May 28, 2018

Korea (South): Turn on the lights!

We attended the annual meetings of the African Development Bank (AfDB) in Busan (South Korea) last week, and can report a strong Nigeria presence. In addition to the current officials required to be present, we had a former finance minister, a former CBN governor, a former director-general of the Securities and Exchange Commission and the managing director of the Africa Finance Corporation as well as the AfDB president.

The location moved from Ahmedabad (India) the previous year. The distance from the home base has an impact on attendance: perhaps not the overall numbers but we noticed a lower turnout among ratings agencies, international bank economists, due diligence firms, Africa journalists, think tanks and general Africa watchers. We understand that the meetings will be held next year in Africa, probably at the AfDB’s headquarters in Abidjan.

On the positive side, the location enabled us all to see a little of another Asian success story, and hear how it has been achieved from Korean officials and business people. The theme of the meetings was Accelerating Africa’s Industrialization, and perhaps the most revealing presentation was entitled Pathways to Industrialization.

As the centrepiece, we heard a passionate account of the Korean miracle from Sung-Soo Eun, the chairman and president of Korea’s Eximbank. The country has no natural resources and, he might have added, limited land suitable for agriculture. (Most of it is covered by forestry.) The determination of its people to lift themselves out of poverty and create a better life for their families has driven the transformation. Eun was asked by the mediator to confirm the story that Korean schoolchildren generally study until 10pm, and replied that he had put his books down each day closer to 11.30pm.

The hard work of individuals has been complemented by the leadership and planning of government, and the participation of enterprises. In an earlier presentation senior officials responsible for the Korean railways and urban development reeled off statistics showing the rapid expansion and core role of planning in their sectors. They also acknowledged the fiscal constraints. It was not a case of spending billions on flash infrastructure at the outset of industrialization. The initial focus was on railways and roads, and the impressive housing development only really kicked in once the domestic resources were available and manufacturing had entered its second phase (heavy industry, chemicals and shipbuilding) in the 1980s.

The miracle has created the tenth largest economy in the world in less than 70 years since the end of a highly destructive war in 1953. Its population is little more than 50 million. South Korea was invited to join the OECD as long ago as 1995, and is one of only two countries to have made the transition from low-income economy to membership of the organization. Nor has the success story ended since the country is a world leader in aspects of construction, engineering and urban development. The planning may have been central but not in the socialist sense. Our favourite slide of the presentation (for its punchiness and unashamed triumphalism) showed the Korean peninsula at night: the north in darkness and the south brightly lit.

Following Eun’s presentation, Egypt’s director at the AfDB and the economy minister from a francophone country broadly endorsed the vision, while indicating that its replication in Africa would be challenging. The director argued that the priority was not the building of world-class infrastructure: rather the focus should be hard work, discipline and good governance across society, competent management in the public sector, the education of children and jobs.

Africa’s route to industrialization should initially be via the acquisition of the relevant skills and not the purchase of machinery. Unemployment rates are generally high in Africa, the director said, and yet business owners complain that they cannot find the workers with the appropriate training. Additionally, he noted that societies are fractured, and that elites retreat at night to rich ghettos to insulate themselves from their compatriots.

The economy minister’s view was similar. He called for good leadership in government, and bemoaned the shortage of entrepreneurs. The work ethic is often poor, and he observed caustically that the preoccupation of many young people is to acquire a mobile phone with 5G. His government had been able to push up education spending to 5%-7% of the total budget although this was still inadequate. His country had one necessary element of industrialization, hydro-power capacity, which it is developing with South Korean support.

In the Q&A session at the end of the discussion, the central bank governor from Mozambique asked how the external conditions to replicate the South Korean (or the Chinese) success story had changed in the past 50 years. Eun acknowledged that the transformation of South Korea coincided with the opening up of world trade to newcomers, and that barriers and regulations had since multiplied. We might add that East Asia benefited from a first mover advantage, being far ahead of the rest of the developing world.

Gregory Kronsten
Head, Macroeconomic & Fixed Income Research