Korean growth experience and its relevance to Sri Lanka today

Sunday 27th April 2014

Learning by sharing experiences with KDI School

Professor Jin Park of the KDI School of Public Policy and Management, a reputed

research and higher learning institution in South Korea, recently delivered a lecture

under Global Development Learning Network or GDLN Seminar Series on Lessons

from Korea’s Development to participants in a host of Asian countries including Sri

Lanka.

The program is delivered under its distance learning training system and its local host

has been the Colombo based Distance Learning Centre, popularly known as DLC. In

this lecture series, the participants get an opportunity to interact with the resource

person to seek clarifications, record their dissent if any or comment on what the

resource person or other participants have presented. Hence, it is a very fruitful

learning and knowledge sharing experience for adult learners by using modern

advanced Information and Communication Technology.

Mission of KDI: Develop future leaders

KDI School is an offshoot of the Korean Development Institute established by the

Korean Government in 1971 as an independent economic policy think tank to conduct

research for guidance in public policy making. KDI School, established in 1997, has

earned high reputation as a global think tank. Its objective has been to develop future

leaders by equipping them with knowledge, vision and global perspective. The current

distance learning lecture series is an extension of this mission to the budding leaders

in the rest of the world.

Debate over practical wisdom and conventional wisdom in Sri Lanka

In view of the current debate in Sri Lanka whether the country should have a practical

approach to development or whether it should follow a development model, it is

important to examine how South Korea managed to deliver a miracle by elevating a

poor and a backward country in the world in 1960s to the status of a rich country within

a matter of a single generation.

Governor Cabraal: Practical wisdom was the guide

The debate in Sri Lanka was sparked by one of the top policy makers of the country,

Central Bank Governor Ajith Nivard Cabraal, who had confessed in an article first

published in the Forbes magazine (available at

http://www.forbes.com/sites/realspin/2014/03/28/practical-not-conventional-wisdom-

has-driven-sri-lankas-rebuilding-and-reconciliation/ ) and later in Daily FT that it was

the practical wisdom and not the conventional one that was responsible for driving Sri

Lanka’s recent rebuilding and reconciliation efforts.

Though the learned Governor has not discarded economic

models, his position, according to the examples he has

given, has been that as and when the country was

confronted with grave economic issues, its top policy

leaders drew wisdom from practical experience to come

out of such economic issues instead of relying on orthodox

economic models. This is true with any economic policy leader who is faced with day

to day economic issues since it is the practical experience that will help him to resolve

such issues. However, when it comes to planning long term sustainable economic

growth, it is the economic models that will help economic policy makers to steer the

destiny of their nations.

Dr. P.B. Jayasundera: Long term guided by economic principles

The need for relying on economic principles in long term policy making was

emphasised by the other top economic policy maker in the country, Dr. P.B.

Jayasundera, Secretary to the Ministry of Finance and ex-officio member of the

Monetary Board of the Central Bank when he delivered the Dr. W.M. Tilakaratna

Memorial Oration recently in Colombo. (available at:

http://www.ft.lk/2014/04/17/contemporary-thrust-of-sri-lankas-development-strategy-

part-ii/ ).

The reputed economist, throughout his speech, had emphasised the action taken by

this government to consolidate the budgetary process to maintain the budget deficit at

4% of GDP by generating savings in the budget, both of which are in fact in accord

with the conventional wisdom in economics. Hence, in the short run, a policy maker

has the liberty to sort out day to day issues by drawing on his practical wisdom. But in

the long run, it is the conventional wisdom that will help a country to maintain growth

and sustainability in an economy. That was the essential message delivered by

Professor Jin Park, an expert on development economics and government reforms, in

his above mentioned lecture.

Korea was a laggard in 1960s

In 1960s, before South Korea embarked on its remarkable

growth initiative tag-lined ‘Miracle on the Han River’ imitated from

the West Germany’s ‘Miracle on the River Rhine’ which it created

to boost public support for the economic reconstruction after the

World War II, South Korea was behind many of the poor nations

today.

As Jin Park has noted, with a per capita income or PCI of just $

80 in 1960, South Korea was a little ahead of Ghana (PCI = $ 75)

but behind Mozambique (PCI = $ 85). It was a way behind Sri

Lanka whose PCI in 1960 amounted to $ 142. But after 30 years

in 1990, Park said that South Korea was well ahead of all these

countries: Its PCI of $ 6673 was a tall pillar rising into the sky

among the dwarfs of Ghana (PCI = 902), Mozambique (PCI = $

760) and Sri Lanka (PCI = $ 472). In the next 22 years, the gap

was still wider except in the case of Sri Lanka which managed to

reach a PCI level, according to official statistics, of $ 2923 as

against South Korea’s PCI of $ 22590.

Four secrets contributing to economic success

Park then highlighted four secrets of South Korea’s remarkable success: Motivation of

people, firms and political leadership including the government service, focus on

leading industries instead of seeking to develop everything, coordination of

development efforts with newly built infrastructural facilities and among firms and

effective capacity-building in all levels in the economy. These four secrets are nothing

but strategies which South Korea had adopted in order to give a sudden boost to its

economy. But they were all based on sound economic principles rather than ad hoc

experiences of policy makers.

Lazy Koreans were matched by dependent firms in 60s

The motivation was necessary, according to Park, because both individuals and firms

in South Korea in 1950s were not geared to development. People were lazy and had

imbibed themselves in drinking and gambling thereby wasting away the meagre

incomes they had made. In such abject poverty and wasteful expenditure, they were

dependent on the government for a living and could not invest in the education of

children or health of their families. The result was the condemnation of the majority of

individuals into a vicious cycle of poverty. Firms on the other hand were having a good

time due to the protections afforded to them by import controls. Hence, there was no

necessity for either individuals or firms to work hard in order to earn their living and

advance their conditions.

Killing laziness and dependence in Korea

How could the policymakers motivate people and firms into action? That is only by

following sound economic logic. If people and firms are continuously supported by the

government without favouring winners more than what it would give to non-winners,

both individuals and firms have no incentive to become self-reliant. Economists call

this ‘moral hazard behaviour’. Then, in order to get the support, people and firms will

choose to be in the group that is being supported by the government making the

selection being made by the government adverse to it right from the beginning – a kind

of adverse selection problem according to economists. Then, what is known in

economics as Gresham’s Law comes into play.

When people see that their neighbours who are lazy and unproductive are being

supported by the government, they leave all productive jobs and become lazy too.

Thus, lazy people will drive out the hard-working people. Finally, what happens is that

laziness and dependence become wide-spread throughout the economy. If the

economy wishes to make a ‘breakout’, it has to kill the laziness and dependence by

punishing those who are lazy and dependent and rewarding those who are hard-

working and aspiring to become self-reliant.

President Park Chung-hee: Support who will support themselves

This is exactly what South Korea did according to Park. President Park Chung-hee

who was in power at that time had announced that he would support only those who

help themselves. If individuals work hard and firms seek to be self-reliant, the

government too will support them. That was the only way, as announced by President

Park, to ‘eradicate sense of dependence and encourage work ethics’.

In other words, the President, guided by sound economic logic, did not want to

promote moral hazard behaviour in people or firms, was not prepared to make an

adverse selection and wanted to put a stop to the operation of the Gresham’s Law.

Then the President had made a bold statement that he was prepared to even risk his

presidency by sticking to those essential but politically unpopular policies. The policy

of the government was that it ‘will support who make improvement and not those who

need improvement’. It is only a few leaders in developing countries who have courage

to make such bold statements.

Supporting only the winner

In the case of business firms, the government’s approach was firm. Loans at lower

interest rates were given to firms which exported more, based on their track record

and not on the rosy plans they have come up with. This created a spirit of competition

among business firms to win favours from the government by becoming better. The

bottom-line, according to Park, was that ‘encourage competition and support only the

winner’. Those winners were further rewarded by reducing the income tax rates

applicable to them. This was like granting partial tax holidays to firms that had shown

better performance.

Recruit the best to the public service

The motivation of government officers was done, according to Park, by adopting three

strategies. First, the political commitment to development was demonstrated by the

active participation of the President in reviewing the progress of the activities at a high-

level committee chaired by him. Second, the public service was filled by top graduates

from universities recruited through independent and transparent recruitment

examinations. That was to eliminate irregularity, favouritism and nepotism in the

recruitment to public service and fill it with top class officers. Third, Ministers and Vice-

Ministers were chosen out of top class civil servants to add a professional flavour to

the ranks in the Cabinet.

This means that in the case of ministerial positions, there was a selection process in

addition to the election process similar to the system that prevails in Singapore. If

Ministers are not in a position to make sound decisions because of ignorance,

incompetence or inexperience, then, the whole government operations become

ineffective and inefficient. The motto behind this procedure was that everybody was

given high hopes so that they had the incentive to remain clean in their affairs and

acquire knowledge through a continuous learning program.

President Park: We’ll win nothing if we try to win everything

The right focus is the more difficult and complex strategy adopted by South Korea. In

any country, including Sri Lanka, political leadership tends to embrace everything

without considering the country’s ability and resource availability. This is because the

political leadership is normally set on pleasing everyone with an eye on winning

elections. South Korea selected a few industries to focus on so that once they are

developed to very high degree, they will open the gateway for the country to reach the

wider world on the one hand and support all other link industries on the other.

Park compared it to the case of a father with several children providing higher

education facilities only to one so that he would support all others later. This strategy

was amply explained by President Park who remarked that ‘we’ll win nothing when we

try to win everything’. The five industries selected were from ship-building, electronics,

cellular phones, automobiles, steel and chemicals and Korean firms in these industries

today have occupied the first few top positions in the world.

“South Korea is a good example for other developing countries to emulate. But can

that be replicated in cultures which do not have the cultural attributes which South

Korea has? The answer is there is nothing impossible if one makes an honest attempt

with a clean political leadership and a competent public service. Hence, if Sri Lanka is

to replicate the miracle which South Korea has created, it has to first of all clean the

government and make it competent”

The criteria for selecting these focus industries were all based on economic logic:

Whether they could succeed in the future with the available resources and technology,

whether they could build up linkages with the rest of the economy and whether they

could sustain their employment levels in the future’ This strategy enabled South Korea

to move from simple products to complex products over the time and become world

leaders in those complex products beating Japan, North America and Europe, a sure

way to have a reserved market for its products.

Coordinate infrastructure with industry

South Korea built a large number of new infrastructural facilities but all of them were

well coordinated with industry so that they became productive right from the beginning.

Thus, they were responsible for providing positive support to all economic activities. In

a free market economy with profit seeking individuals and firms, there is no necessity

for an outside body to make the needed coordination of activities.

However, if an economy is interested in achieving the best results within a short time

period, it is necessary for the government to do the coordination work actively.

Accordingly, the government took action to link industries to infrastructure, to newly

developed research and development institutions and to training institutions in a bid to

enhance the skills base of the workers.

Build capacity of individuals, firms and public service continuously

For an economy to maintain sustainable economic growth, it is necessary to invest in

the continuous capacity building of both individuals and firms on one side and the

government organisations on the other side. If firms and individuals are efficient but

the government is inefficient, then, the government’s inefficiency will rub on the private

sector impeding its growth.

On the other hand, if the government is efficient but the private sector is inefficient, the

government will find it difficult to move forward with the burdensome shackles tied to

its legs. Hence, it is necessary for all the three to build their capacity simultaneously.

Accordingly, the educational system was reformed to help individuals to build their

capacity. While the local universities were developed, as was the case in Singapore, in

the line of reputed foreign universities, scholarships were granted to Korean citizens to

complete doctorates in essential subjects in best universities in the West.

Vocational high schools were set up so that those who could not get into universities

could train themselves as technically qualified workers who were in large demand by

heavy industries promoted in the country. Hence, it was a sure way for a young person

to get himself quickly employed. The capacity of firms was developed to facilitate them

to go for original equipment manufacturing after getting into original designing. It

facilitated firms to acquire what they do not have. They were supported with

technology by a large number of government owned research institutes. Firms were

encouraged to engage sub-contractors so that there was effective linkage with the rest

of the economy.

Governments to intervene only if they are clean and competent

Park said that Korea believed in government intervention in the economy only if it is

clean and competent. If not, it is better if the government does not intervene in the

economy at all and instead rely on the market. It is the worst if a corrupt and

incompetent government intervenes in an economy since it could destroy everything

which the private initiatives have attained. But this is the case with many developing

countries and Sri Lanka is not an exception.

Miracles are not impossible if political leadership is clean and competent

South Korea is a good example for other developing countries to emulate. But can that

be replicated in cultures which do not have the cultural attributes which South Korea

has? The answer is there is nothing impossible if one makes an honest attempt with a

clean political leadership and a competent public service. Hence, if Sri Lanka is to

replicate the miracle which South Korea has created, it has to first of all clean the

government and make it competent.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can

be reached at waw1949@gmail.com.)