Download Comparing Ghana and Korea

International Business: Competing in the Global Marketplace
Fifth Edition
Cases
COMPARING GHANA AND S. KOREA
SYNOPSIS
The case provides a comparison of the economic development and trade policies of
Ghana and South Korea during the latter half of the 20th century. Whereas Ghana
implemented an import substitution policy, South Korea had a very outward oriented protrade policy. The net effect is that South Korea has developed economically much faster
than Ghana.
Many new countries free from the shackles of colonial rule, felt that they were being left
behind as the developed world built larger and more extensive industries. They were
afraid that they would be stuck only producing commodity products (e.g., cocoa,
bananas, rubber), and importing all advanced good from other countries. They wanted to
be able to develop their own industries for advanced manufactured goods. However,
most of them did not have the economic and often political infrastructure to stand on their
own feet.
As a result many of these countries adopted a socialistic approach and created
protectionist trade policies. Ghana embraced Pan African socialism and instituted an
import substitution policy. The key to an import substitution policy is being able to
produce a good that can be heavily taxed upon export in order to fund the development of
other industries. In the case of Ghana, this was cocoa. Government tax revenues from
the export of cocoa were used to subsidize the development of other industries that would
replace imported goods (e.g., radios, household items). It was felt that once these
industries got going, not only would they be able to supply the domestic market and lead
to self-sufficiency in manufactured goods, the country would be able to export these
goods and develop the capability for making ever more sophisticated manufactured
goods.
The import substitution policy caused Ghana to shift productive resources away from
goods in which it had an absolute advantage (cocoa), and into goods where its costs of
production were much higher than that of other nations. Cocoa farmers wee being paid
far less for their cocoa by the national cocoa board than farmers in the neighboring
countries. Consumers were now forced to pay higher prices for generally inferior goods,
and productive resources were used in relatively unproductive pursuits. In the case of
cocoa farmers, the government’s policy of import substitution and price control only
made them poorer. They were driven to grow subsistence crops on Cocoa growing lands
in order to feed their families. These inefficiencies put a brake on economic development.
Part of the explanation for South Korea’s success lay in its much more open trade
policies. South Korea’s policies allowed its resources to be put to their best productive
use, and it liberally imported and exported goods.
25
International Business: Competing in the Global Marketplace
Fifth Edition
Cases
South Korea’s resources shifted from agriculture to the manufacture of labor intensive
goods such as textiles, and footwear. More recently in the last decade Korea has seen
labor costs rise and the growth areas in the economy have shifted to more capital
intensive manufacturing sectors such as semiconductors, motor vehicles, consumer
electronics etc. It promoted strongly the principles of free trade. Thus, consumers were
able to get the most for their money, and workers were able to earn higher wages
Use with Chapter 4 and 5
TEACHING OBJECTIVES
The main teaching objectives of the case are:
1.
To understand that governmental policies with respect to free trade or protecting
domestic industries can significantly impact global competitiveness of nations.
2.
To examine how protectionist governmental policies only help in the short term
and are often politically motivated.
3.
To illustrate that, in this global economy, countries should work to encourage
governmental policies that support free trade. If a country is able to get its goods
from the best sources worldwide, and compete in the sale of products into the
most competitive markets, it has a good chance to survive and prosper. If such
openness is restricted, a country’s long-term economic survival will be in greater
question.
4.
To show that government intervention is usually ineffective and
counterproductive.
STRATEGIC ISSUES AND DISCUSSION QUESTIONS.
Use the theory of comparative advantage to explain how the trade policies adopted by the
governments of Ghana and South Korea had an effect on the economic growth rates of
both nations?
The theory of comparative advantage holds that a country should specialize in the goods
it can produce more efficiently and buy the goods it produces less efficiently. After
Ghana gained independence from the British, the country adopted a socialist form of
government. For Ghana this meant imposing high tariffs on many imports and an import
substitution policy that was aimed at making the country self sufficient. This import
substitution policy caused Ghana to shift productive resources away from goods in which
it had an absolute advantage (cocoa), and into goods where its costs of production were
much higher than that of other nations. Consumers were forced to pay higher prices for
generally inferior goods, and productive resources were used in relatively unproductive
pursuits. These inefficiencies put a brake on economic development.
26
International Business: Competing in the Global Marketplace
Fifth Edition
Cases
In contrast, South Korea was never an European Colony. The government did not feel the
same pressures felt by the newly liberated colonies. Korea realized its success lay in its
much more open trade policies. Import tariffs were reduced from 60% to less than 20%
in three decades. South Korea’s outward looking orientation led to a dramatic
transformation of its economy. Korea’s policies allowed its resources to be put to their
best productive use, and the country liberally imported and exported goods. South
Korea’s resources shifted from agriculture to the manufacture of labor intensive goods
such as textiles, and footwear. More recently in the last decade Korea has seen labor
costs rise and the growth areas in the economy have shifted to more capital intensive
manufacturing sectors such as semiconductors, motor vehicles, consumer electronics etc.
It promoted strongly the principles of free trade. Thus, consumers were able to get the
most for their money, and workers were able to earn higher wages
In conclusion, in 1970 living standards in Ghana and Korea were comparable. GNP per
head was $250 and $260 respectively. By 1998 Korea’s GNP was $8,600 and was the
e12th largest economy in the world. Ghana’s GNP per capita in 1998 was $390 and its
economy was 96th in the world.
The average annual growth rate in Ghana was less than 1.5 percent. In contrast, South
Korea’s growth rate was more than 8% annually between 1968 and 1998.
1.
What trade and trade related policies could the government of Ghana have
adopted that would have led to greater economic growth? Why?
In retrospect, Ghana’s policies were short sighted. Ghana could have had more liberal
trade policies. The country should have encouraged the export and development of their
most efficient resources such as Cocoa. Their policy of import substitution and price
control only made the farmers poorer. They were driven to grow subsistence crops on
Cocoa growing lands in order to feed their families.
2.
What trade policies could South Korea have adopted that might have boosted that
country’s economic growth rates?
From the case S. Korea adopted the right policies that put it on a steady growth path.
Could they have dropped all trade barriers to hasten economic development? While it
may seem so at first glance, the reality may be more complex. In order to compete with
the world especially with Japan right next door (viewed as a political and economic
enemy) the country needed to develop its technology, its educational systems, its cities
and infrastructure before it could drop all its trade barriers. Korea was able to do this
over two decades transforming its once rural agricultural base into a technological one.
27