Stephan Langdon

Universidad del Rosario

• Course objectives• Assignments• How to study the subject• Desired outcome• Class Web• Other Info

• Foundation of business and marketing practices unique to Far East

• Cultural aspects of Asian business• General economic and business climate affected

by the PEST environment.• Foreign investments and their impact on Asia

countries.• Asian Crisis and Asian Century• Appreciation for Asian Business

• Culture, structural, policy and political economy features of Asian economies and the Asian business environment

• The impact of globalisation and policy reforms on Asian economies and implications for business firms

• Important current issues and impact of global developments on Asian economies and business.

• Presentation• Class 7

• Exam• Final Class

• Attend classes• Read texts• Follow current events in magazines and

periodicals in Asian Business • Time Asia• Asian Times

• Take part in group discussions

• Understand how changing PEST environment in the Asia-Pacific region impact managerial and business practices

• Appreciate relationship between business and government

• Appreciate relationship between business and culture

• Understand the dynamics of interactions and influence of the countries within the Asia-Pacific region and the regionalization and globalization of their state and private enterprises.

• Mail• Readings• Forum• Links

• Articles• Podcast

• Schedule• Reading• Class

• Contacts• Stephanlangdon.rosario@gmail.com• 341-3099

• Appointments

• North-East Asia - Japan, Korea, Taiwan, China

• South-East Asia - Myanmar, Laos, Thailand, Cambodia, Philippines, Vietnam, Malaysia, Brunei, Singapore, Indonesia, East Timor

• Australia and New Zealand

• Rapid development for several decades • “Asian Miracle” • “Pacific Century”

• Increasing economic and political importance• includes some of the world’s largest markets

• Miracle disturbed by the Asian crisis• What about the future?

• Potential to fulfill needs of some 2.5 billion people - about 60% of the world’s population

• Need to understand the wide diversity of cultures - culture influence needs and business practices

• Stages of economic development range from underdeveloped nations, e.g. Myanmar, Laos, to developing nations, like Malaysia, to Newly Industrialised Economies, like Singapore and Taiwan, to fully developed nations like Japan - presents both threats and opportunities

• Huge potential for infrastructure projects• Rapid changes in political leadership in several

Asian countries e.g. Philippines, Thailand and Indonesia

• Emergence of consumer credits• IT demand in U.S. accounted for nearly 40% of

economic growth in Asian countries in Year 2000, outside Japan

• Large Western Firm • Short time horizons in

decision making• The company is driven by

profits and/or market share

• Corporate direction determined by overall corporate "vision" and strategy

• Highly structured • Wide ownership

(institutions)

• Large Asian Firms • Long time horizons in

decision making • The company is growth-

driven

• Corporate direction determined by opportunity

• Often poorly structured• Narrow ownership

(family)

• Large Western Firm • Professionally managed • More concentrated • Invest on the basis of

research • Highly structured • Minority shareholders

well treated • Dispersed decision

making • Relatively small number

of units/companies

• Large Asian Firms • Professionally managed• Highly diversified • Invest on the basis of

connections • Often poorly structured• Minority shareholders

abused • Centralized decision

making • Large number of

units/companies

• Singapore

• Area: 1,000 sq. km. Capital: Singapore

• Disposable Income: 25,200 USD

• Population: 3.5 million Population Growth: 1.5% per year

• Religions: Buddhist, Christian, Moslems, Hindus, and Sikhs Government System: Republic

• Languages: English, Mandarin, Malay, Hindi

• Economy: Electronics, Tourism, Manufacturing (27% gdp), Oil refining, Chemicals

• Area: 377,835 sq. km. • Capital: Tokyo • Disposable Income: 28,700

USD• Population: Population peaks

in 2005 at 127.7 million andwill fall to 102 million by 2035.

• Religions: Shintō, Buddhism, Christianity

• Government System: Constitutional Monarchy

• Languages: Japanese, Korean• Economy: Electronics,

Banking, Manufacturing (27% gdp), Chemicals

• Area: 9,596,960 sq. km. • Capital: Bejing • Disposable Income: 4,700

USD• Population: 1.3 billion • Religions: Buddhist,

Confucian, Islam, Christian Government System: Marxist

• Languages: Mandrin, Cantonese, Weiger,

• Economy: Electronics, Tourism, Manufacturing (27% gdp), Oil refining, Chemicals

• Area: 3,287,590 km²• Capital: New Delhli • Disposable Income: 2,200

USD• Population: 1,02500,000 • Religions: Hindu, Moslem• Government System:

Republic• Languages: English,

multienthnic • Economy: Manufacturing,

Mining, Computer

• British. • India, Burma (now

Myanmar), Malaysia, Hong Kong, Singapore

• Portugal• Macau Indo-China

colonized by France• Dutch

• Indonesia• Japan

• Taiwan and Korea• USA and Spain

• Philippines• French, German, Brit

• China

• Apart from Thailand and Japan, no country in the Asia-Pacific region was spared from Western influence

• 400 years of Spanish presence and another 50 years by Americans has resulted in a Westernised culture in the Philippines

• Many Dutch words have crept into the Indonesian language

• Legal systems in India, Malaysia, Singapore and Hong Kong are still based on the foundations of British law.

• The chaebol system in South Korea is very similar to the Japanese keiretsu system

• Post WW2• Recovery and development

• Since 1970s• economic liberalization • market oriented policies

• 1980s-1990s • pace of liberalization

accelerated

• 1997 • crisis

• 2000• aftermath

• South Korea, Taiwan, Hong Kong, and Singapore, together often called the Four Tigers or Gang of Four

• 1960s and 1970s• South Korea and Taiwan experienced periods of dramatic

economic growth• export oriented industrialization EOI • during these two decades, income distribution remained stable

• Gradually• enhanced the value of exports• diversifies exports into manufactured goods• Allowed political liberalization, personal freedoms and

democracy • The only economies in the developing world likely to catch

up with industrialised countries in terms of technology, infrastructure and per capita income

• Lesser Tigers

• Second-Tier NICs

• Thailand • Indonesia• Phillipines• Malaysia

JapanChina

Thailand

Indonesia

Hong Kong

Taiwan

Singapore Malaysia Philippines

Vietnam

Korea

China

Indonesia

MalaysiaPhilippines

Singapore

Thailand

Korea

Taiwan

Hong Kong

Vietnam

Japan

China

Indonesia

Malaysia

Philippines

Singapore

Thailand

Hong Kong

Taiwan

Korea

Vietnam

Japan

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0 1000 1500 1600 1700 1820 1870 1913 1950 1973 1998

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f to

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rld

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P

Western Europe and offshoots

Asia

AfricaEastern Europe and former USSR

Latin America

Fig 1: Regional distribution of world GDP, 0-1998

Income shareof bottom

20 %

Incomeshare oftop 20%

Top 20 % / Bottom 20 %

Share of pop.with less than1 USD per day

China 5.5 47.5 8.6 22Indonesia 8.0 44.9 5.6 8Malaysia 4.6 53.7 11.7 4Philippines 5.9 49.6 8.4 27SingaporeThailand 5.6 52.7 9.4 2Vietnam 7.8 44.0 5.6

Finland 10.0 35.8 3.6

• Development of domestic industry to substitute for imports

• Trade barriers, subsidies, and exchange controls necessary to protect domestic producers: state intervention replaces market prices

• Benefits: short-cut, coordination, synergies

• Problems: • low level of competition, • administrative costs, • current account deficits, • interest groups

• Development based on exploitation of comparative advantages

• Gradual diffusion of wealth to other sectors• Benefits: foreign exchange, competition,

technology transfer

• Problems: • information, • incomplete markets, • market access, • diffusion of benefits

According to The Asian Miracle (World Bank 1993): Modified “Washington consensus”

• Macroeconomic stability• Growth fundamentals• Equity and income distribution• Appropriate government intervention (exports,

industrial development)

• To create a stable and predictable investment environment- Moderate inflation: below 10%- Government budget deficits below 2% - Stable real exchange rates

• Inputs into the growth process- Investment and savings- Human capital- Agricultural productivity growth- Demographics- Export markets

• To create political stability- Relatively equal income distribution- Social services- Infrastructure- Education

• Deviation from Washington Consensus- To correct market failures: credit markets, scale economies, coordination, information when the market cannot cope- Competition and contests + neutral incentives- Requirements, monitoring, discipline- Good institutions + reputable civil service

• Japan • South Korea• Taiwan

Export promotion integral element of overall development strategy after WWII:Catching up to the West

• Support conditional on satisfactory export performance

• Competition policy and industrial rationalization• Main instruments: allocation of investment capital

and foreign exchange

• Export-led demand pushed up prices, profits and production—artificial acceleration of import substitution, esp. in machinery and chemicals.

• BoP crisis (gold reserve loss) was solved.• Narikin emerged (Suzuki, Ship Narikins). They spent money

on big villas, parties, women.

1913 1919Iron 47% 65%Steel 34% 47%

0

1

2

3

1904 1912 1914 1916 1918 1920 1924 1928

Export

Import

Production

1920s• WW1 Bubble burst and recessionary period begins• Machinery, chemical, heavy industries expands• Electrification (hydraulic power generation) rises

0%

1%

2%

3%

4%

5%

6%

7%

8%

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1905

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1911

1913

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1921

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1925

1927

1929

1931

1933

1935

Late Meiji Taisho Early Showa

0%

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1911

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1919

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1925

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1931

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1935

Late Meiji Taisho Early Showa

WW1

Real GNE Growth (5-year moving average)

Estimate by Ohkawa, Takamatsu, Yamamoto

Source: S.J.Bytheway (2005), pp.166-169

Compared with Meiji Period,• The number of US FDI increases.• FDI in automobile, electrical, machinery.• Zaibatsu plays key role in FDI partnership or subsequent

take-over.

At the same time, Japan’s outward FDI begins:• FDI to China: textiles (Shanghai, Qingdao), steel (Anshan)• FDI to Korea: heavy chemical industries

Technical Experts(Graduates of Technical Univs. & High Schools)

0

2000

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6000

8000

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14000

16000

1880 1890 1900 1910 1920

Private sector

Public sector

1. Foreign advisors (public and private sector)

2. Engineering education (studying abroad, Institute of Technology; technical high schools)

3. Copy production, reverse engineering, technical cooperation agreements (esp. automobiles, electrical machinery); sogo shosha (trading companies) often intermediated such cooperation

Private-sector experts, 1910 Mining 513 (18.0%) Textile 300 (10.6%) Shipbuilding 250 (8.8%) Power & gas 231 (8.1%) Trading 186 (6.5%) Railroad 149 (5.2%) Food 149 (5.2%) TOTAL 2,843 (100%)

• Heavy & chemical industries (not banks, textiles, trade)

• Backed by political connection and support• Active investment in Korea and Manchuria (NE

China)

Name Features Current firms

Nissan 日産（ Japan Industry ）

Cars, chemicals, machinery, fishery, mining;Raising fund in stock market;Invest in Manchuria

Hitachi, Nissui, Nissan Motors, Sompo Japan, Japan Energy

Riken 理研 Chemical, medical research Riken （ Res. Inst.)

Nicchitsu 日窒 Fertilizer, medicine, metals Chisso

Nisso 日曹 Sodium hydroxide (NaOH) Nihon Soda

Mori 森 Aluminum, ammonia, iodine Showa Denko

• Export Led• Conglomerates• Technology Transfer• FDI• (Japan) Cradtsmanship Manufacturing Spirit

• In Japan’s early factories, traditional shokunin (craftsmen) and modern shokko (workers) coexisted.

• Craftsmen were proud, experienced and independent. They were the main force in initial technology absorption.

• Workers received scientific education and functioned within an organization. Their skills and knowledge were open, global and expandable.

• Over time, craftsmen were replaced by workers. Experience was not enough to deepen industrialization.

Prof. Odaka proves these points by examining the history of concrete firms in metallurgy, machinery and shipbuilding.

• Mono means “thing” and zukuri (tsukuri) means “making” in indigenous Japanese language.

• It describes sincere attitude toward production with pride, skill and dedication. It is a way of pursuing innovation and perfection, disregarding profit or balance sheet.

• Many of Japan’s excellent manufacturing firms were founded by engineers full of monozukuri spirit.

Sakichi Toyota1867-1930

Konosuke Matsushita1894-1989

Soichiro Honda1906-1991

Akio Morita (Sony’s co-founder)

1921-1999

Japanese Post WWIICompetitive StrategyJapanese Post WWIICompetitive Strategy

1960 ～ 1970 ～ 1980 ～ 1990 ～ 2000 ～1950 ～1940 ～

<Japanese Economy Trends><Japanese Economy Trends>

<Management Innovation <Management Innovation History>History>

Japanese Economy and Management Innovation

Wartime controlled economy

Postwar recovery period

High-growth period

Energy saving & lean management

Bubble economy

Heisei recession

Recovery period

Process management methodology

American style management method

Productivity improvement

Strategy & marketingMarket-based flexible manufacturing

Japanese style management

American style global management

• Cartels.• Allowing industry cartels

(government controls on how many competitors are allowed in industries, this promoting competitive stability);

• Anti-trust.• Lax antitrust enforcement to

enable Japanese companies to grow into world-class size;

• R&D.• Government-financed corporate

R&D; • Financing.

• “Sweetheart loans” to corporations that the government would pay off if the corporation ran into financial trouble.

• Cárteles. • Permitir los cárteles de la

industria (controles de gobierno en se permite a cuántos competidores en industrias, esta estabilidad competitiva que promueve);

• Anticompetitivo. • Aplicación anticompetitiva floja

para permitir a las compañías japonesas crecer en tamaño de la mundo-clase;

• Investigación y desarrollo • I&R corporativo Gobierno-

financiado; • Financiamiento.

• el "amor presta" a las corporaciones que el gobierno pagaría apagado si la corporación funcionó en apuro financiero.

• Cartels.• Allowing industry cartels

(government controls on how many competitors are allowed in industries, this promoting competitive stability);

• Anti-trust.• Lax antitrust enforcement to

enable Japanese companies to grow into world-class size;

• R&D.• Government-financed corporate

R&D; • Financing.

• “Sweetheart loans” to corporations that the government would pay off if the corporation ran into financial trouble.

• Cárteles. • Permitir los cárteles de la

industria (controles de gobierno en se permite a cuántos competidores en industrias, esta estabilidad competitiva que promueve);

• Anticompetitivo. • Aplicación anticompetitiva floja

para permitir a las compañías japonesas crecer en tamaño de la mundo-clase;

• Investigación y desarrollo • I&R corporativo Gobierno-

financiado; • Financiamiento.

• el "amor presta" a las corporaciones que el gobierno pagaría apagado si la corporación funcionó en apuro financiero.

• Investing in nations that trade with Japan (by purchasing their stocks & bonds, real-estate, building manufacturing plants, etc.).

• Sharing technology with their trading partners.

• Joint ventures with foreign firms.

• Loaning money to Western governments which debt finance their domestic budgets (“Keynesian economics”) .

• Making sure Japanese products are better than foreign products.

• Invirtiendo en las naciones que negocian con Japón (comprando su acción y enlaces, las instalaciones fabriles inmobiliarias, constructivas, etc.).

• Compartir tecnología con sus socios que negocian.

• Empresa a riesgo compartido con las firmas extranjeras.

• Prestando el dinero a los gobiernos occidentales que las finanzas de deuda su domestic presupuestan ("economía de Keynesian").

• Los productos japoneses que se cercioran de son mejores que productos extranjeros.

• Customers stay loyal to their first company.

• Especially when that company has lowest prices due to vast manufacturing economies of scale.

• Los clientes permanecen leales a su primera compañía.

• Especialmente cuando esa compañía tiene precios bajos debido a las economías extensas de la fabricación de la escala.

• National industrial planning pours new investment into rising new global markets .

• Drains money from declining markets.

• Japan allowed the sun to set on :• Electronics industry & the

sun to rise on digital products;

• Small cars to luxury cars; • Home products to

biogenetic.

• El planeamiento industrial nacional vierte la nueva inversión en nuevos mercados globales de levantamiento.

• Drena el dinero de mercados que declinan.

• Japón permitió que el sol fijara encendido: • Industria de electrónica y el

sol a levantarse en productos digitales;

• Coches pequeños a los coches de lujo;

• Productos caseros a biogenético.

• Bridgestone• Canon• Citizen• Daihatsu• Hitachi• Honda• Isuzu• Komatsu• Mazda• Mazuno

• Mitsubishi• Nissan• Olympia• Panasonic• Pioneer• Seiko• Sharp• Sony• Suzuki• Toyota

• Acquiring Technology Cheaply.

• Innovating.• Selling Product Below

Cost.• Build market share.

• Adquiriendo Tecnología Barato.

• Innovación. • Venta Del Producto

Debajo Del Coste. • Cuota de mercado de

la estructura.

• In the 1980s, Japan claimed the global VCR market for itself by under-pricing potential competitors. They acquired a patent for the VCR process from an American company that couldn’t find a way to make a short-term profit on the VCR.

• Japanese companies then began selling VCRs below cost to build market share & soon were selling at such a high volume that their costs declined to a profitable level.

• Japanese economies of scale were so great that foreign competitors were locked out of the market.

• En los años 80, Japón demandó el mercado global del VCR para sí mismo por los competidores potenciales de debajo-tasacio'n. Adquirieron una patente para el proceso del VCR de una compañía americana que no podría encontrar una manera de hacer un beneficio a corto plazo en el VCR.

• Las compañías japonesas entonces comenzaron a vender VCRs debajo de coste para construir la cuota de mercado y pronto vendían en un tan alto volumen que sus costes declinaron a un nivel provechoso.

• Las economías japonesas de la escala eran tan grandes que los competidores extranjeros eran bloqueados fuera del mercado.

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Globalization (Especially Financial Market)

Traditional System

New System

• Management geared for high growth

Interacting with

• Macroeconomic policy mistakes

• Interest rates were 0%• Firms overborrowed

• Projects that earned a mere 0% passed muster

• Banks overlent• Collateral or track records were enough

• Asset prices proved unrealistic• Projects didn’t earn 0% ex post • Banks couldn’t collect on their loans

• Management had no need for financial controls• project selection was easy

• failure was hard / recessions were few & far between

• But pricing long-lived assets was hard• Real estate grew faster than economy

• Stock prices grew faster than economy

• Growth industries grew very fast indeed!!

• Change undermines rules of thumb for banks

• Change in types of industry / borrowers

• Change in strategic environment / flow of funds

• Change in regulatory environment

• Mistakes are made …

• … and a shock produces crisis

• Transition out of agriculture• Fast productivity growth in industry• Urbanization!

• Household formation• Infrastructure, housing

• But it’s a one-time transition!• And eventually ends

• Industry no longer needs funds• 1970s: 10% of GDP swing in under a decade!!

• But households keep saving• Past savings were when incomes were low

• So accumulated wealth was modest

• So people needed to keep saving to fund old age

• Who then will borrow this funds?• Paradox of Thrift!!

1961-65 1966-70 1970 1971-75 1976 1976-80 1981-85 1986-92I (business) 17.0 16.7 19.6 15.2 8.8 8.3 8.5 11.1

S (business) 5.2 8.7 10.7 4.0 0.8 2.7 2.9 2.3S - I -11.7 -8.0 -8.9 -11.2 -8 -5.7 -5.5 -8.8

I (household) 2.8 4.3 4.5 4.0 7 6.1 2.8 1.3S (household) 12.1 12.0 12.8 16.4 19.9 17.1 13.6 11.6S - I 9.2 7.7 8.3 12.4 12.9 11.0 10.8 10.3

S - I Private -2.5 -0.3 -0.6 1.2 4.9 5.3 5.3 1.5

I (Center 5.5 5.7 5.7 6.9 6.5 7.5 6.8 6.4S & Local) 6.9 6.6 7.6 6.7 2.3 2.4 3.6 8.3T - G 1.4 0.9 1.9 -0.2 -4.2 -5.1 -3.2 1.9

T - G + S - I -1.1 0.6 1.3 1.0 0.7 0.3 2.0 3.4

• Corporate investment fell 10% of GDP

• Savings rose!

• Banks were left to scramble

• Japanese fiscal deficits• created a new borrower for banks• MOF policy stopped that by 1982

• Reagonomics: US consumption boom• Export-led growth from 1982• Appreciation / Plaza Accord stopped that from 1986

• Bad macro policy• Easy money from 1986• “Japan as Number One” psychology

• Just as banks sought new borrowers• Real estate … and more real estate!• Small business• Also international loans

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BOJ Discount Rate Target Call Rate

Nov 1, 1986following

"Plaza Accord"

Feb 23, 1987

May 31, 1989first anti-"Bubble"

rate hike

Aug 30, 1990

Jul 1, 1991interest rates

kept high for 18 months following

the "bubble's" peak

Sept 8, 19950.5%

discount rate!!

Feb 12, 1999"Zero InterestRate Policy"commences

Christmas 1989rate hike

– "bubble" peaks –

• “Bubble” economy • Stock prices doubled• Urban real estate prices rose even more

• Fiscal policy mistakes accentuated• On-again, off-again policy built up debt

• Regulatory policy errors accentuated• Banks allowed to make more bad loans

Closing Price, Nikkei 225

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Peak = 38957Dec 31, 1989

Today's Close14,988 is 37% lower than 10 years ago, and 61.5% below peak!

• Monetary policy doesn’t work• Interest rates can’t be pushed below 0%• But prices are falling ==> real rates are positive

• Banks (rightly) fear bad assets• Outstanding loans are shrinking!• Money growth is of cash…

• “Liquidity Trap”• If monetary policy doesn’t work, how about fiscal??

Current lending rates:Short-term prime rate: 1.5%Long-term prime rate: 2.25%

• Repeated fiscal packages• Short-term policies are discounted by consumers• Higher temporary incomes are counteracted by

stagnant consumption• Credibility lost

• Permanent tax cuts??• Huge deficits already - 7% of GDP• Demographic “old age” boom looms• No room left to add fiscal stimulus?

Extensive corporate restructuringExtensive corporate restructuring Reorganization of facilities and labor, selection andconcentration of business (business selling-off)

DDefaulted debt clean-upsefaulted debt clean-ups and banks and banks integrationintegration

Public fund for major banks and zero interest ratesExport boom supported up by global Export boom supported up by global economic growtheconomic growth

Positive growth cycle for individual consumptionsand facility investments

Risk

　　　 Higher price of row materials and lower price of finished products

　　　 Employment shortage

Long term and close relationship among Government, Banks, Companies and Employees

Government

Banks & Companies Employees

Short term relationship based on flexible financial market like US Economy.

Emphasis on exports from early 1960s, due to reduction of US aid

• Strong state with export success as main goal• Highly successful neutral export promotion until

early 1970s• Targeting of heavy industries from mid-1970s to

1979, with mixed success

Instruments of export promotion• Credit allocation; banking system nationalized• Subsidies, tax and tariff exemptions• Exchange rate policy• Explicit links between domestic protection and

exports• Institutional incentives: presidential

commendations

Strong export orientation from early 1960s due to termination of US aid

• Successful targeting of light labor intensive industry until mid-1970s

• Focus on heavy industry from mid-1970s, with some problems

• Redirection to high-tech industries from early 1980s

Instruments of export promotion• Fiscal and institutional incentives. Small role

for credit allocation: little subsidized capital• Promotion of FDI, unlike Japan and South Korea• Export processing zones• SOEs producing inputs for private sector

exports

• Model 1: South Korea• Strong government, selective intervention• Controlled capital markets, debt financing • Concentrated industry (50 large chaebols)

• Model 2: Taiwan• Strong government but less selective intervention• Informal capital markets, equity capital• 57,000 small and medium-sized firms in industrial sector

(on average ~40 employees)

• Purchasing power parity GDP of 2004• South Korea: 925 billion US$• Taiwan: 576 billion US$

• GDP growth rate of 2002• South Korea: 4.6%• Taiwan: 6.0%

• South Korea in 1997• negative growth for the 1st time in 2 decades• unemployment rate rose from 3% to 7%• per capita GNP almost shrank by half

• Taiwan in 1997• economic growth slowed down• still robust

• Is the NIE development model in crisis?

• development becomes state’s priority• commitment to private property & market

• government’s strategic industrial policy

• state agencies formulate and implement strategic policies (e.g. Japan’s MITI)

• sound macroeconomic management• bureaucratic autonomy from interest groups

• Military strongman rule from 1960s to 1970s

• South Korea• Park Chung Hee• 1962-79

• Taiwan• Chiang Kai-Shek • 1945-75

• Experience with Japan’s wartime economic management in Northeast China

• Economic Planning Board• Ministry of Trade and Industry• Ministry of Finance• Import substitution => Export orientation

• Normalization with Japan• Vietnam War

-20

0

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1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

South Korea's GNP & Export Growth Rates (% )

GNP Growth Export Growth

• Government owned and controlled • all 5 commercial banks

including the central bank (Bank of Korea)

• all 6 special banks• 2 of the 3 non-bank

financial institutions

• Foreign Capital Inducement Law• control private sector’s

access to foreign capital

• Business activities directed by the state

• Low interest rate to induce firms to grow• favored large firms (Chaebol)• firms compliant with state policies and plans

• Excessive demand for capital• inflation favored large debtors

• Inflation discouraged domestic savings• reliance on foreign debts

• Vulnerable to external shocks

• Large, conglomerate family-controlled firms of South Korea

• Lit. business association• Pronounced jay BOL • State-corporate alliance came into being with the

regime of Park Chung Hee• Prohibited from owning banks • Government-favored chaebol had special

privileges • Many grew quickly because borrow vast funds

• 19741. Samsung 2. LG 3. Hyundai 4. Hanjin 5. Ssangyong 6. SK 7. Hanhwa 8. Daenong 9. Dong-Ah

Const. 10.HanilSyn.

Textile

• 20001. Hyundai 2. Samsung 3. LG 4. SK 5. Hanjin 6. Lotte 7. Daewoo8. Kumho 9. Hanhwa

10.Ssangyong

• HCI plan in 1970s• heavy and capital-intensive industries

• Strengthening of state intervention• Foundation for the emergence of chaebol• Combined net sales of the top 10 chaebol• 1974 15.1% of GNP• 1978 30.1% of GNP• 1981 55.7% of GNP

• 1962 157 million US$• 1979 20.5 billion US$• Government preferred foreign borrowing over

foreign direct investment• maintain domestic ownership of industries

• in 1990s private sector borrowed heavily• 1994 56.9 billion US$• 1997 154.4 billion US$

Debt to Equity Ratio (% ) of Manufacturing Firms

0

100

200

300

400

500

600

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

South Korea

Taiwan

• Debt to equity ratio of top Chaebol

• Control inflation and maintain stability• Central Bank of China ultra-conservative• Government controlled financial sector

• nationalized the banking system• private commercial banks were not allowed to operate

until 1991• 71.3% of the assets of all financial institutions were in

government-owned banks

• Traditional family networks became the major source of capital

• limited the size of Taiwan’s companies• small and medium-sized firms

• limited the expansion of firms• limited the debt-equity ratio of firms• most large, capital-intensive, technology-intensive

industries were state-owned

• Government’s anti-inflation policy• encouraged savings

• Government avoided concentration of economic power

• Government promoted equitable distribution of income

• Government’s reluctant to use preferential financial treatment to large firms

• Remarkable success in both South Korea and Taiwan

• Growth rates have reached 8-10% most years since the early 1960s,

• Per capita incomes have grown from less than 200 USD in the 1950s to over 10,000 USD in the mid-1990s.

• The price of growth has been one third higher in Korea• Korea has invested 30-35% of GDP every year, while

Taiwan has managed equally well with 20-25%

• Korea has been forced to borrow heavily while Taiwan has become a capital exporter

• Clear differences in vulnerability when the Asian crisis strikes in 1997

Characteristics of successful state intervention (export promotion programs)

• Allocation of preferences based on markets and competition: hard budget constraints

• Policies target the private sector• Relatively little corruption and interference from

interest groups as long as policies were neutral

• Infrastructure investment• Access to inputs at world prices• Preferential access to loans and foreign exchange• Fiscal incentives to promote new industries• Institutions for technology and market research• Quality control and quality standards

• What have Indonesia, Malaysia, and Thailand learned from East Asia?

• Two stages: attempts at import substitution and industrial targeting in the 1970s and early 1980s but increasing focus on export promotion since then. Differences across region emphasized during Asian crisis

• 1970s: Growing public revenue, active industrial policy, and emergence of significant SOE sector

• Early 1980s: Dutch disease symptoms and home market bias

• Mid-1980s: some trade liberalization and export promotion, but continuing targeting of ”strategic” capital-intensive sectors.

• High foreign debt and distorted industry structure: the wrong lessons from Korea

• 1970s: NEP. Support to bumiputra and promotion of employment and labor intensive exports. EPZs.

• Early 1980s: Attempt at heavy industry promotion, with little success

• From late 1980s: Export oriented reforms, inflows of FDI, with positive impact on growth. Surprisingly large impact of Asian crisis: political factors important?

• 1970s: Import substitution. Industrial targeting lacked success, weak political system

• Early 1980s: Shift to relatively neutral export promotion. Rapid export expansion, inflows of FDI, and high growth rates

• However, fixed exchange rate + low investment in education and infrastructure eroded competitive-ness of labor-intensive export industry.

• Reasonably sound industry structure after crisis