Business Culture and the Economic Miracle of the Pacific Rim

1. 1 Business Culture and the �Economic Miracle� of the Pacific Rim Week 1

2. 2 Facts and Figures 1965 � 1990 East Asian economy grew 3 times faster than any other developing region World share of manufacturing exports rose 9% to 21% 1965 � 1995 Real per capita income increased Singapore and Korea 700% Taiwan and Hong Kong 400% Malaysia, Thailand and Indonesia 300%

3. 3 Facts and Figures 1972 � 1994 GNP increased Indonesia 90 USD to 880 USD Thailand 220 USD to 2,410 USD Malaysia 450 USD to 3,480 USD

4. 4 Why this �miracle�? There is no general consensus World Bank (1993) Lessons: Keep macroeconomy stable Focus on early education Do not neglect agriculture Use banks to build a sound financial system Be open to foreign ideas & technology Let relative prices reflect economic scarcities

5. 5 Why this �miracle�? World Bank � revised (1997) Outward orientation Macroeconomic stability Investment in people Things not to do Don�t promote specific industries or attempt to miss out stages of technological development Don�t provide large subsidies to borrowers Don�t provide direct credit without adequate monitoring and proper selection of borrowers

6. 6 Why this �miracle�? World Bank (2001) The 4 keys to the �miracle� Adhering to sound macroeconomic policy Having an efficient bureaucracy that can conceive and implement policy for a strong state committed to long-term development Pursuing �activist� government policies to industrialise and export increasing proportions of industrial output Adopting a flexible policy approach which incorporates an error correction method

7. 7 Can we identify factors in the growth? The �miracle� did not affect South Asia or India Openness to trade and technology But see Chiarlone & Amighini (2001)

8. 8 Can we identify factors in the growth?

9. 9 Can we identify factors in the growth? Overcame limitations of domestic market Provided new opportunities to exploit international markets Created competitive pressures for the domestic economy Allowed access to new technology through imports of new machinery & equipment

10. 10 Average annual rates of changeUS Bureau of Labor Statistics

11. 11 Outcomes Openness complemented by macroeconomic stability, labour market flexibility and good economic governance Economies had authoritarian/semi-authoritarian regimes Export oriented policies helped raise income levels Led to increased investment in education New technology put pressure on workforce to upgrade skills Economic success led to rising expectations for international competition

12. 12 Role of FDI �Miracle� economies sought foreign technology through technology transfer via licences import of capital goods foreign training Openness to FDI increased these measures and Brought in new production techniques Created competitive pressure on local firms to acquire new skills Created impetus to improve service provision (eg accountancy)

13. 13 Role of FDI India and South Asian countries Actively discouraged FDI Restricted imports of foreign capital Shunned advanced technology and its benefits

14. 14 Was the �miracle� a myth? Krugman (1994) and �growth accounting� Economic Expansion = Increase in inputs + increase in output per unit of input Inputs are Growth in employment Improved education of workforce Growth of physical capital (machines, buildings, etc) Increase in output per unit of input = growth in efficiency Bigger inputs without efficiency improvements will create economic expansion

15. 15 Was the �miracle� a myth? But increase in inputs are limited So economic growth without improved efficiency must also be limited What makes up efficiency? Technological Advances Studies of Soviet growth in 1950�s showed Massive economic expansion based on rapid growth inputs without accompanying technology advances

16. 16 Was the �miracle� a myth? Singapore Between 1966 and 1990 the economy grew 3 times faster than USA How? Employed share of population rose from 27% to 51% Educational standards upgraded 1966 50% workforce had no formal education 1990 66% had completed secondary education Capital investment Investment as share of output rose from 11% to 40% Huge increase in inputs MUST EQUAL huge increase in outputs (but not per unit of input)

17. 17 So what about services? Accounting in Korea The December 1997 currency and financial crisis in Korea was primarily attributable to the mismatch of short-term foreign currency liabilities and long-term investments of many financial institutions and high leverage of the corporate sector that caused the series of large-scale corporate failure. Non-compliance of Korean financial statements with internationally recognizable accounting standards, disclosure deficiencies and the lack of rigorous monitoring function by external auditors thus resulting in the overall loss of reliability on the financial statements of Korean enterprises and financial institutions also played a significant contributing role.

18. 18 So what about services? Accounting standards must grow to match business development These standards must be: Reliable Rigorously applied Rigorously monitored Match with IAS/IFRS Provide information for decision making Problems with Authoritarian/State-orientated business environment Compared with market-orientated