Comparative Analysis of Economic Development in South Korea and Taiwan: Lessons for Other Developing Countries

By Kim, Hayam; Heo, Uk | Asian Perspective, January-March 2017 | Go to article overview

Comparative Analysis of Economic Development in South Korea and Taiwan: Lessons for Other Developing Countries


Kim, Hayam, Heo, Uk, Asian Perspective


Economic development in South Korea and Taiwan has received considerable scholarly attention, as they are two of the most successful cases since the 1960s. South Korea, once one of the poorest economies in the world and devastated by the Korean War, is now the world's twelfth largest economy (Heo and Roehrig 2014). Taiwan has turned itself from a small island with a history of colonization into the twenty-first largest economy in the world (CIA 2016).

South Korea and Taiwan have many similarities. Both experienced colonization but developed their economies very rapidly under a government-led development paradigm. Due to limited natural resources, both governments employed an export-oriented industrialization policy. Both economies also were favored by high rates of domestic savings and human capital characterized by high levels of education and a good work ethic (Hahm and Heo 2008). Domestic and foreign direct investment, particularly from the United States and Japan, also benefited their economic development, although Taiwan enjoyed the benefit more than South Korea (Heo and Hahm 2007). With economic development, both governments also went through the transition to democracy, which ended authoritarian rule.

However, economic development models employed in South Korea and Taiwan were somewhat different. The South Korean government monopolized credit allocation, providing preferential credit to big export-oriented corporations to promote economic development. By contrast, small and medium-size enterprises that were mostly family owned led economic development in Taiwan. South Korea's democratization led to declining international competitiveness due to increased labor costs and labor strikes that caused lost workdays. But in Taiwan, the transition to democracy hardly had any impact on the economy. The small, family-owned businesses did not experience labor-management conflict (Heo and Tan 2003).

In this article we revisit economic development in South Korea and Taiwan to draw lessons for other developing countries by comparing the similarities and differences of each economy's miraculous success.

Similarities in Economic Development

Rapid and Consistent Development with Relatively Low Income Inequality

South Korea and Taiwan have enjoyed rapid economic development since the early 1960s. As Table 1 shows, gross domestic product (GDP) per capita in South Korea and Taiwan has continuously increased over the past decades. For example, South Korea's GDP per capita in purchasing power parity (PPP) value was a mere $290 in 1960, but it went up to $28,384 in 2010. Taiwan's per capita income grew from $350 to $32,529 in the same period. The average growth rate of GDP per capita from 1960 to 2010 was 9.52 percent for Korea and 9.53 percent for Taiwan, in PPP units. Such consistently high economic growth is not common, as growth rates tend to fluctuate over time (Page 1994).

What makes these economic successes even more impressive is that economic development was achieved while maintaining relatively high levels of equity. This feature of economic growth in South Korea and Taiwan contradicts the conventional wisdom that rapid growth tends to be accompanied by increasing income inequality because some sectors with low productivity do not enjoy the benefits of growth (Birdsall, Ross, and Sabot 1995; Kuznets 1988). For example, South Korea's Gini index-a commonly used indicator to measure income inequality-was 0.344 and 0.336 in 1965 and 1989, respectively (Yonhap 1991). Taiwan's Gini index in the same years was also low at 0.322 and 0.292 (National Development Council 2002). To put the numbers in perspective, Brazil had a Gini index of 0.520 and 0.633 for the same years (World Bank n.d.). In other words, both South Korea and Taiwan achieved rapid economic growth with relatively equal income distribution. Scitovsky (1985, 216) states, "By the double criterion of growth and equity, they have been the most successful of all the developing countries. …

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