How South Korea rose from the ashes to outshine Kenya with rapid economic growthThursday October 09 2014
A year before Kenya broke loose from the grip of colonial rule, a rickety Asian nation was laying the cornerstones of what would become an economic powerhouse.
That was 1962 and as Nairobi demanded self-rule, Seoul pursued redemption from crippling poverty. South Korea’s journey to a modern industrial hub had just begun with the rollout of an ambitious development plan to boost growth and warm up welfare of citizens.
“The successful progression of Korean economy is hinged on the implementation of Economic Development Plan of 1962,” Dong Heon Kim, senior professor of Economics at Korea University told the Business Daily.
The plan aggressively promoted exports for capital accumulation and was spearheaded by a team of top economists and business experts, he added.
Present day Korea is not only industrialised, but has risen to claim space at the high table of G20 major economies as a technology hub. It is home to global behemoths such as Samsung, LG, Hyundai and KIA Motors.
Kenya six years ago embarked on a similar mission with launch of Vision 2030, during which time it looks to transform into a humming industrial economy.
Globally acclaimed for its vibrant mobile money transfer technology, the country is racing to create new growth drivers besides mainstay rain-fed agriculture which accounts for slightly over a fifth of its gross domestic product (GDP).
The East Africa’s largest economy has attained middle-income status ahead of time after rebasing and its fortunes could further be buoyed by recent oil finds.
READ: Kenya joins Africa’s top 10 largest economies
But before the dramatic shift, Korea’s backwater economy was neck deep in sickly agriculture that accounted for three quarters of its output.
Productivity was at an all-time low as technology lacked. So bad was the situation that Korean population faced acute starvation, prompting goodwill from nations as a matter of urgency. Kenya in 1963 gave out a $10,000 (Sh892,200) loan and relief food to the Asian country eclipsed by a wartime past.
That was the year the founding President Jomo Kenyatta had declared war on poverty, disease and ignorance.
The loan was repaid three years later. By 1996 which was final year for the development plan, Korea had already joined the league of wealthy nations.
Fast-forward. The technologically advanced nation today sits pretty as the 14th largest economy with manufacturing sector’s 31 per cent share of GDP towering above 2.3 per cent for agriculture.
It cold-shouldered rumbling geopolitical tensions from hostile North Korea and weaned itself off handouts from the US after breaking free from Japan’s rule.
The country’s per capita income or GDP per capita – the wealth produced annually divided by the population – has grown 275 times from $82 (Sh7,316) in 1960 to $26,204 (Sh2.3 million) last year.
By comparison, Kenya pales with a per capita income of $1,246 (Sh111,168) after the recent economic rebasing.
Kenya with a population of 43.1 million people, is five times larger in land mass than Korea whose population stands at 50.2 million.
And despite agriculture accounting for 22.2 per cent of output, sections of Kenya still grapple with perennial famine.
The World Bank uses per capita income, GDP, industrial progress, infrastructure and standards of living to categorise developed nations and those that are not.
Prof Kim based the successful implementation of Korea’s development plan on a simplified formula: clear target minding + small reform + institutional change = growth.
He said the government used the textile and apparel industry as an economic alchemy at its disposal to transform the fortunes of the country.
“The government picked strategic industries such as textile and clothing for exports in the initial stages of development plan,” he said.
Prof Kim said Korea used grants and loans from the US and the World Bank to finance the sector before moving to heavy-capital industries which required massive energy that was in short supply. Infrastructure bloomed on the loans.
Nairobi’s Vision 2030 is divided into economic, political and social pillars, each consisting key projects to be executed in five-year medium term plans.
However, it remains to be seen whether Vision 2030 Delivery Secretariat will pull a similar feat with Kenya’s economic model. Under the captainship of Prof Wainaina Gituro, an agricultural economist, the secretariat has cut its teeth in mega- infrastructure projects to connect the country to a manufacturing economy.
Increased industrial activity is key in job creation, which pushes up demand for goods and services as disposable incomes for households rise. This creates a market for producers and service providers and therefore, increasing output.
The jobs dimension is particularly critical at a time when Kenya’s unemployment rate stands at about 40 per cent with youths hardest hit.
The Economic Development Plan by Seoul was steered by a team of top economists and business experts dubbed Economic Planning Board and headed by a deputy prime minister.
Implementation was spread out in five-year plans up to 1996.
The action-plan pinpointed energy as one of key planks in powering the economic engine alongside manufacture of electronics, sub-conductors, cement and steel products. Others were machinery, plant assembly, petrochemicals and ship building all of which received fiscal backing from Korean government.
Infant units would be shielded from external competition by making import of such products difficult.
The board also marshalled resources around manpower training alongside research and development for the innovative, creative economy. “The State invested heavily in engineering, sciences, ICT and technical courses for human capital accumulation,” said Prof Kim.
At the frontline of Seoul’s epic transformation were family controlled companies known as chaebols, including Samsung and Hyundai, which enjoyed government’s low interest loans.
The cheap credit energised their capacity to invest in research and development and boost competitiveness of their products for export. This came amid technology transfer pacts with highly developed Japan and the US.
In the quest to ramp up exports and build up forex reserves, the government would entice industries into closing sales outside the country in return for corporate income tax waivers and tariff exemptions.
“The government combined a policy of import substitution with the export-led approach,” says US Library for Congress, a research institution.
Industrialisation is characterised by replacement of individual manual labour with mechanized mass production and much control over natural conditions such as weather: less reliance on rain-fed agriculture, for instance.
“People’s tastes become refined and they increasingly become choosy owing to a state of abundance,” Prof Kim noted, adding that households’ lifestyles, ambitions, value systems and beliefs change with the transition.
A mineral-barren nation and faced with dry coffers, Korea’s only lifeline was loans.
According to the US Congress Library, Seoul financed its economic development with a dramatic build-up of foreign debt totalling $46.8 billion (Sh4.2 trillion) in 1985, making it the fourth largest Third World debtor.
The cash borrowed dwarfed Kenya’s debt levels as of June and outstripped its GDP before rebasing.
Kenya’s public debt stood at Sh2.3 trillion ($26.2 billion) in the first half of the year, with the Parliamentary Budget Office raising the red flag on a possible debt unsustainability in relation to the country’s GDP which grew 25 per cent to Sh4.75 trillion ($53.2 billion) after rebasing.
The country has adopted a mix of infrastructure debt-financing and public private partnerships as it races to play catch-up with Asian giants such as Singapore and Malaysia with which they were once at par.
“Though the industrialisation process takes up enormous resources, it still remains the shortest route to national wealth creation,” said Moonsung Kang, a professor of international economics at Korea University.
The export-led strategy which initially focused on textile and apparel industry grew Seoul’s exports 36 times from $22 million (Sh2 billion) before the development plan to $835.2 (Sh74.5 billion) million in 1970.
This saw the economy expand by double digits for the first time at 10.4 per cent in 1971, marking the beginning of a series of such expansion with highest growth at 14.8 per in 1973.
“Textile and apparel industry was critical in the early development stages of Korea,” said Prof Kang in what could offer Nairobi a lesson in its plans to revamp textile and leather industry with creation of textile cities as key engine for growth and job creation.
The Ministry of Industrialisation and Enterprise Development has hinted at plans to revive the sector with setting up of modern warehouses and infrastructure at the Athi River-based Export Processing Zone.
Korea’s steady build-up of dollar stock plus credit facility enabled shift from light industries producing wigs, eye lashes, clothes and plywood to technology-based products with high yields.
Industries began taking shape with automobile company Hyundai coming on the scene in 1967, steel-maker Posco the following year and Samsung Electronics in 1969.
Kenya’s Vision 2030 team had anticipated similar double-digit growth from 2012 onward but this has been dampened following consecutive underperformance of below five per cent economic growth.
The shy growth of 4.7 per cent, 4.6 per cent and 4.4 per cent in 2013, 2012 and 2011 respectively has unnerved policymakers who are under pressure to hit the right policy cords and stimulate the economy. The economy grew 5.7 per cent last year, rebased figures show.
“The Korean government had close relationship with the private sector with whom they formed an internal circle to discuss policies for industrial growth,” said Prof Kang who is also head of the Centre for Asian Cooperation, Asiatic Research Institute.
Industrial growth significantly changed lifestyles and eased the pain of joblessness.
The average monthly income in Seoul rose to $868 (Sh77,443) in 1988, equivalent to $10,416 (Sh929,315.50) a year – which is eight times larger than Nairobi’s present average income.
By the late 1980s, television sets and refrigerators had become a standard part of the average household and ownership of a car was not unusual, David Steinberg, a professor of Asian studies at Georgetown University in the US says in his book The Republic of Korea: Economic Transformation and Social Change.
By contrast, owning a car in Kenya today is still viewed an accomplishment for many, including middle class. About 46 per cent of households in the country live below the poverty line, surviving on less than $2 (Sh178.44) a day and not connected to electricity whose supply is erratic.
Worse still, high cost of doing business partly blamed on expensive energy bills has seen Kenya lose out to other African nations following relocation of manufacturing operations by battery maker Eveready, Colgate alongside Procter and Gamble, maker of Ariel detergent.
Chocolate maker Cadbury is on its way out in a worrying trend that has jolted the government which was betting on a dense concentration of industries for job spin-offs.
READ: PS terms Cadbury, Eveready closures a wake-up call
This could reverse gains made in the manufacturing sector which contributed 10.4 per cent of the country’s rebased GDP. Manufacturers have borne the brunt of erratic supply of utilities which cut their margins and sap morale.
Experts say developing nations are better off sharpening their competitiveness edge in promising areas that would ignite waves of new jobs, boost productivity and stimulate growth of other sectors through economic contagion.
They warned against imitation of economic models noting that developing countries could draw lessons from iconic economies without turning into copycats.
By 1986, five million Koreans had jobs in the 70,865 factories that had sprung up but over a thousand were killed in industrial accidents, according to US Library for Congress.
Long working hours characterised the workplace, especially for slum-based semi-skilled workers who toiled for 54.7 hours a week.
The late President Park Chung Hee, a military general, who masterminded Korea’s development roadmap, sought to transform the welfare of citizens and defend the territory from external aggression in the volatile Korean Peninsula.
He settled for an export-led production model and directed shift to the manufacturing of heavy machinery, automobiles, chemical and electronics, sparking industrial growth. The drive was heavily financed through loans.
Park was at the helm of the country after staging a successful coup in 1961 until was assassinated in 1979. The strongman was the father of the current Korean President Park Geun-hye.
The late President Jomo Kenyatta attempted a similar move with the rollout of a development policy dubbed African Socialism in 1965. The policy encouraged domestic and foreign investment partly as a path to higher per capita incomes and wealth distribution.
To build up reserves of foreign exchange currency, Kenyatta’s government pushed for heavy export of agricultural produce, mostly tea and coffee, while encouraging foreign direct investment in the manufacturing sector.
His successor former President Moi has come under scathing attack for an apparent failure to play catch-up with newly crowned wealthy economies during his 24-year rule.
Moi’s ‘Dream Team’ of 1999 which was composed of technocrats including outgoing Kenya Airways chief executive Titus Naikuni failed miserably to turn around the country’s economic fortunes and was unceremoniously disbanded two years later. It was during former President Mwai Kibaki’s tenure that Vision 2030 plan was mooted in 2008.
General Park set up the Economic Planning Board in 1961 to drive growth. The board dangled a carrot in the form of subsidised credit lines to firms which met export targets. Failure to meet export goals, attracted cuts in State loans.
This strategy worked because the government had tight control over capital circulation following the conversion of all banks into public lenders (nationalisation), effectively putting cash-hungry firms and chaebols – family controlled companies – under its influence.
With this leverage, the late leader often had his way in imposing policies geared towards achieving development plan targets – he dished out incentives and at times arm-twisted.
Opinion is split on whether he was a villain or hero having stepped on Korea’s growth gas pedal, albeit in an authoritarian fashion. His declaration of martial law in 1972 which quashed presidential polls in his tenure also soured relations with pro-democracy camp.
The Vision 2030 secretariat, which is in the second five-year development plan, has continually maintained that Kenya’s flight is on the runway for economic and industrial take-off.
This is despite project delays and icy scorecards of leading economic indicators such as growth that has partly been weighed down by high operational costs.
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