Outward Facing Economies: What Are They and How Can South Korea Be An Example?

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South Korea in the 1950’s was recently out of a brutal war with its northern neighbour and it used that opportunity to start afresh. With considerable help from the US (and later Japan) the country embarked on a new project, guided by a dictator repressing his people.

From 1962 onwards a succession of 5-year-plans were put into place that helped guide South Korea out of its war-ravaged state in the direction of becoming a production powerhouse. It did so first by entering the textile sector, followed by heavy industry and then the chemical industry, which is why they are now big players in all those sectors. South Korea holds a rare example of a lacking service sector and a highly productive industrial sector where 24% of the labour force generates 40% of the GDP, compared to the US’ 20% of labour force generating 19% of GDP (industry figures). This is also due to the fact that service companies in South Korea have been unable to fully break into their markets.

Personally it was important (and interesting) to understand the above in order to grasp the outward facing economy model. South Korea has an extremely poor agricultural capability, as is the case for Taiwan, Singapore and Hong Kong, the other three Asian Tigers. Together with South Korea, these countries represent the most successful examples of export driven economies. They were all economies that had the liberty and need to focus investment into production in order to sell to a growing globalised market. And a big reason their success was so smooth is that they had no competition, as South America went through their inward facing “lost decade” and Africa was drowning in aid ineffectiveness.

South Korea’s relative geographical size and history became a huge advantage as it was able to exploit its labour force in production (similar to China in more recent history), its incredible financing from US aid and Japanese interests, topped with its lack of competition to develop into being the second Asian nation in the OECD. It was through these methods that many gigantic Chaebol’s (family controlled conglomerates) were created, such as Hyundai, Samsung and LG. Another incredible development was the ability to quickly bounce back from crises quickly and effectively.

On that note, since their incredible development, South Korea has gone through two main crises: the first caused mostly internally and in South East Asia, and the second caused internationally. In the 1990’s there was easy access to credit for everyone, meaning that, on average, people had 3 credit cards- all of them racking up debt. At the same time, Chaebol’s were growing unsustainably, thus racking up huge debt themselves and becoming too big to fail, so the government started pardoning their unpaid loans leading to banking and financial collapse. Daewoo and Kia both crumbled. However, two years later they were back up on their feet mostly by devaluing the currency, cutting wages, finally letting companies fail and various other reasons.

From that example, there are a few lessons for potential export economies. The first is that there needs to be huge amounts of investment. Nowadays business models normally run by setting up low-investment ventures that then are expanded. Export-driven economies are historically big producers of both consumer and heavy industry goods, which has very high up-front costs. Secondly, they need focus; since most of South Korea is geared towards these tasks, they have become very effective at performing them. Their compound meritocracy rewards continuous winners at every stage; fail once and you’re out. This philosophy is seen everywhere from children in school to office jobs to actual companies.

A third attribute is South Korea’s openness to the outside world, which they fully depend on. One of the reasons South Korea bounced back quickly from its crises is that its main export partner was China, a country that throughout this last economic crisis has never ceased investment. A fourth attribute is the lack of dependence on natural resources. Being able to have a diverse portfolio in export, instead of one specific resource, has given them more resilience in tough times as well as a complete avoidance of the Dutch Disease. Lastly, its changing 5-year-plans have lead South Korea (and Taiwan) to being one of the most innovative countries in the world, while Singapore and Hong Kong remain two of the best places in the world to do business.

The worst thing to come out of this example is the South Korean ingrained fear of failure. No one is allowed to fail at no level in their life, which is a one of the pillars causing their poor corruption score for a developed economy (46th least corrupt) and why it has extreme suicide rates (3rd in the world). They are also remnants from the dictatorship, when corruption ran rampant.

This model is extremely hard to imitate (barriers to entry and a competitive field already) and, as such, new models will need to arise, which could be based on decentralised production (read as 3D printing), on data storage (read as cloud computing), on wifi (read as free wifi everywhere) or something completely different. But to fully face an economy outward, one rule still stands, which is that of openness and accessibility. The economy will have to be open to business to a level where companies will base there to export, thus generating jobs, increasing GDP, etc.

I am a business student, therefore this might sound like a very capitalistic notion, but the fact remains that businesses can make a difference. The sad reality that businesses are mostly not actually making a difference is entirely a different problem and that is why regulation exists: to create the limits to business while attracting them. Then again, this is a piece about a specific type of economic activity faced towards consumption.

Benjamin Tirone Nunes

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