Economic Systems

Ohio Wesleyan University

Goran Skosples

12. East Asia

2

HPAEs

Japan, Hong Kong, South Korea,Singapore,Taiwan,Indonesia,Malaysia, and Thailand

3

Key characteristics

primarily agricultural societies until the early 1960s

abundant labor + low marginal productivity in agriculture

state-led development model

initially very protected markets

export promotion

4

Growth of GDP per capita

0

2

4

6

8

10

12

HKKOR

SNGTAIW THA

IDN

MYS

PHLIN

DJP

NFRA

GERGBR

USA

An

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al G

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ate

1960-701970-801980-901990-002000-04

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The miracle steady and sustained growth for 25 years

accompanied by a decline in inequality

accumulation of human capital•

high and persistent savings rate• stable financial system + postal savings banks• lag in demand• low inflation and positive real interest rates• concentrated banking sector• heavy regulation of banks

6

The miracle

high rates of investment

• gov’t provision of infrastructure and skilled labor

• the role of directed credit & development banks - banks’ focus on ____-term projects and emphasize

real estate lending and commerce financing

- banks tend to focus on large enterprises

- limited role of ________________ markets

• low cost of imported inputs (investment goods)- ______ and _______________ manipulations

• ________ controls limit the export of ______

7

The miracle the market friendly approach of HPEAs

• neither market oriented nor wholly interventionalist

• gov’t intervention justified on ground of market failures:- __________ is lacking

- __________ are common

- market is ____________ coordination failure

• gov’t could outperform the market in these cases

• _______________ export performance as a yardstick (“managed competition”)

was it really the miracle or something else?

8

The miracle? is it sustainable?

• growth can come from:- increased inputs- increased productivity

• HPEAs: research shows most of growth (___) came from increased inputs - increase in labor force - higher participation rate- redeployment of workers from low productivity areas

(agriculture) to high productivity areas (manufacturing)

- more capital per worker

• sustained growth comes from increases in total factor productivity (TFP). In HPEAs, 25% of growth can be attributed to TFP (1% of growth)

9

The East Asian Crisis

high inflow of foreign capital in mid 1990s

• in the form of ___________ investments

• very few ____________ capital investments

___ capital account ___ current account

interest rates in the US _ + _____ exchange rate

problems in Korea and Thailand (_______ capitalism) caused foreign investors to lose confidence – capital flight + currency attacks

a run on banks credit crunch

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Policy response

the International Monetary Fund’s (IMF) role:

• extended credit to recapitalize banks-

-

• required stringent fiscal and monetary policies-

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Lessons1. macroeconomic stability

2. gov’t provision of infrastructure and human capital

3. industrial policy and directed credit

4. stability of the financial system

5. stock markets not as important

6. FDI

7. corruption in the bureaucracy

Future? Will the system hold? What will be the role of managed development? What happens when the comparative advantage of cheap labor is exhausted?