South Korea’s “Gold Medal” Economy’s Lesson on Development to the Arab World: First, Forget the Rankings Surveys and Then Drop the Consultants

Afshin Molavi

Imagine you are a resident of South Korea in the early 1960s. Your country is poor, your economy desolate. A military leader with no experience in governance has just taken over the country in a coup d’etat. Your per capita income is lower than that of Yemen, Haiti or Ethiopia, and your per capita GDP is lower than that of Pakistan and Egypt and half the size of Morocco’s. You are an afterthought in the global economy, just another poor Asian “Third World” country.

Now, imagine someone tells you that in the year 2018, your country will host the Winter Olympics, and you will have the 11th largest economy in the world, with a GDP exceeding $1.5 trillion. You will also be the world’s fifth largest exporter, with global brands known the world over, from Samsung to Hyundai. You will be the world’s largest builder of ships, a global auto producer and a cutting-edge technology hub.

Oh, and remember Pakistan, Egypt and Morocco – all far ahead of you in per capita GDP? Now, your per capita GDP is almost nine times larger than that of Egypt, nearly 10 times larger than Morocco’s and almost 19 times larger than Pakistan’s. You could be forgiven if you thought anyone who made such a prediction was insane.

Perhaps that’s why economists and development specialists took to calling South Korea’s rise an “economic miracle.” But to call it a miracle fails to account for the myriad policy choices made by successive Korean governments and the extraordinary perseverance, dedication and hard work of the Korean people in building their destiny. South Korea’s rise was a result of smart policy, hard work and strategic vision, and the details of its rise offer some lessons for many of those countries in the Arab world that South Korea lapped on its way to what emerging-markets economist Ruchir Sharma called its “gold medal” economy.

To understand the scale of South Korea’s rise, we need only look at the 22 countries of the Arab League, accounting for more than 400 million people. All told, the combined GDP of the Arab League countries clocks in at some $2.8 trillion, roughly equivalent to France, and lower than Japan and Germany.

South Korea with a population of just over 50 million people has an economy that is more than half the size of the combined economies of the entire Arab world. To take it further, one company, Samsung, has a market capitalization that is larger than the entire economies of 19 Arab states. Only Saudi Arabia, the UAE and Egypt are larger than “Samsung-istan.”

This begs the question: are there lessons from South Korea’s rise applicable to the Arab world today? While the details of each country’s rise are hard to emulate, there is one clear lesson that Arab and other developing countries can learn from South Korea, and it’s a lesson that the World Bank, IMF or other development agencies will not like: state-guided capitalism, when done right, can be a powerful tool for leapfrogging in development.

The architect of South Korea’s early rise was General Park Chung-hee, who took over the country in a coup d’etat in 1961. He believed the state should protect strategic infant industries and incentivize the private sector through cheap credit, subsidies and tax breaks to develop industries ranging from steel to automobile-making to chemicals. He added an important twist: the entrepreneurs and family businesses who heed the call of the state and leverage the state’s backing must compete fiercely in global markets and among each other, or else their credit and incentives will dry up. Tea-sipping, sclerotic state-owned enterprises need not apply.

The surest sign of success, in Park’s eyes and in that of the South Korean Economic Planning Board, was rising exports. The scholar and journalist Joe Studwell describes how Park’s “export discipline” pushed Korean companies to innovate rather than stagnate, and helped give birth to some of the big names we know today: Hyundai, Kia, Samsung. Those companies that failed to keep up lost government support and died on the vine. The government of South Korea was, thus, not picking winners. The market was doing that task. The government was picking the strategic industries they would support.

The World Bank and other development agencies often speak of creating an enabling environment for business. They speak of ecosystems, and they rank countries according to “Doing Business” rankings. Countries in the Arab world vie for top spots on those rankings. Park would have scoffed at such an idea, much in the same way that the World Bank scoffed at his ideas of building a steel or petrochemical industry, and told him to stick to garments and textiles, as Joe Studwell noted in his book, “How Asia Works.”

South Korea’s educated and diligent work force, combined with a state that created an industrial ecosystem for potential success, and entrepreneurs and companies that competed fiercely in global markets, created South Korea’s economic “miracle.” Many Arab states can heed these lessons. Rather than chasing rankings on the World Bank’s Doing Business list or the World Economic Forum’s Competitiveness Index, the far-sighted Arab leader should survey the landscape of industry today as well as future growth industries, and take a page out of Park’s playbook: support the growth of domestic private-sector exporters while imposing an “export discipline” on the winners and losers.

The numbers do not lie. The Arab world has, by and large, failed to achieve its tremendous potential. Barring a few success stories, most notably the UAE as a country that has punched above its weight economically, there is virtually no Arab country that could stand on the medal platform of the global economy.

To do so will not require a miracle. It will require bucking the trend of what the army of consultants and development advisors are offering to the Arab world, and following in the footsteps of the broad parameters of South Korea’s model.

Afshin Molavi is the co-director of emerge85, a lab that explores change in emerging markets and its global impact. He is also a senior fellow at the Foreign Policy Institute of the Johns Hopkins University School of Advanced International Studies.