Title: Asia’s Next Giant: South Korea and Late Industrialization
Author: Alice Amsden
Scope: 3 stars
Readability: 3 stars
My personal rating: 4 stars
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Topic of Book

Amsden analyzes South Korean economic policy to determine how the nation transformed itself from poverty to industrialized wealth in just one generation.

If you would like to learn more about how nations develop, read my book From Poverty to Progress: How Humans Invented Progress, and How We Can Keep It Going.

My Comments

The book was written in 1989, so it is little dated. The book appeared when the West was just becoming aware of the economic transformation that had taken place in South Korea. The book is fairly technical, but it does make some interesting observations about economic policy in late industrializing nations.

Key Take-aways

• In the 1950s South Korea was one of the poorest nations in the world. The nation shared much in common with Sub-Saharan Africa in terms level of development at the time.
• Starting in the early 1960s South Korean experienced dramatic economic growth. By the late 1980s and early 1990s, the nation had transformed into a wealthy and democratic society, that more closely matched European levels of development.
• South Korea actively copied Japan and the West and focused heavily on promoting manufacturing exports and educating their people.
• South Korea started with light industry, particularly textiles, and then moved onto heavy industry, such as steel, ship-building and automobiles.
• The South Korean state was far more willing to intervene in the economy compared to how much the UK and USA did during their industrialization.
• Rather than protecting losing companies, as many states do, South Korea was relentless in supporting only those companies that were successful on the world market.

Important Quotes from Book

Diversity notwithstanding, all late industrializers have in common industrialization on the basis of learning, which has conditioned how they have behaved. These countries industrialized by borrowing foreign technology rather than by generating new products or processes, the hallmark of earlier industrializing nations. “

South Korea’s growth is a classic example of late industrialization, and embodies all of the elements common to these countries. It has involved a high degree of state intervention to get relative prices “wrong” in order to overcome the penalties of lateness, the growth of large diversified business groups (even in Taiwan) to transcend the hardships of having to compete without the advantages of novel; technology, _ the emergence of salaried managers responsible for exploiting the borrowed technology (the private entrepreneur in large companies playing a much reduced role compared to earlier times), and a focus on shopfloor management to optimize technology transfer. All these factors allowed Korea to be _ among the first countries to penetrate world markets on the basis of low wages rather than a technological edge. England succeeded during the First Industrial’ Revolution on the basis of invention) and leading firms in Germany and .the United States at a later time captured market share from England on the basis of innovation.

But Korea has succeeded far beyond the non-East Asian late industrializers. This book will examine in detail the factors that contributed to its success. It will analyze the crucial role of government not only in subsidizing certain industries to stimulate growth, but in setting stringent performance standards in exchange for the subsidies. In other countries-in Turkey and India, for example-subsidies have been dispensed primarily as giveaways. In Korea the “wrong prices have been right because government discipline over business ; has enabled subsidies and protection to be less than elsewhere and ‘ more effective. If the big business groups of Korea have been loaned long term capital at negative real interest rates, the government has demanded that they use the borrowed capital productively, not speculatively. If they have been allowed to sell in protected domestic'” markets, they have had to produce and sell in the export market:._ Discipline over business as well as labor provided the starting point, for high growth rates of productivity, which allowed Korea to borrow extensively in international capital markets without overextending itself financially. The Big Push into heavy industry was financed primarily with overseas loans, but at the beginning and end of the period 1973 to 1979, the ratio of foreign debt to GNP was virtually unchanged.

The book will also examine why the power of the state to discipline big business was greater in Korea-and Japan and Taiwan as_· well-than in other late-industrializing countries.

The nature and role played by technical knowledge, therefore, separates the industrial revolutions in England, Germany, and the United States, on the one hand, from the industrialization that occurred in twentieth-century agrarian societies. If industrialization first occurred in England on the basis of invention, and it occurred in Germany and the United States on the basis of innovation, then it occurs now among “backward” countries on the basis of learning.

The paradigm of late industrialization through learning generalizes to a diverse assortment of countries with different growth records: Japan (although in many respects it is unique among late industrializing countries), South Korea, Taiwan, Brazil, India, possibly Mexico, and Turkey. (This list might be expanded, but one cannot add to it the city-states of Singapore and Hong Kong, because neither began from the agrarian or raw material base that is typically taken to be the starting point of industrial transformation.)

Learners do not innovate (by definition) and must compete initially on the combined basis of low wages, state subsidies and incremental productivity and quality improvements.

The corporate office. inclusive of research and development functions. tends to be the strategic focus of companies that compete on the basis of innovation. This is because it is at the administrative level that new technology gets developed and marketed. Critical significance is attached to the organization and operation of research and development because here are created the profit-making opportunities that drive the entire company.

The shopfloor tends to be the strategic focus of firms that compete on the basis of borrowed technology. The shopfloor is the focus because it is here that borrowed technology is first made operational and later optimized. Because products similar to those that the company produces are internationally available, the strategic focus is necessarily found on the shopfloor, where the achievement of incremental, yet cumulative, improvements in productivity and product specification are essential to enhance price and quality competitiveness.

In late-industrializing countries, the state intervenes with subsidies deliberately to distort relative prices in order to stimulate economic activity. This has been as true in Korea, Japan, and Taiwan as it has been in Brazil, India, and Turkey. In Korea, Japan, and Taiwan, however, the state has exercised discipline over subsidy recipients. In· exchange for subsidies, the state has imposed performance standards on private firms. Subsidies have not been giveaways, but instead have been dispensed on the principle of reciprocity.

Salaried engineer are a key figure in late industrialization because they are the gatekeepers foreign technology transfers. The protagonist of industrialization has shifted from the entrepreneur in the late eighteenth century, to the corporate manager in the late nineteenth, to the salaried engineer in the late twentieth.

Salaried engineers have performed especially well in Korea because society has invested heavily in education, from the primary level on up.

Turning now to production workers, late industrializations have exceptionally well-educated work forces by comparison with earlier industrializations. Moreover, the wages of these workers have generally been’ prevented from rising rapidly by a conspiracy of forces: political repression, an unlimited labor supply at the onset of growth, an absence of international opportunities to migrate, and the insignificance of a class of skilled crafts-persons, who were the organizers of trade unions in earlier periods.

Korea, therefore, provides supporting evidence for the proposition that economic expansion depends on state intervention to create price distortions that direct economic activity toward greater investment. State intervention is necessary even in the most plausible case’s of comparative advantage. because the chief asset of backwardness low wages-is counterbalanced by heavy liabilities. Where Korea differs from most other late industrializing countries is in the discipline its state exercises over private firms.

The discipline exerted by the state, and the rise of big business, were interactive. Big business consolidated its power in response;: to the government’s performance-based incentives. In exchange for stunning performance in the areas of exports, R&D, or new product introduction, leading firms were rewarded with further licenses to’ expand, thus enlarging the scale of big business in general. In exchange for entering especially risky industries. the government rewarded entrants with other industrial licenses in more lucrative sectors, thus furthering the development of the diversified business group in particular.

Discipline may be thought of as comprising two interrelated dimensions: a) penalizing poor performers; and (b) rewarding only good ones.

Whatever the time period and whatever the firm structure, learners rely heavily on foreign know-how to narrow the gap… profit. The central tendency has shifted from the absorption of foreign technology through copying and self-teaching to the adoption of foreign technology through investing in foreign licenses and technical assistance. The former mode of technology acquisition may be called imitation, and .the latter, apprenticeship.

Whether in Korea’s shipyards, steel mills, machinery works, automobile plants, or electronics factories, the credo has become, “Invest now in inhouse technological capability-even if outside expertise is cheaper to reap the rewards of self reliance later.”

The preponderance of foreign technical assistance came from Japan, a fact that gave Korea an edge over other late-industrializing countries that were culturally and geographically further afield than Korea from Japan.

1962- 1966 and 1967-1 971 , the real growth rate of GNP , averaged 9% per annum. In the period 1972- 1979, growth was still higher, 1 0% on average each year. It is evident that exports and investment… led overall economic activity. Consumption grew only modestly. The real growth rate of exports; deflated by the U.S. wholesale price index, averaged a phenomenal 40% in the period of the first two five-year plans. Between 1972 and 1979 (the year of Park’s assassination), the export growth rate averaged 28%.

Exports as a percent of GNP rose steadily from less than 5% in the 1950s to approximately 35% in the 1980s. In tandem, imports as percent of GNP rose, although at a slower rate. By’ international standards, Korea became ultra-dependent on foreign trade. The evidence suggests that none of the Great Powers, whatever their stage of development, ever had anywhere near as high a dependence on trade as did Korea.

The most elementary lesson from late industrialization is that Japanese competition is not a unique, culturally specific phenomenon. There exists a much larger set of countries that include Japan, Korea, India and Brazil, each having similar institutions that have evolved in response to the exigencies of industrializing late through learning. These institutions include an interventionist state that deliberately distorts relative prices to stimulate economic growth, business groups that diversify widely to compete initially at the lower end of many markets, a strategic focus on shopfloor management, ‘ where respected engineers strive to achieve incremental productivity and quality improvements, and a politically and economically weak labor movement (motivated in Korea by high real wage increases). What distinguishes the United States from Korea is not economic ideology. Rather, the difference lies in how the two states define free market in practice. Because the productive forces in Korea have never been developed according to free market principles, Korea’s workable definition of the free market is loose, satisfied by the existence. of private property and intense rivalry among the big business groups.

If you would like to learn more about how nations develop, read my book From Poverty to Progress: How Humans Invented Progress, and How We Can Keep It Going.