Capital Accumulation and Economic Growth The Korean Paradigm Shahid Yusuf R. Kyle Peters WORLD BANK STAFF WORKING PAPERS Number 712 r~~~~~~~~~~~~~~~F - ===u\ WN;StJILL I WORLD BANK STAFF WORKING PAPERS Number 712 Capital Accumulation and Economic Growth The Korean Paradigm Shahid Yusuf R. Kyle Peters The World Bank Washington, D.C., U.S.A. Copyright (©) 1985 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All nghts reserved Manufactured in the United States of America First printing February 1985 This is a working document published informally by the World Bank. To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The publication is supplied at a token charge to defray part of the cost of manufacture and distribution. The World Bank does not accept responsibility for the views expressed herein, which are those of the authors and should not be attributed to the World Bank or to its affiliated organizations. The findings, interpretations, and conclusions are the results of research supported by the Bank; they do not necessarily represent official policy of the Bank. The designations employed, the presentation of material, and any maps used in this document are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, area, or of its authorities, or concerning the delimitation of its boundaries, or national affiliation. The full range of World Bank publications, both free and for sale, is described in the Catalog of Publhcations; the continuing research program is outlined in Abstracts of Current Studies. Both booklets are updated annually; the most recent edition of each is available without charge from the Publications Sales Unit, Department T, The World Bank, 1818 H Street, N.W, Washington, D.C. 20433, U.S.A., or from the European Office of the Bank, 66 avenue d'1ena, 75116 Paris, France. Shahid Yusuf is an economist and R. Kyle Peters an economic support systems analyst in the East Asia and Pacific Regional Office of the World Bank. Library of Congress C atz1oging in Pub]lication Dana Yusuf, Shahid, 1949- Capital accumulation and economic growth. (World Bank staff working papers ; no. 712) Includes bibliographical references. 1 Saving and investment--Korea (South) 2. Korea (South)--Economic conditions--1960- . 3. Saving and investment. 4. Economic development. I. Peters, R. Kyle, 1954- . II. Title. III. Series, HC470.S3Y86 1985 338.9519'5 85-648 ISBN 0-8213-0500-X ABSTRACT The purpose of this paper is to reaffirm certain notions that have provided the foundations of development economics, but which now are coming increasingly under attack: that growth in such pacesetters as the Republic of Korea, Japan and Brazil has principally arisen from capital accumulation; and that investment during the important initial phase of their industrialization was often only distantly related to market forces. The discussion is opened with a brief description of the turmoil sweeping economics and specifically, development economics. Drawing upon this, we discuss models derived from the neoclassical paradigm, and compare and contrast this paradigm of development with the experience of Latin American countries and Japan. In this context, we move to two more eclectic models which are very much in the spirit of development economics, representing managed development under different political and sociological circumstances. One is the so-calLed bureaucratic- authoricarian model which has been helpful in explicating developments in Latin American countries, and the other, a model of Japanese development since the second World War. In the final section of the paper, we narrow our focus to Korea and show how these models can illuminate Korea's investment policies during the sixties and the seventies. The paper concludes that a simple neoclassical paradigm is not sufficient to explain Korea's successful economic development. The story is much more complex, involving extensive government planning which utilized the entire register of policy instruments in pursuit of industrial, export and growth objectives. CONDENSE Cette etude a pour but de r6affirmar certaines notions qui ont servi de base a 1Qeconomie du d6valoppexpent, mais qui sont ett.tjourd'hui de plus en plus decriees9, a savoir que la croissance de certains des pays lee plus dynamiques, tels que la R6publique de Cor6e, le Japon et le Br6sil, est essentiellement le fruit de I'accuoulation de capital; et que l'inves- tissement au cours de la phase initiale tres importante de leur industria- lisation n'avait qu'un rapport tres lointain avec les forces du march6. Les auteurs commencent leur analyse par une breve description des remous qui agitent l'conomie et, singuli6rement, 1'6conomie du d6veloppement. Puis ils examinent les modeles elabores sur la base du paradgige neoclas- sique et comparent, ou plutot confrontent, ce paradigme du developpement a ce qui se passe dans les pays d'Amerique latine et au Japon. De l, ils passent a deux modeles plus eclectiques qui sont particulierement conformes a l'esprit de lconomie du developpement et qui representent le develop- pement ger6 dans des contextes politiques et sociologiques diff6rents. L'un est le modele qualifi6 de bureaucratique et d'autoritaire, qui permet d'expliquer l1evolution des pays d'Am6rique latine, et l'autre est le modele offert par 1'histoire du Japon depuis la fin de la Deuxime guerre mondiale. La derniere partie de cette etude se concentre sur la Coree et montre comment ces modeles 6clairent la politique d°investissement suivie par la Cor6e au cours des ann6es 60 et des annees 70. La conclusion est qu'un simple paradigme neoclassique ne saurait suffire a expliquer le suc- ces du developpement economique de la Cor6e. La realite est beaucoup plus complexe et comporte de longs travaux de planification au cours desquels l'Etat a mobilis6 le registre complet des instruments politiques a la poursuite des objectifs qu'il s'6tait fix6s en ce qui concerne l'indus- trie9 les exportations et la croissance. EXTRACTO La finalidad de este documento es reafirmar ciertos conceptos que han sentado las bases para la economia del desarrollo, pero que actualmente estan siendo atacados en medida creciente: que el crecimiento de paises que han estado a la vanguardia, como la Repdblica de Corea, el Jap6n y el Brasil, se ha debido principalmente a la acumulaci6n de capital, y que la inversi6n durante la importante fase inicial de su proceso de industrializaci6n con frecuencia s6lo guardaba una relaci6n remota con las fuerzas del mercado. La exposici6n comienza con una breve descripci6n de la turbulencia que existe en el campo de la economia y, especificamente, de la economia del desarrollo. Sobre esa base, se examinan modelos derivados del paradigma neoclasico del desarrollo, el que se compara y contrasta con la experiencia de los paises latinoamericanos y el Jap6n. En ese contexto, se pasa revista a otros dos modelos mas ecl6cticos, estrechamente vinculados con el espiritu de la economia del desarrollo, que representan el desarrollo dirigido en circunstancias politicas y sociol6gicas diferentes. Uno es el conocido como modelo burocratico-autoritario, que ha sido util para explicar la evoluci6n de los paises latinoamericanos, y, el otro, el modelo de desarrollo existente en el Jap6n desde el final de la segunda guerra mundial. En la ultima secci6n del documento, se centra la atenci6n en Corea y en la forma en que los modelos mencionados pueden aclarar la politica de inversi6n aplicada por el pais en los anos sesenta y setenta. El documento llega a la conclusi6n de que un sencillo paradigma neoclAsico no basta para explicar el exito logrado por Corea en el proceso de desarrollo econ6mico. Se trata de una cuesti6n mucho mas compleja que comprende una extensa planificaci6n del Gobierno, el que emple6 todo el conjunto de instrumentos de politica para fomentar la consecuci6n de objetivos en la industria, la exportaci6n y el crecimiento. Acknowledgements We are deeply indebted to Mr. M. Laurent for his help in conducting the quantitative tests and guiding us into some of the deeper recesses of Latin American economic history. Wise comments and encouragement were offered by Messrs. Oktay Yenal9 Guy Pfefferman, Johannes Linn, Rakesh Mohan9 Roger Key and Farrukh Iqbal. To all of them we are grateful. Of course9 all remaining errors must lie at our doorstep. Table of Contents Page No. I. Introduction .. 1 II. Battle of the Paradigms .. 1 III. Development Economics: Paradigm Lost ...................... 5 IV. Neoclassical Doctrine: Paradigm Triumphant? ............... 8 V. Models for Korea .. 9 VI. Growth in Korea through Neoclassical Eyes .................. 17 VII. Growth and Capital Accumulation in Korea: Development Economics .................................... 19 VIII. Korean Development: Econometrics .......................... 28 IX. Paradigm Soup .............................................. 44 Introduction Our understanding of how countries progress from a state of back- wardness to industrial maturity is undergoing a sea change. The purpose of this paper is to reaffirm certain notions that might have seemed self-evident in yesteryear but have now increasingly begun to appear contentious: that growth in such pacesetters as the Republic of Korea (hereafter, Korea), Japan and Brazil has principally arisen from capital accumulation; and that investment during the important initial phases of their industrialization was often only distantly related to market forces. The paper is divided into three parts. We open the discussion w th a glance at the turmoil sweeping our corner of the intellectual universe.l Next we sketch models derived from the neoclassical paradigm as well as the experience of Latin American countries and Japan. In the final section we show how these models can illuminate Korea's investment policies during the sixties and the seventies. Korea was selected to play the axial role because its past is being woven into a doctrine that 2ay greatly influence countries eagerly seeking a springboard to prosperity.- Battle of the Paradigms Economics is a religion balkanised into many sects perennially at war with each other. For their members, life is an unceasing round of squabbles over theoretical fine points; of theological debates among them- selves as well as with heretics espousing antagonistic creeds; and of toiling in empirical quarries where generations of the committed have sought something that could be described as truth. All the creeds are at the mercy of the economic seasons. Every so often an entirely fortuitous train of events will lead to changes, in predicting which one creed appears to have an edge over 1/ M. Blaug notes, "The 1970s... have been full of talk of "crisis", revolution and counterrevolution amounting at times to a veritable orgy of self-criticism on the part of some of the leading spokesmen of the economics profession". M. Blaug, The Methodology of Economics, Cambridge University Press, 1980, p. 253. That the prolonged debate is in no danger of resolving the issues, at least on the macroeconomic plane, is apparent from A. Klamer, Conversations with Economists, Rowman and Alanheld, 1983, see p. 35, 54, 145, 159. 2/ There has been a steady accumulation of books and articles extolling the performance of the leading East Asian economies. See E.K.Y. Chen, Hyper- growth in Asian Economics, Holmes and Meier, Inc. 1979; R. Hofheinz and K.F. Calder, The East Asia Edge, Basic Books, 1982. - z - the othersi31 Immediately the favoured sect begins to assert that its teach- ings have been vindicated, forcing all other groups onto the deLensive0 A few years of feverish proselytizing to win recruits for the empirical endeavours and a measure of acquiescence from the lay audience9 follow this shift in the balance of power. After which, the leading sect declares victory, unilater- ally, and proceeds to rewrite history so that the newly gained authority can be legitimized and, in Bernard Lewis' words, "what is distasteful in the past [replaced] with something Tore acceptable, more encouraging and more conducive to the purpose in hand"-4 .Meanwhile, the other groups, temporarily humbled, probe and skirmish as they pray to the fickle weather machine for another turn of the climatic wheel0 In recent years, the winds that long supported the Keynesian faith, have been still, allowing the rival neoclassical school to flourish and gain ground surrendered inch by inch over three decades. The retreat of Kevnesia- nism has also brought into question the intellectual valigqty if not the prac- tical usefulness of discretionary macroeconomic policies;' of planning; public sector investments to spur industrialization; and policies that supple- ment or displace the roLe of the price mechanism in the allocation of resources0 Development economics, that for years basked in the light of Keynesian self-confidence and became wedded to a moderately dirigiste approach in countries with fractionated or underdeveloped market systems, has taken a 3/ Keynesian economic's inability to find an answer to the high unemployment and inflation that dogged western economies throughout the seventies was one of the principal reasons behind the growing popularity of the new classical economics. See R0Eo Lucas, Jr0 Studies in Business Cycle Theory, MIT Press, 1981, po 221. A0 Leijonhufvud, "What would Keynes have thought of rational expectations", in D. Worswick and J0 Trevithick, Keynes and the Modern World, Cambridge University Press, 1983, po 201o 4/ B0 Lewis, History: Remembered, Recovered, Invented, Princeton University Press, 1975, p0 56-57. 5/ R.E. Lucas, and T.J0 Sargent, "After Keynesian Macroeconomics," in R.E. Lucas and ToJ0 Sargent eds, Rational Expectations and Econometric Practice, University of Minnesota Press, 1981, po 295-319; R. Maddock and M. Carter, "A Child's Guide to Rational Expectations," Journal of Economic Literature, Vol. 20, March 1982, po 40; J. Tobin, Asset Accumu- lation and Economic Activity, University of Chicago Press, 1980, po 30; M. L. Weitzman, The Share Economy, Harvard University Press, 1984, ppo 56-57. Stephen Marglin believes that "because of the shock of the Great Depression, economics attracted people of unusually liberal persuasion, more skeptical of the market and more trusting of the Government than has been the case before or since0" S0 A. Marglin, "The Wealth of Nations," New York Review of Books0 July 19, 1984, po 410 - 3 - considerable buffeting.6/ In some quarters, its imminent demise has already been announced.7 As practitioners of a neoclassical bent prepare the ground for a new season, there is a danger that a few valuable lessons may be ploughed under along with the many illusions retailed by development econo- mics. No tendril of economics ever runs much risk of being destroyed but by being consigned to the status of a lesser creed dts message loses force or is so diluted as to lack form or carry conviction.- With neoclassical hindsight, it is now being claimed that develop- ment economics withered because no country achieved success by translating its message into practice. Instead, the relatively high growth rate enjoyed by the developing world as a whole, and the unusual gains registered by a few outstanding performers, were made possible by the ability to tap into a flou- rishing international trading system;9 by the emergence and gradual coales- cense of markets that have enlarged their allocative role in the new econo- mies; and the spread of modern technology. This is a part of the story but it is cast exclusiveLy in neoclassical terms. Since neither planning nor inter- ventionist macro and industrial policies are a part of the neoclassical pan- theon, much that was and is relevant to the activity of development has fallen victim to the elision inevitable when paradigms clash. The process of selective enhancement and judicious editing signifi- cantly modifies the perspective on development over the past twenty-five years. It can, on occasion, give a dramatic twist to the experience of a few of the most successful economies. Perhaps the instance where reinterpretation can result in a quite radical shift of focus, is the experience of Korea. 6/ I.M.D. Little, Economic Development, Basic Books, p. 29-59 and 125-136. A. Hirschman believes that the efforts of practitioners have been blunted because of political crises beyond their control and any kind of revival would involve facing up to the challenge of dismal politics. A. Hirsch- man, "The rise and decline of development economics," in A.O. Hirschman, Essays in Trespassing, Cambridge University Press, 1981, p. 20-23; see also W. Arthur Lewis, "The State of Development Theory," American Economic Review, March 1984, Vol. 74, No. 1, p. 1-10 7/ D. Lal, The Poverty of Development Economics, Hobart Paper No. 16, Institute of Economic Affairs, 1983, p.108. 8/ The near impossibility of falsifying or discrediting economic theories has been frequently noted as has been the impossibility of refuting hypotheses, in the eyes of believers, through empirical means. See S.J. Latsis, "A research program in economics," in S. J. Latsis ed: Method and Appraisal in Economics, Cambridge University Press, 1976, p. 8-9; T. W. Hutchison, "On the history and philosophy of science and economics," in S.J. Latsis, Method and Appraisal in Economics, op. cit, p. 186,199; and M. Blaug, The Methodology of Economics, op. cit., p. 221, 109. 9/ D. Lal, The Poverty of Development Economics, op. cit. p. 25. There is little doubt that it occupies a very exclusive spot in the develop- ment sweepstakes. Few nations have done as well. None has ascended the ladder of per capita income with greater celerity as Korea. An economic theory that is able to enfold the forces shaT67g Korea's recent history, could very well dominate thinking for years ahead0- Hence, it is no surprise that the rival creeds have been jockeying for position9 each claiming Korea for itself. As we draw further into the eighties and Korea closes the distance that separates it from the mature market economies9 it is the neoclassical school that has the edge in this battle of wits as in other contested areas0 It would be a pity if deveLopment economics were to be wholly eclipsed because its message is not without solace0 In our view9 the torch it shines on Korea's experience is at least as powerful as that of neoclassicism and in less forbidding intellectual times one could imagine a happy co-exis- tence of two creeds at the pinnacle of thought0 In this paper an attempt will be made to show how dirigisme and market prices fared9 as Korean policymakers juggled with a profusion of models and the advice pressed upon by visiting experts9 in their search for growth maximizing policies0 To cover all major facets of recent Kor rP economic history could test the determination of small army of researchers0- We9 therefore9 have concentrated on the area of capital accumulation0 A topic much beloved by development economists9 that is now almost ignored by neoclassicists9 presumably because it falls within the 10/ On a skeptical note Cline has wondered about the possibility of general- izing the export-led growth model9 employed with such virtuosity by the East Asian economies and so integral a part of neoclassical thinking on development0 He feels that export-led growth can be effectively pursued only by a small number9 the limits being imposed by the absorptive capa- city of markets in industrial economics0 That these limits are being approached has become steadily more apparent in the early eighties0 WORO Cline9 "Can the East Asian Model of Development be Generalized?" Vorld Development9 Vol0 109 Noo 2. 19829 po 81-90. A similar point is made by S. A0 Marglin9 "The Wealth of Nations,09 Oqe cit09 po 42. 11/ The 1945-75 period was scrutinized in great detail by EoSo M'lason et0al0 See Studies in the Modernization of the Republic of Korea° 1945-759 Council on East Asia Studies, Harvard University Press9 1980, in nine volumes;g see also P0 Hasan and D.C. Rao9 eds0 Korea9 Johns Hopkins Press9 1978. - 5 - domain of the market.12/ Worrying over it or analyzing its dynamics, is deemed fruitless. We first provide a snapshot of the theoretical scaffolding which supported the policies propagated in the fifties and sixties. Next, we sketch the frugal neoclassical doctrine before proceeding to a discussion of the factors that mediated investment decisions in Korea during the two decades following the removal of the Syngman Rhee regime in 1960. uevelopment Economics: Paradigm Lost Development economics was born around the time Harrod and Domar were engaged in the enterprise of dynamising Keynesian frycepts in the hope of avoiding secular stagnation in the distant future.- Their concern with resource mobilization and investment and their vision of steady growth was rapidly absorbed into che new discipline, who saw ics goal as leading poverty stricken nations to evencual prosperity. From the Keynesian school as well as the theorising in the field of welfare economies during the fifties, came also the belief in deliberate government action to generate demand, circumvent bottlenecks, coordinate decisions within the economy, internalize externali- ties and to find solutions for the pervasive incidence of market failure arising1fom institutional shortcomings and the markets' notorious myopia.L- Having scaled their way out of a serious depression by dint of public works and war related spending, no government questioned the efficacy of the tools being crafted at the Keynesian forge. With few market related institutions to shoulder the management of the economy, in the fifties it was almost taken for granted that the government in an LDC would be the prime mover, harnessing the resources of the economy to the needs of growth. 12/ A glance through the recent issues (1982 through mid-1984) of the Journal of Development Economics, World Development and Economic Development and Cultural Change, revealed only a single article by W. Mandelbaum that touched directly upon capital accumulation. See W. Mandelbaum, "Modern Economic Growth in India and China: The Comparison Revisited, 1950-80," Economic Development and Cultural Change, Vol. 31, No. 1., 1982, pp. 45- 84. Lal maintains that the volume of capital available from domestic sources is not a major constraint on the growth of LDCs. See The Poverty of Development Economics, op. cit., p. 53, 98. On the importance of investment for economic growth, see M. Fg. Scott, "The Contribution of Investment to Growth," Oxford Economic Papers, Vol. 28, No. 3, November 1981, pp. 211-226. Even in advanced economies such as the US where growth has decelerated, a larger proportion devoted to investment would serve to offset a higher rate of equipment obsolescence and raise the level of output per worker. See B. Bosworth, Tax Incentives and Economic Growth, Brookings Institution 1984, p. 57-58. 13/ H.W. Arndt, The Rise and Fall of Economic Growth, Longman Cheshire, 1978, p.33. 14/ On market failure, see Little, Development Economics, op. cit. p. 38-40. - 6 - History as it was being rewritten in those years9 strengthened the hands of all those who saw dirigisme as the only credible solution to extreme backwardness. Gerschenkron identified a discontinuity or a "iGreat Spurt" in the economic maturing of a number of European "late developers"0 Under the prodding of governments9 allied on occasion with major banks9 these economies suddenly gathered momentum /nd crossed the threshold of industrialization in the space of a few years-15 Rosenstein-Rodan's study of southern Europe suggested the desirability of a "Big Push", a large scale mobilizing of resources and their investment, principally in the industrial seccorol6/ Around the middle of the fifties, Rostow capped these efforts at encapsulating the historical sequence of development with his grand vision of the "take-off" and his sketch of the "e7tametric rhythm" which stage by stage raised countries to modernity0 Underlving all of these analyses were two impera- tives0 The necessity for augmenting and marshalling the economy's investible surplus and the emergence of a mechanism,1§7vernment-cum-entreprenurial, of transforming this into productive assets.- Historical findings and ideological leanings received impetus from two different directions0 First, :uznets and his legion of co-workers in the national income vineyards provided statistical credibilit to the view of development grounded in the steady accretion of capital.l / Second, Lewis began work on the theoretical foundations of the discipline by outlining a mechanism enabling a backward agrarian economy to pull itself up by its own 15/ A. Gerschenkron, Economic Backwardness in a Historical Perspective9 Harvard University Press, 1962, po353--9 16/ Paul N0 Rosenstein-Rodan, "Problems of Industrialization of Eastern and South-Eastern Europe", Economic Journal, June-September, 1943. 17/ W.W. Rostow, The Stages of Economic Growth, Cambridge University Pres, 1960, po 36-57. "Pentametric rythmn" was a phrase coined by Gerschenkron, see A0 Gerschenkron, Economic Backwardness in Historical Perspective, op0cit0 po355o 18/ The Schumpeterian entrepreneur received considerable attention in the development literature of the sixties but has since gone into eclipse0 See, for instance, G0 Papanek, Pakistan's Development, Harvard University Press, 1967, Chapter 20 One exception is a recent article, "Interna- tional Trade, Foreign Investment, and the Formation of the Entrepreneur- ial Class", American Economic Review, Vol0 74, No0 4, September 1984, pp. 605-614, by Gene M0 Grossman0 This paper examines the relationship between free trade and the formation of an entrepreneurial class, con- cluding that in situations characterized by the lack of efficient risk- sharing institutions such as stock markets, "the size of the entre- preneurial class 000 is smaller than would be first-best optional." (po613)o This result indicates that in small open economies, pursuing free trade policies, there remains a substantial role for government intervention, especially towards ameliorating risk0 19/ S. Kuznets, Modern Economic Growth, Yale University Press, 1966, pp. 234-262. bootstraps. The Lewis model showed how the intersectoral transfer of labor could be tnterlaced with surplus creation and investment in the modern sector. 20 Later, when progress was made with Japanese historical statistics, the two sector model gained in respectability as it become evident that agri- culture could be the source of both the labor/ and the capital needed to ignite and in the initial stages, sustain growth.21 As development economics passed from infancy into adolescence, the activity of theorizing and empirical validation accelerated, so that eventually, practitioners were left breathless by the abundance of pLanning models and policy choices. But the development effort and the kind of economics with which it was associated, received a considerable setback when the first oil shock shattered what now appears to have been a fragile prosperity. Neither has yet recovered from it. First and foremost, the increase in oil prices involved a large transfer of resources to the oil producers, seriously impairing the growth potential of poorer LDCs. It also worsened inflationary pressures, devastating budgetary planning and undermining all attempts at prudent monetary housekeeping. Second, the shock waves unleashed by the crisis destabilized many politically precarious regimes that had been clinging to power on the basis of moderate economic achievements. As the seventies progressed, all those taking stock of what had been achieved after nearly two decades of planning and state activism could not but be impressed by the meagreness of the results. Governments continued to plan, to intervene, to expand the boundaries of the public sector, but development economics as a dirigiste creed went on the retreat. In dismay, many econo- mists sought refuge in the one theoretically unimpeachable sanctuary within their field, the theory of prices. Henceforth, as Hirschman puts it, "i[many] thought it legitimate to operate on the basis of an implicit Pareto-optimality assumption: like plumbing repairs or improvements in traffic control, the technical efforts of economists would improve matters in one area while at worst leaving others unchanged, thus making society as a whole better off. Economic development policy was here in effect downwrded to a technical task exclusively involved with efficiency improvements." 2 20/ W. Arthur Lewis, "Economic Development with Unlimited Supplies of Labor". The Manchester School, May 1954. 21/ A.C. Kelley and J. Williamson, Lessons from Japanese Development, University of Chicago Press, 1975 cop pp.73, 104; J.C.H. Fei and G. Ranis, "Agrarian Dualism and Economic Development," in I. Adelman and E. Thorbecke, The Theory and Design of Economic Development, Johns Hopkins Press, 1966, p. 39; D.W. Jorgenson, "Testing Alternative Theories of the Development of a Dual Economy," in I. Adelman and E. Thorbecke, The Theory and Design of Economic Development, op. cit. pp. 45-60. 22/ A.O. Hirschman, Essays in Trespassing, op. cit. p. 21. For a critique of the neoclassical position, see S. A. Marglin, "The Wealth of Nations," op. cit., pp. 42-43. - 8 - Neoclassical Doctrine: Paradigm Triumphant? Such determined parochialism lies behind the resurgence of neoclas- sicism in the sphere of development policy making9 evidenced by the recent spurt of literature on export-led development9 effective protection9 and on the dismal performance of import-substituting policies. One approach9 now quite popular in neoclassical circles9 is to characterize a developing country's trade strategy as either export-promoting (EP) or import- substituting (IS). The conclusion reached in the literature is that an EP strategy - with its reliance on international trade as the engine of growth - is superior to an IS strategy for the promotion of economic growth in developing countries. IS policies lead to an isolation from the market place, confounding the signals transmitted by prices. IWhereas9 EP leEds to incen- tives which are m7re neutral across industries and therefore closer to a free trade position0- Bhagwati argues that a neutral policy in which the ratio of the effective exchange rates for ',mports and exports is close to one, is essentially a free trade position02 Where the Keynesian/development economist saw market failure or the absence of markets as providing openings for government action9 the neoclassicist perceives innumerable price distortions9 many of them linked with the government's attempts at improving upon the market or side stepping the price mechanism. Thus the neoclassicist views his mandate as a very narrow one: he must track down and rectify price distortions0 Eradicating such blemishes, improves the markets' functioning9 ensures the efficient allocation of resources and permits the system to derive the maximum growth from available supplies of capital and labor0 Instead of operating on a broad front9 neoclassicism identifies a limited9 supposedly precise9 and ultimately self-effacing role for the economist0 He services the market's plumbing9 the price mechanism takes care of everything else0 Narrowing the compass of policy lightens the weight of responsibility, and the occasionally Sisyphian wrestling with large problems is superceded by the routinized and effort conserving dissection of distorted prices0 Where capital accumulation was once a central concern, it is efficient resource use that has captured attention0 Neoclassicists feel that enough is being invested for earlier preoccupations to have been rendered nugatory0 Planning and state activism are, of course, proscribed as causes of many a development trauma0 Amartya Sen has pointed out how serious a change has occurred in the reading of past evidence0 After wondering about how the importance of capital accumulation can be denied in a poor pre-industrial country, he notes that among the low income countries, the three top growth performers, also had the 23/ See the two companion volumes on this subject published by the NBER° Jagdish Bhagwati, Foreign Trade Regimes and Economic Development: Anatomy and Consequences of Exchange Control Regimes9 Vol0 XI9 MBER, New York9 19789 and Anne 00 Krueger, Foreign Trade Regimes and Economic Development: Liberalization Attempts and Consequences, Vol0 X, NBER, New York, 1978. 24/ J. Bhagwati, ibid., pp. 207-8. - 9 - highest share of gross domestic investment in GDP (Sri Lanka, China, Pakistan). Among the ranks of the middle income countries, the three countries dominating the growth leagues also notched up the highest rates of capital accumulation (Yugoslavia, Romania and South Korea). Significantly, four of these countries have a rich history of state activism supporte by planning, while Pakistan can hardly be described as a market economy.2 The sixth, Korea, is: used to proclaim export promotion as the key to equitable and rapid growth. And export promotion in turn is often identified with the absence of government intervention and the free play of market forces. But the reasons for the success of Korea are much more complex. ... [Korea] promoted labor-intensive import substitution as well as exports; early import substitution led to later exports; the labor force employed in exports is a small proportion of the total labor force; and government inter2v7tion as well as the public sector played a very important part.- Models for Korea Planning A la East European economies or even China was never attempted by the Korean government. But planners utilized the entire register of policy instruments that economists of a dirigiste persuasion had labored to compile and there was no reluctance at all to intervene in pursuit of indus- trial, export and growth objectives. In many respects, Korea is a paradig- matic case of a managed economy in the non-socialist sense of the term. It is our contention that the pace of capital accumulation over two decades is a key to Korea's striking economic performance. What we will try and show is that this investment was not the outcome of market signalling but to a large extent deliberately contrived by the government. Economists of all stripes lean towards empirical testing as the most effective means of discrim- inating between competing theories but there are great differences in methodo- logical preferences. If the model yields accurate empirical predictions, then, according to Friedman, it is acceptable no m atter how heroic or unrea- listic the assumptions on which the model rests.m Others quail at the thought of taking at face 2v8aue the results of a model only tenuously linked with real life situations.2- 25/ A. Sen, "Development: Which way now", Economic Journal, Vol. 93, December 1983, p.750-752. 26/ Paul P. Streeten, "Development Dichotomies," Pioneers In Development, Oxford University Press, 1984, p. 346. 27/ M. Friedman, Essays in Positive Economics, University of Chicago Press, 1956, p.14. 28/ A brief survey of the long swirling debate is provided by M. Blaug The Methodology of Economics op. cit. p. 104-114. - 10 - In our search for hypotheses to understand capital accumulation in Korea we were in something of a quandary. Most empirical procedures formalized over the years by macroeconomists working on the industrial nations are only tangentially related9 if at all9 to the reality of economic processes in the LDCs0 These standard macro models which have become, a staple of forecasting and analysis in mature industrial economies have popularized equations where investment is a lagged function of changes in output or movements in profitability. These models9 mirror the demand constrained and cycle regulated conditions in the advanced countries. To use them for filter- ing the experience of backward9 capital constrained economies runs contrary to intuition and institutions. Of course9 investment and output will be related9 but in the early stage of industrialization that is a mechanical and not an interesting behavioral relation. As one moves up the scale to returns9 risk perception9 motivation and the periodicity of investment, political concerns, social developments and planning imperatives can take on a towering importance in a rapidly industrializing nation not easily quantified and inserted into an equation as an explanatory variable or reducible to a variance term modifying a stream of returns. The point is that even if an econometric equation can be made to track the data and a few credible explanatory variables isolated, we do not have an adequate analysis of an industrialization process spanning two or more decades. The econometric results -- good, bad or indifferent -- are tantalizing, suggestive of certain familiar economic processes at work but only a slice of the whole story. They can, however, reinforce important details of the story, so we conducted what tests we could with the available data, although attractive theories such as the one using Tobin's "q", had to be regretfully put aside because of scanty statistics0 Our findings are described later in the paper but for the moment let us move to more eclectic models0 Two candidates seem especially relevant to the Korean experience0 They are very much in the spirit of development econo- mics, representing managed development under different political and sociolo- gical circumstances0 There is the so called bureaucratic-authoritarian (BA) model that has been helpful in explicating developments in Latin American countries such as Brazil, Mexico and Argentina; and the model of Japanese development since the Second World War. Both lack the theoretical articula-- tion and finesse of the two sector models that launched the first wave of theorising and neither one displays the simplicity of the tools possessed by neoclassicists, but they enable us to narrate an interesting and possibly even a more accurate story of capital accumulation in Korea. Unlike neoclassicism that has steadfastly clung to its Calvinistic rigour and exclusivity, development economics has supported a traffic in ideas with other disciplines along its periphery, which are also concerned with the social dynamics of modernization. Thus, many of the concepts that are the everyday currency of development economics carry the imprint of notions more commonly encountered in the domain of political science and sociology. O'Donnells model of industrialization under a bureaucratic-authoritarian (BA) system, although very definitely a creature of economics, has the traits of a - 11 - hybrid.29/ Its political science ancestry permits a fuller appreciation of the early stages of modernization, when economic and political activities are like the warp and weft of a single process; the presence of one being neces- sary for the intelligibility of the other. The BA model takes up the story at the point where an economy has completed the earliest stage of industrialization, the creation of import substituting light industries, and is faced with the choice of: continuing with the low-growth and ultimately self-defeating strategy of import substitu- ting investment in other branches of industry; or marshalling its resources and making the leap to an entirely different phase, where industrial deepening goes hand in hand with a vigorous search for export markets. Both deepening the industrial base and developing export markets involve partaking of risks far removed from those producers must accept when manufacturing consumer goods to be sold in a secure home market. Deepening, according to O'Donnell, is predicated on the emergence of "large organizations that are financially and otherwise capable of waiting out the long periods required for the maturation of their investments," while for industrial exports to grow "it (is) necessary to guarantee stability in some of the institutional mechanisms typically pro- motion systems and exchange rates". The crucial ingredient is "a hign degree of future certainty concerning thM0/actors decisive for determining the final results of investment decisions".- In other words, a dynamic outward looking industrial policy rests upon a powerful and enduring political mecha- nism for minimizing domestic risks, by mitigating the effects of economic fluctuations and safeguarding the continuity of public policy. A lessening of risks strengthens the willingness to invest, but entrepreneurs must also be able to draw upon an adequate supply of capital to see their projects to fruition. Hence, more of the economy's resources must be directed toward industry by policies promoting savings, public as well as private, and by actions w7ich suppress "premature social aspirations caused by demonstration effects"o.31/ By forcing the state into costly programs involv- 29/ G. O'Donnell, "Reflections on the Patterns of Change in the Bureaucratic Authoritarian State," Latin American Research Review, Vol. 13, No. 1, Winter 1978, pp 3-38. Only a hybrid is likely to suffice. As Lloyd Reynolds writes, "In this era... some countries have progressed much faster than others... .The explanation does not seem to be mainly in the realm of factor endowments... .My hypothesis is that the single most important explanatory variable is political organization and the administrative competence of the Government." L. Reynolds, "The Spread of Economic Growth to the Third World: 1850-1980," Journal of Economic Literature, Vol. 21, No. 3. September 1983, p. 976. 30/ O'Donnell, Ibid, pp. 12. 31/ J. Serra, "Three Mistaken Theses regarding the Connection between Indus- trialization and Authoritarian Regimes", in D. Collier ed. The New Authoritarianism in Latin America, Princeton University Press, 1979, p. 150. - 12 - ing a debilitating hemorrhage from the public budget9 such expenditures can place insuperable obstacles in the way of efforts to augment industrial investment. BA9 in the eyes of its advocates9 offers the shortest route to the kind of stability and social predictability conducive to the emergence of a broad based and complex industrial sector. By sanitizing a country's politics9 BA can defuse the threat businessmen face from sudden changes in political moods. In quelling poLitical activity and concentrating economic decisionmaking in the hands of technocrats commanding bureaucracies with developed surveillance and control capabilities9 BA exalts economic goals over all others. Depending on the country's political circumstances and its own success in the economic sphere, for a time at least9 BA wrests the ability to manipulate more of the economy's resources free from the pressure of political demands, often by unionized workers, and the distributivist policies they can frequently entaile In short, "BA involves an attempt to put the state in shape, to develop its capacity to conduct and process information as well as to select and implement policies that serve to quickly reduce the socio- economic fluctuations that preceded its emergence and proviqe,the infrastructure needed for future investments in deepening'.2 As a model for accelerating development, BA rests on three pillars. risk reduction; the increased supply of investible funds; and a more rational approach to making policy and allocating resources by way of central- ized bureaucracies, sheltered from politics by an authoritarian regime. Risk, capital and planning are very much a part of the development economics main- stream, The dimension that BA introduces is the political one. Development requires a single mindedness, a concentration of effort and resources, will- ingness to forego consumption and a penchant for taking risks by establishing capital intensive9 basic industries, and exploiting external market oppor- tunities. Politics can often detract from such single-mindedness by multi- plying the dimensionality of concerns. By permitting people to express their dissatisfaction with a state of affairs and to change the composition of the government, political activity also allows for drastic shifts in gov 7ment policy that can disrupt the arithmetic underlying business ventures,-_ 32/ O'Donnell, op cit. 33/ O'Donnell's thesis and the related work on state capitalism sparked heated debate and has since fathered a considerable literature. For a "gtest'9 of the BA model using the experience of Brazil, Mexico, Uruguay, Chile and Argentina, see R. Kaufman, "Industrial Change and Authoritarian Rule in Latin America: A concrete view of the BA model", in D. Collier, The Mew Authoritarianism in Latin America, op. cit. pp 165-253. A survey of recent writing on BA can be found in t^J.LL Conak, The Peripheral State Debate: State Capitalist and BA regimes in Latin America," Latin America in Research Review, vol. 19, No. 1, 1984 pp. 3-36; and K.L. Remmer, 'Evaluating the Policy Impact of Military Regimes in Latin &Rerica,` Latin American Research Review, vol. 13, No. 2, 1978, pp. 39-43. - 13 - It was the economic crisis during the last few years of the Kubitschek presidency and the growing strenth of military hardliners following the revolution of 1964, that set the stage for BA economics in Brazil. But under the Castello Branco regime, the emphasis was on stabilization and Sh7 president attempted to balance the demands of moderates and hard liners.- 4 Within a year of Costa e Silva's coming to office in 1967, the trend away from "an open system of competitive politics accelerated and BA rule by military and technocratic elites began in earnest, continuing through the presidency of Garrastazu Medici."35 The drastic therapy administered to the country's politices, the determination of wages, the financial system and the approach to industrial management, together with the expansion of public enterprises, produced a dramatic improvement in economic performance as measured by savings, investment and growth with foreign capital attracted by the changed business climate making a significant contribution 361 (see Table 1). Table 1: BRAZIL: Aggregate Economic Indicators 1960-67 1968 1969 1970 1971 1972 1973 Growth of GDP 4.5% 11.2 9.0 8.8 13.3 11.7 14.0 Gross domestic investment 21.2 22.1 22.7 24.3 24.6 22.6 Gross domestic savings (GDS) 20.7 22.2 22.2 22.7 23.2 25.3 Public savings as % of GDS GDS as % of gross domestic investment 97.6 100.5 97.8 93.4 95.5 112.0 Given its political institutions, Mexico does not, at first blush conform to the BA mold. But in fact, flexible interpretation of the 1917 constitution by a succession of Presidents' resulted in a steady concentration of power at the center of this federal republic. In 1927 General Calles abolished the plural party system and founded the Partido Revolucionario Institucional (PRI) headed by the president. Under this one party system which has continued to the present, much of the administrative, political and 34/ T.E. Skidmore, "Politics and Economic Policy Making in Authoritarian Brazil, 1937-71," in A. Stepan ed. Authoritarian Brazil, Yale University Press, 1973, p. 10, 15. 35/ T.E. Skidmore, op. cit. p. 15. 36/ This is discussed in great detail by J.R. Mendonca de Barros and D.H. Graham, The Brazilian Economic Miracle Revisited: Private and Public Sector. Initiative in a Market Economy, Latin American Research Review, Vol. 13, No. 2, 1978, pp. 5-38; and T.E. Skidmore, op.cit., p. 20. - 14 - legislative authority is in the presidents' handsL371 While a BA system has existed in Mexico for some time9 the characteristic push towards high growth is evident only under some regimes. For instance in the late forties and early fifties the government of Cordenas was successful in raising the rate of domestic resource mobilization and accelerating growth. This phenomenon can also be witnessed during the latter part of the sixties and the late seventies but rapid growth was interspersed by spells of sluggishness during which political pressures9 external circumstances and the nature of the leadership deflected the developmental stance of the BA system. BA's answer to the threat emanating from political activity is not the most palatable one and only in rare cases are the costs of suppressing politics offset by economic gains over any length of time. Hence9 the appeal of other approaches that retain BA's economic axes but offer less draconian ways of holding political turbulence in check. The path followed by Japan since the early fifties is in this sense highly instructive0 During the years of rapid industrialization9 the Japanese government managed9 without direct statutory controls over the allocation of resource or an excessively obtrusive involvement of the economic bureaucracy9 to conduct a supremely successful operation of planning and coordinating the actions of major industrial par- ticipants. Investment was rarely impeded by a shortage of capital and a workable means of socializing risk9 alongside other incentives9 gave Japanese businesses more than enough financial rewards and economic security to 3r?ceed with industrial deepening and the long-term assault on foreign markets.38 Those who have attempted to decant a few lessons from the Japanese experience have generally encountered some difficulty in translating the highly influential administrative guidance9 credit allocation and incentive system utilized by economic ministries9 into terms that clearly differentiate it from the brand of planning and control encountered in the centrally managed economies0 Most commentators stress the absence of statutory authority to regulate industrial decisions; and the extensive network of contacts between ministries and industrial bodies which promote a two way flow of advice9 exhortation and information0 The government is in a position to offer finan- cial and other incentives and this strengthens its hand but ministries colla- borate with business; bureaucrats persuade9 negotiate and listen9 they never command, even if they had the authority to do so0 The channels of communica- tion are highly developedo The thinking of the state and the business sector very much in tune9 not the least because senior bureaucrats after quitting the 37/ JOAO Booth and M.A. Seligson9 The Political Culture of Authoritarianism in Mexico; A reexamination9 Latin American Research Revie,9 Vol0 199 No. 19 19849 pp. 106-1249 esp. pp. 106-107. 38/ The number of publications is legion0 See for instance9 G0C0 Allen9 The Japanese Economy9 St0 Martin's Press9 19819 chs0 39 6; an IoCo Magaziner and ToMo Hout9 Japanese Industrial Polic 9 Institute of International Studies9 University of California9 Berkeley9 19809 ppo 35O540 - 15 - government ap the age of 55, frequently take up high ranking corporate positions.39 Still, the ability to formulate and implement complex development programs, involving the participation of numerous and diverse actors, through informal arrangements, is quite astounding. A number of scholars trace the efficient functioning of the Japanese system to the "loyalty centered" Confu- cianism which serves as the ethical basis of conduct, predisposes the Japanese to seek a consensus and structures group orientation and attitudes in a manner which facilitates the reaching of a consensus 9n,and commitment to objectives, whether of a company or the nation as a whole. /0 Continuity of policy derived from a "relentless concentration on the single objective of industrial growth." This met no serious challenge because political power remained in the hands of the Liberal Democratic Party, the bureaucracy and big business. "Outside the tripartite combination there were no centers of power from which opposition could proceed."- industrial advance rested on the selection of leading sectors on the basis of anticipated income e asticities of demand and the likely rate of technological pro- gress.42 These industries were then nurtured by subsidies, tax exemptions, the provision of cheap credit and protection from competitive pressures until they had reached a comfortable position on the learning curve. Their entry into 4h7 maelstrom of the export market was eased by an undervalued exchange rate. 3 Administrative guidance and a sustained commitment to an industrial policy, dedicated to the enhancement of key basic and export industries, was combined with an abundant supply of investible funds. All three sectors con- tributed. The unfolding of lucrative industrial possibilities stimulated business savings. Government frugality in such areas as social security and public housing directly aided the construction of infrastructure with strong industrial linkages and an important bearing on the productivity of the 39/ W.W. Lockwood, "Japan's New Capitalism", in W.W. Lockwood ed. The State and Economic Enterprise in Japan, Princeton University Press, 1965, see especially p. 503; E.F. Vogel, Japan as No. 1, Harvard University Press, 1979, pp. 57, 59, 65-66; and E. F. Vogel, Guided Free Enterprise in Japan," Harvard Business Review, May-June 1978, pp. 161-170, esp. p. 162. 40/ See R.J. Smith, Japanese Society, Cambridge University Press, 1983, p. 16. M. Morishima, Why Has Japan Succeeded, Cambridge University Press, 1982, pp. 8, 62, 188-193. 41/ Allen, The Japanese Economy, op. cit. p. 86. 42/ M. Shinohara, Industrial Growth, Trade and Dynamic Patterns in the Japanese Economy, University of Tokyo Press, 1982, pp. 24-25; Allen, The Japanese Economy, op. cit. p. 87. 43/ M. Shinohara, Industrial Growth, ibid., p. 31, 49. - 16 - leading sectors. But as Lockwood points out, gothe government [also] lent large sums to private borrowers year after year for investment in industries9 export financing and other such purposes. These sums originated only partly in tax revenues. But mostly they came from private savings invested in various svernment banks and public life insurance, postal savings and annuity funds"J?' Government agencies accounted for almost a quarter of that invest- ment in the fifties and if to this is added the capital that flowed to private busine,s through government controlled banking channels, the amount rises to a third. 45/ Investment as a percentage of GNP rose from 27% in the early 50s to 32% in the latter half of the decade and provided the foundations for Japan's solid prosperity and remarkable industrial strength in the sixties. As Kuznets has observed9 "it [was] the combination of a high capital formation proportion with a low capital-output rt Io that yields the high growth rate of Japan s total products for 1955-64.',46 (Table 2) In fact, the rapidity with which domestic sources of investible funds grew, obviated the need for more extensive planning and control, as has on occasion been the case under BA regimes. The resulting abundance of capital, meant that other industries did not have to be severely rationed in order for the leading sectors to meet their requirements and economic manage- ment could remain in the realm of guidance and persuasion. Eventually, even the tight monitoring and direction of financial flows could be dispensed with piece by piece. Without consciously hewing to any ideological position, whether Keynesian or dirigiste or being troubled by the appeal of laissez faire stric- tures, Japanese policymakers and their partners in the business sector, acted out the message of development economics0 They selected leading sectors, coordinated industrial decisions and transferred some of the risks of new investments onto the shoulders of government0 Above all, they supervised a mobilization of capital on a vast scale and used policy tools as well as moral suasion, in tandem with the price mechanism, to ensure that allocation was consonant with their vision of Japan's industrial future0 44/ H0 Lockwood, "§Japan's New Capitalism"2, 2p° cit0 po 467o 45/ H0 Lockwood, "Japan's New Capitalism"q, 2.R cit0 po 468. 46/ S0 Kuznets, Motes on Japan's Economic Growth, in L. Klein and K0 Ohkawa, Economic Growth: The Japanese Experience, Richard Irwin, 1968, po 412. - 17 - Table 2: Capital Formation and Rate of Growth 1955-64 Share of GNCF in GNP /a Annual Growth Current Constant Rate of GNP Prices Prices Japan 33.6 34.6 10.8 Fed. Rep. of Germany 28.2 26.6 5.7 Netherlands 27.2 27.0 6.6 Italy 22.2 22.1 6.4 U.K. 17.2 17.8 3.1 Belgium 19.6 20.6 3.7 U.S. 18.6 18.7 3.2 /a GNCF = Gross National Capital Formation Source: S. Kuznets; notes on Japan's Economic Growth, in L. Klein and K. Ohkawa, Economic Growth: The Japanese Experience since the Meiji era, Richard Irwin, 1968, p. 411 Table 13-4. Denison's decomposition of the sources of growth in Japan also underlined the importance of investment. "The largest contribution to growth was made by capital" [2.10 percentage points between 1953-71, 2.57 percentage points between 1961-71]. E. F. Denison and W. K. Chung, p. 103 & 112, "Economic Growth and its sources," in H. Patrick and H. Rosovsky, Asia's New Giant, Brookings Institution, Washington, D.C. 1976 Growth in Korea through Neoclassical Eyes There are many ways of depicting Korea's development since the early sixties. It can, very succinctly, be described as a miracle, which rules out the possibility of any logical explanation. The most astringent neoclassical accounts of the development process are almost as cryptic. For instance, Korea's development could be described in the following terms: In 1961, the regime of President Park embarked upon a strategy of export-led industrializa- tion. Businessmen responded with alacrity to export incentives and the lifting of restrictions on the import of intermediate inputs, setting up factories and selling Korean goods with the utmost zeal, in foreign markets. Meanwhile, the government bent its own efforts towards correcting, bit by bit, the flaws in market functioning and improving the allocation of resources. Periodically, the exchange rate was adjusted to ensure that exports retained a healthy competitive edge. In 1965, interest rate reforms calculated to spur financial savings, were introduced and thereafter, under the government's tutelage, Korea moved towards a gradual diversification of the financial system, which multiplied the channels giving businessmen access to capital. As the economy matured, the government allowed its grip to relax and the ° 18 market came into its own9 a development reflected in increased efficiency of resource use9 higher growth ra es and the emergence of more capital and tech- nology intensive industries.47' With the complete liberalization of the financial sector imminent and Korea now having made a start at some of the most advanced industries9 the transition from backwardness to industrial maturity, is almost complete0 In a somewhat similar vein to the neoclassical scenario outlined above9 a number of recent studies have characterized the Korean situation as one where a strategy of export promotion was introduced in the early sixties with the Government practically distancing itself from the policy of substituting imports followed in previous decades. In this account9 the export promoting policies introduced by the Korea Government in the early sixties achieved a "broad neutrality between import substitution and exporting 000 entailed the introduction of interventionist export incentives to counteract the effects of import controls0 00.'48/ Thus9 even if the Korean success story is not ascribed to "pure" free trade9 it is contended that the ultimate effects of overnment incentives were neutral because they largely offset each other.49 These renditions shows the government working hard to clear the obstacles in the way of the market. In the first9 which is the strict neoclassical scenario9 the Government is no more than priming, what is in many respects9 a self-regulating system9 through the selective use of eventually dispensable incentives0 In the second9 the export-led scenario9 policy-makers neutralize a previously distorted incentive structure9 in effect restoring a 47/ A description of Korea's success along neoclassical lines is Gerald M. Meier, Emerging From Poverty. The Economics That Really Matters9 Oxford University Press9 19849 pp. 59-60O 48/ See the two NBER studies by Jagdish Bahgwati and Anne 00 Kreuger9 op. cit09 as well as the background studies0 49/ D. Lal, °op cit09 po 46. The concept of neutrality and the manner in which it might be equated with the free market neoclassical model are not entirely clear0 At the empirical level9 we are uncertain as to how the many and diverse incentives for export and import substituting industries can be aggregated and compared with each other0 In any case9 we have not seen this done0 Effective protection rates are hardly adequate0 Second9 does neutrality imply that relative prices and resource allocations would be unchanged if the entire structure of incentives and protection were to be eliminated at one stroke? If it does not9 if tariff subsidies9 import controls9 cheap credit and all the other incentives are responsible for a certain level of industrialization and exports9 then neutrality9 whatever it may mean9 is a far cry from the neoclassical free market price guided system0 The allocation of resources in an economy where neutrality is being contrived must be very different from one where there is no government interference0 Further9 the evolution of relative prices and their structure at the time "full neutrality"g was achieved must thus be considerably at variance from that of an economy in which market forces had untramelled freedom throughout0 - 19 - self-regulating free trade environment. It is not so much by neglecting the government's presence that the neoclassical picture manages to project the illusion of an economy ruled by the market. Rather, it is by arranging what is placed in the foreground and in selecting the details that are nudged into the background, that a curious transformation of Korea's economic history can be achieved. A closer look at the details suggests, that the trajectory followed, more nearly resembles the BA and Japanese models adumbrated above. Growth and Capital Accumulation in Korea: Development Economics The fifties was a period of recovery from the Korean War, infra- structure building, some inward looking industrialization, a moderate growth and high inflation. Domestic saving5 yere small, much of the investment being financed through foreign assistance. The student revolt of 1960 revealed the depths of popular discontent with the economic drift and forced Syngman Rhee out of power, preparing the ground for a new era. After it had been in office for less than a year, the Chong Myon regime was overthrown by a military coup masterminded by General Park Chung Hee, who wasted no time in pointing the country down the road to modernization. Military regimes that reach a nition's helm by way of a coup, are troubled by the question of legitimacy.51 But since political avenues are denied to them, it is only by their skill at maneuvering the economy that the tacit support of the populace can be won.52 In the aftermath of a coup, a government can for a brief period enjoy great latitude in redrafting the rules of the game and in formulating a new policy blueprint. Shortly after he took office, Park had hitched the economy between the shafts of Korea's First Five Year Plan and began perfecting the bureaucratic apparatus that his been the architect responsible for the country's economic achievements.53 50/ National savings financed between 15% and 36% of investment (which itself amounted to only 10% of GNP) during the period 1953-60. K.S. Kim and M. Roemer, Growth and Structural Transformation, Studies in the Moderni- zation of the Republic of Korea, 1945-75, distributed by Harvard University Press, 1979, pp. 49-51. 51/ J.E. Goldthorpe, The Sociology of the Third World, Cambridge University Press, 2nd ed, 1984, p. 265; and L. Westphal, "Review of Studies in the Modernization of the Republic of Korea, 1945-75, by E.S. Mason et al," Economic Development and Cultural Change, October 1983. 52/ The notion of the military as economic modernizer is obtrusive in the literature on Latin America. See K.L. Remmer, "Evaluating the Policy Impact of Military Regimes in Latin America," op. cit. p. 40. 53/ Details of the early planning exercises can be found in Kim and Roemer, Growth and Structural Transformation, op. cit. p. 43-45; and D.C. Cole and P.N. Lyman, Korean Development, Harvard University Press, 1979, pp. 164-5. On the planning organization, see K.S. Kim, "The Korean Experience in Development Planning, Policy Making and Budgeting," World Bank, mimeo, January, 1983. 20 -- In 19619 Korea ranked as one of the poorest economies. Two thirds of the labor force was employed in the primary sector and industry accounted for only 13.5 % of the GNPo Merchandise exports were a meager $50 million and were almost entirely raw materials and foods ffs0 Being scantily endowed with mineral resources and cultivable land95 development choices were limited to the production and export of manufactured goods through the effec- tive use of sizeable manpower reserves. The First Plan established an annual growth target of 7.1% and consciously adopted a strategy of industrialization based on the progressive penetration of selected export markets. In these years9 Korean development was entirely in the BA mould. Political activity was outlawed and union militancy not permitted to take root; almost all economic initiatives came from the government; much importance was given to planning and even though the ownership of industrial assets was in private hands9 investible funds went where the government deemed they should; finally9 infrastructure building created demands that domestic producers were gradually drawn into filling. In two areas9 however9 Korea was lucky0 First9 generous foreign assistance especially during the fifties and early sixties allowed the country to repair the damag to the infrastructure which served to prepare the ground for future growth05 Second9 decades of colonial occupation had resulted in a levelling of the income distribution and inculcated a strong sense of egalitarianism.561 This had been carried further by the Land R7f?rm of 1945-19529 that Limited the maximum size of a holding to 3 hectares.57 Thus9 in the Korea of the sixties9 there were no marked income disparities that could engender demands for distributive social spending by the government or the creation of industries producing luxury durables. As tax revenues grew9 therefore9 more resources could be diverted by way of budgetary savings 54/ The only mineral Korea possesses in abundance is coal9 that too of poor quality and used principally for purposes of home heating0 There are 2o2 m ha of cultivable land9 0005 ha per head9 among the lowest ratios in the world. 55/ Anne 00 Kreuger9 opo cit09 pp. 280-281o 56/ See RoJo Szak9 "Income Distribution and Basic Needs in Korea,9 mimeo9 World Bank9 1980; The Gini coefficient in 1965 was 0.344. See also S0 A0 Marglin9 "The Wealth of Nations9, °R cit09 op 42. 57/ S.H. Ban9 POYO Moon and D0H. Perkins9 Rural Development; Studies in the Modernization of the Republic of Koreag 194519759 distributed by Harvard University Press9 19809 po 290. - 21 - into capital investment.58/ Detailed control over industrial investment, over imports, and by means of indirect taxes, over relative prices of consumables, permitted the government to check the growth of durable and luxury goods consumption, a form of expenditure reduction directly benefiting domestic savings. Three major and interrelated developments took place in the sixties over the course of two Five Year Plans, both of which exceeded the initially stated growth objectives (see Table 3). First, the economic bureaucracy modelled in terms of structure and function on that of Japan, grew in size, expanding its reach and the scope of its regulatory activities. It became more adept in the use of instruments and with the passing of each economic milestone, the bureaucracy gained in self-confidence. The sixties also wit- nessed the creation of a financial system which was to act as a condu't for the accumulation of financial savings and the allocation of credit.5- At the core of the financial system were a number of specialized banks, owned by the government, and five commercial banks whose lending was subject to the Ministry of Finance's detailed instructions, much as was the case in Japan during the fifties.60 Orchestrated by (and even surpassing) the goals outlined in each successive plan, investment doubled between 1961 and 1968, rising from 13% of GNP to 26% and pulling the growth rate from 5.6% to over 11%. The relation- ship between growth and investment, both directly and through the realization of embodied technical process, is unassailable, as are the links between the government's attempts to implement the planned expansion of the infrastructure 58/ Government savings, as a percentage of GNP, was the following: 1960 4.4% 1980 5.9% 1965 5.8% 1981 6.6% 1970 7.3% 1982 6.7% 1975 4.1% For more detailed data see S. Yusuf and R. Kyle Peters, "Savings Behavior and Its Implication for Domestic Resource Mobilization: The Case of the Republic of Korea," World Bank Staff Working Paper, No. 628. 59/ For a discussion of the impact of the financial structure on Korean development, see M.K. Datta-Chaudhuri, "Industrialization and Foreign Trade: The Development Experiences of South Korea and the Philippines," in Export-Led Industrialization and Development, Eddy Lee (ed.), Asian Employment Programme, 1981. p. 56. 60/ D.C. Cole and Y.C. Park, Financial Development in Korea 1945-1978; Studies in the Modernization of the Republic of Korea: 1945-75, distributed by Harvard University Press 1983, p. 173. - 22 and the increase in investment.611 During this period the government was responsible for some 20 to 25% of total fixed investment, more iŁ the capital spending of the twenty-six public corporations9 is included. Through its allocation of credit to industry9 the state also reviewed and directed all major investments by the private sector. This is not to imply that market forces and the pull of incentives had no part in the making of investment decisions9 they did9 but were overshadowed by state planning. Investment in manufacturing which was a scant W 57 billion (1975 prices) in 1961 had mushroomed to a respectable W 365 billion late in the decade. It was such capital accumulation that could be described as being in some sense responsive to the neoclassicists market forces0 But so dense was Table 3: GROSS DOMESTIC INVESTMENT° Planned vs0 Actual (constant Won) Planned Actual /a Period growth rate growth rate First Five-Year Plan (1962-66) 7.2 29.3 Second Five-Year Plan (1967-71) 9.9 20.2 Third Five-Year Plan (1972-76) 8.1 12.7 Fourth Five-Year Plan (1977-81) 8.0 7.2 /a For the first and second FYP's9 the actual growth rates were calculated using 1975 constant prices; for the third and fourth9 1980 constant prices (1980 base data is not available past 1970). Therefore9 the actual growth rates are not strictly comparable0 Sources: Figures for the First9 Second9 and the Third Five-Year Plans were obtained from Youngil Lim, Government Policy and Private Enterprise: Korean Experience in Industrialization9 Korea Research Monograph 69 Center for Korean Studies9 Institute of East Asian Studies9 Univer- sity of California9 Berkeley9 (1981). Figures for the planned Fourth Five-Year Plan were taken from The Fourth Five-Year Economic Development Plan 1977-19819 Government of the Republic of Korea (1976)o Figures for the actual Fourth Five-Year Plan were obtained from the National Income in Korea 19829 by the Bank of Korea0 61/ M0J. Kim9 "Preliminary Notes on the Factor Contributions to Growth in Korea9 1964-759," World Bank mimeo9 May 69 1977 estimated that 40% of the real output growth over this period was the result of capital deepening0 - 23 - the concentration of incentives for export industries, so substantial the flow of directed capital, and so powerful the force exerted by exchange rate policies, that it is hard to sega ate market impulses from the overburden of fiscal and monetary incentives. 2 This structure of incentives, which again, resembled that emplaced in Japan a decade earlier, was the third major devel- opment in the sixties. As Table 4 indicates, these incentives were so compre- hensive, that the advantages of exporting were almost irresistible and if enthusiasm appeared to be flagging, the government sought ways of removing any lingering impediments and raising the value of existing incentives. While most of the provisions listed are self-explanatory, wastage allowances, an important benefit, requires some elaboration. These allowances were set as a proportion of required inputs that exporters were allowed to import, over and above established needs per unit of output. While the idea was to provide an offset for damaged goods and losses during production, the wastage margin far exceeded these, and allowed exporters a handsome profit when intermediate imports were legally resold on the domestic market. After the mid sixties, interest rate subsidies probably constituted the single most important incp- tive for exports, accounting for as much as a fifth of the total subsidy.- The incentive system undoubtedly lowered the domestic value added content of exports and some uncertainty exists as to the extent of gains derived by the economy. But the expansion of exports even from the small initial base was spectacular. Between 1960 and 1968, a compound annual rate of 40% was attained while the share of manufactured goods rose from under a fifth to almost three fourths. Export buoyancy and mounting public expenditures on infrastructure maintained investment at close to 25% of GNP through the early seventies. There followed an upward shift in the investment function which can be ascribed to a number of factors. Most prominent was the decision to break with the pattern of industrial development that had been hammered out over the course of two successive Plans. Korean planners, much like their Japanese counterparts of the fifties, had began to evince disquiet over the growth potential of light industries and Korea's future competitiveness in the face of rapidly rising, real wage rates and an onslaught from countries where labor was cheaper. They felt that Korea would have to actively seek a new center of gravity for its industrial operations. From the angle of dynamic comparative advantage, the next step was to move into basic process industries with stable techniques such as steel and chemicals and from there eventually into the machinery and transport sectors. Complicating the situation were certain pressures arising from a turn in Korea's relations with the U.S. in the early seventies. Pressures, that compelled political leaders to consider building a 62/ Details about the incentive system can be found in A.0. Krueger, The Developmental role of the Foreign Sector and Aid: Studies in the Modernization of the Republic of Korea: 1945-75, distributed by Harvard University Press, 1979, pp. 92-99; and, Y.W. Rhee, B. Ross-Larson and G. Pursell, Promoting Exports: Institutions, Technology and Marketing in Korea, World Bank, January 1983, pp. 7-19. 63/ Krueger, The Developmental Role of the Foreign Sector and Aid, op. cit. p. 95-96 and 99. - 24 - defense industry9 so as to support the more independent military posture Korea was being required to adopt. Table 4: TYPES OF EXPORT INCENTIVES AND DATES OF OPERATION (1950-75) Type of export promotion scheme Dates applicable Tariff exemptions on imports of raw materials and spare parts 1959-75 Tariff and tax exemptions granted to domestic suppliers of exporting firms 1965-75 Domestic indirect and direct tax exemptions 1961-72 Accelerated depreciation 1966-75 Wastage allowance subsidies 1965-75 Import entitlement linked to exports 1951-55 1963-65 Registration as an importer condition on export performance 1957-75 Reduced rates on public utilities 1967-75 Dollar-denominated deposits held in Bank of Korea by private traders 1950-61 Monopoly rights granted in new export markets 1967-71 Korean Trade Promotion Corporation 1965-75 Direct export subsidies 1955-56 1961-64 Exports targets of industry 1962-75 Credit subsidies Export credits 1950-75 Foreign exchange loans 1950=54 1971-75 Production loans for exporters 1959-75 Bank of Korea discount of export bills 1950-75 Import credits for exporters 1964-75 Capital loans by medium industry bank 1964-75 Offshore procurement loans 1964-75 Credits for overseas marketing activities 1965-75 Source: A. 00 Krueger9 The Development Role of the Foreign Sector and Aid distributed by Harvard Unviersity Press9 19799 po 939 Table 24. Notes: Tariff exemptions were shifted to a rebate system in July 1974. Thus9 the call of dynamic comparative advantage and the exigencies of defense9 persuaded planners to propose major investments in the basic and heavy engineering industries. The ambitious nuclear power progr&mf which was initiated after the first oil shock9 so as to diversify the sources of energy9 also served to enhance the attractiveness of a domestic heavy industry sector. Only a part of the new industrial investment - e.g.9 the Pohang steel plant - was in the public sector9 much of it was conducted by private busi- - 25 - ness, but at the Government's insistent urging and supported by credit extended by the state controlled financial institutions. It is about this time (1974) that the National Investment Fund was created, to finance large new industrial projects, using funds from 64e budget plus the credit set aside by the commercial banks for this purpose.- The extent to which the government was responsible for engineering the shift to a new phase of industrialization cannot be gleaned from estimates of nominal and effective protection rates during the late 70s and early 80s (Table 5). These were relatively modest and taken by themselves would suggest that resource allocation in Korea was being guided, to a greater extent than in most other LDCs, by world prices. However, if the moderate distortions in product markets, as reflected in effective protection rates, are combined with capital market distortions, i.e. the provision of directed credit at subsi- dized rates, import licensing (see Table 6) and the favorable tax treatment received by firms that followed the government's proposals, one takes a long step back from markets ruled by world prices. New departures in industrial and energy policies were mainly respon- sible for the surge of investment in the mid-seventies but certain other ele- ments were at work as well. Investment was also responding to movements in anticipated longterm returns, i.e. it was in some ultimate sense, profit-led, with businessmen realizing the potential profitability of these new industrial ventures. Thus, faced with a huge demand for investment fostered both by government policies and 'animal spirits', the supply of investible funds became decisive. Government and business were able to push ahead with their designs to transform Korea's industry and modernize the infrastructure at such an impressive speed not the least because domestic savingg, were moving forward at a smart clip, rising from 12% in 1966 to 23% in 1976.-/ 64/ For details regarding the operation of the NIF which commenced business on January 1, 1974 as a long-term equipment loan system see The National Investment Fund System, Bank of Korea, Seoul, August 31, 1977, pp. 5-8. On the decision to develop heavy industries, see Park Yungchul, "South Korea's Experience with Industrial Adjustment in the 1970s," Asian Employment Program Working Papers, ILO-ARTEP, August 1983, pp. 43-45. 65/ An extensive discussion of Korean savings is contained in S. Yusuf and R.K. Peters "Savings Behavior and Its Implications for Domestic Resource Mobilization: The Case of the Republic of Korea," op. cit. 26 Table 5: NOMINAL AND EFFECTIVE RATES OF PROTECTIOM BY INDUSTRY GROUPS (X) Nominal rate of Effective rate of protection Protection Balassa 7a Corden /b 1978 1982 1978 1982 3.978 1982 Agriculture & fishery 43.4 66.3 57.1 74.3 54.5 706 Mining 6 energy 0.5 03 -lo5 -1.7 -1.3 -105 Processed food 16.9 1909 '42.2 --46.7 -28.7 -32.6 Beverages 11.3 808 -02 -12.8 -Oo -8.6 Tobacco 19.3 16.3 87.0 57.6 73.7 5000 Fiber yarn & textile fabrics 8.6 7.1 0.6 3.6 0.5 2.8 Fabricated textile products 30.5 27.2 88.6 8708 61.0 60.6 Lumber & wood products 2.4 9o0 -8.5 29.2 -6.2 19.2 Furniture l5.0 208 36.7 -10.5 23.2 -7o6 Paper & paper products 21.4 18.9 7002 400 37.7 23.4 Printing & publishing 8.1 1.6 -So6 -14.9 -4.3 -lloS Leather & leather products 22.0 29.3 -7.5 14.6 -5.8 10.7 Rubber products 3.5 8.5 l11.3 5S9 --7.6 3.7 Chemical products 29.1 31.5 11321 97Y6 55.4 49.7 Petroleum & coal products 8c2 18.7 5601 294.6 42.4 161.9 Nonmetallic mineral products 800 23.9 13.0 42.4 9M3 28.1 Metal & primary products 16.0 14.5 3308 43.3 20.0 24.9 Metallic products 13.9 8.6 10.4 -5.4 7.0 -3.8 General machinery 28.9 22.6 6402 30.3 41.6 21.2 Electric appliances 42.1 275 141.1 63.5 78.7 41.3 Transportation equipment 46.6 311 25604 99.7 97.5 52o1 Miscellaneous manufacturing 14.2 13.4 806 -2.9 6~0 -2.1 /a B. Balassa, The Structure of Protection in Developing Countries9 Johns Hopkins University Press, 1971. /b W0M. Corden, Trade Policy and Economic t^Welfare, Oxford, 1974. Source: Korea Development Institute. - 27 - Table 6: IMPORT LIBERALIZATION RATIO BY INDUSTRY Total number Import of import liberalization items ratio (%) /a Group I Agriculture, forestry and fishery products 993 31.9 Group II Other primary material industries 1,400 84.2 - Mining and energy 262 77.9 - Metals 848 85.0 - Non-metallic minerals 290 87.6 Group III Light industry 1,465 67.4 - Wood and paper 256 85.9 - Textiles 1,110 60.9 - Rubber 99 92.9 Group IV Chemical industry 1,695 34.9 Machinery industry 1,371 61.3 (excluding electricity and electronics) - General machinery 760 63.3 - Transport equipment 276 48.2 - Precision machinery 335 67.8 Electricity and Electronics 367 38.4 /a The percentage of imported items that have been liberalized. Source: Korea Development Institute. But the supply of capital from internal sources was insufficient for to finance the many schemes being promoted by the government. It was there- fore, fortuitous that the years following the first oil crisis found inter- national banks awash with funds that they were willing to lend at a real cost of 1-2% per annum to borrowers from among the LDCs.66 To the extent it could, Korea drew upon this pool of capital to finance its investment plans, with government owned or controlled financial banks acting as the principal conduits through which this money was distributed over approved projects whether private or public. By the late seventies, with investment spending at very high levels, a turning point was reached. The volume of newly created industrial capacity, a decline in domestic savings, the rising costs of overseas borrowing and 66/ R.I. McKinnon, "The Evaluation of the Korean Financial System," World Bank, mimeo, August 1984. - 28 - slack domestic demand9 all served to decelerate capital spending in the manu- facturing sector, although infrastructure and services more or less held their ground. The early 80s were also a time of change in the governments° thinking on economic matters, a reaction as much to the economic shoals only just navigated in 1980-82, as to the emergence of an impressively diversified industrial base and the increasing maturity of the corporate sector. Two notable strands can be identified in the strategy for the revised Fifth Plan which covers the 1982-86 period. First there is the insis- tence on the necessity for the market to eventually assert its dominance in the allocation of resources. Instead of the government providing most of the cues, establishing a hierarchy of objectives and shuffling resources across sectors usi7g budgetary or banking devices, planners now take an abstemious position0- In a complex economy, the market is far superior at gathering and processing information and should take over the burden of managing the economy from the economic ministries0 The move away from detailed p.anning and close supervision of resource allocation goes hand in hand with the governments' efforts to nurture the independence of the financial system since it would play a key role in market economy0 Essentially what has commenced with the Fifth Plan, is a retreat from direct management to the kind of informal guidance which the Japanese have developed to a fine art0 A second strand running through official thinking concerns the need to propel the manufacturing sector beyond the basic, capital intensive, process industries towards technology intensive fields where future export growth prospects seem concentrated0 Much investment in electronics, machinery and transport industries has already occurred and more is being programmed0 But unlike the past spurts of accumulation in Korea, the government is taking a backseat, thickening the incentive mix but letting private corporations respond mainly to market signals0 But the context in which this is being undertaken is the diversified industrial economy of the eighties. However, it took two decades of dirigisme for this result to be realized0 The institutional matrix of a tightly regulated economy cannot be dismantled overnight0 Through its recent policies the government has shown a readiness to pursue the neoclassical line and allow the price mechanism more latitude in determining the tempo of economic activity0 The future may see Korea edging ever closer to a free market system but the message for other LDCs, with per capita incomes only a fraction of Korea's, should not be dis- torted by changes in policy and orientation that occurred after the country had developed its industrial base. Korean Development: Econometrics Having defined the context, we are in a position to interpret the results of empirical testing. The point of departure for the empirical inves- tigation of investment behavior is the "generalized accelerator" model, involving a distributed lag relationship between the amount of investment and both the level of and changes in output0 In addition, these models normally contain a fraction of the capital stock in the previous year, to serve as a proxy for replacement investmento The underlying idea is of partial adjust- ment with the "ideal" capital stockc a function of changes in output, and investment in year t as a fraction of the difference between the level of capital stock in '"t-l" and the desired level of capital stock in year to This - 29 - "partial" adjustment reflects the lumpiness of investment expenditures, the increasing adjustment costs which would be incurred if a firm made the entire adjustment in one period, and the uncertainty systemic to decisions of this nature. The primary assumption underlying these types of models is that the desired capital stock is related only to changes in output and not other economic variables such as the cost of capital goods, the profit rate, the tax rate, the depreciation rate, or the ratio of the price of investment goods to the wage rate. Theoretically, this model would imply techn?logical rigidities, arising from a constant capital output ratio.68 Throughout the sixties and seventies, a number of theoretical models of investment were advanced which fleshed out the neoclassical theory of investment. The most 1iportant of the new variables incorporated were: the user cost of capital;69 the relative price of investment goods to output price or the wage rate; the tax rate, including depreciation rules; and the market va ue of the firm, usually represented by security market infor- mation .70 The distinguishing feature of these advances was theorizing on a firm specific basis - a micro approach - and aggregation to an economy-wide relationship - a macro model. To understand the potential of these neoclassical investment func- tions in explaining investment behavior on an aggregate basis in developed or developing countries, one needs to examine closely their underlying assump- tions. The standard Jorgenson model employs the critical assumption that the desired capital stock is generated from a Cobb-Douglas production function or a CES production function with constant returns to scale and unitary elastic- ity of substitution. The assumption of perfect competition in both factor markets and output markets must also be made, since the equality relations of output price to marginal costs, and marginal net revenues to marginal factor 68/ See C.W. Bischoff, "Business Investment in the 1970's: A Comparison of Models," Brookings Papers on Economic Activity, No. 1, 1971, p. 16. He notes that this model has performed very well in practice not because the assumption of a fixed capital-output ratio is characteristic of production functions in general, but because "the other models are deficient in specifying the precise way in which other factors determine the optimum capital-output ratio." 69/ This theory is most fully outlined in Dale W. Jorgenson, "The Theory of Investment Behavior," in Robert Ferber, ed., Determinents of Investment Behavior. For an empirical application, see Dale W. W. Jorgenson, "Capital Theory and Investment Behavior," American Economic Review, Vol. 53, May 1963, pp. 247-259. 70/ This is Tobin's 'q' theory of investment; see J. Tobin, "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Vol. 1, February 1969. 30 costs are essential to the derivation of the user cost of capital0'711 In Tobin's q-theory of investment, the following market scenario is implicitly assumed: that the firm's management is seeking to maximize the net worth of the firm as measured by the market value of the outstanding comrmon shares. If the potential benefits are greater than the costs, then the market in evaluat- ing the anticipat5cJ profit from an investment, will reflect this assessment in the share price.7 Even in developed countries at the micro or firm Level, the validity of these assumptions is questionable; whether the problems are magnified when these relationships are aggregated to the macro or economy-wide level, and the accuracy of these models further compromised, is a question that has been hotly debated for some time. For developing countries, a number of specific factors suspend serious doubts over the usefulness of these models in explaining even firm level investment, unless in Friedmanian style, the irrelevance of assumptions is the methodological article of faith. A few of these factors are: (i) weak and very thin capital markets; (ii) chronic shortages of credit; (iii) non-market credit allocation9 (iv) managed and non-market official interest rates; (v) "green field" investments, or investments in creating new industries, largely the result of targeting specific sectors for industrial development; and (vi) lack of data on any but the most basic aggregate variables.73/ As a result, there has been only limited success with modelling investment in developing countries0 In the World Bank, the standard macro- simulation model, the RMSM, allows several forms for the aggregate investment function: a simple ICOR, a sectoral ICOR, and a simple percentage of GDPO The ICOR is defined as: It-l ICORt =GDP - GDP 71/ A critical examination of the assumptions underlying the Jorgensonian investment function is: Robert Eisner, "Econometric Studies of Investment Behavior: A Comment," Economic Inguiry, pp. 92-93. 72/ For an examination of the assumptions underlying the q-theory of investment, see Hiroshi Yoshikawa, "On the 'q' Theory of Xnvestment,, American Economic Review, September 1980, Vol0 70, Ho. 4, ppo 739743. 73/ These are listed in a recent study by Blejer and Khan, which is summarized in "Government Policies in Developing Countries Can Change the Pattern of Private Investment," IMF Survey, May 21, 1984, pO 152o - 31 - But, this relationship is used primarily to judge the consistency of output level projections, given an assumed or feasible level of aggregate investment, and not as a model of aggregate investment behavior. In spite of these limitations, numerous studies of the neoclassical variety have been undertaken on the anakrsis of investment in developing countries and in particular, on Korea.7 Aside from the Blejer and Khan study noted earlier, two of these studies that attempt to remedy the shortcomings of standard analysis as applied to LDCs, merit attention: one by van Wijnbergen on Korea, and a cross-country study by Leff and Sato. Van Wijnbergen specifies an investment function for Korea in which private fixed investment is a function of the real curb market rate, and the change in the flow of real credit from the banking sector. The results show a significant positive effect of real credit and a significant negative effect of the curb market rate. The quantity and the price variables affect two different sectors of the Korean economy: the subsectors currently being encouraged by the government, which had access to credit from the banking sector, and the traditional subsectors, which were being denied official sources of credit and, therefore, had to raise money in unofficial money markets. (In our examination of manufacturing investment later in this section we explore this dichotomy in more detail.) This work's importance lies in its unusual specification of the investment relation and its emphasis on factors more relevant to the situation of developing economies. Leff and Sato specify an investment function which models gross domestic investment as a function of 74/ Numerous studies on investment in developing countries have been undertaken. A good sample of this literature is: M.FG. Scott, "The Contribution of Investment to Growth," Scottish Journal of Political Economy, Vol. 28, No. 3, November 1981; Nathaniel H. Leff and Kazuo Sato, "A Simultaneous-Equations Model of Savings in Developing Countries," Journal of Political Economy, 1975, Vol. 83, No. 6, pp. 1,217-1,228; Nathanial H. Leff and Kazuo Sato, "Macroeconomic Disequilibrium and Short-Run Economic Growth in Developing Countries," in M. Syrquin and S. Teitel (eds.), Trade, Stability, Technology, and Equity in Latin America, Academic Press, 1982, pp. 167-190; Maxwell J. Fry, "Saving, Investment, Growth and the Cost of Financial Repression," World Development, Vol. 8, pp. 317-327; U. Tun Wai and Chorng-huey Wong, fDeterminants of Private Investment in Developing Countries," The Journal of Development Studies, Vol. 19, No. 1, October 1982, pp. 19-66; and, Jere R. Behrman, "Sectoral Investment Determination in a Developing Economy," American Economic Review, December 1972, pp. 825-841. For studies on Korea, see: Roger D. Norton and Seung Yoon Rhee, "A Macro- economic Model of Inflation and Growth in South Korea," in William R. Cline and Sidney Weintraub (eds.), Economic Stabilization in Developing Countries, The Brookings Institution, Washington DC; V. Sundararajan and Subhash Thakur, "Public Investment, Crowding Out, and Growth: A Dynamic Model Applied to India and Korea," IMF Staff Papers, Vol. 27, No. 4, December 1980. pp. 814-855; and, Sweder van Wijnbergen, "Short-Run Macro-Economic Adjustment Policies in South Korea," World Bank Staff Working Papers, No. 510. - 32 changes in lagged output (a lagged aycelerator), changes in real domestic credit, and the rate of inflation075 Notwithstanding all the caveats outlined above, regression analysis remains a powerful tool not to be -gnored0 Hence we saw fit to pursue the econometric investigation of aggregate investmrlent behavior a little further. Our results which are shown in Tables 7-9, will not be surprising to practi- tioners in che field of development economics. Table 7 uses gross domestic investment as the dependent variable; Table 8 fixed investment; and Table 9 private fixed investment. We tried all of the standard variables believed to affect investment behavior: (i) a simple accelerator model; (ii) the "market" interest rate9 for which the proxy in Korea is the so- called "curb rate"; (iii) the level of9 and changes in real. domestic credit; and (iv) lagged investment0 In all of our results, the only significant variables were the change in income (the accelerator) and lagged investment0 In addition to (i)-(iv) above, we tried, with no success, the level of foreign savings, the expected rate of GNP growth (measured as the FYP projected rates) and the rate of growth of exports0 Following more closely upon the work of van Hijnbergen, and Leff and Sato, we estimated a short-run equation of quarterly data over the period Q3 1964 to Q4 l981. These results, summarized in Table 10, show a strong relationship between the level of GCP, changes in GNP, the availability of private credit, and the curb market rateo In part they represent' the strong correlation between growth and investment9 and, the need for credit expansion (in a country like Korea where the financial markets are fairly backward) before any appreciable investment can be undertaken by either the private or public sector0 However, as will be shown later in our analysis of 75/ Leff and Sato, 1982, (2, Cito , po 171) make the following points concerning the more traditional specifications involving official interest rates: "oInterest-rate changes, an adjustment mechanism familiar from more developed economies, are not very relevant to LDCso For doctrinal and political reasons, the governments in these countries generally do not permit interest rates to move sufficiently to clear the financial markets0 Rather, the monetary authorities create new credi.t more or less independently of domestic saving, often in response to the government deficit0 Credit creation, in turn, influences domestic investment because firms in LDCs are generally very dependent on credit for financing0" - 33 - Table 7: GROSS DOMESTIC INVESTMENT - 1970-82 Change Real Change Real in real Curb Real in real domestic domestic Market equipment Lagged Constant GNP credit credit rate loans inv. D.W. Eqn 1 -753.84 0.757 0.111 0.961 1.28 0.92 (-0.79) (3.837) (0.290) (8.54) lagged -59.62 Eqn 2 3,388.07 0.284 (-0.75) 0.779 1.45 0.80 (1.32) (0.46) (4.27) Eqn 3 -677.46 0.850 -0.143 1.179 1.76 0.936 (-0.78) (4.48) (-1.33) (7.08) Eqn 4 -1,346.13 0.905 -0.660 1.164 1.68 0.918 (-1.17) (3.89) (-1.10) (6.38) change Eqn 5 -1,949.37 1.059 -2.098 1.113 1.66 0.90 (-1.22) (3.46) (-1.43) (7.77) lagged Eqn 6 -1,039.87 0.823 -0.755 1.146 1.64 0.87 -0.66 (3.10) (-0.69) (4.34) logged change Eqn 7 -1,542.92 1.084 -26.25 -2.203 1.125 1.56 0.88 (-0.67) (3.14) (-0.27) (-1.34) (6.96) - 34 - Table 8: FIXED INVESTMENT: 1970-82 Change Real Change Real in real Curb Real in real domestic domestic Market equipment Lagged Constant GNP credit credit rate loans invO D.W. Eqn 1 -715.12 0.617 0.227 0.987 2.14 0.957 (-loOl) (3.91) (0.67) (10o44) Eqn 2 2,349.15 0.353 -45.39 0.862 1.02 0.881 (1.16) (0.64) (-0.69) (5.50) Eqn 3 -695.25 0.639 -0.026 1l068 2.47 0.954 (-0.91) (3.82) (-0.25) (6.78) Eqn 4 -69161 0.619 0.020 1.024 2.34 0.944 (-0.76) (3.80) (0.03) (6.03) change Eqn 5 -951.90 0.700 -0.640 1.063 2.52 Oo926 (-0.71) (2.48) (-0.431) (8ol0) lagged Eqn 6 -633.25 0.600 0.378 00948 2.12 0.926 (-0.55) (2.86) (0.37) (4.15) lagged change Eqn 7 -980.52 0.698 10858 -0.630 1.062 2.52 0.912 (-0.48) (2.15) (0.02) (-0.38) (7.02) Eqn 8 -753.18 0.623 0.006 1.024 2.34 0.954 (-1.03) (3.56) (0.06) (5085) - 35 - Table 9: REAL CORPORATE INVESTMENT: 1970-82 Change Real Change Real in real Curb Real in real domestic domestic Market equipment Lagged Constant GNP credit credit rate loans inv. D.W. R2 Eqn 1 -611.07 0.562 0.247 0.965 2.15 0.954 (-1.01) (4.05) (0.847) (10.28) lagged Eqn 2 2,069.57 0.354 -38.51 0.837 1.05 0.868 (1.12) (0.72) (-0.64) (5.17) Eqn 3 -576.92 0.580 -0.018 1.047 2.46 0.951 (-0.85) (3.90) (-0.19) (6.72) Eqn 4 -524.39 0.555 0.05t4 0.997 2.33 0.939 (-0.68) (3.15) (0.01) (6.01) change Eqn 5 -670.87 0.608 -0.366 1.034 2.46 0.916 (-0.57) (2.43) (-0.28) (7.70) lagged Eqn 6 -510.83 0.545 0.324 0.934 2.16 0.916 (-0.50) (2.90) (0.37) (4.10) lagged changes Eqn 7 -1,092.24 0.583 26.27 -0.253 1.021 2.47 0.901 (-0.59) (2.06) (0.319) (-0.18) (6.73) Eqn 8 -634.90 0.566 0.010 1.004 2.34 0.951 (-0.99) (3.67) (0.11) (5.90) - 36 - Table 10: SHORT-RUN INVESTMENT FUNCTIONS: FIXED INVESTMENT Real Real Lagged Lagged Real Change in equipment curb real curb fixed Constant GNP real GNP loans rate rate invO R2 DoWo Eqn 1 -180095 0.370 -01oO 00806 1.52 (3.33) (16.38) (4.08) Eqn 2 115.45 OlO9 055 E-3 -26.06 0.205 00899 1.75 (1 o28) (4.12) (3.44) (1 o29) (1 o80) Eqn 3 175.04 0.106 0.62 E-3 -190444 0.403 0.924 1069 (2.12) (6.23) (4.75) (&O098) (3.88) - 3 7 - manufacturing investment, a relationship between credit availability, the interest rate and other economic variables, along neoclassical lines, does explain some important private investment activity. By carefully screening the econometric results outlined above, it is clear that only a portion of the story is explained. Since our hypothesis is that the process of investment in Korea was not solely determined by market forces, as suggested in the neoclassical paradigm, we were not surprised by our results. In fact, the data on gross domestic investment (GDI) vividly illustrate our point. As shown in Table 11, the ratio of GDI to GNP is highly correlated with the Korean five-year planning cycles. With the exception of the First Five-Year planning period, at the beginning of the "takeoff", there is a characteristic pattern of investment activity. In the first two years of each plan, the ratio rises steadily, peaking in the third year. The five-year actual growth rates exceeded the growth rate cargets of the plans in first three FYPs (see Table 3). Performance during the Fourth FYP, was below par because rising oil prices, weak export demand and excess capacity in domestic industry arrested the tempo of economic activity during the final three years of the Plan (1979-81). The cyclical behavior shown in Table 12 also is illustrated by the actual annual growth rate of GDI. In the first three years of the plan, the growth rate significantly exceeds the plan targets only to decline markedly in the fourth year. In these first three years, there was an overshooting of plan targets that tended to push the economy into terrain not charted in the Plan, as a result of which progress slowed. This occurred primarily for two reasons. First, as the private sector met and exceeded the goals set by the planners, businessmen entered a zone of uncertainty - did the planners wish them to continue? in what areas should they continue? Private entrepreneurs who had been operating in the secure environment of explicit government direction became uncertain of their bearings and increasingly reluctant about committing capital to risky ventures. Second, a floor of investment has hitherto been provided by the government's spending on infrastructure across a variety of sectors that have strong linkages to private investment. As the economy approached the goals of each successive FYP, investment in the public sector tended to slacken since it was difficult to start major new projects towards the close of a plan period, policy makers preferring to delay important new initiatives until the start of the new plan. Essentially, the risks which the government had endeavored to ameliorate with the FYP process were effectively covered for only three years and not five years, and the resultant uncertainty produced a characteristic oscillation in investment activity. - 38 - Table 11: GROWTH RATE OF GROSS DOMESTIC INVESTMENT AND MANUFACTURING INVESTMENT Manufacturing GDI investment 1965-70 30O4 22.5 1970-75 12.3 8.8 1975-80 9.9 10.0 1980-83 6.8 2.4 Source: National Income in Korea, Bank of Korea, various issueso - 39 - Table 12: THE RATIO OF GDI TO GNP AND THE KOREAN FIVE-YEAR PLANNING CYCLE Year Planning cycle GDI ratio 1962 First Five-Year Plan: Year 1 12.8 1963 2 8.1 1964 3 14.0 1965 4 15.0 1966 5 21.6* 1967 Second Five-Year Plan: Year 1 21.9 1968 2 25.9 1969 3 28.8* 1970 4 25.3 1971 5 24.1 1972 Third Five-Year Plan: Year 1 27.7 1973 2 25.7 1974 3 31.7* 1975 4 30.0 1976 5 25.6 1977 Fourth Five-Year Plan: Year 1 27.7 1978 2 31.2 1979 3 35.6* 1980 4 31.3 1981 5 29.1 1982 Fifth Five-Year Plan: Year 1 27.0 1983 2 27.6 Note: The highest GDI to GNP ratio in each successive planning period is indicated by an The view that public investment strongly influences accumulation in other sectors is supported by the close correlation among the types of invest- ment goods. Table 13 shows these correlations over the period 1970 to 1983. Since private investment has been concentrated in transport equipment and machinery, and public investment has been concentrated in the construction of infrastructure, these high correlations reveal the coordination between the public and the private sector which has been a hallmark of Korean economic growth. - 40 - Table 13: CORRELATION MATRIX OF THE COMPONEMTS OF INVESTMENT Building Construction Equipment -OMP-! Bldg/GNP lOCO Const/GNP 0.809 10COO Equip/GNP 0.919 0.825 1oOOO Notes: Bldg/GNP = Investment in dwellings and nonresidential buildings as a share of GNP Const/CNP Investment in other construction and works as a share of GNP. Equip/GNP Investment in transport equipment and machinery as share of GNPO As illustrated by the above analysis, a model based on government policy objectives and planners preferences would be apparently a more appro- priate vehicle for analyzing aggregate investment. However9 we felt that the manufacturing sector9 in which the state has a small share9 would be more amenable co standard theories of investment behavior. Of course it is not claimed that this sector satisfies the stringent assumptions underlying con- ventional models, only that industrial magnates and small factory owners matte investment decisions9 not just on the basis of Government direction but also in response to price signals9 market expectations and anticipated returnso Investment in manufacturing9 as shown in the national accounts9 has risen more or less in line with aggregate investment over the past twenty years9 its share ranging from 17.7% in 1970 to 15.2% in 1983. Predictably9 it has fluctuated more than capital spending on social overhead and services and since 19799 it has stagnated due to overcapacity and uncertain market prospects. For detailed data on manufacturing output and investment9 we have relied on the data collected annually in the Mining and Manufacturing Survey issued by the National Bureau of Statistics (MBOS)o These data are given for eight sectors: food and beverages; textiles; wood and wood products; pulp and paper products; chemicals; non-metallic minerals; basic metals; and fabricated metals. As shown in Tables 14 and 159 the composition of output and invest- ment has changed dramatically over the period 1966 to 1981Dfroiwi the second FYP to the fourth FYPO This reflects the government's emphasis on the heavy and chemical industries as the economy matured and Korea's comparative advan- tage shifted from the labor-intensive light manufacturers to miore capital- intensive heavy industries9 such as iron and steel9 electronics9 shipbuilding9 and machinery0 In fact9 as a percentage of total manufacturing output9 the share of light industries (food9 textiles9 wood9 pulp and non-metallic minerals) has shrunk from 61.0% in 1966 to 40G7% in 1981 (Table 14)o This change has9 of course9 been mirrored by the composition of manufacturing - 41 - Table 14: SUBSECTORAL OUTPUT AS SHARES OF MANUFACTURING OUTPUT (%) Light Industry Heavy Industry Nonmetallic Basic Fabricated Total Food Textiles Wood Paper minerals Total Chemicals metals metals 1966 61.0 21.1 21.8 6.0 6.8 5.3 36.3 17.1 6.0 13.2 1970 56.2 22.1 18.7 5.4 4.9 5.1 41.4 21.3 5.8 14.3 1975 51.2 17.7 22.3 3.3 3.9 4.0 47.5 25.8 6.3 15.4 1980 42.3 13.7 17.9 2.4 3.9 4.4 23.8 9.3 19.2 1981 40.7 13.2 17.7 2.1 3.9 3.8 57.7 27.1 9.6 21.0 Source: Economic Planning Board, Mining and Manufacturing survey, Various issues. - 42 - Table 15: SUBSECTORAL INVESTMENT AS SHARES OF TOTAL MANUFACTURING INVESTMENT (%) Light Industry Heavy Industry Nonmetallic Basic Fabricated Total Food Textiles Wood Paper minerals Total Chemicals metals metals 1966 65.2 11.5 31.5 6.3 9.3 6.6 32.8 15.4 6.0 11.4 1970 605 13.2 26.3 9o1 4.0 7.9 36.4 19.6 5.3 11.5 1975 44.2 8.8 24.1 1.5 3.2 6.6 55.3 17.1 7.6 306 1980 32.7 8.7 12.1 1.6 3.2 7.1 68.1 27.0 17.5 23.6 1981 30.9 8.5 12.7 1.6 2.4 5.7 68.4 20.1 20.8 27.5 Source: Economic Planning Board, Mining and Manufacturing survey, Various issues. 43- investment expendit,ures, with the share of the light industries diminishing from -65.2% in 1966 to 30.7% in 1981. While this dramatic change has been to some extent a reaction7 Korea's altered economic circumstances, such as a rising real wage rate,- an increase in skilled manpower, and an erosion of export market opportunities due to protectionism and increased competition from less developed countries, it also stems from a determined government effort, through a succession of FYPs, to redirect entrepreneurial initiative into new and promising industrial subsectors. Therefore, when the decision was taken to develop the heavy industries (basic metals, fabricated metals and chemicals) in which Korea enjoyed only a limited comparative advantage at that time, it was the government's willingness to provide the resources and bear the risks, which made possible the germination of these industries. With the energies of the planners committed to solving the problems encountered by the new subsectors and satisfying their requirements of capital, the light industries, had more and more co fend *or themseLves, to compete for capital in the financial markets and to weigh the desirability of investing on the basis of profit rates, expected demand and other market signals, instead of taking their cues from the government's planning agencies. If this is an accurate assessment of che conditions prevailing in Korean industry during much of the seventies, we would expect to find our conventional, market related variables unhelpful in expiaining investmenc in the government-supported basic induscries, which began to emerge in the early 70's. On the ocher hand, the light industries should be more amenable to standard econometric analysis. To establish the validity of this hvpothesis, we estimated investment equations for aggregate manufacturing investment, for heavy and chemical industry investment, and for light industry investment. In conducting our econometric tests, we have employed the following independent variables: the level of manufacturing output; real interest rates--both the curb market rate and the official interest rate; the amount of loans allocated for equipment investment; the amount of loans allocated by the NIF; and financial policy variables such as the profit rate, the tax rate and the depreciation rate. These financial indicators were constructed from the Financial Statement Analysis, published by the Bank of Korea (BOK). Rather than cobble together a "user cost of capital", a'la Jorgenson, the effects of each of these financial variables have been entered separately into our estimation, allowing us to disentangle the effects of this key neoclassi- cal variable. All of our regressions were on annual data over the period 1968-1981. Initially, we tested a simple accelerator model, including our measures of credit availability. These results were gratifyingly consistent with our model of Korean investment (Table 16). Our credit variable has been defined as the total amount of equipment loans from Deposit Money Banks (DMB), 76/ Labor and Export-led Industrialization: The Case of Korea, World Bank, Report No. 4485-KO, September 1983, pp. 55-61. (This is an internal World Bank document with restricted circulation.) - 44 - Table 16: SIMPLE ACCELERATOR MODEL OF KOREAN MANUFACTURING INVESTMENT 1968381 Con- Lagged change Credit Lagged stant in output variable investment R2 DoWo EQN 1 Total Manuf. 12.71 0129 0747 0313 0935 2.30 Investment (Oo11) (1.53) (3.52) (1.68) EQN 2 Heavy Industry -37.27 013 E-3 0.438 0.495 0.941 2oO5 Manuf. Inv. (0.57) (1.64) (2.90) (2.84) EQN 3 Light Industry 16.72 021 E-3 Oo396 00117 0.892 2.56 Manuf. Inv. (0.28) (1.99) (3.67) (0.55) - 45 - plus total loans from the NIF; for the heavy industry and light industry investment equations, this variable reflected credit for the respective indus- trial subsectors only. In equation 1, total manufacturing investment is marginally affected by changes in output, strongly influenced by credit availability, with lagged investment also significant. For manufacturing investment in the heavy industries, the effect of the accelerator is insigni- ficant; this is consistent with our hypothesis since the government was promoting these industries, and this investment was in anticipation of future export markets, not the result of established markets. The credit variable is strongly significant, reflecting the importance of credit availability in a country with a limited number of channels for investible funds; as is lagged investment. This was expected since invescments in the heavy industries involve large scale and long gestation projects over a number of years. In the light industries, where one would expect the neoclassical paradigm to serve as a closer approximation of reaLity, the acceLerator is significant at the 95% level. Credit, for which chese industries had to compete fiercely, is also strongly significant. And since the gescation lag for light manufactur- ing investmenc is short, these were not captured by the partial adjustment mechanism. Buoyed by these results we proceeded to examine the impact of other variables on heavy and light industry investment expenditures more closely. With a standard investment function employing investment as a func- tion of a lagged accelerator and lagged investment, we explored the impact of our three financial indicators--the profit rate, the tax rate, and the rate of depreciation (Table 17). In the light industries, all three were significant at the 90% level and of the correct sign. For the heavy industries, neither the profit rate nor the depreciation rate were significant. However, the tax rate was highly significant and that is consistent with the government's reliance on tax incentives to encourage investment in these industries. In summary, our results support our view that investment in Korea has been influenced by government policy and targeting, and to a lesser extent by the 'standard neoclassical variables.' While we feel the success of Korea's development has important implications for theories on investment and growth in other less developed countries, we caution the reader in extending the results for projecting future investment in Korea. As the heavy and chemical industries grow and mature, there is evidence that the government is allowing the market to 'deliver the signals' and is becoming less involved in detailed investment planning. Also, as the government reduces its role in investment planning and completes its agenda for infrastructure investment, another floor for aggregate demand in the economy will need to be found. Paradigm Soup By their very nature economic models provide partial explanations; each helping to lift only a corner of the veil. To expect more, given how restrictive are the assumptions we build around the models and how stylised and fragile the structures erected within, is to indulge in fantasy. It hardly bears repeating that the recent economic history of developing coun- tries is extraordinarily rich and variegated, not amenable to simple mono- causal theories, irrespective of how elegant or powerful these might be. Only - 46 - Table 17: IMPACT OF FINANCIAL RATIOS ON MANUFACTURING INVESTMENT Output Depre- accele- Lagged Profit Tax ciation rator invest- Constant rate rate rate lagged ment k2 D.W0 Light Industry Eqn 1 -114.20 3,514.4 016 E-3 0966 0.80 308 (1.03) (1.63) (1.05) (5.91) Eqn 2 113.36 -20b483 0114 E-3 0.899 0793 3.19 (1.03) (1.50) (0.69) (6.08) Eqn 3 -265.44 32089 0149 E-3 00712 0824 2.49 (1.76) (2.09) (1.06) (5.30) Heavy Industry Eqn 1 29.64 -630.19 0.22 E-3 0922 0.892 2.81 (0.13) (0.16) (2.12) (5.25) Eqn 2 54.66 -47402 0001 E-3 1.316 0.947 1096 (0.84) (3.20) (1.18) (9.55) Eqn 3 564.26 -56.01 023 E-3 0.973 0.897 2.80 (0.69) (075) (2.28) (8.79) - 47 - a syncretic approach, inteLligently and flexibly conceived, can ever hope to skirt the many pitfalls encountered in framing an adequate historical inter- pretation. Such syncretism does not come easily to creed bound economists, because mixing religions is not far short of blasphemy. The animated debate on the virtues of the market, and the govern- ment's frequently expressed support for the price mechanism over planning and centralized resource allocation, has in the past four years tended to obscure the characteristic features of Korean development under the Park regime. Because prices have come to enjoy a greater play in recent times, there has arisen in some quarters, the illusion that resource allocation in Korea was always largely "price guided." But the market mechanism was a captive of the planners in the sixties and just nominally autonomous in the seventies. So overwhelming was the scope of the government's economic jurisdictLon and regu- latory activities, that it requires some ingenuity to make verv much of the pricing system (even one which over time may have begun co approximate distantly, perhaps, world prices, beneath the special incentives. tne directed credit and che planning. A scory as simple as the neoclassicists would have it cannot be teased out of the Korean experience and since, in mixed economies of the Korean stripe, Lt is hard to assemble a reliable index for measuring the degree of market orientation, we cannot even make a convincing case, that Korea was more or less a price guided economy than Mexico or India or other semi-deveLoped comparator countries. Capturing the essence of what transpired is enormousLy difficult, especially if we allow ourselves to be guided by a single theory. From a syncretic perspective however, the situation is some- what more transparent. That is, we can assemble many more pieces of the puzzle. As we stated above, the military coup of 1961 was an event of the greatest significance for Korea's development. But military governments have come and gone in many countries without leaving such an indelible economic imprint. In Korea's case, the military's intervention yielded dramatic results, in part, because of the personaLity and goals of Park Chung Hee, who brought enormous persistence and force of will to the cause of national devel- opment and was able to motivate a corps of farsighted technocrats to effi- ciently conduct the country's economic affairs. Korea's geopolitical circum- stances immeasurably strengthened the military's hand and helped maintain the edge of the regime's commitment. The constant threat from the north as well as the sizable U.S. military presence, averted factionalism and instability within the ranks of the army, while at the same time serving to unite, more or less, many key elements of the populace behind the regime's economic program for an extended period of time. With the military providing the authority and an economic bureau- cracy, its functions modeled on those of similar Japanese institutions, the instruments, President Park was able to mount a Big Push to develop export industries which capitalized on the trade boom of the sixties. As the domes- tic supply of capital was initially quite scarce, budgetary resources had to be carefully husbanded and it was a great boon for the infrastructure building efforts that a fairly egalitarian income distribution and the relative freedom - 48 from political pressures and interference from vested interest groups enjoyed by the military regime, held down social spen9ing, freeing resources for projects with a higher development pay off.77 The investment flowing into social overhead capital generated a large and stable demand for a range of manufactured goods and induced busi- nessmen, who could also count on access to state sponsored credit, to estab- lish production facilities for cement, glass, steel, other metal products and machinery. This gave industrialization a powerful nudge, but the impetus from export related opportunities was even more important. The sixties were years of unprecedented growth in world trade and through its exchange rate and incentive policies the Korean government encouraged producers to pursue what- ever opportunities they could. Exports of textiles, plywood, toys and metal products expanded at an enormous rate and keen eyed Korean businessmen were quick to exploit new markets, such as for wigs, as they materialized. But the investment which made possible this feverish export activity would have been inconceivable had the government not been prepared to funnel subsidized credit to the industrial sector and accept a part of the risk arising from produc- tion, largely for a cycle prone export market. This risk transfer or risk spreading by the government grew immensely in importance as Korea moved from the era of small textile factories to the building of large, capital intensive, metal, chemical, transport and machinery plants. It was the government's willingness to arrange for the financing and directly or indirectly, absorb the risks of setting up the g giant facilities which drew the large conglomerates into such projects.7 Aside from low interest credit, whose flexible repavment schedules made the government a de facto shareholder, the state also provided the assurance of a market and it held labor militancy, if not the rate of increase of wages, completely in check. For instance, shipbuilders could depend on the purchases of Korean shipping firms which obtained much of their financing from specia- lized banks; producers of synthetic fibers were offered a captive market 77/ The egalitarian income distribution also contained the demsnd for luxury consumer durables. As Kronish and Mericle have shown, demand for automobiles in Latin American countries is closely linked to the lopsided structure of incomes0 See K.S. Mericle, "The Brazilian Notor Vehicle Industry," and R. Kronish and KoSB Mericle, "The Development of the Latin American Motor Vehicle Industry l900-19809 A Class Analysis," both in R. Kronish and K.S. Mericle eds0 The Political Economy of the Latin American Motor Vehicle Industry, MIT Press, 1984, pp. 17-21, 265. 78/ On the advantages enjoyed by the government in pooling and spreading risk, see K.J. Arrow and RoCo Lind, "Uncertainty and evaluation of public investment decisions", in K.J. Arrow, Essays in the Theory oRisk Bearing, North Holland, 1970, pp. 239-2450 The influence of risk perception on investment decision, particularly when firms are highly leveraged (as in Korea) is discussed by B0 Malkiel, "2The Cspital Formation Problem in the UoS.," Journal of Finance, Vol0 34, Noo 2,, May 1979, pp. 296-303. - 49 - because textile firms were required to meet a percentage of their raw material needs from domestic sources even though the prices were higher; and metallur- gical industries could depend upon the vast public sector building program. For over a decade and a half, Korean investment was conducted within a highly authoritarian framework, the government through its many organs being a party to all industrial decisions of any significance, including many con- cerning matters of detail. In this fashion, a desire to meet if not exceed plan goals was directly translated into capital accumulation. By the latter half of the seventies, involvement of this order became questionable for a number of reasons. First the enormous expansion in the size and complexity of the economy made it increasingly more arduous to monitor virtually the entire spectrum of economic activities and the advan- tages of a gradual disengagement became ever more apparent. Second, as Korean industry came to be dominated by a handful of glanE conq9merates, there began taking shape in the private sector a "echnostructure," 9 with a capability to monitor and concroL the market.80 The close Links between aovernment and business, and the degree of unanimity over objectives among the cwo parties, meant that these industrial bureaucracies could complement tne official appa- ratus. ControL over economic activities aid not any Longer have to be as concentrated, it couLd be decentralized without the state having to appreci- ably sacrifice its ability to take and press certain initiatives. Third, towards the end of the seventies, the financial system had accumuLated a fund of experience at aLlocating resources ano gachering market information,suffi- cient for a start to be made at injecting a measure of autonomy into its functioning. An autonomy that could eventuaLly become a cornerstone of a more thorough going market system. Fifth, most of the principal measures needed for the foundations of a dynamic industrial economy had been introduced and were weLl on their way to being implemented. Day-to-day supervision by the government had ceased to be either necessary or desirable. Finally, domestic savings coupLed with the access to foreign financial markets had eased the disequilibrium between the demand and supply of capital to a point, where strenuous efforts to mobilize savings and a tight grip over investment deci- sions, could be substituted by the more indulgent Japanese form of guidance. This said, we do not want to leave the impression that prices did not matter. For the thousands of small businessmen in whose factories are manufactured between a third to one half of Korea's exports, market signals loomed as large as the planners directives. Even the big corporations certainly did not exclude prices from their calculations and as their opera- tions have expanded the weight of international market conditions may outweigh domestic market conditions, reducing the weight of planners preferences. But that will be the story of Korea as a front runner among the NICs and should not be insinuated into the analysis of Korea as one of the most successful LDCs. 79/ A term popularized by Galbraith in the late sixties, it embraces all those in the corporate sector who bring specialized knowLedge, talent or experience to group decision-making. J.K. Galbraith, The New Industrial State, Hamish Hamilton, 1967, p. 71. 80/ Korea's Development in a Global Context, A World Bank Country Study, 1984. World Bank An Analysis of Developing NEW Country Adjustment PublicztioEE Experiences in the 1970s: Low- Compounding and Discounting of Re.ated Income Asia Tables for Project Analysis Christine Wallich (with a Guide to Their lnterest Staff Working Paper No 487 1981 43 Applications) pages (including references). Second Edition, Revised and Stock No WP 0487 $3 Expanded Adjustment Experience and Aspects of Development Bank J. Pnce Gittinger Growth Prospects of the Semi- Management Project planners and analysts will find Industrial Countries William Diamond and V. S. this book a convenient and time-sav- Frederick Jaspersen Raghavan ~~~~~~~~~ing reference for the preparation and Fredenlck Jaspersen Raghavan analysis of clevelopment projects Six- Staff Working Paper No 477 1981 132 Deals exclusively with the manage- decamal tables for I percent through Sx pages (including 3 appendixes) ment of development banks The book percent show the compoundog factor Stock No WP 0477 $5 is divided into eight sections, each for I and for I per annum, the sinking dealing with one aspect of manage- fund factor, the discount factor, the Adjustment in Low-income ment of its problems, and of the var- present worth of an annuity factor, Africa ious ways of dealing with them and the capital recovery factor The Robert Liebenthal EDI Series in Economic Development The first edition of this book underwent Staff Working Paper No. 486 1981 62 Johns Hopkins University Press, 1982 seven pnntings in ten years and was pages (including bibliography) 2nd printing, 1983 311 pages translated into Arabic, Chinese, Stock No WP 0486 $3 LC 81-48174 ISBN 0-8018-2571-7, Stock French, and Spanish This new edi- No. IH 2571, $29 95 hardcover, ISBN 0- bon-with narrow-interval compound- Aggregate Demand and 8018-2572-5, Stock No IH 2572, $12 95 ing tables added for higher interest Macroeconomic Imbalances in paperback rates, updated project examples, a guide to using simple electronic calcu- Thailand: Simulations with the Capital Accumulation in lators to perform the computations SIAM 1 Model Eastern and Southern Africa: A discussed, and an annotated bibliog- Wafik Grais Decade of Setbacks raphy increases the proven usefulness Staff Working Paper No 448 1981 132 Ravi Gulhati and Gautam Datta of its predecessor, both in the class- pages (including 3 appendixes) Analyzes the magnitude of the setback an At the proes Stock No WP 0448 $5 in capital accumulation in eastern and May 1984 About 208 pages southern Africa. This phenomenon is ISBN 0-8018-2409-5 Stock No BK 2409 examined in twenty-eight statistical ta- $10 95 NEW bles The authors sample sixteen coun- Translations of this new edition will be tnes and rely on expert observations to available in 1985 Still available are the explore the proximate causes of the following translations of the first edition Alternative Mechanisms for setbacks French Tables d'interets composes et d'ac- Financing Social Security World Bank Staff Working Paper No 562 tualisation Economica, 4th printing, Parthasarathi Shome and Lyn 1983 74 pages 1979 Squire ISBN 0-8213-0169-1 Stock No WP 0562 ISBN 2-7178-0205-3, Stock No IB 0542. Reviews, clanfies, and evaluates theo- $3 $6 retical literature about the effect of so- Capital Market Imperfections Spanish Tablas de interes corpuesto y de cial security on capital accumulationio Spanish T alas de proilectos and labor supply Analyzes empincal and Economic Development descuento para ealac97n 4tde pro yect 1980 studies using U.S. data, the impact of Vinayak V. Bhatt and Alan R. Roe Itra 84n30 973, 4th Nting 1980 pay-as-you-go financed and fully Staff Working Paper No 338 1979 87 ISBN 84-309-0716-5. Stock No IB 0526. funded social secunty schemes, and ieages (including footnotes) $6. charactenstics of optimal social secu- Stock No WP 0338 $3 nty systems. This study provides a starting point for everyone interested The Changing Nature of Export A Conceptual Approach to the in the relevance of existing theones for financing social security in developing Fonance and Its Implicationisthe of Extel n al Debt of countnes for Developing Countries the Developing Countries Staff Working Paper No 625. 1983. 62 Albert C. Cizauskas Robert Z. Aliber pages Staff Working Paper No 409 1980 43 Staff Working Paper No 421 1980 25 ISBN 0-8213-0292-2 Stock No WP 0625 pages (including 3 annexes) pages (including appendix, references) $3 Stock No WP 0409 $3 Stock No WP 0421 $3 NEW jStaff Working Paper No. 632.. 1984. 144 Growth and Structural pages. Adjustment in East Asia Development Finance Stock No. WP 0632. $5. Parvez Hasan Companies, State and Privately Staff Working Paper No. 529. 1982. 42 Owned: A Review NEW pages. David L. Gordon ISBN 0-8213-0102-0. Stock No. WP 0529. An informative guide to the function Economic Liberalization and $3. and design of development finance Stabilization Policies in Interest Rate Management in companies as they are set up in devel- Argentina, Chile, and oping countries. Case histories high- Uruguay: Applications of the Developing Countres: Theory light the differences among these com- Monetary Approach to the and Simulation Results for panies-their institutional structure, South Korea management style, financial perfor- Balance of Payments Sweder van Wijnbergen mance, and other features. Looks at Edited by Nicolas Ardito Barletta, Sweder v anWnb gen the problems of resource mobilization Mario 1. Blejer, and Luis Landau deposit rates raise output and lower and strategies to overcome them. Twenty-eight leading international' inflation in the short run, and increase Staff Working Paper No. 578. 1983. 84 economists and regional specialists re- growth through their favorable impact pages. view the salient characteristics of the on savings rates. It concludes that this ISBN 0-8213-0226-4. Stock No. WP 0578. monetary approach to the balance of theory depends heavily on the as- $3. payments, examine the variations in sumption that portfolio shifts into time its application, and evaluate its suc- deposits come out of unproductive as- Development Prospects of cesses and failures. Emphasizes the sets, providing less intermediation Capital Surplus Oil-Exporting empirical evidence and dynamic as- than the banking system. Impact of Countries: Iraq, Kuwait, Libya, pects and costs. Provides an important changes in time deposit rates on infla- Qatar, Saudi Arabia, UAE examination of economic policies and tion, capital, capital accumulation and Qatar, Saudi Arabia, UAE their effects in a region that looms medium term growth are discussed, Rudolf Hablutzel large in current deliberations about in- and empirical relevance is demon- Staff Working Paper No. 483. 1981. 53 temational indebtedness and finance. strated through simulation runs with a pages (including statistical tables). June 1984. About 240 pages. macroeconomic model of South Korea. Stock No. WP 0483. $3. ISBN 0-8213-0305-8. $17.50 paperback. World Bank Staff Working Paper No. 593. 1983. 52 pages. Developments in and Prospects Energy Prices, Substitution, ISBN 0-8213-0188-8. Stock No. WP 0593. for the External Debt of the and Optimal Borrowing in the $3 Developing Countries: 1970-80 Short Run: An Analysis of and Beyond Adjustment in Oil-Importing International Adjustment in Nicholas C. Hope Developing Countries the 1980s Staff Working Paper No. 488. 1981. 70 Ricardo Martin and Marcelo Vijay Joshi pages (including 2 annexes, references). Selowsky Staff Working Paper No. 485. 1982. 57 Stock No. WP 0488. $3. Staff Working Paper No. 466. 1981. 77 pages. pages (including footnotes, references). ISBN 0-8213-0062-8. Stock No. 0485. $3. NEW Stock No. WP 0466. $3. Exchange Rate Adjustment NEW Domestic Resource under Generalized Currency Mobilization in Pakistan: Floating: Comparative Analysis' Links between Taxes and Selected Issues among Developing Countries Economic Growth: Some Nizar jetha, Shamshad Akhtar, Romeo M. Bautista Empirical Evidence and M. Govinda Rao Staff Working Paper No. 436. 1980. 99 Keith Marsden Fouses on the relationship between pages (including appendix). Reviews the experience with growth taxation and the three main compo- Stock No. WP 0436. $3. and taxation in twenty developing and nents of savings. Emphasizes tax re- developed countries, spanning a wide form with a view to raising additional A General Equilibrium spectrum of incomes. Do countries revenues and encouraging household Analysis of Foreign Exchange with lower taxes experience more and business savings. Proposals for tax Shortages in a Developing rapid expansion of investment, pro- reform take account of equity consid- Economy ductivity, employment, and govern- erations and the need to keep tax-in- Kemal Dervis, Jaime de Melo, and ment services? This provocative paper duced distortions in the allocation of Sherman Roisnsheds new light on this and other key resources to a minimum. Highlights Sherman Robison questions especially relevant to devel- appropriate policies on current ex- Staff Working Paper No. 443. 1981. 32 opment economists. It also examines penditures, subsidies, user charges, pages (including references). the mechanisms by which fiscal poli- public enterprise pricing, self-financing Stock No. WP 0443. $3. cies may affect.growth rates. of investment by public enterprises. Staff Working Paper No. 605. 1983. 48 Includes three annexes that examine pages. direct taxes, indirect taxes, and tax Prices subject to change without notice ISBN 0-8213-0215-9. Stock No. WP 0605. changes in Pakistan's 1983/84 budget. and may vary by country. $3. NEW The Policy Experience of Private Bank Lending to Twelve Less Developed Developing Countries Municipal Accounting for Countries, 1973-1978 Richard O'Bnen Developing Countries Bela Balassa Staff Working Paper No 482. 1981 60 David C. Jones Staff Working Paper No 449 1981 36 pages (including appendix, bibliography). This manual is based on Bntish prac- pages (including appendix) Stock No. WP 0482 $3. tices and terminology of municipal ac- Stock No WP 0449. S Private Capital Flows to counting, modified to suit the needs of other countnes, especially those lack- The Political Structure of the Developing Countries and ing a core of appropnately trained ac- New Protectionism Their Determinations: countants Provides the basic pnncl- Douglas R. Nelson Historical Perspective, Recent ples of municipal accounting for those with little or no bookkeeping experi- Staff Working Paper No 471 1981 57 Experence, and Future ence and proceeds through successive pages (including references) Prospects levels of difficulty to some of the most Stock No WP 0471 $3 Alex Fleming advanced concepts currentlv in use, Staff Working Paper No 484 1981 41 including the pooling of loans. An im- pages portant feature is the multitude of NEW Stock No WP 0484 $3 practical applicahons and examples of forms and records Private Direct Foreign A joint publicaton of the Chartered Price Distortions and Growth Investment in Developing Institute of Public Finance and Ac- in Developing Countries Countries countancy and the World Bank Ramgopal Agarwala K. Billerbeck and Y. Yasugi June 1984 About 900 pages Sixteen informative tables trace the Staff Working Paper No 348 1979, 101 ISBN 0-8213-0350-3 Stock No BK 0350. distortion in pnces of foreign exchange pages (including 2 annexes) $30 and other factors affecting the growth Stock No WP 0348 $5 of developing countries. Based on sta- The Nature of Credit Markets tistics from thirty-one developing in Developing Countries: A countnes NEW Framework for Policy Analysis Staff Working Paper No 575 1983 78 Arvind Virmani pages Savings Mobilization through Staff Working Paper No 524 1982 204 ISBN 0-8213-0242-6 Stock No WP 0575 Social Security: The Case of pages S3 Chile, 1916-1977 ISBN 0-8213-0019-9 Stock No WP 0524. Christine Wallich 55 Pricing Policy for Development Descnbes the savings mobilization po- The Newly Industrializing Management tential in Chile and in five Asian pro- Developing Countries after the Gerald M. Meier grams Some sort of social security Oil Crisis Presupposing no formal training in program functions in almost all devel- Oil Crisis economics, it explains the essential oping countres Programs are often Bela Balassa elements of a price system, the func- costly, whether measured in relation Staff Working Paper No 437 1980 57 tions of pnces, the various policies to GNP, government expenditure, pages (including appendix) that a government might pursue in government revenue, or the wage bill Stock No WP 0437 S3 cases of market failure, and the princi- This paper compares the successful ples of public pncing of goods and systems Notes on the Analysis of services provided by government en- Staff Working Paper No 553 1983 109 Capital Flows to Developing terpnses It also provides the would-be pages Nations and the "Recycling" practitioner with an appreciation of the ISBN 0-8213-0123-3 Stock No WP 0553. underlying logical structure of cost- $ Problem benefit project appraisal. To give sub- Ralph C. Bryant stance to the applied and policy di- Short-Run Macro-Economic Staff Working Paper No 476 1981. 67 mensions, many of the readings are Adjustment Policies in South pages drawn from the experience of develop- Ajsmn oiisi ot Stock No WP 0476 $3 ment practitioners and relate to such Korea: A Quantitative Analysis important sectors as agnculture, in- Sweder van Wijnbergen Notes on the Mechanics of dustry, power, urban services, foreign Staff Working Paper No 510 1981 182 Growth and Debt trade, and employment. The pnnciples pages (including 3 appendixes) Benjamin B. King host of development problems. ISBN 0-8213-0000-8 Stock No WP 0510 A practical model to explore the way hsofdvlpetrbem.$5 Ar which capltal tflow from abroad af- The Johns Hopkins University Press. 1983. fects economilc growth 272 pages (including bibliography and in- fects economic growth ~~dex) The Johns Hopkins University Press, 1968 LC 82-7716 ISBN 0-8018-2803-1. Stock 69 pages (including 4 annexes) No IH 2803, $35 hardcover, ISBN 0- LC 68-8701 ISBN 0-8018-0338-1, Stock 8018-2804-X, Stock No IH 2804, $12 95 Prices subject to change without notice No IH 0338 $5 paperback paperback and may vary by country. State Finances in India A three-volume set of papers that ex- plores a range of issues relating to the nature of intergovernmental fiscal rela- T p suc f e tions in India. "The primary source for ; Wrd Debt Tabbs Vol. 1: Revenue Sharing in India medium- and long-term Christine Wallich exteral debt ofI Vol. 11: India-Studies in State Fi- many nances developing countries,." Christine Wallich fort of State Governments, 1973-1976 Economist and Vice President, Raja J. Chelliah and Narain Sinha Marine Midland Bank, N.A. Staff Working Paper No. 523. 1982. vol. 1, 85 pages, vol. II, 186 pages, vol. III, 85 pages. 4sOftenttheoonlyrreliable ISBN 0-8213-0013-X. vol. 1, Stock No. WP 1523, $3, vol. II, Stock No. WP source of information for 2523, $5, vol. III, Stock no. WP 3523, $3. countries for which data is hard to come by ... Used quantitatively for macroeconomic detail as well as qualitatively in Structural Adjustment Policies reports discussing the debt picture. I find the in Developing Economies projected servicing payments a strong feature.9 Bela Balassa BelaffWorking Balassaper No.464.1981.3Jonathan Kayes, International Staff Working Paper No. 464. 1981. 36 Economist, Republic pages. National Bank of New York Stock No. WP 0464. $3. Structural Aspects of Turkish World Debt Tables, 1983-84 Edition Inflation: 1950-1979 The World Bank's invaluable reference Also available for the first time.. M. Ataman Aksov guide to the external debt of develop- Staff Working Paper No. 540. 1982. 118 ing countries. Essential planning tool Summary Report pages. - for economists, bankers, country risk Debt and the Developing ISBN 0-8213-0098-9. Stock No. WP 0540. analysts, financial consultants and all World: Current Trends $5. those interested in the global system of trade and payments. Provides data and Prospects on the extemal debt of 103 developing Includes an overview and summary ta- Thailand: An Analysis of countries augmented by information, bles from the 1983-84 edition. Structural and Non-Structural where available, on major economic' 1984. 64 pages. Adjustments aggregates plus indicators used to ana- Arne Drud, Wafik Grais, and lyze debt and creditworthiness. Shows Stock No. BK 0319, $6.50. Dusan Vujovic statistical tables by country, including Companion computerized data figures for extemal public debt out- Staff Working Paper No. 513. 1982. 93 standing, commitments, disburse- base pages (including appendix). ments, service payments, and net bor- Includes all debt information given in ISBN 0-8213-0023-7. Stock No. WP 0513. rowings. Reports on private the unabridged volume, and, where $3. nonguaranteed debt of 19 countries. available, offers continuous historical Gives aggregate position of 13 major series for 1970-82 and projected debt- borrQwers-countries with disbursed service payments for 1983-92. Write for Trends in Rural Savings and and outstanding medium- and long- sample purchase agreement. Private Capital Formation in term total debt in excess of $13.5 bil- (9-track, phase-encoded, recording India lion at the end of 1982. Includes peni- density 1600 bpi) Raj Krishna and G.S. odic supplements as fresh data are re- Stock No. IB 0500, $5,000 (service bur- Raychaudhuri ceived. eaus for reselling to their clients); Stock World Bank Staff Working Paper No. 382. 1984. 328 pages. No. IB 0667, $2,000 (banks and commer- 1980. 43 pages (including 2 tables, 3 ap- Stock No. BK 0315 $75 (annual subscrip- cial corporations); Stock No. IB 0666, $500 pendixes, references). tion) (universities and libraries). 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