SOUTH KOREA AND TAIWAN : Stalwarts of Tiger Economy

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SOUTH KOREA AND TAIWAN : Stalwarts of Tiger Economy

East Asia began to make an impact on the global economy in the 1960s when it began developing faster than the high-income economies of the West.  Asia now accounts for one-third of global output and half of global PPP output.

China, Hong Kong, Japan, Macau, Mongolia, North Korea, South Korea, and Taiwan are all part of East Asia. Favourable political and legal conditions for industry and commerce, as well as vast natural resources and plentiful supply of relatively low-cost, skilled, and adaptable labour, have all contributed to the East Asian countries’ rapid rise. East Asia began to make an impact on the global economy in the 1960s when it began developing faster than the high-income economies of the West.  Asia now accounts for one-third of global output and half of global PPP output.

According to economist Dani Rodrik, the East Asian nations posed significant obstacles until the 1960s. In 1960, South Korea was poorer than several countries in Sub-Saharan Africa, and Taiwan was not much wealthier.  Since then, these two countries have had average growth in per capita income of 6.8% and 6.2%, respectively, leaving them well behind not only these African countries, but also others such as Mexico and Argentina, who were much wealthier at the time. It's still a mystery how these two countries went from being economic basket cases to economic powerhouses. Both countries have placed a strong emphasis on export orientation since the early 1960s. However, it's difficult to understand how export orientation could have been a major factor in these countries' development. The estimated rise in relative export profitability throughout the 1960s is insufficient to explain the amazing export boom that followed. Furthermore, exports were initially not significant enough to have a substantial impact on overall economic performance. The investment boom that occurred in both countries is a more believable story. Both economies had an extraordinarily well-educated labour population in relation to their physical capital stock in the early 1960s, resulting in a high latent return on capital. The government strategy was able to produce a considerable rise in the private return on capital by subsidising and coordinating investment decisions. A high level of income and wealth equality aided government intervention by making it more effective and keeping it free of rent-seeking. The economy's outward orientation resulted from an increase in demand for imported capital goods.

Taiwan's quick economic growth can be ascribed to its high savings rate, high labour productivity, privatisation, intelligent government planning, significant foreign investments, and its trade connection with the US.

South Korea:
South Korea's structural development has been attributed to legislative measures aimed at opening the country to outside markets. Indeed, one of the most crucial causes in South Korea's success is its export-oriented policies: South Korea is currently one of the top ten exporters in the world, with exports accounting for 62.3% of GDP in 2019, up from 35.9% in 1995.

South Korea's development in foreign trade and industrialisation has been aided by two other factors:

  • Improvements in the business climate were given priority.
  • Investment in innovation was rewarded by policies that encouraged it.

According to the current World Bank annual evaluations, South Korea is placed 5th out of 190 economies in terms of ease of doing business. South Korea's ranking stayed at 5 in 2019 after being at 5 in 2018. (Source; World Bank)

According to Trading Economics global macro models and analysts, the Ease of Doing Business in South Korea is anticipated to reach 3.00 by the end of 2020. According to our econometric models, the Ease of Doing Business in South Korea is expected to trend around 3.00 in 2021.  

Innovation and the Environment:
To begin with, a healthy business climate promotes domestic market growth attracting overseas investors as well. South Korea leads the list of criteria in terms of making it easy to start a business and enforcing contracts. They all play a key role in promoting investment, production, communication, and, ultimately, economic prosperity. Second, in order to boost prosperity, South Korea has placed a greater emphasis on technological development and innovation. South Korean export competitiveness has been bolstered by innovation and technology, which has powered the country's amazing economic progress in recent decades.

In fact, South Korea now spends the most of its GDP on research and development (R&D), surpassing the United States and Japan, two of the world's top innovators in terms of R&D intensity. South Korea's R&D intensity increased by 90.5% between 1996 and 2019 (from 2.24% in 1996 to 5.23% in 2019), while the United States' only increased by 14.4% (from 2.44% in 1996 to 3.79% in 2019). South Korea's total investment on research and development (R&D) in both the public and commercial sectors was over USD 93 trillion in 2020, up from about USD 89 trillion in the previous year.   

South Korea's demanding educational system, as well as the creation of a highly motivated and educated population, is significantly responsible for the country's high-tech boom and rapid economic progress although the country has little natural resources and a high population density on its land. South Korea has displayed extraordinary economic growth and global integration over the last four decades to become a high-tech industrialised economy. South Korea's high R&D intensity, which has helped it become a global leader in information and communication technologies, stems from a traditionally "top-down" innovation system that encourages "tight collabouration between government, industry, and academia in the process of nation building.

Given that it was an agrarian-based Japanese colony and subsequently a battleground for the first half of the twentieth century, South Korea's status as one of the world's most inventive nations is a remarkable feat now which is incredible.  It is only second to Germany on Bloomberg's 2020 Innovation Index, having previously topped the 60-country list for five years. South Korea is placed 11th among the 129 countries ranked in the separate 2019 Global Innovation Index, issued by Cornell University, INSEAD, and the World Intellectual Property Organisation.

Taiwan’s Economy:
Taiwan has undergone economic booms and busts throughout its recent history. Several centuries ago, the island thrived as a major commerce center in East Asia. Taiwan prospered economically under Dutch authority in the mid-1600s and under Chinese rule in the late 1800s. It prospered economically as a Japanese colony from 1895 to 1945, but suffered deterioration in the years following World War II.

Many economists in the late 1940s and early 1950s were pessimistic about Taiwan's economic status. Taiwan's unfavourable land-to-population ratio, a lack of natural resources, a capital shortage, and a discredited administration all contributed to this conclusion. That perception, however, did not prove to be correct. Taiwan's economic boom, which began in the mid-1960s, was so remarkable that it earned the moniker "economic miracle." Taiwan's economy stagnated in the 1990s, although it continued to develop steadily, even during the East Asian financial crisis of 1997. Taiwan went through a recession in 2001, owing to governmental gridlock. Its economy was once again hit by a downturn, this time triggered by the global recession in 2008, from which it only slowly recovered.

Land reforms, which resulted in a significant increase in the agriculture sector, preceded Taiwan's economic boom in the 1960s and for several decades afterward. Rural affluence boosted industrial development, while more efficient farming freed up labour for Taiwan's industrialisation boom in the 1960s and 1970s. Taiwan shifted to capital-intensive and knowledge-based sectors in the 1980s. As mentioned above, Taiwan's rapid economic boom was fueled by a high rate of savings, rising labour productivity, privatisation, savvy government planning, significant foreign investment, and trade.

The expansion of textile factories and companies that produced light manufactured goods, such as small appliances, footwear, and athletic equipment, fueled Taiwan's initial industrialisation. Following that, companies began producing semiconductors and electronic devices, such as radios, television sets, and computers. Taiwan has become one of the world's top producers of computers and computer accessories by the mid-1980s. It was also successful in establishing steel and shipbuilding businesses, although these were minor compared to the companies that produce information and communication technology (ICT) products. One explanation for this is that Taiwan's economy is based mostly on small and medium-sized businesses, rather than massive conglomerates, as it is in Japan and South Korea. Taiwan developed an import substitution policy early on, charging hefty tariffs to defend its fledgling industries. However, it quickly abandoned that strategy in favor of aggressively promoting exports, to the point where it was soon trading more than Japan and had established itself as a development model that defied the dependency theory model that had previously been applied to developing countries in other parts of the world (e.g., Latin America). In Taiwan, the establishment of export-processing zones, in which foreign companies were allowed to establish factories that received significant tax breaks and other benefits while also training local labour and generating spin-off enterprises that were also part of the "Taiwan model," was noteworthy. Low taxes and solid infrastructure, a stable society, and a good educational system were also part of the plan.

Agriculture, forestry, and fishing:
Because of its rich volcanic soil, abundant rainfall, and pleasant environment, Taiwan has long been noted for its fruitful agriculture. In fact, it was those conditions that drew the first Chinese migrants. Taiwan supplied enormous amounts of rice and sugar to Japan during the Japanese colonial period. Agriculture flourished in the early post-World War II years. Double cropping of rice and other crops, fertilisation, and irrigation, as well as the introduction of hybrid and other superior seed stocks, all increased yields significantly.

Foreign competition has harmed Taiwanese farmers since the turn of the century, in part because individual farms on the island are small, but also because it became simpler to import cheaper foreign agricultural products once Taiwan joined the World Trade Organization (WTO) in 2002. Animal husbandry hasn't fared much better. Pigs, chickens, and ducks have all been favoured to cattle, although all have had difficulty competing with international imports. Farmers who grow fruits and vegetables have fared better, while those who grow tea and other specialty crops have fared reasonably well.

Forestry and fisheries, which were formerly key economic industries, have declined in prominence as well. Forests have been depleted, and the forestry industry today makes up only a small part of Taiwan's economy. Fishermen must now fish in more distant waters, and many have turned to aquaculture to supplement their income. Floriculture has seen substantial growth, with Taiwan becoming a major exporter of orchids. Organic farming is becoming increasingly popular in Taiwan. The agricultural industry accounts for only a minor portion of Taiwan's economy, with crops accounting for the majority of the value. Despite the problems that Taiwan's WTO membership has generated for rice farmers, rice has remained Taiwan's most valuable commodity. Bamboo shoots, cabbages, watermelons, shiitake mushrooms, leafy vegetables, and green onions are the most valuable fruits and vegetables planted. Tea has a sizable domestic market and is also a significant export item. Sugarcane production has decreased dramatically as a result of rising labour costs and more competition from other countries.

Taiwanese manufacturing:
The Japanese began building industry in Taiwan quickly after establishing it as a colony at the end of the nineteenth century, and the rate of industrialisation accelerated during World War I (1914–18). World War II gave the island an additional boost in terms of manufacturing, including the establishment of certain heavy industry, all of which contributed greatly to the island's economic expansion. However, beginning in the late 1950s, when the annual growth rate was around 12%, Taiwan's industrial sector exploded. Manufacturing increased even faster in the 1960s and 1970s, reaching nearly unheard-of levels in world history. At those years, Taiwan's industrialisation grew at twice the rate of the United Kingdom or Japan during their most rapid eras of expansion. Light industry, such as textiles and small appliances, was the beginning of Taiwan's industrialisation. It quickly proceeded to more labour- and capital-intensive manufacture, including radios and other electronic devices, computers, and other ICT goods, such as integrated circuits. Meanwhile, Taiwan developed a thriving petrochemical sector based on imported petroleum, which produced a variety of spin-off items such as plastics, medicines, and synthetics, many of which were used in improved textiles. Taiwan also began producing steel and other metals and components for use in shipbuilding, oil rig construction, and vehicle manufacturing (mostly under coproduction agreements with Japanese and U.S. companies). Tools, automobile parts, electrical equipment, optics, and telecommunications all grew in importance. Taiwan also manufactured cutting-edge weapons, such as jet fighter planes and missiles, albeit it had limited success competing for sales on the global market.

Taiwan's service sector is presently the most dynamic and fastest growing, accounting for almost two-thirds of the country's yearly gross domestic product (GDP). Wholesale and retail trade, government services, finance and insurance, real estate (including renting and leasing), transportation (including storage), health care and social services, professional and high-tech services, accommodations (including food), education, and culture are the main components of services (in order of importance in terms of GDP) including sports and recreation.

While tourism is not a service sector, tourist-related activities make up a significant portion of Taiwan's economy. Tourism was discouraged in the years following WWII due to worries that it posed a security danger. After that policy changed in the mid-1950s, the number of yearly tourist visits skyrocketed. The number of visitors to Taiwan has increased to several million each year in the early twenty-first century. For years, the majority of visitors came from Japan, Hong Kong, the United States, and Southeast Asia; but, since 2008, as relations between China and Taiwan have improved, a substantial number of visitors have come from the mainland.

Taxation and labour:
Taiwan's tremendous economic rise has been aided by the labour movement. Initially, labour was inexpensive and the work ethic was strong. Increases in labour expenses were eventually offset by better education, higher skill levels, and a more flexible workforce. Between 1950 and 1970, Taiwan's labour force doubled due to the country's high birth rate in the years after WWII. Three-fifths of working-age citizens are employed, which is a high percentage by international standards. Agriculture now employs only a small percentage of the population. Manufacturing employs around a quarter of the workforce, while services employ about three-fifths. Strikes were prohibited and the government organised unions were suspended during the period when Taiwan was under martial law (1949–87). Workers got organised when martial law ended in 1987, but they were not as active as expected. Two attempts to build labour-oriented political parties failed, mostly because their socialist agendas were unappealing to workers. The rate of unionization is presently quite high (more than one-third of workers), far higher than in the United States or Japan—though this is primarily due to Taiwanese regulations requiring union participation. A number of labour laws were passed in the early twenty-first century to address safety and other issues. Strikes and labour protests are uncommon in Taiwan, owing to the fact that the majority of the country's businesses are small and family-owned.

Although unemployment was high in the early years, it has since fallen to a low level—around 2% annually in the 1980s and 1990s, which was among the lowest in the world. As a result, Taiwan has encountered labour shortages on occasion. Companies have responded by implementing automation and other labour-saving equipment, as well as relocating plants to China and other Asian countries. Many businesses have hired foreign workers, which has turned into a social and political issue in Taiwan. The Democratic Progressive Party, a left-of-centre party, has resisted foreign labour importation, citing worries that it would dilute their primarily Fukien Taiwanese support base. Unemployment soared to 5% as a result of the 2001 recession; it then fell, only to rise again with the 2008 crisis, before dropping to prior low levels.

In Taiwan, women are rapidly entering the workforce. Prior to the early 1960s, the number was low in comparison to Western countries, but it began to rise after that. By the early twenty-first century, the proportion had surpassed 50% and was roughly equal to that of the United States.

Taiwan has progressive taxes. But modest personal income taxes are lower than those in Japan but higher than those in Western Europe and the United States. Business taxes are likewise low, and there is a strong belief in Taiwan that they must remain low in order to keep Taiwanese products competitive in the global marketplace.

Transportation and telecommunications:
Taiwan had a scarcity of decent roads and no railroads early in its history. Few individuals travelled far from home, and those who did, did so by boat on rivers or along the shore. There was no centralised transportation system for the entire island. Similarly, no developed communications networks existed.  

Economic growth was complemented by improvements in transportation and communications. From  later part of the Chinese period through the end of the Japanese era, roads were built or renovated. The current systems were made possible by Taiwan's economic boom, which began in the mid-1960s. The Sun Yat-sen Freeway, which connects Taipei and Chi-lung with Kao-hsiung was completed in 1978. It was one of Taiwan's first big achievements. Other express highways followed, the majority of which were toll roads with charges that could be raised or lowered to control traffic.

Railroads were renovated at the same time, and lines have been expanded and new ones have been built since the late twentieth century as the road system could no longer handle the significant rise in automotive traffic. The construction of a high-speed line connecting the island's north and south was completed in 2007. Modern mass-transit networks are primarily underground in Taipei and Kao-hsiung.

Taiwan has four main seaports capable of handling ocean going ships and substantial volumes of traffic. The largest is at Kao-hsiung, followed by Chi-lung, T'ai-chung, and Taipei. Taiwan is served by two international airports, one in Taipei and the other in Kao-hsiung.

Although the high-speed rail line was a one-of-a-kind government-to-private-enterprise collabouration, the train lines are mostly owned by the government. The majority of shipping lines are privately operated. China Airlines is Taiwan's national airline. International and domestic flights are also provided by a number of private air carriers. Taiwanese inhabitants own a large number of private automobiles and motorcycles.

The post office was Taiwan's traditional mode of communication, and it was quite efficient. In the cities, letters were delivered within hours. In the 1970s and 1980s, telephones were ubiquitous in private houses. The main telecommunications provider is Chunghwa Telecom, which was majority-owned by the government until 2005. It controls a significant portion of the fixed-line, mobile, and broadband sectors in Taiwan. After its debut, internet use exploded in Taiwan, and broadband became widely available.

According to a Ministry of Economic Affairs (MOEA) official, Taiwanese research institutions earned seven awards at this year's R&D 100 Awards, a prominent science and technology competition. Taiwan has received a total of 66 prizes at this yearly event over the previous 14 years, which is recognition of the country's achievements in technological research and development.

The leaders of our nation should take the lessons from these two nations. The miraculous economic growth that they have been able to achieve after 1967 is something that we should take in consideration for the progress of our country.  

(Rajendra Prasad Koirala is a PhD. Scholar and can be reached at [email protected])

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