The Evolution of Financial Systems: Lessons from Advanced Industrialized Economies for Developing Economies

Tae Jeong Lee’s research examines the remarkable economic growth of South Korea and Taiwan from 1951 through 2007. During this period, the average annual growth rate of real GDP of Taiwan was 7.5%, and that of Korea was 6.8%. In addition, Korea and Taiwan were able to reduce overall poverty and maintain a highly equitable distribution of income along with such an unusually rapid growth.

Lee’s research project studies how the two economies adapted their development strategies to the changing economic, political and administrative environments paying special attention to their financial policies. The ultimate goal of his research is to draw lessons from their success. This insight will help in designing and implementing poverty alleviation strategies that could be applicable to other low income, developing countries. It will also suggest the direction of theoretical development to understand better the development processes.

Lee notes that Korea and Taiwan’s growth and success may look similar on the surface, but the two have followed distinctly different paths. For instance, Korea adopted an export strategy that was supported mainly by large conglomerates and fueled, at first, primarily through external debt. Taiwan, on the other hand, relied more on an export strategy served by small and medium enterprises and fueled by a notable domestic savings rate of up to 40%, while the relatively large businesses concentrate on the domestic market. He argues that these differences are results of interactions of the initial resource endowments, the initial industrial structure, the political interest of the leader and the ruling party, and the self-interest of the bureaucrats and the technocrats, the challenges to national security, and the relation with the foreign countries.

Research Questions: 

How the initial conditions of the two economies inherited from the Japanese colonial rule differ?  What was the nature of the state built right after the liberation in South Korea and Taiwan?

  • How did the governments of the two countries adapt their general strategies for economic development and financial systems, in reaction to the changing economic and political environments? 

  • How similar or different are the structural changes along the growth path of the two economies from 1951 through 2007, based on the macro indexes and some micro evidences?
  • How did the resource constraints of each country affect their choice and implementation of the development strategies?

  • How did the regulated and unregulated financial systems in each country contribute to the mobilizing and allocating of domestic resources, ultimately, to economic development, and to the equitable distribution of income?
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