Comment Writer Rico Singh Dhami explores South Korea’s economic development, arguing that the nations progression highlights how important it is for a government to have a good relationship with the economy and enterprise
South Korea declared independence on 15 August 1948, following Japanese colonial rule and continuing American occupation. The nation, officially the Republic of Korea, was only a part of the Korean peninsula. The remainder of which became North Korea, with the support of the USSR and China. In the next five years, South and North Korea fought the destructive Korean war, supported by UN, Soviet and Chinese forces. By the time the war ended, South Korea’s railways and infrastructure was destroyed, its factories devastated and three million Koreans were killed. The total value of damage done to Korean assets was $2 billion, equal to the entire GNP in 1949. The nation had a meagre GNI per capita of just $67 in 1953, making it one of the world’s poorest states. How the nation increased its GNI per capita over 30,000 times, overcame the damage to the war torn nation, and emerged as a major economic manufacturing power is, in my view, the perfect example of economic development.
States aiming for economic development must focus on several factors. In my opinion, the most important would include: increasing total factor productivity using education, developing infrastructure, increasing exports, improving institutions and businesses so they are more efficient and encouraging foreign direct investment.
The early South Korean government was faced with the daunting task of rebuilding the battered country. It understood that the best way to begin the rebuilding of the nation would be to unleash the entrepreneurial talents of its already successful businesses, such as Samsung. American aid to South Korea amounted to $1.2 billion from 1945-53 and was spent on the military. The large inflows of aid into South Korea allowed the government to disseminate funding to businesses and infrastructure projects, which would otherwise have been used on the military. The businesses were then able to expand and increase their exports. I would argue that it was this commitment to free trade that allowed South Korea to dominate Asian markets in manufacturing, textiles and mining later on.
Additionally, the South Korean government worked closely with large businesses, ensuring its policies promoted entrepreneurial activity. This meant that the government was influencing its business activity using tax breaks. One remarkable example is South Korea’s steel industry. The nation lacks major reserves of iron, yet is now the fourth largest steel exporter in the world (as of 2017). The genius of the government was to provide subsidies and tax breaks for steel production. This encouraged Korean entrepreneurs to import iron from Canada . The entrepreneurs would then manufacture and sell steel. This experience in the steel industry led to spill-overs into modern manufacturing industries as other ambitious entrepreneurs took their skills from steel and applied them to other products. Examples of this would include electronics such as televisions and smartphones, as well as South Korea’s position as the world’s largest shipbuilder.
In return for generous government support, businesses had to meet export quotas and accept government control of banking. This prevented the creation of monopolies, which would stifle competition, and established South Korea as an exporter. Due to the government’s subsidies, businesses sold overpriced goods. This gave businesses extra money to invest in research and development, which they used to improve technology and expand into different sectors. In the process, such firms modernised South Korea’s economy.
In this way, Samsung was transformed from a fish exporter into a world leading technology firm. In essence, the state’s interventionism and control over banking allowed it to create a favourable market for businesses. As a result, South Korea has the world’s highest research and development expenditure.
I believe this clever marriage of interests between enthusiastic businesses and a supportive state created a winning combination that led to sustained economic growth. South Korea even operated state owned firms in several industries to develop them, without impeding private enterprise. Indeed, China has pursued a similar path with similar results.
Interestingly, while South Korea has lacked the stability of other nations, it has still been able to achieve tremendous economic development. I believe this is due to the revolutionary governments continuing work in alliance with businesses and the implementation of good policies. This shows that even turbulent nations can continue to grow economically if government policies are favourable.
I also view the human capital element as crucial to economic development. At the start of the 20th century, South Korea was mostly illiterate. However, the government has created loans, supported educational institutions and channelled foreign aid into education. This gave businesses and the state sector a workforce well suited to develop new technology and maintain high levels of economic growth.
Yet, South Korea’s success was not inevitable and the nation had few advantages.
Across the border, North Korea benefited from the majority of resources and arable farmland on the peninsula. However, state hostility to businesses, a lack of trade partners and poor institutions led to North Korea being outpaced by its southern neighbour. In my view, this proves that institutional factors are more important than geographical advantages in defining economic development.
Of course, the other major difference was ideological. South Korea has always embraced capitalism, whilst the North is nominally communist. Unlike many postcolonial states, South Korea supported businesses rather than focusing on state dominated industries. Several other postcolonial nations such as India attempted to develop using state control of industries much as the USSR had done, fearing that imperialism and capitalism were much the same thing. This led to wasted entrepreneurial talent, a lack of competitive development and excessive bureaucracy. The brilliance of South Korea’s model, in my opinion , was to use the state to support businesses and attract foreign investment.
There are clear lessons about economic development to learn from South Korea. It is a geographically unlucky nation, bequeathed with only limited natural resources and arable land, hostile neighbours as well as a small population. It overcame these limitations because the government committed itself to creating modern industries, which meant favouring entrepreneurship and free trade. This commitment endured even through the turbulence of revolutionary coups as the businesses always maintained close links to the government.
The nation also evaded neoliberalism and a socialist command economic system. Indeed, free market economics dictates that South Korea should not have had a steel industry, due to a lack of iron ore, yet this is what led to its success.
Instead, the South Korean state played an interventionist and complementary role to private businesses. This was the key to success. I would argue that a developing nation should avoid ideological dogma and pursue necessary policies, as South Korea does.
Its progress from one of the world’s poorest states to one of its most technologically advanced and the 11th richest is only rivalled by the other three Asian tiger economies and China. Even today, it has handled the pandemic with relative success and remains the world’s third fastest growing economy. Developing nations should view South Korea’s policy book over the last seven decades as an invaluable manual for economic development.
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