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“Over the 1970s and 80s, Korea improved its growth environment significantly, especially its micro environment, leading to a 14-fold increase in manufacturing output in 20 years,” analysts in economics research report write in the report titled ‘How India can become the next Korea’.
“If India were to emulate the Korean model and grow manufacturing at the same rate as Korea’s in the 1970s and 80s, we calculate it could add 1.4 percentage points to its GDP growth annually for the next decade.”
The Korea model was based on a single-minded focus by the government on developing export-led manufacturing, they write.
“This was encouraged by cheap land and infrastructure through industrial parks, reducing red tape and the cost of doing business, tax benefits and flexible labor laws for manufacturing firms, and cheaper power to industry than to consumers.”
India versus Korea
In the early 70s, the manufacturing sector’s share in India’s gross domestic product stood at 14 percent and stays at the around the same number even today.
While Korea’s output as a share of GDP grew from less than 10 percent then to over 30 percent today.
How do various conditions that are vital for success of manufacturing activity stack up for India today compared to the Korea of 1970s?
“We thought that there might have been initial conditions that were favorable to Korea. To our surprise, we found that the scores were fairly similar,” analysts write.
According to Goldman Sachs Growth Environment Scores, both countries are similar to each other in the different timeframes.
“India’s per capita income currently (about USD 4,000 in purchasing power parity terms) is similar to that of Korea in the early 1970s, in purchasing power parity terms,” the analysts point out.
Macroeconomic conditions including openness to trade and investment were quite similar. The micro environment was also similar, while in human capital, Korea was considerably weaker than India currently but macroeconomic stability is where India scores much lower than Korea.
“From the early 1970s, Korea made rapid gains in its growth environment scores. The biggest improvements were in the microeconomic environment, though it also made further progress on human capital and on the macroeconomic front.”
What did Korea do?
“In Korea, the push for manufacturing was driven by the government, especially in the 1960s. With a strong leadership, the government focused on removing bottlenecks and incentivizing manufacturing,” the report says.
“There was a realization that Korea was labor abundant but deficient in capital, so the focus was on labor-intensive manufacturing. There was an early recognition that export-led manufacturing could lead to rapid increases in productivity, and there could be increasing returns to scale due to a much larger export market. This government focus on export-led industrial growth as the main economic objective was critical in our view.”
In India, thus far, the single-minded focus on export-led manufacturing growth is missing.
“The agriculture and services sectors, which have been relatively lightly taxed and often the recipients of large government subsidies, have been preferred over industry,” the report says.
What should India do?
The report lays out a seven-point agenda that the Indian government should pursue to boost its manufacturing growth, similar to how Korea did in the 1970s.
1. Government focus on manufacturing as primary objective
The Korean government emphasized labor-intensive, export-led manufacturing as the key objective of economic policy starting from the 1960s in order to increase productivity and use its abundant resource, labor. The sectors that drove manufacturing growth were labor intensive – textiles, garments, wood etc.
2. Low fiscal deficit
This needs to be the starting point for greater macro stability, and to reduce crowding out of the private sector. It also provides space for government spending on infrastructure.
3. Develop effective industrial parks
If the government provided infrastructure, land were made available to industry at below market prices, there are strict conditions on usage of land for industrial purposes only, greater labor flexibility, favorable tax treatment, and single-window clearance for all permits, as Korea did in its industrial parks, then it could allow for agglomeration benefits and economies of scale.
4. Reduce cost of doing business
This involves cutting bureaucratic red tape to reduce the number of permits and administrative costs to setting up a business, construction approvals, getting electricity, and enforcing contracts. Korea significantly improved its business climate in the 1970s and 80s.
5. Flexible labor laws
Korean policy was focused on job creation and training, rather than protecting those who are employed. Activities of labor unions were restricted, and minimum wage legislation not adopted till 1988.
6. Tax policy to encourage industry
Korea provided tax benefits to encourage capital accumulation; incentives were provided to exporters and foreign direct investment, and exemptions granted to interest income on deposits and government bonds. Real estate taxation was strengthened to discourage real estate speculation by manufacturing companies.
7. Subsidize power for industry
Korea made power available to industry at lower rates compared to consumers. In India, the opposite is currently the case.
source:moneycontrol.com
