By W.A. Wijewardena –

Sri Lanka’s move should be from bankruptcy to solvency

Two Sri Lankan analysists, Chanuka Wattegama and Milinda Rajapaksa, have documented the success story of South Korea since 1960s for the benefit of Sri Lanka’s ordinary readers. Published in both Sinhala and English simultaneously under the title ‘Poverty to Prosperity: A Review on the Development Model of South Korea’, the book can be used as guidance for Sri Lanka which is deeply mired in an unprecedented economic crisis today. South Korea’s success story, as the two writers have presented it, was from poverty to prosperity, marking a successful march toward a rich country within a generation. Sri Lanka would start its journey from one step backward, from bankruptcy to solvency. It can talk about moving from poverty to prosperity, if this first step is successfully made.

Sri Lankans had a disparaging view of early Koreans

Korea was a disparaging name used by Sri Lankans in early 1950s to describe people living in extreme poverty. That was because when Sri Lanka gained independence in 1948, it was relatively a prosperous newly independent country that could decide on its own future without depending on outside help. It had a trade surplus, while its foreign assets were sufficient to finance future imports of 17 months. Its foreign debt was so low and amounted only to 4% of GDP. It had been blessed with an efficient civil service inherited from the British. The country showed all the signs of being able to make a quick acceleration to economic prosperity. However, this did not happen and over the years, the conditions deteriorated from this wishful prosperity to poverty.

Now that poverty level has fallen to a state of bankruptcy forcing Sri Lanka to beg for assistance from all the nations in the world including those in the developing world. Meanwhile, South Korea which was in abject poverty moved progressively in the other direction thereby becoming a rich country within a generation. This is the success story which Wattegama and Rajapaksa have reminded to us.

Coverage of the book

The book covers South Korea’s growth strategies in 1960s, 70s, 80s, and 90s that enabled this backward nation to become a rich country within about four decades. In addition, special chapters have been written on the development of school education, higher education, rural development and reforestation, and infrastructure developments.

Poor performing South Korea

South Korea was a poor performing economy by any standard. According to the statistics presented by the two authors, during 1953-60, its average per capita income was $ 72, the average savings ratio was 11%, investments amounted on average to 12%, exports as a share of GDP were mere 3%, and imports to GDP amounted to 11%. By any standard, the country was suffering from a major macroeconomic disability. This is similar to today’s Sri Lanka. President Park Chung-hee became the head of the state in 1961 after a military coup when the country had been hit by this major crisis. His job was to build the country by using scanty resources available to the government. Taking this factor into account, his challenge has been named by Wattegama and Rajapaksa as ‘building a country on a shoestring’.

Forex shortage

The summarised macroeconomic indicators presented above tell us only one story. South Korea was not earning enough foreign exchange, its exports have been stagnating against rising imports, its currency was under pressure for continuous depreciation, and it has run into a severe balance of payments problem. Sri Lanka is presently undergoing the same in much worse conditions. To fix the ailment, Park went for export-based industrialisation strategy. This was a drastic deviation from the previous policy of import substitution. Naming it as a dead-end, Wattegama-Rajapaksa duo have noted that ‘since domestic prices could not compete against international market prices, import substitution would have required far too many import-control policies’.

Choice of JRJ and RW

This was the choice which J.R. Jayewardene faced in Sri Lanka in 1977 and his nephew Ranil Wickremesinghe is facing today. JR also, like Park, went for an export-led industrialisation policy and achieved success in its first stage of development. By relying on apparel industry which heavily used cheap labour as the main input, he was able to increase manufactured-good exports from almost nothing to 75% over a decade. His successors, namely, Ranil Wickremesinghe who became the Minister of Industries in 1989, should have changed the country’s industrial base to the second stage of industrialisation moving away from apparels and adopting electronics-based industrial products. That would have helped Sri Lanka to embrace what we call today as the Third Industrial Revolution.

Wickremesinghe had made the announcement, on the bidding of his Secretary, the late A.S. Jayawardena, that Sri Lanka will make its plans to become a Newly Industrialised Country or an NIC, the vogue at that time relating to the four East-Asian tigers that included South Korea too. But nothing was done in this regard and Sri Lanka continued to expand its apparel industry covering the whole island. The subsequent administrations too were lethargic in converting Sri Lanka’s industrial base to meet the requirements of the Third Industrial Revolution. Now the world has gone for the Fourth Industrial Revolution, but Sri Lanka still remains in the Second Industrial Revolution that has mechanised industrial production by using electricity instead of electronics.

Wickremesinghe is planning to go for export-led industrialisation strategy but the political party which backs him in Parliament, namely, Sri Lanka Podujana Peramuna or SLPP, still believes in the virtues of import substation policies. Hence, Wickremesinghe’s main challenge is to de-educate his party supporters and re-educate them of the changing world outlook today.

South Korean central planning

Wattegama and Rajapaksa have noted that Park attained his goal of industrialisation not through pure market mechanism but through a system similar to the central planning adopted by the Soviet Union at that time. The difference was that products were developed for the global market and not for building domestic prestige. When Park became the Head of the State in 1960, South Korea has already started planning by establishing an Economic Development Council in 1958. Say Wattegama-Rajapaksa duo: ‘The Council was assigned to conduct economic research for current policy problems and formulate a long-term development plan. A draft was submitted to the Cabinet and (was) approved in 1960. So when Park took office he already had a blueprint in his hand. It was launched with minor changes in January 1962’.

Features of the plan

How this was done is then explained by Wattegama and Rajapaksa as follows: ‘The plan specified the sources of prospective income and investment options. Nearly a half of the investments were expected from foreign donors, mostly the United States. About one third was to come from domestic savings and about one fifth from borrowings abroad in the form of intergovernmental or private loans or private direct investments. Each year roughly one fifth of GDP was planned to be invested. About 18% of the total investment was for agriculture, forestry and fisheries; 16% for transportation and communications; 21% for mining and power; 25% for manufacturing industries, and 20% for education, housing, and social welfare. Half was for the public sector and the rest was for the private sector’.

Achievements were short of expectations

However, the achievement of the plan was less than expected. Growth fell from the expected 6.5% to 5.7%. The expected domestic savings were 7% but the actual realisation was only 5%. Since the government expenditure exceeded the planned numbers, the contribution which the government was expected to make toward capital formation fell short of the targets. Wattegama and Rajapaksa conclude that this was not a matter for worrying because a country was able to attain the targets of a plan very rarely and Korea had the advantage of effecting a change in its economy. This change was the one that was continued in the subsequent four decades to make South Korea a rich country. Thus, the seeds for changing the system and making Korea a prosperous nation was sown by Park through his centrally planned economic development system.

I had addressed the relevance of South Korea’s economic development to Sri Lanka in a previous article. I had highlighted the following in the article, and it will add to what Wattegama and Rajapaksa have reminded us.

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 policymakers.

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: Support who will support themselves

This is exactly what South Korea did according to Park. He 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’.

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.

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.

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.

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.

I recommend Wattegama-Rajapaksa book to all Sri Lankans.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com