Abstract

Continuing from Chapters 5 and 6, this chapter attempts to combine the traditional learning model with the recent theory of economic growth using Maddison's long-run real GDP per capita data of the three fastest-growing countries in East Asia: Korea, Taiwan and Japan.

We first explain the game of catching up among nations in the World. We find that catching up and falling behind among countries are the rule rather than the exception. We then explain the learning coefficients of Taiwan and Korea with Japan and the United States through periods before and after World War II. The model of learning leads to a logistic model of economic growth of convergence between two countries. Using time-series data, the coefficients of a logistic model are estimated to confirm that the real GDP per capita of Taiwan and Korea is converging to that of Japan and that of the United States, respectively. Similarly, Japan's GDP per capita converges to that of the United States. The time required for finite convergence, other things being equal, for these countries is also estimated.

Introduction

One of the most important challenges for developing countries is to catch up with developed countries. It is a question of economic convergence, and is generally framed in terms of the convergence of the level of real GDP per capita. Historically, poorer countries develop faster than (and so catch up and converge with) richer countries, if the former are closely associated with the latter. Korea and Taiwan are good examples. Before World War II, both nations were colonies of Japan, which was the fastest-growing economy in the world during the period 1911– 40. Despite Japanese exploitation, both achieved high growth rates of real GDP per capita, and, by the end of the 1930s, their levels of real GDP per capita were higher than those of any other developing countries in Asia (Hsiao and Hsiao, 2003).

Abstract

In the face of the Asian financial crisis of 1997, the first part of this chapter carefully studies the characteristics of the financial crisis and its impacts on the Taiwanese and Korean economies. We examine 22 macroeconomic fundamentals, such as GDP, inflation rates, government budget, trade balance, external debt and so on, between Korea and Taiwan. We find that the macroeconomic fundamentals of both countries were basically the same, with the exception of the international finance sector. After defining the currency crisis and banking crisis, the causes of crises are identified as the nominal exchange rates and the short-term external debt to international reserves ratios. In view of this, in the second part of the chapter, we use cointegration and causality tests to examine the relationship between these two time series. We find a unidirectional causality from the short-term debt ratio to the exchange rate for Korea, but no causality is found between the two for Taiwan. The chapter ends with some discussion on the lessons and challenges from the experiences of these two countries.

Introduction

It is well known that Korea and Taiwan are the only two noncity-state countries, other than Japan, that have achieved and maintained rapid modern economic growth since the end of World War II. As such, most studies often lump them together as both countries achieved impressive growth through rapid industrialization and accelerated exports, like two wheels of a cart. Thus they are generally treated as twins, if not as identical, in world capitalistic development.

In recent years, however, their differences in the development process have also come to light. Taiwan relied more on domestic savings and direct foreign investment, along with emphasis on the contribution of small and medium-size enterprises. Korea depended on foreign borrowing, incurring large external debt, with a major role played by large conglomerates or chaebols in industrialization and trade. What are the impacts of the Asian financial crisis on these differences?

Abstract

Using the weighted Malmquist productivity index, the efficiency index and the technical index, this chapter compares the productivity growth of 15 matched manufacturing sectors of Korea and Taiwan. The distance functions are derived by using industry-wide production frontiers from 1979 to l996. We find that the efficiency growth rates for both countries are high and are the predominant component of productivity. We also find that technology and productivity growth rates are much higher in Taiwan than in Korea. At a disaggregated level, there is more similarity in technology growth, but less or no similarity in efficiency growth. In both countries, productivity growth is similar, but traditional industries rely more on efficiency, basic industries on technology and high-tech industries on both. Lastly, in the innovator analysis, we found that the petroleum and coal products sector was consistently the major innovator of the manufacturing industry in both countries, but the minor innovators differed.

Introduction

Since the Asian financial crisis of 1997, it has become clear that the “East Asian Economic Miracle” has its limits. The Asian NIEs and the Association of Southeast Asian Nations (ASEAN) countries have fallen into recession and face the prospect of a productivity slowdown. Taiwan and South Korea (hereafter Korea), the most prominent “twins” among the impressive Asian performers, are no exception. This chapter compares productivity growth and its two components, technical progress and efficiency change, at the matched manufacturing levels of the two countries during 18 years (1979–96) before the financial crisis set in.

The importance of productivity growth in the study of the economic development of nations cannot be overemphasized. Productivity growth is “the single most important indicator of any nation's economic performance in the long run” (Lester, 1998), and “for real economic miracles you have to look to productivity growth […] In terms of human welfare, there is nothing that matters as much in the long run” (Baumol et al., 1989). Indeed, Korea and Taiwan can claim long-run “miracle growth” in the twentieth century. From 1911 to 1992, the average annual growth rate of real GDP per capita of Taiwan was 3.04%, and of Korea, 2.98%. The two ranked second and third in long-run world development, surpassed only by Japan, which had 3.34%.

Asia is a vast, complex and diverse region. It has about one-third of the earth's land area and about one-half of the world's population. The world's major religions and cultures— Christianity, Islam, Hinduism, Confucianism/Daoism and Buddhism— originated in Asia. In addition, it has diverse climates, geology, races, cultures, country areas, population sizes and resources. According to Maddison (2006, Table B-18), India had the highest GDP from 0– 1000 AD in the world, and China caught up with India after 1500 AD, which lasted until around 1820. China then fell behind the aggregate real GDP of 12 major European countries in 1870 and further fell behind that of the United Kingdom after 1913. The Industrial Revolution in the West during the nineteenth century did not spread to Asia, and Asia fell behind the West further during the era of Western colonialism. The economies of India, China and most of the Asian countries stagnated under colonialism and the imperialism of the European powers. Even two decades after World War II, “On the per capita basis the East [, Southeast, and South] Asian developing countries are in fact the world's poorest region” (Kirby 1967, 25; the brackets are the authors’).

Japan was an exception in Asia. It was the only country in Asia to shed feudalism and start modernization in the late nineteenth century. Japan's policy of “Rich Country Strong Army” helped it rise up to annex Taiwan (1895) and Korea (1910), became a world power and eventually formed the “Greater East Asia Co-prosperity Sphere.” While Japan tried to unite the East, Southeast and South Asians against European colonialism in the 1940s, it only proved to be another kind of Japan-centered imperialism and colonialism in Asia, and Japan was eventually defeated by the Allies in 1945.

Nevertheless, World War II brought a sea change in the world order. When the rest of Asia was still engaged in monocultural economic development and there was fighting among groups of nationalists, socialists, capitalists and communists, Japan recovered from the war damage quickly and, by benefiting from the Cold War and trading with the United States, achieved a highgrowth “Japan Miracle” in the 1960s. Japanese foreign direct investment then moved to Taiwan and Korea in the 1970s.

Abstract

In growth theory, industrial productivity is the major factor driving economic growth. Instead of using conventional measures of total factor productivity, we use the weighted Malmquist productivity index, which was developed only recently, and its components, the efficiency index and the technology index.

Following the previous chapter, this chapter also compares the productivity performances of 15 matched manufacturing sectors in Korea and Taiwan. Using Maddison's data, we first ascertain that Taiwan and Korea are at the same development stage. The distance functions are derived by using the Malmquist productivity indexes, based on category-wise metafrontiers, 1978–96. Comparisons at the sector levels are made using sequential multiplicative products of the indexes.

We find that during this period, the overall productivity and technology growth rates of Taiwan were higher than those of Korea. This is also shown at disaggregated levels. While there are many similarities between the two countries, the productivity and technology growth rates of the high-tech industries in Korea are much larger than those of Taiwan, and more high-tech sectors in Korea are leading innovators compared to Taiwan. In contrast, Taiwan's high overall growth rate rested mainly on its traditional and basic industries. The differences are chronic rather than transient.

Our results indicate that there are several signs that Korea is catching up with Taiwan in productivity at long last. Their performance in the next decade will be of interest to watch.

Introduction

The rapid postwar growth of Taiwan and of the Republic of Korea (hereafter Korea) has been a focus of studies among scholars of development economics. The development of these two countries began in the early years of the twentieth century (Hsiao and Hsiao, 2003a), and accelerated after World War II (Hsiao and Hsiao, 2002, 2003a; Page, 1994). Beginning in the late 1960s, they entered the world production process, achieving impressive growth through rapid industrialization and accelerated exporting in the 1970s and the 1980s, with double dependence on Japanese imports (capital equipment and intermediate goods) and US markets (Hattori and Sato, 1997; Hsiao and Hsiao, 1996; Okuda, 1997).

Abstract

Before World War II, Taiwan was a colony of Japan, and India was a colony of the United Kingdom. This chapter is unique and different from other chapters in that we compares the colonial experiences of Taiwan and India before World War II and their effects on the economic development of the postwar period. The chapter combines the traditional learning model with recent theory of economic growth using Maddison's long-run real GDP per capita data.

We first discuss the performance of India and Taiwan in the world economy. While economic theory suggests that, due to its large area and population, India could have grown faster than Taiwan, this was not the case after World War II. We identify differences in terms of learning in the development experience of the two countries under colonial rule. The colonial distortion in industrial and agricultural development appeared to be more important in India than in Taiwan. It appears that the most important factors, however, were health and education.

We then derive learning coefficients of India with the United Kingdom, Taiwan with Japan, and Japan with the United States through the prewar and postwar periods. Long-run coefficients of learning are estimated. Using the conventional unit root– based test of convergence, we show that the model of learning leads to a logistic model of economic growth. We then confirm that real GDP per capita of Taiwan was converging to that of Japan, whereas that of India showed only slight convergence to the United Kingdom or Taiwan. Our results underscore the importance of studying colonial experiences of the two countries, and for that matter, of any country in order to understand its postwar economic development.

Introduction

The study of the economic convergence of developing to developed countries as well as the convergence of some developed countries to dominant developed countries, such as the United States, is one of the most intriguing and difficult matters in the recent literature on economic growth and development. Few works, however, have focused on whether former colonies could catch up with the colonizer country once the colony achieved independence and cast off colonial institutions deemed inimical to economic development.