Economic Development and Economic Catch-Up

Two different models of eco-nomic development

Agrarian Epoch

• Economy engaging in agriculture with low degree of social division of labor.

• Per capita GDP lingering around sub-sistence level.

• Absolute poverty

Epoch of Modern Growth(Kuznets)

• Rising population• Capital deepening – rising per capita

capital• Rising per capita income due to ris-

ing labor productivity• Relative decline of agriculture with

rise of manufacturing industry

Industrial Revolution and Industri-alization 1

AD1 1000 1500 1600 1700 1820 1900 2000

467 453 566 596 615 666 1,261 6,038 230 270 900 6,100 Table : Trend of world per capita GDP and

populationIn 1990 International Geary-Khamis DollarsIn millions

# Angus Maddison 2010

Industrial Revolution and Industri-alization 2

1 1820 2000

Trend of World Per Capita GDP - Graph

0

1000

2000

3000

4000

5000

6000

7000

Transition Growth

• Transition from agrarian growth to modern growth.

• Industrial revolution and subsequent industrialization of Western Europe – innovation/benchmarking driven.

• Industrialization of late 20th century – economic catch-up.

Growth by Epochs

per capita income (in thousand) US$30.- low growth rate

high growth rate US$1.- no growth

0 agrarian transition post-industrial T (catch-up)

Growth by Epochs 2

• Stagnant agrarian growth (Solow)• Rapid transition growth (Kuznets and

catch-up)• Slow post-industrial growth (Kuznets)• The gap between rich (industrialized)

countries and poor (agrarian) coun-tries is ever widening.

Economic ‘Catch-Up’ in East Asia

• Japan started ‘catch-up’ right after Meiji Restoration.

• South Korean and Taiwanese agrarian epochs, exporting primary goods (agri-cultural products and natural re-sources) and importing industrial products, overlapped with colonial age.

• Their transition growth followed libera-tion.

Raul Prebisch Thesis

• Divided world - CENTER : Group of industrialized

countries - PERIPHERY : Agrarian countries• CENTER exports industrial products

to PERIPHERY, and PERIPHERY ex-ports agricultural products and natu-ral resources to CENTER.

Raul Prebisch Thesis 2

• International prices of industrial products were ever rising, while those of agricultural products and re-sources had remained stagnant and volatile.

• Trade between CENTER and PERIPH-ERY had been siphoning PERYPHERY’s surplus to CENTER.

Raul Prebisch Thesis 3

• The implication of Prebisch Thesis : “Trade with CENTER will deprive PE-RIPHERY of their every surplus that is essential for their own industrializa-tion.”

• Industrialization with a minimal trade with CENTER was recommended.

Import Substituting Industrializa-tion.

Import Substituting Industrializa-tion

• Industrialization effort begins with try-ing to produce domestically the indus-trial products, which used to be im-ported from CENTER.

• Quantity target of production is limited by the size of local market.

• In order to protect domestic production, competing foreign products are not al-lowed to import (protective trade).

East Asian Development

• South Korea and Taiwan started their in-dustrialization with import substituting activities initially to sell at local market.

• They increased production beyond their domestic demands later, and expanded scope of production items, promoting export of their products.

• On the other hand, Latin Americans stayed stubbornly in import substitution.

Nature of Catch-Up

• Trade-led growth - Export-oriented growth of South Korea

and Taiwan was successful, while im-port-substituting Latin America failed.

• Authoritarian government - Japan, South Korea, Taiwan, and Singa-

pore were authoritarian, with tight regu-lations.

- Only colonial Hong Kong was liberal!

Nature of Catch-Up 2

• Government of LDC derives a “de-velopment path”, which is proven by industrialization experienced by first-movers (advanced economies) – “Late-comer’s Advantage”

• Then tightly regulates all the eco-nomic activities to abide by the “path”, in order to minimize wastes.

Trade-led Growth

• Industrial production is viable only when its products find market.

• Import substituting production limits its sales by thin and small local mar-ket for most developing economies.

• Consumers of advanced economies command major purchasing power in the world market.

Trade-led Growth 2

• Industrial producer of LDC will be successful only when he can produce sellable products to consumers of advanced economies.

• Cheap labor of LDCs can compete with workers of advanced economies in global market for simple labor-in-tensive products. So trade-led growth.

Strategy of Catch-Up

• Core of the catch-up strategy lies in learning from industrialized economies for their experiences of industrialization.

• Trade with CENTER provides PERIPH-ERY with most valuable lessons on industrialization and industrial soci-ety.

• No lesson is free in economic world!

Authoritarian Regime

• Catch-up aims at industrialization as soon as possible with minimal waste.

• Controversies such as ‘import substi-tution vs export promotion’ will cause indecision or delay in decision on key strategy.

• Authoritarian regime rather than democracy.

Normalization of S. Korea-Japan Diplomatic Relation : Example

• Two national goals of S. Korea in 1960s : Industrialization and Democ-ratization.

• S. Korean government noted the im-portance of cooperation with Japan for Korea’s industrialization.

• S. Korean people resented over mea-ger amount of reparation for atroci-ties which Japan inflicted on colonial Koreans.

continued

• Absolute majority of Koreans de-manded renegotiation, which Japan would not accept.

• Democracy complying to people’s will would virtually emasculate all at-tempts to industrialization.

• S. Korean government chose indus-trialization over democracy.

State Capitalism : Profit Motivation under State Initiatives

• Authoritarian catch-up system : License and Regulation (State Initiatives)

• Business profit was protected and pro-moted as proper reward for the contri-bution to industrialization.

★Corruption (Rent-seeking) problem• State Capitalism = Profit Motivation +

State Initiatives

Heading for full-fledged market economy

• What after catch-up?• From high (7-10%) to low growth (2-

3%). From free-riding on first-movers’ experience to own innovation with trial and errors. From waste mini-mization to experiment maximiza-tion.

• To the age of Deregulation and Liber-alization of selfish individuals.

Cooperation among Selfish Individ-uals

• Give me that which I want, and you shall have this which you want …. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. (Adam Smith’s The Wealth of Na-tions)

Cooperation Must Be Based on Selfishness

• In civilized society [man] stands at all times in need of cooperation and as-sistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. (Adam Smith’s The Wealth of Na-tions)

Equalitarian vs Egalitarian, A Caveat

• Equalitarian : give ex ante equal chance to everybody.

• Egalitarian : guarantee ex poste equal distribution of income.

• Equalitarianism would encourage selfish motivation, but egalitarianism would ruin it.

Toward Well-Functioning Market

• Profit motivation will drive coopera-tion among selfish individuals, under

(1) Protection of property right(2) Enforcement of contract(3) Fair dispute resolution mechanism.• High-powered protection of property

right contrives many markets into reality such as financial market.