Emulating South Korea’s success

South Korea

It seems that South Korean pop star Psy’s hit, Gangnam Style, is the biggest viral success story of the year. The official YouTube page has 765,000,000 views and counting. Add in the 100,000,000 views of bootleg versions on YouTube and you have a music video fast approaching 1 billion views!

And Psy isn’t the only breakout success to come out of South Korea in recent times. Samsung, another South Korean export topped the global mobile device sales chart for the third quarter of 2012 beating out Nokia, Apple and every other device manufacturer. On the motoring front, the list of South Korean companies making waves globally includes Hyundai, Daewoo, Kia Motors and SsangYong. Hyundai’s Elantra was chosen as 2012 Car of the Year here in South Africa. In fact, some pundits believe that Hyundai is now the biggest selling car brand in South Africa beating both Toyota and VW (Hyundai don’t release sales figures so we can’t know for sure).

How has South Korea pushed its way into the top 20 biggest economies in the world? It should be interesting to compare South Africa to this shining example of modern economic development to see if South Africa can follow and emulate the South Korean success.

 

Economic performance

South Africa was actually a wealthier country than South Korea in the early 80’s, both in absolute terms (see graph 1) as well as per capita terms (see graph 2).

Source: World Bank 2012

Since the 80’s, South Korea has powered ahead and now boasts a GDP per capita of more than three times that of South Africa, $7,271 versus $22,424.

Source: World Bank 2012

 

The average growth in the size of the economy for the two countries for the last five decades is shown in table 1 below.

Table 1 – Average annual growth in GDP: South Africa vs South Korea

1960’s 1970’s 1980’s 1990’s 2000’s
South Korea 8.25% 8.29% 7.68% 6.25% 4.56%
South Africa 6.08% 3.25% 2.24% 1.39% 3.59%

Source: World Bank 2012

South Korea has sustained high levels of growth throughout this 50 year period. South Africa was growing strongly in the 60’s but grew very slowly for most of the 80’s and 90’s (with negative GDP per capita growth in the 90’s). It is only in recent years that South Africa is catching up with relatively higher growth rates than in the past.

 

Macro-economic policies

South Korea is part of a group of countries called the Asian Tigers. This group consists of Hong Kong, Singapore, South Korea and Taiwan. These countries follow an economic development approach that is characterized by high levels of investment, small public sectors, an export-oriented economy, a competitive labour market, and high levels of government involvement in the economy.

South Korea, along with the other Asian tigers, followed a strategy of export promotion. This started with encouraging firms to create low wage jobs and manufacture and export labour-intensive products. Gradually over time, with government assistance and guidance these companies got better and better at what they did and moved up the value chain to produce high-end technology-driven products such as cars and mobile phones. Wages also moved upwards as companies got more successful. The result has been a spectacular rise in incomes for those economies and their elevation from developing countries to developed countries in a single generation.

Source: World Bank 2012

Employment

The World Bank lists South Korea’s unemployment rate as less than 5% (as a percentage of the labour force) since 1980. It currently stands at 3.7%. Contrast this to South Africa’s unemployment rate increasing from 20% in 1990 to 24% in 2011.The South African unemployment rate is actually 40% if one counts discouraged employment seekers. Korea’s growth has therefore created jobs whilst South Africa’s growth has not.  Why is this? One point of view is that South Africa is characterised by a highly unionised labour force and restrictive labour laws. This has resulted in higher wages than similar middle-income countries and this is the main reason behind the country’s high unemployment rate and therefore the cause of poor economic growth.

Another explanation is that the South African economy has not been able to create low-skilled jobs in the manufacturing sector the way South Korea was able to. Instead, the manufacturing sector (and the entire non-minerals sector in general) has lost out to the tertiary sector (services) which now account for over 65% of the South African economy. Since the services sector requires small numbers of highly skilled labour, South Africa’s unemployment has remained at high levels.

Education

The roots of South Korea’s success seem to lie in its highly educated workforce. In South Korea, gross enrolment rates for tertiary education are more than 100% (yes, this is not a typo…more than 100% means that there are lots of older people also studying with the current year’s university cohort). South Africa has primary school completion rates of only 93%. In fact, South Africa is one of the few countries that is expected to miss its 2015 Millennium Development Goals target of 100% primary education completion. South Africa’s secondary school completion rate is only 44% and its tertiary participation rate for the 20-to-24-year-old age group is only 16% (remember Korea’s rate is 100%!). In total South Africa has 6.7 million adults who are ere either totally or functionally illiterate. South Africa’s poor educational outcomes are not a result of less emphasis and investment in education. In fact, South Africa spends relatively more than Korea on education as seen in table 2 below.

 

Table 2  – Educational Expenditure: South Africa vs South Korea

South Africa South Korea
Education expenditure as % of total government expenditure (2010) 19.2% 15.7%
Education expenditure as % of GDP (2009) 5.9% 5.04%

Source: World Bank 2012

So we spend more than South Korea but our returns are way less. Why? Textbooks dumped in the veld in Limpopo might have something to do with it. More serious commentators generally cite the causes of South Africa’s poor education outcomes as the legacy of apartheid; high levels of poverty; the unequal distribution of resources; the implementation of flawed educational policies; and the government’s reluctance to challenge teacher unions. The daunting nature of these challenges seems to suggest that South Africa’s workforce will take a long time to emulate South Korea’s highly trained and skilled workforce.

 

Technology

South Korea spends more than 3% of GDP on research and development whilst South Africa spends less than 1. Since their relative GDP’s are so different, this equates to an even bigger difference in actual R&D spend. Less R&D spend by South Africa means less opportunity for developing and exporting high-tech products. High technology exports are currently 29% of GDP for South Korea but only 4% of GDP for South Africa.

 

Savings and investment

In the early 80’s South Africa had a similar savings rate to that of South Korea. South Korea’s saving rate shot up in the 80’s whilst South Africa’s decreased markedly (see graph 4). At present, South Africa’s saving rate is only 16% compared to South Korea’s 31%. More savings means more funds available to be invested in new projects and businesses.

Source: World Bank 2012

Together with more local savings for investment, South Korea also had access to higher foreign direct investment (FDI) over the last 30 years. Graph 5 shows the FDI flows for the last 30 years. During the 1980’s companies were disinvesting from South Africa leading to negative FDI rates. During the same period large amounts of investment flowed to South Korea. The period since the South East Asian financial crisis is marked by highly volatile FDI flows in both countries. However, on average South Africa is seen as a less safe investment environment and therefore less FDI flows to South Africa.

Source: World Bank 2012

 

Where does that leave South Africa?

South Africa and South Korea were at relatively similar statuses of economic development in 1980. However, the two countries have diverged considerably since then. As one of the Asian Tigers, Korea has developed into a fast-growing, high-tech economy with a well-educated workforce and almost full employment. There are some key lessons that South Africa can learn from South Korea in order to emulate its success. How can we improve our education system? How can we create more employment? What reforms can we make to our labour policies? How can government guide and stimulate successful enterprises? The answers to these questions are tantalisingly clear in Seoul’s gleaming skyscrapers.

 

 

 

 

Data sources

The stats and numbers in this article come from:

  • Central Intelligence Agency (CIA). 2012. The World Factbook.
  • Department of Education (DoE). 2009. Trends in Education Macro Indicators 2009, Summary Report.
  • World Bank. 2012. World Development Indictors.