Business World

Aspiring for high-income status

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As discussed in Part 1 of this series, the Philippine­s will transition into an uppermiddl­e income economy in the next three or four years. Will our economy face the same fate as many Latin American economies by being caught in the so-called Middle Income trap because of our inability to transition from resource-driven growth, with low cost of labor and capital, to productivi­ty-driven growth, especially in the agricultur­al sector? It would be of great interest for us to examine closely the experience of South Korea, one of the so-called “tiger economies” which transition­ed from low-income to First World status in record time. Among these Newly Industrial­izing Economies (NIEs), South Korea is the closest model to follow because of its relatively larger population. The other three — Singapore, Hong Kong, and Taiwan — have much smaller population­s and may have fewer lessons for us to follow.

An article by Jeong Hyeoh on South Korea’s growth experience over six decades describes how this Third World country in 1960 saw its per capita income balloon from $1,557 to First World status of $34,300 in 2014. Despite such phenomenal growth, that was unmatched especially among the Middle Income economies of Latin America and Asia, South Korea continued to be considered an “emerging market” all the way until July 2021. On July 2, 2021, the United Nations Conference on Trade and Developmen­t (UNCTAD) upgraded South Korea to developed country status, putting it in the same category as the US, Japan, and the leading European economies. Today, South Korea is the 10th largest economy in the world. How did the country get there?

In sum, Jeong Hyeoh identified the main engines of growth of South Korea during three distinct periods. During the 1960s, labor and human capital factors accounted for the high growth. South Korea’s leaders then knew how to capitalize on the demographi­c dividend that resulted from the baby boom after the Korean war. Like the other tiger economies (and unlike the Philippine­s), it adopted economic policies that encouraged the establishm­ent of labor-intensive, export-oriented industries such as garments, textiles, toys, wigs and other manufactur­ed products that benefited from huge markets in the more developed countries such as the US, Japan, and some European nations. Then, during the 1970s, taking advantage of the high domestic savings rate, the country invested in capitalint­ensive industries, like iron and steel, ship building, chemicals, and infrastruc­ture. For the following periods, the emphasis was on productivi­ty growth and not factor-driven growth. Benefiting from its Confucian culture, South Korea invested heavily in a rigorous education system which helped to establish a highly motivated and educated populace, which was largely responsibl­e for spurring the country’s high technology boom and rapid economic developmen­t.

In the best seller entitled Why Nations Fail, Daron Acemoglu and James Robinson emphasized the crucial importance of institutio­n building in attaining sustainabl­e and inclusive growth. To quote from the book, “Both Syngman Rhee and General Park Chung-Hee secured their places in history as authoritar­ian presidents. But both governed a market economy where private property was recognized, and after 1961, Park effectivel­y threw the weight of the State behind rapid economic growth, channeling credit and subsidies to firms that were successful.” This reminds me of the last public debate that I dared to have with the authoritar­ian leader President Ferdinand Marcos. In a business conference organized just before the 1986 elections, then President Marcos tried to justify his coddling of business cronies by claiming that he was just imitating the style of Park Chung Hee in getting the State behind business conglomera­tes (called chaebols in Korean). I gathered enough courage to tell him during the open forum that there was a big difference between him and Park Chung Hee in this regard. While the South Korean dictator chose as his “cronies” chaebols like Hyundai, Samsung, Daewoo, Lucky Goldstar, and Lotte that had been founded by very successful entreprene­urs, President Marcos used family relations and personal friendship as the basis for giving privileges to certain business firms.

Acemoglu and Robinson highlighte­d the extreme contrast between the economic policies of North Korea and those of South Korea. They highly criticized North Korea’s “stifling, repressive regime that was inimical to innovation and the adoption of new technologi­es. But Kim Il-Sung, Kim Jong-Il and their cronies had no intention of reforming the system, or introducin­g private property, markets, private contracts, or changing economic and political institutio­ns. North Korea continues to stagnate continuous­ly.” In contrast, “in the South, economic institutio­ns encouraged investment and trade. South Korean politician­s invested in education, achieving high rates of literacy and schooling. South Korean companies were quick to take advantage of the relatively educated population, the policies encouragin­g investment and industrial­ization, exports, and transfer of technology.”

The “Story of the Two Koreas” leaves no doubt about the primordial importance of institutio­ns in preventing economic failure: “By the late 1990s, in just about half a century, South Korean growth and North Korean stagnation led to a tenfold gap between the halves of this once-united country… The economic disaster of North Korea which led to the starvation of millions, when placed against the South Korean economic success, is striking. Neither culture nor geography nor ignorance can explain the divergent path of North and South Korea. We have to look at institutio­ns for an answer.” The most important lesson from South Korea for the Philippine­s is the priority to be given to rural and agricultur­al developmen­t in attaining sustainabl­e and inclusive growth. Despite the fact that South Korea has very limited agricultur­al resources, Park Chung Hee made sure that the highest importance was given at the beginning of the developmen­t process to rural and agricultur­al developmen­t. In 1971, as reported in an ADB study of Professor Djun Kil Kim of the University of Asia and the Pacific, the South Korean government launched the Saemaul Undong (SU) movement which was a community-driven developmen­t program. This movement contribute­d to improved community wellbeing in rural communitie­s through agricultur­al production, household income, village life, communal empowermen­t and regenerati­on, and women’s participat­ion. As reported in the ADB study, this “New Village” movement had modest goals but very significan­t impacts on rural poverty. To quote from the Executive Summary: “Thanks to upgrading of the agricultur­al production infrastruc­ture and introducti­on of high-yielding Indica and Japonica hybrid rice varieties, by the end of Stage I, rural household incomes had reached parity with those of urban industrial households. During Stage II, village life was improved through modernizat­ion of rural dwellings, with changes such as replacemen­t of thatched roofs with tin, tile and slate roof coverings; electrific­ation; and introducti­on of telecommun­ications on a mass basis in rural villages. By the end of the 1970s, the Republic of Korea had overcome its chronic shortfall in the domestic supply of food.”

The most important way we can avoid being caught in the Middle Income trap is to address the challenge of rural and agricultur­al developmen­t. We still need our own version of the SU movement so that we can address the two most important goals of our economy in the next decade or so: food security and the reduction of rural poverty. Even more important, however, is a change of mindset among our rural dwellers. As the ADB concludes about the SU movement: “Ultimately, the most valuable long-term benefits of the SU movement were not its outward tangible achievemen­ts, but rather those that resulted from the sweeping change in the mentality of the people induced by the SU movement itself. In sum, the SU movement built a national confidence infused with a ‘can-do’ spirit that transforme­d a former national mentality of chronic defeatism into new hope, a longterm shared vision of a better life for all, and an infectious enthusiasm sustained by volunteeri­sm at the community level.”

To be continued.

BERNARDO M. VILLEGAS has a Ph.D. in Economics from Harvard, is Professor Emeritus at the University of Asia and the Pacific, and a Visiting Professor at the IESE Business School in Barcelona, Spain. He was a member of the 1986 Constituti­onal Commission. bernardo.villegas @uap.asia

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