Asian business and economics: introduction

Professor Ari KokkoÅbo Akademi University

Schedule

• Why bother about East Asia?

• Definitions

• Country characteristics: diversity

• Miracle or crisis?

• Relevance for Finland

Why bother?

• Rapid development for several decades - “Asian Miracle” and “Pacific Century”

• Increasing economic and political importance - includes some of the world’s largest markets

• Miracle disturbed by the Asian crisis

• What about the future? Obvious need for Europe to understand developments in the region

East and Southeast Asia

Diversity and change

• Some of the richest and most advanced economies, but also some very poor countries

• The largest country (China), but also some of the smallest (Singapore)

• Rapid changes during past decades

• Still large differences in social structure (income distribution, health and education indicators)

Figure 1Relative size: economy (GNP)

JapanChina

Thailand

Indonesia

Hong Kong

Taiwan

Singapore Malaysia Philippines

Vietnam

Korea

Figure 2Relative size: surface area

China

Indonesia

MalaysiaPhilippines

Singapore

Thailand

Korea

Taiwan

Hong Kong

Vietnam

Japan

Figure 3Relative size: population

China

Indonesia

Malaysia

Philippines

Singapore

Thailand

Hong Kong

Taiwan

Korea

Vietnam

Japan

Table 1General characteristics

GNP, billionUSD, 1998

GNP / capita,USD, 1998

Average annualGDP growth1990-98, %

Japan 4,090 32,380 1.3Korea 370 7,970 6.2Taiwan 262 12,040 6.6Hong Kong 158 23,670 4.4China 929 750 11.1Indonesia 138 680 5.8Malaysia 80 3,600 7.7Philippines 79 1,050 3.3Singapore 95 30,060 8.0Thailand 134 2,200 7.4Vietnam 26 330 8.6

Table 2General characteristics

Population,millions, 1998

Surface area,thousand km2

Pop. density,people / km2

Japan 126 378 335Korea 46 99 470Taiwan 22 36 606Hong Kong 7 1 6,755China 1,239 9,561 133Indonesia 204 1,905 112Malaysia 22 330 68Philippines 75 300 252Singapore 3 1 5,186Thailand 61 513 120Vietnam 78 332 238

Table 3Structure of the economy

Value added as % of GDPAgriculture Industry Services

1980 1998 1980 1998 1980 1998Japan 4 2 42 38 54 60Korea 15 6 40 43 45 51Taiwan 8 2 46 35 46 63Hong Kong 1 0 32 15 67 85China 30 18 49 49 21 33Indonesia 24 16 42 43 34 41Malaysia 22 12 38 48 40 40Philippines 25 17 39 32 36 52Singapore 1 0 38 35 61 65Thailand 23 11 29 40 48 49Vietnam 26 31 43

Table 4Income distribution

Income shareof bottom

20 %

Incomeshare oftop 20%

Top 20 % / Bottom 20 %

Share of pop.with less than1 USD per day

China 5.5 47.5 8.6 22Indonesia 8.0 44.9 5.6 8Malaysia 4.6 53.7 11.7 4Philippines 5.9 49.6 8.4 27SingaporeThailand 5.6 52.7 9.4 2Vietnam 7.8 44.0 5.6

Finland 10.0 35.8 3.6

Table 5Health indicators

Life expectancy 1997,

Male Female

Childmalnutrition,

1992-97

Infantmortality, ‰

1997

Access tosafe water, %,

1995

Public expenditureon health, % ofGDP, 1990-97

Japan 77 83 4 96 5.7Korea 69 76 9 83 2.3Taiwan 72 78Hong Kong 76 82 5 2.3China 68 71 16 32 83 2.1Indonesia 63 67 34 47 65 0.7Malaysia 70 75 20 11 89 1.4Philippines 66 71 30 35 83 1.3Singapore 73 79 4 100 1.5Thailand 66 72 33 89 2.0Vietnam 66 71 45 29 47 1.1

Table 6Education and technologyPublic expenditure

on education,% of GDP, 1996

Adult literacy rate,1997

Male Female

People pertelephone,

1997

Scientists andengineers per

million people,1985-95

Japan 3.6 2 6,309Korea 3.7 99 96 2 2,636TaiwanHong Kong 2.9 96 88 2 98China 2.3 91 75 18 350Indonesia 1.4 91 80 29Malaysia 5.2 90 81 5 87Philippines 2.2 95 94 34 157Singapore 3.0 96 87 2 2,728Thailand 4.1 97 93 12 119Vietnam 2.6 95 89 48 308

Roots of East Asian development: states or markets?

• Increasing consensus that growth has largely been export-led (although several countries exhibit periods of import substitution)

• Disagreement about the relative role of state intervention and market signals.

• Main reason: differences between countries and time periods?

Import substitution• Development of domestic industry to substitute

for imports

• Trade barriers, subsidies, and exchange controls necessary to protect domestic producers: state intervention replaces market prices

• Benefits: short-cut, coordination, synergies

• Problems: low level of competition, “inappropriate” factor inputs, administrative costs, current account deficits, interest groups

Export orientation

• Development based on exploitation of comparative advantages

• Gradual diffusion of wealth to other sectors

• Benefits: foreign exchange, competition, technology transfer

• Problems: information, incomplete markets, market access, diffusion of benefits

Asian growth model

• Export booms not automatic: governments have actively promoted competitiveness and exports

• Two policy areas:

Macroeconomic stability

Microeconomic measures to support industrial development

National experiences

• Japan

• South Korea

• Taiwan

• ASEAN

Japan

Export promotion integral element of overall development strategy after WWII:

Catching up to the West

• Support conditional on satisfactory export performance

• Competition policy and industrial rationalization

• Main instruments: allocation of investment capital and foreign exchange

South KoreaEmphasis on exports from early 1960s, due to reduction of US aid

• Strong state with export success as main goal

• Highly successful neutral export promotion until early 1970s

• Targeting of heavy industries from mid-1970s to 1979, with mixed success

South KoreaInstruments of export promotion

• Credit allocation; banking system nationalized

• Subsidies, tax and tariff exemptions

• Exchange rate policy

• Explicit links between domestic protection and exports

• Institutional incentives: presidential commendations

TaiwanStrong export orientation from early 1960s due to termination of US aid

• Successful targeting of light labor intensive industry until mid-1970s

• Focus on heavy industry from mid-1970s, with some problems

• Redirection to high-tech industries from early 1980s

TaiwanInstruments of export promotion

• Fiscal and institutional incentives. Small role for credit allocation: little subsidized capital

• Promotion of FDI, unlike Japan and South Korea

• Export processing zones

• SOEs producing inputs for private sector exports

Two Asian Models

• Model 1: South Korea– Strong government, selective intervention– Controlled capital markets, debt financing – Concentrated industry (50 large chaebols)

• Model 2: Taiwan– Strong government but less selective intervention– Informal capital markets, equity capital– 57,000 small and medium-sized firms in industrial

sector (on average ~40 employees)

Rapid development and growth...

• Remarkable success in both South Korea and Taiwan

• Growth rates have reached 8-10% most years since the early 1960s,

• Per capita incomes have grown from less than 200 USD in the 1950s to over 10,000 USD in the mid-1990s.

… with some notable differences...

• The price of growth has been one third higher in Korea– Korea has invested 30-35% of GDP every year,

while Taiwan has managed equally well with 20-25%

• Korea has been forced to borrow heavily while Taiwan has become a capital exporter

• Clear differences in vulnerability when the Asian crisis strikes in 1997

Lessons and conclusions from Big 3

Characteristics of successful export promotion programs

• Allocation of preferences based on markets and competition: hard budget constraints

• Policies target the private sector

• Relatively little corruption and interference from interest groups as long as policies were neutral

Lessons and conclusions for export promotion

• Infrastructure investment

• Access to inputs at world prices

• Preferential access to loans and foreign exchange

• Fiscal incentives to promote new industries

• Institutions for technology and market research

• Quality control and quality standards

The Second-Tier NICs: Southeast Asia

• What have Indonesia, Malaysia, and Thailand learned from East Asia?

• Two stages: attempts at import substitution and industrial targeting in the 1970s and early 1980s but increasing focus on export promotion since then. Differences across region emphasized during Asian crisis

Indonesia• 1970s: Growing public revenue, active industrial

policy, and emergence of significant SOE sector

• Early 1980s: Dutch disease symptoms and home market bias

• Mid-1980s: some trade liberalization and export promotion, but continuing targeting of ”strategic” capital-intensive sectors.

• High foreign debt and distorted industry structure: the wrong lessons from Korea

Malaysia

• 1970s: NEP. Support to bumiputra and promotion of employment and labor intensive exports. EPZs.

• Early 1980s: Attempt at heavy industry promotion, with little success

• From late 1980s: Export oriented reforms, inflows of FDI, with positive impact on growth. Surprisingly large impact of Asian crisis: political factors important?

Thailand• 1970s: Import substitution. Industrial targeting not

very successful because of weak political system

• Early 1980s: Shift to relatively neutral export promotion. Rapid export expansion, inflows of FDI, and high growth rates

• However, fixed exchange rate + low investment in education and infrastructure eroded competitive-ness of labor-intensive export industry.

• Reasonably sound industry structure after crisis

Repetition: Main elements of (export) success in East Asia

• Macroeconomic stability

• Microeconomic interventions and support

• Realistic exchange rates

• OK on first issue - mistakes on other two. Relevant for understanding impact of Asian crisis, as well as prospects for recovery

Relevance for Finland

• Rapid expansion of Finnish exports to Asia since early 1990s

• Machinery and transport equipment dominant product category

• East Asian share of imports and exports still less than 12% : large potential for growth

Figure 4: Development of Finnish exports to Asia

0

200

400

600

800

1000

1200

1400

1600

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Mil

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n U

SD

, co

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pri

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Figure 5: Country distribution of Finnish trade 1996

Other

KoreaJapan

Taiwan

China

Thailand

Singapore

Hong Kong

Foreign direct investment

• Modest Finnish FDI in Asia before 1999 - significantly lower than Asian shares of Finnish trade

• Japan, China, Hong Kong, and Singapore only major investment locations

• Effects of crisis? Other investors have increased their investments in some of the East Asian economies (Thailand, Japan, South Korea)