Term Paper on "Economic Issue and Model"

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Big Push in South Korea

South Korea is currently one of the fastest growing economies of the globe, and this is due to four decades of sustained growth. The government of the country has developed and implemented an economic growth model based on massive exports, and a restriction of the imports. Additionally, when imports were engaged in, they mostly included raw materials and technologies, as opposed to commodities. In other words, emphasis was placed on production and exports, rather than on consumption, which constituted the backbone of economic growth in several Western economies.

While the policy of growth through exports generated economic stability and development, it also translated into a series of disadvantages. For instance, the country is highly dependent on exports, meaning as such that its financial stability is directly pegged to that of the countries where South Korea exports its items; in other words, economic problems in the destination countries materialize in decreased demand for the South Korean items, and decreased revenues and GDP in South Korea.

With lessons learnt from the Asian economic crisis of 1997-1998, as well as the current internationalized economic crisis, South Korea has begun to address its limitations and is also basing its economic growth on the consumption of the domestic population. Still, challenges remain to be overcome and the most relevant examples in this sense include the aging of the population, the lack of flexibility in the labor market as well as the still increased dependency on exports (Central Intelligence Agency, 2012).

The challenges encountered by South Korea are multiple an

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d complex and they need to be addressed through a multifaceted economic model. A component of this approach is represented by the Big Push model, at the level of worker education and company investments in research and development. In other words, it is argued that the rule of president Park Chung Hee (between 1962 and 1979) has supported the alignment and coordination of worker education efforts and the R&D efforts, which has consequently led to a big push in the overall economy of South Korea, by supporting its transition to a knowledge-based economy.

2. The big push model in South Korea

In a most generic formulation, the big push model represents a theory of economic growth based on coordination that would lead to industrialization. Generally speaking, several forces would be expected to interact and stimulate a big push, namely a sustainable economic growth. In the case of South Korea, the two forces interacting to generate a big push are represented by the increased emphasis on the training and education of the workers, as well as the attention of economic agents in research and development.

Then, another important trait of the big fish economic model is that the combination of the two forces is expected to be integrant and aligned, and to materialize in economic growth.

The big fish model is also characterized by the fact that it stimulates an open and free economy, as opposed to a rigid and highly controlled economy (Groning, 2010). The South Korean economy was historically rather enclosed, but has recently opened up to more international trade, namely more imports.

During the rule of President Park Chung Hee, South Korea generated high levels of industrialization and economic growth and development. This development was nevertheless based on exports and free trade was not encouraged. Today however, more emphasis is being placed on free trade and the liberalization of commerce, but the reign of Park Chung Hee represents the background to the current economic evolution of the country.

Park Chung Hee was a military man, who seized power and became the ruler of South Korea in 1962. The leader is often criticized for the authority and even dictatorship he used in ruling the country, but he is also praised for the economic growth he helped create in South Korea. At a more detailed level, the ruling of President Park Chung Hee is characterized by the following:

Support of the military throughout the entire presidency period; this support took the form of an administrative democracy, which set out to "weed out corruption, strengthen the autonomous ability of people and establish social justice" (Khaled, 2007).

Decreased emphasis on the unification of Korea

Intense intervention of the state in the industrial enterprises, with the role of creating equality. According to Park, "guided capitalism was [a] system of economic management designed to create an economic order that would guarantee the equalization of income and public benefits from the economy" (Khaled, 2007).

Emphasis on the securing the energy resources, expanding social infrastructures (such as railroads and ports), constructing basic industries (such as fertilizers, steel, cement and so on), increasing the production of farms, balancing the foreign payments and promoting technology

The strengthening of the family-controlled corporate groups, the chaebols, coupled with an intense collaboration between the chaebols and the government, which supported industrialization

The regulation of the capitals, stimulating foreign investments in the country, to ensure the development of the national industries

The strict control of the labor force through the prohibition of unions and strikes (Khaled, 2007).

At the beginning of Park's rule, South Korea was one of the poorest economies of the globe, with limited industry and relying primarily on agricultural operations. Inflation was soaring; prices gradually increased; unemployment reached peak levels and production of national commodities had decreased dramatically. "A vicious circle of poverty had set in Korea" (Khaled, 2007).

In such a setting, Park's focus was that of ensuring the rapid industrialization of the country, and his emphasis fell on short-term gains and objectives. He granted little attention to long-term issues, such as free trade or human rights (Gregg, 1999). Given his approach, the former president is often criticized for his autocratic leadership, but is also praised for the industrialization of South Korea.

Returning to the big push model, another feature worthwhile mentioning in the context of Park's presidency is represented by the need for state intervention. In the context of the previous model feature -- that of a need for a free market -- this particular trait would result in the creation of a paradox. Nevertheless, the argument is that the state recognizes the need for a big push and supports its creation through adequate intervention. In other words, by maintaining equilibrium in the economy, the state intervenes to support the coordination of the investments in the attainment of the big push (Arrow, Ig and Yang, 1998). The former South Korean president fully played this role in generating a big push in the domestic industry.

In the specific case of modern day South Korea, the two interdependent elements in the big push model are represented by an increase in worker education and by an increase in the investments made by firms in the direction of research and development. The occurrence of the two features, as well as the relationship between the two in the creation of economic development is pegged to a series of features, including the rule of Park Chung Hee. Some of the Park policies which support worker education and R&D include the promotion of technology, the improvement of the infrastructure or the stimulation of foreign policies.

At the level of worker education, this feature has generally been overlooked in South Korea, especially when former president Park Chung Hee had denied numerous rights to the workers. In the past recent years however, the South Korean employees are beginning to enjoy more rights, such as better paid wages or more financial and non-financial benefits.

The education of the workers is generally ensured with a twofold benefit. On the one hand, it provides the employer with staffs which are better skilled, better qualified, more efficient and as such more productive. On the other hand, employee education also enhances the satisfaction and motivation of the worker, once again leading to increased worker performance (Armstrong and Baron, 2002).

The education of the workforce in South Korea is however not only supported by the business sector, but by the very state. In this order of ideas, in 1998, the government opened the Credit Bank System (CBS), which allows adults in the country to accumulate credits with which to support their educational efforts in institutions such as colleges, universities, non-formal educational institutions, as well as online universities.

The institution has the benefit of centralizing the needs of adults as well as the offer of various educational institutions. It also strives to ensure educational equity, especially for the undereducated South Koreans. The primary feature of the Credit Bank System is that it operates based on a market system, in which educational programs are offered in a balance between the needs of learners, as well as the needs of the market (Rubenson, 2011).

Throughout the recent years, the South Korean government has recognized the role of a skilled labor force in the attainment of the economic goals of the nation. The state as such introduced the vocational training system, through which emphasis was placed on the creation of skilled technicians to support the development of the… READ MORE

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Quoted Instructions for "Economic Issue and Model" Assignment:

“

*The term paper asks us to delineate economic issues underlying a particular topic related to the area of growth and development.

- I listed possible topics you could write about for each model. You could pick one of the models you are most familiar with and write about the example and relate it to the model.

Possible topics could be about economic issues and relate that economic issue with one of below model (I personally think number 1 could be more interesting if there are resources for the example)

1) Big Push (ex. South Korea*****s president Jung Hee Park*****s new policies and their impact on economy and creation of chaebols ï¿½*****" for example, you could talk about how his policies led to coordination in worker*****s education effort and entrepreneur*****s R&D effort, leading to a big push.)

2) Activation of modern industry (which basically talks about needing enough funding or skilled labor to activate an industry- and perfect adoption of advanced technology, weak preference bias or small modern capital investment barriers) ï¿½*****" for example, you could talk about how South Korea*****s IT industry could take off (what policies/factors led to enough funding in Korea*****s IT industry*****¦current situation of Korean IT industry and it*****s economic problems)

*For help, I listed some of the characteristics of the above 2 models

1) Big Push:

*****coordinated investment***** is the basis of the concept of the big push.

-When many sectors have simultaneously adopted increasing returns technologies, they would all create income as well as demand for goods in other forward and backward linked sectors

-such income creation and demand enhancement would then enlarge the market, leading to industrialization.

The arguments are therefore rooted in:

-scale economies

-interactions between firms and across industries

-interactions between demands and supplies

Thus, there is a scale barrier to overcome, which requires *****big push***** ï¿½*****" the force of big push could be:

-history-dependant

-expectations-driven (self-fulfilling prophecies)

Optimization/Equilibrium outcome

-entrepreneur*****s R&D is increasing in worker*****s education

-strategic complementarity: worker*****s education effort, v, and entrepreneur*****s R&D effort reinforce each other

-Equilibrium: high, low or multiple equilibria

-coordinated worker investment in education and entrepreneur investment in R&D can generate a big push over the required threshold Vc, giving a high-human capital and high-output equilibrium

-lacking such coordination, the equilibrium features low-human capital and low-output

-expectations are crucial:

-if workers expect entrepreneurs to invest in R&D, they exert V(high)>V(critical)

-if entrepreneurs expect workers to exert V(high)>V(critical), they invest.

2) Activation of a Modern Industry: Wang and Xie (2004)

The key issue to be addressed is to explore the important channels through which a modern industry is activated. They key features considered are:

-production in the modern industry requires high-skilled labor in addition to new technologies

-the modern sector needs industrial coordination to overcome the scale barrier concerned by big push

-the modern goods are not necessary for survival

Production technologies:

-traditional industry: Y1 = (A1)(K1^a1)(L1^1-a1)

-modern industry: Y2 = (A2)(K2^a2)(L2^1-a2)(K-bar^1-a2)

-key features:

-L1 can be either unskilled or skilled, whereas L2 must be skilled

-A2>A1: modern sector is more technologically advanced

-a2>a1: modern sector is more capital intensive (manufacturing vs. agriculture)

-there is an uncompensated positive knowledge spillovers in the production of the modern goods represented by K-bar as in Romer (1986)

-as a result of the presence of uncompensated positive knowledge spillovers, there is a scale barrier in the sense that the modern sector*****s production is not as effective when its size is too small ï¿½*****" that is, the coordination issues in big push theory can be captured

-The modern sector is not operative if either K2 = 0 (insufficient funding to be allocated to modern production) or L2 = 0 (unattractive wage for skilled labor to work in modern sector)

-Industry 2 can become operative only if it is sufficiently productive to attract funding

-the modern sector remains inactive with:

-insufficient funding or skilled labor

-imperfect adoption of advanced technology

-strong preference bias

-large modern capital investment barriers

-this above condition is necessary but not sufficient, because it considers only capital but not labor allocation, which is driven by the relative wage of modern to traditional industry

-in order for the modern sector to attract skilled labor, W2/W1 must exceed 1, that is the skilled can earn higher wages in the modern sector than working as unskilled in the traditional sector

-this condition is more likely to hold true with

-better modern technology (A2)

-weaker preference bias (theta)

-when this condition is met, the labor markets are segmented

-all the unskilled work in the traditional sector (L1=N1)

-all the skilled work in the modern sector (L2=N2), earning W2>W1

-In summary, we have

-stage 1: W2/W1 is smaller than 0: funding is insufficient and industry 2 is unprofitable

-stage 2: W2/W1 is bigger than 0 but smaller than 1: the relative wage is too low for skilled workers to participate in industry 2

-stage 3: W2/W1 is bigger than 1: the modern industry is activated

*****

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“Economic Issue and Model.” A1-TermPaper.com, 2012, https://www.a1-termpaper.com/topics/essay/big-push-south-korea/1917. Accessed 4 Oct 2024.

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1. Economic Issue and Model. A1-TermPaper.com. https://www.a1-termpaper.com/topics/essay/big-push-south-korea/1917. Published 2012. Accessed October 4, 2024.

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