Thursday,20 September, 2018
Current issue | Issue 1285, (3 - 9 March 2016)
Thursday,20 September, 2018
Issue 1285, (3 - 9 March 2016)

Ahram Weekly

Learning from Seoul

Egypt has much to learn from the South Korean development experience, reports Niveen Wahish

South Korea
South Korea
Al-Ahram Weekly

Comparisons between the economies of Egypt and South Korea are often a topic of discussion. “They started off from a similar baseline, but look where Egypt is today and then compare South Korea,” is a phrase that never fails to come up in conversations about development in Egypt.

In 1960, the GDP per capita of South Korea was $155, and its population was 25 million. At the same time, Egypt’s GDP per capita was $149, and its population was 27 million. By 2012 South Korea’s GDP per capita had grown to $16,684 and its population had increased to 50 million.

Egypt, in the same year, had a per capita GDP of only $1,976, and its population had grown to 82 million, according to economist Ahmed Nassar, who shared his research in his paper “A Comparison of the Political Economy of Egypt and South Korea”.

What went wrong in Egypt? South Korea had a clear strategy for industrialisation and it depended on the private sector to carry it out, said researcher Mohamed Fayez, general manager of Al-Ahram Establishment. “The priorities according to which the private sector could work were set by the government [in South Korea],” he explained. In Egypt, the industrialisation process was weighed down by the problems of the public sector.

“South Korea chose an outward-looking orientation and began to aggressively promote exports through subsidies,” added Nassar. That orientation was mostly driven by the fact that South Korea was poor in mineral resources, he said, adding that Egypt had oil, phosphates and zinc, as well as the Suez Canal and tourism to generate income.

Government spending on research and development is another aspect highlighted by Nassar. “Instead of wasting public funds on inefficient projects, the South Korean leadership invested in research and development [R&D],” he said. As he explained, by 2007 only 0.2 per cent of Egypt’s GDP was devoted to R&D while South Korea spent 3.36 per cent of its GDP on R&D.

“This led to advances in high-tech industries and generated higher export revenues,” Nassar said.

There are many other lessons to be learned from the South Korean experience. “The key ingredients of South Korea’s development are strong government leadership, export-oriented industrialisation, a heavy and chemical industries drive, rural development and reforestation, infrastructure and human-resource development, and macroeconomic and financial reforms,” said Lim Wonhyuk, a director of policy research, in his introduction to leading economist Kim Chung-yum’s From Despair to Hope: Economic Policy-Making in Korea, 1945-1979.

“The memoirs of the architects of South Korea’s development emphasise the role of performance-oriented leadership and business-government consultation and suggest that export-oriented industrialisation and human resource development, as encapsulated in the slogans ‘exportisation of all industries’ and ‘scientification of all people,’ capture the essence of Korea’s approach,” Wonhyuk writes.

A key issue for South Korea in the early 1960s was financing, according to Wonhyuk. The domestic savings rate was less than 10 per cent of gross national product at the time, and the country had to attract foreign capital and foreign loans to finance its investment needs.

To help domestic firms that could not raise foreign capital on their own, the government decided to guarantee private-sector foreign borrowing in 1962. “In making this move, the government signalled that it was willing to form a risk partnership with the private sector,” Wonhyuk writes.

It also supported exporters through the automatic approval of bank loans to those with letters of credit, allowing businesses access to trade financing without having to put up collateral. The government also gave exporters other incentives, such as various tax deductions, easy customs clearances and subsidies on export loans.

Strong export performers received medals and national recognition. “Merchants were honoured annually as patriotic entrepreneurs contributing to the nation’s modernisation,” Wonhyuk writes.

In fact, the private sector was very much a partner of the government. The government formulated multi-year development plans, but delegated much of their implementation to business groups, Wonhyuk says. To monitor progress, identify emerging problems, and devise solutions to these problems, the government held regular consultations with the private sector, including monthly export promotion meetings.

In addition to securing foreign capital, South Korea also worked on mobilising domestic resources by reducing tax evasion and corruption and introducing a value-added tax in 1977 to secure a stable source of fiscal revenue. It used strategic trade liberalisation as a means of supporting local capacity development, rather than seeing unconditional trade liberalisation itself as an objective, Wonhyuk writes.

The South Korean government also invested heavily in improving infrastructure projects to boost the supply of electricity, extend expressways and build ports to support its export-oriented industrialisation. It built dams and other infrastructure to promote agricultural development. “State-owned enterprises played a predominant role in the infrastructure sector, and improving infrastructure management required their reform,” he says.

Today, Fayez believes, Egypt has all the ingredients that enabled South Korea to take off over 50 years ago, explaining that South Korea, like many Asian countries, had adopted the development state as its growth model.

The latter, he continued, differs from the Western growth model, which is based on a market economy, democracy and the role of the private sector. The key elements of the development state model, on the other hand, are a strong political leadership focussed on social and economic development, a strong administrative apparatus to support the political leadership, and a private sector that operates according to the strategy decided by the government.

Egypt has these elements, Fayez said, including a strong leadership that believes in social and economic development. The state has also begun to play a greater role in development through various national mega-projects such as the Suez Canal Area Development Project, he said.

However, there is still a problem with the Egyptian bureaucratic apparatus, he said. While in South Korea this was small, efficient and well educated, in Egypt the apparatus is too big and too unwieldy. Egypt today has some seven million government employees, and President Abdel-Fattah Al-Sisi has recently been quoted as saying that only one million are actually needed.

The Asian countries, Fayez said, had a strategy for development. “Thanks to Egypt’s Strategy 2030 plan we have begun to set out the main criteria for development,” he added.

Fayez stressed that there should be priorities for industrialisation and that, unlike in the past, the state should not force the private sector to work in certain areas. Instead, it should provide incentives for work to be undertaken in particular sectors or geographical locations.

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