japan) for production techniques.
MNCs such as General Instruments (US) brought
technological know-how and production techniques
to Taiwan that was vital for Taiwan’s transformation
from labour-intensive industries to the more
skills-based high-tech industries.

These partnerships gave the private enterprises international branding and boosted overseas sales.

Copyright ©2018 by CW Tan

Problems of Chaebols:
● Monopolisation of wealth → Inequity + Exploitative towards workforce for productivity
○ Korean workers earned 10% the wage of a German worker in 1980.
○ This demoralised the maturing workforce to the point of massive labour disputes.
○ There were more than 1000 labour disputes between July and August 1987
alone while there was only an annual average of 200 in the preceding 10 years.
● Mismanagement within family-run chaebols unchecked + Patronage links with govt.
○ Chaebol bosses tended to promote their own relatives and award business
contracts to firms owned by relatives, such as in the case of vending machines in
the Samsung group being stocked by Cheil Jedang soft drinks, from a firm
owned by relatives of Samsung’s chairman.
○ While unsound business decisions cause chaebols to accumulate financial
problems, the government kept them afloat by bailing them out, which set the
stage for the massive firm bankruptcies during the AFC. Daewoo was one of the
major chaebols to go bankrupt amidst the AFC as long-term mismanagement
caught up to the group.

Problems of Taiwanese SMEs:

● Family-centred nature → Hinders Innovation
○ The family-centered nature of the private sector in both countries reinforces a
form of rigidity and inertia such that there is little incentive to change and the
blood heirs of the family business more often than not follow the same old
prescribed route to do business.

Effect of Culture
Did cultural factors help or hinder the economic transformations of South Korea and Taiwan
from 1945 to 1990?

1. Nationalistic and Collectivistic → ISI

○ Sense of national pride and collectivistic nature compelled them to do what is in the interest
of the nation over self-interest
○ Supported local industries by buying domestic products regardless of its relative quality and
price compared to imported products.
○ Important in initial stages as it gave infant industries a stable domestic market to sell to and
accumulate capital.
○ This contributed to ISI transformation + “transformation stats”
○ This helped to nurture the infant industries before they ventured overseas and embarked
on export-expansion later on once they have had a sturdy domestic foundation.

Copyright ©2018 by CW Tan

2. Confucian values of hard work and diligence → Industrialisation (ISI & EOI)
○ They were generally industrious people who prioritised work and valued diligence.
○ The average Korean would work about 11 hours per day while the average Taiwanese
would work about 12 hours per day.
○ The average Korean only took 4.5 vacation days per year while their Japanese and
American counterparts took about 9 and 19 days respectively.
○ Such diligence ensured industrial productivity was high, aiding the shift from
agrarian-based economies to industrial ones. + “transformation stats”
○ Furthermore, Korea and Taiwan are high power distance societies that respect hierarchy
and authority, making them susceptible to low wages since they rarely question authority,
such that Korean wages were intentionally kept low throughout the 1960s and 1970s such
that the wage costs of a Korean worker was 10% of a German worker in 1980.
○ With high productivity as a result of diligence and low wages as a result of their respect for
hierarchy, industrial products were generally cheaper and of higher quality such that it was
in demand for both local consumption and overseas exports. This aided in
export-expansion immensely + “transformation stats”

3. Confucian values of hardwork and diligence → Investments for EOI

○ Diligent and obedient workforce was appealing to foreign investors, especially in addition to
the anti-communist nature of the workforce due to historical animosities.
○ The stability and potential for profits guaranteed by these cultural traits made Korea and
Taiwan more attractive to investors in addition to the government incentives, leading to
massive growth in FDI + “transformation stats”

4. Family-oriented nature gave rise to guanxi networks in Taiwan → Contributed to EOI

○ SMEs in Taiwan did not receive special treatment from the government in the 1960s, but
rather rode on government incentives for export expansion that did not discriminate based
on business size. In spite of this, SMEs faced difficulty in getting loans from formal financial
institutions as the small family enterprises did not maintain auditable bookkeeping and had
irregular business and accounting practices.
○ The SMEs still grew substantially during the 1960s because of their guanxi networks that
allowed them to access capital via such informal connections. The guanxi networks also
gave rise to the subcontracting system where firms specialised in producing specific parts
of a product to allow each firm to enjoy economies of scale in a specific market segment.
○ The role of family-solidarity must be taken note of since nearly 2500 co-owners of over 700
firms from Taiwan’s largest 96 business groups were close family members, friends,
co-workers and distant relatives in 1983.
○ The family-oriented nature of SMEs made them successful and in turn allowed them to
contribute substantially to Taiwan’s export expansion due to the subcontracting system
enhancing the competitiveness of Taiwan’s exports.
○ In the 1960s, SMEs accounted for 60% of Taiwan’s exports. By 1980, that figure rose to
68%, attesting to Taiwan’s increasing dependence on SMEs.

Copyright ©2018 by CW Tan

5. Values Education → Shift from labour-intensive to skills-based industries
○ Governments value education and new knowledge of the industries, which prompted them
to embark on skills-upgrading for their workforce.
○ In Korea, the Korea Institute of Science and Technology was created in 1966 to train
skilled-workers to meet the requirements of the rising technology industries. In Taiwan,
public research institutes such as the Electronic Research and Service Organisation
formed in 1974 helped to transform Taiwan into a technology hub.
○ It was not just the government’s prioritisation of education but also the people’s as they
chose to take advantage of these education opportunities to improve their skills. A new
generation of highly-skilled workers with university education was formed on the part of the
people who values education and chose to enroll when given the opportunity, with Taiwan’s
university enrollment ratio increasing from about 1% in 1953 to about 33% in 1991 when
the number of universities increased from 3 to 68.
○ The cultural trait of valuing education complemented the government’s endeavour to
upgrade their human resources to move the economy to a skills-based one to overcome
the challenges of rising labour-intensive economies like China and India.

6. Rebellious workforce (1980s) → Hindered investments for high-tech transformation

○ Being exploited and given low wages sparked a cultural shift from one that obeys authority
unquestioningly to one that would rise up against oppression. This cultural shift manifested
in the form of disruptive labour movements.
○ In Korea, there were more than 1000 labour disputes between July and August 1987 alone
while there was only an annual average of 200 in the preceding 10 years. In Taiwan, more
than 10,000 labour disputes were registered between 1981 and 1988.
○ This limited the economic transformation of Korea and Taiwan as the governments no
longer had the full control of the workforce as they had before and could not as easily
mobilise the workforce to work towards later economic transformations. The labour
movements also scarred off some investors and the loss of capital might make economic
transformations more difficult.
○ However, this did not hinder Korea and Taiwan’s economic transformation at the time much,
as the labour movements did not affect that much of the industries and the labour disputes
in Taiwan were even weaker than in Korea due to the geographical distribution of SMEs
that made unions harder to take root.
○ The economic transformation from labour-intensive industries to skills-based industries was
still taking place successfully with such labour movements in the backdrop.
○ Instead, such labour movements perhaps sparked a transformation of its own, transitioning
the economic system to an unfair one to a more equitable one over time once the
governments and private sectors restructured the wage models to one that was deserving
of a mature workforce, adding stability to the labour force over time. The temporary surge
of labour movements led to an equity transformation that was beneficial to the countries in
the long run by stabilising the workforce in the long-run for continued appeal to investors.

7. Family-oriented nature → Problems in Private Sector

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External vs Internal
“South Korea’s/Taiwan’s/The Asian Tigers’ economic transformations from the 1950s to 1990s
can be attributed to favourable external factors.” Discuss.

1. External → Politics (Cold War)

○ Cold War Context
○ US Aid → ISI
○ US Markets → EOI

2. External → Growth of Western Economies

○ It was against the backdrop of a growing global economy that Korea and Taiwan developed
their economy. By the 1960s, the Western economies have matured such that they sought
overseas expansion of their industries. This desire for overseas expansion was highly
beneficial for Korea and Taiwan’s economic transformation from import-substitution
industrialisation to export-oriented industrialisation as these Western multinational
corporations invested heavily in Korea and Taiwan, bringing in much needed capital,
technology and skills transfers to make these transformations possible.
○ + “transformation stats” (FDI)

3. Internal → Politics (Authoritarian & Interventionist Governments)

○ Authoritarianism and Economic Oversight
○ Policies (Controlling Banks & Channeling Loans)
○ Policies (Attracting and Channelling Investments)

4. Internal → Importance of Private Sector [Leave out if time does not permit]
○ SMEs in Taiwan
○ Chaebols in Korea

5. Internal → Positive Role of Culture [Minor]

○ Confucian values of hard work and diligence → Industrialisation (ISI & EOI)

Economic Challenges (1970s-1990s)

How effectively did South Korea’s/Taiwan’s/the Asian Tigers governments manage the
economy from the 1970s to the 1990s?

1. Effective in 1970s because of Government Oversight in the 1950s & 1960s

a. Authoritarianism and Economic Oversight
b. Policies (Controlling Banks & Channeling Loans)
c. Policies (Attracting and Channelling Investments)
d. + “transformation stats” for export-expansion

Copyright ©2018 by CW Tan

2. Effective in facing Twin Effects of Competition & Protectionism
a. Protectionism
● Korean exports dropped from over 40% in the early 1970s to less than 10% in the early
1980s due to protectionism
● Taiwan experienced high tariff barriers in areas such as textiles and leather goods.

b. Competition
● With the growth of China, there was increasing competition in terms of trade, such that
China surpassed both Korea and Taiwan in terms of their share of US markets for textiles
● Wages in China were one-tenth of those in Taiwan for manufacturing, while the average
cost per hour of a textile operator in India and China was less than US$1 which was much
more attractive than the US$2.87 in Korea.
● This reduced Korea and Taiwan’s comparative advantage in labour industries in terms of
investments and competitiveness of products vis-a-vis its price.

c. This was managed effectively as the governments made a move to high tech-industries.
Governments promoted the shift via research assistance …+ “transformation stats”

3. Effective in Managing Inflation

a. Korea printed money as capital for developing key industries but this came at the cost of
inflation statistics accelerating to about 18% in the 1960s and 1970s. Though inflation was
not effectively managed at that time due to the greater need of capital to move the Korean
economy towards capital goods and high-tech industries, the government started to reduce
inflation by the 1980s. The tight monetary and fiscal policy, as well as the raising of
interests rates that encourage domestic savings to reduce demand and consumption, were
effective in lowering inflation to less than 5% by 1995. The government also moved to other
alternatives to accumulate capital such as reducing the barriers to entry of the financial
market to accumulate foreign capital as a substitute to printing money.
b. Taiwan has effectively managed inflation through the 1960s, with inflation rates averaging a
little over 3% per year, but Taiwan’s inflation problem stemmed from the oil shocks that
made inflation rates climb up to over 40% in 1973. By adopting an effective inflation control
measures, a tight monetary and fiscal policy as well as raising interest rates to encourage
domestic savings, inflation was once again reduced to an annual rate of 3% by 1982.

4. Effective/ Not effective in Economic Liberalisation

a. With a shift to democratisation in both Korea and Taiwan in the 1980s, the economy was
liberalised in order to meet the needs of a politically and economically matured population.
b. Both countries shifted from a highly interventionist economy to one that was based more on
free-market principles.
c. Both countries saw the need to liberalise the financial sector for greater inflow of capital, as
well as diversifying from traditional forms of capital accumulation methods previously
established. This could prevent over-reliance on a single method of capital accumulation
that would be disastrous with the increasing volatility of the global economy. They allowed

Copyright ©2018 by CW Tan

 for foreign investors to invest directly to the stock market and allowed for the entry of
commercial banks to the banking sector. This was a sign of both countries adapting to the
trends of the global economy and capitalising on the availability of capital via such financial
liberalisation measures, indicating effective economic management to ensure continual
source of capital for sustained economic development.
d. However, the over-reliance on foreign capital via the stock markets became a sign of
ineffective economic management for that is why the Asian Financial Crisis hit Korea so
hard when foreign investors pulled out and capital flight ensued.

5. Limited effectiveness in Managing the Private Sector

a. Chaebol Dominance
● Korea faced the problem of chaebol dominance, which obscured the development of
SMEs, which meant that the full capacity of the Korean economy had not been realised.
The government set out to nurture SMEs via the Small and Medium Enterprise Group
Affiliation Promotion Law enacted in 1975 to form linkages among domestic industries in a
subcontracting system where each SME handled an individual part of a product. This was
somewhat effective as the proportion of SMEs that served as subcontractors increased
from about 20% to 70% from the 1970s to 1990 but decreased to about 50% by 1994
because chaebols rather buy cheaper foreign-made parts and SMEs rather go into exports,
which they simply could not compete against the chaebols in.
● The dominance of the chaebols remained regardless of whatever measures the
government put in place, be it by reducing the preferential access to credit for the chaebols
or giving SMEs collective monopolies over certain products like leather and toys and
stopping chaebols from manufacturing those products. This was largely because of the
patronage links, besides the great significance of chaebols to the Korean economy such
that the sales for the 10 largest chaebols made up over 50% of Korea’s GDP by the 2000s.

b. Taiwanese SME’s Lack of Innovation and Branding

● Taiwan on the other hand effectively managed their SMEs to propel them towards high-tech
industries by providing them with R&D facilities. However, the government had limited
impact where innovation is concerned due to the administrative inertia in SMEs as a result
of its family-oriented nature, as well as its rigidity in terms of business model. The
government can provide all the accommodations ready for R&D, but they are helpless in
spurring innovation in the high-tech industries for the SMEs to remain competitive in that
field.
● Furthermore, the development of Taiwan’s high-tech industries was still largely based on
the manufacturing products of other brand names such as Apple and Hitachi under
contract. This made it difficult to create and establish Taiwanese brand names in
international markets, with the exception of a few corporations like Acer.

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*Taiwan’s Political Isolationism in the 1970s
● With Sino-American rapprochement culminating in the PRC’s emergence as a player on the
world stage in the 1970s, Taiwan was no longer regarded as the legitimate representative
government of China such that it was expelled from the UN in 1971 in favour of the PRC
and forced out of the World Bank and IMF in 1980. The US also withdrew formal
recognition of Taiwan in 1979.
● These developments threatened Taiwan’s access to work markets and trade partners,
especially since they relied on exports for growth.
● In response to these challenges, Taiwan embarked on the development of HCI to enhance
industrial growth and increase economic self-reliance. + “Transformation stats”
● Taiwan also focused on diversifying markets and wooing new foreign investors from Europe
to increase economic participation and to accumulate capital for their industrial projects,
having witnessed the problems of an over-dependence on the US.

Copyright ©2018 by CW Tan