Government-led Economic Development:
Reflections on the Korean Experience
Economic Development Strategy
November 17-29, 2011 Seoul
Maldives, Nepal, Pakistan and Sri Lanka.
Core Elements of Economic Growth
Three Critical Conditions (Stiglitz & Squire):
• Credibility: A stable and credible policy
environment along with a transparant and
effective legal/judicial system.
• Competition and openness: competing in
foreign markets and attracting foreign
• A focused public sector where the private
Characteristics of 13 High Growth
Were more open and integrated with world market;
Abundance and mobility of labor force;
Ability for domestic savings
An increasingly capable, credible and committed
government: As the economy grows the role of an
active and pragmatic government becomes crucial
• Strong political leadership
infrastructure, education and health
• Industrialization, equality of opportunity, emphasis on
education of girls. (Michael Spence, The Growth
Why Government Should Lead?
Market failure: imperfection in market structure, operations, deep
seated structural rigidities in LDCs.
Resource mobilization and allocation: Not to waste scarce
financial and skilled human resources on unproductive ventures and
channel them in most productive sector for most productive use.
Institutional capacity and infrastructure development: generate
and distribute social benefits that the private sector may not be
interested in supplying...Public provision of socio-economic
infrastructure...good governance and system development.
Information asymmetry: provide critical information to all citizens.
Attitudinal and psychological dimension specially in diverse and
fragmented population...evolving a sense of belonging together.
Development aid: A necessary condition for receiving foreign
aid...can speak on behalf of the nation...ownership as per Paris
Korea in Brief
• Peninsular in the North Eastern Asia
• Area (Land:Water)
– S. Korea: 98,480 km2 (98,190 km2 : 290 km2)
– N. Korea: 120,540 km2 (120,410 km2 : 130 km2)
• Weather: temperate, with rainfall heavier in
summer than winter
• (Limited) Natural Resources: coal, tungsten,
graphite, lead, hydropower potential
• > Rich Human Resource
Gojoseon (BC 2333 – BC 108)
The Three Kingdoms (BC 57 - AD 935)
Balhae (AD 668 – AD 926)
Koryo (AD 918 - AD 1392)
Joseon Dynasty (AD 1392 – 1910)
Japanese Colonialization (1910-45)
Korean War (1950-53)
Journey to Industrialization (Five-Year
Economic Development Plans: 1962-1991)
Seoul Olympic Games (1988)
IMF Crisis (1997)
World Cup (2002)
• Kimchi. (Chopped cabbage mixed with chilly
pepper and other spicy ingredients,
• One of the World's five healthiest foods (Health
Magazine, MAR 25, 2006);
• Spanish olive oil (reducing heart disease risk),
• Japanese soy bean paste (preventing cancer
• Greece yogurt, and
• Indian Lentils.
Korea in 1950s
War-torn economy and society
Lack of jobs
Lack of resources including natural
Frustration/ Inferiority/ Lack of confidence
Mental inertia from the colonial rule
No skills due to lack of job opportunities
Low morale due to failure in meeting basic human needs (BHNs)
Engineers and merchants perceived as lower status than scholars
Wide-spread latent unemployment
– Extremely high risks & uncertainty, and no means to run business
– Low morale and sense of inferiority
– No savings capacity due to low level of income
– No technology & mgmt skills after the withdrawal of colonial regime
– Poor market due to low level of income
– Market segmentation due to poor infrastructure
• Park Chung-hee (1963-1979) and 5-Year
Plan for Economic Development
• 1st (1962-1966): 14.8%
• 2nd (1967-1971): 20.2%
• 3rd (1972-1977): 20.3%
Industrialization four stages
1.Setting up target industry: Industrial basis for
Subsistence & Sovereignty
– National drive for thrifty and savings
• Heavy tax on luxuries
• Strict control on smuggling
2. Preparation of Seed Money: Establishment of Large
– Introduction of foreign capital
• Shopping list on hands
• Government guarantee
• Keeping the ownership
– Large scale manufactory plants: steel, automobile,
– Created demand for SME products
3.Strategic support to SMEs
– Financial & tax incentive
– Establishment of SME bank
– Credit guarantee for SMEs
• Ensuring market
Protection of local market
Priority of public procurement to SMEs
Birth of entreprenuership
Demand for skilled labor & technicians
4. National drive to foster technical human resources
Rise of entrepreneurship
Acceleration of capital accumulation
Rise of globally competitive enterprises
Sound basis for sustainable growth
Planning in Korea in 1948-1955
• Planning Agency under PMO.
• Planning was compatible with Confucian culture and centralized
authoritarian rule based on dynasties.
• Was expected to deal with the challenges of rising expectations
and challenges of national economic development.
• The Planning Agency was expected to develop comprehensive
plans and to mobilize resources and take care of government
budgeting and accounting.
• But it could not formulate development plans remained primarily
focused on short-term stabilization policies...due to lack of
political commitment... resources and institutional capacity.
Ministry of Revival (1955-61)
• There was a strong foreign intervention and need for immediate
rehabilitation and reconstruction.
• The idea of development planning was criticized on account of
resource and capacity constraints.
• The Ministry was entrusted with planning economic stabilization,
rehabilitation and reconstruction program.
• Budget function was carried out by Ministry of Finance.
• During this period five year plan was prepared by foreign
consultant but was not implemented...lack of political support.
• Economic programs of the ministry lacked long-term
The Economic Planning Board (1961-1993)
• A revolutionary political regime of General Park Chung-hee took
power in 1961.
• Reorientation of national priorities: political stability and
• Supreme Council for National Reconstruction was established
which exercised legislative, executive and judicial powers and
tight control...strong leadership with commitment to
modernization and economic development.
• Economic Planning Board created by transforming Ministry of
Reconstruction and merging some functions from other
• It combined overall planning and resource mobilization function
of Ministry of (then) Construction with budgeting function of
Ministry of Finance, National statistics and economic policy
advice and coordination function of economic development
council. Two new bureaus (economic cooperation and technology
management) were added.
National Development Framework
EPB was responsible...
Not only for the formulation of plans, but the supervision of their implementation
and complementary provisions for improvement.
• financial resource mobilization, internal and external, formulation of budget
within the framework of development plan.
• integration and modification of policies and measures initiated by any ministry or
• conducting economic research and administration of government statistical
• coordination of foreign technical and economic aid programs and promotion of
• overall scientific and technological development.
• coordination of activities of technical agencies both in public and private sector.
• forging possible level of national consensus by bringing on board all significant
stakeholders i.e. government technocrats, research institutes, business
community, non-government experts in the process of strategic planning.
• Headed by deputy prime minister it played the role of a creative thinker, planner,
competent executive and innovative administrator.
• This function was carried out in an aggressive manner
both at internal and external fronts.
• On the domestic front Tax administration was
streamlined, strong incentives given for saving.
• Foreign capital was mobilized for strategic
development project and a special institution was
created for mobilizing foreign resources i.e.
International Economic Cooperation, Korea.
Research and Statistics
• Capacity of national system strengthened.
• All statistical activities coordinated, methodologies
improved and standardized and specialized to ensure
• In the beginning research and studies were carried out
by in-house staff while at the later stage a number of
government sponsored research institutes were
established including KDI.
Five Year National Development Plans were prepared tiered in three
components/levels: The aggregate plan, sector plan and project plan.
Complementing five year science and technology plan was also prepared
The emphasis was on implementability and annual implementation plan
was part of it.
Intensive inter-ministry, thematic or sectoral group meetings were held
Budget function was transferred to EPB from Ministry of Finance was
effectively aligned with development plan and geared to economic
development goals and targets.
Emphasis was given to align national budget with national strategic
Annual review by EPB and PMO separately.
The president presided the monthly economic trend report meeting in
EPB to review economic performance.
President also presided monthly export promotion meeting (Nov. 30
1964 Export Day- export exceeded US$ 100 mn.
Korean Success: Factors
• Visionary, strong-willed and innovative political leadership
– Engineered a futuristic development vision and always looked for
quality and excellence.
– Pragmatic and focused political commitment.
– Delivered what was promised.
• EPB assumed
– High profile office and status
– Focused but coordinated planning, budgeting, resource mobilization,
R and D and national statistics.
• Established a pool of highly motivated and talented policy
makers, technocrats and professionals
– Best people were brought in government bureaucracy and provided
with further development opportunities.
– National R and D capacity developed inviting non-resident Koreans
with special package of incentives.
Korean Success: Factors
Selection and concentration' approach
Human resource development and fostering of entrepreneurial spirits
– Plans and strategies were designed and implemented by national CB
– Foreign borrowing was sought more than grants to make aware of the burden
– Three jung principles (jung sung (devotion), jung will (minuteness), jung jik
Meaningful and efficient use of foreign aid
Building and promotion of prestige projects to engender hope and pride
among people often against conventional wisdom and In. Dev.
Seoul-Busan Expressway construction
POSCO construction and operation
Heavy and chemical industries promotion
Defense industry promotion
Self Sufficiency in main staple i.e. rice.
Bridging the implementation deficits through periodic review and
Korean Success: Institutional Factors
• Capitalist ideology and market economy
• Strategic national development framework
Renewal of national identity and pride
Strategic planning agency and development plans
Consensus building among key stakeholders
Centralized economic planning and implementation
Role of R and D.
Determining Factors of Competitiveness
• Market factors: Traditional Cobb-Douglas production function
– Technological capability through R&D investment
– Government expenditure
Labor and capital market structures and policies
Human capital formation
Diffusion of technology and protection of patent rights
– Corporate governance
– Innovative capacity through entrepreneurship
– Political stability, quality of political institutions