HVK Archives: For the Seoul of the state
For the Seoul of the state - The Telegraph
Sudip Chaudhuri
()
25 August 1997
Title: For the Seoul of the state
Author: Sudip Chaudhuri
Publication: The Telegraph
Date: August 25, 1997
What should the state do? This is the moot question addressed by this
year's World Development Report of the World Bank. For years, the World
Bank has been actively propagating the idea that the state should not play
an active role in economic development. The state should decide how
resources are to be allocated. Such basic economic decisions as what
should be produced, how they should be produced and who should produce
should be left to market mechanisms - and, of course, the World Bank.
Economic performance has been poor in countries like India, where the state
was assigned a major role In economic strategy This has been used as an
argument in support of the World Bank position. But what has created
problems for the overall acceptance of the World Bank view is the
successful state intervention in Japan, South Korea and some other east
Asian countries.
What basically the report says is these are atypical countries. Others
should not follow them. The report admits that the state can actively
intervene to enhance economic growth. But whether or not it should try to
do so depends on its capability.
Countries with low state capability should concentrate on the following
five fundamental functions: establishing a foundation of law, maintaining a
favourable policy environment including macroeconomic stability, investing
in basic social services and infrastructure, protecting the vulnerable and
safeguarding the environment. The report stresses the importance of
raising state capability by reinforcing public institutions. But till that
capability has been built up, they should not go beyond these basics.
The implication for countries like India, where state capability is
considered to be low, is clear: the state should abandon most of the
economic functions it has been performing. Public enterprises should be
privatized, trade and investment should be liberalized and so on. This is
precisely what the World Bank has been telling these countries to do all
these years.
If such an advice were taken seriously in South Korea, when it embarked on
the process of industrialization, then the state should not and could not
have played an active and productive role. The economic condition of South
Korea in the Fifties was dismal. The government was considered to be
incompetent and corrupt. Such was the level of dissatisfaction that a
student revolt forced the government of Syngman Rhee - which had been in
power since 1948 - to step down in 1960. When a military coup led by Park
Chung Hee overthrew the government in 1961, the economy was passing through
a severe crisis with decreasing growth and rising employment.
Such a background would have been considered by the World Bank as totally
unsuitable for an interventionist state. But Park, who became the president
and ruled like a dictator till his assassination in 1979, initiated and
implemented an economic strategy with the government as the major actor
This transformed the economy and achieved remarkable economic progress.
Much of South Korea's dramatic economic changes actually took place during
Park's regime.
The growth of exports was a major factor behind South Korea's economic
success. Export promotion was one of the first things which Park's
government did in an organized way. The United States agency for
international development and the World Bank played active roles in
devising the export oriented policies. Some of what South Korea did -
periodic devaluation of its currency, no taxes on foreign and domestic
inputs used for exports - formed part of the standard neo-classical trade
policies which these organizations promote.
But South Korea did much more than that. A number of non-market instruments
were used for promoting exports. Lets take an example. The system of
export targetting was introduced in 1962. The targets were comprehensive
and specified the firms, the commodities and the markets to be penetrated.
These targets were closely monitored. Daily contacts were made with the
major exporters and problems, if any, were directly tackled. A monthly
trade promotion meeting chaired by the president and attended by ministers,
bankers, successful exporters, both big and small, used to be held to
supervise the progress and act accordingly.
South Korea not just promoted exports. It also started substituting imports
and developing domestic industries. The government directly initiated the
manufacturing of a number of vital products, such as steel, fertilizers,
petrochemicals and refined petroleum products. Public enterprises in South
Korea actually played a more important role than in most other countries of
the world.
But it is true that it is the private sector which has so far played a more
dynamic role. South Korean private enterprises however did not operate
independently. Park, the chief architect of South Korea's industrialization
strategy, believed that without government guidance rapid economic growth
is not possible. Allocation of resources was not to be left to market
mechanisms. The government was to decide the important economic activities
to be promoted and mobilize and direct the flow of resources accordingly
The government masterminded every major industrial project in the country
during the Sixties and the Seventies. It promoted selected industries. The
industries designated as priority industries received massive support from
the government. To direct the flow of resources to the desired industries
and firms, the government used a wide variety of instruments, including
industrial licensing and import control. Import regime was liberal in the
export industries. But imports otherwise were tightly controlled.
The objective of the government was not only -to develop industries but to
do so under South Korean control. It was believed that the South Korean
economy could not be developed unless industry came up. Hence, foreign
direct investment was carefully regulated. FDI for exports was identified
as one of the desirable areas and hence no restrictions were imposed on them.
In fact, liberal incentives were offered to attract export oriented
investments. FDI proposals for the domestic market however were routinely
screened and approvals were not granted unless national objectives were
satisfied. Foreign enterprises were not allowed to grow at the cost of
South Korean enterprises. Uncontrolled FDI was considered to be detrimental
to national developmental goals. Foreign capital and technology were used
but were regulated to fit in with the national priorities.
Thus the lessons from the World Development Report and South Korea are
different. What we learn from South Korea is that ineffectiveness of
government at a particular point of time is not an argument for not
assigning the government an active economic role. The countries should
decide their priorities themselves and act according to their national
interests.
After all, the World Bank advised South Korea not to go ahead with its plan
to set up a steel plant. It did and today it is among the most efficient
producers of steel in the world. South Korea's experience supports those
who are unhappy with the way the state has intervened in India, but rather
than relegating it to the background, want a reorientation of policies.
(The author is professor of economics, Indian Institute of Management,
Calcutta)
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