What Latin America Can Learn from South Korea

By: Guest Contributor - Dec 7, 2016, 6:59 pm
Latin American nations could do well by learning from
Latin American nations could learn much from following the economic example of South Korea (Flickr).

EspañolBy Javier Alonso

In 1945, Japan ended its occupation of Korean territory, at World War II drew to a close. Under a United Nations-led treaty, the administration of the Korean territory was divided in two, establishing the division at the 38th parallel north, giving the Soviet Union control of the north, and the United States control of the south.

In 1948, the General Assembly of the United Nations, passed a resolution establishing a UN-supervised general election in Korea. The proposal was rejected by the north but accepted by the south. In the southern region, a constitution was established, a presidential form of government was implemented, and later, under the elected president Syngman Rhee, the Republic of Korea was born on August 15, 1948. A few weeks later, in the North, the Democratic Republic of Korea was proclaimed under the rule of Kim Il-sung. Relations were tense between the two new nations, culminating in North Korea’s invasion of South Korea in 1950. The Korean War ended in an armistice between the two nations in 1953.

In 1960, South Korea had a GDP per capita of US $79, much lower than that of some sub-Saharan African countries. By 1989, the South Korean economy had been growing in real terms at an average annual rate of over 8% since 1962. All this thanks to the industrialization that had been taking place since the beginning of the 1960s along with trade liberalization.

It serves as a fine example of the basic need of the state to create an environment conducive to economic development, by establishing smoothly functioning institutions. When we discuss the quality of institutions, factors such as business freedom, respect for property rights, the rule of law, macroeconomic stability, and fighting corruption are all taken into account.

While South Korea began its process of massive industrialization with some state interventionism in order to institute an export-oriented industrial model and encourage foreign investment to compensate for the nation’s low savings rate, in the 1970s it began to encounter problems with monetary stability, with inflation soaring into double digits.

Thus, in the 1980s a much more conservative fiscal and monetary policy was adopted with a drastic reduction in state intervention, liberalization of foreign investment, and budget austerity for several years. South Korea managed to grow by an average of 9.2 per cent between 1982 and 1987 and an average of 12.5 per cent between 1986 and 1988. It also managed to reduce its public debt.

South Korea’s economic development through adopting a market economy was far superior to that of the majority of Latin American nations over the last 50 years, which tended to be immersed in the ideas of CEPAL (Economic Commission for the Development of Latin America and the Caribbean), where Keynesian thinking prevailed, as well as the historicists and structuralists of Central Europe. Another school of thought of economic development that prevailed in the continent was that of Dependency Theory, which was based on the ideas of Marxism blended with the postulates of Max Weber. Both encouraged a very energetic role for the state in economic affairs, in order to jumpstart industrialization in the region.

As Carlos Alberto Montaner asserted, it is the set of beliefs, values and knowledge in societies that determines their ability to achieve development. Latin America, with notable exceptions such as Chile and Peru, was and is a product of public policies that condemn it to failure. Thus, Latin America’s main problem lies in the delegation of power beyond what is due to the state. In general, the state should concern itself with enforcing the rule of law, protecting property rights, transparency in resource management, ensuring compliance with contracts, and limiting the power of lobbyists. Not with intervening in the economy.

Daron Acemoglu and James A. Robinson, in their book “Why Nations Fail” clearly state that in Latin America, from the Spanish colonization to the present day, the extractive institutions that were formed, did not adequately delimit property rights, and were not inclusive enough to achieve equality before the law for all citizens. A political and economic oligarchy was responsible for the fate of millions of economically desperate people, waiting from time to time to vest their hopes in a political candidate who would improve their future.

With the needs of the masses, it is easy for statist politicians to use such things as healthcare and education to expand the role and influence of the state and its institutions in the economy. But, as South Korea has shown us, we must first ensure that there is sufficient economic growth in conjunction with the improvement in the quality of our institutions to ensure that this excluded majority can achieve a better life, rather than simply fall prey to different types of actors who seek nothing more than a perpetuation of the current state in which we find most Latin American nations.

Javier Alonso is an economist and alumnus of Students for Liberty in Paraguay.