Case Study 9: South Korea vs Taiwan

Question 1

What role did government policies play in South Korea’s transition from one of the poorest countries in the1950s to becoming a high-income economy? Reflect on four specific strategies and discuss why these may have been effective in achieving such rapid economic growth.

Answer 1

• South Korea’s transition from a poor country to a high income and industrialized nation was driven by government policy. (export industrialization, education, chaebol, land reform)
• South Korea promoted trade through higher exchange rates for exports rather than imports and also included tax breaks for suppliers of export related goods.
• This Outward looking, export promoting policy made the manufacturing sector competitive which contributed to industrial and sector growth.
• This policy encouraged domestic firms to remain competitive in international markets and encouraged businesses to focus on producing goods for exports rather than consuming.
• South Korea also invested heavily on education of skilled labor which has also contributed to human capital growth as well as a more skilled labor force which in turn led to rapid technological growth.
• The government supported large conglomerates run by families (chaebols). These conglomerates became major parts of many industries resulting in increased economic growth and creating jobs.
• There was significant land reform. The foundation for industrialization was enabled by the reduction of rural poverty and the creation of a domestic market for manufactured goods.

Question 2

What specific lessons from Taiwan’s development experience could be applied by other developing countries today to support their own economic growth?

Answer 2

• One key lesson is the emphasis on education as “Six years of education became compulsory in Taiwan
  in 1950” with the enrollment rates for girls exceeding 90% by 1956, which shows the importance of inclusive education for long-term progress. Additionally, Taiwan’s “land-to-the-tiller reform programmed in the 1950s” boosted agricultural productivity, which provided a foundation for industrialization that other countries would emulate through equitable land distribution.
• In addition, Taiwan used U.S air for investments such as technology and infrastructure rather than consumption which ensured sustainable growth rather than short term financial relief for Taiwan.
  -Taiwan’s success suggests that development requires multiple factors to align rather than relying on one
  or two key policies. The simultaneous effectiveness of various policies and strategies had a huge impact on their growth.
• Taiwan has a high national savings rate of 30-40%. Taiwan’s policy supported saving by having high real interest rates and low taxation on savings
• Taiwan shifted from domestic to an export-led economy. Taiwan emphasized on manufacturing and high-tech exports, not just raw materials.