Download Can Ghana copy and implement the industrial policy of South Korea

Can Ghana copy and implement the industrial policy of South Korea
successfully?
By:
Sylvanus Kwaku Afesorgbor
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Introduction
Specific industrial policies of the late developers, popularly called the Asian Tigers (Singapore, Taiwan,
Hong Kong and South Korea) can be viewed in the context of three different economic schools of
thought. These schools of thought ascribe different reasons as to the success of industrial policies in
these late developer countries. Among the late developers, we shall focus on South Korea and compare
to Ghana, a developing country. We selected these specific countries as both were at the same level of
development in 1960s. The three different schools of thought can be analysed from these perspectives:
neoliberal policies, government’s role and intervention and overseas development assistance.
Furthermore, we would be analysing in the context of current challenges of global trade agreements,
increasing environment concern about industrialisation, trade domination and competition from the
advance economies, the obstacles and possibilities of implementing such industrial policies as in the
case of South Korea in Ghana and to what extent would these policies be successful. The conditions
under which late developers started their process of industrialisation are quite different from the
conditions existing currently in global context. Developing countries would not just be successful in their
process of industrialisation by mimicking these same industrial policies. This argument is best captured
by Hirschman that the process of industrialisation under late-coming conditions would extremely
become difficult, thus this will require a deliberate, intensive, guided and well-co-ordinated effort by
government (Hirschman, 1981).
Neoliberal Policies
From the neoliberal perspectives, South Korea’s industrial policies success was attributed to the
adoption of international division of labour in which the pattern of specialisation was based on dynamic
comparative advantage and liberalisation of trade and capital flows. South Korea started their process of
industrialization not by competing with the already industrialised countries in high technology products
and capital goods. There was abundant cheap labour, thus, South Korea adopted a labour intensive
system of manufacturing in which they concentrated in the production of products such as textiles,
leather, clothing and plywood (Pilat, 1994).
In addition South Korea benefited substantially by opening of its borders to free movement of
people and capital and that allows transfer of technologies from the rest of the world especially from
the Japan, almost half of its technology was acquired from foreign sources through its foreign suppliers,
and its local who were working abroad and the technical assistance from the other countries (Pliat,
1994). The process of industrialisation must come from the increase in domestic capital stock, which can
only be increased through domestic savings or foreign savings. At South Korea’s initial stage of
industrialisation domestic saving was very low because of its low interest rate and more of its investible
finance concentrated in the informal sector, and foreign savings played a pivotal role in the building of
its capital stock (ibid).
Overseas Development Assistance
From those who attribute its success to role of overseas development and technical assistance
supported these claims from these angles. Overseas development assistance in form of aid, market
access and contracts awarded to major industries in South Korea firms. Japan and United States of
America (hereafter US) were of great financial assistance to South Korea. In 1965 the Park
administration in the signing of the Japan Korea Normalisation Treaty demanded for war reparations in
which South Korea was able to garner $500 million as war related claims (Shin and Ciccantel, 2009). For
US financial assistance its best captured in the words of Hart-Landberg, “The US government provided
even a greater financial assistance, in large measure in exchange of South Korea’s participation in the US
led war against Vietnam. The US paid secret bonuses to South Korean Soldiers, which generated $185
million over the period 1965 -73. ‘’The South Korean’s government and business community earned more
than $1 billion over the same period” (Hart-Landberg, 2004: p 102). In 1980, when South Korea
experienced its major crises, the US was of great financial support, the US Export and Import Bank
supported the government in form of import credit to tune of $600 million and Japan also supported
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them with amount of $4 billion under exceptionally generous term (ibid, p 103). With access to huge
amount of foreign exchange, the government was able to resolve its persistent balance of payment
difficulties that resulted from huge investment in and operations of state controlled enterprises
(Amsden, 1989: 93).
Assistance from its bilateral partners was just not limited to access to financial aid but also
technical assistance. South Korean firms benefited by having access to about 60% of machines, parts
and licensed technology from Japan corporations (Hart-Landberg, 2004, p 103). For example, they
obtained the technology about the automobile engine design and transmission from Japan, for factory
construction and internal combustion engines from England and the car design from Italy (Amsden,
1989). To further buttress this point, between 1963 and 1966, Korean firms acquired technologies as
they work under the supervision of US Engineers in executing contracts in road construction, building
dams, reservoirs and army barracks using technology specified by US Corps of Army Engineers (Amsden,
1989).
The focal point for any country to thrive and be successful in its industrial policy is access to
market and to compete favourably in the global market. South Korea had direct access to US market
under the US Generalised System of Preference (GSP), which was established in 1974, in which
beneficiary countries could export to US under a duty free treatment for 3400 products (USTR). In 1970,
the total exports of East Asian Industrialising economies to US was about $29 billion, by 1987, this
amount has risen to $750 billion (Yang, 1994). South Korea experienced its first trade surplus of $4.2
billion under the $7.3 billion bilateral trade surplus with the US (Hart-Landberg, 2004: p 103). Thus it
was no surprise, when GSP statue in 1989 authorised President Reagan of the USA to withdraw or limit
that privileges to the four new industrialising countries (USTR1).
The Role of Government
The role of government cannot be overemphasised, as stated by Pilat “Most studies disagree with the
notion that Korea’s economic development is due to market forces, but primary as a result of strong
government policy directed through the market (Pilat, page 86, 1994). In this statement Pilat tends to
portray that government intervention in the economy was indirect, in the sense that it rather tried in
facilitating the market system and not directly prohibiting imports, protecting infant industries, giving
export subsidies or engaging in production herself. Though that statement is true to some extent, there
is no denying the fact Korea government had taken certain decisions that directly affected and
promoted productions system.
The South Korean government formulated major industrial policies, namely the industrial policy
of 1970 and Comprehensive Stabilisation Program of 1979, and the industrial Master Plan for 1986 to
1995. The industrial policy of 1979 was basically about the government commitment to develop the
heavy and chemical industries. This policy helped in promoting the steel and iron, shipbuilding,
chemicals, electronics and machinery industries mainly through the policies of tax holidays, low interest
rate, import restriction and temporary investment tax credit. This policy yielded major gains as South
Korea’s major exports by 1980s were products such as consumer electronics, semi-conductors,
automobile which were all products from the heavy and chemical industries (Yoo, 1994).
For instance, in 1979, it was in response to government’s machinery export promotion policy
that Hyundai Motor Company began its technological development when exports appeared on its
agenda (Amsden, 1989). Korea is one of the largest shipbuilders in the world; this was not achieved
merely on the basis of leaving it for private enterprises but a myriad of support from the government.
The government supported shipbuilding industry by providing, funding the Korea Shipbuilding Society to
develop model ship designs which were made available to all ship builders in the country. The
government invested in the education and training of naval architecture graduates, who have been
working in the shipbuilding industry (Amsden, 1989).
The less frequent changes in government provided that needed consistency and commitment in
development planning. For example the Park administration was in power from the period 1961 to
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Office of US Trade Representative
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1979. Though this regime was criticised as undemocratic, it pioneered and championed the process of
industrialisation. The regime maintained high rate of efficiency and inculcated discipline into the state
agencies (Shin and Ciccantel, 2009, p 174).
Possibilities and Obstacles for Ghana Implementing the South Korea’s Model
Ghana as developing country is predominantly an agrarian economy. This structure has not changed so
much since independence. Agriculture contributes about 51% to Domestic Products (GDP), and accounts
for 54% of the labour force (GSS2). The share of the industrial sector accounts for about 25% of GDP. The
industrial sector in Ghana consist these four main sectors; manufacturing, mining, constructions and
electricity generation, however, manufacturing sector accounts as low as 4% for the total industrial
sector output (ibid).
Though, we cannot completely discard the possibilities of Ghana implementing the same
industrial policies of South Korea and galvanising some gains in its industrialisation process, the
challenges for adopting these same policies far outstrip the possibilities of them being implemented and
also being successful. Ghana is predominantly very rich in natural and primary resources, namely Gold,
Coffee, Cocoa, and different metals, for that matter, will have enough raw materials to kick-start and
support the local industries. Conversely, South Korea was less endowed with raw materials and to a
large extent depended heavily on imported raw materials (Woronoff, 1983, p.14). The endowment of
raw materials though very important in process of industrialisation does not give a significant added
advantage to countries endowed with them. The demand for these raw materials income inelastic, and
most often tend to decline consistently in world prices and thus, an economy being endowed with them
is necessarily but not sufficiently beneficial. With the current structures of production in which science
and technology has brought a lot of innovations and efficiency in the production process through which
raw materials are substituted with synthetic materials, coupled with declining raw materials usage as a
result of more efficient production methods (Polanyi-Levitt, 2005).
Developing countries may be abundant in labour surplus, but much of these labours are
unskilled and it will require some form of skill training and moving them to the location of the industries
to productive (Yang, 1994). South Korea also in the start-up of their industrialisation process also had
abundant labour, thus they concentrated in the production of products that required less capital
intensive goods. However, the implication is that even if Ghana should also adapt to the production of
the same labour intensive light products, can Ghana compete favourably with emerging countries (like
China, South Korea) in the production of textiles, clothing and plywood, with which these industrialised
countries would by now improved in terms of efficiency using more advanced technology and also
producing on a large scales.
The process of industrialisation in South Korea was heavily supported and facilitated by the
government through many interventions such as a consistent industrial policy. South Korea had
consistency in its development policies as a result of less frequent changes in government. Ghana,
though has stable political system and democracy, its development policies have not been consistent.
Development policies tend to fade with the end of the political term of office of the governments,
different governments with different development policies. Certain key strategies adopted by
governments in promoting the process of industrialisation such as direct export and production
subsidies, preferential treatment of domestic producers over foreign producers, state ownership and
coordination of key enterprises from which South Korea benefited, in the current trend of world trade
agreements and structural adjustment policies by the international economic institutions, these
measures are strictly prohibited. At the time South Korea commenced its process of industrialisation
these measures were not strictly prohibited. A country’s risk of trade sanctions makes contravention of
such measures not attractive.
Technology acquisition and absorption from abroad is seen as the best and rapid way to boost
the industrialisation process to catch up with advanced industrialised economies (Pilat, 1994, p66).
South Korea benefited substantially from technology transfer from Japan and USA without any
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Ghana Statistical Service
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impediments to technology transfer. But with the current trend of international patent and copyrights
laws, such as Trade Related Intellectual Property (TRIPs) of the World Trade Organisation (WTO), which
tend to protect interest of producers of technological knowledge. Developing countries, like Ghana,
which largely are depended on the advanced countries, would be affected negatively in the acquisition,
who must either buy this patents and licenses in order to have access to these technologies.
The process of industrialisation especially under late-coming conditions comes with structural
impediments such as inadequate foreign exchange, persistent balance of payment deficits and also
rising cost of urbanization. Thus aid is identified to play an important role in support of the
industrialisation process (Fischer, 2009). South Korea has benefited substantially from financial
assistance from USA and Japan. Ghana has also benefited from financial assistance under Multi Donor
Budget Support; however, this amount cannot measure in comparison to what South Korea received.
For instance, Ghana received a total of $2 billion from its multilateral donors in support of government’s
budget activities from the period of 2002 to 2009(MOFEP3). Thus, over a period of seven years, Ghana
received $2 billion in aid compare to South Korea’s $4 billion from Japan and $600 million from USA in
just 1980 when the South Korea was facing balance of payment problems.
The current global trading system is now moving towards new forms of trade protection, from
health, environment and labour standards especially from the developed countries. These standards
tend to affect developing countries that must in meeting these standards increase their cost of
production thereby making them less competitive in the international markets. For instance, for the
environmental standards, it means that more environmental-saving or green technologies must be
adopted but only at higher cost and only available in the developed countries. Also the rise of trade cooperations and regionalism are being promoted and most efficient and effective among the developed
countries resulting in limited market access to other developing countries. Taking the European Union
for instance the countries that formed this union almost have free access and less trade tariffs and
restrictions. Ghana’s success in industrialisation policy means it needs its products to go beyond the
Ghana and West Africa borders because you must produce on large scale to enjoy economies of scale.
Conclusion
The success of South Korea in its industrial policies can be viewed from the three different perspectives.
The adoption of dynamic comparative advantage in which they used labour intensive method and as
and when the surplus labour was exhausted it shifted to capital intensive method. The trade and capital
liberalisation also contributed in increased foreign saving which generated enough foreign exchange to
support the industrialisation drive. The role of government was also very supportive through the
initiation of consistent industrial policies, and preferential treatment to encourage the growth of local
industries. Finally, South Korea also benefited immensely from financial and technical assistance from
US and Japan, and also had free market access under GSP from the US. With current trend of the global
trading system and competition from advanced countries, developing countries such as Ghana, cannot
just simply by mimicking the models of industrial policies of South Korea would in turn be successful.
The current global challenges are different from the conditions that existed about four to five decades
ago when South Korea embarked on their industrialisation process. The possibility lies not in just
adopting the industrial policies of South Korea but adapting to the policies under the context of the
current competitive global conditions.
References:
Amsden, A. (1989) Asia’s Next Giant: South Korea and Late Industrialization.
Ciccantell P, Shin K.(2009) ‘The Steel and Shipbuilding Industries of South Korea: Rising East Asia and
Globalization’, American Sociological Association, Volume XV, Number 2, pp 167-192
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Ministry of Finance and Economic Planning, Ghana
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Fischer, A. (2009) ‘Putting Aid in Its Place: Insights from Early Structuralists on Aid and Balance of
Payments and Lessons for Contemporary Aid Debates’, Journal of International Development pp 856-67.
Hart-Landbergs, M. (2004) ‘The South Korea Economy and US Policy’: Asian Perspective, Vol 28. No.4, pp
89-117
Hirschman, A. (1981) ‘The Rise and Decline of Development Economics’ Essays in Trespassing,
Cambridge University Press.
Pilat, D. (1994) The Economics of Rapid Growth: The Experience of Japan and Korea.
Polanyi-Levitt, K (2005) “Raul Prebisch and Arthur Lewis: The Basic Dualities of Development Economics”
Woronoff, J. (1983) Korea’s Economy: Man-Made Miracle
Yang, S. (1994) ‘Open Industrialisation in East Asia and the Quest for Regional Cooperation: An
Overview’, in Y. Shun-Chin(ed) Manufactured Exports of East Asian Industrializing Economies, pp 3-33
Yoo, J. (1994) ‘South Korea’s Manufactured Exports and Industrial Targeting Policy’, in Yang S.(ed)
Manufactured Exports of East Asian Industrializing Economies, pp 149-73
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