South Korea has the second-highest Human Development Index in Asia and a GDP per capita of over US$29,700. Just fifty years ago, South Korea’s present situation seemed incredibly improbable. In 1963, it was a low income agrarian economy with a GDP per capita of only US$146.
South Korea’s exports of minerals and agriculture products were $25 million, while imports were an unsustainable $389 million. This significant deficit was filled by USAID funds. Today, South Korea’s exports are $596 billion and imports are $471 billion. From being donor dependent, it has become the 15th largest donor country providing development assistance of US$ 2.4 billion per annum.
In 50 years, South Korea transformed itself from a country no industrial base and dependence on foreign aid into an economic powerhouse – its GDP per capita grew an incredible 207x or 10.2% per annum. How did this happen?
The South Korean resurgence or “Miracle on Han River” began under the military dictatorship of General Park Chung-hee. It was an International Public-Private-Partnership (I-PPP) endeavor underpinned by three principles.
The first principle of the Miracle on Han River was the adoption of Japanese work ethics and business practices. General Park’s admiration for Japan’s rapid modernization in the post Meiji reformation period led him to push South Korean corporates to Joint Venture (JV) with Japanese conglomerates to adopt Japanese work ethics and business practices. He achieved the cultural shift from an agrarian mindset by stoking nationalist sentiments of making South Korea a strong economy against its more wealthy rival, North Korea.
The second principle was industrial cooperation or development assistance from the US and Japan, with Japan transferring 60 percent technology and technical know-how during 1962-1970. This enabled firms such as Hyundai and Samsung to develop advance capabilities in engineering and technology. They applied their newfound capabilities to become global corporates, which in turn fuelled South Korea’s growth for decades.
The third principle was that the private sector led the Miracle with government as a facilitator, rather than government driving the program. Through the Promotional Committee for Economic Reconstruction, General Park forged a partnership with the country’s entrepreneurial elite that led to the creation of “chaebol”; family run corporates that exercised dominance over sectors in the initial decades. The top ten chaebols were responsible for sixty percent of the growth of the South Korean economy.
The government facilitated chaebols through cheaper loans, tax incentives and in turn chaebols boosted economic growth. At the same time, South Korean government enforced strict discipline on chaebols business performance and ethics – some chaebol founders were jailed for corruption, and they were not bailed-out when they failed.
So, can China Pakistan Economic Corridor (CPEC) create a ‘Miracle on the Indus River’?
Our government did well in the planning of early harvest projects. However, it did no transition to industrial cooperation between Pakistani and Chinese corporates that would have built local industrial capability and taken CPEC forward on a sustainable basis. The government continued to remain front-and-center of CPEC, and took a tactical contracting approach to the projects with Chinese companies as the main contractors.
Therefore, till now the long-term strategic element and improvement in the micro-economic drivers of the economy are neglected in the planning of CPEC. For example, while running Pakistan’s most sophisticated vocational training institute, this writer did not encounter public sector interest to map-out and develop skills needed to execute CPEC. And according to Hamza Orakzai, CEO of Obortunity, “It was communicated that SEZs will generate Sino-Pakistan JVs; however, there is no requirement in the law to have local partners nor to use local labor in SEZs”. Therefore, CPEC will not benefit the local economy in a sustainable manner.
In the past, we failed to capitalize on foreign development programmes in a manner that could have led to building competitiveness and fueling our long-term growth. Pakistan received large foreign assistance during the 1960s (Cold War), the 1980s (Afghan War) and the 2000s (War on Terror), but growth fizzled out when the assistance came to an end. This pattern may yet repeat in CPEC.
However, CPEC has the potential to become an engine of sustainable growth, if our policymakers envision CPEC as an International-Public-Private-Partnership and a vehicle for transformation of Pakistan’s economy – in which China plays the same role as Japan and the US did in the resurgence of South Korea, based on three principles that led to the ‘Miracle on Han River’.
Therefore, catalyzing CPEC requires a fundamentally different implementation and governance approach. Firstly, make it mandatory for Chinese companies to joint-venture with local businesses, with a component of transfer of technology. This will enable us to adopt Chinese work ethics, business practices, the real source of Chinese competitiveness, and build our own Samsungs and Hyundais. One way to achieve transfer of technical expertise is through technical training cooperation to equip our workers with the right skills.
Secondly, the government should create a level-playing field and enforce the rules but not become a player itself. The private sector should be in the lead alongside the Chinese State-Owned Enterprises (SOEs), and government facilitates to the extent of cheaper loans and tax breaks, without government guarantees that take out entrepreneurial risk from a project. Our path to development may be longer, but it will be more robust, homegrown and hence sustainable.
The feat of South Korea’s phenomenal economic transformation is achievable by Pakistan. There can be future case studies of the ‘Miracle on Indus River’, but it requires a different vision and implementation plan for CPEC. We must change our thinking and our approach, to change our destiny.