China Korean Catchup - Essays PDF

Preview

Summary

Essays...

Description

China’s Strategies for Economic Catch-up and Implications for Korea

May 2006

Keun Lee,* Mansoo Jee,** and Jong-hak Eun** *Seoul National University; ** Korea Institute for International Economic Policy (KIEP)

1

1. Introduction. While many appreciated the rapid economic growth achieved by the newly industrialized economies (NIEs) (Amsden 1989; Chang 1994; World Bank 1993), more recent concern has been why such catch-up is not happening in other parts of the world. Despite huge amount of development aid and the accompanied policy changes, poverty and the gap between the rich and poor countries still persist. While performance contrast between East Asian and Latin America has been quite common in the literature, it was Rodrik (1996) that have extended the comparison in terms of the Washington Consensus. Of course, the motivation was the puzzle of slow growth of Latin America which followed more closely the Consensus than East Asian economies (Korea and Taiwan) which showed some deviation from the Consensus. The mismatch between predictions and results (in Latin America) and the successes of China, India, and Vietnam where there were substantial deviations from the full package of reforms, has stimulated diverse explanations. The attention to the latecomers in economic development goes back to Gerschenkron (1962, 1963) that emphasized the advantages of the late comers, such as economy of scale in plant sizes in steel, owing to the fact that these countries started to use the technology only after it become matured enough to have the capital goods suitable for efficient production. However, the majority of the early literature have focused on explaining how developing countries including the NIEs have tried to catch up with advanced countries by assimilating and adapting the more or less obsolete technology of the advanced countries, which is consistent with the so-called product life cycle theory (Vernon 1966; Utterback and Abernathy 1975; L. Kim 1980, 1997). In this view, catching-up is considered as a question of relative speed in a race along a fixed track, and technology is understood as a cumulative unidirectional process (Perez 1988). The speed of progress on the track has been uneven, with some catching-up rapidly and others lagging behind. On the other hand, a new brand of research points out that the catching-up paths taken by countries are different and there is an issue of policy choices among the alternatives. Lee and Lim (2001) has identified the three different patterns of catch-up: a path-following catch-up, which means the late-comer firms follows the same path taken by the forerunners, a stageskipping catch-up, which means that the late-comer firms follows the path but skips some stage, and thus saves the time, and a path-creating catch-up, which means that the late-comer firms explores their own path of technological development. Then, some countries make quick progress and save time because they achieved some leapfrogging taking advantage of 2

new techno-economic paradigm or skip some stages or even create their own path which is different from the forerunners. This observation is consistent with the emerging literature on leapfrogging. For example, Perez (1988) observes that every country is a beginner in terms of the newly emerging techno-economic paradigm, which implies the possibility of leapfrogging by late-comers like NIEs. The idea of leapfrogging is that some late-comers may be able to leap-frog older vintages of technology, bypass heavy investments in previous technology system and catching-up with advanced countries (Perez and Soete 1988). The increasing tendency toward globalization and development of information technology makes the leapfrogging argument ever more plausible as analyzed for the case of digital TV in Lee, Lim and Song (2005). More traditional view on China’s reform success or another East Asian miracle has attributed the success to policy changes to take advantage of comparative advantages in labor intensive goods (Lin, et al 1996; Lin 2003). Taking comparative economic system perspective, Lee, Hahn, and Lin (2002) argues that China seems to deviate from the JapanKorea style east Asian model but has several components found in the Anglo-Saxon model in terms of economic systems. Recently there are some sign that the Chinese leadership is trying to bring in some changes in their development policies. The 11th 5-year plan of the Chinese government emphasized the promotion of indigenous technological capability and nationallyowned large-sized companies whereas there are increasing criticism on the role of FDI such that it leads to more jobs without much technological learning by local companies. With this change as a background and a follow-up study, this paper looks at China with a focus on strategies for economic catch-up and derives their policy implications for Korea. The paper will first argue that China’s catch-up policies are not following the Washington Consensus, and exactly for the reason China is succeeding so far and possibly in the future. Rather, it argues that China is following the “east Asian sequencing” (Lee 2006) as it has been adopting the similar policy sequencing of Korea or Taiwan, namely firstly adopting the first 5 policies suggested by the Washington Consensus but delaying the next 5 policies (financial liberalization, massive privatization, deregulation of FDI, etc.). In addition, China has emphasized science and technological innovation and higher education, which are not mentioned in the policy packages of the Washington Consensus but emphasized in Korea and Taiwan. Second, the paper will point out and elaborates some uniqueness of China’s catch-up strategies which can be termed as “Beijing Consensus” because they are not explicitly

3

adopted by Korea or Taiwan. Such uniqueness includes emphasis on forward engineering (role of university spin-off firms) in contrast to the reverse engineering of Korea and Taiwan, acquisition of technology and brand by international M&A, parallel (indirect) learning from FDI firms, and the strategy of going global (zouchuqu) at earlier stage of economic development. These strategies might provide the Chinese some opportunity for leapfrogging style catch-up. In the next section, the paper starts with a review of the earlier argument by Lee , Hahn and Lin (2002) on the contrast of the emerging economic system in China with that of Japan and Korea in the earlier period. Section 3 put China in comparison with the policy packages prescribed by the Washington Consensus and the East Asian countries. Section 4 discusses technological catch-up strategies of Korea and Taiwan to provide a comparative perspective on the Chinese experiences so far. Section five analyzes several components of China’s strategies for industrial catch-up: strategy of trading market for technology and parallel learning, strategy of forward engineering, and strategy of going global and international M&A.

2. China moving beyond the East Asian model Prior to the Asian financial Crisis, many people wondered if China, with the remarkable performance of its reformed economy, would achieve another “East Asian Miracle” (Lin, Cai, and Li 1996). Now, after the financial crisis in the region, the question has turned to whether or not China will follow the model that created the East Asian tiger economies in the first place and, consequently, whether or not China could avoid the mistakes that led to the crisis. In this regard, Li and Lian (1999) and Li, Li, and Zhang (2000) argue that China is following the

Japan-Korea

model,

describing

the

Chinese

model

as

“market-preserving

authoritarianism, ” and notes the German-Japanese characteristics of China’s legal system as well as not the rule-based but the relation-based nature of the Chinese governance as indicators that China is likely to follow the Japan-Korea model. In the meantime, Qian and Weingast (1996) argue that China is more likely to follow the Anglo-American model, describing the Chinese model as “market-preserving federalism”. Really, there could exist diverse approach and views on the future of China. Lee, Hahn and Lin (2002) take a specific economic systemic approach, comparing the Chinese economic system with the Japan-Korea version of the East Asian model. The Japan-Korean model is also specifically defined in

4

terms of the following five aspects: corporate governance, bank-firm relations, labour market conditions, product market conditions, and industrial policy (Lee Hahn and Lin 2002).1 In this framework, the features of the Japan-Korea model include the followings: high insiders’ ownership and weak roles for outsiders in corporate governance, close bank-firm relations and weak reliance on stock markets in investment financing, rigid labour markets, a monopolistic domestic market with little presence of foreign firms, and selective industrial policies. Then, Lee Hahn and Lin (2002) argues that China does not seem to follow the JapanKorea model in these areas, and that China is more likely to evolve directly toward on an economic system more similar to the Anglo-American model. This argument is based on an investigation of several aspects of the Chinese economy. First, in terms of corporate governance of listed companies, the number of the insiders’ equity is relatively small and outsiders’ voices are heard. The stock markets in China are developing very fast, with the listed stock value to GNP ratio rising fast. Second, in terms of bank-firm relations, Chinese banks are not allowed to own shares in firms, thus maintaining an arms-length relationship as in the Anglo-American system, and listed companies in China rely primarily on stock markets to finance new investment. Third, labor market flexibility has also been increasing quickly with increasing labor turnover rates and dismissal of the workers becoming much easier than in the past. Fourth, the domestic market has become competitive owing to the presence of foreign-invested companies and the integration of national markets. Finally, it is not easy for the government to implement selective industrial policies, given the limitations

1

This means that we are not discussing other important dimensions of an economy, such as

technological development, labour-management relations, the role of the foreign capital and exports, etc. We cannot help this given the huge literature on the East Asian miracle, beginning with The East Asian Miracle: Economic Growth and Public Policy by the World Bank (New York: Oxford University Press, 1993). Each study on the miracle discusses different or diverse aspects of economic growth in East Asia and identifies different elements as the secret recipe for the miracle. One big issue, of course, has been a discussion of the state vs. market dichotomy as in Masahiko Aoki, Hyung-ki Kim, and Okuno-Fujiwara Masahiro (eds.), The Role of Government in East Asian Economic Development: Comparative Institutional Analysis (New York: Oxford University Press, 1997); Another important distinction in East Asian economies is in the models for the firm and for bank-firm relations.

5

set for the membership in the WTO and the condition created by globalization, the huge size of the economy tempered by the active inter-provincial politics, and the heavy presence of foreign companies. Perhaps we have to say that this new model is still competing with the old model that featured closed, state-dominated corporate governance, unified bank-firm relationships under state influence, rigid and internally-oriented labour markets, state-controlled product markets, and discretionary state intervention in industries. It might be still possible for this old system to evolve first toward the Japanese-Korean style East Asian (or northeast Asian) economic model, characterized by insider-oriented corporate governance, close bank-firm relations, rigid and internally-oriented labour markets, monopolistic domestic markets with little presence by foreign firms, and selective industrial policies, rather than to jump toward a more market-based and open system. Actually, the old Chinese and the Japanese-Korean model appear to be closer to each other than to a new emerging open market-based system. Above all, it will be very difficult and take time to establish a sound banking system in China as the experience of Japan and Korea suggests. Another alternative might be a Taiwan or Southeast Asian model, where we see a greater role of FDI, less government activism, and more flexible labour markets than in the Japan-Korean style capitalist economies.2 The so-called “Comparative Institutional Analysis (CIA)”, proposed in Aoki, Kim and Okuno-Fujiwara (1997) and Aoki and Okuno-Fujiwara (1996), provides a good explanation about how difficult it is for an economic system to transit into a new system. The answer can be found with the help of the two concepts proposed by the CIA, institutional complementarity and strategic complementarity. When institutional complementarity prevails among the components of the system, it is difficult to replace (or introduce) one component without

touching

(or

introducing)

other

components

simultaneously.

Strategic

complementarity implies that unless a majority of the population adopts and switches to a new system or its components, individuals will be worse off when switching to a new system alone. Aoki and Okuno-Fujiwara (1996) suggest three ways to overcome the institutional inertia or the status quo, namely frequent experiments or mutations, government regulations, and promotion of contact with new systems (opening and liberalization). A major crisis, like the financial crisis in 1997 Korea, can serve as the momentum to try some of the three ways

2

Dong Hyun Park, “East Asian Capitalism”, paper presented at the 1999 WEA Annual Convention, held in San

Diego, July 1999.

6

for system transition. As a matter of fact, the Korean economy has recently been undergoing fundamental systemic changes. In the Chinese case, the momentum for change was the declaration in 1978 for reform and the open door policy, which is known to have been motivated by the leadership's sense of crisis about the possibility of China being left behind permanently by her small neighbors, Taiwan and Korea. Since then, the Chinese have adopted all the three ways in their system transition, although a typical combination was initial experiments to be followed by the government recognition by the laws or provisions. For example, the SOEs were initially transformed into joint-stock companies on an experimental basis, and the Special Economic Zones and the open cities were tested in limited places to invite foreign companies and new business practices. Introduction of the labour contract system should be a case of a system transition by the initiatives of the government in that all new employees were to be hired on a contract basis. It is also the law that prohibits commercial banks to own stocks of the companies. All these new elements are mutually complementary and were introduced more or less simultaneously around the mid to late 1980s. As these new institutions spread widely, they won in terms of strategic complementarity and thus more and more players began switching to the new ways. Here, we notice the importance of intentional experiments and designs supported by laws and government initiatives. The Korean emulation of the Japanese model was initiated by intentional design. In the case of China, it seems that the influence of the Anglo-American model of a market economy was heavy in reform designs, and that any resemblance to the Japanese-Korean model emerged, not 100 percent, but largely connected with effort to preserve and/or modify the legacy of the planned economy, and these efforts were not very successful, judging from the cases of promotion of industrial policy and business groups. From now on, if there was to be no strong government activism in the future, the natural evolution of the economy is less likely to be toward the Japanese-Korean model and more likely to be toward something else. Besides all the supportive evidence presented in this paper, one more theoretical point could be that the so-called “quasi internal organization” or transaction-cost-oriented justification for state activism does not hold for China with a huge difference in the size and diversity of the economy. Another point could be that one of the initial conditions for the Northeast (Japanese-Korean) Asian model is a strong base of skilled human capital, which was lacking in China and Southeast Asia.

7

3. The Washington Consensus or Beijing Consensus While comparison of East Asian and Latin America has been quite common in the literature, it was Rodrik (1996) that have extended the comparison in terms of the Washington Consensus. Of course, the motivation was the puzzle of slow growth of Latin America which followed more closely the Consensus than East Asian economies (Korea and Taiwan) which showed some deviation from the Consensus. The mismatch between predictions and results (in Latin America) and the successes of China, India, and Vietnam where there were substantial deviations from the full package of reforms, has stimulated diverse explanations. Rodrik (1996)’s observation can be summarized in table 1. He observes that while Latin America endorse and tried all the 10 elements of the Consensus, East Asian countries of Korea and Taiwan adopted only the half (macroeconomic stabilization, 1 to 5) but maintained microeconomic interventions by not committing to privatization, liberalization, and deregulations. [table 1 : W Consensus and EA Consensus]

Having reached this insightful distinction, his interests turned to another puzzle of why unproductive rent-seeking often associated such microeconomic interventions did not realize in East Asia, and then he discuses such initial conditions as the initial levels of educational attainment and inequality. He pointed out that equality have been conducive to better governance in terms of its implications for relative autonomy of the governments, less need for redistribution, and political leadership’s focus on economic rather than political goals. Such analysis is basically the thesis of “institutions matter,” claiming dominance of institutions over policies argued by Acemoglu, etc (2001), Rodrik etc (2002), and Easterly and Levine (2003). While this realization itself is a great progress, the thesis seems to have an implicit function of saving the face of the Washington Consensus identifying the sources of the failure not in the policies but something else (initial conditions or institutions). Reviewing the experiences in several countries in Asia, Lee (2006) makes the following two points. First, he argue that the mixed results with the Consensus has to do not only with the heterogeneous

8

initial conditions but also with the missing or neglected policies, such technology policies and higher education revolutions (table 1). Second, more importantly, some elements of the Consensus, such as financial liberalization, are wrong in the sense that they are not really necessary or it could bring in crisis rather than stability or growth unless properly sequenced and implemented. The case of 1997 financial crisis in Asia is supportive to this critical observation, as the mid 1990s financial liberalization is immediately followed by financial crisis through the very similar processes in Korea and Indonesia. One of the reasons for the limited success of the Washington Consensus model was that it does not pay attention to the importance of consolidating stable and reliable export basis within a short period of time, while enhancing the capacity to generate foreign exchanges is critical as a means to defend against the future balance of payment crisis. However, most reform experiences ...