H1 Geo / 2012 / Either b: To what extent is the role of the state in a newly industrialising economy

(NIE) an effective factor in the process of economic development?

The state is a politically-bound space, within which the resident population is governed by an
authority. They are the direction setter for the development of the economy; they regulate how
their economies operate through its ability to manage the economic well-being of its citizen and
attempt to control what happens within and across their boundaries. Their role is clearly illustrated
from the case study of South Korea, a Newly Industrialising Economy back in the 1960s onwards,
where they are instrumental in making crucial turns to the economy. Nevertheless, their efforts
were only paid off with the help of other power houses like the Transnational Corporations (TNCs)
and supranational bodies which have also contributed immensely to the development of the
economy by mainly attracting Foreign Direct Investments (FDI) and liberalising trade between
boundaries respectively.

South Korea took a slightly different and daring approach to industrialise and develop their economy
thanks to the fact that the country was governed by a succession of authoritarian, military-backed
and strongly nationalistic governments. In 1948-1950 when the country was still fresh in the global
economy, the State influenced economic development in a number of ways. Firstly, there was land
reformation. This removed the old landlord class and created a more equitable class structure by
involving the redistribution of state properties to well-connected individuals. Secondly, there was
the creation of a powerful economic bureaucracy and the nationalization of banks. By controlling the
financial system like devaluing the won, the government was able to intervene actively in the
economy. Thirdly, there was the development of Chaebols, a small number of extremely large and
highly diversified firms, and prioritisation of industries by providing the selected ones financial
subsidies and protection against external competition. Lastly, there was rejection of inward foreign
investment as means of technology transfer. Instead, they purchased technology from overseas and
adapted it to fit the Korean economy. These foundations set by the State allowed the initial stage of
South Korea’s economic development to progress rapidly and successfully. Though eventually there
were consequences in 1980s where there was an uneven distribution of wealth in the economy and
strikes, the State handled the situation decisively and immediately made a dramatic increase in
wages even at the cost of reducing its competitive edge on exports on the global market. In 1990s,
the State liberalised the formerly, tightly controlled financial sector when they felt that the
promotion of exports using cheap labour as comparative advantage while keeping domestic markets
protected from foreign competition showed its limit. From these significant events, we can see that
the State is constantly shaping the economy, and in this case with much success, to adapt to the
changing nature of globalisation over time. For the case of South Korea, the State interventions in its
economy have driven the country to be the 12th largest economy today, with a high Gross Domestic
Product (GDP) of 1.13 Trillion USD as of 2012. As such, South Korea will remain as one of the leading
economies in the global market with great development to their economies, with the influence of
the role of State.

Next, Transnational Corporations (TNCs) are also important in the economic development of a
country. TNCs are capitalist enterprises that are capable of controlling and coordinating production
chains and service activities across transnational borders. Through TNC activities, host countries
usually develop economically from cycles of cumulative causation and when more locals are
employed. Trade flows, in terms of Foreign Direct Investments (FDIs), ultimately contribute to the
country’s economy and thus allowing the country to be plugged into the global economy, leading to
massive economic gains. In South Korea, as a result of the economic crisis in 1997, the Korean
government decided to be active in their efforts to attract FDI into the country by opening up 99.8%
of all local industries to foreign investment and provided significant protection for foreign investors’
interests, including incentives like tax breaks, cash grants, and affordable lands. After this policy by
the government, the number of foreign-invested companies in South Korea has increased
exponentially from less than 2000 in 1997 to more than 14000 in 2010. Over these few years, South
Korea’s economy has continued to rapidly improve, with the FDI received by South Korea being
increased from US$11.5billion to US$16.3billion from just 2009 to 2012 alone. One example of a
significant FDI is from the Standard Chartered First Bank which has now become the largest foreign
investor in Korea’s financial sector, injecting up to US$900million into the bank since 2005. However,
all these FDIs that have contributed to the stark growth of the economy in Korea must still be
attributed to the Korean government which has intelligently decided to open up the economy in the
first place. Without the State’s intervention and decision to open up the economy to FDI flows, its
economy can never be able to thrive at such rate, decade after the 1997 economic crisis which Korea
has revived from.

Lastly, the aid from supranational bodies can also enable positive economic developments in a
country. Supranational bodies refer to agencies that have powers above that of the nation state, and
they exist as either international regulators or regional trading blocs. International regulators help to
liberalise markets, thus promoting globalisation and the accelerated growth of economies in
countries that depend on export oriented strategies. Regional trading blocs help create markets for
member states and protect them from external competitions, thus promoting trade flows within the
bloc of member, leading to positive economic developments. For instance, South Korea, after the
economic crisis in 1997, as mentioned, has diverted its economy from a government-oriented
investment to one that is more market-oriented. As such, there needs to be platforms and networks
for the country to conduct trades with other countries within the supranational bodies or
agreements. To manage the economic crisis in 1997, South Korea called in the International
Monetary Fund (IMF) and produced the economic reform programme which focused on the
macroeconomic stability through the acquisition of sufficient foreign reserves and reformation of
the corporate and the financial sectors to form strong foundations for the country’s future long-term
growth. With the IMF support, the Incheon Free Economic Zone was also set up to allow South Korea
to be plugged into the global economy. South Korea is a member of the Asia Pacific Economic
Cooperation (APEC) which is an association of regional economies established in the 1989 to
promote trade liberalisation and economic cooperation among member states, which include China,
Singapore, and USA. Furthermore, the government of the country has also signed the Korea-
Australia Free Trade Agreement (KAFTA) on 2013, with the Australian government seeking to benefit
from Korea’s industries. As such, it can be seen that over the temporal scale, South Korea has
changed the structure of its economy from a protectionist approach of state-oriented investment in
their local Chaebol manufacturing industries to a more export-oriented economy that is plugged into
the globalised world trade flows via involvements in international trade agreements and being
member of supranational bodies in face of economic crises and challenges.

Ultimately, the process of economic development will only be made successful if the three
stakeholders work together with good intentions for the development of the economy over time
despite their different priorities. This is mainly made effective by the role of the State as they are
undeniably the decision makers and the key catalytic player in the economic development, as they
set the strong foundations through state intervention methods, as well as opening its economy to
FDI and the influence of Supranational bodies. The TNCs and supranational bodies are just powerful
driving force to reach the goals of the State. However, there needs to have emphasis that it is
assumed that the government is uncorrupted, have considerable negotiating power and capability
with good intentions in making the economy thrive as illustrated in this case study of South Korea
where the State is able to handle most economic crisis decisively over time.

Koh Zhe Wei
Cai Peng Fei