South Korea achieved high-income country status in 1995, marking a significant economic milestone. In the same year, the World Bank took its name off the list of aid recipients. The following year South Korea joined OECD, the club of the world’s developed nations. All these accomplishments were particularly noteworthy as they preceded thirty years during which no other Asian nation transitioned into the high-income category. That’s why South Korea is distinct.
The development narrative of South Korea, commonly referred to as the ‘Miracle of the Han River,’ has multiple versions. Neo-liberals often lay claim to this success story, and while there is some truth to their assertion, South Korea’s liberalization efforts only took place in the 1980s, towards the maturity of its development programme. By this time, South Korea had already achieved middle-income status and was poised to make the transition to a high-income country. The economic policies that propelled its development in earlier times can hardly be categorized as ‘neo-liberal.’ Some of these practices, such as Central Planning, faced severe criticism from neo-liberal commentators.
Central Planning in South Korea, often overlooked by mainstream economists, offers a compelling narrative. Spanning the period from 1962 to 1996, Korea witnessed the implementation of seven five-year central plans, each with varying degrees of success. Despite encountering staunch opposition, this approach played a crucial role in fueling the country’s economic growth. In conjunction with the establishment of Chaebol groups, or business conglomerates, central plans facilitated notable advancements in heavy industries, export promotion, and job creation. This state-driven economic endeavour also fostered the emergence of a burgeoning middle class, which in turn exerted considerable influence in the democratization process, thus heralding a transition towards a more participatory political landscape.
The most noteworthy five-year plan in South Korea was the third one, which spanned from 1972 to 1976. This plan, known as the Heavy Chemical Industrialization Plan (HCI Plan) or the “Big Push,” identified five key sectors as “strategic fields”: Electronics, Shipbuilding, Machinery, Petrochemicals, and Non-ferrous metals. In the face of increasing threats from North Korea, and uncertain support from the United States South Korean political leaders sought to reduce their military reliance on the United States and bolster the Republic of Korea Armed Forces through a robust heavy industry initiative.
All this happened in a very turbulent political environment. President Park Chung Hee had already completed two terms. He won in 1971 in a close election, defeating rival Kim Dae-Jung. Shortly after being sworn in, he declared a state of emergency to face ‘the dangerous realities of the international situation’. The previous constitution was scrapped and a brand new one was introduced. This turbulent political situation seems to have had very little impact on the economy. The economic initiatives continued as if nothing happened.
Heavy-Chemical Industry Drive (HCI) was nothing but a gamble. South Korea, then a middle-income country, had two options: continue as a middle-income country forever or attempt moving ahead, risking everything it had gained so far. Developing countries typically start their industrialization in the light industry category, at a lower point in the value chain, using their comparative advantage in labour-intensive manufacturing (e.g. garments).
Not everybody could move to higher value-added segments (e.g. machinery and equipment) in the value chain. Those require additional investments such as research and development as well as marketing. They also require significant additional commitments by both the public and private sectors. Korea, without any hesitation, took the second option.
To cut a long story short, that gamble changed South Korea’s future. The outcome has been too good. Per Capita GDP which stood at $300 in 1972 has increased over five times to $1,650 just seven years later. Growth rates were always double-digit (except in 1975 when the growth fell as a result of the global oil crisis) and legendary. In 1978 it was as high as 40%.
The capacity of the steel sector was raised to 4 million tons a year in 1977, up from 1 million in 1972. Machinery production grew at an even faster rate. Between the end of the years 1972 through 1978, this sector averaged an annual growth rate of 45%.
Transport equipment output grew annually at a rate of more than 50%. Electronic machinery also took off in the mid-1970s, starting with the production of colour television sets and other electronic items. The sector grew at a rate of more than 50% a year. In 1972, South Korea manufactured small cargo ships of only 21,000 tons of gross weight. By 1975 this had risen to 800,000 tons. In short, a country which was perhaps the poorest in Asia was in the way of reaching the club of the rich.
Unfair Branding
The question is with such a good example of its success, why anybody wants to brand central planning as a failure? Let’s take a few of the hardest critics of central planning. Friedrich Hayek (1899-1992), an Austrian economist and Nobel laureate, argued that central planners lacked the knowledge and information necessary to effectively manage a complex economy.
Ludwig von Mises (1881-1969), another Austrian economist, believed that central planning was inherently flawed because it could not accurately calculate economic costs. He argued that market prices, arrived at through free exchange, were the only way to efficiently allocate resources. Milton Friedman (1912-2006), an American economist and Nobel laureate, criticized central planning for its rigidity and inefficiency. Finally, Joseph Schumpeter (1883-1950) another Austrian-American economist, argued that central planning stifled innovation and entrepreneurship, which are essential for economic growth.
Some mentioned above were unable to witness the developments in South Korea. More contemporary figures such as Friedman were perhaps unaware of the rapid progress taking place in the far eastern region. Consequently, their observations primarily revolved around the centralized planning implemented in the Soviet bloc nations during the twentieth century, particularly those led by the USSR.
It is possible that they were unaware of the utilization of central planning beyond the communist countries. Similarly, the local pundits who echoed their sentiments like parrots may have been uninformed about this fact as well.
The economists in question failed to acknowledge the presence of planned economies beyond South Korea. If they were alive today, they would undoubtedly be astonished to discover that the very principles of planned economies they vehemently criticized as being “leftist” are now being employed by various capitalist international private sector firms. Notably, some of these firms surpass the size of certain small national economies. Walmart and Amazon are two good examples.
Walmart, as an organization, operates based on a centrally planned micro economy, even though it competes externally with other firms. This internal structure of Walmart entails that managers have the authority to dictate tasks, while departments establish goals and goods are distributed based on directives.
Unlike traditional market-based competition, managers do not engage in setting attractive price levels; rather, these decisions are centrally determined. Walmart effectively manages a complex system that spans from sourcing raw materials to stocking finished products on shelves through the utilization of record-keeping and algorithms.
One notable aspect of Walmart’s operations is that suppliers often engage exclusively with Walmart, resulting in the creation of an integrated network for production and distribution.
The key distinction between Walmart’s centrally planned economy model and countries that have adopted planned economies lies only in the objective of the planning. In Walmart’s case, the planning is primarily driven by the interests of the shareholders, rather than the ordinary citizens.
This showcases the feasibility of implementing large-scale economic planning within a corporate structure. Overall, Walmart’s centrally planned economy model serves as a testament to the effectiveness of such an approach, demonstrating that it can function efficiently within a corporate framework.
This busts one of the myths the Austrian school of economics has propagated for decades. Still, what made Hayek so wrong? The explanation lies in the historical context in which Hayek formulated his observations, a time when manual systems predominated. As Hayek himself noted, central planners were limited in their ability to collect and analyze economic data that encompassed a multitude of complex parameters. Little did he anticipate that future generations would inhabit a world where the collection and analysis of millions of parameters could be achieved without any human intervention.
Further, in Hayek’s era, market mechanisms were considered the pinnacle of efficiency, operating at nearly one hundred per cent effectiveness. However, advancements in information systems and artificial intelligence have since surpassed the capabilities of markets. With the aid of computer systems, surpassing market efficiency has become a relatively straightforward task.
To illustrate this point, consider the accuracy of the best price determined for an apple in a specific market, which far outweighs any market decisions based on human assumptions. Given these advancements, it should come as no surprise that central planners at Walmart possess not only an abundance of data but also the computational power to swiftly analyze and draw conclusions within a fraction of a second.
Just a few points on the Soviet system before getting into Sri Lanka. The statement that Soviet central planning was a failure must be taken with a pinch of salt. Critics of the Soviet system often overlook the difficulties the country was facing when Gosplan was established in 1921. It was primarily a poor agrarian society.
USSR has shown steady growth rates, annually above 5% – something exceptional at that time since the 1920s to ‘60s. It was the spending diversion to Cold War efforts that brought down this figure in the following decades. Had the USSR not entered into the Cold War and focused on economic development, the story would have been entirely different.
The implementation of economic planning in the USSR further contributed to significant societal progress. The country transformed from one of the least developed ones in Europe to one that competed with the USA in the space race and became a major producer of iron.
The programme also provided enough steel and other materials to support the successful war effort in WWII. While living standards in the USSR were inferior to those in the United States, they were considerably better than those in many market-based economies during the 1980s and 1990s. In light of these factors, Gosplan cannot be considered an outright failure. It successfully played a pivotal role in the economic development of the Soviet Union.
However, we all agree that Gosplan did not achieve all of its objectives.
The same can be said about the “failure” of Indian economic planning too. The implementation of India’s five-year plans did not yield the desired outcomes primarily due to the country’s impoverished state. Nevertheless, these plans played a crucial role in laying the foundation for India’s subsequent growth, exemplified by the establishment of prestigious institutions such as the Indian Institutes of Technology (IITs) and National Institutes of Technology (NITs).
Only Once
Sri Lanka has only implemented Five Year Plans once, in 1972, which proved to be unsuccessful. One of the primary factors contributing to this outcome was the excessive focus of the Sirimavo Bandaranaike government from 1970 to 1977 on achieving self-sufficiency, which was impractical. Additionally, the global economic challenges caused by rising fuel prices imposed by OPEC countries in 1973 further exacerbated economic hardships for smaller economies. Since then, Sri Lanka has shifted away from economic planning and has not pursued any subsequent Five Year Plans.
The absence of centralized planning in Sri Lanka may be perceived as favourable, but on the other hand, one can argue that it has hindered the country’s ability to make a significant leap into the higher-income category. To avoid being trapped in the middle-income bracket, both the private and public sectors must align their efforts towards this goal. Unleashing the potential of the private sector requires market liberalization, while the government needs to be prepared to support this momentum through internal impetus.
A crucial approach to achieving this is through the implementation of a well-defined central plan that is guided by key performance indicators (KPIs) and offers rewards for achieving set targets. Such a plan would provide clear direction for every bureaucrat, ensuring a collective focus and shared objectives. Presently, Sri Lanka is seeking a comprehensive and ambitious plan of this nature, which should be introduced by whatever government is in power towards the end of the year. It is important to acknowledge that the current context is vastly different from 1972, as we now have access to more advanced tools and resources. Therefore, it is worth exploring the possibility of uniting the entire nation under a single economic focus to drive progress and development.