Extending the East Asian Miracle: Microeconomic Evidence from Korea

Do THE ECONOMIES OF East Asia need to undertake fundamental economic reform to resume a path of strong economic growth? This vital question, posed in the wake of the economic crisis of 1997, has divided both economists and policymakers. The case against major structural reform begins with the dramatic growth of these economies over the past twenty years. For example, Korea, the focus of this paper, has transformed itself into a major economic power, exporting cars and semiconductors to the world and quintupling its GDP per capita between 1970 and 1995. East Asia's achievement is all the more remarkable given that most developing countries have achieved very little development and have fallen further behind the advanced economies. Indeed, East Asia has been used as an example to understand how other countries could achieve more rapid economic development and convergence. I According to those who contend that major reform is unnecessary, the crisis of 1997 was the result of macroeconomic (notably currency) mismanagement and the effects of economic crises in Thailand that created a temporary liquidity shortage. For example, Steven Radelet and Jeffrey Sachs characterize the crisis as a financial panic that shifted the countries involved from a high-investment to a low-investment equilibrium. They argue that "much of the economic activity supported by