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Korean Growth Experience

 Arvind Panagariya

 IN THE 1950s, India and South Korea had approximately similar levels of per capita incomes. In the following two decades, Korea grew at rates far exceeding those of India, achieving a much higher per capita income level than the latter.

 During the same decades, Singapore, Taiwan and Hong Kong grew at rates even higher than that of Korea. Precise source of the success of these countries, sometimes called the Asian tigers, has been a subject of considerable controversy among scholars. At least three alternative views have emerged.

  Jagdish Bhagwati, Anne Krueger, Ian Little, T N Srinivasan and late Bela Balassa have taken the view that outward orientation and pro-market policies were the primary forces behind the stellar performance of these economies.

  These authors generally downplay the role of interventionist policies and argue that export subsidies neutralised the anti-trade bias introduced by import barriers, yielding domestic relative prices that more or less corresponded to the world prices.

  The second view, associated with Larry Westphal and Howard Pack also recognises the importance of outward orientation but assigns more substantial role to industrial policy, especially in affecting technical change in selected industries.

  The third and final view, associated with Alice Amsden, Dani Rodrik and Robert Wade, considers industrial policy central to the Korean success and downplays the role of outward orientation. Amsden goes so far as to assert that industrial policies that propelled these countries to such high rates of growth essentially amounted to "getting prices wrong".

  According to Westphal and Pack, a central element in Korea’s trade strategy was to permit exporters to trade at world prices. They were allowed to import all inputs and sell all exports at these prices.

  In addition, targeted infant-industry promotion played a crucial role in Korea’s success. At their inception, targeted industries were granted absolute protection in the domestic market via import controls. At the same time, using export targets, the government insisted that the firms export a swiftly growing proportion of their output at world prices.

  The Amsden-Rodrik-Wade view regards the role of the government in promoting investment as much more central. Rodrik notes that since exports were only 5 per cent of the GDP in 1960, they could hardly serve as the engine of growth.  Moreover, since the relative price of exports in Korea showed no positive trend, export incentives cannot be credited with export growth. He argues that, on the contrary, export expansion was itself the result of an investment boom, which the government of Korea was able to engineer by solving the so-called coordination failure problem. Rodrik’s view clearly conflicts with the Westphal-Pack view, which considers activist export policies central to Korea’s growth experience.

  But even accepting the Rodrik view at its face value, one cannot downplay the role of outward-oriented policies. The boom in investment demand hypothesised by Rodrik could not have translated into a miracle had Korea chosen inward-looking policies. Thus, no matter which of the three views we accept, trade openness turns out to be a necessary ingredient in the success of Korea.

  What can we say about the role of infant-industry protection? Both the Westphal-Pack and Amsden-Rodrik-Wade schools assign significant importance to infant-industry promotion in Korea. Wade argues, "(T)he balance of presumption must be that government industrial policies, including sectoral ones, helped more than hindered. To argue otherwise is to suppose that economic performance would have been still more exceptional with less intervention which is simply less plausible than the converse."

 Little questions Wade’s reasoning. He contends, "Since the less interventionist Hong Kong, Singapore, and Taiwan grew faster than Korea, it is unclear why Wade thinks it simply less plausible that less intervention would have been better, given also the widespread failure of government industrial policies elsewhere. I find it simply more plausible that Korea grew fast despite its industrial policies, than because of them."

  Little argues further that productivity growth in the most capital-intensive sector, which was the object of industrial policy promotion, was less than half that in the most labour-intensive sectors in Korea. Electrical goods; rubber, leather and plastic products; furniture; and clothing and footwear all showed above average productivity growth.

 Thus, the contribution of infant industry protection to Korea’s growth is at best controversial and at worst negative. But even if one accepts it to be positive, there are two reasons why it is safer today to err on the side of non-intervention.

 First, the experience with interventions on behalf of infant industries in South Asia has been uniformly negative. There are no studies to be found suggesting that infant-industry protection in this region had even moderate success, especially after 1965. The inefficiency of the Indian auto industry, protected for long by appeal to both the infant-industry and economies-of-scale arguments, stands out in this respect.

 Second, the government has much better prospects for contributing positively to growth when the economy is small and just initiating the process of development. Recall that in the initial years, even the Soviet Union was a success story. As development proceeds, however, the expansion of demand for education, health, infrastructure, legal institutions, regulation and macroeconomic stability is likely to limit severely the government’s ability to make wise decisions on behalf of new infant industries.

  Moreover, once the economy has grown large and diversified, organisational diseconomies of scale set in and the government’s ability to "manage" it declines as was witnessed in the Soviet Union and to a lesser extent China and India.

Economic Times, April 25 2001