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May 23, 2019

The Korean model


May 23, 2019

Pakistan’s economic conditions remain dire but there is hope. It is time it looks East for inspiration. Had we looked East decades back we could have been a happier country today. Much could be learnt from the successes of China, Malaysia, Bangladesh and South Korea -- all of whom were unconventional in their policies. A small window of opportunity may still be available to Pakistan before our population monster devours us.

Let us focus on South Korea. Its GDP rose from $2.4 billion in 1961 to $1.5 trillion in 2018. The per capita income surged from $94 to $30,000 during this period. Amazingly, in 1961 Pakistan’s economy was better placed but today our GDP is a paltry $350 billion and the per capita income about $1600 dollars. Empty rhetoric and faulty reading of development dynamics were responsible for our failure. Tall promises, bogus claims and loud speeches are no panacea for success; mature understanding of the economic environment, strict discipline and hard work are.

At the time of partition of Korea along the 38 parallel, the South was poorer than the communist North. After the Korean war ended in 1953, South Korea experienced low economic growth with high corruption under then president Syngman Rhee. The coup d’etat in 1961 by General Park Chung Hee which led to 20 years of military rule was mainly responsible for the economic miracle in South Korea.

South Korea’s success story was built upon three ingredients. (The fourth factor was sharing the heavy defence expenditure with the US).

First, the Koreans realized that economic progress depended upon human resource development. Elementary education, scientific and technical training and healthcare were given center stage. Second, a strict and authoritarian executive within a stable economic environment spread over two decades was provided by president Park Chung Hee. A premium was placed on achieving the industrial objectives set and any deviation or slackness was quickly penalized. The crucial policy change was that General Park substituted performance for cronyism. Such strict adherence to policy is equally possible within a democratic framework.

Thirdly, state protection was provided for ‘infant industries’, based on import substitution and export growth, subsidized credit and development of heavy industries.

President Park decided early to focus on Heavy and Chemical Industries (HCI) which turned out to be an overwhelming success. During 1950, the Korean net domestic savings were close to zero which rose to 20 percent of GDP by 1970 and to 35 percent in 1990. He believed in the primacy of state power with strong and centralized management of the economy. His was an effective government under the authoritarian Yashin constitution. An Economic Planning Board was created in 1961 under the deputy prime minister with wide powers and the best available expertise was recruited.

General Park fully protected the ‘infant’ industries but only for a limited period and on the condition that the protected industries must progressively become competitive internationally. Subsidized loans and other facilities were provided and the real interest rate for the development of select export enhancing and heavy industries was reduced to a low of minus five percent or more. The qualifying criteria for support was quality performance only unlike in Pakistan where the textile, vehicle assembly and sugar industries remain stagnant and non-competitive despite decades of state protection. Losing state concerns were sold or leased out -- unlike PIA, Discos and the steel mills in Pakistan.

The neo-classical economists’ belief that import substitution policies never succeed over time were proved wrong. The protection accorded to the export enhancing and import substituting industries was conditional upon achieving the targets assigned. Imports were eased on items used for developing export goods. Any laxity or failure resulted in withholding state subsidies, bank credits and other protective measures. ‘Sound’ firms routinely bought struggling ‘unsound’ firms which created inbuilt economic efficiencies. Public enterprises grew at annual rates of up to 10 percent with their share rising to 9 percent in GDP. Banks were guaranteed against loan defaults for selected industries.

The same businessmen, industrialists and politicians who were earlier held responsible for corrupt practices and fraudulent transactions were directed to invest in modern industries to avoid prosecution for their past misdeeds. Most of them responded energetically to the offer and repatriated their money in the development of the new Korea. This was how the first ‘chaebols’ like Samsung, Daewoo, Goldstar and Hyundai emerged. They soon became household names for class and competed successfully with the best products in the world. Hyundai for instance became so adept in heavy industries that it remained profitable even when there was a glut in ship building across the world. However, those ‘chaebols’ that performed poorly soon became bankrupt because they were unable to compete efficiently and were taken over by the efficient performers.

The repatriation of capital from abroad might be a pragmatic approach to follow in Pakistan. Incentives should be offered to those with wealth stashed outside for establishing modern industries in Pakistan. Such an arrangement would mean no one would lose face while the economy would benefit enormously. A win-win for all!

In 1968, after the World Bank rejected a proposal for building a steel plant in the public sector the government developed POSCO (Pohang Iron Steel Company) and placed it under a very capable and devoted senior military officer Gen Park Tae-joon who operated it till 1992. However, corporate executives and generals who failed to achieve excellence were soon cashiered. The steel production climbed to nine million tons initially, rising further to 17 some decades later. (Some years back, POSCO offered to lease/buy the Karachi Steel mills but was rebuffed by the government of the day). Similarly, in Pakistan the World Bank declined to fund the vital water-storing Diamer-Basha Dam and instead forced on us the low priority Dasu dam.

The Koreans also proved that the concept of comparative advantage could be turned around with dynamic state support. Much later, Bangladesh drove home the same argument by outclassing established textile weaving and stitching manufacturers through constant innovation and dexterity. Much earlier we saw that without any comparative advantage Sialkot developed world-class sports goods industries, almost by accident, due only to the skills of its artisans and the dedication of sponsors.

Is there a lesson for Pakistan? Yes, looking East is more profitable than cringing towards the West.

The writer has served as the chief secretary of GB, AJK, KP and Sindh and was the chairman of Wapda and the Pakistan Railways.

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