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 Koreas 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 countrys 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 Koreas 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 Koreas 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 States 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 countrys 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 Koreas 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.