Government-led Economic Development: Reflections on the Korean Experience

Sanjaya KhanalDamodar Regmi

Aanyang Haseyo

Training Program:Economic Development Strategy

November 17-29, 2011 Seoul

• 14 participants two each from Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka.

Core Elements of Economic Growth

Three Critical Conditions (Stiglitz & Squire):• Credibility: A stable and credible policy

environment along with a transparant and effective legal/judicial system.

• Competition and openness: competing in foreign markets and attracting foreign investment.

• A focused public sector where the private sector fails.

Characteristics of 13 High Growth Achievers

• Were more open and integrated with world market;• Abundance and mobility of labor force;• Ability for domestic savings• An increasingly capable, credible and committed

government: As the economy grows the role of an active and pragmatic government becomes crucial

• Strong political leadership• Impressive rates of public investment in

infrastructure, education and health• Industrialization, equality of opportunity, emphasis on

education of girls. (Michael Spence, The Growth Report)

Why Government Should Lead?• Market failure: imperfection in market structure, operations, deep

seated structural rigidities in LDCs.• Resource mobilization and allocation: Not to waste scarce

financial and skilled human resources on unproductive ventures and channel them in most productive sector for most productive use.

• Institutional capacity and infrastructure development: generate and distribute social benefits that the private sector may not be interested in supplying...Public provision of socio-economic infrastructure...good governance and system development.

• Information asymmetry: provide critical information to all citizens. • Attitudinal and psychological dimension specially in diverse and

fragmented population...evolving a sense of belonging together.• Development aid: A necessary condition for receiving foreign

aid...can speak on behalf of the nation...ownership as per Paris Principles.

Korea in Brief

• Peninsular in the North Eastern Asia• Area (Land:Water)

– S. Korea: 98,480 km2 (98,190 km2 : 290 km2)– N. Korea: 120,540 km2 (120,410 km2 : 130 km2)

• Weather: temperate, with rainfall heavier in summer than winter

• (Limited) Natural Resources: coal, tungsten, graphite, lead, hydropower potential

• > Rich Human Resource

Milestones

• Gojoseon (BC 2333 – BC 108)• The Three Kingdoms (BC 57 - AD 935)• Balhae (AD 668 – AD 926)• Koryo (AD 918 - AD 1392)• Joseon Dynasty (AD 1392 – 1910)• Japanese Colonialization (1910-45)• Korean War (1950-53)• Journey to Industrialization (Five-Year• Economic Development Plans: 1962-1991)• Seoul Olympic Games (1988)• IMF Crisis (1997)• World Cup (2002)

Korean Meal

Kimchi

• Kimchi. (Chopped cabbage mixed with chilly pepper and other spicy ingredients,

• One of the World's five healthiest foods (Health Magazine, MAR 25, 2006);

• Spanish olive oil (reducing heart disease risk), • Japanese soy bean paste (preventing cancer

and osteoporosis), • Greece yogurt, and • Indian Lentils.

Korea in 1950s

• War-torn economy and society• Food shortage• Lack of jobs• Traditional mindset• Lack of resources including natural

resources

Seoul in 1950s

Seoul in 1950s

Seoul in 2000sSeoul in 2000s

Seoul in 2000s

Continued...• Workforce

– Frustration/ Inferiority/ Lack of confidence– Mental inertia from the colonial rule– No skills due to lack of job opportunities– Low morale due to failure in meeting basic human needs (BHNs)– Engineers and merchants perceived as lower status than scholars– Wide-spread latent unemployment

• Entrepreneurship– Extremely high risks & uncertainty, and no means to run business– Low morale and sense of inferiority

• Capital /Technology– No savings capacity due to low level of income– No technology & mgmt skills after the withdrawal of colonial regime

• Market– Poor market due to low level of income– Market segmentation due to poor infrastructure

Park Chung-hee

• Park Chung-hee (1963-1979) and 5-Year Plan for Economic Development

• 1st (1962-1966): 14.8%• 2nd (1967-1971): 20.2%• 3rd (1972-1977): 20.3%

Industrialization four stages

1.Setting up target industry: Industrial basis for Subsistence & Sovereignty

– National drive for thrifty and savings• Heavy tax on luxuries• Consumptions• Strict control on smuggling

2. Preparation of Seed Money: Establishment of Large Corporations

– Introduction of foreign capital• Shopping list on hands• Government guarantee• Keeping the ownership

– Large scale manufactory plants: steel, automobile, shipbuilding, etc.

– Created demand for SME products

Industrialization ...2

3.Strategic support to SMEs– Financial & tax incentive– Establishment of SME bank– Credit guarantee for SMEs

• Ensuring market– Protection of local market– Priority of public procurement to SMEs– Birth of entreprenuership– Demand for skilled labor & technicians

4. National drive to foster technical human resources Rise of entrepreneurshipAcceleration of capital accumulationRise of globally competitive enterprisesSound basis for sustainable growth

Planning in Korea in 1948-1955

• Planning Agency under PMO.• Planning was compatible with Confucian culture and centralized

authoritarian rule based on dynasties.• Was expected to deal with the challenges of rising expectations

and challenges of national economic development.• The Planning Agency was expected to develop comprehensive

plans and to mobilize resources and take care of government budgeting and accounting.

• But it could not formulate development plans remained primarily focused on short-term stabilization policies...due to lack of political commitment... resources and institutional capacity.

Ministry of Revival (1955-61)

• There was a strong foreign intervention and need for immediate rehabilitation and reconstruction.

• The idea of development planning was criticized on account of resource and capacity constraints.

• The Ministry was entrusted with planning economic stabilization, rehabilitation and reconstruction program.

• Budget function was carried out by Ministry of Finance.• During this period five year plan was prepared by foreign

consultant but was not implemented...lack of political support.• Economic programs of the ministry lacked long-term

development objectives.

The Economic Planning Board (1961-1993)

• A revolutionary political regime of General Park Chung-hee took power in 1961.

• Reorientation of national priorities: political stability and economic development.

• Supreme Council for National Reconstruction was established which exercised legislative, executive and judicial powers and tight control...strong leadership with commitment to modernization and economic development.

• Economic Planning Board created by transforming Ministry of Reconstruction and merging some functions from other ministries.

• It combined overall planning and resource mobilization function of Ministry of (then) Construction with budgeting function of Ministry of Finance, National statistics and economic policy advice and coordination function of economic development council. Two new bureaus (economic cooperation and technology management) were added.

National Development Framework

Political ideology

Liberal democracy

Economic system

Capitalist, market economy

Form of government

Presidential with centralized administration

Foreign affairs

Pro-western

International Eco

Cooperation, Korea

Research Institute

Economic Planning

Board

Business Community

President and

his Team

EPB was responsible...• Not only for the formulation of plans, but the supervision of their implementation

and complementary provisions for improvement. For • financial resource mobilization, internal and external, formulation of budget

within the framework of development plan.• integration and modification of policies and measures initiated by any ministry or

agency.• conducting economic research and administration of government statistical

activities.• coordination of foreign technical and economic aid programs and promotion of

foreign investment.• overall scientific and technological development.• coordination of activities of technical agencies both in public and private sector.• forging possible level of national consensus by bringing on board all significant

stakeholders i.e. government technocrats, research institutes, business community, non-government experts in the process of strategic planning.

• Headed by deputy prime minister it played the role of a creative thinker, planner, competent executive and innovative administrator.

Resource Mobilization

• This function was carried out in an aggressive manner both at internal and external fronts.

• On the domestic front Tax administration was streamlined, strong incentives given for saving.

• Foreign capital was mobilized for strategic development project and a special institution was created for mobilizing foreign resources i.e. International Economic Cooperation, Korea.

Research and Statistics

• Capacity of national system strengthened.• All statistical activities coordinated, methodologies

improved and standardized and specialized to ensure quality.

• In the beginning research and studies were carried out by in-house staff while at the later stage a number of government sponsored research institutes were established including KDI.

National Plans

• Five Year National Development Plans were prepared tiered in three components/levels: The aggregate plan, sector plan and project plan.

• Complementing five year science and technology plan was also prepared and implemented.

• The emphasis was on implementability and annual implementation plan was part of it.

• Intensive inter-ministry, thematic or sectoral group meetings were held regularly.

• Budget function was transferred to EPB from Ministry of Finance was effectively aligned with development plan and geared to economic development goals and targets.

• Emphasis was given to align national budget with national strategic development plan.

• Annual review by EPB and PMO separately.• The president presided the monthly economic trend report meeting in

EPB to review economic performance. • President also presided monthly export promotion meeting (Nov. 30

1964 Export Day- export exceeded US$ 100 mn.

Korean Success: Factors • Visionary, strong-willed and innovative political leadership

– Engineered a futuristic development vision and always looked for quality and excellence.

– Pragmatic and focused political commitment.– Delivered what was promised.

• EPB assumed leadership in strategic planning and implementation

– High profile office and status– Focused but coordinated planning, budgeting, resource mobilization,

R and D and national statistics.• Established a pool of highly motivated and talented policy

makers, technocrats and professionals– Best people were brought in government bureaucracy and provided

with further development opportunities.– National R and D capacity developed inviting non-resident Koreans

with special package of incentives.

Korean Success: Factors

• Selection and concentration' approach• Human resource development and fostering of entrepreneurial spirits

– Plans and strategies were designed and implemented by national CB– Foreign borrowing was sought more than grants to make aware of the burden

and responsibility.– Three jung principles (jung sung (devotion), jung will (minuteness), jung jik

(honesty)• Meaningful and efficient use of foreign aid• Building and promotion of prestige projects to engender hope and pride

among people often against conventional wisdom and In. Dev. Institutions

– Seoul-Busan Expressway construction– POSCO construction and operation– Heavy and chemical industries promotion– Defense industry promotion– Self Sufficiency in main staple i.e. rice.

• Bridging the implementation deficits through periodic review and immediate corrections.

Korean Success: Institutional Factors

• Capitalist ideology and market economy• Strategic national development framework

– Renewal of national identity and pride– Strategic planning agency and development plans– Consensus building among key stakeholders– Centralized economic planning and implementation– Effective coordination– Role of R and D.

Determining Factors of Competitiveness

• Market factors: Traditional Cobb-Douglas production function– Labor– Capital– Technological capability through R&D investment

• Government factors– Government expenditure– Regulations

• Labor and capital market structures and policies• Human capital formation• Diffusion of technology and protection of patent rights• Corruption

• Others– Corporate governance– Innovative capacity through entrepreneurship– Political stability, quality of political institutions

Korea and Nepal

•

Thank You

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