Dragons In Distress

At a time when Economists have been busily enshrining the NICs' (newly industrializing countries) model as the new orthodoxy in development economics, the formula has stopped working in Taiwan and South Korea, two of the four Asian tigers. (Singapore and Hong Kong being the other two.)

Export-oriented industrialization, an undervalued currency and dirt-cheap labor are the central elements of the NICs formula. All these advantages have been severely eroded by fast moving developments in both the world economy and the NICs themselves.

While other Third World countries in the 1960s were opting for economic strategies stressing the development of domestic markets, Korea and Taiwan chose a different path. Guided by authoritarian governments that protected their own entrepreneurs from international competition while urging them to export manufactured goods, Korea and Taiwan hitched their wagons to the expansion of the world economy and the U.S. economy in particular.

The strategy worked. In 1987, Korea's current account surplus stood at almost $10 billion while Taiwan's came close to $18 billion. The United States was the prime destination of the two countries' exports, accounting for 45 percent of Taiwan's exports and 39 percent of Korea's. The NICs were so successful at penetrating the U.S. market that their exports actually pushed U.S. manufacturers from the lower end of the market in textiles, garments, footwear and electronic goods. Indeed, by the mid-1980s the NICs were in the process of replacing even the Japanese at the lower end of the U.S. market in such products as microwave ovens, video cassette recorders (VCR) and personal computers.

Targets of the trade war

By the late eighties, Korea and Taiwan had become two of the prime targets of the aggressive protectionist offensive launched by the Reagan administration. With the dramatic decline of the Soviet threat and the deepening technological crisis facing U.S. industry, the NICs, together with Japan, have become leading candidates to replace the Soviet Union as America's new "Enemy." Economic hostilities against two of the United States' staunchest Cold War allies were formalized in a much-publicized statement by senior Treasury official David Mulford in October 1987: "Although the NICs may be regarded as tigers because they are strong, ferocious traders, the analogy has a darker side. Tigers live in the jungle, and by the law of the jungle. They are a shrinking population."

The U.S. trade offensive has several prongs. Washington has revoked the tariff-free entry of many of the NICs goods into the United States under the General System of Preferences (GSP); and, to make NICs' imports even more expensive and less appealing to consumers, it has forced the appreciation of the New Taiwan Dollar and the Korean Won by 40 percent and 30 percent, respectively, in the last three years.

Protectionist measures were coupled with an aggressive drive to abolish import restrictions and lower tariff barriers for U.S. goods in the NIC markets. Korea and Taiwan have been forced to liberalize their trade restrictions considerably on a wide range of products, from computer software to cigarettes. The two governments have, however, been reluctant to lift agricultural tariff barriers, for fear of losing the political support of farmers, who believe they would go bankrupt under a free trade policy.

While Washington has used trade policy to wage war on the NlCs, U.S. corporations have initiated technological warfare on Korea and Taiwan's cloners, companies which produce products that directly imitate well-established brand name models. The cloners have gained the reputation of turning out products that are even better and considerably cheaper than the originals. IBM is demanding that Taiwanese and Korean clonemakers pay 25 percent royalties on new clones of IBM computer models, plus 1 percent in "retroactive" royalties on past earnings. Since the United States is the main export market for their products, the cloners have no choice but to pay up. Even these small royalties are likely to have negative consequences for the Taiwanese and Korean computer industries since the cloners work on very narrow profit margins and can be devastated by small cuts in profits.

Following IBM's example, Intel and Texas Instruments have successfully sued Korean chipmakers Hyundai and Samsung, respectively. In the case of Samsung, Korea's ambitious semiconductor firm, the settlement costs have been high; royalty payments to Texas Instruments may be as much as $95 million.

The U.S. techno-trade offensive has drastically curbed further expansion of NIC exports to the U.S. market, which is the NlCs' primary outlet and the source of the region's impressive growth. Both Taiwanese and Korean exports to the United States grew by only 1 percent from 1987 to 1988, while imports from the United States to the NICs rose sharply, climbing by more than 100 percent in the case of Taiwan. The U.S. share of NlCs' exports fell from 39 percent in 1987 to 32 percent in 1988 in the case of Korea, and from 45 percent to 39 percent in the case of Taiwan.

The challenge from labor

Assaulted from the outside by U.S. protectionism, the government-business elites who supported and encouraged export- oriented growth have also had to contend with a formidable challenge from another front: labor. In the 1960s and 1970s, low-cost labor was the key element in the NIC development formula. Labor had no power in either country. In Taiwan, the grassroots units of the ruling Kuomintang Party (KMT) kept the working class in line, while in Korea, the notorious Korean Central Intelligence Agency (KCIA) of strongman Park Chung-Hee crushed even the slightest attempt at labor organizing. As late as 1987, Korean working conditions included: a 58-hour work week, the longest of any country surveyed by the International Labor Organization; an industrial accident rate which tripled from 1960 to 1988 and is now the highest of any country in the world; and wages in manufacturing that were 11 percent of U.S. wages and 14 percent of Japanese wages.

By the late seventies and early eighties, however, high speed growth had tightened the labor market, pushing wages inexorably upwards. Moreover, labor organizers were registering successes despite severe repression. The working class insurgency really escalated, however, after the "democratization" decree of Korean President Roh Tae Woo in June 1987 and the lifting of the 38- year-old martial law in Taiwan in July of that same year.

In Korea, 3,500 strikes broke out in 1987 alone, and in the last three years real wages have gone up 60 percent. Labor unrest in Taiwan too has become alarmingly "epidemic," according to the Economist Intelligence Unit. By 1988, South Korea and Taiwan were clearly no longer cheap-labor havens; blue-collar wages in other parts of Southeast Asia stood at a third to a half of wages in Korea and Taiwan, while wages in China were one-tenth the wages in Taiwan.

But it is unlikely that labor will be pacified by higher wages alone. According to Seong Ok Choi of the Korea Information and Resource Center, Korean workers are beginning to make political demands, including calls for labor law reform. Workers in both countries have proved highly resistant to calls for "responsible unionism" coming from government and business. As Lee So Sun, one of Korea's most admired labor leaders told Multinational Monitor: "The government says the economy is successful. But only a few benefit from this economy.... There is nothing in it for us." In both Taiwan and Korea, workers are seeking significant influence in determining the direction of the economy. One young Korean metalworker in Inchon asserted, "We, the workers, will set our own agenda."

Labor's resentment is reinforced by the increasingly unequal distribution of income in both countries. In Korea, the lower 40 percent of the population's share of the national income was 19.3 percent in 1965; by 1985, it was down to 17.7 percent. During the same period, the share of income going to the top 20 percent rose from 41.8 percent to 43.7 percent. The pattern was similar in Taiwan: in 1978, the lower 40 percent received 22.6 percent of the national income; by 1986, this had decreased to 21.8 percent. The top 20 percent, on the other hand, increased their share from 37.1 percent of income to 38.2 percent.

The sensational exposes of corrupt dealings between the leading monopolies, or chaebol, and the discredited regime of former strongman Chun Doo-Hwan further stoked working class indignation in Korea. The legitimacy of the chaebol, whose concentration of wealth used to be justified as "capital accumulation," has also been eroded in the eyes of workers by the diversion of enormous sums from productive investment to real estate speculation, pushing housing costs in many areas of Seoul beyond the reach of even the middle class. With the rich flaunting their wealth, labor is in no mood to heed the government's call for "discipline." The explosion of conspicuous consumption among the "haves," who drive imported BMWs and Mercedes-Benzes, has jarred the sensibility of a people socialized to the myth of a relatively egalitarian Korea.

The environmental nightmare

The third major challenge posed to high-speed, export-oriented growth is the growing realization of the terrible toll it has taken on the environment. Both Korea and Taiwan have developed economically but have also paid a price environmentally. Most of Taiwan's rivers and streams, for example, are seriously polluted with untreated sewage, pesticide and fertilizer runoffs, heavy metals and toxic waste. Dr. Edgar Lin, the island's leading environmentalist, estimates that at least 30 percent of the annual rice crop is dangerously contaminated by heavy metals like mercury and cadmium. Taiwan's air is so polluted that it is officially considered harmful to residents' health for 17 percent of the year. Taiwan also has the world's highest incidence of hepatitis B, a phenomenon that undoubtedly stems from the fact that only 1 percent of human waste receives primary sewage treatment.

The dimensions of the environmental disaster in Korea are only now coming to light, but what is known indicates that the situation is very bad. Seoul's air exhibits one of the highest concentrations of sulphur dioxide among the world's cities; and 67 percent of the rain falling on this city is reported to contain enough acid to pose a hazard to its 10 million people. The latest revelation is that most of Korea's tap water is unsuitable for drinking; at several of the country's purification plants, water has been found to contain heavy metals like iron, manganese and cadmium at nearly twice the official tolerance level, and ammoniacal nitrogen (generated by human and animal waste) at nearly 10 times the tolerance level.

The environmental disasters are not just long-term health threats in Taiwan. While the chaebol-government alliance in Korea faces its main opposition in the rebellious working class, in Taiwan the KMT-business elite's greatest challenger is a multiclass, grassroots environmental movement. This decentralized but increasingly powerful movement has already forced the suspension of construction on the country's fourth nuclear reactor and halted the construction of Dupont's $160- million titanium dioxide plant. Most recently, the environmentalists brought about the closing of a major petrochemical plant which fishermen had accused of dumping acid waste. Even more threatening to the KMT-business power structure than these specific examples of popular activism is the environmental movement's philosophy which de-emphasizes growth rates and favors channelling investment away from the high-tech industries and toward cleaning up the environment.

Groping for a way out

Facing formidable external and internal challenges, the business-government elites have come up with a new technocratic blueprint to replace the current strategy of emphasizing labor- intensive manufactures for export to the United States. The key elements of the new approach are developing the domestic market, diversifying export markets away from the United States and moving up to higher value-added capital- and skill-intensive industries. Though it is attractive on paper, this new strategy faces significant obstacles in the highly competitive international marketplace.

"Developing the domestic market" is less an enthusiastic proposal than the technocrats' grudging concession to the reality that, as a result of the workers' push for higher wages, the internal market has already begun to develop. The boom in domestic demand that the higher wages created compensated for the severe slowdown in Korea's export growth in 1989. For instance, while Korea's car exports dropped almost 30 percent in the first half of 1989 compared to the first half of 1988, domestic sales jumped by 58 percent. Had they not been saved by higher incomes brought about by worker militancy, Hyundai Motors and Daewoo Motors, two of Korea's most aggressively anti-union firms, would have had a severe over-production crisis.

Korea's technocrats, however, are very uncomfortable with a strategy that relies principally on domestic demand; like International Monetary Fund bureaucrats, they uniformly label it "inflationary." They still look to export markets as the engines of economic growth, though higher wages and salaries make Korea less and less competitive as an export platform. Moreover, the pro big business economic managers fear that a domestic demand- oriented strategy will provide organized labor with tremendous clout and will institutionalize regular wage increases at the expense of profits.

The second element of the new blueprint, the hunt for untapped and prosperous export markets to significantly reduce the NlCs' overwhelming dependence on the United States is not likely to yield more than marginal dividends. Exports to Europe have risen, but so have antidumping moves against Korean producers by the European Economic Community (EC). In fact, many Taiwanese and Korean manufacturers assume that when the EC becomes a unified market in 1992, their access to the continent will be severely limited.

NIC exports to Japan are currently up, but NIC entrepreneurs know that Japan's watchful, protectionist bureaucrats will eventually limit their market share. Already, Japanese knitwear producers have successfully persuaded Korean manufacturers to limit their exports to Japan. The prospect of markets in China, the Soviet Union and Eastern Europe has been hyped in the press, but recent developments reinforce the fact that these fragile socialist economies will generate no more than a small fraction of the massive U.S. demand.

Taiwan: sticking to cheap labor

In Korea, the trend away from production which relies so heavily on cheap labor is being taken more seriously than in Taiwan. In Taiwan, says sociologist Michael Hsiao, "moving up to more value-added, capital-intensive production is the stated policy, but reliance on labor-intensive production remains the operative policy."

Taiwan's entrepreneurs have countered the upward pressure on wages in two ways. First, they have transferred their capital out of Taiwan to China and other lower-wage countries in Southeast Asia and the Caribbean. In 1988 and the first eight months of 1989 alone, Taiwanese businesspeople invested an estimated $3.3 billion abroad. An estimated $1.5 billion of Taiwanese investment is now in China.

Their other response is to bring low-wage, foreign labor into Taiwan. By mid-1988, an estimated 10,000 foreign workers were working legally, with another 50,000 to 100,000 laboring illegally at less than half the average monthly wage of Taiwanese workers. There are now factories around Taipei that run almost entirely with illegal, foreign labor from the Philippines, Indonesia and Thailand, while the government looks the other way. Indeed, illegal Southeast Asian labor is the KMT government's not-so-secret weapon against Taiwan's increasingly militant unions.

The low-wage foreign workers offer a competitive alternative to the better-paid indigenous workers and, therefore, dampen the wage demands of the local labor force. A system similar to that which developed in Europe in the 1960s and 1970s is gradually emerging; it is a two-tier labor force composed of poorly paid, unorganized "guest workers" and better-paid, organized indigenous workers. Taiwan may well be able to slow its loss of competitiveness in wage costs, but only at the price of destabilizing social conflicts in the medium term.

Korea: the high-tech escape route

Relatively few foreign laborers are going to Korea, and while Korean overseas investments are rising, the chaebol-government coalition is committed to upgrading technology or moving to high-tech industries in response to the loss of the cheap labor advantage. This means taking on the high-tech leaders themselves: the United States and, especially, Japan.

This is no easy task, in part because Korea has been heavily dependent on Japanese parts and technology for its much publicized advances in consumer electronics, computers and automobiles. Japanese components account for 85 percent of the value of a Korean-made color television set. Core parts of strategic consumer-electronics exports, such as microwave oven doors and VCR decks are not available locally, and production of the VCR, claims one trade journal, "depends on the whim of Japanese headrum makers." Kim Woo-Chong, the founder of the Daewoo conglomerate admits, "Korean development is largely... promoted by foreign supplies of parts and equipment, and sustained by the technical know-how of foreign partners."

In 1988, Korea had an $8.7 billion trade surplus with the United States but suffered a $3.9 billion trade deficit with Japan, mainly due to the importation of sophisticated electronic components, automobile parts and machinery.

Korea is also heavily dependent on Japan for technology. Despite their reputation for being VCR producers, the top three Korean manufacturers (Samsung, Goldstar and Daewoo) all acquired their technology from one source, the Japanese corporation JVC, which is a Matsushita subsidiary. In 1987, 6 percent of the Korean companies' export earnings was turned over to JVC.

The experience of Hyundai's popular subcompact car, the Excel, demonstrates some of the problems with Korea's continuing inability to develop core automobile technologies. The Excel's transmission is designed and produced in Japan by Mitsubishi, and the car engine is also designed in Japan. Its body style is drawn from an Italian design. Mitsubishi personnel claim that Hyundai's sole role is to integrate parts and components from various foreign sources. Hyundai has, in fact, unwittingly served as a stalking horse for Mitsubishi: when the Japanese corporation witnessed the Excel's tremendous success in the U.S. market, it proceeded to market the very same model with a slightly altered body design as the Mitsubishi Precis.

Indeed, in automobiles, consumer and industrial electronics and semiconductors, a pattern is emerging; the Japanese sell less sophisticated technology to the Koreans for the low-profit, low end of the U.S. market and they keep for themselves the sophisticated, top-of-the-line technology for the more profitable, high end of the market. Being stuck at the low end of the market, where prices are inelastic at a time of currency appreciation, has forced the Koreans, in many instances, to sell products at a loss. In 1988, for example, Samsung lost money on every VCR unit it exported to the United States.

The alternative to the increasingly costly strategy of acquiring less than cutting-edge technologies from the tight-fisted Japanese is autonomous development of these technologies. But the obstacles are formidable. Sheridan Tatsuno, an East Asia analyst, points out that Korea has produced only 4,500 electrical engineers or 110 per million citizens. This contrasts sharply with Japan, which was turning out 15,000 engineers, or 140 per million, annually in the 1970s, when it was undergoing the sort of structural transformation that Korea is now experiencing.

According to the Korea Institute of Economics and Technology (KIET), Korea is more than 10 years behind the advanced countries in research and development; this is not surprising since there are only 52,000 qualified scientists and engineers engaged in research and development in the country. KIET claims, in fact, that without "urgent attention," Korea's high-tech industries will have a very hard time surviving beyond the nineties when, under U.S. pressure, they will be fully opened up to foreign investors. A Daewoo senior executive, commenting on Korea's effort to develop and mass produce the 1-megabit memory chip indigenously offered a harsher judgment when he told a U.S. reporter, "You just don't have the foundation in South Korea. The people aren't skilled. You're just renting space in Korea. China could do the same thing."

Nevertheless, the government-chaebol alliance is intent on moving into high-tech in a massive way. A recent government report called for the investment of $33 billion in microelectronics, mechatronics, aeronautics, new materials, fine chemistry and biochemistry in the period 1990-94. But in a period of slower economic growth, such a massive allocation is likely to clash with the worker and middle class demands for more investment in social welfare, improving the quality of life and cleaning up the environment. Just cleaning up the country's contaminated water supply will cost $5.3 billion between 1990-96, according to the Construction Ministry. The government budget is likely to become the object of a bitter struggle among social groups with different priorities. Having clean water to drink and clean air to breathe may well translate into scrapping plans for more nuclear reactors and shelving ambitions to mass produce the 1-megabit memory chip.

Even if Korea succeeds in the herculean effort to compete successfully with Japan, Western Europe and the United States in the frontiers of high-tech, it is likely to be at great social cost, which will surely result in even greater social and political instability.

Focusing on high-tech industries will lead to a declining capacity to absorb unskilled and semi-skilled labor, that is, a rise in structural unemployment. Already, there are disturbing signs of this trend. According to one source, if one were to add the underemployed, the "precariously employed" and the seasonally unemployed to the figure for the formally unemployed, the current real unemployment rate would reach 20-25 percent of the work force. A survey of recent graduates of Korean universities showed that 40 percent were unemployed in 1989, compared to 18 percent in 1985.

Trapped in the paradigm of export-oriented growth, the government-chaebol coalition is likely to discover that high-tech will prove less an escape route than a losing battle. One former senior official of the Korea Development Institute recently admitted: "Old formulas for keeping the economy on track, usually technocratic solutions developed in a political vacuum-- are no longer appropriate given the new socio-political environment."

Both Taiwan and Korea have been hailed as the economic successes of, and role models for, the modern, global economy, but their experiences have been examined only selectively. A single criterion has been used to evaluate their success: the unprecedented rise in GNP. While the NlCs have achieved high- speed growth, however, they have also created social and political divisions and environmental problems which the international economic community has tried to ignore. This uncritical examination created a distorted vision of the process of industrial development in these countries. As the circumstances which allowed for their growth have changed, Taiwan and Korea are now being forced to face the difficult issues which their dependence on foreign markets and their disregard for human and physical resources has created.

Walden Bello is a senior analyst at the Institute for Food and Development Policy (Food First). He specializes in Pacific affairs and is the author of the forthcoming Dragons in Distress: A Critical Assessment of the NICs and Brave New Third World? Strategies for Survival in the Global Economy. Stephanie Rosenfeld is an intern at Food First.