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Midterm_TOMRHEE_Solutions - PART A 1 Lkdsjf 2 A The...

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PART A 1. Lkdsjf 2. A). The benchmark model offers an explanation as to why the growth of Korea, Taiwan, Hong Kong, and Singapore in the 1980s was not sustained forever . This model indicates that the economic growth rate of the NIEs will not overtake that of the United States and the NIEs’s per capita real incomes will always lie significantly lower than that of the U.S. Assume that the growth rate of cgdp (i) is represented as a function, F = d log cgdp (i)/dt. Three elements increase this function: the ability to absorb technology transfer (y), the scope of possible technology transfer (1-y), and a policy parameter that is favorable to technology transfer (θ). Even if economies enjoy high, positive growth, it may still fall further and further behind the advanced economies. Furthermore, the benchmark model helps to explain the scenario of the NIEs’s failure to sustain rapid growth and the four countries’ inability to complete close the income gap between themselves and the United States. B). The combination of foreign debt and a lack of financial transparency on the lenders’ part played a large role in driving Korea, Taiwan, Hong Kong, and Singapore into the Crisis of 1997-1998. It is foreign debt and not domestic debt that can lead a country to an acute crisis, forcing governments to begin to lose power (Wan, 2004, p. 177). For example, Korea approved short-term foreign borrowing rather than a devaluation of its own currency to raise national pride (Wan, 2004, p. 179). Once the growth expectations had been built up, the government had to maintain growth whenever possible; as a result, private borrow had to be undertaken, in an attempt to at least maintain an appearance of sustained growth. As debtors failed, the lack of financial transparency left the lenders that were involved to remain unknown. Thus, the lenders who suffered losses refused to roll over credits. The resulting
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speculation translated local distress into an international crisis. Additionally, the debtor becomes caught between a debt denominated in foreign currency and a foreign exchange rate that shifts suddenly. Hence, a debt crisis is fostered. i). The use of ‘Solow residuals’ in the catching up process under-estimates productivity gain in industry launching. Specifically, Alwyn Young’s approach of the growth of total factor productivity neglects the heterogeneous nature of capital. For example, at the industry level, pioneer firms launch new industry by trial and error and must incur high start-up costs, frequently with government aid. Later on, latecomers free ride on the initial firm’s costly experience to make their own profits (Wan, 2004, p. 159). Tung (2001) indicated that Taiwan’s profitable semiconductor sector was originally launched by two firms spin-off from a government lab and several years later, private business groups joined. At the firm level, “management commits to long term projects, with phased investments at specific levels, to enter desired markets” (Wan 2004, p. 159). Stern, Kim, Perkins, & Yoo (1995) stated that
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Midterm_TOMRHEE_Solutions - PART A 1 Lkdsjf 2 A The...

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