Economic Challenge Series 5: Economic Development in South Korea and Ethiopia

Dear Patriotic Ethiopians and Friends of Ethiopia.

As part of our review of the Millennium Challenge Series, I found this intersting comparison of South Korean andEthiopian Economic Development.

This should be a rather timely paper as Ethiopia is once more again trying to copy the Tiger Countries Economic System via the "Developmental State" construct. It is critical that we should be developing our own instead of copying others.

Unfortunately, we seem to make the same mistake over and over again and expect different results.

Ethiopia is an ancient country and needs to learn from other's experience but not copy cat every thing others did. If you recall the Tiger Countries economies were in critical situation some years back and we need to learn from their success as well as their mistakes too.

We need to develop a unique Ethiopian Economic System that takes into consideration our culture, civilization and current economic challenges.

Please read on this rather interesting paper.




AN OVERVIEW OF THE ECONOMIC DEVELOPMENT OF SOUTH KOREA AND ETHIOPIA



Assefa Abebe



Paper Prepared for Presentation at

Fourth International Conference on the Ethiopian Economy

Organized by

Ethiopian Economic Association



June 10-12, 2006

UNCC, Addis Ababa



Table of Contents


Section
Title
Page






Abstract 3

1
What is Economic Development? 4

2
Economic Development of Korea: Transition from Aid recipient to Donor 5


2.1 Internal Factors 6


2.1.1 Political Leadership 6


2.1.2 Economic Development Policies 8


2.1.3 Culture 18


2.2 External Factors 19


2.2.1 Good Use of Foreign Resources 19


2.2.2 Japanese and American Influence 20

3
An Overview of Economic Development of Ethiopia 21


3.1 Internal Factors 22


3.1.1 Political System 22


3.1.2 Economic System 24


3.1.3 Culture 28


3.2 External Factors 30

4
Concluding Remarks 30


References 32



AN OVERVIEW OF THE ECONOMIC DEVELOPMENT OF SOUTH KOREA AND ETHIOPIA


Assefa Abebe

email: assefaabebe@yahoo.com


Abstract


Some literatures indicate that in 1960s South Korea and Ethiopia were almost in the same stage of economic development. But currently, we are observing the huge difference between the stages of economic development of these two countries. South Korea, a country that had been in abject poverty in 1960s, has become one of the rich countries in the world by registering recognized economic success story. The economic growth that took Japan almost a century has been accomplished by the South Korea in less than half of that time. The question is how this was done? What were the factors that have contributed to this fast economic growth and success? Why the economic development that happened in South Korea couldn’t happen in Ethiopia? What has Korea done to achieve fast economic development that Ethiopia didn’t? What could we learn from the Korean development experience to improve the performance of Ethiopian economy?

This paper tries to shed some light on the history of economic performances of South Korea and Ethiopia in order to seek answers for the above raised and similar questions. The objective of the study is to draw some lessons for Ethiopia by analyzing the dynamics of South Korean economic development and by identifying some of the constraints that Ethiopian economy had and still having. The methodology of the study is reviewing secondary sources of information and analyzing these information/data to reach upon conclusion and recommendations.


AN OVERVIEW OF THE ECONOMIC DEVELOPMENT OF SOUTH KOREA AND ETHIOPIA

1. What is Economic Development?

Before we embark upon discussion about the economic development of South Korea and Ethiopia, it would be helpful to define what the economic development is. Economic Development refers to progress towards achievement of more quantity of resources (wealth) and more quality of life (access to education and health care, employment opportunities, availability of clean drinking water, as well as existence of good governance). It is also progress towards improving country’s ability in economic productivity, employment of human and physical resources, business activity and investment. Unlike economic growth, which is concerned with annual increases in quantity of production, economic development deals more with the basic fabrics of society including cultural beliefs, institutions that govern the way an economy and society function. Soubbotina and Sheram (2000, p. 96) define economic development as:

Qualitative change and restructuring in a country's economy in connection with technological and social progress. The main indicator of economic development is increasing GNP per capita (or GDP per capita), reflecting an increase in the economic productivity and average material well being of a country's population. Economic development is closely linked with economic growth.

They define economic growth as:

Quantitative change or expansion in a country's economy. Economic growth is conventionally measured as the percentage increase in gross domestic product (GDP) or gross national product (GNP) during one year. Economic growth comes in two forms: an economy can either grow "extensively" by using more resources (such as physical, human, or natural capital) or "intensively" by using the same amount of resources more efficiently (productively).



Regarding the indicators of economic development, there is a difference of opinion among the economists. For instance, Todaro (2002, pp. 14-15) argues that since a number of developing countries which experienced relatively high rates of per capita income showed relatively little or no improvement or even an actual decline in employment, equality, and real income of the lower segment of their population, reduction of poverty, inequality, and unemployment within the context of a growing economy could be better indicators of economic development rather than GDP or GNP.

For the purpose of this paper, economic development is a process that involves economic growth (the process of steady increase of productive capacity of the economy over time to bring about more national output and income) plus positive changes in quality of life of the citizen of a country as a result of improved performance of the factors of production and improved technique of production. Put other way, economic development is multidimensional including sustained real per capita income; reduction of a number of people below poverty line who are unable to meet basic human needs including food, shelter, and health; lessening of income inequality that affects self-respect of a person and that makes a person susceptible to ignorance, misery, and dominance of other people. In sum, economic development is a process and means of obtaining a better life both in physical reality and a state of mind. Indicators of economic development also should take these qualitative and non-market values into consideration.


2. Economic Development of Korea: Transition from Aid Recipient to Donor
South Korea has a recognized economic success story. A country that was in abject poverty in 1960s, is now a member of the Organization of Economic Cooperation and Development (OECD), an organization considered as a group of richest countries of our world. The economic growth that took Japan almost a century has been accomplished by the South Korea in less than half of that time. The questions to be raised here are how was this done? What were the elements that have contributed to this fast economic growth and success?

Different scholars have studied the dynamics of South Korean economic development and its contributing factors. Based on these studies, it is possible to categorize the contributing factors of Korean economic growth in to two broad categories--- internal and external factors. These will be discussed below in turn.

2.1 Internal Factors

2.1.1 Political Leadership

The Korean economic system during its early development stage, for that matter up to mid 1990s, was “ government guided capitalism”. This system was clearly indicated in the First Five Year Plan (1962-1966) of the country: “ Through out the plan period [1962-1966], the economic system will be a form of ‘guided capitalism’, in which the principles of free enterprise and respect for the freedom and initiative of private enterprise will be observed, but in which the government will either directly participate in or indirectly render guidance to the basic industries and other important fields” (Economic Planning Board/EPB, 1962, p. 28).

Korea was liberated in 1945 from the 36 years (1910-1945) of Japanese colonialism and the Republic of Korea was officially established on August 15, 1948, three years after liberation. After its liberation, Korea had been under U.S. Military Administration for three years (1945-1948). The first president of South Korea, Syng-Man Rhee was a man who spent most of his adult life in USA and after his resignation on April 26, 1960 mainly because of students’ protest against election fraud, corruption, and dictatorship in late February and March 1960, he also went back to USA where he died. Korea’s economic growth during the president Rhee, particularly from 1954 to 1960 was modest achieving an average GDP growth of 3.7% per annum (Cho, 1998, p.6). After President Rhee’s resignation, the interim government headed by Ho Chong led a country for four months and held election in which Yun Po-Sun was elected as a president. During the presidency of Yun Po-Sun (1960-1961), which lasted only for nine months, Korea adopted parliamentary form of government and the real power was in the hands of Prime Minister Chang Myon. The government of Chang Myon was taken over on May 16, 1961 by the bloodless coup led by General Chung-Hee Park that forced president Yun Po-Sun to resign.

By the election held in December 1963, General Park was elected and the military government was replaced by the civilian government, though the leadership remained in the hands of president Park. The real miracle of Korea’s economic development began with the coming to power of President Park who led the country from 1961 to 1979. Albeit it is not free from critique, his economic policy pulled South Korea out of the economic malaise. President Park who was educated in the Japanese Military Academy in Manchuria and used Japanese experience as a model for economic development, made protecting his country from communist invasion (from North Korea) and alleviation of poverty the primary goals of his government (Cho, 1998, p. 6). During 1961-1979, the real GDP of Korea grew on average by 11% per year and per capita GNI increased on average by 8.9% per year (Kim, 2002, p. 2). That period was the time of Korea’s economic development take-off.

Following president Park’s assassination on October 26, 1979 by Chief of the Korea’s Central Intelligence Agency (CIA), Kim Jae-Kyu, Vice President Kyu-Ha Choi became Acting President. However, the student movement that consistently demanded the removal of martial law which was instituted following the assassination of the president Park and mushrooming demonstration in opposition of the continuity of remnants of Park’s regime in power posed a challenge to the government. After about ten months in office, Vice President Choi relinquished power in August 1980.

The political instability occurred following the assassination of President Park coupled with other internal factors such as failure of agricultural products due to unusual cool weather during the summer of 1980 and external factors such as the second oil shock of 1979 which adversely affected the world economy affected Korean economic growth. In 1980, the Korean economic growth saw negative growth rate (-4.8%) for the first time since the liberation (Stern, Kim, Perkins, and Yoo, 1995, pp. 84-85).

After the resignation of President Choi, General Chun Doo Hiwan who was acting Chief of the Korean CIA and Head of the Defense Security Command was elected president and ruled Korea for seven years (1981-1987). During his period substantial economic liberalization in trade and industrial policies were achieved in part due to the government’s own initiative and in part due to pressure from Korea’s largest trading partner, the USA (Cho, 1998, p.9).

The end of President Chun’s term of office was followed by the government of President Tae-Woo Rho, who was another former military General and close friend of President Chun (Chu, 1998, p.9). He was elected for five years term (1988-1992). Above all, his period was known for allowing political democratization.

In 1993, President Yong-Sam Kim (1993-1998), the first head of state who was not from military background since 1961, was elected. His government was pressed internally by the globalized Chaebols (large business conglomerates of Korea) and externally by USA, OECD, WTO, and IMF to take economic liberalization and market opening measures. In short, his period was a period when Korea joined OECD and launched various economic liberalization measures and the period of financial crisis that surfaced in November 1997.

The period of President Dae Jung Kim (1998-2002) was the period of recovery from the financial crisis and it is too early to comment at this juncture on the performance of the current government led by president Moo-Hyun Roh (2003-2007).

2.1.2 Economic Development Policies

As mentioned above the Korean economic development is known as government led economic development. By putting in place necessary economic policies and suitable strategies as well as showing flexibility in implementation of these policies and strategies, the government played very important role in the economic development of the country. These policies and strategies will be discussed below briefly.



2.1.2.1 Inward Looking Economic Development Policy, 1948-1960

The first president of South Korea, Syng Man Rhee, adopted an economic policy known as “Revised Capitalism” which allowed private ownership within the limit of what his government believed would maximize public welfare. His trade policy was import substitution, which then used by many less developed countries. Korea maintained an overvalued exchange rate and strove to substitute imports with domestically produced goods (Sohn, Yang, and Yim, 1998, p. 13). To implement its import substitution policy, the government used strategies such as restricting imports through tariff and non-tariff mechanisms and at the same time giving incentives to exporters through subsidies and export credits.

Three years after the establishment of South Korea, the Korean War (1950-1953) broke out and caused huge human causalities and tremendous economic destructions. During the war, 1.5 million people were killed and 40% of the country’s industrial facilities were destroyed (OECD, 1996, p. 1). Fortunate enough, by 1957, with the massive economic assistance mainly from USA and from United Nations, the Korean economy had largely recovered from damage inflicted during the Korean War (EPB, 1962, p. 27).

Even though the government of president Rhee was criticized by some for giving more attention to maximizing foreign assistance in order to rebuild industries and finance imports rather than to domestic savings and export earning (Sohn, Yang, and Yim, 1998, p. 15), the GDP growth was not bad. Korea’s GDP growth for years from 1953 to 1960 was an average annual rate of 4% (Kim, 2002, p. 2.).



Table 3.1: Key Economic Indicators for Korea, 1948-1960

Year
GDP

(Bil.Won)
Per Capita GDP (US$)
Export

(Mil.US$)
Imports

(Mil.US$)


Exchange Rate

(Won/US$)
Foreign Exchange Reserve

(Mil. US$)

1948
-
-
22
208
-
20

1949
-
-
14
133
-
22.4

1950
-
-
29
48
-
26.8

1951
-
-
16
155
-
38.0

1952
-
-
28
214

82.7

1953
48
67
40
345
6.6
108.7

1954
66
70
24
243
18.0
107.8

1955
115
65
18
341
30.2
96.1

1956
152
66
25
386
50.0
98.6

1957
197
74
22
442
50.0
115.6

1958
205
80
17
378
50.0
146.5

1959
218
81
20
304
50.0
147.3

1960
245
79
33
344
62.8
157.0




SOURCE: National Statistical Office and Ministry of Commerce, Industry, and Trade. Quoted in Chan Hyun Sohn, Jun Sok Yang, Hyo Sung Yim (1998). Korea’s Trade and Industrial Policies, 1948-1998: Why the Era of Active Policy is Over. Korea Institute for International Economic Policy (KIEP), Working Paper No. 98-05, p.14.



2.1.2.2 Outward Looking Economic Development Policy, 1961-1972

The outward looking economic development policy, also known as export oriented industrialization (EOI), was came to operation with coming to power of General Chung Hee Park. The main goal of this policy was to transform the aid-based economy of Korea into an export-led manufacturing based economy. The main reasons for choosing this policy were to overcome Korea’s lack of natural resource and small domestic market, need for foreign exchange in the face of decreasing volume of foreign aid, and belief that Korea has comparative advantage in production of labor intensive export products (OECD, 1996, p.1 and Kim, 2002, p. 2).

Here, the reader should bear in mind that the shift of policy from inward looking development that was based on import substitution to outward looking development policy that was based on export promotion did not mean liberalization of import. The government continued import restriction using both mechanisms of quantitative restriction and tariff. For quantitative restriction, the government used what was know as “ positive–list system” under which only those commodity items listed could be imported with or without prior government approval depending upon the system of semi-annual trade program designed to control imports quantitatively. After the second half of 1967 the “positive-list system” was changed to “negative-list system” under which only the imports of those items listed were prohibited or restricted (Kim, 1994, p. 22).

Besides restriction of imports by the use of positive and negative list system, the government of Korea also used the complete prohibition of import of certain items considered inessential. According to the Law Prohibiting Sales of Special Foreign Products enacted in 1961, sale of certain foreign products such as foreign made cigarettes, coffee, cosmetics, high-quality clothes and the like were banned and transcending this ban was a crime (Kim, 1994, p. 9). In short, the trading behavior of Korea during this period may be characterized as promoting exports as much as possible and keeping imports to the minimum necessary level by giving preferential treatment only to capital goods in order to accelerate investment activities and to raw materials and intermediate goods which were used for the production of goods for export. The import liberalization seen in the field of raw materials and intermediate goods, which were used to produce export goods, was because of the reason that the objective of export promotion strategy cannot be achieved while maintaining extreme forms of import restriction.

During 1961-1972, the Korean government used various export promotion measures to promote export. These measures include, but not limited to, the following:

1. Vigorous administrative support for export promotion;

2. Giving preferential export credit (policy loan), a loan on which interest rate was lower than the normal interest rate, to exporter;

3. Sending economic missions consisting of leading business persons to Western industrialized countries to negotiate on financing for selected projects;

4. Allowing investors to import capital goods on long term-settlement basis using the long-term export credits of capital exporting countries;

5. Foreign loan repayment guarantee;

6. Tariff exemption on imports of raw materials and intermediate goods used for export production;

7. Indirect domestic tax exemption on intermediate inputs used for export production and on export sales;

8. Direct tax reduction on income earned from exports and other foreign exchange earning activities;

9. Wastage allowance for raw materials imported for export production, allowing export producing importers more than normally needed to compensate wastage occurred during production;

10. Tariff and indirect tax exemption for domestic suppliers of intermediate goods used in production;

11. Accelerated depreciation allowance for fixed assets of major export industries;

12. Export targeting system, setting annual export targets by major commodity groups and by destination;

13. Support for overseas’ marketing activities of Korean exports through Korea’s diplomatic missions and governmental agency called Korea Trade Promotion Agency (KOTRA) overseas’ networks;

14. Dissemination of necessary information and solving problems associated with export on Monthly Trade Promotion conference which was attended by the president of the country, all cabinet members, head of major financial institutions, business association leaders, and representatives of major export firms (Frank, Kim & Westphal 1975 Quoted in Kim, 1994, p.18 and pp.19-20 for items listed in numbers 8, 9&10).

The export promotion policy of Korea is often cited as a successful example of a government led outward looking (export based) economy. This policy worked in favor of Korea’s comparative advantage of that time which was in light manufacturing.

Unlike other developing countries, which tried to induce heavy manufacturing without adequate capital base or experience, the focus on light manufacturing allowed Korea to make the most of what it had. Exports resulting from such a strategy brought Korea the foreign exchange it needed to upgrade its capital stock, build up entrepreneurial experience, and set up the necessary foundation to move into heavy manufacturing in the late 1970s and 80s (Sohn, Yang, and Yim, 1998, p.24).

It was with this experience that Korea registered a successful record in implementing its Heavy and Chemical Industries development policy.













Table 3.2: Key Economic Indicators for Korea, 1961-1972

Year
GDP

(Bil.Won)
Per Capita GDP (US$)
Export

(Mil.US$)
Imports

(Mil.US$)


Exchange Rate

(Won/US$)
Foreign Exchange Reserve

(Mil. US$)

1961
294
82
41
316
127.4
207.0

1962
356
87
55
422
130.0
168.6

1963
503
700
87
560
130.0
131.5

1964
716
703
119
404
214.2
136.4

1965
806
105
175
463
266.3
146.3

1966
1,037
125
250
716
371.3
245.2

1967
1,281
142
320
996
270.5
356.6

1968
1,653
169
455
1,462
276.6
391.0

1969
2,155
210
122
1,823
288.3
552.9

1970
2,788
253
835
1,983
331.6
609.7

1971
3,419
289
1,068
2,394
347.2
568.1

1972
4,191
319
1,624
2,522
392.9
739.7




SOURCE: National Statistical Office and Ministry of Commerce, Industry, and Trade. Quoted in Chan Hyun Sohn, Jun Sok Yang, Hyo Sung Yim (1998). Korea’s Trade and Industrial Policies, 1948-1998: Why the Era of Active Policy is Over. Korea Institute for International Economic Policy (KIEP), Working Paper No. 98-05, p.18. (Available at Economic liberalization).



2.1.2.3 Heavy and Chemical Industry Promotion Policy, 1973-1979

This policy is also known as Heavy and Chemical Industry (HCI) Drive and the policy gave special focus to six major industries as a base for Korea’s economic development. These industries were iron and steel, non-ferrous metal, machinery, shipbuilding, electronics and chemical industries. The main reasons for pursuing HCI Drive were:

1. Security threat from North Korean and need to build domestic defense industry.

2. Increase of protectionism in industrialized countries against labor intensive goods of Korea produced under the Export Oriented Industrialization (EOI) policy;

3. Rapid rising of wage-rental ratio within the country which reduced the international competitiveness of Small and Medium Enterprises (SMEs) of Korea;

4. Need to improve the balance of payment of the country in the long run (Kim, 1994, p. 42).

It is also said that HCI Drive was President Park’s attempt to copy the Japanese model of industrialization that achieved development through promotion of heavy and chemical industries. In most cases, the Korean pattern of economic development is said to follow Japanese development pattern. “ Korea’s HCI promotion policy took elements from the successful early heavy manufacturing and chemical industry promotion and industrialization strategy of Japan” (Sohn, Yang, and Yim, 1998, p. 29).

Korea used various policy measures to mobilize resources including capital, technology, and technical manpower, entrepreneurship and to determine industrial sites. These policy measures include:

1. Giving preferential long term credit (policy loan), on which interest rate lower than that of normal interest rate was paid, to HCI sector;

2. Providing tax incentives to those enterprises engaged in HCI sector;

3. Giving credit repayment guarantee to those who borrow money from the abroad;

4. Enhancing the capacity building schools and expanding vocational and technical training facilities to supply necessary manpower to the HCI sector;

5. Expansion of Research and development (R & D) activities;

6. Constricting industrial sites;

7. Following expansionary monetary and fiscal policy despite the high inflationary pressure (Kim, 1994, p.43).

These policy measures were able to attract many large business groups to invest in HCI projects and HCI became the womb of today’s Korean Chaebols. The today’s Korea’s major exports such as automobiles, ships, steel, electronics and semiconductors got their impetus in HCI Drive.

In the second half of 1980s, the HCI sector took the advantage of favorable international environment, especially the advantage of what is known as “Golden Opportunity of Three Lows” (low oil price, low Dollar value as a result of devaluation of dollar as a result of Plaza Accord, and low interests rate in world financial market), and began to increase its exports. As a result, “…the HCI exports increased from 14 percent of total manufactured exports in 1971 to 39 percent in 1979 and then to 52 percent by 1989….” (Kim, 1994, p. 44).

In fact, the story of HCI policy is not only the story of success. It had also its own drawbacks and these drawbacks were excessive investment in heavy and chemical industries that outpaced the increase in the supply of skilled labor or the capacity to absorb the related technology, taking limited financial resources in the form of credit away from other industries such as SMEs and service industries, creating imbalance in investment and causing the economic power to concentrate in the hands of few business groups.

Table 3.3: Key Economic Indicators for Korea, 1973-1979

Year
GDP

(Bil.Won)
Per Capita GDP (US$)
Export

(Mil.US$)
Imports

(Mil.US$)


Exchange Rate

(Won/US$)
Foreign Exchange Reserve

(Mil. US$)

1973
5,376
396
3,225
4,240
398.3
1,094.4

1974
7,597
542
4,460
6,582
404.5
1,055.7

1975
10,135
594
5,081
7,274
484.0
1,550.2

1976
13,913
803
7,715
8,774
484.0
2,960.6

1977
17,807
1,012
10,047
10,811
484.0
4,306.4

1978
24,002
1,396
12,711
14,972
484.0
4,937.1

1979
30,802
1,644
15,056
20,339
484.0
5,708.1




SOURCE: National Statistical Office and Ministry of Commerce, Industry, and Trade. Quoted in Chan Hyun Sohn, Jun Sok Yang, Hyo Sung Yim (1998). Korea’s Trade and Industrial Policies, 1948-1998: Why the Era of Active Policy is Over. Korea Institute for International Economic Policy (KIEP), Working Paper No. 98-05, p.30.



2.1.2.4 Stabilization, Liberalization, and Globalization, 1980-1996

In April 1979, the Korean government announced the Comprehensive Stabilization Program (CSP) to redress the mistakes made in 1970s. The CSP was based on the recognition that the industrial policies had caused havoc in all aspects of Korea’s economic life: management of macroeconomic policies; management of small- and large- scale firms, in both the favored sectors and other industries; competitiveness in the export markets; and credit standing in the international financial market. The macroeconomic policies had become a hostage held by industrial policies rather than setting the general framework for industrial development. (Stern, Kim, Perkins, Yoo, 1995, p.85).

As a result, the government began striving to attain price stability, establishing an unbiased incentive structure, promoting competition with in the domestic market and from abroad, emphasizing on overall economic efficiency rather than promotion of particular industries, relying more on market rather than intervening at the industry and firm level and pursuing conservative management of fiscal and monetary policy to reduce the then double-digit inflation.

In 1988, Korea became a signatory to the IMF Article VIII agreeing not to control foreign exchange and in 1989 Korea announced that it would follow Article XI of GATT agreeing not to restrict trade to control its balance of payment and to further increase its pace of import liberalization. In addition, realizing that integrating itself more with the world economy encourages both exports and imports that make the economy more efficient, Korea decided to be part of globalization in 1990s. Korea participated in Uruguay Round Negotiation of (1986-94) and when World Trade Organization (WTO) established on 1 January 1995, Korea was one of the founding members. One year after, in December 1996, Korea joined Organization for Economic Cooperation and Development (OECD) and became one of the thirty members of the organization. To join both WTO and OECD, Korea took various economic liberalization measures required to qualify for the membership of these international multilateral organizations.

2.1.2.5 Crisis and Recovery 1997-2003

The Asian financial crisis, which began in Thailand in July 1997, occurred in South Korea in November of the same year. The spillover contagion effect from other Asian countries coupled with internal weaknesses associated with trade and industrial policies of the country caused the Korean financial crisis of 1997. Foreign capital flew out of the country; foreign exchange reserves of the country depleted and exchange rate soared; the foreign banks, particularly the Japanese banks which lent money to Korean Chaebols at a very low interest rate with out proper consideration of the financial status of the borrowers, wanted their money to be paid back and refused further extension of loan agreement. However, the Korean firms to whom the assistance of government was reduced due to the liberalization of 1980s and early 1990s were not in a position to pay back their debt. This was partly because some of them already lent out what they borrowed on the short term basis at a very low interest rate from foreign financial institutions to other foreign borrowers on the long term bases with high interest rate to get the difference of the interest rates as a profit by continuous renewal of their short term borrowing agreement and others invested in what they mistakenly thought would be productive area. Therefore, the healthy-looking Korean economy faced a sudden financial crisis.

Since some of the Chaebols were considered “too big to fail” because if they fail and went out of business the national economy would be in a problem due to the number of workers they employed and their contributions to the national economy were large, the government had to bail them out of this financial crisis. Knowing that the problem was getting worse, the Korean government requested the assistance of International Monetary Fund (IMF) in November 1997. With the IMF coordinated rescue package, the South Korea has made significant progress in stabilizing its external financial position and overhauling its financial and corporate sectors. “On December 3 [1997] Korea and the IMF reached an agreement on a financial aid package totaling $58.35 billion that include loans worth $ 21 billion from the IMF, $10 billion from the World Bank, $4 billion from Asian Development Bank (ADB), and $23.35 billion from the G-7 and other countries. The nation [Korea], however, was obliged to accept the terms and conditions imposed by the IMF…” (Lee and Patricia, 2003, p. 15) The terms and conditions of IMF have led Korea to further restructuring of the economy, liberalization and market opening.

The Korean economy, which achieved an average GDP growth rate of 8% for the three decades before the 1997 crisis, showed sharp contraction of about 5.5% in 1998. The Korean currency (Won) depreciated by about 50% in January-February 1998, inflation which was 4.5% in 1997 rose to 7.5% in 1998 because of price increase partly due to depreciation of the Won, which resulted in higher import prices (ADB, 1998, p.82).

In the second half of 1998, the Korean crisis began to subside and the country entered period of rapid recovery. Usable foreign exchange reserves, which were only US$8.9 billion in December 1997, increased to US$ 48.5 billion (more than six month’s import cover) by the end of 1998. External debt declined from US$ 158 billion in December 1997 to US$ 152 billion by the end of 1998 and the share of short-term debt in total external debt has declined from 40% in December 1997 to 21% in December 1998 (ADB, 1998, p. 83).

Following the recovery from the financial crises, Korea continued undoing the half a century old cronyism of government and business sector, which was the main cause of the 1997 financial crisis, to allow more competition within the framework of free market. Currently the South Korean economy is doing well. Korea’s GDP growth rate that was –6.7% in 1998, immediately after the financial crisis of November 1997, registered annual GDP growth rate of 6.3% in 2002 (World Bank Group, September 26, 2003)

2.1.3. Culture

Korean economy has shaped by the Korean people and their land on which they live. Directly or indirectly, culture, behavior, attitude, and practice of Korean people and the location, climate, and the status of natural resource endowment of the country have influenced Korea’s economic development.

The rapid economic development achieved by the resource poor Korea makes some one to be interested in looking into the culture of the people, which in turn has influenced the economic development of the country. Unlike peoples in Ethiopia, which are heterogeneous, Korean people are homogeneous, speak one language, share the same history and have similar psychological makeup. The Korean people have the tradition of Confucianism, which gives emphasis on value of education (self-improvement, personal cultivation, and achievement), subordination to authority, respect to seniority, family life and filial duty, hierarchical and harmonious relationship, personal integrity in public service and loyalty to the country. These Confucian values contributed to the existence of disciplined and hard working workforce in Korea, and culture of respect to authority and loyalty helped in implementation of economic policies formulated by the government.

Compared to Ethiopia, which has large area of land and an abundant natural resource, Korea has smaller land area (98,480 sq. km, out of which only 20% is arable), relatively poor in natural resources and unfavorable climate. These led the people to develop the culture of hard working, saving by postponing current consumption and creativity. This contributed to the outward looking economic development strategy of Korea and its focus on knowledge based products.

In short, ethnic and cultural homogeneity, strong Confucian heritage and ability of political leadership to harness the strength of the Korean people contributed to the rapid economic growth recorded by Korea.

2.2 External Factors

2.2.1 Good Use of Foreign Resources

The availability and good use of foreign resources were another important factors that contributed to rapid economic development of Korea. The sources of these foreign resources were foreign borrowing and official development assistance (foreign aid).

Many observers overlook the importance of foreign aid and loans in shaping Korean economic policies (…) and its push toward economic development. From 1946 to 1976, the United States provided $12.6 billion in economic and military aid to Korea (…); Japan contributed an additional $1 billion, and Korea borrowed $2 billion from multilateral financial institutions. For a country with a population of 25 million (at midpoint 1960), the total of more than $15 billion gives a per capita assistance figure of $600 for three decades. No other country in the world received such large per capita sums, with exception of Israel and South Vietnam (…). The total of $6 billion U.S. “economic” grants and loans to Korea during 1946-78 compares with $6.89 billion for all of Africa, and $14.89 billion for all of Latin America (…)(Cho, 1998, p. 7).

South Korea benefited from external resources not only by getting access to relatively huge amount of foreign funds, but also by investing it in productive projects.



2.2.2 Japanese and American Influence

The question whether the foreign rule, particularly colonization, played positive role in the economic development of a country or not is a contentious issue and some times even considered as taboo to discuss about it. Everybody knows that foreign rule is worst and freedom or self-governing is best. Here, the questions I want to raise is that is self-governing always good for economic development and had colonization has no contribution for the economic development of the colonized? Let’s ponder upon these questions taking the case of Ethiopia and South Korea.

Ethiopia is one of the few countries that were never colonized except the five years occupation by Italy (1936-1941). When we see the levels of its infrastructure, the levels of education of its people or literacy rate, the coverage of social services and in general the levels of socio-economic development of Ethiopia is below the majority of African countries that experienced colonialism. Until recently, its political administration was also one of the worst in the world. This fact tempts someone to raise the questions raised above: is self-governing always good for economic development and had colonization has no contribution for the economic development of the colonized?

Turing to the case of South Korea, putting aside all the evil things perpetuated against Korean people during the Japanese colonial rule and American military administration for a while and thinking in economic way, can’t we find something that contributed to the later economic development of the South Korea? Weren’t there knowledge and skill transfer, experience sharing, imitation, taking Japanese and Americans as role models and initiation of aspirations? Lee-Jay Cho and Yoon Hyung Kim summarized some of the answers for these questions as follows:

In terms of technical and economic development, the 36 years of Japanese occupation were not entirely disadvantageous to Korea. In carrying out its imperialistic expansion, Japan provided the Korean peninsula with substantial infrastructure: [like railways, roads, harbor farcicalities, communication systems, European-style of educational system, medical studies, factories, centralized administrative structures]….

While under Japanese rule, Koreans did gain some social and economic benefits, even if confined to only some segments of society. Many of these were conducive to later economic growth—in particular, the lasting benefits of technical education, acquisition of new skills and technical know-how, experience in working with entrepreneurs and in large-scale industries, and changing habits of consumption (Cho and Kim, 1991, pp. 6-7).



Even though proving and disproving the proposition that says Japanese and US influence have positive contribution for the economic development of South Korea is beyond the scope of this work, the writer doesn’t believe that the argument that says the presence of Japanese and Americans in South Korea contributed to the later rapid economic development of the country is baseless.


3. An Overview of Economic Development of Ethiopia
Ethiopia is one of the least developed countries of our world. In 2004, its Gross National Income (GNI, Atlas Method) in current US $ was 7.6 billion and the GNI per capita for the same year was only US$ 110 (World Bank Group, May 03, 2006). Out of 67 million Ethiopian populations (as at July 2002), 44% were below the poverty line (with income of below US$1 a day) (Ministry of Finance and Economic Development/MOFED SDPRP, 2002, p. Xvii). Its economy has not developed and it highly depends on foreign aid even to feed its people (in 2002/2003, 12.6 million Ethiopians needed food aid due to the famine caused mainly by severe drought). As Getachew Olana put it and many researchers agree “Ethiopia is one of the poorest economies in the world. Values of socio-economic development indicators available for the country are unfavorably lower than the average of the Sub-Saharan Africa. Each year, on the average, about five million people have problems securing enough food for themselves and need assistance” (Getachew Olana, 2001, p. 135).

The question which comes to one’s mind in this regard is that why a country whose 60% of the total land area of 1.1 million square kilometer is arable, who has abundant natural resource and who claim having modern system of government since 1907 failed to feed its population and suffer from various economic problems? This section tries to find answers for these questions.

Internally, although it is possible to list various reasons to explain the retardation of economic growth of Ethiopia and the causes of poverty the people are now in, the possible reasons can be categorized under the three main categories—the political system, economic system and culture. Externally, Ethiopia’s joining of the Eastern Bloc in mid 1970s affected the flow of foreign resource from Western Bloc, particularly ODA to the country. These will be explained briefly as follow.

3.1 Internal Factors

3.1.1 Political System

Directly or indirectly, political system affects the economic development of a country. It either facilitates production by pursuing appropriate policies, assuring stability and continuity or discourages economic activity. “…[E]conomic prosperity depends in part on political prosperity. A country with an efficient court system, honest government officials, and a stable constitution will enjoy a higher economic standard of living than a country with a poor court system, corrupt officials, and frequent revolution and coups”(Mankiw, 2001, p. 254). Therefore, economic development is partly influenced by political system.

When we look into the case of Ethiopia, it experienced feudal and socialist political systems and at present endeavoring to build democratic political system. Both the feudal and the socialist political systems were authoritarian in character and did not accept popular participation, difference in opinion, and empowerment of the people. Under these systems, everything was decided at the top/center and those who were at the bottom/periphery were required to implement the decision without questioning. If they fail to do as they were told to do, they would suffer from very harsh penalties. This hindered creativity, self-reliance and initiation for work.

The fate of Ethiopians during the feudal regimes of Emperor Menelik II (1889-1913) and Emperor Haile Sellassie (1930-1974), to mention the prominent recent kings only, and during the socialist Derg (committee) regime (1974-1991) was brutal political oppression, horrifying economic and social problems. The Ethiopian kings claimed that their accountability was only to God and the broader people, their subjects, were created simply to serve the royal family and others who belongs to the feudal ruling class as well as their cronies. The feudal system in Ethiopia was cruel system that had required the tenant peasantry to hand over about 70% of their produce to the landowners (Workers Party of Ethiopia/WPE, 1984, p. 9). As a result, this system discouraged production and economic development.

The socialist Derg government (1974-1991), which brought to an end to the backward and savage feudal system in Ethiopia, took some positive measures. These include 1) nationalization of rural and urban land, a great majority of which was taken by the feudal ruling class and their cronies from the indigenous people by gunpoint during the feudal conquest of the 19th century. 2) Abolition of social hierarchy between the conqueror and the conquered, the “gentle” (chewa) and the “rude” (balegge). 3) Banning of usage of some derogatory words and stigmas associated with some ethnic groups and professions. 4) Expansion of education opportunity, mainly through illiteracy eradication campaigns and the like.

However, the political, economic and social measures taken by the Derg government couldn’t win the hearts of some rebel groups who were fighting for the liberation of their respective ethnic groups and regions as well as for the change of the statusquo and couldn’t stop the ongoing war by the rebel groups. The rebel groups such as Eritrean Liberation Front (ELF), Eritrean People’s Liberation Front (EPLF), Oromo Liberation Front (OLF), Tigray Liberation Front (TPLF), Afar Liberation Front (ALF), Ogaden National Liberation Front (ONLF) and others intensified their struggle against the Derg government and finally the coalition of rebel forces called Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) succeeded to overthrow the Derg by gun and controlled the government power on May 28, 1991.

The civil war during the Derg regime, especially in 1980s, demanded allocation of more resource, both human and material, for the military purpose than the average for all of African countries. “ By 1980, domestic military outlays [of Ethiopia] (excluding foreign military aid) as a percentage of GNP reached 9.7 percent while the all-African average was only 2.9 percent” (Taye 1996, p. 3)

When we see the share of defense expenditure out of the recurrent expenditure of the Ethiopian government for the period 1985-1991, on average, it was 42% per annum. This share was increased to 45% for the last three years (1989-1991) of the Derg regime (Ministry of Economic Development and Cooperation/MEDaC, 1999, pp. 5 & 93). This figure was reduced on average to 15% for the year 1995- 1997, though it was again rose up due to Ethio-Eritrea war of 1998-2000.

The political force that ousted the Derg, aware of the fact that suppression leads to war, has tried to mitigate internal conflicts by introducing some reform measures to change the way the former Ethiopian governments had been doing politics. It put in place the new constitution that enshrines the right of ethnic groups to self-determination up to secession, respect for human rights and democratic rights, federal arrangements that allow ethnic groups to administer themselves.

Though some still express their dissatisfaction with the current political system, others argue that the socialist system brought to them economic emancipation by abolishing the notorious land tenancy system and evils associated with that and the current political system brought to them political emancipation by recognizing their inherent human and democratic rights. Among other things the current EPRDF led government is admired by its supporters for allowing the disadvantaged ethnic groups of Ethiopia to stand by their own feet rather than kneeling on their knees as it was before 1991.

3.1.2 Economic System

During the socialist period (1974-1991), like that of any other socialist country, the Ethiopian economic system was centrally planned command economy. The socialist government of Ethiopia focused on building the so-called “self supporting socialist economy” and adopted import substitution economic regime. This was clearly mentioned in the Ten Year Economic and Social Development Plan of Ethiopia (1985-1994). It reads as follows:

We shall build a national economy, which is based on domestic resources, interrelated and strongly self-supporting. The main focus of this is to produce raw materials and intermediate goods that a country used to import from abroad, to strengthen linkage of industry and agriculture as well as the linkage of mining and industry, and to make the economy to move by its internal initiation and power towards reliable and continuous growth” [own translation from Amharic language] (WPE, 1984, p. 27).

One of the implementation tactics identified for the achievement of this “self-supporting” economy was increasing export products in volume, quality and type and to replace import commodities by domestic products as much as possible (WPE, 1984, p. 29). This economic policy added upon other shortcomings of the socialist government’s policies ruined the country. This can be seen from some macro economic indicators. During the last decades of the Derg regime, which was ended in 1991, the GDP by industrial origin at 1980 constant factor cost was growing on average at about 1.5% per annum, while the population growth rate at the same period was 2.9% per annum. (MEDaC, 1999, p.1). From this we can easily understand that the per capita income had been declining during that period.

Table 3.4: Major Macro Economic Indicators For Ethiopia, 1962-2000



Year

Indicators
1962-66
1967-71
1972-76
1977-81
1982-86
1987-92
1993-2000

Real GDP Growth Rate (%)
4.7
4.0
1.3
2.3
3.7
-0.01
5.7

Investment as % of GDP
13.5
12.6
9.7
11.0
14.3
13.4
15.9

Saving as % of GDP
11.4
11.0
9.0
4.7
6.5
7.1
5.3

Inflation (%)
- -
1.7
11.4
10.7
3.4
11.8
3.8

Export as % of Imports
83.6
86.6
95.8
53.6
53.7
52.3
56.4




SOURCE: Adapted from Ministry of Finance and Economic Development (2002). Ethiopia: Sustainable Development and Poverty Reduction Program. Addis Ababa. July. P. 19



Since 1992, Ethiopia is following the free market oriented economic system. Its development policies, strategies and programs were designed to achieve rapid economic development and poverty reduction within the framework of free market economy.

As it is well known, more than 80% of the populations of Ethiopia live in rural and agriculture plays a dominant role in the economy of the country in terms of employment creation, foreign exchange earning (60% of Ethiopian export is agricultural products) and supply of raw materials to industries. Taking this fact and the economic problems of the country that are deep rooted and structural and that could not be solved with out rural structural transformation and improvement of the agricultural sector into consideration, the government of Ethiopia adopted a long term economic strategy which gives primary focus to rural and agricultural development. This economic strategy is known as Agricultural Development Led Industrialization (ADLI). The emphasis that the Ethiopian government put on agriculture was explained in one of the leading policy documents, Ethiopia’s Economic Policy During the Transitional Period, as follows:

The failure of agriculture to supply the country’s food needs has made it necessary to depend on food import, both in the form of aid and direct purchases. The distressed state of agriculture and especially its failure to supply raw materials for industry has increased dependency on imported raw materials and has further weakened the linkage between agriculture and industry, thereby adversely affecting the dynamic growth of the economy. The decline of exportable agricultural products has worsened the foreign exchange position of the country and has stifled economic growth (The Transitional Government of Ethiopia/TGE, 1991, p. 6).

ADLI has been considered as strategy to bring industrialization based on the agriculture and make extensive use of country’s natural resources and finally lead to economic development and prosperity. Unfortunately, recurring drought that hits the country particularly that of 2002/2003, the war with Eritrea of 1998-2000 and other internal and external obstructing factors had been a challenge to achieve, the desired rapid economic growth in the last one and half decade. Because of this, some organizations and individuals have questioned the practicability of ADLI to be the best possible economic development strategy for Ethiopia. For instance, in 2003 United Nation Development Program (UNDP) Ethiopia Office and Professor Jeffrey Sachs had questioned the success of ADLI and other economic policies, which are considered by Ethiopian government as “quickest and most reliable” means to reduce poverty and bring development.

The UNDP report [ UNDP 2003 Human Development Report] revealed that Ethiopia is still failing to make inroads in its fight against widespread poverty in the country. Professor Jeffrey Sachs, special adviser to UN Secretary General Kofi Annan and head of the Millennium Project, said the goals were "not achievable if we continue the way we are going right now"….“Time is short and we are not playing games,” he told members of the international community and Ethiopian government officials. “We are talking about the fate of tens of millions of people in the coming years, whether literally they will live or die (IRIN, July 22, 2003).

In addition, in 2003, the head of the World Bank in Ethiopia, Mr. Ishac Diwan said that he was not convinced that ADLI is working sufficiently well so far and advised Ethiopian Government to interpret ADLI in a way which makes the country competitive in the global market and achieve sustainable development.

[In Ethiopia m]ost people are in agriculture and agriculture needs to grow and become more productive to make a difference. This is a truism. But the government has focused on success in agricultural exports leading to demand for locally produced industrial goods. I am less convinced about that. I think it should be more, say, cotton feeding into manufacturing exports. Exporting agricultural goods is OK for some things, but the gains are limited, and the terms of trade fluctuate a lot.

Plus for most of the crops, such as cereals, transport costs are just too high - the cost of transporting the cereals [from Ethiopia] to Djibouti is equal to the international price of cereals. What you want to do is add value to agricultural goods. I think that is also the way the government is interpreting ADLI now (IRIN, 22 August 2003).



Based on the lessoned learned in the past and consultations made with the stakeholders, Ethiopia’s guiding strategic framework for the five year-period of 2005-2010 which was named Plan for Accelerated and Sustained Development to End Poverty (PASDEP) made clear that the Ethiopian government will put particular emphasis on greater commercialization of agriculture and private sector. If this is plan is implemented properly and necessary internal and external resources continue to be committed to the agricultural and rural development, there is high possibility for ADLI to be practical development strategy.



3.1.3 Culture

Ethiopia is a multi ethnic nation where 83 different languages are spoken with 200 dialects. These 83 language groups (ethnic groups) have their own distinct culture and this makes difficult to talk of Ethiopian culture as one monolithic culture. However, this diversity cannot make impossible to talk about what the people in the country share in common and about the culture that exist in the country. In this sub-section we will try to have a brief look at a “cultural space” (cultural values, ways of thinking and social norms and behavior) of the Ethiopian people and its impact on the economic growth.

The holistic approach to development argues that economic growth is influenced by economic factors (accumulation of capital, labor and technology), institutional factors (well organized markets, suitable legal frameworks, efficient government and corporate structures), and cultural factors (attitude towards work, wealth, rules and social relationships) (Lee & McNulty, 2003, p. 5).

In most cases, the life in Ethiopia is communal. Familial bond and relation among kin members (relatives) are strong. Individualism and saving which is upheld in the western countries are less favored in Ethiopia. It is common to hear in Ethiopia sayings like “God knows for tomorrow” and “Mr. X or family of Y is behind me”. This shows that an individual relies not only on what he/she achieved and on what he/she has but also on what his/her relatives achieved and have. This has negative impact on motivation of an individual to work hard and save for the rainy days. However, Ethiopians who went out of the country and has nothing to rely upon, but only their personal efforts are mostly successful. This clearly shows the effect of communal life on hard work and saving.

In Ethiopia the major religions are Christianity and Islam and these religions have influenced not only the spiritual life of their followers but also their culture. These two religions require their respective followers to be benevolent and share what they have with the needy. This is noble idea and the norm of almost every religion in this world. But, the dilemma is that some abuse this religious value by making begging their means of livelihood. The Amina (begging) culture practiced in the northern part of Ethiopia can be cited as an example in this regard. The followers of other major religion of Ethiopia, Islam, are also not free from this kind of problem. The so-called Garibas travel from place to place and spent their time singing on major street sides and market places to get money and other kinds of handout. It is no more than modified begging; some times they even overtly beg for money.

Moreover, the followers of the Orthodox Christianity also have the tradition of observing many religious holidays within a month. Most of the days in the month are assigned to Jesus Christ, His Disciples, His Mother St. Merry, pioneering holy fathers (Abuns) and others who have significant role in the development and expansion of Christianity. This has an impact on the work culture of the people and household production.

The other Ethiopian culture, which has significant impact on economic growth, is high propensity towards having more children and lower propensity to educate them. In 2004, the total fertility rate was 5.9/woman and the average annual rate of population growth for years 2000-2005 was 2.73% (National Office of Population of Ethiopia, 2004). When we look at the over all literacy rate in Ethiopia for the year 2000, it was only 29% (MOFED, SDPRP, 2002, p.11). This means 70% of the Ethiopian population couldn’t read and write. Thirty years ago, in 1974, the illiteracy rate was 90% (WPE, 1984, p. 10).

The expenses associated with funeral, celebration of major holidays and weddings are also beyond the economic capability of most of Ethiopian people, but incurred because of culture as face-saving. These backbreaking expenses affect the household saving and distort the economic and social life of many persons.



3.2 External Factors

Ethiopia was a socialist country from 1974 to 1991. During that period her economic and political relation with the Western countries was not in a good term. The ODA flow to Ethiopia from the Western bloc, which during the Cold War period highly influenced by anti communism position, was reduced. At that time, the economic policy and political system of Ethiopia was also not impressive to World Bank and IMF to get low interest rate loans from these international financial institutions.

More over, the international trade of Ethiopia had been influenced by principle of socialist solidarity rather than by principles of economics. Ethiopia’s international trade, which focused on Eastern bloc, in some cases also involved barter system, for example trade with Cuba. As a result, Ethiopian economy suffered from lack of foreign exchange and necessary resources to replace worn-out or impaired capital goods and to increase its capital stock through new investments at required pace.

4. Concluding Remarks

As indicated in the introductory section of this paper, the purpose of reviewing the histories of economic developments of South Korea and Ethiopia is to seek answers for the following questions: Why the economic development that has taken place in the Republic of South Korea didn’t take place in Ethiopia? What has Korea done to achieve rapid economic development that Ethiopia has not? What were the conditions that have existed in Korea and lacked in Ethiopia? The answers for these questions will be summarized below.

1. Political Stability-- In its about six decades of history, South Korea didn’t face serious internal political instability except the coup of 1961 and the serious demonstration of 1980, mainly in Kwangju. Compared to the political situation of Ethiopia, which suffered from the recurring destructive civil wars, it is possible to say that the political condition of Korea was stable.

2. Cultural Factors-- Korea has homogenous culture and population. Its culture and the worldview of its population have been influenced predominantly by Confucian ethos. This Confucian ethos contributed to the economic development of South Korea by inspiring the people for higher accomplishment, particularly in education, and for serious concern about duty/obligation. There is no visible conflict on cultural value in case of South Korea.

Ethiopia is a multi ethnic country with heterogeneous culture and worldview. Ethiopian ethics are neither Confucian nor protestant. It is diverse ranging from Orthodox-Abysinian in the northern part of the country to nomadic-egalitarian in the southern part of the country. These differences in cultural values and worldviews some times lead to conflict, which in turn affect the economic development.

3. Human Recourses-- Korea has had skilled human resources that have managed to imitate, internalize, and generate modern technology, which contributed to the fast growth of the economy. Adult literacy rate of South Korea in 2002 was 97.9%, whereas that of Ethiopia for the same year was only 40.3% (UNDP, 2003).

4. Foreign Saving. During its initial stage of development, Korea filled its resource gaps with massive foreign saving which had flowed to the country in the form of ODA and commercial loans. But Ethiopia didn’t have such opportunity.



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