Bernardo M. Villegas
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Miracle on the River Han (Dec. 24, 2012)

           Every time I travel to South Korea, I cannot help but marvel at what has been referred to as "the miracle on the River Han."  Completely devastated by the war with North Korea in the early 1950s, left with practically no natural resources after the South-North division, ravaged by a corrupt regime during the early years of its independence and under constant military threat from its northern neighbor, this country of 50 million today was able to leapfrog from a Third World status at less than $100 per capita of annual income in the 1960s to close to $30,000 today.  Now a member of the elite club of advanced nations called the OECD, a recent host of the G-20, still considered as one of the emerging markets that will dominate the global economy in economic growth in the next two decades, and already a part of the most powerful economies in the world (having surpassed the one trillion dollars of GDP threshold), South Korea is undoubtedly a global economic power.  As David Pilling wrote in the Financial Times (September 27, 2012),  "And whether it is winning $20 billion nuclear contracts in Abu Dhabi, pouring money into emerging markets such as India, China and Brazil, or vying with Japan to be Washington's best friend in Asia, Seoul is having a global impact as never before."

          In my book, South Korea should be for the emerging markets of today the "lead goose" to follow as Japan was at the head of the "flying geese" formation of the Newly Industrializing Economies (NICs) of the last century.  It is no secret that what many of the East Asian countries tried to do in the last century was to replicate as much as possible what Japan had been able to attain in the first half of the last century, when the foundation of its industrial economy was laid.  With strong leadership from the State, the first ones to follow the Japanese model were Singapore, Taiwan and South Korea.  Hong Kong also adopted the export-oriented model but with less government intervention and more free-market policies.  What was common to them in the 1960s and 1970s and to Malaysia, Thailand and Indonesia in the 1980s and 1990s was their ability to capitalize on the demographic dividend they enjoyed as a result of the baby boom after the Second World War by adopting economic policies friendly to labor-intensive industrialization.  They raised their savings rates and invested heavily in infrastructures, especially rural or countryside infrastructures.  As Paul Krugman wrote in a celebrated essay, there was nothing "miraculous" about their outstanding economic performances.  They just had the wisdom of making full use of their human resources by adopting the appropriate economic policies.  The country that stood out like a sore thumb was the Philippines that lingered too long on the discredited import-substitution, inward-looking, protectionist and ultra-nationalist industrial policy and committing the most serious error of neglecting rural and agricultural development. No wonder it was derisively referred to by the end of the last century as the "sick man of Asia."

          In the light of the Krugman thesis, the "miracle on the River Han" was not strictly an economic miracle.  A miracle strictly so-called is a phenomenon or event for which there is no human or natural explanation.  The success stories of the NICs or NIEs had a very obvious explanation:  enlightened economic policies.  The failures of many Latin American economies as well as the Philippines by the same token had a clear explanation:  erroneous or unenlightened economic policies.  Let me summarize what the enlightened policies were.  First of all, with the exception of Singapore and Hong Kong that had no natural resources, all the successful NIEs gave a high priority to rural and agricultural development, the most obvious of which were Malaysia and Thailand.  Even Taiwan and South Korea, that have meager agricultural resources, had the sense and political will to focus on the difficult process of agrarian reform and heavily invested in farm-to-market roads, irrigations systems, post-harvest facilities and other infrastructural support that the small farmers needed to make a decent living.  Taiwan's agrarian reform program was a model for the developing world.  Through the strong leadership of authoritarian leader Park Chung Hee, the Saemaul Undung movement, a community-based rural development program, transformed the South Korean countryside.  This focus on agricultural productivity created a bigger market among the predominantly rural population then for the consumer goods that local industries started to produce at the initial stage of industrialization.   In fact, this early focus on the mass market that farmers constitute should be a timely reminder to today's emerging markets that their engine of growth should be increasingly the domestic market rather than foreign markets.      In the case of South Korea, the only one with a sufficiently large domestic market among the first "tiger economies", there is the added feature of a large country avoiding the so-called "middle-income" trap into which many developing countries fell over the last thirty years.  Countries like Brazil, South Africa, Thailand, Indonesia, the Philippines, Turkey, Egypt, Pakistan, Iran and Nigeria have not been able to break away from their middle-income status for decades.  These have reached middle income status but have been unable to grow to advanced country levels.  They are unable to compete with low income, low wage economies in manufacturing exports while unable to compete with advanced economies in high skill innovations.  These countries are finding it difficult to transition from resource-driven growth, with the low cost labor and capital, to productivity-driven growth. Some of them have been inflicted with what is known as the Dutch disease, overly depending on the export of natural resources.

          How was South Korea able to escape the middle-income trap?  First, like the other successful NIEs, it focused on rural infrastructures and agricultural development in its first decades of economic development.  Here the Saemaul Undung program was an essential component.  Then, through an undervalued currency, realistically high interest rates, and prudent fiscal management, its economy had a very successful export-oriented industrialization.  It then surpassed many of its peers in investing in quality education for all and at all levels.  Through a close and strong partnership with the private sector, especially the so-called chaebols, the State was able to encourage a high level of investments in research and development, creating an atmosphere of innovation in key industries that spawned the likes of  Samsung, Hyundai, Hanjin, Lucky Gold Star, and other world leaders in product and technological innovation.

           A word about the chaebols.  Today, the younger generation in South Korea is very critical of these large conglomerates that can trace their rapid rise to the time when Park Chung Hee worked closely with their founders to build powerful industrial empires.  These chaebols are now being criticized because of their alleged monopolistic practices and their strangle hold on the economy, to the detriment of the small and medium-scale enterprises that are powerless in the face of their economic power.  I have long studied the role of the chaebols in the phenomenal rise of South Korea.  My conclusion is that they served a very important purpose at the time that Park Chung Hee engaged them as partners in the industrialization of his country.  Without them,  Korean industry would have not reached the economies of scale needed in the 1970s and 1980s to be able to compete with the industrial giants of the U.S., Europe and Japan.  They would not have been able to amass the needed resources to invest aggressively in research and development that have handsomely paid off in today's lead of Samsung, Hyundai, LG and other Korean companies that are unquestionable global pacesetters.  Without being blind to the human rights abuses during the Park Chung Hee regime, it is possible to recognize the wisdom of his close partnership with these conglomerates that were chosen, not on the basis of political patronage or blood relations as in the case of President Marcos  of the Philippines or President Suharto of Indonesia, but on the merits or track records of the founders of the Korean chaebols.

          That was forty years ago.  Today, there is reason to complain about the monopolistic practices of the chaebols.  Just witness how Samsung was heavily fined in an anti-trust case filed by Apple.  South Korean leaders today, especially the daughter of Park Chung Hee if she wins the presidency, must be committed to implementing a very strict and effective competition policy that will guarantee true economic democracy in tandem with the political democracy that South Korea has painstakingly built over the last twenty five years.  I fully concur with the observations of David Pilling in his FT commentary about the December 2012 presidential elections:  "One possible interpretation of the political mess in general and the popularity of the political novice Mr. Ahn (an IT entrepreneur) in particular is that Korea is going through a crisis of democratic legitimacy.  That would be quite the wrong conclusion.  The country that threw off dictatorship in 1987 is now as robust, if imperfect, a democracy as any in Asia, a rebuke to those who argue that Confucian societies or 'Asian values' are somehow incompatible with the ballot box.  Far from suggesting that democracy is failing Korea, the noisy tussle around the presidency shows a system adapting to the popular will.  That, at least, should brighten the national mood."  I can only say Amen, thinking of a similar political mess that we are now witnessing as we move in the Philippines to the next national elections in May 2013.  For comments, my email address is bernardo.villegas@uap.asia