Case studies

CASE   STUDIESStrategy
To understand the problem of Tiger countries’ economic development in the wide context of their historical legacies, cultural background, vision and commitment of governments and the highly pragmatic manner of approaching their problems, a through case study is needed to concentrate on the nature of the specific core development issue which influenced the rest of its development process.

For example, core issue for Singapore is its micro-dimension ; for Malaysia it is its tangled ethnic problems ; for Indonesia, it is archipelagic character and electric social systems ; for Thailand it is how to balance its deep religiosity with the need for material achievement ; for Philippines it is the inability to check polical cynicism; and for Brunei it is affluence and paternalistic rule. To view those core issues for drawing appropriate lessons, an indepth case study of these countries can help understand its indigenous perspective.

The case study will include, as to how they had planned their economies and implemented them in the past years to achieve spectacular socio-economic standard in the present. This would also give an inside view of the policies and strategies pursued to surmount impediments to attain success. With this aim, two of the Tiger countries namely South Korea and Malaysia have been selected.

THE REPUBLIC OF KOREA
Unlike serveral of the larger economies in East-Asia, which evolved from protectionist, inward-looking trade regimes towards relatively open economies, Korea did not have a sufficiently large domestic population to contemplate a strategy other than export-led development. Its performance may be described as forced growth, because it did not stem from exploitation of natural resources, an influx of labour flows of speculative capital, or the adoption of new means of production. Rather, growth resulted from a systematic programme of importing raw materials and intermediate goods for processing re-export with added value.

Reforms (1950-60)
.Korea had a realatively well-developed infrastructure at the end of World War II, but the partitioning of the peninsula by US and Soviet forces severed economic links between the heavily industrial north and agricultural south. The war took a heavy toll, taking 1.5 million lives and destroying two-thirds of the south’s industrial capacity. With a poor natural resource base and one of the world’s highest population densities, the south was almost entirely depended on US aid after the war. For all its devastation, the war may have helped to prepare Korea for an industrial take off by loosening a rigid social structure and opening the way for fundamental changes in outlook. While development efforts in the 1950s included several false starts, progress was made in reconstruction, including the restoration of transportation and communication network. The government also completed an all important
land reform programme that had stalled before the war.

Measures (1953-57)
During the second stage, the government attempted to develop industry as the base for economic self-sufficiency. The government invested heavily in infrastructure, expanding transportation and power networks built by the Japanese ; US aid was an important source of finance, funding 49 per cent of public investment in infrastructure. Extensive quantitative restrictions and high tariff rates shielded domestic consumer goods from foreign competition.

Export (1958-72)
Anticipating the termination of US aid and hence a need to obtain foreign exchange, the government shifted to a policy for outward orientation and export promotion. Stating in 1958, it adopted a series of measures aimed at promoting exports and foreign investment. A multiple exchange rate system was replaced with a unitary rate and appreciation was avoided. Tariffs and import countrols were gradually reduced, especially for inputs to export. In addition, the Bank of Taiwan, China, offered low-interest loans to exporters. The government also hired the Stanford Research Institute to identify promising industries for export promotion and development. On the basis of Taiwan, China’s comparative advantage in low-cost labour and existing techinical capabilities, the institute chose plastics, synthetic fibres and electronic components. Other industries subsequently promoted included apparel, consumer electronics, home appliances, watches and clocks. Direct foreign investment (DPI) played a catalystic role during this period and replaced US aid as the main source of foreign capital. Although DEI was only 6 per cent of gross capital formation, in the 1960s, nearly 80 per cent of it went into manufacturing. More important, DPI facilitated technology and skill transfers, leading to much improvement in quality and the diversification of industries.

Trade Development (1961-73)
Under President Park, aggressive promotion of exports was combined with classic import protection at home. Korean policymakers maintained close control over trade, exchange and financial policy, as well as aspects of industrial decision making. In contrast to other controlled economies, they used these instruments to pursue the primary objective of export growth. The trade regime was biased in favour of export as a whole but essentially neutral with respect to the composition of exports.
Even so, the first instruments of export promotion were highly discretionary. Exporters were supported with multiple exchange rates, direct cash payments (see table I)22, permission to retain foreign exchange earning to import restricted commodities and permission to borrow in foreign currencies. This system not only avoided hampering exporters with restrictions on capital and intermediate input for their own use but it also gave access to the favourable exchange rates determined by scarcity rents in heavily protected domestic markets.

Even as more domestic instruments gradually replaced discretionary incentives, exporters received significant exemptions from import controls. Traiff exemptions were given to indirect as well as direct exporters and generous wastage allowances on imported intermediates allowed some resale (table 1). These enabled exporters to avoid distortions from protection and in some cases to benefit from the protection of the domestic market.
Support for exports was also channeled through the state-controlled banking system. Objectives were implemented through bank loans explicitly earmarked by the government for particular activities or industries, lent passively by banks at preferential interest rates. Following explicit government directives, banks increasingly used export performance as the criterion of credit-worthiness.

Industrial Development
The heavy and chemical industries (HCI) drive was a major policy shift, away from the neutral incentives of the takeoff period to a commitment by government to use all its levers to steer resources into specific sectors to rapidly alter the industrial structure. Special legislation singled out six strategic industries namely steel, petrochemicals, nonferrous metals, shipbulding, electronics and machinery to receive support, including tax incentives, detailed engineering, subsidized public services and preferential financing.

The government chose the first three sectors to enhance self-sufficiency in industrial raw materials, while the last three were meant to be groomed into technology-intensive export industries. As a result, projects tended to be forward-looking only current technology was imported and US trained Korean scientists and engineers were recruited (see box I).

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