- Paul Streeten
- Published Date:
- September 1988
I must compliment Mr. Sang-Woo Nam on a most interesting paper reviewing the growth and adjustment experience of the so-called newly industrializing countries, especially of his own country, the Republic of Korea, and drawing lessons from this review for other Asian countries. Korea’s remarkable postwar growth and its economic performance in the 1980s have been the envy of all similarly placed countries and have led to much speculation on the essential ingredients of its success. Mr. Nam, with his intimate knowledge of the country, has made a valuable contribution to this discourse.
The subject of the appropriate mix, timing, and efficacy of trade liberalization-cum-stabilization policies is of immense interest. In my comments, however, I would like to focus essentially on the nature and relevance of the Korean experience in this area; first, on the role of non-economic factors in its economic development; second, on just what was the early economic strategy that was pursued, how it can be said to exemplify an outward-oriented strategy, and just what is meant by this term. Finally, in the light of this experience, I will focus on the conclusions that can be drawn on appropriate future trade and industrial strategies for poor countries today.
I. The Korean Experience
Success is said to have many fathers. It is not surprising, therefore, that adherents of entirely opposed economic ideologies have seen their faith vindicated in the Korean experience: planners have seen in it the advantages of planning and government control, and liberal economists have found proof of the virtues of free trade and the magic of free markets. My own views on the subject have been influenced strongly by what I consider to be one of the most balanced appraisals of the issues involved, which was presented in an article (Streeten (1982)) by the distinguished chairman of this session, Professor Paul Streeten.
For all the interest in what have come to be called the newly industrializing countries, the only careful studies of their postwar experience were carried out under the supervision of Bhagwati (1978) and Krueger (1978) for the U.S. National Bureau of Economic Research (NBER). These studies do suggest that in the countries studied, over the period examined, under carefully qualified circumstances, transitions from an import-substitution strategy to an export-promotion strategy (both carefully defined) were associated with higher growth rates.
Mr. Nam, however, believes that “although . . . the direction of the association [in terms of a significant positive correlation between openness of an economy to world trade and its growth] is ambiguous, the experiences of the Southeast Asian newly industrializing countries seem to indicate that the causality runs from openness to high growth.” This in my view calls for more faith than can be supported by the evidence.
It is the prerogative of all men who are blessed with long lives to designate the secret of their longevity. Just as we do not quarrel with them, I would not take issue with Mr. Nam’s views on the secrets of Korea’s success. I would only say that I would favor more complex explanations of economic history over more simple, reductionist ones which identify merely one or two factors as sufficient cause for all economic developments in postwar Korea.
1. Non-Economic Factors
No one would deny that, apart from domestic policies, Korea’s economic development was greatly assisted also by non-economic external factors. In assessing the relevance of the Korean miracle to countries like Pakistan and India, for example, I would raise two questions.
First, according to figures provided by the U.S. Bureau of the Census ((1984), pp. 811–12), during 1962–83 Korea received US$6.4 billion in military assistance from the United States of America; the comparable figure for Pakistan was US$469 million, and for India, US$147 million. This must have been a source of considerable strength for the Korean economy, in comparison, say, to India and Pakistan.
Mr. Nam broaches the issue when he cites, among the factors which contributed to Korea’s economic problems in the late 1970s, the Nixon administration’s decision in the early 1970s to reduce the number of U.S. troops in Korea. It would be useful to see a more systematic analysis of the contribution of external military assistance on this scale to Korea’s growth and development.
A second consequence of Korea’s close political relations with the countries of the North Atlantic Treaty Organization was the preferential access that Korea received to markets of the countries of the Organization for Economic Cooperation and Development (OECD). According to OECD figures cited by Cable (1986), in 1984 Korea accounted for 14.4 percent of total U.S. imports of textiles and clothing, 8.0 percent of Canadian imports, 12.5 percent of Japanese imports, and 2.8 percent of imports from the European Economic Community (EEC)—adding up to over US$5 billion.
Together, Hong Kong, the Republic of Korea, and Taiwan Province of China held 46.5 percent of the U.S. market share and 29.1 percent of the Canadian market share; Korea and Taiwan Province of China held 37.8 percent of the Japanese market share, and Korea and Hong Kong held 8 percent of the EEC market share. It would also be useful to evaluate the contribution of this preferential access to markets in Korea’s growth and development, especially for countries with quite different political relations with the West which seek to emulate Korea.
2. Adjustment in the 1980s
Turning next to economic developments in Korea in recent years, I would suggest, first, that the appropriate comparator for evaluating the success of Korea’s adjustment efforts in the 1980s would be Turkey, and not Taiwan Province of China. Apart from Turkey, which, as Hasan (1986) points out, was the most successful among those countries that pursued adjustment through greater reliance on exports, India (which did not pursue an outward-oriented strategy) and Thailand (which did) also achieved a degree of success comparable to Korea’s, with all three countries relying mainly on an exceptional savings performance.
In fact, comparing the figures provided by Mr. Nam (Table 8) to those for Pakistan (which also implemented a stabilization program, without the aggressive export-promotion effort), it appears that as an average during 1979—85, economic growth in Korea was 5.2 percent, compared with 6.5 percent in Pakistan; inflation in Korea was 9.4 percent, compared with 8.7 percent in Pakistan. In the 1980s, then, Korea’s economic performance was not as exceptional as in the early years.
Mr. Nam’s principal lesson from Korea’s recent experience, therefore, about “the superiority of an export-oriented development strategy” as being central even to successful adjustment in the 1980s, would need more proof; especially since, as Mr. Nam suggests, in the wake of U.S. troop withdrawals, Korea undertook major investments in the late 1970s and the 1980s in chemicals, heavy industries, and defense-related industries to substitute for imports, in addition to its export efforts.
This view is also supported by Hasan (1986), who identifies two phases in Korea’s adjustment efforts: 1974–78, when the key factors were aggressive export promotion, success in obtaining construction contracts in the Middle East, and heavy external borrowing to increase the investment rate (including import-substitution investment), and 1980–83, when classical stabilization policies of the Fund variety were pursued to reduce inflation and restore external payments viability, with “considerable import substitution in industry,” which helped to reduce import growth to only 3.5 percent a year during 1979-83.
In sum, it is difficult to support the argument that mainly outward orientation (supplemented by stabilization and “sectoral” policies secondarily) was the secret of successful adjustment in Korea in the 1980s. First, the Korean economy’s performance in the 1980s was not much different from that of a number of other countries (including Turkey, India, and Thailand). Second, there is considerable evidence that during this period substantial import substitution also took place in Korea, and it remains to be established that on a net basis Korea was in fact pursuing an outward-oriented strategy.
3. Lessons for Others
Finally, in terms of the relevance of the Korean experience, both early and recent, to countries seeking higher material standards of living today, let me pick up where Mr. Sang-Woo Nam concludes his paper. Mr. Nam seeks to conclude that
(1)Export promotion is good even in the face of rising protectionism in our export markets;
(2)Export promotion is not just a matter of providing export incentives, but involves the provision of a virtually free trade environment, the pursuit of stable and consistent macroeconomic policies, the ensurance of price stability, the provision of unfaltering political support, etc.; and that
(3)Successful adjustment requires the simultaneous pursuit of stabilization and sectoral structural policies (with the latter defined as policies “designed to reduce various inefficiencies . . . in the . . . economy,” which include “reducing government intervention in resource allocation, promoting competition, and restoring the functioning of the market mechanism”).
In reviewing these conclusions, I shall not seek to answer whether in fact these are the right conclusions to draw about Korea’s experience. Instead, I shall address the more interesting question, at least from the policy perspective, of whether it makes sense for poorer Asian countries to pursue these policies today.
In answering this question, it is important to be quite clear about some of the key words which feature in this discourse: shocks, adjustment, structural adjustment, and export promotion or outward-oriented strategy. Much of the confusion, in my view, can be accounted for by the shifting meanings of these terms. It may be fruitful, therefore, to note briefly the mainstream usage of these terms.
By shocks the literature sometimes refers to any major disruption of economic activity owing to a sudden large change in social, political, or economic conditions. In the context of the present discourse, however, it is best to define the term more narrowly, as, for example, Hasan (1986) does, to refer to a large decline in the terms of trade or, at most, in the capacity to import.
A large increase is also sometimes referred to as a shock, but this is obviously a perverse use of the term, and is best avoided. Also, to subsume wars, famines, and the like under the rubric of shocks and speak of adjustment policies may be viewed as an attempt to seek a level of generality beyond the point of diminishing returns.
If this is accepted, then adjustment policies can also be defined, once again following Hasan (1986), for example, quite precisely as policies designed to reduce aggregate expenditures and/or to switch them toward activities which either save or earn foreign exchange. (The adjective “structural,” I would suggest, should be used to refer to those adjustment policies that seek parametric changes in behavioral relationships, changes which alter the structure of economic relationships—shifts of the curve rather than movements along a curve, to employ the textbook phrase.)
This is a much more restrictive view of adjustment policies than that presented in the paper. Although, to be fair to Mr. Nam, he is in good company in using the term adjustment policy interchangeably with development policy or even economic policy in general. But in doing so, Mr. Nam’s discussion of Korea’s adjustment efforts in the 1980s becomes somewhat diffused, and neither the magnitude of the shocks not the precise responses and their degree of success are clear.
In examining Mr. Nam’s principal conclusion that an export-oriented development strategy is superior in all circumstances, it is also useful to be clear about what is meant by this term. All too often the tendency is to pick high-growth economies, identify ex post facto the set of policies that they pursued, and label this assortment of initiatives as an export-oriented (or outward-oriented, or export-promotion) strategy. In fact, there have been cases where countries supposedly pursuing an export-oriented stategy were held later, when growth rates plummeted, to be substituting for imports during the same period.
To lend some objectivity to this discussion, I suggest we define quite clearly what is meant by an export-promotion strategy. In the mainstream usage, an “EP strategy,” as Bhagwati (1986) calls it, refers to a condition in which the average effective exchange rate for exports is held at about the same level as that for imports. When the rate is higher for imports, there is a net incentive (relative to the dictates of international prices) to substitute for imports, and a country can be said to be pursuing an import-substitution strategy. (When the bias is in favor of exports, however, Bhagwati suggests that this be called an “ultra-EP” strategy.)
This definition, Bhagwati suggests, is also consistent with the conditions that were prevalent in the four Far Eastern economies (as judged by the NBER studies, which have the distinction, as mentioned earlier, of being the most extensive and careful studies of the subject) and in the Republic of Korea (according to a recent study by Chong-Hyun Nam (1986)). An export-promotion strategy, therefore, both logically and historically, consists of maintaining incentives that are neutral to exports and import substitution, rather than of providing a positive bias in favor of exports.
Once we accept this definition, a number of issues can be clarified. First, it appears to be both a rather more precise, and more useful, way of looking at export-oriented development and strategy, and a somewhat more accurate description of what happened in Korea, than that presented in the paper.
Second, it immediately makes clear that the pursuit of an export-promotion strategy is quite independent of whether there is government intervention in the economy (and Korea, Taiwan Province of China, and Singapore have intervened actively and effectively in the markets, contrary to Mr. Nam’s suggestion), or whether a liberal attitude is taken toward foreign investment, as opposed to trade (where the newly industrializing countries coincidentally have been quite liberal, despite Mr. Nam’s misgivings, in comparison, say, to Japan).
It also clarifies, as Bhagwati (1986) points out, some of the confusion in the theoretical literature, which in my view has served to buttress some of the most strongly held but misguided economic ideologies that have gained currency in the dialogue on economic policy. Although the literature itself is quite careful in its wording, there is a distinct effort to suggest a causal link, independent of time and space, between the pursuit of liberal trade policies and economic growth. This has often succeeded in misleading the scholars and policymakers in poor countries.
II. Relevance of the Korean Experience Today
I will conclude by making a few observations on some considerations that would be relevant to the kind of industrial and trade strategies that poor countries may pursue in the coming decade or two.
Whatever may have been the merits or demerits of the old export pessimism (to borrow Bhagwati’s (1986) term once again, which could refer either to the quantities of poor countries’ exports that industrial countries could absorb, which worried Nurkse (1953) and more recently Lewis (1980), or to the prices which poor countries would receive over time for their exports, which was the concern of Prebisch (1951 and 1959); see also Prebisch (1984) and Singer (1950)), there would be few today who would dismiss the very real danger which presently exists of rising protectionism in industrial countries. (See, for example, Hasan (1986).)
This rising protectionism is part of a larger historical trend in the industrial countries away from internationalism, even in the most ardent champion of this idea, the United States of America. A variety of factors, no doubt, account for this move. One aspect, however, relates to the rise of a critical realism in the industrial countries that finds the ambition to build a rational, secular, democratic industrial world, in its own image—as reflected, for example, in the language of the United Nations Charter or the Treaty of Rome—too taxing.
Another aspect relates to a degree of satisfaction with present conditions, with an unwillingness to sacrifice immediate comforts for dubious moral purpose. Yet another relates to a change in global objectives and defense strategy, which no longer require good relations around the world in order to facilitate the stationing of conventional forces.
Whatever the reasons, it is clear that the commitment to multilateralism and free trade is no longer what it used to be. The most serious victim of this development has been the credibility of the system developed under the General Agreement on Tariffs and Trade (GATT) and the Bretton Woods institutions. Trade liberalization today is simply an ideology to be forced upon the weak, while the strongest elements in the system reserve for themselves the right to pursue down-to-earth discrimination at home. Future industrial and trade policies must be based on a very clear perception of whether this new export pessimism is warranted, and the balance of caution would certainly seem to lie with some degree of contingency planning.
To put this in concrete terms, let me speak of the real problems that a country like Pakistan faces. Like all other poor countries, we suffer the misfortune of being preached at by the best and the brightest that the industrial world has to offer. Although fashions do change, the message today, among others, is that comparative advantage dictates the pursuit of liberal trade policies. (In this, through no fault of the Koreans, unfortunately, a carefully cultivated set of perceptions about the Korean experience is held up as an example.)
Now, where does our comparative advantage lie? One would think that agriculture would be a prime candidate. But here we find that in 1986 the three major trading countries or country groups (the United States, the EEC, and Japan) gave about US$200 billion in agricultural subsidies. The provisions of the U.S. Food Security Act, 1985 (under which the United States recently drove down the price of cotton) and those of the Common Agricultural Policy in Europe ensure that no poor country can remain competitive in agricultural exports. As a result, if we pursue our comparative advantage, we find ourselves in a no-win poker game with the treasuries of the industrial world.
Since the world is not perfect, we are advised to pursue the second-best course. This brings us to textiles, where most estimates show that over half the gains from trade accrue to the so-called developing countries. But, here, the fourth Multifiber Arrangement (MFA) has just been renewed until 1991, conveniently in advance of the new round of multilateral trade negotiations, and proposals to insert a clause to the effect that this would be the last MFA, or to include textiles on the agenda for the new round, were not acceptable to the major shareholders of the GATT, the Fund, and the World Bank.
In such conditions, it is difficult to take seriously the arguments for trade liberalization and the pursuit of an export-oriented strategy. The credibility of this message rests squarely on the dismantling of the MFA, the prototype for managed trade, which the richest and the most powerful industrial democracies in the world do not seem to be able or willing to put away. This, despite the fact that the cost of protection to the industrial countries is estimated to be two to eight times the annual wages of textile workers; or as the World Bank (1984) puts it, that it costs one dollar for the United States to provide seven cents of benefits to its textile workers. It also rests on the dismantling of a variety of nontariff barriers to trade, like norms, rules, and voluntary export restraints.
In practice, then, a simple adherence by all countries to outward orientation in all industries, based on a magical faith in the experience of the newly industrializing countries, is neither warranted nor desirable. Country size is obviously a major consideration. For most of the smaller countries (and most sub-Saharan African countries would be in this category), an open trade regime is a necessity, and not a matter of choice. For the larger countries (like China, Brazil, Mexico, India, and Iran—the five non-industrial countries with 12-digit U.S. dollar gross domestic products in 1984), there is considerable latitude in the choice of trade policies. For the midsize economies, like that of Pakistan, the situation is in between.
For countries that truly have a choice, the pursuit of an export-promotion strategy (that is, the provision of incentives neutral between exports and import substitution) should be based not so much on the logic of comparative advantage, nor on the postwar history of the newly industrializing countries, but on the appropriateness of lowering protection to the industry in question, in the light of a realistic assessment of their initial conditions— political, social, and economic.
As should be clear, the pursuit of an export-promotion strategy requires only that the average level of effective exchange rates for exports and imports be equal. Although wide dispersions should probably be avoided, there is every reason to pursue import substitution in certain industries where it seems warranted, while opening stronger industries to competition. It also seems to be desirable that a trade strategy be formulated in concert with a long-term industrial policy. Finally, the timing and sequencing of stabilization policies in relation to trade liberalization should be carefully tailored to individual circumstances; a uniformly applicable policy package probably does not exist.
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Cable, Vincent,“Textiles and Clothing in a New Trade Round,”paper presented at the Conference on the Role and Interests of the Developing Countries in the Multilateral Trade Negotiations,October 30-November 1, 1986 (Bangkok, 1986).
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At the time this paper was presented, Mr. Zaman was Economic Adviser and Additional Secretary, Ministry of Finance, Government of Pakistan. His participation in the seminar and his comments were in his personal capacity.