export earnings were not as badly hurt as in other oil-exporting countries, and further devaluations from 1983 to 1986 encouraged a non-oil export boom (Lewis and McPherson, 1994). We present two more detailed cases, Korea and Malaysia.

**Korea.** Korea is often viewed as an example of a country that grew despite (or because of) interventionist government policies. While the actual effect of government policies is hotly debated, one fact is clear - Korea avoided overvaluation of its exchange rate to encourage its exporters. Thus, many regard its exchange rate management policy as a key to Korea's successful long-term economic performance (see Nam, 1995). Before 1960, the government kept the nominal exchange rate fixed with only small adjustments, resulting in overvaluation and balance-of-payments problems. These problems forced the government to use multiple exchange rates, import licensing, and high and diverse tariffs. In this way, Korea was a typical inward-looking developing country.

Starting in the early 1960s, however, Korea shifted its strategy to export orientation. It unified its exchange rate in 1961 and devalued from 130 won to the dollar to 255 won to the dollar in May 1964. With Korean inflation much higher than the levels of Korean trading partners, Korea avoided overvaluation by gradually devaluing the nominal rate, reaching 893 to the dollar at the end of 1985.14 Only during the second half of the 1970s, in an effort to dampen domestic inflation, did policy makers fix the nominal rate at 484 won to the dollar. The fixed-rate policy, along with a number of other factors, resulted in overvaluation and a stagnation in growth and export performance. These economic problems led policymakers to devalue the won in 1980 to 580 to the dollar, the first devaluation since 1974. Afterwards, they allowed the won to depreciate gradually through the end of 1985.

The most telling result of Korea's policy of exchange rate flexibility is that from 1953 to 1960, per capita GDP measured in constant purchasing power parity dollars grew at an average annual rate of 1.8 percent. From 1960 to 1991, it grew at an average annual rate of 6.9 percent, from $904 to $7,251. Analyzing data for 126 countries for the period 1960 to 1992, Pritchett (1997) showed that Korea had the highest growth rate of real per capita GDP measured in purchasing power parity dollars.'<sup>5</sup> Nam reported that in addition, exports rose even more rapidly than GNP. The ratio of exports to GNP was 2.4 percent in 1962, and 25.6 percent in 1991. Manufactured goods as a share of exports rose from 27 percent in 1962 to 95.4 percent in 1991.

**Malaysia.** In some ways, the problems faced by Malaysia in the early 1980s were similar to those of Africa, to be described in section IV. Malaysia faced decreases in

14 The nominal rate appreciated once again betweenl986 and 1989, and then depreciated through 1991, the end of the period under study in Nam.

'5 Using real GNP data from the Bank of Korea, Nam reported an aggregate growth rate of 3.6 percent annually in the 1950s, and 10.6 percent annually from 1962 to 1991. World Bank (1999) showed an average annual growth rate of real aggregate GDP of 8.6 percent from 1962 to 1991, but did not have data for the 1950s. The per capita GDP figures cited in the text and by Pritchett are from the Penn World Tables Mark 5.6 (Summers and Heston, 1991). We downloaded the data from the University of Toronto, http://datacentre.chass.utoronto.ca/pwt/index.html.

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