Real estate prices soared residential construction

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Real Estate prices soared (residential construction boom) l Benefited from low energy prices and devalued exchange rates In the 1990s, l Non-military democratic regimes l Financial liberalisation (led to “hot money”) l Joined the OECD l Chaebols’ speculative investments l Asian financial Crisis (1997 – 1998) l Many firms liquidated l Further financial liberalisation (floating exchange rate) l Large foreign direct investment (FDI) inflows
u Key Issues (1) Are Chaebols liabilities? Chaebols …… Ø contributed to economic growth in the 70s and 80s, but Ø have become so dominant and powerful since the late 1980s. Ø Problem is their rent-seeking and anti-competitive behaviour. (also prone to cronyism and corruption) Ø Increasingly reluctant to take risks. Ø Dependence on them too large in keeping employment and output. Ø Hinders growth in venture capitals. Ø Corporate governance needs an overhaul. How Chaebols exercise controls? E.g. Samsung The Owner family controls the group with only 1.67% of overall group shares through cross-shareholding structure and a holding company. (2) Labour Market (3) Other Challenges Ø Dualistic labour markets Ø Low productivity in the services sector Ø Rising wage disparity between regular and casual labour Ø Minimum wage is only about $6. Ø Unions (began after 1987) – ‘insider/outsider’ problem. Ø Labour market inflexible in the manufacturing sector. Ø Low tax base. Require a tax reform. Ø Growing needs for social security Ø Ageing population and birth rates (may become extinct in the next century.) Ø Rising household debt (170% of incomes) A potential time bomb. Ø Bureaucratic inefficiencies (red tapes) and driven by partisan interests u Challenges and policies Ø Need a new engine of growth Ø Need to raise productivity Ø Park Guen-Hye government set up the Ministry of Science, ICT and Future Planning. Ø Fostering “Creative Economy” Ø Threats from communist North. Ø Manufacturing face growing competition from China.
² Discuss the pros and cons of large conglomerates such as Korea’s Chaebols and Japan’s Zaibatsu. Advantages: l Can utilise resources and finances to focus on the key businesses. l Can create its own demand and structure businesses to complement (e.g. shipbuilding and shipping companies) l Can help protect from foreign takeover bids. l Can have long-term strategies (rather than short-term focused to meet shareholder interests) l Can help guide government policies. Disadvantages : l Does not cater for shareholder interests l Cross-ownership and mutual guarantees are prone to systemic risk l Ownership and management are not separable l Prone to cronyism and political influences. Rent-seeking behaviour. l Inhibit creative small business ventures.
Week 4: Chinese economy: communism to a global economic engine Overview of Chinese History Preceded by: (in reverse order) Ming, Yuan, Song, Tang, Sui, Jin, Three Kingdoms, Han, Qin 1644 – 1912 Qing Dynasty 1912 – 1949 Republic of China (Japan invaded 1937 – 45) 1949 Chinese Civil War 1949 Oct: People’s Republic of China (Mao Zedong)

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