MACROECONOMETRIC STUDIES ON FOREIGN TRADE AND ECONOMIC GROWTH---THE CASES OF TAIWAN AND SOUTH KOREA, WITH DISCUSSIONS ON FURTHER DEVELOPMENT IN THE HINDSIGHTS OF JAPAN'S EXPERIENCE

KAI-CHEONG LEE, University of Pennsylvania

Abstract

Taiwan and South Korea are close in geographical location, but they are even more close in development stage. They both have similar structure in production and in foreign trade, yet each one has her own characteristics in growth and stability. This study is a comparative study between Taiwan and South Korea. The focus is on comparing not only their development experiences but their responses to a variety of economic policy, such as fiscal policy, monetary policy, and the balance of payments policy. In order to do so macroeconometric models are built for each one of them under a common framework, as common as allowable after taking account of each one's own characteristic features. These model, in general, place prime emphasis on the interactions between the foreign sector and the domestic sector. After the models are constructed, estimated (with sample periods 1960-1975), and tested, policy simulations are performed, and policy responses are derived and compared. In this way, the comparisons will manage to become free from the usual pitfalls of being based on piecemeal or partial information, because now they are based on the results from the full operation of the whole macromodels instead. After the two economies are modelled and compared, a study on their prospects in the 1980's is offered. The analysis is performed within a framework using Japan as a reference economy and using the Product Cycle theory of international trade and investment as a guideline. Major findings include the following: (1) Fiscal policy in similar design has similar effects in Taiwan and in Korea. When government investment is increased persistently by 1% of GDP in each place, the impacts will be a 2% GDP increase and 1.2% prices decrease in Taiwan, and 1.6% GDP increase and 0.6% prices decrease in Korea. (2) Devaluation policy has stronger effects in Korea than in Taiwan. After a 5% devaluation, GDP in Korea increases by 1.2%, while GDP in Taiwan increases only by 0.4%. The inflationary impacts on prices, however, are similar in both places. (3) Interest rate policy is able to generate more desirable impacts in Taiwan than in Korea. For Taiwan, with an interest rate policy carefully designed in a way to induce more savings and investments, GDP can be raised and inflation can be reduced. Yet for Korea, the results will be more inflation and almost no additional growth. (4) If commercial loans alone are increased in Taiwan, the impact is mainly inflationary. The additional growth in GDP is slight, while the impact on foreign trade is unfavorable. (5) When exports loans, banking credits, and banking borrowings from the Central Bank are all increased by 10% every year, the Korean economy will respond with an increase of foreign trade by 3.8%, and of GDP by 1.8% on the average. With respect to the prospects for further development, both Taiwan and Korea have much to learn from Japan. From the Japanese experience, they should be able to learn, first of all, how to develop one's own capacity to engender new industrial techniques while one is assimilating the Western technologies. They should also be able to learn how to organize and penetrate a foreign market through the efforts of research and direct contact. And finally they should be able to learn how to combine the internal and external efforts to generate a still better future.

Subject Area

Economics

Recommended Citation

LEE, KAI-CHEONG, "MACROECONOMETRIC STUDIES ON FOREIGN TRADE AND ECONOMIC GROWTH---THE CASES OF TAIWAN AND SOUTH KOREA, WITH DISCUSSIONS ON FURTHER DEVELOPMENT IN THE HINDSIGHTS OF JAPAN'S EXPERIENCE" (1980). Dissertations available from ProQuest. AAI8018570.
https://repository.upenn.edu/dissertations/AAI8018570

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