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Mainstream, Vol XLV, No 40

India’s Options for Economic Progress : Clues from South Korea

Wednesday 26 September 2007, by O P Sha, R Sharma

India has become known in recent years as a centre of competence in operating and servicing Information Technology—and the thrust of public policies over the last few years has been on the IT and software-related industries. Even the media has created an impression that the Indian economy can drive its growth on this IT and software sector. This impression is fundamentally flawed.

Information Technology and software account for only 1.5 per cent of the world’s GDP. The share of India at present is around five per cent. Now, even if on a dreamy estimate India increases its share to a very high value at around 50-60 per cent, it is difficult to imagine how a sector that accounts for only 1.5 per cent of the world’s GDP will drive economic growth and generate large scale employment.

Should India have looked elsewhere for its key to prosperity? Could South Korea’s chosen path provide some clues? The Korean choice was shipping: building up a shipping transport industry, and its assertive pursuit of that choice led it to economic breakthrough and stability.

India has always refused to learn either from its own mistakes or even worse, from its neighbours. It has the infrastructural capabilities, such as a reliable network of sub-contractors and vendors to supply materials and human resources, supply chains of manufacturing, a skilled workforce, expertise in basic sciences and engineering, and an infrastructure of logistics and connectivity. Still, the huge unemployment figures persist. It is surprising that in a developing and populated nation like India where millions of people are still looking for work, there is not a single policy initiative to enter and gain access to industries where this large and under-used labour force could be turned to profitable productivity.

It can be argued that India is not on the industrial map of the world because of lack of reform processes, stable businesses, commercial and legal environment and policy support. It could be said that that the core heavy manufacturing industries do not provide lucrative jobs. This is misleading. Though it is true that the wages in the core heavy manufacturing industries are lower than the wages in IT and software, they provide large scale employment and train the labour force in operations that have a positive effect on other sectors as well.

A nation like India would do better in equitable distribution by providing 100 jobs at the rate of Rs 5000 per month, rather than 10 jobs at the rate of Rs 50,000 pm. The core heavy manufacturing industries and related design and consultancy services account for nearly 75 per cent of world’s GDP. And they demand a network of roads, rails, ports, canals and power. Basically, they stimulate the government to invest in the creation of physical assets.

Astonishingly in India, the government is slowly but firmly withdrawing any direct or indirect investment in the creation of national infrastructural facilities of transportation and power. Hence, in budgetary allocations the Plan expenditure on capital accounts is being neglected year after year. Indian capital plan expenditure for 2006-07 was budgeted at Rs 289.9 billion. This is a paltry amount, and it is very difficult to understand how it can be sufficient for the creation of national assets.

Table 1: The Employment Generation Information of Shipbuilding Industry
S. No. Shipbuilding Addition of business (in CGT-compensated gross tons) shipbuilding and Industries Number of people employed in the shipbuilding industries (direct employment with shipyards) Number of people employed in the shipbuilding industries (indirectemployment with the ancillary industries) Annual people in the ancillary
South Korea 19.4 6,30,500 22,06,750 5920
Japan 15.5 5,03,750 25,18,750 4312
China 6.9 2,24,250 8,97,000 6840
USA 0.7 22,750 1,13,750 600
Denmark 0.5 16,250 52,813 100
Norway 0.2 6500 21,125 50
India 0.23 7500 26,2502 225
Table 2: The Comparative Performances of Indian and South Korean Economies (1983 to 2003)
1983 1993 2003
Export* (fob) 24,445 82,236 1,93,817
South Korea % Change over previous time - 236.4 135.7
Import*(cif) 26,192 83,800 1,78,827
% Change over previous time - 219.9 113.3
Export* (fob) 10,061 26,855 76,345
India % Change over previous time - 166.9 184.3
Import*(cif) 15,715 35,904 99,836
% Change over previous time - 128.5 178.1

*The values are in million $ US

What does the Korean story tell us? Around the 1980s, the South Korean economy faced a serious crisis because of multiple shocks; it had been hit hard by the second global oil crisis, by crop failure, and by political and social instability arising out of political assassinations. But, because of its in-built strengths in core heavy manufac-turing industries, steel and petrochemicals, the economy quickly recovered. The GDP growth rate stood at 6.2 per cent in 1981, with the current account deficit/GNP ratio down from 8.5 per cent 1980 to 1.9 per cent in 1983, and the inflation rate fallen to 6.6 per cent in 1982—from 17.7 per cent just a year before. At around that same time, the situation in India was very similar. However (as listed in Table 2), after the 1980s, the South Korean economy rebounded with impressive growth in exports, while the Indian economy remained sluggish. Between 1983 and 1993, South Korea was able to not only reverse its current account balance but also showed impressive gains at 156.6 per cent. From 1993 onwards, it registered notable growth and has been posting decent figures ever since.

India moved differently. Between 1983 and 1993, the Indian Government allowed the situation to go from bad to worse, and even when it took initiatives they lacked the vision to contain the current account balance.

Normally, in a politically stable environment the world trade transportation grows. It means that leaving aside the few but cyclic recessionary trends in global economy which do affect the container transportation markets, container transport will grow faster than world trade in the long run, and will be having an increasingly bigger share of the total global transportation market. The forecast is that the container volume will double on most major routes in another 10 years or less. What is more, the future trend seems to be that in the container business the top 20 carriers will be having an increasing share of global transportation bookings. Some smaller players such as Hong Kong, Singapore, and the Emirate of Dubai in India’s neighbourhood were intelligent enough to develop the financial clout to take a big share in the world sea transportation market. The foreign operators are profitable because they are vertically integrated: they operate terminals at the export site, manage the shipping lines that transport the cargo and then operate terminals that unload the cargo at the other end, anywhere in the world. This ‘soup-to-nuts’ management allows these operators to cut costs, increase efficiencies on high volumes and achieve higher margins.

The international shipping business has evolved in recent years to include many more containers with consumer goods, in addition to old-fashioned bulk commodities, and that has helped lift profit margins to 30 per cent, from the single digits. For example, most major ports overseas operate 24 hours a day, seven days a week, efficiently and without any problem. In India even a proposal to implement this will attract very critical and often violent and destructive response from the labour unions.
Additionally, shipping orders abroad are transmitted electronically to other ports to save time. In India this cannot be done; the orders need to be re-keyed into the port’s computer systems, a concession that would be vehemently opposed by the unions trying to preserve jobs. In this prevailing environment, it is no surprise that India has failed even to produce one world-class shipping company though it has a significant coast line.

On the other hand, foreign terminal operators (that is, operators in Hong Kong, Singapore, and emirate of Dubai), have benefited by running several lower-cost port operations around the world, and in that process have become huge export and trans-shipment centres for international trade. The Indian ports operate largely as local ports, receiving ships with goods meant for nearby consumption.

Since the volume of internal trade has risen significantly, some of the foreign operators have leveraged ties with their major customers, the large shipping lines, into much closer relationships. In this process they were able to achieve better efficiency because of vertical integration. A nation must realise that a terminal operator is now expected to manage where and when a ship will berth, the use of gantry cranes, relations with unionised stevedores and arrangements with trucks or rail cars to take goods to market. These operations are carried out with specialised software that minimises the amount of time a ship stays in port, and therefore allows the owners to use their vessels as much as possible. The failure to have efficient terminal operators increases delays at the port and causes irreplaceable losses to the economy.

A nation which has world-class terminal operators will obviously have strategic power in an increasingly vital industry. Terminal operators can manage ports in different countries. At the global level, in recent times the port authorities have started relying much more on foreign terminal operators to help finance land acquisitions, dredging and other improvements. This further shows that if a nation can export its terminal operators abroad it will create a long term geo-strategic relationships among nations. In the international political world where economic relations are supreme, that is very important.

In this environment, it is quite disheartening to see no policy initiative from the Indian government to concentrate on the development of terminal operators. About 90 per cent of the world’s break bulk cargo is transported by ships, and 90 per cent of these travel in standardised shipping containers. Efficient and economic transportation is the key in the competitive globalised world. Technically, this will demand the big sized containers. With increasing container carrying capacity per ship, transportation cost per container will go down; hence making it even more economical to transport by container ships. Currently, research is focused on the design of very big or ultra large sized container ships in the range of 8000 to 12,500 TEU, where the upper limit of 12,500 TEU is restricted by the infrastructure limitations that constrain the operational flexibility of the ships.

The Indian scene is very bleak. Presently, medium to large-size container ships are neither designed nor manufactured in India. The share of Indian companies in world container transportation is negligible. There are only 10 container ships of a total 11,000 TEU capacity under the Indian flag; of these ten, three of 1600 TEU each belong to a public sector shipping company, and seven to a private sector shipping company. Since the container ships of the Shipping Corporation of India are of small to medium size, they operate in international waters; and those of the Shreyas Shipping Limited—all of much smaller capacity—are feeder vessels.

In the world transportation market, the orders placed for new container ships are expected to increase the global capacity by 60 per cent over the next five years or less. The shipbuilding market for container ships is highly competitive. It is mainly because the major shipyards in the category are Chinese and South Korean (DHI— Daewoo Heavy Industries, DSME—Daewoo Shipbuilding and Marine Engineering, HHI— Hyundai Heavy Industries, HMD—Hyundai Mipo dockyard, HHIC—Hanjin Heavy Industries and Construction, and SHI—Samsung Heavy Industries). They compete stiffly with each other by undercutting costs. Therefore it is difficult for any new shipyard (such as a private sector Indian shipyard) to enter the shipbuilding market for container ships.

A possible approach to gain entry into the shipbuilding market for container ships is to explore the market for small-sized container ships (that is, around 400-700 TEU short haul coastal feeder vessels), and after that to move up in the value chain for the bigger container ships. The annual labour cost is low in India, at an estimated US $ 1192.00, against the South Korea price tag of US $ 10,743.00. The limited technical expertise presently available with Indian shipyards and design organisations is suitable only for the design of smaller container ships. So it will be easier for an Indian shipyard to explore and enter into the market and get orders for feeder vessels.

Summary : Lessons for India

It is high time that India realised that it is a coastal country, and recognised that this is itself a resource. Hence, it cannot neglect the potential and relevance of marine industries like shipping and ports.

If we look around even in Asia, we can see why we had failed to achieve and sustain a high growth rate, and why we are, shamefully, at the 127th place, far below many other developing countries in the human development index. India needs to pursue an outward oriented economic policy. The shipping, cargo transportation and container industry beckons as a sphere of burgeoning demand.

Looking at South Korea in particular, some very basic lessons can be learnt:

• There must be conscious investment in primary education, vocational education and training; the focus must be on good quality, and attention must go to the people at the lower rungs of the social and economic structure.

• Vocational training capacity and infrastructure must increase, and the investment must come from both public and private institutions.

• Industry and the State must train and upgrade the labour force, and create institutions to do this.

• India must concentrate and focus on gaining a foot-hold in the markets of core heavy manufacturing industries.

Once it can perceive them, India has opportunities to pursue. It can chart a new course, with better prospects of enduring gain. It will demand vision and hard work. But hopes die hard in an open democratic society.

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, pp. 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. ICAF, “Shipbuilding Sector Remains Uncompetitive”, National Defense Magazine, US Military Information, USA, March 2002, Website address: www.nationaldefense magazine.org/ issues/ 2002/Mar/Shipbuilding.htm<http://www.nationaldefensemagazine....> , 2002.

9. 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.

10. Schultz, T.W., The Economic Value of Education, Columbia University Press, 1963.

11. Kim, S.J., and Yong, J.K., Growth Gains from Trade and Education, International Monetary Fund Publications, 1994, pp. 3-4.

12. Krueger, A.O., Trade and Employment in Developing Countries: Synthesis and Conclusions, University of Chicago Press, Chicago, USA, 1983, pp. 12-18.

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

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