South Korea and OEI
Kennedy Round ‟62-‟67 marked tariff reductions among GATT members
Lowered tariffs + expansion of trade = opportunity to exploit trade
Developing countries chose to use trade in order to develop their economies
(Taiwan, south Korea, Hong Kong, Singapore)
Manufacturing in GDP of S. Korea went 14% 1960 t0 30% 1983.
Exports important, export earnings grew 3.9%, exporting sectors lead the
S. Korea invited to join OECD
Immediate post-WWII years S. Korea blocked all imports on industrial goods,
domestic demand to stimulate domestic production
Import substitution industrialization (ISI) (1950-1963)
ISI criticisms = consumers are hurt by lack of competition,
o Forces transfer of income from consumers to industrial sector, distorts
prices in market by eliminating cheaper priced competition.
o Ex: local steel supported through ISI – producers using steel as an input
must pay more, and thus must raise price of their own goods
o No guarantee that profits will return to the same sector, could be spent
among other sectors or on conspicuous consumption. Also could be taken
out of the country entirely.
Possible to get comfortable with a steady profit without any increase of
production or improved productivity
Some blocked imports could not be fully replaced by domestic counterparts
ISI takes time to develop… domestic levels of production are rarely at a high
enough productivity to meet import-level demands. While these domestic
productions catch up, there is a scarcity, which takes effect on all products that
use it as an input bottlenecking
Technology… needs high levels of technology and know-how in order to produce
at efficient rates
Labor-intensive production may be costly and inefficient for a country that is
primarily abundant in land and agricultural resources.
ISI supposed to be temporary, but local industries have not been compelled to
increase competitiveness – leads to a slowing of industrialization (even where ISI
helped to kick it off)
Developing countries that use ISI often have a small domestic market and low
consumer purchasing power
Efficient factories produce a high amount of output in a year in order to make
profit = economies of scale. Countries based on ISI may not have the domestic
demand to support a fully efficient plant, but build them anyway and run them at a
smaller capacity than would be efficient.
Rent-seeking? Drained resources without producing any product or profit for the
S. Korea political and economic competition with N. Korea S. Korean production was slowed due to ISI
o Private business sector not very well developed nor was it very powerful
vis-à-vis the state
However ISI allowed Korea to build up its industries and pinpointed its basic
Embraces international trade!
Builds industrial plants for efficiency in order to meet international demand
Avoids many problems associated with ISI and doesn‟t even need to be big!
Production is supported by consumption
Risks: tied to international economy and subject to its changes, since domestic
markets are presumably small, a fall in international market can mean trouble,
thus, timing is everything.
Very competitive market system, too much competition results in a fall of profit
so sector selectivity is crucial when entering EOI
US and European producers respond to increased imports by asking for protection
– would affect itn‟l market.
EOI strategy assumes free trade
Developing EOI countries therefore lead the GATT to become the WTO
ISI is a way to raise capital, EOI is a way to pay off foreign investments
EOI creates broader changes – leading to increased industrial efficiency that can
built competitiveness in certain sectors which in turn stimulates local producers
without causing distortions in the domestic market. Also produces a surplus in
investment in the long run.
EOI = gains while I