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South Korea‘Republic of Korea’

Independent in 1948

2nd Highest Standard of living in Asia

4th Largest economy in Asia

1.198 trillion $ in 2013

Member of UN, WTO, OECD and APEC

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History Pre War and Post War

Korea was occupied by Japan and it ended after 2nd World war in 1945

In 1948, an Independent Republic of Korea has established

Between 1945 and 1948 Korea has been divided into two parts and called North Korea and South Korea

It has also been decided by UN to administer the North Korea by Soviet union and South Korea by US

But US and Soviet Nations did not agree for the UN’s unanimous decision.

In 1950 Korean war started for seeking complete authority over Korea.

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Democratic People’s Republic of Korea Vs People’s Republic of Korea-1950-51

North Korea goes communist – Started unexpected attacks

South Korea goes right wing/democratic – Lost most of the battles due to untrained and unequipped military

Later UN supported ROK and damaged DROK with heavy loss

Korean War ended in 1951 but tensions remain across the borders

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South Korea – 1952-61 (Rhee era)

Rhee forcefully ruled the government by constitutional amendmentsHe made 8 years term for him through constitutionRehabilitation started from 1953 with the financial assistance by UNTextile industry started in 1953 to emerge as the way for industrialization and reconstructionLater textile industry became an export oriented industry which helped South Korean Economy

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South Korea-1961-1979(Park Era)Actual economic growth started in 1961

In 1965 General park Signed a contract with Japan for peace and trade relations

Park’s model was export oriented industrialization

He created three institutions for the development processThe Economy planning BoardThe Ministry of Trade and IndustryThe Ministry of Finance

Park was against corruption made industries developing

One of the Important projects he took up and boosted industries in south Korea – Seoul to Pusan Highway

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South Korea – 1985-1992 (Roh Tae Woo)

Started Democratic Elections – to end dictatorship

Allegedly arrested for taking bribe of more than 300 Million $

Rule ended in 1992

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DSM-Decision Support Model

Concentrated version of Japanese Economic model Strong, centralized (Military) government giving direction

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Government Strategy to Boost Economy

“OIG” Outward facing Industrialisation

Government Direction

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Outward facing Philosophy:

Exports First

Nation building Through Exports

Import Production Export

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Industrialisation

1960’s – Textiles, Cloths, Toys etc.

1970’s – Steel, Electrical Goods, Electronics etc.

1980’s to till date - Cars, Computer Hardware etc.

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Government Direction

Banks: Two-tier credit policy

Tax: Two-tier tax policy

Trade: Exchange rate controls

Education: Human Capital Investment

Labour: Trade Union Controls

Planning: Ministry of Commerce and Industry and Ministry of Economic Planning Board

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‘Chaebols’ ‘Large Firm Conglomerates’

Samsung, Hyundai, Daewoo, LGS, SK etc…

Close Relations between Government

Same as Keiretsus but,• Family owned and Controlled• No Banks• Suppliers are subsidiaries• No company unions• Heavy borrowers

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China-People’s Republic of China

Total Population - As on September 2013 - 1,362,391,579(1.3 Billion)

Total Workforce – 820 million (Approx.)

GDP - 8,226,885 Millions $

GDP Per capita - 6,091 $

9.7 % growth in GDP

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History

Communist take over in 1949

Cultural Revolution in 1965-70

Mao dies in 1975

Deng became leader in 1976

In 1978 reform program announced- ‘Two Systems, One Country’

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‘Two Systems, One country!’

It is a constitutional principle formulated by Deng Xiaoping, the Paramount Leader of the People's Republic of China (PRC), for the reunification of China during the early 1980s.

He suggested that there would be only one China, but distinct Chinese regions such as Hong Kong, Macau, and Taiwan

These countries could retain their own capitalist economic and political systems, while the rest of China uses the socialist system.

Under the principle, each of the three regions could continue to have its own political system, legal, economic and financial affairs, including external relations with foreign countries.

Taiwan could continue to maintain its own military force.

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‘Two Systems, One country!’

Program encouraged,The formation of rural enterprises and private businessesliberalized foreign trade and investmentRelaxed state control over some prices and invested in industrial production and the education of its

workforce

By nearly all accounts, the strategy has worked spectacularly.

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Chinese Growth in last two decades

China has tremendous growth from 1978 with the reform program ‘Two Systems, One Country’

Per Capita income has increased eight times from 1980

Pre-1978 China had seen annual growth of 6 percent a year

Post-1978 China saw average real growth of more than 9 percent a year with fewer and less painful ups and downs.

In several peak years, the economy grew more than 13 percent.

Few analysts are even predicting that the Chinese economy will be larger than that of the United States in about 20 years.

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Why China has done so well? An IMF research team recently examined the sources of that nation's growth and arrived at a surprising conclusion

Even capital accumulation is the reason for growth in capital assets, a sharp and sustained increase in productivity is the reason behind the economic boom

During 1979-94 productivity gains accounted for more than 42 percent of China's growth and by the early 1990s had overtaken capital as the most significant

source of that growth.

*What are capital assets?

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Why China has done so well?

This marks a departure from the traditional view of development in which capital investment takes the lead. This jump in productivity

originated in the economic reforms begun in 1978.

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How Productivity inject the growth?

Chinese productivity increased at an annual rate of 3.9 percent during 1979-94, compared with 1.1 percent during 1953-78.

By the early 1990s, productivity's share of output growth exceeded 50 percent, while the share contributed by capital formation fell below 33 percent.

Analysis of the pre- and post-1978 periods indicates that the market-oriented reforms undertaken by China were critical in creating this productivity boom.

The reforms raised economic efficiency by introducing profit incentives to rural collective enterprises, family farms, small private businesses, and foreign investors and traders.

Prior to the 1978 reforms, nearly four in five Chinese worked in agriculture; by 1994, only one in two did.

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How Productivity inject the growth?Decollectivization and higher prices for agricultural products also led to more productive (family) farms and more efficient use of labor.

Together these forces induced many workers to move out of agriculture.

The resulting rapid growth of village enterprises has drawn tens of millions of people from traditional agriculture into higher-value-added manufacturing.

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Foreign Investment and Growth

By welcoming foreign investment, China's open-door policy has added power to the economic transformation.

Cumulative foreign direct investment, negligible before 1978, reached nearly US$100 billion in 1994; annual inflows increased from less than 1 percent of total fixed investment in 1979 to 18 percent in 1994.

This foreign money has built factories, created jobs, linked China to international markets, and led to important transfers of technology.

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Innovation and growthInnovation system in China has undergone considerable change and its innovation performance has improved noticeably.

Gross expenditure on R&D (GERD) increased consistently from 0.73% in 1991 to 1.5% of GDP in 2008, the equivalent of around 13% of total OECD GERD.

China has invested extensively in human resources in science and technology (HRST) in recent years.

The number of first-stage university graduates has almost tripled since 2000.

China’s innovation policy, put forward in the Medium- and Long-Term Plan of Science and Technology Strategic Development: 2006-2020, aims to achieve an innovation-oriented society by 2020.

Some recent policy actions, such as increasing export rebates, reducing property transaction taxes and interest rates, will help stimulate the domestic market.

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Rural and Industrial Reforms

The success of the rural reform from the late 1970s to the early 1980s resulted in a temporary surge in TFP in agriculture.

Second, industrial reforms provided individual firms, managers, and workers with greater incentives to improve efficiency, and especially township-village enterprises (TVEs) achieved higher efficiency levels and TFP growth than state firms.

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Labor force

Rising labor force participation rates, improvements in educational attainment, the transfer of labor out of agriculture, and the narrowing the technology gaps between China and developed

economies also contributed to the TFP growth.

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Efficiency and GrowthThe restructuring of China’s economy and efficiency gains have made it the world’s second largest economy after the United States.

Average annual GDP growth was 13% between 2000 and 2008, but slowed to 7.8% in 2009.

GDP per capita was around 14% relative to the United States in 2009 and its urban unemployment rate was around 4.3%.

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Capital Accumulation

After a recession in 1989-90, China’s leadership signaled its long-term commitment to market-based reforms, and investment accelerated reaching 43.5% of GDP in 1993.

Gross capital formation rose from 36% in 2000 to 43% in 2003 — about 5 percentage points above China’s 1978-2003 average (Shane and Gale, 2004). All this investment meant that GDP grew by over 9% per year from 1995.

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Capital Accumulation Two aspects of central government policy since the mid-to-late 1990s supported this extraordinary investment growth.First, key input prices such as land, electricity, and other utilities, including

water, were kept low through subsidies and controlled pricing. Second, cheap finance was channeled into industry, particularly to SOEs and

other large companies, often effectively at zero cost.

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Allocation and Utilization of Capital

About two-thirds of China’s investment has been in construction of infrastructure such as roads, dams, public buildings, and other facilities. Most of the remainder is in machinery and equipment (Shane and Gale, 2004), mostly manufacturing; agriculture, which produces 15% of GDP, is getting only 2% of investment.

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Conclusion

China has had one unorthodox reform after another with short-run gains in productivity.

Structural reforms with longer-run effects have been delayed in the process.

China’s growth-strategy since the mid-1990s has emphasized capital formation at the expense of efficient allocation and utilization of production factors, which has led to a slowdown in TFP growth.

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Questions?