Why can’t we Compare the Economic Progress of Pakistan with that of South Korea?

Introduction

It has become very fashionable among a large number of Pakistani intellectuals to compare the economic progress made by Pakistan during the last 7 decades of its existence as an independent nation-state with that of South Korea, Hong Kong, Taiwan, etc., and wonder why Pakistan fail to become one of the so-called Asian Tigers. Some even go to the extent of citing the rapid rise of post-World War 2 Japan and Germany as proof that Pakistan could have done far better if it had taken a different course or if the Ayyub style of the developmental model had been adopted throughout. It is nothing but ignorance and sheer naivete.

Comparing Pakistan of 1947 with post-WW2 Germany and Japan is ab initio absurd; both these countries were world powers in the 1940s. World War II only dismantled their war machine and destroyed their few cities, which were economically or commercially not extremely vital for their economic regeneration. No doubt thoroughly defeated, they were strong enough in terms of infrastructure, institutional setup, and trained workforce to withstand the economic ruin caused by the war.

The massive dose of foreign aid under the Marshall Plan helped them bounce back with vengeance. The provision of a security umbrella by the superpower of the day absolved them of the need to maintain a large standing army, which helped overcome their capital deficiency. There is no question of equating Pakistan of 1947 with post-WW-2 Japan or Germany.

Similarly, great caution should be exercised while comparing the 70-year development experience of Pakistan with that of any of the Asian Tigers, particularly South Korea. We must keep in mind that the speed and content of the economic development of a country depend upon several constants and variables, of which three are the most crucial, namely

1. Initial conditions at the start of its economic development

2. Economic policies adopted to kick-start and accelerate its economic progression

3. Unknown Factors and Global Environment Available

All four countries, namely Taiwan, China, South Korea, Hong Kong, and Singapore, enjoyed certain advantages in the above-mentioned three areas that Pakistan did not. Let us take the case of South Korea.

A. Initial Conditions: South Korea

Koreans being of the same racial stock, Japan treated Korea as its province, not as a colony, for the exploitation of its resources. Accordingly, Japan developed Korea as an extension of itself. Applying the lessons learned during the Meiji Revolution, Japanese civil servants, who dominated the Korean state structure after its occupation, planned Korean development on the Japanese model.

After destroying its landed aristocracy, they built a strong state and packed it with more than 50,000 Japanese civil servants. This new strongly centralized state structure not only extracted resources needed by Japan for its imperial designs but also developed its human resources, provided a congenial environment for savings and investment, and gave it a direction on how to go forward.

Even more importantly, the Japanese transformed the entire Korean socio-political landscape and cultural norms within a short span of three decades by carrying out redistributive land reforms, nurturing a dynamic commercial middle class, adopting Western laws, and creating a strong police and security force that ensured the rule of law. This sociopolitical re-engineering resulted in the release of human and financial resources, the emergence of a technically competent middle class, and a strong state structure that could extract resources through coercion.

Korean agriculture benefited immensely from Japanese technical expertise in farming and heavy investment, which permitted Korea to become the granary of the Japanese Empire. Korean rice production increased by 2% per annum from 1910–1940. The export-oriented nature of Korean agriculture led to major increases in productivity and efficiency in Korean food production but also created a class of commercial exporters who played a crucial role later.

Side by side with the agricultural revolution in Korea, an industrial revolution, although initially discouraged to protect Japanese manufacturing, started taking place. Because of the rising labour costs in Japan, Japanese companies had already lost capital and started investing in low-cost Korea. It also had other motives.

1. Firstly, to dampen the Korean nationalist fervour by coopting its businessmen and buying the local elite’s loyalties. These alliances of convenience ensured Korean integration into the overall Japanese imperial design. All the top 50 conglomerates (Chaebols) of South Korea’s business class, which are now global brands, had their roots in the Japanese colonial era.
2. Secondly, it ensured the easy availability of semi-processed inputs for Japanese firms at low prices. Such a division of labour ensured an increasingly capable and efficient war economy, which later helped Japan fight World War 2.

Consequently, Korean industrial growth averaged 10% per annum from 1910 for the next three decades, with the result that by 1940, nearly 40% of all commodities produced in Korea originated from the industrial sector in Korea.

As a result of agricultural and industrial revolutions, the Korean economy grew more than 3% per annum for three consecutive decades up until Korean independence, nearly 35% of which consisted of manufacturing and mining sectors. The number of students who had grown from 10,000 in 1910 to 1.7 million in 1945 would form the backbone of the state bureaucracy and future industrial policy. After independence, Korea just followed the model left by the Japanese with ruthless efficiency.

Initial Conditions: Pakistan

On the other hand, the British colonization of India vastly differed from the Japanese colonization of Korea. Unlike Japan, which considered Korea an ethnocultural and geographic extension of Japan and developed it accordingly, the British treated the Sub-continent as a colony for resource extraction, to serve as a market for British goods, and to provide human resources for the Indian Royal Army for further colonization.

As such, the British made no concerted effort to direct social and economic change in India the way the Japanese had done in Korea. They only tinkered with the system they inherited from the Mughals on a need-basis, created the infrastructure for resource extraction, and introduced modern political ideas on an incremental basis.

They did not destroy the landed aristocracy of India but rather made alliances with the existing local landowning, feudal elite, utilizing their political clout combined with the clout of the British Indian army to control India. The British were not interested in forming an effective, centralized, and authoritarian state nor did they have any plans or impetus to industrialize India. The British companies did not outsource production to India on any significant scale or incur any social and political changes that would have made India and Pakistan more amenable to industrialization after independence.

Unfortunately, the areas that comprised Pakistan were on the periphery of the British Indian Empire and could not reap the benefits of colonial development. Consequently, when Pakistan came into existence as a result of the dissolution of the British Indian Empire in 1947, it was a typical underdeveloped country that inherited a weak state lacking the necessary wherewithal to even carry out its normal regulatory functions, not to mention initiating an ambitious program of socio-economic development on a massive scale. (Out of a total of 1,157 Indian officers, only ninety-five officers opted for Pakistan.)

It was a subsistence agricultural rural economy with an extremely poor level of rudimentary infrastructure, technological penetration, or application of modern techniques of agricultural farming. After the migration of Sikh farmers to India, Pakistan’s agricultural sector was facing an acute shortage of skilled labour force and resourceful landlords. The same was the case with its industrial sector, which inherited only 34 industrial units of insignificant importance. without any jute mill; any textile mill worth the name. A mass-scale exodus of administrative talent, financial capital, and entrepreneurship meant there were very few people who could run government offices, social services, financial institutions, and commercial enterprises. The arrival of more than one million traumatized refugees, who were without any assets but full of expectations

To make matters worse, soon after independence, communal rioting started, which resulted in the deaths of 250,000 people and an influx of 12 million refugees. As the state was grappling with these crises, Pakistan got engaged in hostilities on both borders. While hostilities with Afghanistan were the most irritating, they were much more serious with India. It started with a battle over canal water in Punjab; it went to Kashmir, where the war started with India, which withheld the release of the money that came to Pakistan’s share.

A seriously under-resourced military force, which it badly needed to ensure its external defence and internal security. All 16 ordnance factories were in India, which refused to hand them over. The military supplies that India agreed to hand over sometimes did not arrive, or when they did, they were often old, worn, damaged, and obsolete.

After severing ties with India, Pakistan lost the major market for its two major commodities, namely cotton and jute. On the other hand, commodities such as coal and sugar were in short supply in Pakistan as they had traditionally come from areas now part of India. And much of Punjab’s electricity was imported from Indian power stations.

The trade war between the two countries reached a crisis in September 1949 when Britain devalued the pound. India followed Britain’s lead, but Pakistan did not, so India severed trade relations with Pakistan. New trading relationships were formed, and the construction of cotton and jute mills in Pakistan was quickly undertaken.

Keeping in view the above differential in the initial conditions between Pakistan and South Korea at the time of the start of their respective processes of economic growth, it is not fair to blame Pakistan for faring badly; it was an unequal fight

B. Economic Policies Adopted in South Korea

After the Japanese defeat in World War 2, the USA occupied the Korean peninsula, which, after a two-year war, split into two, with the South Korean part coming under American control. To obviate the possibility of unleashing the revolutionary forces in South Korea that were budding in the north, the American occupation forces kept the Japanese colonial state intact in post-war South Korea. A façade of civilian government under Syngman Rhee, who had spent 39 years in Washington, was set up. He effectively used the repressive state apparatus bequeathed by the retreating Japanese to repress communist and other revolutionary forces, even killing the freedom fighters who had fought to liberate Korea from the Japanese.

However, besides allowing a reign of terror by the puppet regime, the US military carried out the socio-political re-engineering and fine-tuning of the political economy of South Korea. After seeing the popularity of Communist land reforms and massive infrastructural development in the North, they launched their land reforms in the South and started a massive program of infrastructural development. Utilizing the US$1,500 million in military aid provided by the USA, they built roads, bridges, and other infrastructure, which greatly helped Korean industrial firms.

As South Korea lacked natural resources, growth through industrial development became the priority, for which the state played a pivotal role. Following the MITI model of Japan, Korea created a planning board that steered the economic development of the country with an iron hand. The state took over the farming surplus by making it compulsory for farmers to deliver to state entities at a price determined by the authorities. The State kept on patronizing the colonial-era chaebols, like Samsung, Hyundai, Lucky Goldstar, Daewoo, Kia, etc. They benefited tremendously from the numerous subsidies, tax concessions, and non-tax concessions from the state, financial institutions, the USA, and Japan. This state patronage was instrumental in converting these Chaebols into global MNCs.

Similarly, the state played an extremely crucial role in the creation of a vast pool of educated and skilled manpower readily available to manufacturing firms at the cheapest possible wage rate. It was supplemented by the huge amount of resources allocated for R&D, whose fruits were accessible to firms almost free of charge. For two years, 1977–79, almost 80% of all state investments were devoted to establishing heavy industries by these conglomerates through deficit financing, diversion of pension funds, and massive foreign loans. South Korea was fourth on the list of the most heavily indebted countries in absolute terms (43 billion dollars) but got bailouts because of its strategic position The United States urged Korea to resume economic relations with Japan. Japan signed a ten-year agreement (1965–1975) that included economic aid of USD 500 million, 300 of which was in the form of grants.

One of the components of the Korean miracle was the exploitation of industrial manpower with impunity. In 1963, there were 600,000 industrial workers, in 1973, 1.4 million, and in 1980, over 3 million, half of whom were trained. They were subjected to extreme exploitation: the longest working hours, extremely low wages, and no trade union capable of fighting for their rights. Fierce repression resulted in all opposition leaders being arrested, which led to violent urban uprisings that led to the imposition of martial law in May 1989. Paratroopers were sent out and killed demonstrators (including young girls) with their bayonets.

Policies adopted-Pakistan

Incidentally, the policies Pakistan adopted after gaining independence to kick-start its economic development did not differ significantly from those adopted by the South Koreans because the source of both policy frameworks was the same. Pakistan started its development through economic planning, stressing capital accumulation and rapid industrialization through import substitution, the globally accepted strategy to overcome the critical shortage of essential goods. The state thus formulated an extremely pragmatic Industrial Policy in 1948 which favoured a globally accepted capitalist development model and adopted the same policies as were hallmarks of the South Korean model, namely

1. Quantitative restrictions on the import of manufactured goods
2. Imposition of taxes on the export of raw material
3. Keeping currency overvalued to ensure cheap import of capital goods and raw materials needed for the industry
4. Cascading structure of import duties to allow capital goods and raw materials for the manufacturing sector at cheaper rates
5. Squeezing the peasants by keeping the terms of trade in favour of industry vis-à-vis agriculture
6. Liberal tax concessions and non-tax incentives to industrialists

Consequently, despite all the handicaps mentioned above, we started the construction of infrastructure and built factories to hand over to the private sector, and within one decade, we were able to develop a robust private sector that was not only meeting the domestic demand for consumer goods but also started exporting. These very policies were continued with greater gusto during the 1960s and even afterwards till today, with one small deviation during the Bhutto regime in the early 1970s.

It helped in the emergence of the commercial mercantilist class of Pakistan, which was to play a very dominant role in the succeeding decades. However, while the freehand given to the private sector in South Korea helped the colonial-era conglomerates (chaebols) to become global MNCs, in Pakistan the same free-to-market forces led to an accentuation of inherited inter-provincial economic disparity between the two wings. The seeds of secession of East Pakistan were strengthened because of the vast economic disparity these policies created.

Thus, we can say that it was not the difference in policies adopted by the two countries that can account for the difference in their respective development processes. Rather, it was the edge South Korea had over Pakistan in terms of human development indicators, level of industrial development, and the nature of the state that made all the difference between the speed and scale of their economic growth.

The South Korean state was capable of extracting resources and suppressing its ethnically homogeneous citizenry with impunity when it agitated against the lack of political empowerment and economic injustice created during the process of economic development at breakneck speed. The state had no qualms about brutally squeezing its peasantry and exploiting its labour force with the help of the apparatus left behind by colonial Japan.

On the other hand, the same economic growth model when applied in Pakistan resulted in agitation, insurgencies, and even a civil war that the state could not manage because we were not an authoritarian, centralized state with the capacity to suppress at the level South Korea could repress. Nor were we ethnically homogeneous enough to bypass economic disparities across ethnic lines.

C. External Environment & Unknown Factors: South Korea

In Irma Adleman’s famous development model for identifying the factors instrumental in accelerating the growth rate of an economy, there is a set of factors bracketed under the word U; "unknown factors. These are the historical socio-economic and political reasons unique to a country or a region that cause its rate of economic growth to be better or worse than other countries, starting with similar initial conditions or adopting the same set of economic policies.

To me, after the differences in the initial conditions between Pakistan and South Korea at the start of their development process in the 1950s, it was the difference in these U factors that made all the difference in their efforts to grow. One was Confucianism and the principles it incorporates, which favoured economic development in Southeast Asian regions.

“Indeed,”[…], the Confucian values and tradition lead to a model of maximal government, with its myriad responsibilities, duties, and obligations. The state is not just supervisory and regulatory in function but, to a very large extent, developmental, educational, and mobilizational in emphasis. The bureaucracy is not just administrative and government functionaries but acts as guidance for national interests and is often perceived as leaders, intellectuals, and teachers”.

Secondly, South Korea is situated in proximity to the sea; thus, their transport and shipping costs are relatively small, and the ratio of the population living near the coasts to the land area is one of the highest in the world.

Thirdly, massive amounts of US financial aid, mostly grants, along with technical assistance provided by the USA to the South Korean regime, serve at the forefront of anti-Communist bulwarks. The grants Korea received from 1945 to 1961 amounted to more than the World Bank’s total loans to newly independent developing countries, which meant that South Korea did not rely on loans for 17 years after the end of WWII.

Fourthly, and paradoxically, South Korea had no option, like its model Japan, to go for early and rapid industrialization because of the shortage of natural resources. The USA permitted South Korea to industrialize to give its anti-communist regime the economic stability it needed to survive.

Fifthly, the South Korean firms benefitted enormously from another fortuitous event: the presence of large contingents of American forces inside and around Korea. By the 1970s, 20% of South Korean exports were supplied to the American forces in Vietnam and other countries of the region.

These were not only taking care of their security needs but also providing them with a window case for manufacturing goods and services and improving them as per specifications needed in mainland America for subsequent export. The top 50 Chaebols of South Korea’s business class, which had their roots in the Japanese colonial era, became global MNCs and international brands by supplying goods and services to the American forces in the region.

Finally, not only South Korea but the three other Asian Tigers were more like the city-states of ancient Greece without any poverty-stricken hinterland to carry along. If someone wants to make a meaningful comparison, then compare them with Karachi, which has marvellously taken along the entire country.

This very smallness of theirs was a blessing in disguise for them; their exports, being a small percentage of the import bill of the USA and Europe, did not result in any substantial dislocation of the American and European industries. If China and India had also started exporting similar goods and services to these countries, all types of sanctions could have been imposed to protect their domestic industries