How South Korea got Rich
I had mentioned in my last post that I was going to embark on a series of posts about Institutions. Given that I have to do some original research on the subject they will take some time. In a side task I had been preparing a write up on the South Korean economic development story for an On Air Personality (OAP), in the hope that it could serve as the basis of a radio program. I have decided to turn that write up into a post and in order to save time and effort, I am reproducing the original write up almost verbatim.
Hello Gabriel (not real name). Trust you are good? Here is the script I was talking about. I wrote this script so you could understand how in trying to solve our economic problems, how misplaced our emphasis on natural resources is.
I had already treated this topic in general terms, in one of my posts titled The Illusion of Natural Resources. What I want to do here is specifically focus on the developmental story of South Korea. South Korea went from being poorer than Ghana in the 1960s to being one of the richest in the world in the space of 30–40 years.
South Korea was in very bad shape at the end of the Korean War with North Korea in the 1950s. In 1961, the yearly income of the average South Korean was $82. That is less than half what the average Ghanaian was making at the time, which stood at $179. Half of its manufacturing base and at least 75% of its railway system had been destroyed in the war. Their primary schools were even more crowded than African primary schools in the 70s and 80s. Today, South Korea ranks amongst the world’s wealthiest nations. Samsung, is emblematic of the journey the South Korean economy has undergone as a whole and is a pointer to the economic structural change the economies of Sub-Saharan Africa need to undergo, if our economies are to generate mass prosperity. From its inauspicious beginnings in 1938 as an exporter of fish, vegetables and fruit, Samsung is now a world leader in the production and export of high end mobile phones, semiconductors, computers and consumer electronics in general, as well as ocean-going ships.
The following table shows the changing percentage composition of GDP going to agriculture, Industry (Manufacturing, mining + Utilities, Construction) and services in South Korea.
I don’t have data for the remaining years till date but if you do a Google search, you will find that in 2021, around 56.98% of South Korea’s GDP went to Services, 32.45% went to Industry and less than 2% went to Agriculture. For comparison, the figures in 2021 for Nigeria are 43.79% went to services, 31.41% to industry and 23.36% to Agriculture. You should bear in mind that official statistics doesn’t track the informal economy, which takes the larger share of economic activity in Nigeria (roughly between 50–80%) and is heavily skewed towards subsistence agriculture and low income services like hairdresser, bricklayer, welder, labourer etc. So what I am saying is that the share of manufacturing in Nigeria’s real GDP (official + unofficial) is probably overstated, perhaps significantly so. Plus, not all manufacturing are alike. The bulk of Nigerian manufacturing goods will be of the most basic kind (agro-processing and basic chemical products), lacking the sophistication and richness of the high value goods produced in South Korea. You shouldn’t interpret South Korea’s declining share of industry in GDP as a diminishing importance of Industry. A significant amount of services are created as a result of demand from industry. To take an example from the British Fashion Industry, 90% of the jobs in that industry are involved in conveying the product to the consumer, not making it but without the 10% required for making the product, the other 90% would not exist.
The following table shows the change in South Korea’s production pattern, basically, its top ten exports over the decades.
Notice how in the 1960s that its top 10 exports were exclusively natural resource based? They were agricultural, aquacultural, forestry and mining produce. In just 10 years, they had started exporting light manufacturing products that used these natural resources as inputs. Here I am talking about textiles, Wigs, footwear, tobacco, iron/steel/metal products. They had even started exporting electronics (most likely consumer electronics like radios and TVs). Note that for them to be exporting means that they were already successfully producing for the domestic market. By the 2000s, a mere 40 years later, they were exporting advanced electronics like semiconductors, computers and wireless telecommunication equipment. By 2015, South Korea, representing less than 1% of the world population, became the fifth largest exporter in the world, accounting for 3% of world exports.
That is the kind of progress we need to be making if we are to create mass prosperity in Sub-Saharan Africa. Note also that this is also typically the pattern of development for any country that has industrialized and managed to pull the bulk of its population from poverty.
The South Koreans and the other East Asian Tigers were able to achieve this economic miracle as a result of aggressive Industrial Policy.
Industrial Policy is a country’s official strategic effort to encourage the development and growth of all or part of the economy, often focused on all or part of the manufacturing sector. The government takes measures aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation.
The Industrial Policy implemented by South Korea in 1960s and 70s radically and drastically changed the South Korean economy from an agrarian one to an export-oriented industrial one.
Successful industrialization in the modern era has nowhere and never been an accident. It has always been based on some policy that aimed at supporting manufacturing. Few fully realize that industrialization is a crucial necessity for economic development and requires design and implementation of appropriate policies. Many countries ignore industrial policy or fail to employ it effectively.
Industrial policy is used to change the production structure of an economy in favour of the manufacturing industry by channeling a government’s selected budgetary and non-budgetary resources and by channeling private capital, labour, and entrepreneurs towards the manufacturing sector. Industrial policy, as other ‘structural policies,’ is designed and implemented in order to improve the long-term growth performance of the economy. In particular, it helps countries surmount the so-called middle-income trap by raising growth performance over the long term. This is made possible by the innovational and growth-inducing nature of the manufacturing sector.
Today’s industrialized nations which experienced their industrial revolutions after the British have all employed industrial policies at different times in their development cycles. This is confirmed by the stories of France, the USA, Japan, Germany, and Russia. In each of them, one or more dominant leaders pushed for economic (and social) reform and industrialization. They did it for the country to become powerful both militarily and politically. Industrialization has thus been used as a tool for military and political power.
Overall, industrialization is a capacity-building process that materializes through real manufacturing experience over time. It requires the development of human and institutional skills.
It is also important to understand that Manufacturing is the pioneering driver of growth; it is the sector in which the productivity is relatively high and which raises the growth of the sector. That in turn leads to productivity increases (and hence growth) in the non-manufacturing sector, importantly including services, amply demonstrated by the British Fashion Industry example above.
That’s it. Let me know what you think.
Bibliography
1. Chang, Ha-Joon. 2007 Bad Samaritans: The Guilty Secrets of Rich Nations & the Threat to Global Prosperity. London: Random House
2. Yulek, Murat A. 2018 How Nations Succeed: Manufacturing, Trade, Industrial Policy, & Economic Development. Singapore: Palmgrave Macmillan
