How Can Korea be a Role Model for Catch-up Development? A ‘Capability-based View’

This paper proposes a “capability-based view” on the Korean or Asian experience in catching-up development. This approach may be considered as an extension of technology-based view but want to keep distance from the government-market dichotomy as it has more sound micro-economic foundation. The reason we are taking this view is that the real lesson from the Korean achievement is not from the role of government in economic development but from the fact that it was able to build firms’ capability and thereby sustained growth for several decades. Sustained growth for several decades is not easy, and there are numerous cases where macro-based reform brought in immediate recovery but was not sustained, and eventually the economy fell into another round of crisis. The most fundamental barriers to sustained development is whether to build local capabilities or not. We contend that without some critical degree of capabilities, growth, which is based on lower wage rates or simple price competitiveness, tends to be short-lived or not sustained. The discussion in this paper suggests that the Korean economy had laid the basis for a transition from a middle- to high-income country by building up technological capabilities around the early to mid 1980s. The early to mid 1980s is when the R&D/GDP ratio surpassed 1%, the share of private R&D exceeded the half to reach around 70%, and the share of corporate patent became large than that by individual inventors., Based on these capabilities, Korea was able to make the transition from an upper middle income to high income countries; its per capital GDP in 1980 was around 1,673 dollars in nominal terms and 3223 dollars in the 2000 dollar terms and became 10,890 in 2000 (Lee and Kim 2009, table 1). Tertiary school enrollment rate jumped from around 10% in 1980 to higher than 30% in 1985 and finally higher than 70% in 2000 (Lee 2006, table 5). R&D/GDP ratio was around 0.7% in 1980, increased to 1.5% in 1985 and to almost 2% in 2000. In contrast, trade/GDP ratio was already as high as 70% in 1980 and stayed around that level by 2000. These figures clearly indicate that it is not more openings but capability building associated with tertiary education and private R&D that has made the transition possible. Final section of the paper discusses the issue of transferability of the Korean model, focusing on the role of the government, .possibility of state activism in the WTO environment, and role of locally-owned firms.