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Wednesday, May 11, 2005

South Korea's Triumph

Perhaps no nation in the past fifty years has travelled so far as South Korea. In the aftermath of the Korean War that divided the peninsula and cleaved the Korean people in twain, South Korea was one of the poorest nations on earth. Devastated by the war, and by decades of brutal Japanese occupation up until the end of World War One, South Korea was in a sorry state. No outsider, thinking objectively, could possibly have imagined that a child born in South Korea in 1955 would reach their half-century in one of the world's wealthiest and most technologically advanced nations. Yet that is what happened. And it is a remarkable tale.

In the aftermath of the Korean War the South Korean government pursued a policy of import substitution industrialization, with high tariffs on imported manufactures set in order to encourage the development of local industry. The main beneficiaries of this policy were what came to be known as the chaebol. The chaebol were, by the 1990's, vast conglomerates with tentacles extending through virtually every level of the South Korean economy. They were feted, right up until the Asian financial crisis of 1997, as the engine that had driven South Korea to prosperity. Yet their beginnings were often humble. Daewoo, for instance, began when its founder, Kim Woo Choong, told some potential Singaporean clients that textile samples he had bought in Hong Kong and Vietnam were Korean products, thus securing his first order.

Another of the chaebol, Samsung, began as a trucking business, before diversifying into sugar and textiles, and from there into a vast range of businesses, culminating in the founder Lee Byung Chull's decision, in the late 1960's, to start moving Samsung into electronics. Today, Samsung is one of the world's most profitable and innovative electronics corporations, having long since put to rest the image of Korean products as cheap and shoddy. How Samsung has transformed itself into a global marquee brand is the subject of a fascinating recent article by Frank Rose in Wired. When the regional financial crisis hit South Korea in 1997, Samsung, like the other chaebol, was driven to the point of bankruptcy. Having recklessly borrowed for years, the conglomerates were unprepared for the skyrocketing of interest rates ordered by the IMF following a run on South Korea's currency, the won. In response, Samsung shed 30% of its workforce in a massive restructuring operation that included the elimination of dozens of businesses. With South Korean labor no longer cheap, at least in comparison to what could be obtained in China, Mexico, and elsewhere, the decision was made, as the article explains, to redirect Korean operations towards innovation, to emulating Sony and rising to a level where Samsung would no longer be involved in the dog-eat-dog world of low-end price competition. The gamble has paid off, and today Samsung is one of the world's leading electronics brands, a global power in cellular phones, video cameras, still cameras, music players, computer monitors, and high-definition TV's.

One of the things that really struck me when I read the article was the mention on page three of the fact that, in the early 1960's, South Korea "rivaled Ghana on the poverty scale". Today, the fortunes of the two nations could not, seemingly, be more different, so it is remarkable to think that only forty years ago they were on the same level. So what went so wrong in Ghana? And what went so right in South Korea? About a month ago, I posted about the failure, in Ghana, of the socialist policies adopted by President Kwame Nkrumah in the early 1960's. The economic crises that have been recurrent throughout Ghana's post-colonial history (at least until the last decade, when Ghana seems to have finally gotten on to a more even keel) are often held up by Western free-market ideologues as a prime exhibit of the failures of socialism, with South Korea being seen as a successful example of capitalism in action.

The problem, though, is that seeing South Korea as some kind of poster child for free market capitalism is a perversion of the truth (as would laying Ghana's problems purely at the doors of Nkrumah's socialism). Without rehashing my previous post (I suggest clicking on the link to read the whole thing), Ghana was hit by several serious problems that South Korea did not face, and it did not have some of South Korea's advantages. One thing that was completely out of the control of the Ghanaian government was that the British colonial regime had focused economic development on the efficient extraction of raw materials, especially gold and cocoa, with the fostering of internal trade an afterthought. So, like their South Korean counterparts, the Ghanaian government was determined to transform the nation into a producer of finished goods, because manufactures are so much more profitable than raw natural resources. The problem, though, was that in order to pay for the creation of the necessary infrastructure the government was reliant on global market prices for cocoa and gold holding up. It was a gamble that had to be made, but, unfortunately for Ghana, by the early 1960's the nation was facing vastly increased competition in the global cocoa markets from Brazil, Malaysia, and other nations who had substantially expanded their own cocoa production. With cocoa prices in free-fall, another problem, already bubbling under, began to assume increased prominence. That problem was corruption. I explored this at greater length in the essay, but, briefly, the big problem with corruption in Ghana in comparison to South Korea was that in Ghana the main industrial concerns were in the hands of the state, while in South Korea the chaebol remained in private hands, albeit with heavy state subsidy and involvement. As the state had its hands directly on far more of the national economy in Ghana, there were far greater opportunities for self-enrichment among civil servants. The wall, however flimsy, between state and business in South Korea helped the nation to avoid the worst ravages of corruption.

Additionally, there were several factors at work within South Korea that played an important role in helping that nation's economy take off. One was the enormous, and constant, infusion of American money, due to the US military's role in protecting South Korea's frontier from Kim Il-Sung's Stalinist North Korea. The presence of tens of thousands of American soldiers provided an enormous boost to the South Korean economy, creating a lot of business for construction, agricultural, and transportation firms. South Korea also had the luck of being in a booming region, with Japan leading the way, while Ghana was, in West Africa, surrounded mostly by countries that were far off than itself.

Another advantage that South Korea held over Ghana was ethnic homogeneity and a long history. Ghana was merely the Africanized name for the Gold Coast, a creation of the British that combined the conquered the Ashanti kingdom with the homelands of several other ethnic groups. In the 1960's the South Korean government embarked on a series of national mobilizations to transform the nation, and the population embraced them, because their sense of 'Korean-ness' went deep, and they were willing to work for the nation. In Ghana, nationalism was present, yet it was built on a base where old ethnic and religious considerations had not disappeared, so, in consequence, it was a lot more difficult to get people to put aside their personal considerations for the sake of something like 'the nation', a concept that was mostly an abstract consideration outside the ranks of the urban intelligentsia.

Ultimately, while the failure of Ghana's socialism was not surprising, considering the dismal long-term record of socialism throughout the world, South Korea, as a counterposed example, was hardly an out-and-out capitalist success story. South Korea's economic triumph owed far more to the adaptation of development techniques more usually seen in socialist states than to the theories of the Chicago School.

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