Bernardo M. Villegas
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Aspiring for High Income Status (Part 5)

            As discussed in Part 1 of this series, the Philippines will transition to an upper-middle 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 a 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” who 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, i. e, 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 during 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” till all the way to 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 U.S., 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 U.S., Japan and some European nations.  Then during the 1970s, taking advantage of the high domestic savings rate, the country invested in capital-intensive industries, like iron and steel, ship building, chemicals and infrastructures.  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 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 long-term shared vision of a better life for all, and an infectious enthusiasm sustained by volunteerism at the community level.” To be continued.