Name_________________________________

ECN 171: Economy of East Asia

Midterm Exam
Spring 2011
Please write your name at the top of each of the five pages. No wide-brimmed hats or
electronic devices are permitted. Turn off and put away all cell phones, pagers, calculators,
etc. Use only paper provided here or ask instructor for an extra sheet if necessary.
I. Short Answer (3pts each)
1. material balance planning The quota system used by China in place of the pricing
mechanism to direct intermediate goods toward targeted industries

2. value guarantee program Chinese government policy requiring banks to index interest rates
paid on deposits to inflation during periods of high (hyper-) inflation

3. accrual of interest Automatically adding overdue interest payments to the principal of a loan

4. asset stripping -- The illegal transfer of state-owned assets into private control (nonstate
ownership).

5. Tata One of the dominant business groups in India for over 100 years.

6. full convertibility Allowing a currency to be bought and sold in foreign exchange

transactions without specific approval of the transaction by the government

7. export processing zone A special area established by the government to encourage export
production by providing cheap land and subsidized utilities, transport and communications
8. kanji geisha A main securities firm that keeps stockholdings cross-held between the
member companies of a keiretsu under lock and key to prevent hostile takeovers

1/4

Name_________________________________
9. apex firm the firm that effectively controls all of the other firms in a pyramidal stockholding
scheme
10. internal economies of scale When the expansion of production by a firm or business group
generates lower average costs (cost per unit)arises when there is a fixed cost of production.
II. Explain the following (15pts each)
1. Describe the evolution of and motivation behind Japanese monetary policy from 19852000. (When was it tight, when was it loose, how could we tell, and what motivated these
changes in the policy stance?)
1985 tight monetary policy (BoJ increased the target interest rate) to strengthen the yen against
the dollar
1986-89 loose monetary policy (large and rapid drop in interest rate) to prevent exporters and
other firms from experiencing distress from the strong yen/high interest rate policy after the
tightening in 1985
1989-91 very tight monetary policy (BoJ increased the interest rate againeven more sharply)
to rein in speculative buying (bubble) in asset markets
1991-2005 loosened monetary policy again to try to get out of the recession that ensued after
asset prices fellinterest rate dropped all the way to zero
2. What compelled Vietnam to pursue doi moi reforms? What were the principal
components of the reforms? What were three results of the reforms, in terms of
macroeconomic outcomes?
-(4pts) Doi moi reform began when Vietnams economic support from the Soviet Union ended.
Vietnam was also suffering severe food shortages and hyperinflation, so the planned economy
itself was not functioning well. It also witnessed Chinas growth increase after its transition away
from a planned economy under Deng over the preceding decade.
-(4pts) Reforms included the following (any two):
Elimination of price controls
Land reform that transferred control to farmers
Opening to FDI
Establishment of trade relations with ASEAN nations and later Japan, Europe, and the
US
Acceleration of offshore oil drilling
-(2pts) One factor that aided the success of Vietnams transition was the discovery of new
offshore oil reserves, which brought extra foreign currency earnings to finance imports for
industrial and agricultural development. Export sales grew rapidly, as did inflows of FDI perhaps
in part due to the end of western countries embargoes left over from the Vietnam (Indochinese)
war.
-(5pts) Results (any 2)

2/4

Name_________________________________
Viet Nam became the second-largest exporter of rice, increased exports over 500%, generated a
trade surplus, reduced the role of SOEs to 10% of GDP, reduced the poverty rate, increased the
savings and investment, achieved consistent 8% growth in GDP
3. Explain four different reasons why business groups might form and grow in a
developing country.
Any four:
-to overcome market failures (shortage of credit or skilled labor as in India pre-Independence)
-to increase access to credit and capital (cross-guarantees and cross-holdings of shares as in
Korea)
-during a transfer of previously foreign-owned assets following independence from a colonial
power (or the introduction of joint-ownership laws) or to redistribute wealth among ethnic
groups as in India, Malaysia
-during the transfer of state-owned assets to the private sector after a change in economic policy
(as in India after the License Raj)
-due to special treatment of well-connected individuals who receive import licenses, production
licenses, or state-subsidized credit (as in India or Thailand)
-through keiretsu defenses against hostile takeovers (as in Japan)
-due to financial liberalization, allowing existing firms to establish or acquire new affiliates using
capital raised on the stock market (as in India and Thailand)
III. Essay (25pts)
Briefly and concisely compare and contrast the post-war development strategies of China
and Korea through the mid 1970s.
2pts: organization, clarity of logic/analysis (i.e.: their strategies were similar in some
respects, but different in others despite a few differences, the strategies were almost
exactly alike although they shared a few commonalities, the countries had completely
different philosophical motivations behind their development strategies)
9pts: Compare (similarities)
-Goal of industrialization, especially for heavy industries
-Began with largely rural, cash-poor population
-Began with undeveloped financial sectors
-Government tried to lower production costs for targeted industries via
-wage controls
-low interest rates
-Government tried to focus import activity on intermediate/high-tech goods for industry
-Focus on large firms, high industry concentration
-Others
9pts: Contrast (differences: China v. Korea)
-Overvalued v. undervalued exchange rate policy

3/4

Name_________________________________
-Tight, centralized govt control over import activity v. use of import credit program as incentive
for exporters
-Jumping over development of any light/medium industry (textiles, etc.) v. cycling through
stages of industrial development
-Heavy state intervention into every aspect of production v. use of incentives to encourage
desired firm behavior (tax exemptions, export processing zones, and removal of bureaucratic
controls to encourage exporters, for example)
-State v. concentrated private ownership
-Embargoes, disconnection from US and Europe v. support from, trade with US and Europe
-Others

4/4

Name_________________________________

Extra Credit (2pts): What company had the second-largest software campus in the world in
2003? In what country was it located?

5/4