Overcoming Middle Income Trap, and Industrial Relations in Indonesia

Seung-Hun Chun, Ph.D.

sychun@kds.re.kr

Korea Institute for Development

Strategy (KDS)
www.kds.re.kr

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In the race for the growth of income, only a few countries have succeeded in
overcoming middle income trap (MIT).
Growth trend in international comparison and middle income trap

Income

Income
Population

Population

30,000
USD

50
million
26,205 50m.
USD

Republic of Korea
Source: IMF(2013), Growth Slowdowns and the Middle-Income Trap
Note: t=0 is defined as the year when the GDP per capita for a particular
country reached 3000 U.S. dollars in PPP terms.

Source: Chosun-ilbo (10.6. 2014)

Korea is expected to enter 30-50 club in 2015, being a sole developing

country to join it next to Japan, USA, UK, Germany, France and Italy.

Korea Institute for

Development Strategy

Overview of Koreas Economic Development

Trade balance and export in Korea
Source: OECD.stat

Unit: Billions of USD

60
40
Trade balance
20
0
1957
-20
-40

Trade
balance

USD 311 m.

USD 40.16 b.

Export
volume

31m.

363b.

IT

Export
item

Fish,
plywood,
fabrics,
etc.

Automobile

Shipbuilding

Steel

Petrochemical

5th largest

Top
shipbuilder

Global
top-level

5th largest

Top in TV,
Semiconductor
chips,
smartphone
Korea Institute for
Development Strategy

Major obstacles to sustainable growth in Korea were industrial dispute and wage hike.
In that course, Korea had to face the critical point of breaking the gourd, which was
successfully overcome in a rare case.
The rise of income and industrial dispute in Korea
Number of disputes

Current USD
25000.00

4000

3500
GDP per capita
20000.00
3000

Frequency of labor
dispute

2500

15000.00

2000
10000.00

1500

1000
5000.00
500

0.00

Korea Institute for

Development Strategy

In line with the rise in income, human desires change, and at the stage of eyes,
most countries fall behind due to mutual conflict and dispute struggling for more
dividend from one another.
Cause of the MIT: Four stages of human desire

Human Desire

Relative
deprivation
Seek less work,
luxurious life

Still work hard

Follow govt

Work hard
Follow govt

Spiritual
satisfaction

Stage of
brain

Stage of
eyes

Stage of
arms & legs

Stage of
mouth

Income

Source: Itogawa Hideo (Tokyo University)

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At the risk of breaking the gourd at the stage of eyes, Korean government launched
bold strategies to ensure sustainable growth.
The policy package for not breaking the gourd at the stage of eyes

II. Upgrade of
labor skills and
techniques for
productivity
increase

I. Diversification
of
competitiveness
sources

MIT: Wage hike

& losing
growth
resilience
III. Promotion of
transparency in
business
accounting and
activities

IV. Development
of institutions for
sound industrial
relations

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Development Strategy

Beyond the common knowledge and expectation, President Park Chung Hee ran
the risk of big investment for the future competitiveness sources, which provided a
sound base for sustained economic growth.
I. Diversification of competitiveness sources
Intl criticism:
No economic
feasibility

Steel plant (1970-73) 1m. M/T

- Local demand (1961): 100ths M/T
- International Standard: 3m. M/T
Petrochemical complex (1968-72) 60ths. M/T
- Max. Local demand: 30ths M/T
- International standard: 300ths M/T

Global top-level
competitiveness
: the fifth
producer in the
world

Base material industry

Industrial & technology

development capacity

Strong push for heavy &

chemical industry

Korean Institute for Science

& Technology (KIST, 1966)
- Salary: 3times higher than
local professors
- Full budget support with
audit exemption
- Hongreung nobles

From light industry to heavy

& petrochemical industry
USD 10b. investment plan
when total export was 1.8b.
(1972)

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All right. If proper education or training is provided, we Koreans can do as the Western
people and Japanese do. -Korean government
II. National drive for training technicians and labor skills for enhancing productivity
Presidential
commitment

Model Technical
High School

Skilled workers are national treasures!

Faculty: best in Asia

Students: Upper 10% of junior high schools
Full scholarship
Education philosophy: Three Jeong Principle
- Devotion (JeongSung)
- Accuracy (JeongMill)
- Honesty (JeongJik)

Expansion of the
model

Outcome

Renovation of
labor market

Strong discipline similar to a military camp

International skill contest: Korea > Japan

Industrial backbone to support sustainable growth

Since the mid-1970s, Korean technicians have dominated
gold medals in the World Skill Olympics
Strong base of grass-root industry
Establishment of TQS(Technical Qualification Standard) and
PES(Public Employment Service)
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Faced with serious labor disputes at the stage of eyes, Korean government realized the
importance of transparency in business management and responsibility of enterprises,
and has taken a series of policy package consecutively.
III. Transparency in business accounting & activities

Institutional
development

Consequences

Tax administration reform with the establishment of the National Tax

Service (1966)
Business accounting audit system
Public Offering Promotion Act (1973)
Fair Trade & Anti-Monopoly Act (1980)
Real name financial transaction act (1993)
Basic Act on Administration Regulations & Establishment of
Regulation Reform Committee (1997)
Money Laundry Prevention Act & Financial Information Analysis
Center (2001)

Under the basic policy conditions of developing industries, the

government more or less neglects transparency of management and
responsibility of business firms
Recently being capable of anything of the owners of conglomerates
was under public criticism

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Under a circumstance of massive unemployment, Korea thought that the best human right
of labor lies in providing employment, rather than in having decent labor institutions in
favor of labor.

IV. Development of indigenous IR institution

ILO Standard

Progression

Consequence

Unions are free to choose the type of unions

Political activity of unions is permissible to some extent
Minimum wage is recommendable
In the early days, ideal models of advanced countries were introduced
Which accompanied serious threats to national security and economic
recovery due to ideologies of unions
Oppressing labor disputes, Korean government strongly supported
industrial development
Labor dispute was still considered as the major obstacle to sustained
growth
Minimum wage is not introduced until 1988 in Korea
In line with sustained economic growth, the government gradually
moved toward the ILO standard of IR
For considerable period of time, Koreas IR laws were considered
underdeveloped by the ILO standard
Finally, Korea has succeeded in both founding a strong industrial base
and global standard ILO institutions, which took six decades to be
completed
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The last six decades of Koreas economic development was the history of struggling and
mediation among unions, employees, and the government with many trials and errors.

Development for Industrial Relations institutions in Korea

Period

IR Laws

Effects

Consequences

US Military Rule
(1945-47)

Wagner Act
Pro-union institution

Unions show a struggle for

classes
Serious social instability

Prohibit unions political

activity

Syngman Rhee
(1948-60)

Taft-Hartley Act

Struggle against
ideological unions

Post-war economic
recovery

Park Chung Hee 1st

(1961-72)

Industrial union system

Control on illegal labor

dispute

Base for industrial

development

Park Chung Hee 2nd

(1972-79)

Suspension of labor
activity
Under martial law

Strict control on unions

High season for rapid

industrialization

Chun Doo Hwan

(1979-87)

Enterprise union system

Prohibit 3rd party
engagement

Strict control on union

Resistance from the union

Est. basic labor system

So far, underdeveloped by
ILO standard

Financial Crisis
(1997) and after

Adjustment of laws
Allow 3rd party
engagement
Allow one company multiunions

Good lesson from financial

crisis
Unions become more
active

Indigenous IR system
In accordance with ILO
standard

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With the philosophy that the best welfare of the labor is employment, Korean government
concentrated its full capacity on founding of industrial development, sacrificing all others, and
standing out to international pressure over IR institution.

The development and industrial policies and IR institutions in Korea

Number of disputes
4000

Current USD
30,000

3000

GDP per capita

20,000

Frequency of labor dispute

2000

10,000
1000
0

0
1960

IP
IR

LP
BT

1970

Light
industry

Base
industry

Authoritarian rule on union

Industrial union system

1980

HCI drive

1990

2000

OECD membership
Market opening

2010

Opening of capital market

IMF crisis

Prohibit labor
dispute

Authoritative
regime
Enterprise union

Gradual adjustment of labor laws to ILO standard

Minimum wage
OJT system

TVET

Kumoh THS

TQS, PES

TAR
NTS

Fair Trade & Anti-Monopoly Act

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Money Laundry Prevention

Act & Financial Information
Analysis Center
Real name financial transaction act
Korea Institute for
Development Strategy

Securing sustainable and equitable growth based on strong manufacturing industry is

not only a matter of well-being, but also of being itself in a big country endowed with
great resources like Indonesia.
National tasks of Indonesia
National
endowment

National tasks

Conditions

Population:
253,609,643

Territory:
1,811,569 sq
km

Islands:
13,466

High living
standard for the
people

National
integration

Sustainable &
equitable
growth

13

Ethnics: 360

Defense capacity

Sound base of
manufacturing
industry

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Development Strategy

Rich resources may cause an easy falling into the middle income trap in Indonesia. However,
the reward of overcoming the trap will be great, not comparable with any other countries.

Growth trend in comparison and middle income trap

Market
accessibility

Resource
accessibility

Economic
Growth

Wage
competitive
ness

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Struggle for more

dividend
Wage hike
Industrial dispute

Over-evaluation
High wage cost

Exchange Rate

Labor intensive
industry in a form
of FDI

Stakeholders

Economic Growth

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Development Strategy

Under a circumstance of massive unemployment, the best welfare and human right of the
labor is employment.

National task & policy options in priority under the MIT

P.I Upgrade labor
skill & technique
Infrastructure

Sound industrial
base
Reduction of
unemployment rate

FDI

P.IV Diversified
competitiveness
sources

P.II Indigenous IR
institutions

Unemployment rate
under target figure

P.III Settlement of
economic
transparency

Sound base for

sustainable growth
ILO standard right
of labor with
prevalent
employment

P.III Economic
transparency

P.II Peaceful IR
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Korea Institute for

Development Strategy

Policy recommendations (P.I)

P.I. Upgrading
labor skill & techniques

Establish a model TVET institution benchmarking the global best

practice
National drive
for TVET

Underline labor discipline and mindset of labor

Secure global-level competitiveness in labor skill and technique

Renovation of
labor market

Establish TQS (Technical Qualification System) and PES (Public

Employment System)
Secure efficient matching between labor supply and demand

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Korea Institute for

Development Strategy

Policy recommendations (P.II)

. Develop indigenous
IR institutions

Concentrate national capacity on prior-establishment of sound

industrial base and extension of employment
Basic approach

In-depth study for the history of industrial development and labor

institutions in the world
Establish philosophy on industrial development and IR
institution.

Development of
indigenous
labor
institutions

In accordance with industrial development and employment

status, develop indigenous IR institutions in a step-wise manner
At the regional/provincial level, develop a grand compromise of no
industrial dispute among labor, employee and local government

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Korea Institute for

Development Strategy

Policy recommendations (P.III)

Tax
administration
reform

. Transparency in business
accounting & activities

In consideration of large informal sector, tax administration reform

(TAR) seems the most urgent task
Establish the National Tax Service for expertise of taxation, under
the Ministry of finance

Build institutions for transparency in business accounting and

audit system
Institution for
economic
transparency

Long-term plan for transparency in financial and property

transactions in line with economic development
Establish institutions for anti-corruption
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Development Strategy

Policy recommendations (P.IV)

. Diversification of
competitiveness sources
other than wage

Upgraded labor skills and technique

Preconditions

Peaceful IR

Strong leadership to surpass the wall of advanced countries

Under the rapid technological innovation, the huge bio and
agricultural resources may be invaluable future assets
Strategic plan for development of base material industries
Opportunities

Global level R&D institutions

Long-term development plan for the enormous bio-environment
asset
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Development Strategy

This might be the right time for Indonesian people to make resolution and design a
grand plan for not breaking the gourd, and securing sustainable growth in the long-run.

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Development Strategy

In order for a butterfly to fly as a butterfly,

it has to undergo the pain of breaking out
of its chrysalis.

Only the people who stand up to the pain

of being reborn may enjoy sustainable
and equitable growth in the long-run.

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The flag of the Asian Games was handed over from Incheon Korea
to Jakarta Indonesia in October 2014.

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Development Strategy

KDS Global Network

Overseas
Development Institute*
London, UK

Jordan
Investment Board
Amman, Jordan

UNECA*
Addis Ababa,
Ethiopia
Ministry of Planning,
Erbil, Kurdistan Region, Iraq

Federal Ministry of
Science &Technology
Abuja, Nigeria

Mongolian
Development Institute
Ulaanbaatar, Mongolia

Economic Research
Institute
Astana, Kazakhstan
Ministry of Agriculture,
Animal Industry &
Fisheries,
Kampala, Uganda

Ministry of Industry
Quito, Ecuador

KDS HQ
Seoul, Korea

Joaquim Chissano
Foundation
Maputo, Mozambique

Ministry of Industry and

Trade
Maputo, Mozambique

ASEAN Foundation*
Jakarta, Indonesia
* Currently under discussion for cooperation

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Thank you!
Seung-Hun Chun, Ph.D.
sychun@kds.re.kr

Korea Institute for Development

Strategy (KDS)
www.kds.re.kr

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Korea Institute for

Development Strategy