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Mainstream, VOL XLV, No 37

Importance of Productive Choices and Education in Reviving the Indian Economy: Lessons from the South Korean Model

Tuesday 4 September 2007, by O P Sha, R Sharma

“The Indian political system is far from participatory. In fact, it is elitist.” —Prof Jean Dreze1

Although Prof Dreze’s observation is on India’s political system, even a cursory look reveals the same bitter truth about the Indian economy as well. Policy-making and subsequent reaping of its benefits is around the bunch of middle class Indians. Everything is subsidised by the Indian State at the expense of more deserving but politically voiceless hungry Indians. Media coverage of public policies and of publicity campaigns by the IT (information technology) and software-related industries, implies that India is heading for IT-driven growth. This is plain wrong, and quite misleading. The growth of service industries in India lies in low-volume areas, and to a major extent in capital and skill-intensive manufacturing. It is also clearly elitist, because whosoever gets employment in services like capital and skill-intensive manufacturing will typically be a university or institution graduate. This leaves out the majority of Indians.

India produces roughly 15 million employable young people every year. Instead of initiating public policies to enter and gain a foothold in high-volume light and consumer goods industries creating employment for this large section of the labour force; the Indian nation is pursuing a path which will benefit only a select class. Compared to other nations, India is nowhere near its more prosperous neighbours in Asia, let alone other developed nations.

Each of the various fundamental economic transformations of the past few centuries has affected the nature of Society directly or indirectly, discreetly or indiscreetly, and comprehensively or marginally. The ‘knowledge revolution’, which laid the foundation for the industrial revolution transformed society through the increased yield in agriculture and the higher production in industry. This not only increased consumption and therefore living standards, but also changed the location, centre of thrust and attention in life from rural communities to metropolitan mega-cities. The scientific revolution of the past century has resulted in the conceptualisation and systematisation of change itself: the very process of producing new innovations has been changed from focused, isolated and independent inventors’ laboratories to huge multi-disciplinary research institutions. Knowledge and information are being accepted as the key to successful development today. The countries that realise this will reap the rewards of development in future.

The successful economies of the world have built their knowledge bases and have subsequently widened their economies consisting of growths driven by multiple sectors. Ideally, a broadbased valued economy has the following GDP composition: agriculture: 1-15 per cent, industry: 20-60 per cent, and services: 35-79 per cent.2

Table 1
Some world economies Agriculture Industry Services
USA 1% 20.7% 78.3%
Denmark 2.2% 25.5% 72.3%
Norway 2.2% 36.3% 61.6%
Japan 1.3% 24.7% 74.1%
South Korea 3.8% 41.4% 54.8%
China 13.8% 52.9% 33.3%
India 23.6% 28.4% 48%

Our failure is clear: we have not developed our knowledge base, and therefore could not develop a broadbased valued economy driven by high technology and centered around industries and services. Lacking a knowledge base, we were neither able to develop industries nor services. Without industries and services, there was no value addition in agriculture either. A concerned Indian citizen must ask this question: If South Korea could perform so impressively in spite of such complicated obstacles as Japanese colonial rule, the devastation of the Korean wars, political conflicts, and heavy military expenditures under national partition; why has India—without such complex obstacles—failed so miserably to achieve impressive growth?

Economic Growth of South Korea

South Korea achieved impressive growth, and utilised it to improve the education of its people. It was able to do so because it pursued a comprehensive growth strategy consisting of high savings and investment ratios, a well-trained and educated labour force, and well-conceived and implemented export orientation, with both equity and outward-orientation. With resources used to build a knowledge base and infrastructure, South Korea benefited from the education level of its human resources. It grew by more than 8 percent each year from the early 1960s till 1996, and then by an average of 6 percent from 1996 onwards; emerging as one of the world’s fastest growing economies. From its liberation in 1945, the country’s economic growth went through four stages: a reconstruction period (1945-61), an export-driven period (1962-73), a crisis and recovery phase (1974-82), and a period of growth and adjustment from 1983 to the present.

The Reconstruction Phase

South Korea started rebuilding its economy after Japanese occupation ended in 1945. In the colonial Period (1910-45), the Japanese Government had built modern economic and social institutions, and invested heavily in infrastructure such as schools, railroads and utilities, but all these resources were used only to advance Japanese interests. The ownership of physical capital was heavily concentrated amongst the Japanese who had lived in Korea, and few opportunities if any, were given to South Korean entrepreneurs and technicians for development.3 Hence the country’s economy was in terrible shape in 1945. With many constraints, including lack of managerial manpower and raw materials, and volatile political and social environment, South Korean manufacturing in 1948 stood only at about 0.15 of its 1939 level.4 The Korean war (1950-53) damaged the economy further. South Korea suffered extensive damage in human lives and infrastructure, with most manufacturing facilities destroyed and about one million people killed. But once the war ended, concrete efforts to rebuild the economy began. From 1954 to 1961, the GDP growth rate reached 4.1 per cent, and the per capita income growth rate 0.8 per cent each year.. The government attracted large foreign aid including raw materials and capital goods, and used that to drive growth. Some estimates for 1953-60 show foreign aid contribution in imports at around 70 per cent, and contribution to savings at about 90 per cent.4, 5 In this period, a conservative policy of protectionism and import substitution kept the currency over-valued and used high tariff rates and licensing systems to control imports. Because of this, exports remained negligible at 3.3 per cent of GNP and consisted of only primary agricultural and fishery products, and mineral ores. Inflation was high during this time, and months after the 1945 liberation, the Seoul wholesale price index climbed to 1600 per cent because of extreme social and political environment. The price index rose to 1700 per cent during the three-year Korean war mainly due to the drain of monetary resources. High inflation continued during the post-war period, the annual wholesale rate averaging 14.3 per cent during the eight years following the war.

The Export-driven Phase

In the next decade, South Korea realised its mistake, and changed the policy focus from import substitution towards export orientation. It then undertook active and comprehensive trade reforms and export promotion.5, 6 Providing exporters extensive direct subsidies, tax exemption, and loans with preferential low interest rates. In 1964, it devalued the domestic currency sharply against the US dollar, and thus made exports extremely competitive. It encouraged inflows of foreign capital to offset insufficient domestic savings. The impact was impressive. The economy changed structurally. The average annual growth rate of GNP hit 8.7 per cent, the GDP share of mining and manufacturing rose from the 16 per cent level of 1962 to 26 per cent in 1973, and that of the agricultural sector in GDP went down from 37 per cent in 1962 to 25 per cent in 1973. The real value of total exports was up by 30 per cent per annum, and the share and structure of exports in GNP changed significantly from six per cent in 1962 to 30 per cent in 1973, with the share of industrial products in total exports increasing 27 per cent to 86 per cent in the same decade,. The problem of price instability relaxed, and the inflation rates measured by the consumer price index were only moderately high at around 12.3 per cent.

Since the economy was performing well, there was a deep domestic desire to invest; savings increased, although they remained insufficient. This gap gave rise to the excess of investment over domestic savings. It was countered by deficits in current accounts that averaged around 4.0 per cent of GNP. Because of this current account deficit, the foreign debt accumulation climbed to around 32 per cent of GNP in 1973.5, 7

The Crisis and Recovery Phase

South Korea now found its competitiveness in the world market declining. So the government changed its focus on promotion of new strategically important export-oriented industries and import substitution of intermediate inputs and capital goods. It undertook massive investment programmes in heavy and chemical industries. It is known that any nation which strives to build its knowledge base and wants to utilise this to drive growth; needs to focus on core heavy manufacturing industries. Once competence is developed in core industries, then the competence can be better utilised to drive growth in all sectors. Moreover, once heavy manufacturing industries gain a foothold in world markets, the service sectors revolving around these industries are bound to evolve.

The Growth and Adjustment Phase

Since the 1980s, South Korea’s economy has been performing very well, with impressive GDP growths. A series of tight monetary and fiscal measures achieved price stability, bringing down the government budget deficit as a ratio of GNP from 4.7 per cent in 1981 to one per cent in 1985.

The government also controlled money supply, and this slowed the growth rate from 21.3 per cent in 1982 to 7.2 per cent in 1984. In the same period, a wide range of policies were directed toward market liberalisation in conjunction with the price stabilisation programme. Building upon its highly successful industrial policy of the 1970s, the government has now shifted from direct intervention to a higher-level strategy of indirect guidance and control. South Korea slowly moved to reduce all subsidized policy loans, and will eventually eliminate them under the financial market liberalisation programme.5, 7 Visionary leadership initiatives have steradily improved the balance of payments; the current account deficit dropped from 1.9 per cent of GNP in 1983, to 0.9 per cent in 1985, and in 1986 the current account registered a surplus of 4.3 billion US dollars. With the improvement in current accounts, total external debt was gradually reduced. Since 1986, the country has been experiencing a remarkable economic boom, with low inflation, and concerns about foreign debts are becoming unfounded.

Benefits of Education and Human Resource Development

Even before the economic boom, South Korea started investing in education. School enrolment was then patchy.8 Educational attainment in the labour force increased remarkably from 1945 to 1960 because of the strong growth of school enrolments. By the early 1960s, this early investment had given South Korea a human resources base; educational attainments of South Koreans far exceeded those of other developing countries. The country’s record of rapid growth of both the economy and educational attainment has been outstanding. A number of economies, such as Botswana, Hong Kong, Singapore and Taiwan, have achieved equally high income growth rates, but none of them has achieved comparable educational growth. South Korean students have out-performed China and 17 other countries in science, rank second only to China in mathematics, and have consistently shown good results in cognitive skills (numeracy, literacy and scientific reasoning). South Korea has invested more intelligently than other countries in order to promote both quantity and quality of education. At the primary and secondary levels student-teacher ratios are much higher in South Korea than in the developing countries, and it has invested in providing qualified teachers in primary education. The critical parameters of high-quality teachers, long school days, low repetition and drop-out rates demonstrate efficient management of primary education.

The primary education system and scenario in India do not require any critical analysis. In a nation where most primary schools lack even the basic infrastructure of building, black board, quality teachers, and reference materials, it is useless to talk of education quality. It took the Indian government roughly 50 years to realise that primary education for everyone is not a luxury but a necessity, to build a knowledge base. The launching of the Sarva Shiksha Abhiyan scheme to promote primary education merely indicates that the nation now will impart a flawed, and low quality primary education to its people. There has been no indication or policy initiative to build the basic infrastructure required for a high quality primary education. This lack of focus on primary education in India is really surprising. When illiterate people number some 600-650 million, it is painful to see India’s official definition of literacy as the ability to write your name. Of China’s people, 93 per cent are literate. Are we so aloof to even our neighbors that their progress does not motivate us to plan and think better?

Instead of concentrating on good primary education consisting of primary reading and writing in at least one language, basic arithmetic operations, and basic sciences, the Indian government has left primary education for the poor people in the dark. It has only invested in primary education that can at best serve for the middle class which has enough money to supplement it with coaching and extra textbooks. It is no surprise that middle class families themselves prefer either “Kendriya Vidyalayas” or public schools for their children. One can hardly imagine the children of the poor getting into either of these.

It is well known that educational growth is usually accompanied by economic prosperity because demand for education responds positively to change in income. In South Korea, there had been a strong demand for education, which was attributable to strong social and economic motivations. A successful economy follows a pattern. In the first phase, a nation pursues a high quality primary education, and once the knowledge base consisting of a well-educated labour force is formed then an outward-looking economy emerges. In this phase the exports will be concentrated in labor intensive manufactured goods. After this, a nation feels confident and invests in high-quality secondary education, diploma or degree courses in engineering sciences, and technology, and high-quality tertiary education, with research institutions and laboratories in engineering sciences, and technology. It shifts its focus into more capital- or skill-intensive products and services. The strong performances of labour and skill-intensive export industries ensure the growth of employment and real wages. This in turn will further increase society’s emphasis on education.

In India, a focus on high quality primary education was not even there in the first place. So there was no significant growth of exports based on labour-intensive manufactured goods. Since India’s planning failed at the first step itself, there was never a chance to reach a second and third stage. The focus was always on a protectionist, inward-looking economy; investment in high quality education systems was neither thought of nor implemented. In recent times, some efforts have been made to change the focus to an open, outward-looking economy. But the labour force needs training to develop, and enhance its skills.

India’s policy makers never felt the need to train the work force. So while 90 to 95 per cent of the people aged between 15 and 35 years in the major world economies either learn a vocation, skill or trade—with a choice of 2000 to 2500 vocational education and training (VET) programmes—in India hardly two per cent of the population receive formal VET training. So far, formal VET training in India exists in only 71 trades against the globally identified 2500 trades. Our situation as a nation building its labour skills is pathetic. We have 11,000 VET training institutes against China’s 500,000, Japan’s 1,000,000, and South Korea’s 750,000. What is worse, whatever little VET training exists, is open only to formally educated people, who have completed eight years of schooling, and even 10 or 12 years. Most of Indian workers in unorganised sectors do not have formal education. Till today, there are no diploma or skill enhancing courses for people without formal qualifications. After liberalisation, many industries have either closed or reduced their manpower. In the absence of training opportunities that could equip them to seek work in other industries, it is difficult to imagine the fate of workers.

Educational investment is essential to increase a worker’s ability to adapt to changing job situations. A stiffly competitive environment and technological changes demand constant innovation. In his seminal book, Schultz (1963)9 argues that it is true under widely different circumstances that people with 8 years of elementary schooling are better prepared to move and enter upon new jobs than those who had only 4 or less years of schooling. Similarly, high school graduates are much better prepared to make such adjustments than those who have completed only the elementary grades. Economic growth in modern times can bring about vast changes in job opportunities if governments plan and act with foresight. Schooling in this environment is an important source of flexibility for occupational and spatial adjustments.10 A strategic policy shift towards export orientation, and subsequent changes in industry and employment structures, along with pressures from global competition, should have a positive effect on the demand for education, and generate institutional policies for creating a knowledge base. In this climate, both public and private firms demand proper and efficient educational systems. Once the government realises a future demand for a skills to move industrial development, it can develop systems of vocational training in different trades and practices of manufacturing, and technical graduate and postgraduate courses.

The knowledge economy demands an extensive public and private vocational training system. Governments initiate it, and later back private enterprises via different direct and indirect benefits so that they can provide their own workers with training of good standards. India has neglected this important feature of vocational training systems without the realising that lack of training will impede Industry from adding value and moving towards more profitable and technologically advanced areas.

As an economy transforms, the presence of competitive labour markets implies efficient allocation of labor resources, and this in turn provides more incentives for higher education along with technological sophistication. The global competition imposed by outward orientation will force the government and firms to invest efficiently in the formation of a knowledge base consisting of human resources for the economy.

To implement any policy a government needs money. For a poor country like India, funds are a critical issue. The critics of public spending always cite the crunch of monetary resources in India. Raising of money via direct and indirect taxes is a complicated issue and will need through research to devise any new method to generate revenues. One obvious flaw is that India’s tax revenues as a percentage of GDP stand at a pathetic low of about 10 per cent. The comparable figures for USA, South Korea, and Japan are 20-30 per cent, while those for other the more welfare driven nations of Sweden, Denmark, and Norway are 45-55 per cent.11 There is clearly a basic flaw in the Indian tax system.

There is a crying need to rationalise the taxes, and to reduce duties and tariffs. Management of tax collection also needs revision. Tax exemptions to different sectors like charities, housing industries, and export units should be critically analysed to find out where the government is losing revenues. Services account for 48 per cent in GDP, but contribute barely two per cent to tax revenues. The government should focus on the implementation of value added tax (VAT) in this largely unorganised sector. Once a nation accepts that public spending on education to create a knowledge base is very critical to sustaining growth and creating employment; tax reforms become a warning sign for survival in a competitive globalised world.

REFERENCES

- 1. http://www.cia.gov/cia/publications/factbook/rankorder/2001rank.html
- 2. <http://www.indexmundi.com>
- 3. Suh, Sang-Chul, Growth and Structural Changes in the Korean Economy 1910-1940, Council on East Asian Studies, Harvard University, 1978.
- 4. Kim, Kwang Suk, and Michael Roemer, Growth and Structural Transformation, Harvard University Press (Cambridge, MA), 1979.
- 5. Collins, Susan and Won-Am Park, “External Debt and Macroeconomic Performance in South Korea”, in Jeffrey Sachs and Susan Collins (eds.), Developing Country Debt and Economic Performance, Vol 3, The University of Chicago Press, 1989, 153-369.
- 6. Hong, W.T., Trade Distortions and Employment Growth in Korea, KDI, Seoul, South Korea, 1979.
- 7. Haggard, Stephan, Chung-In Moon, and Byung-Kook Kim, “The Transition to Export-led Growth in Korea, 1954-1966”, Journal of Asian Studies, 50, 4, 1991, pp. 850-73.
- 8. McGinn, N.F., Sondgrass, D.R., Kim, Y.B., Kim, S. B., and Kim Q. Y., Education and Development in Korea, Harvard University Press, 1980, pp. 38-41.
- 9. Schultz, T.W., The Economic Value of Education, Columbia University Press, 1963.
- 10. Kim, S.J., and Yong, J.K., Growth Gains from Trade and Education, International Monetary Fund Publications, 1994, pp. 3-4.
- 11. Krueger, A.O., Trade and Employment in Developing Countries: Synthesis and Conclusions, University of Chicago Press, Chicago, USA, 1983, pp. 12-18.

The authors, R. Sharma and Prof O. P. Sha, are associated with the Design Laboratory of the Department of Ocean Engineering and Naval Architecture, Indian Institute of Technology, Kharagpur.

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