Was South Korea’s Success Produced By Industrial Policy or Entrepreneurship? Pakistan keen to replicate Korean growth model

Pakistan keen to replicate Korean growth model

Regarding Pakistan, the rationale of South Korean Official Development Assistance (ODA) and cooperation is not only limited to humanitarian responsibility, rising global issues and increased interdependence among states, rather it is more focused on the responsibility as a past recipient of development assistance from the world including Pakistan in times of need in the 1960s.

The average economic growth rate of Pakistan was higher than the average of the world economy during the 1960s. Average annual real GDP growth was 6.8 percent at that time.

During the same period, Pakistan was seen as a model of economic development around the world, and there was much praise for its economic progress.

Karachi (the largest coastal city of Pakistan) was seen as a global economic role model, and there was much praise for the way its economy was progressing.

Many countries sought to emulate Pakistan’s economic planning strategy and one of them was South Korea, which replicated the second “Five-Year Plan.” The World Financial Center in Seoul was designed and modeled after Karachi.

It is said that Dr. Mahbub ul Haq, a renowned Pakistani economist and the originator of the Human Development Index (HDI), gave this plan to South Korea which helped it to progress rapidly.

At present, many countries envy South Korea, which has progressed in all spheres of national development and ranks as the 26th country in the world with a very high HDI (0.937) as compared to Pakistan which stands at 141st with a medium HDI (0.572) as per the Human Development Report (HDR) 2009 issued by the United Nations Development Program (UNDP).

South Korea graduated from the World Bank’s lending list in 1995 and became a member of OECD donor countries the year after. Pakistan is still striving hard to pass from the lending list of donor agencies.

Therefore, the most valuable asset of South Korea is its experience in making the transition from aid recipient to an emerging donor.

Given the contemporary situation of both countries, Pakistan is also keen to replicate this transformative model and the South Korean government has reciprocated by providing opportunities to Pakistan through various programs under its ODA program and through other cooperation.

The Republic of Korea has provided $20.75 million in aid ($15.94 million in grants and $4.81 million in loans) since 1991 to assist in the development of Pakistan.

Both countries have cooperated on various development activities and have many excellent illustrations for this. The construction of the Islamabad-Lahore (two major cities of Pakistan) motorway (M2) is one of them.

The construction of the M2 has not only vitalized communication between the two important cities, but also contributed to the enhancement of road construction technology for domestic Pakistani engineers and mechanics that later became able to pursue their own projects without outside help.

It is very encouraging that there are growing numbers of Korean enterprises which are interested in seeking investment opportunities in Pakistan. KP Chemical Corporation, a subsidiary of the South Korean conglomerate Lotte, completed its acquisition of a majority shareholding in Pakistan PTA Ltd (PPTA), investing more than $75 million.

In addition to that, the Korean International Cooperation Agency (KOICA) has planned to invite more Pakistani officials to Korea for capacity building. Some 100 officials will be invited in 2010, and the number will be doubled to 200 in 2011 and 2012. Country-focused programs will be established to cater for the specific needs of Pakistan.

It is envisaged that in the years to come South Korea will continue reciprocating its assistance and cooperation to Pakistan to an extent that the country will set a worldwide example for countries world that have graduated from the recipients list.

Muhammad Nadeem is a management consultant serving in the public sector organization of Pakistan. He stayed in Republic of Korea recently for training at Central Officials Training Institute (COTI) arranged by the Korea International Cooperation Agency (KOICA) for public sector officials of the member states of the South Asian Association for Regional Cooperation (SAARC). He can be reached at nadeemj@yahoo.com.

Was South Korea’s Success Produced By Industrial Policy or Entrepreneurship?

The success of South Korea’s economy in the past 50 years has been remarkable. In 1962 South Korea was among the poorer of the world’s nations, with a per capita income less than Zaire, Congo, and Sudan, and in the next three decades South Korea experienced a growth miracle in which real per capita income increased by about 20 times. In contrast, real per capita income in the United States was about seven times larger at the end of the twentieth century than at the beginning. In percentage terms South Korea’s economic growth in a third of a century far outstripped a century’s worth of US economic growth. This remarkable economic growth began roughly at the same time as President Park’s Third Republic which was established by a military coup in 1961.

President Park designed an economy based on exports. He nationalized banks and set export targets, rewarding those businesspeople who exceeded their targets. High performers were rewarded with economic support such as low-interest loans and import licenses that would boost their profits. Imports were tightly controlled, exports were subsidized, but exporters were free to import their inputs, duty-free. By the time President Park was assassinated in 1979, South Korea had been growing at nearly 10% a year for a decade and a half. South Korea’s success in steel production, ship building, automobiles, and eventually electronics moved the nation from the ranks of the poverty-stricken to one of the world’s leading industrial economies. All of this occurred as the government maintained its policies of supporting successful exporters through financial and regulatory means, lending support to the argument that South Korea’s rapid economic growth was a product of its industrial policy. The idea that industrial policy works by supporting firms that have the potential to be competitive in international markets must be founded on the idea that the government can identify those firms that have this potential. In South Korea firms that were favored by industrial policy were those that were able to demonstrate their ability to export in world markets. What caused successful firms to be successful, and therefore to be favored by the nation’s industrial policy? The answer is entrepreneurship. Firms that were entrepreneurial, that were able to innovate in their production processes by keeping their costs low, and that were able to innovate in their output by producing what consumers wanted, could be competitive in world markets. The initial advantage was produced by entrepreneurship, not be industrial policy.

South Korea had another initial advantage, which was cheap labor, but not all firms were able to use lower labor costs to their advantage. Successful entrepreneurship was what gained firms an edge, and once that edge was demonstrated through their exports; those firms gained further advantages through industrial policy.

In the short run this strategy appears to pay off, because the firms that are the most innovative are the firms that gain additional advantages, which allows them to grow even more than they could have if they were only able to rely on market forces. But innovative firms already have an advantage, and while their initial growth might have been slower without the aid of industrial policy, not only would innovative firms have continued to prosper and grow, they would retain the incentive to be entrepreneurial, because they would only be able to stay on top by being more entrepreneurial than their rivals, both inside and outside South Korea. If they are subsidized by industrial policy, this gives them some slack, and they can remain competitive even if they no longer remain on the cutting edge, because of the advantages they get through government policy.

Industrial policy has two disadvantages. First, it takes away some of the incentive to be entrepreneurial within those firms that industrial policy favors, and second, it makes it more difficult for new firms that may be even more innovative to compete against established firms that have an advantage on an unlevel playing field. For both these reasons, industrial policy has the long-run effect of slowing innovation, and works against the very economic growth it tries to produce. Entrepreneurship and innovation brings with it risk-taking. To stay on top of an ever-changing world market, firms cannot be content to rest on their past achievements, but must innovate. Sometimes those risks pay off; sometimes they do not. Industrial policy gives firms government-granted advantages, which means that firms do not have to take on as much risk, or be as innovative, as whey would without the government support.

In the short run the policy appears to be working because the subsidies go to the firms that have already demonstrated their entrepreneurial nature. In the long run it distorts incentives and will reduce growth. But one key point to see, if one pictures industrial policy as the government’s picking winners and helping them to succeed, is that the government cannot spot those winners until the favored firms have already distinguished themselves through their entrepreneurial actions. It is entrepreneurship, not industrial policy, that provides the initial edge. Once firms find themselves in favored positions industrial policy works against entrepreneurship and continued progress. Firms that were in the cutting edge in the past will not necessarily be the future innovators.

Was South Korea’s Success Produced By Industrial Policy or Entrepreneurship?

Posted on February 1, 2011 by Wyclife Kipruto

 


The success of South Korea’s economy in the past 50 years has been remarkable.  In 1962 South Korea was among the poorer of the world’s nations, with a per capita income less than Zaire, Congo, and Sudan, and in the next three decades South Korea experienced a growth miracle in which real per capita income increased by about 20 times.  In contrast, real per capita income in the United States was about seven times larger at the end of the twentieth century than at the beginning.  In percentage terms South Korea’s economic growth in a third of a century far outstripped a century’s worth of US economic growth.  This remarkable economic growth began roughly at the same time as President Park’s Third Republic which was established by a military coup in 1961.

President Park designed an economy based on exports.  He nationalized banks and set export targets, rewarding those businesspeople who exceeded their targets.  High performers were rewarded with economic support such as low-interest loans and import licenses that would boost their profits.  Imports were tightly controlled, exports were subsidized, but exporters were free to import their inputs, duty-free.  By the time President Park was assassinated in 1979, South Korea had been growing at nearly 10% a year for a decade and a half.  South Korea’s success in steel production, ship building, automobiles, and eventually electronics moved the nation from the ranks of the poverty-stricken to one of the world’s leading industrial economies.  All of this occurred as the government maintained its policies of supporting successful exporters through financial and regulatory means, lending support to the argument that South Korea’s rapid economic growth was a product of its industrial policy. The idea that industrial policy works by supporting firms that have the potential to be competitive in international markets must be founded on the idea that the government can identify those firms that have this potential.  In South Korea firms that were favored by industrial policy were those that were able to demonstrate their ability to export in world markets.  What caused successful firms to be successful, and therefore to be favored by the nation’s industrial policy?  The answer is entrepreneurship.  Firms that were entrepreneurial, that were able to innovate in their production processes by keeping their costs low, and that were able to innovate in their output by producing what consumers wanted, could be competitive in world markets.  The initial advantage was produced by entrepreneurship, not be industrial policy.

South Korea had another initial advantage, which was cheap labor, but not all firms were able to use lower labor costs to their advantage.  Successful entrepreneurship was what gained firms an edge, and once that edge was demonstrated through their exports; those firms gained further advantages through industrial policy.

In the short run this strategy appears to pay off, because the firms that are the most innovative are the firms that gain additional advantages, which allows them to grow even more than they could have if they were only able to rely on market forces.  But innovative firms already have an advantage, and while their initial growth might have been slower without the aid of industrial policy, not only would innovative firms have continued to prosper and grow, they would retain the incentive to be entrepreneurial, because they would only be able to stay on top by being more entrepreneurial than their rivals, both inside and outside South Korea.  If they are subsidized by industrial policy, this gives them some slack, and they can remain competitive even if they no longer remain on the cutting edge, because of the advantages they get through government policy.

Industrial policy has two disadvantages.  First, it takes away some of the incentive to be entrepreneurial within those firms that industrial policy favors, and second, it makes it more difficult for new firms that may be even more innovative to compete against established firms that have an advantage on an uneven playing field.  For both these reasons, industrial policy has the long-run effect of slowing innovation, and works against the very economic growth it tries to produce.  Entrepreneurship and innovation brings with it risk-taking.  To stay on top of an ever-changing world market, firms cannot be content to rest on their past achievements, but must innovate.  Sometimes those risks pay off; sometimes they do not.  Industrial policy gives firms government-granted advantages, which means that firms do not have to take on as much risk, or be as innovative, as whey would without the government support.

In the short run the policy appears to be working because the subsidies go to the firms that have already demonstrated their entrepreneurial nature.  In the long run it distorts incentives and will reduce growth.  But one key point to see, if one pictures industrial policy as the government’s picking winners and helping them to succeed, is that the government cannot spot those winners until the favored firms have already distinguished themselves through their entrepreneurial actions.  It is entrepreneurship, not industrial policy, that provides the initial edge.  Once firms find themselves in favored positions industrial policy works against entrepreneurship and continued progress.  Firms that were in the cutting edge in the past will not necessarily be the future innovators.

 

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