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6 - The role of finance in economic development in South Korea and Taiwan
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- By Yung Chul Park, Korea University, Susan M. Collins, Harvard University, Helmut Reisen, OECD
- Edited by Alberto Giovannini, Columbia University, New York
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- Book:
- Finance and Development
- Published online:
- 05 November 2011
- Print publication:
- 25 March 1993, pp 121-157
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- Chapter
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Summary
Introduction
The economic performance of South Korea (Korea henceforth) and Taiwan over the last three decades has been exceptional by any international standard. Building on overpopulated and agriculture-dominated economies belonging to the poorest group of countries in the 1950s, both Korea and Taiwan have succeeded in sustaining rapid growth and industrialization to join the ranks of newly industrialized countries over a period of three decades.
The two countries share a similar Confucian cultural background, in which education is highly valued and obedience to the authorities and frugality are emphasized. They are also poorly endowed in terms of natural resources, making it necessary to trade with other economies. In fact, both Korea and Taiwan stand out as the two most successful cases of economic development and industrialization through the promotion of exports of manufactures.
Because of their colonial heritage and economic dependence on Japan, Korea and Taiwan have developed a financial system that is quite similar to that of Japan in its structure and role, which is bank-oriented, highly regulated, and which was until recently insulated from world financial markets. Joining the worldwide trend of financial liberalization and internationalization in the 1970s, Japan has managed a substantial deregulation and opening up of its financial markets and industries, and Korea and Taiwan have embarked on a similar course of financial adaptation since the early 1980s.
Discussion
- from Part One - Open economy analysis
- Edited by Ian Goldin, L. Alan Winters, University of Birmingham
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- Book:
- Open Economies
- Published online:
- 04 August 2010
- Print publication:
- 28 May 1992, pp 39-41
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Summary
As with a good jazz musician, we have got used to hearing from Sebastian Edwards many variations on a theme. The theme is the sequencing of structural reform. The variation this time in Chapter 2, is a two-period model to explore two previously neglected aspects of the sequencing literature: the role of labour market distortions and the impact of reform on agriculture. Edwards arrives at a very agnostic result (which is also contrary to some of his earlier findings): from a rigorous welfare perspective it does not matter whether you first liberalise trade, dismantle capital controls, or deregulate labour markets. Either this is a very important result which joins those who have stressed political economy considerations, or it merely reflects the failure of Edwards's model to capture some aspects relevant to the sequencing problem. Let me try to explore this second explanation.
Less agnosticism may be produced by modifying Edwards's model in three ways: (1) by giving a more realistic description of the labour market in LDCs, (2) by introducing a richer production function, and (3) by redefining sectors.
First, the labour market. In Edwards's model, for example, financial opening will reduce employment in agriculture. Financial opening in period 1 raises the real exchange rate, here defined as the price of services relative to tradables. Appreciation raises the demand for labour in the service sector and, due to the labour market constraint, reduces employment in agriculture. What do we observe, by contrast, in reality? Search unemployment in the urban informal service sector, disguised lowproductivity unemployment in the rural sector, and a tendency of industry to contract as a result of real appreciation.