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Mission of KDI: Develop future leaders
KDI School is an offshoot of the Korean Development Institute established by the Korean Government in 1971 as an independent economic policy think tank to conduct research for guidance in public policy making. KDI School, established in 1997, has earned high reputation as a global think tank. Its objective has been to develop future leaders by equipping them with knowledge, vision and global perspective. The current distance learning lecture series is an extension of this mission to the budding leaders in the rest of the world.
Debate over practical wisdom and conventional wisdom in Sri Lanka
In view of the current debate in Sri Lanka whether the country should have a practical approach to development or whether it should follow a development model, it is important to examine how South Korea managed to deliver a miracle by elevating a poor and a backward country in the world in 1960s to the status of a rich country within a matter of a single generation.
Governor Cabraal: Practical wisdom was the guide
The debate in Sri Lanka was sparked by one of the top policy makers of the country, Central Bank Governor Ajith Nivard Cabraal, who had confessed in an article first published in the Forbes magazine (available at http://www.forbes.com/sites/realspin/2014/03/28/practical-not-conventional-wisdom-has-driven-sri-lankas-rebuilding-and-reconciliation/ ) and later in Daily FT that it was the practical wisdom and not the conventional one that was responsible for driving Sri Lanka’s recent rebuilding and reconciliation efforts. 
Though the learned Governor has not discarded economic models, his position, according to the examples he has given, has been that as and when the country was confronted with grave economic issues, its top policy leaders drew wisdom from practical experience to come out of such economic issues instead of relying on orthodox economic models. This is true with any economic policy leader who is faced with day to day economic issues since it is the practical experience that will help him to resolve such issues. However, when it comes to planning long term sustainable economic growth, it is the economic models that will help economic policy makers to steer the destiny of their nations.
Dr. P.B. Jayasundera: Long term guided by economic principles
The need for relying on economic principles in long term policy making was emphasised by the other top economic policy maker in the country, Dr. P.B. Jayasundera, Secretary to the Ministry of Finance and ex-officio member of the Monetary Board of the Central Bank when he delivered the Dr. W.M. Tilakaratna Memorial Oration recently in Colombo. (available at: http://www.ft.lk/2014/04/17/contemporary-thrust-of-sri-lankas-development-strategy-part-ii/ ).
The reputed economist, throughout his speech, had emphasised the action taken by this government to consolidate the budgetary process to maintain the budget deficit at 4% of GDP by generating savings in the budget, both of which are in fact in accord with the conventional wisdom in economics. Hence, in the short run, a policy maker has the liberty to sort out day to day issues by drawing on his practical wisdom. But in the long run, it is the conventional wisdom that will help a country to maintain growth and sustainability in an economy. That was the essential message delivered by Professor Jin Park, an expert on development economics and government reforms, in his above mentioned lecture.
Korea was a laggard in 1960s
In 1960s, before South Korea embarked on its remarkable growth initiative tag-lined ‘Miracle on the Han River’ imitated from the West Germany’s ‘Miracle on the River Rhine’ which it created to boost public support for the economic reconstruction after the World War II, South Korea was behind many of the poor nations today.
As Jin Park has noted, with a per capita income or PCI of just $ 80 in 1960, South Korea was a little ahead of Ghana (PCI = $ 75) but behind Mozambique (PCI = $ 85). It was a way behind Sri Lanka whose PCI in 1960 amounted to $ 142. But after 30 years in 1990, Park said that South Korea was well ahead of all these countries: Its PCI of $ 6673 was a tall pillar rising into the sky among the dwarfs of Ghana (PCI = 902), Mozambique (PCI = $ 760) and Sri Lanka (PCI = $ 472). In the next 22 years, the gap was still wider except in the case of Sri Lanka which managed to reach a PCI level, according to official statistics, of $ 2923 as against South Korea’s PCI of $ 22590.
Four secrets contributing to economic success
Park then highlighted four secrets of South Korea’s remarkable success: Motivation of people, firms and political leadership including the government service, focus on leading industries instead of seeking to develop everything, coordination of development efforts with newly built infrastructural facilities and among firms and effective capacity-building in all levels in the economy. These four secrets are nothing but strategies which South Korea had adopted in order to give a sudden boost to its economy. But they were all based on sound economic principles rather than ad hoc experiences of policy makers.
Lazy Koreans were matched by dependent firms in 60s
The motivation was necessary, according to Park, because both individuals and firms in South Korea in 1950s were not geared to development. People were lazy and had imbibed themselves in drinking and gambling thereby wasting away the meagre incomes they had made. In such abject poverty and wasteful expenditure, they were dependent on the government for a living and could not invest in the education of children or health of their families. The result was the condemnation of the majority of individuals into a vicious cycle of poverty. Firms on the other hand were having a good time due to the protections afforded to them by import controls. Hence, there was no necessity for either individuals or firms to work hard in order to earn their living and advance their conditions.
Killing laziness and dependence in Korea
How could the policymakers motivate people and firms into action? That is only by following sound economic logic. If people and firms are continuously supported by the government without favouring winners more than what it would give to non-winners, both individuals and firms have no incentive to become self-reliant. Economists call this ‘moral hazard behaviour’. Then, in order to get the support, people and firms will choose to be in the group that is being supported by the government making the selection being made by the government adverse to it right from the beginning – a kind of adverse selection problem according to economists. Then, what is known in economics as Gresham’s Law comes into play.
When people see that their neighbours who are lazy and unproductive are being supported by the government, they leave all productive jobs and become lazy too. Thus, lazy people will drive out the hard-working people. Finally, what happens is that laziness and dependence become wide-spread throughout the economy. If the economy wishes to make a ‘breakout’, it has to kill the laziness and dependence by punishing those who are lazy and dependent and rewarding those who are hard-working and aspiring to become self-reliant.
President Park Chung-hee: Support who will support themselves
This is exactly what South Korea did according to Park. President Park Chung-hee who was in power at that time had announced that he would support only those who help themselves. If individuals work hard and firms seek to be self-reliant, the government too will support them. That was the only way, as announced by President Park, to ‘eradicate sense of dependence and encourage work ethics’.
In other words, the President, guided by sound economic logic, did not want to promote moral hazard behaviour in people or firms, was not prepared to make an adverse selection and wanted to put a stop to the operation of the Gresham’s Law. Then the President had made a bold statement that he was prepared to even risk his presidency by sticking to those essential but politically unpopular policies. The policy of the government was that it ‘will support who make improvement and not those who need improvement’. It is only a few leaders in developing countries who have courage to make such bold statements.
Supporting only the winner
In the case of business firms, the government’s approach was firm. Loans at lower interest rates were given to firms which exported more, based on their track record and not on the rosy plans they have come up with. This created a spirit of competition among business firms to win favours from the government by becoming better. The bottom-line, according to Park, was that ‘encourage competition and support only the winner’. Those winners were further rewarded by reducing the income tax rates applicable to them. This was like granting partial tax holidays to firms that had shown better performance.
Recruit the best to the public service
The motivation of government officers was done, according to Park, by adopting three strategies. First, the political commitment to development was demonstrated by the active participation of the President in reviewing the progress of the activities at a high-level committee chaired by him. Second, the public service was filled by top graduates from universities recruited through independent and transparent recruitment examinations. That was to eliminate irregularity, favouritism and nepotism in the recruitment to public service and fill it with top class officers. Third, Ministers and Vice-Ministers were chosen out of top class civil servants to add a professional flavour to the ranks in the Cabinet.
This means that in the case of ministerial positions, there was a selection process in addition to the election process similar to the system that prevails in Singapore. If Ministers are not in a position to make sound decisions because of ignorance, incompetence or inexperience, then, the whole government operations become ineffective and inefficient. The motto behind this procedure was that everybody was given high hopes so that they had the incentive to remain clean in their affairs and acquire knowledge through a continuous learning program.
President Park: We’ll win nothing if we try to win everything
The right focus is the more difficult and complex strategy adopted by South Korea. In any country, including Sri Lanka, political leadership tends to embrace everything without considering the country’s ability and resource availability. This is because the political leadership is normally set on pleasing everyone with an eye on winning elections. South Korea selected a few industries to focus on so that once they are developed to very high degree, they will open the gateway for the country to reach the wider world on the one hand and support all other link industries on the other.
Park compared it to the case of a father with several children providing higher education facilities only to one so that he would support all others later. This strategy was amply explained by President Park who remarked that ‘we’ll win nothing when we try to win everything’. The five industries selected were from ship-building, electronics, cellular phones, automobiles, steel and chemicals and Korean firms in these industries today have occupied the first few top positions in the world.
"South Korea is a good example for other developing countries to emulate. But can that be replicated in cultures which do not have the cultural attributes which South Korea has? The answer is there is nothing impossible if one makes an honest attempt with a clean political leadership and a competent public service. Hence, if Sri Lanka is to replicate the miracle which South Korea has created, it has to first of all clean the government and make it competent"
The criteria for selecting these focus industries were all based on economic logic: Whether they could succeed in the future with the available resources and technology, whether they could build up linkages with the rest of the economy and whether they could sustain their employment levels in the future’ This strategy enabled South Korea to move from simple products to complex products over the time and become world leaders in those complex products beating Japan, North America and Europe, a sure way to have a reserved market for its products.
Coordinate infrastructure with industry
South Korea built a large number of new infrastructural facilities but all of them were well coordinated with industry so that they became productive right from the beginning. Thus, they were responsible for providing positive support to all economic activities. In a free market economy with profit seeking individuals and firms, there is no necessity for an outside body to make the needed coordination of activities.
However, if an economy is interested in achieving the best results within a short time period, it is necessary for the government to do the coordination work actively. Accordingly, the government took action to link industries to infrastructure, to newly developed research and development institutions and to training institutions in a bid to enhance the skills base of the workers.
Build capacity of individuals, firms and public service continuously
For an economy to maintain sustainable economic growth, it is necessary to invest in the continuous capacity building of both individuals and firms on one side and the government organisations on the other side. If firms and individuals are efficient but the government is inefficient, then, the government’s inefficiency will rub on the private sector impeding its growth.
On the other hand, if the government is efficient but the private sector is inefficient, the government will find it difficult to move forward with the burdensome shackles tied to its legs. Hence, it is necessary for all the three to build their capacity simultaneously. Accordingly, the educational system was reformed to help individuals to build their capacity. While the local universities were developed, as was the case in Singapore, in the line of reputed foreign universities, scholarships were granted to Korean citizens to complete doctorates in essential subjects in best universities in the West.
Vocational high schools were set up so that those who could not get into universities could train themselves as technically qualified workers who were in large demand by heavy industries promoted in the country. Hence, it was a sure way for a young person to get himself quickly employed. The capacity of firms was developed to facilitate them to go for original equipment manufacturing after getting into original designing. It facilitated firms to acquire what they do not have. They were supported with technology by a large number of government owned research institutes. Firms were encouraged to engage sub-contractors so that there was effective linkage with the rest of the economy.
Governments to intervene only if they are clean and competent
Park said that Korea believed in government intervention in the economy only if it is clean and competent. If not, it is better if the government does not intervene in the economy at all and instead rely on the market. It is the worst if a corrupt and incompetent government intervenes in an economy since it could destroy everything which the private initiatives have attained. But this is the case with many developing countries and Sri Lanka is not an exception.
Miracles are not impossible if political leadership is clean and competent
South Korea is a good example for other developing countries to emulate. But can that be replicated in cultures which do not have the cultural attributes which South Korea has? The answer is there is nothing impossible if one makes an honest attempt with a clean political leadership and a competent public service. Hence, if Sri Lanka is to replicate the miracle which South Korea has created, it has to first of all clean the government and make it competent.
(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)
