When economists or policymakers talk about industrial policy, Korea usually enters the conversation. There’s no question that Korea has had remarkable economic success in recent decades. There’s no question that various government policies have contributed to that success. But there is continuing controversy over what broader conclusions to draw from this experience. Shahid Yusuf offers useful background by laying out what actually happened Korea’s development experience in “Could Innovation and Productivity
Drive Growth in African Countries? Lessons from Korea” (Center for Global Development, Working Paper 635, March 2023).
As a starting point, here’s a graph from the World Development Indicators database maintained by the World Bank. It shows per capita GDP for Japan and South Korea in inflation-adjusted dollars. In 1990, Japan’s per capita GDP was triple that of South Korea. By 2021, Japan’s lead was down to just 7%. I try to adhere to the creed of never making predictions, especially about the future. But it is not at all inconceivable that a few years down the road, Korea will surpass Japan in per capita GDP.
What policy lessons can be learned from Korea’s remarkable growth trajectory? Yusuf hits the key themes here, but I’ll quote some of his comments in an order of my own.
As a starting point, remember Korea’s situation after World War II and the Korean War that followed from 1950-53. As Yusuf notes, Korea had an egalitarian redistribution of land after World War II: “The distribution of land formerly owned by the Japanese to Korean farmers in 1949 may have contributed to the egalitarian distribution of income and political stability that buttressed Korea’s later development. This redistribution was undertaken by the US. Military Government.” Moreover, South Korea had an external enemy–North Korea–to unite against: “One should not overlook, the threat South Korea faced from its neighbor to the North, a threat that drove the government to accelerate industrialization. Industrial diversification and deepening enabled Korea to meet more of its defense requirements and neutralize the pressure from its hostile neighbor.”
In the 1960s, Korea’s government and business leaders determined to begin a drive to industrialization:
“The unwavering commitment of the political leadership and the business elite, starting with President Park Chung Hee in the mid 1960s and sustained by his successors, to a relatively inclusive, export-led industrial strategy entailing systematic diversification into more complex manufactures, is arguably the most frequently retailed. The strategy itself was choreographed and implemented by Korea’s economic bureaucracy headed by the Economic Planning Board (EPB) in consultation with the leading business groups. The Five-Year Economic Development and Science and Technology Comprehensive Plans spelled out the government’s vision and objectives. Presidential focus on industrial and export outcomes with reference to assigned targets and the attention given to cross sectoral coordination by the EPB mandarins, minimized failures that can short circuit linkage effects and stymie industrial change (Rodrik 1996).”
It’s useful to emphasize several themes about this broad policy approach.
1) There is a built-in emphasis on export-led development. This is a useful policy guideline, because a government can do a lot of things to favor its companies in their domestic sales, but expanding market share in international markets suggests genuine growth of competitiveness. Korean companies that couldn’t meet their targets in international markets found that their government subsidies were reduced or eliminated.
2) Korea’s development strategy was very broad-based, going way beyond offfering subsidies and cheap credit to certain industries. For example, World Bank data says that back in 1970, about 15% of the over-25 population in Korea had completed “upper secondary” education (basically the equivalent of high school. By 1990 the proportion was about half, and now it’s about three-quarters. “Education especially in STEM disciplines and the development of industrial skills was also a priority from the very outset. Thousands of Korean students went abroad to study and links with foreign universities also facilitated a sharing of information on curricula and teaching modalities. Industrial diversification could not have succeeded had the supply of human capital and workforce skills fallen short .”
This graphic shows a range of policies: interventionist support for manufacturing, but also development of human capital (including heavy use of vocational training, science and technology education, and overseas training and education), strong support for research and development; and policies to bring technology from around the world and diffuse it into Korean firms.
3) Korea followed a step-by-step approach to development, with each step building on the previous one.
Korea’s manufacturing in the 1960s revolved around light, labor intensive activities such as
garments, footwear, toys, food products, and light consumer electricals. The kind that were the norm in other low income economies. But starting in the early 1970s, Korea initiated a structural break and launched its heavy and chemical industry promotion plan (HCIPP) so as to diversify into more complex and technology intensive products. It constructed a state-owned iron and steel complex at Pohang financed in part by Japanese grants, a machinery production complex at Changwon, a petrochemical complex at Wulsan, an electronics complex at Kumi, and a major shipbuilding yard at Ulsan.
The development of individual industries followed a step-by-step approach. For example, Korea’s shipbuilding industry started with domestically produced steel, cheap local labor, and subsidized government loans. But then:
[L]eading shipyards such as Hyundai Heavy Industries sought foreign assistance on such
areas as ship designs, operating instructions, the design of dockyards, and production processes. They hired European engineers and technicians to assist with the running of the shipyard and training of the workforce and adopted quality control measures modeled on the best practices of leading competitors. This plus the recruitment of newly minted engineers from Korean universities—with some having received advanced training overseas—aided in the rapid upgrading of the workforce and allowed the shipyards to largely dispense with foreign assistance by the late 1980s. A more capable, tech savvy workforce plus learning by doing delivered substantial gains in productivity as well as in quality (Kim and Seo 2009). These have continued into the present day with Korean firms among the frontrunners in the production of smartphones, autos, consumer durables, and engineering equipment.
Design capabilities took longer to acquire—close to fifteen years. For some years ship designs were acquired from overseas and technology licensed to build new types of higher value ships such as LNG carriers. This dependence gradually tapered once in-house research and testing facilities had matured. During the latter half of the 1980s, Korean shipbuilders were responsible for advances in protective coatings, welding techniques and in core technologies related to ship propulsion, engine performance, and hull design to minimize pressure and friction drag.
4) Korea’s government invested heavily in infrastructure: seaports, airports, roads, rail. But as a more recent example, World Bank data shows that the share of Koreans using the internet went from 7% in 1998 to 73% just six years later in 2004–and the share has been above 90% and rising since 2016. A US-based techie friend of mind said to me: “We have the fastest home internet access available where we live, which means it’s almost as good as the crappy internet access in Seoul.”
5) Continual technological advance was seen as essential. Korea spends more of its GDP on R&D than just about any other country.
Technology was seen as essential to the success of industrialization and export mpetitiveness. MOST (Ministry of Science and Technology) and KIST (Korea Institute of Science and Technology) were established in order to promote technology transfer and absorption by Korea’s nascent manufacturing sector. Incremental institutional additions continued through the 1970s and the 1980s with the creation of the Korea Advanced Institute of Science (now KAIST, the leading S&T university), as well as a flock of specialized government research institutes (GRIs), many located in the Daedeok Science Town, which later morphed into the Daedeok Science Valley, housing public and private research entities employing thousands of highly trained professionals.
6) Korea had some advantages from its global neighborhood: “East Asian neighborhood effects that conferred reputational advantages and attracted the attention of foreign buyers and investors …”
How does one sum up this policy approach? It’s true that Korea’s government subsidized certain industries. As Yusuf writes: “”The state created a controlled environment in which competition among Korean producers was encouraged but the market was protected by tariff barriers, and by restrictions on the entry and exit of firms. Moreover, Korean exporters were assisted by export subsidies, tax benefits and subsidized financing.”
But the Korean government also did a good job of choosing the industries to be subsidized, in a way that didn’t just pump money into existing production or doomed sectors. It emphasized broad education and improving the skills of its workforce. It emphasized modern infrastructure. It emphasized moving up the technological frontier, by importing expertise when needed, but also by taking many steps to develop its own technology. Also, Korea embraced the continual evolution of technological expertise–and the continual disruption that it brings.
South Korea’s economy faces ongoing challenges moving forward, like other economies around the world. For South Korea, a big shift is that much of its economic growth has been based on large industrial conglomerates (“chaebol”) doing various kinds of increasingly sophisticated manufacturing. But for the world economy as a whole, with robotics and automation on the rise, economic growth is increasingly in the services side of production–innovation, design, and support services like finance and legal–not in the making of physical objects. Thus, Korea’s current government plans emphasize continued technological skills and sophistication, but also application of that technology in small- and medium-size enterprises, as well as in the services sector.
There’s an ongoing argument about whether the specific subsidies to industry were more important than the more general improvements in human capital, infrastructure, and support for high levels of investment and technological growth. I won’t try to untangle that knot. But it seems clear that the industrial subsidies by themselves, without the array of broad supporting policies, would not have had the same success.