Description
Review the attached instructions for case study review (bullet point 3, which is circled in red is the only part of the assignment to focus on), which requires you to first read the attached “Case Study 13” and then complete a two part question. The first is compile a summary of the 3rd bullet point and the second part is to create a PowerPoint presentation for the third bullet point.
Attachements:
1. “Instructions” – Please see bullet point 3 (circled in red), which is my part of the assignment.
2. “Case Study 13” – This is the origional case study the presentation/summary is based on.
3. “Case Study 13 presentation_answer_point_1” – This is the competed presentation portion of the assignment from one of my group memebers for bullet point 1 (please match the same style of the power point for this assignment).
4. “Case study 13 summary_answer_point_1” – This is the completed summary portion of the assignment for bullet point 1 from one of my group members.
*Please use the answers for bullet point 1 as a guide for what is expected on this assignment. Additionally, you do not need to perform the voice over. I will do that at the end.
Unformatted Attachment Preview
Case study 13
Abstract:
The case study on South Korea’s development strategy highlights the country’s remarkable
transformation from one of the poorest nations in the mid-1950s to a high-income economy
and a leading global innovator by 2012. The core of South Korea’s success lies in its robust
industrialization and export promotion strategies, focused on sectors like consumer electronics,
motor vehicles, and high technology. The government implemented various policies to
encourage exports, technological advancements, and the development of skilled labor. These
included maintaining a favorable currency rate for exporters, providing tax breaks, offering
direct subsidies, and creating export-oriented infrastructure.
Moreover, South Korea placed a strong emphasis on education, leading to the highest
postsecondary enrollment rate worldwide by 2004, though this success led to challenges in job
creation for highly educated citizens. Life expectancy and other social development indicators
also saw significant improvements.
A unique blend of policies supported South Korea’s industrial sector, protecting infant
industries while simultaneously pushing for a strong export orientation. This approach involved
controlling imports and promoting targeted industries with the aim of moving up the
technology and skills ladder. The government’s role in coordinating technological
advancements and maintaining a favorable environment for industrial growth was pivotal.
Despite liberalizing its economy in later years and facing challenges like the 1997 financial crisis,
South Korea managed to maintain its growth trajectory, underpinned by a strategic shift
towards high-tech industries and innovation. The case study suggests that South Korea’s
development strategy, characterized by government-led industrial policy and a focus on exports
and technology, offers valuable lessons for other developing countries aiming for sustained
economic growth and development.
Case Study 13 Trade,
Capital Flows, and
Development Strategy:
South Korea
South Korea is one of the developing world’s great long-term success stories. Many developing
countries have reached middle-income status but remained there; a much smaller number have
reached nominal high-income status but are still not considered fully developed (either by their own
definitions or by development economists). Only a handful of countries have graduated to the ranks
of advanced industrialized economies, of which South Korea is perhaps the most prominent
example.
In the mid-1950s, South Korea was one of the poorest countries in the world. The country is now
classified by the World Bank as a high-income economy, with purchasing power parity (PPP)
income exceeding $30,800 in 2012. Korean consumer electronics and other goods have become
synonymous with high quality at reasonable prices. Even more impressive are Korea’s social
development achievements. By 2004, Korea had attained the highest postsecondary enrollment
rate in the world, with graduates concentrated in technical fields. Ironically, in 2013, a major policy
question was whether corresponding jobs could be found for all these highly educated citizens. By
2012, life expectancy exceeded 80 years. The country regularly ranks even higher on the Human
Development Index than it does in income per capita, and on the 2012 New Human Development
Index, South Korea ranked 12th globally. How did South Korea succeed so spectacularly where so
many other developing countries had not? Certainly one component was its robust industrialization
strategy.
Exports, particularly manufactures in such key sectors as consumer electronics and motor vehicles
and recently in high technology, have grown at an extraordinary rate in Korea. One apparent reason
for South Korea’s remarkable industrial achievements is a national strategy that has favored the
promotion of exports, reflecting increasingly sophisticated skills and technology. Strong financial
incentives for industrial firms to move up the ladder of skills and technology have been built into
most of its policies.
In its years of rapid catching up, South Korea used at least 19 major types of export-promotionoriented industrial policy interventions (note that only some of these policies were in effect in any
one industry and at any one time and that subsidies were considerably scaled back in later years):
1. Currency undervaluation. The effective exchange rate (EER) for exporters was kept higher
than that for importers. As early as 1964, South Korea’s EER for exports was 281 and its
EER for imports was 247, reflecting not trade neutrality but a pro-export bias.
2. Preferential access to imported intermediate inputs needed for producing exports, with strict
controls to prevent abuse. Rebates were paid only after completion of the exports had been
documented.
3. Targeted infant industry protection as a first stage before launching an export drive. South
Korea has had a high dispersion of effective rates of protection even with a relatively low
average.
4. Tariff exemptions on inputs of capital goods needed in exporting activities. This is a price
incentive, whereas preferential access (intervention 2) is based on quantity restriction.
5. Tax breaks for domestic suppliers of inputs to exporting firms, which constitutes a domestic-
content incentive.
6. Domestic indirect tax exemptions for successful exporters.
7. Lower direct taxes on income earned from exports.
8. Accelerated depreciation for exporters.
9. Import entitlement certificates (exemptions from import restrictions) linked directly to export
levels. South Korea long has maintained an extensive list of items generally prohibited for
import, including both luxury goods and import substitution targets. Profitable exemptions
from this prohibition have often been available for firms exporting specified goods that have
low profit margins.
10. Direct export subsidies for selected industries (no longer in use).
11. Monopoly rights granted to the firm first to achieve exports in targeted industries.
12. Subsidized interest rates and preferential credit access for exporters in selected industries,
including automatic access to bank loans for the working capital needed for all export
activities. Medium- and long-term loans for investment were rationed and often available only
to firms that met government export targets and pursued other requested activities.
13. A system of export credit insurance and guarantees, as well as tax incentives, for overseas
marketing and postshipment export loans by the Korean Export-Import Bank.
14. The creation of free-trade zones, industrial parks, and export-oriented infrastructure.
15. The creation of public enterprises to lead the way in establishing a new industry. Howard
Pack and Larry Westphal found that “the share of public enterprises in [South] Korea’s
nonagricultural output is comparatively high, being similar to India’s.”
16. Activities of the Korean Traders Association and the Korea Trade Promotion Corporation to
promote South Korean exports on behalf of South Korean firms worldwide.
17. General orchestration of sector-wide efforts to upgrade the average technological level
through the use of a new generation of machinery.
18. Government coordination of foreign technology licensing agreements, using national
bargaining power to secure better terms for the private sector in utilizing proprietary foreign
technology.
19. The setting of export targets for firms (since the early 1960s). Firms set their own targets,
which could be adjusted by the government.
Enforcement of export targets in South Korea was mostly based on moral suasion rather than
administrative sanctions or economic incentives, but the evidence suggests that these have been
among the most powerful incentives. South Korea as a whole has had an extensive pattern of
“rituals” reinforcing these economic incentives with cultural ones. In the period of rapid catching up,
a key ritual in the nation’s economic life was the monthly national trade promotion meeting.
According to Yung Whee Rhee, Bruce Ross-Larson, and Gary Pursell:
Chaired by the president, the monthly trade promotion meetings are select
gatherings of the ministers and top bureaucrats responsible for trade and the
economy; the chief executives of export associations, research organizations, and
educational institutions; and the heads of a few firms, mainly the general trading
companies and other large firms. The prominence of those attending shows that the
monthly meetings are far more than perfunctory meetings to improve coordination
between the private and public sectors.
Firms were represented either by their particular export association or, in many cases for large
firms, directly. After briefings, awards were typically presented for excellent export performance.
Nationally, many types of annual export prizes were publicly awarded and proudly displayed by
companies.
Richard Luedde-Neurath has described how South Korea maintained, in addition to domesticcontent regulations, an extensive system of import controls that lasted well into the 1980s. What he
terms the “Korean kaleidoscope” included restrictive trader licensing, widespread quantitative
controls, systematic foreign-exchange allocation under the Foreign Exchange Demand and Supply
Plan, required advance deposits (which have been as high as 200% of import value), and
capricious customs practices. For example, prospective importers had to achieve minimum export
earnings before becoming eligible to import.
Pack and Westphal reported that “through import restrictions, selectively promoted infant industries
were often initially granted whatever levels of effective protection were required to secure an
adequate market for their output as well as a satisfactory rate of return on investment.” They also
found that after the export promotion reforms of the early 1960s, “imports…for the domestic market
remained subject to tariffs and quantitative controls.” As Robert Wade notes, tariff rates appear
much higher when they are averaged over non-export-related imports only. Peter Petri presented
evidence that South Korea has had “an unusually protection-prone export bundle.”
Sanjaya Lall concluded that in South Korea, in sharp contrast to Latin American style import
substitution, “industrial targeting and promotion was pragmatic and flexible, and developed in
concert with private industry. Moreover, only a relatively small number of activities were supported
at a given time, and the effects of protection were offset by strong export orientation.”54
Thus, in the South Korean case, import controls may be called a “handmaiden” of successful
industrial export promotion. In the first instance, many export industries begin as infant industries
requiring protection. Luedde-Neurath goes so far as to argue that the developing industrial sector
functions as a whole and benefits from externalities and linkages between firms, making a market
failure case for general protection of manufacturing at a critical stage of development. Alice Amsden
has pointed out that in South Korea, subsidization across divisions within firms as a company
enters new export markets, such as shipbuilding, is intentionally facilitated by the government.
Diversified companies are made to understand that they expected to use the monopoly rents that
they earn from these various import barriers as working capital for expansion into new sectors. The
state also offers supplemental support for entering new markets as needed.
As Pack and Westphal summarize the evidence, “Something approximating neutrality” applied to
“established industries.…But there has been substantial industry bias in favor of the promoted
infant industries.”
Also important to South Korea’s success was that it avoided the temptation to meddle in sectors,
including new entrepreneurial ventures, that were not central to the current plan. If these private
ventures proved successful, the government would include their sector in future strategy
considerations.
A World Bank study by Westphal, Rhee, and Pursell concluded that South Korea’s export
industrialization “has overwhelmingly and in fundamental respects been directed and controlled by
nationals” and that “technology has been acquired from abroad largely through means other than
direct foreign investment.” The role of multinational corporations in the economy (see Chapter 14)
has been much smaller than in most other (then) middle-income countries.
As Lall concluded, the deliberate fostering of large conglomerates, known as chaebol, was also
important to South Korea’s industrial strategy: “The chaebol were hand picked from successful
exporters and were given various subsidies and privileges, including the restriction of [foreign-firm]
entry, in return for furthering a strategy of setting up capital- and technology-intensive activities
geared to export markets.” Closely regulated large firms could help to make up for “deficient
markets for capital, skills, technology and even infrastructure, large and diversified firms could
internalize many of their functions. They could undertake the cost and risk of absorbing very
complex technologies…, further develop it by their own R&D, set up world-scale facilities and create
their own brand names and distribution network.” Lall concluded that, “The risks were contained by
the strict discipline imposed by the government: export performance, vigorous domestic competition
and deliberate interventions to rationalize the industrial structure.”55
Moreover, Erik Thorbecke and Henry Wan concluded that the establishment of South Korean brand
names rather than contract (or original equipment) manufacturing were the result of government
support of heavy industries.
Peter Evans examined ties between the state and industrial elites in South Korea (as well as Brazil
and India) and concluded that it was the interaction between genuine state autonomy and the
“dense connecting networks” of social ties between state and private sectors—which he terms
“embedded autonomy”—that is a key to a successful industrialization strategy. Again, it is strategic
coordination among the key actors, whether in the private sector alone or in the public and citizen
sectors as well, that is critical to success.
Unquestionably, in the late 1980s and 1990s, South Korea substantially liberalized, particularly
before but also after the 1997 financial crisis and subsequent severe recession. One open question
is whether South Korea would have done as well had it liberalized sooner. Some economists have
argued that South Korea would have industrialized even faster if it had maintained a free-trade
policy from the beginning. Other analysts, such as Ha-Joon Chang, Hong-Jae Park, and Chul Gyue
Yoo, argue that some aspects of mid-1990s liberalization were a major cause of the 1997 crisis. In
particular, capital account liberalization allowed first for speculative inflows and then for outflows
once the crisis hit. But the effect was smaller than for many other countries that have experienced
crises, partly because of the significant increase in saving and repatriation of South Korean capital
abroad.
Active industrial policy continues emphasizing South Korean entry into leading-edge, hightechnology fields. For example, the country’s Highly Advanced National Projects Program supports
the development of high-tech products that the government believes would successfully compete
with those of advanced countries such as the United States and Japan within one to two decades
and also supports development of core technologies believed essential for South Korea to achieve
capabilities for independent national innovation. South Korea’s Ministry of Trade and Industry has
targeted new materials, computer-controlled machine tools, bioengineering, microelectronics, fine
chemistry, optics, and aircraft as fields in which it predicted that the country could catch up with the
United States and Japan economically and technologically. As Lall notes, “Korea alone accounts for
some 53% of the developing world’s total enterprise-financed R&D.” He concludes that “the main
stimulus to industrial R&D in [South] Korea came less from specific incentives than from the overall
strategy that created large firms, gave them finance and protected markets, minimized their reliance
on foreign direct investment, and forced them into export markets.”
What stands out in the case of industrial policy in South Korea is the selective involvement of the
government in projects in which technological progress (product, process, or organizational) has
been a central concern. This policy theme may be traced from early attempts at achieving
technology transfer in relatively basic industries to the nation’s current efforts to develop original
innovative capacity in high-technology sectors.
What are the alternative arguments? Beyond the claim that South Korea could have grown even
faster if government had stayed out of industrial strategy, one can also argue, like Joseph Stern and
his colleagues, that the central role of the state was necessary in industrial policy in large part
because of the way that government set up the rules of the economic game, including government
allocation of credit, which ensured that major initiatives such as the chemical and heavy industry
drive were impossible without government direction. Because South Korea often looked to the
example of Japan in setting industrial policy, one could argue that the country followed a “patterns
of development” analysis rather than a classic industrial policy. The costs of industrial policy in
Japan did not become apparent until many years later, and the same could prove true of South
Korea. The 1997 financial crisis may well have been abetted by some of the less sagacious of the
industrial policy legacy. But in South Korea, few experts hold the view that the strategy was
seriously flawed.
The interpretation that seems most favored by the evidence is that the South Korean industrial
policy mix has served to overcome market failures involved in the process of technological
progress.
By the 1997–1998 crisis, the chaebol came to be seen by many observers as liabilities to further
growth. They were also seen as political liabilities or as companies that unfairly received
government advantages in the past from which other companies did not benefit. Antitrust
regulations are making the South Korean economy more competitive. And as the economy
matures, the government’s role in the productive sector will continue to become more indirect.
As an energy importer, South Korea’s economy was negatively affected by the oil shocks of 1973
and 1979, as pointed out by Vittorio Corbo and Sang-Mok Suh. Its current account deficit reached
8.7% of gross national income (GNI) in 1980. But with real interest rates rising dramatically from
1979, South Korea began adjusting early. This is in marked contrast to other countries hurt by the
debt crisis, such as Brazil, which continued borrowing aggressively despite the increase in rates.
Thus, while both South Korea and Brazil were among the widely noted “17 highly indebted
countries” at the onset of the debt crisis, and both had experienced high growth over the previous
two decades, Brazil (along with many other countries on the list) was to experience a long period of
slow growth. South Korea continued with the adjustment it had already begun. Despite the
concerns generated by South Korea’s debt-to-GNI ratio of about 50%, the country’s ability to pay
was never really in doubt. But by 1985, the country had lowered its current account deficit to just
1.1% and then moved to a surplus of 2.8% of GNI in 1986, as rapid growth had now returned to the
country.
Growth was briefly interrupted again in the East Asian “contagion” crisis. The rapidity of recovery of
the South Korean economy from the 1997–1998 financial crisis surprised many observers, but in
some ways, its speed was foreshadowed by the unusually rapid recovery in the 1982 debt crisis.
South Korea borrowed the then enormous sum of $21 billion from the IMF in December 1997,
evoking great concern at the time, but went on to repay the loan ahead of schedule. The South
Korean government implemented needed reforms quickly. The country had reached a nearly
developed stage, and adjustment was easier than for other afflicted countries, notably Indonesia.
When the very different 2008 global crisis erupted, exports from South Korea, now a high-income
country, were severely hit. But the country’s fairly rapid adjustment—unusual for the fullyindustrialized club in which it now found itself—again underscored both the resilience and the
robustness of the economy and its policymaking.
South Korea will face steep challenges in the coming years. One that will be common to many
societies is how it will adjust to its rapidly aging population. Another challenge unique to South
Korea is how it will handle the inevitable collapse of the regime in North Korea. But societal
resilience is one of the most important and enduring benefits of successful economic development
—something the country will continue to draw upon in ample supply.
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Questions for Discussion
1. Draw up a balance of payments table similar in format to Table 13.3, using the most recent
data from any developing country (consult the IMF’s International Financial
Statistics at http://imfstatistics.org/imfs no longer online, or for broader coverage, see links in
http://imf.org/external/data.html for the most recent data). Explain the significance of the
various entries in the current and capital accounts. What is the status of the country’s
international reserves, and how do they compare with those of one year ago?
2. Describe the basic-transfer mechanism. Using the list of credits and debits in Table 13.2,
identify which ones would fit into the basic-transfer equation. How does the basic transfer
help us analyze developing-world debt problems?
3. Trace the evolution of the developing-country debt problem during the 1970s and 1980s.
What were the key ingredients? Explain your answer.
4. Why was the problem of capital flight so serious in some highly indebted countries? What
causes capital flight, and what do you think can be done about it?
5. What is petrodollar recycling, and how did it contribute to the debt crisis of the 1980s? Why
were developing countries so eager to borrow money from international banks? Explain your
answer.
6. What is the significance of the debt service ratio? Can indebted countries do anything to
lower this ratio? Explain your answer.
7. Describe the typical IMF stabilization package for severely or heavily indebted countries.
What are the objectives of these policies, and why do you think international banks are so
eager for IMF negotiations to precede their discussions with these countries? What are the
economic and social costs of these programs? Explain your answer.
8. Do you think a full-fledged developing-country debt crisis might reemerge in the future? If so,
why and under what conditions? If not, why not?
9. What has been proposed to resolve the problem of odious debt? How effective a solution do
you think this will be for averting future problems involving developing-country debt?
10. In what ways was the recent global financial crisis similar to past crises, and in what ways
did it differ?
11. Prepare a brief update on longer-term impacts of the 2008 global financial crisis. Have any of
the later developments proved unexpected (or previously considered unlikely)? Where
problems have lessened, do you think they could return?
z
Transformation of
South Korea
▪From one of the poorest nations in the mid-
1950s to a high-income economy and global
industry leader by 2012.
▪South Korea has had a long journey from
poverty to prosperity and remarkable social
development achievements.
z
Strategies for
Industrialization and
Export Promotion
▪Key policies and strategies for South
Korea’s economic growth:
▪export promotion, technological
advancement, education for a skilled
workforce
▪and a move towards high-tech
industries and innovation.
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