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Korea's industrial success: 'Getting the prices wrong'.

In the recent multi-sectoral RTD on Hanjin sponsored by the UP Center for Integrative Development Studies and the Freedom from Debt Coalition, the question arose: why was the Philippines left behind by South Korea in terms of industrial development? This question was raised because of the divergent industrialization routes taken by the two countries in the last four decades.

In the early 1960s, the World Bank rated the Philippines as second to Japan in Asia in industrial development. Manufacturing registered a phenomenal annual double-digit growth in the 1950s, a record that the country has failed to duplicate since. By 1961, the share of industry in the national income reached 16 percent. This was a major feat for the newly-independent Republic because three centuries of Spanish colonial rule and four decades of American-imposed 'free-trade' policy reduced the Philippine colony into an underdeveloped agrarian economy specializing in the production of a few export crops (e.g., sugar, abaca, coconut) and minerals (gold and copper).

On the other hand, South Korea was considered in the 1960s as one of the poorest in Asia. It suffered heavily under Japanese colonial occupation (1910 to 1945) and in the bloody 1950-1953 civil war that divided the Korean Peninsula into North Korea and South Korea. South Korea was then a poor rice-growing economy. According to Filipino old timers, pleasure-seeking Filipino Congressmen treated South Korea then as their watering hole.

And yet, the picture today has changed. Many Koreans go to the Philippines for their R and R. More importantly, South Korea has left the Philippines by a mile in the industrial race. What, indeed, has happened? Why has South Korea achieved rapid industrial transformation in one generation?

The most popular explanations can be found in the book of the late Alice Amsden, in her Asia's Next Giant: South Korea and Late Industrialization (Oxford University Press, 1989). Amsden's main thesis: South Korea succeeded because it got its 'prices wrong'.

According to Amsden, South Korea defied the neo-liberal economic thinking that the industrial way forward for a poor and underdeveloped country is to look for its 'comparative advantage', e.g., an abundance of cheap labor or cheap agrarian resources, and use this so-called comparative advantage as the platform for growth. Instead, South Korea, like Japan earlier, ignored this comparative advantage pontification by the neo-liberals by focusing on comparative advantage-defying capacity building in areas it deemed strategically necessary for the economic transformation of South Korea even if the country had no comparative advantage in these areas at the beginning.

This is one reason why South Korea was chastised by the World Bank for launching in the 1970s a program of heavy-industrial development, featuring the costly integrated steel making industry and ship building industry involving huge dockyards. South Korea simply told its American business and defense ally that these industries were needed to fortify South Korea's readiness in a possible war against North Korea.

Of course, it was not a simple case of industrial targeting for South Korea, that is, the government picking up steel making and ship building as the favored industries to lead the country out of industrial backwardness. The government was there to provide all the 'wrong prices' - cheap credit, protection against imports, energy subsidy, special depreciation allowance, control over the number of entrants in a priority industry, assistance in securing needed technology, assistance in export promotion, and so on. To help finance industrialization, South Korea also nationalized and reorganized the banking industry (This is somewhat similar to what Central Bank Governor Miguel Cuaderno did in the 1950s when Cuaderno prioritized the allocation of dollars to the 'new and necessary industries').

Like Japan, South Korea did not promote their early efforts in industrialization by encouraging foreign investments. In fact, in the 1960s, foreign participation was discouraged, obviously to promote the capacity of the Koreans to develop their own industrial capacity. Later, in the 1970s, South Korea allowed foreign investors to come in through joint ventures, usually with a provision for technology sharing or technology transfer (This incidentally is one of the issues raised by the United States against China today).

Moreover, the government's mighty hand was there not only to provide generous subsidies but also to enforce strict performance standards. Park Chung Hee, the coup leader who presided over South Korea's industrial transformation in the 1960s-1970s, held monthly meetings with the chaebols to check on their performance and to punish those who failed to deliver on their industrial targets by withdrawing government assistance. In short, nothing was given free.

But the government readily intervened when things got rough. This was illustrated in the case of the ship building industry, which faced a difficult survival challenge in the 1970s because the global market was depressed. The government issued a decree requiring all crude oil imported by South Korea be loaded only in Korean ships.

The government also coordinated with industry in developing human resources and local capacity in technology management. Thus, in the case again of the shipbuilding industry, the number of personnel for research and development increased from 1,311 in 1996 to 2,360 in 2004, including 165 researchers with Ph.D. degrees.

Overall, the South Korean industrial experience, similar to that of Japan in the earlier decades and replicated in a way in the case of China today, shows that a developmental state dedicated to the pursuit of full industrialization defies the neo-liberal dogma on getting the prices right. A developmental state purposively helps national industries and enterprises develop the capabilities needed to compete at home and in the global markets and move up, continuously, in the industrial and technology ladder. The developmental state does not subscribe to the simplistic neo-liberal thinking that growth is best realized by looking for a country's comparative advantage and by encouraging foreign investors to come in through a blanket program of trade and investment liberalization.

Only when the economy has matured or has reached a high level of industrial development that the policy makers of a developmental state become receptive to the idea of market liberalization. Ha Joon Chang, in his popular book Kicking Away the Ladder (Anthem, 2002), supplemented the work of Alice Amsden when he argued that the neo-liberals from the developed countries have been pushing away the ladder of development even before the developing countries are able to develop the industrial and agricultural muscles that the developed ones had developed through long periods of high tariffs and capacity building.

The overall lesson from South Korea is not getting the prices right. It is how to get the industrial vision right.
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Publication:Business Mirror (Makati City, Philippines)
Geographic Code:9JAPA
Date:Mar 28, 2019
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