A Comparison in the Political Economy of Development between Egypt and South Korea, 1960-2013

Background

The Egypt of today is reminiscent of the South Korea of the 1970s and 1980s. During this time period, South Korea was suffering from military dictatorship that was heavily supported by the US government. They also implemented liberalizing reforms recommended by the IMF that lead to crises as well. However, South Korea has been more successful at adapting policies to fit its national agenda and this is evidenced by its relative stability and almost uninterrupted growth for the last two decades. In 1960, the GDP per capita for South Korea was $155 and its population was 25 million people according to the World Bank.

The causes for this disparity will be explored in detail.

Map of Egypt

In May 1961, the democratically elected government was overthrown by

General Park Chung Hee who ruled until his assassination in 1979. The policies before General Park took over included many import substitution industrialization policies that were created to help protect the infant industries in the era after World War II and the Korean War. Tariff barriers were placed and a ban on manufacturing imports was enforced to protect local industries from global competition. As what occurred with other nations that had sought to protect infant industries with the hope that companies would benefit from importing advanced technology. In addition to this, Korean industrialists were more concerned with bribing officials to perpetuate their favored status and increase profits instead of increasing productivity and creating more jobs, an excellent example of crony capitalism.

The widespread corruption caused living standards and efficiency to falter, and invariably lead to the collapse of the First Republic in April 1960. General Park Chung Hee overthrew the Second Republic in May 1961 and replaced much, though not all, of the import substitution policies with export promotion (Cha, 2010). Exporting firms were rewarded with preferential loans based on their performance, an unbiased and objective mode of measurement. This solved the problem of corruption and vastly increased productivity by placing firms under the pressure of export markets.

South Korea

Korea’s growth during this period is also in part due to the government’s draconian labor policies. Minimum wages were set much lower than market wages, labor unions could operate but had no right to strike, wages in the public sector matched the private sector, and multinationals did not create wage inflation. These anti-labor reforms pushed the cost of labor down dramatically, and helped make Korean exports competitive.

The 1970s saw a return to import substitution policies to build heavy and chemical industries (HCI). The Communist victory in Vietnam and changing geopolitical dynamics were a considerable factor for the Korean leadership. At the time, Nixon had withdrawn 24,000 troops from South Korea and Carter promised to withdraw the remainder by the next few years.

Map of South Korea

The South Korean leadership began to prepare for a time where the US would not be the primary guarantor of protection from North Korea. General Park turned to producing heavy weapons domestically instead of relying on the American military for protection (Cha, 2010). This required heavy government investment in heavy industries and intervened greatly in the financial markets to provide low interest loans government-selected conglomerates that were picked to develop various HCI sectors. The government prioritized iron and steel, non-ferrous metals, shipbuilding, electronics, and chemical industries as the major HCI industries (Mah, 2010). This overinvestment in HCI caused distortions in the market and created structural issues that were noticed in the 1970s and 1980s.

The continuous growth of the Korean economy came under threat by the political unrest in 1987. Massive labor unrest broke out in the streets of Seoul, a consequence of the repressive anti-labor policies instituted in the 1960s. The wages of Korean workers was forcibly kept low to keep exports competitive. Until the late 1980s, the hourly wage of a Korean worker in manufacturing was 75% that of a worker in Taiwan and 80% that of a worker in Hong Kong (Minns, 2001). Between 1980 and 1983 all independent unions were dismantled, 500 journalists and 80 professors were fired, and 500 politicians were either arrested or banned from politics entirely. On June 10, 1987 millions of Koreans marched in Seoul to protest the torture of a female student activist at the hands of the police (Minns, 2001).

The South Korean Model Under Pressure The government was faced with either crushing the protests violently, or giving

concessions. It chose the latter, and the government announced that the next president would be elected directly. After this major concession, a shift in the balance of power between the government and the working class occurred. An empowered working class battled the government over 3700 times in the summer of 1987, and the number of unions tripled within two years (Minns, 2001). The working class pressure caused Korea to slowly lose its comparative advantage in many products. In addition, growing protectionism in the US during the 1980s and more competition from China and the Philippines, which had begun to be more competitive in cheap electronics and textiles manufacturing, threatened to undermine the progress that South Korea had made in the past three decades (Minns, 2001).

Another major obstacle to Korean growth was the never ending reach of the chaebol, which are giant family-owned conglomerates. In the previous era, the government could face off with the chaebol and win to pass necessary regulation, but by the late 1980s they had become too big to control (Minns, 2001). When the Chun government attempted to weaken the chaebol by financing smaller institutions, the conglomerates would just buy out the smaller companies themselves. In other words, the chaebol had become “too big to fail”. Contrary to the notion that conglomerates contribute to jobs by reinvesting in the economy, the chaebol did no such thing. Out of the land that the chaebol owned in 1988, only 10% was earmarked for plant construction. The rest was being held for real estate speculation. In the absence of state oversight, the chaebol was more concerned with short-term profit making instead of long term capital accumulation. (Minns, 2001).

Recovery and Expansion of South Korea’s economy In spite of the harsh conditions imposed by the IMF, the Korean economy

recovered from the crisis and continued to grow. As a result of the crisis, the Korean won had depreciated greatly, thus exacerbating the crisis further. Before the crisis, the dollar was worth 800 won and after the crisis this plummeted to 1700 won (Minns, 2001). The stabilization of the currency market was aided by short-term debt rescheduling, the IMF bailout, and the collapse of import demand resulting from a tight monetary policy which severely reduced domestic economic activity (Koo & Kiser, 2001).

South Korea political economic growth curve

The banking sector was stabilized through the nationalization of Korea National Bank and Seoul Bank. To prevent further capital flight, the government guaranteed full deposits for all financial institutions. The combination of these two policies helped prevent a run on the banks. This was performed entirely with public funds, despite the IMF’s recommendation that private capital be used. The government institution Korea Asset Management Control (KAMCO) used public funds to purchase the nonperforming loans and this gave the government a larger role in the decision-making processes of many financial institutions. The government pressured these financial institutions to lend money to small and mid-size businesses to help generate growth (Koo & Kiser, 2001). Changes in the Korean labor laws helped save many firms that would not have otherwise survived. The government, big business, and labor groups reached an agreement that legalized the use of temporary labor and codified layoffs.

Nasserist Economics in Egypt

The economy of Egypt under President Gamal Abdel Nasser was nationalist socialist. Between 1960 and 1972, Egypt had a socialist, centrally planned model of development. Private investment had been discouraged after Nasser had nationalized all major industrial means of production between 1961 and 1963. During this decade, Egypt borrowed heavily to finance its intervention in the Yemen Civil War and to combat Israeli aggression. Around $2.3 billion was borrowed from the USSR, the European Economic Community, and the United States (Abdulla, 1984). A major problem facing the Egyptian economy at this time was the lack of skilled labor. Much of the skilled laborers had emigrated for better opportunities.

The unskilled workforce was also at a disadvantage. Egypt at this time was industrializing, and the move from the countryside to the city for many was difficult. The majority of unskilled workers was illiterate, malnourished, and had to adjust to a factory routine instead of an agrarian one. This was not helped by the politicization of management at the time. Positions were passed out based on loyalty rather than merit. In 1961, a new law made it so that two out of seven board members would have to be elected by salaried workers. In 1963, this was amended so that four out of nine would have to be elected. Certainly, this had a major negative effect on efficiency. The elected representatives were not technocrats most of the time, and unqualified to have such positions.

Recovery of Egypt’s economy An important motive of the First Five Year Plan was to increase exports, and

the variety of commodities was diversified. However, at the time Egypt was still heavily reliant on its cotton exports. Between 1960 and 1972, Egypt failed to increase its cotton exports, due to fierce competition from Sudan and because of the cotton worm that had devastated crops. However, the variety of exports was diversified, evidenced by the fact that cotton as a percentage of exports decreased from 70.3% to 45.4%.

Policymakers experimented with export promotion through export subsidies and import taxes. Discriminating against luxury goods in favor for capital goods was also another method to help improve the Balance of Trade, which had recorded deficits since 1954.

Egypt would export raw materials such as rice, cotton, and phosphates and import from these countries finished goods. In order to purchase food from with western economies, Egypt needed foreign currency, which it did not receive in its arrangements with the USSR. Therefore, Egypt had to borrow to finance its trade gap (Bromley & Bush, 1994). Even though Egypt had a positive balance with Eastern Bloc countries, its negative balance with the west completely underscored any perceived benefits of Egypt’s arrangements with USSR. This was the major cause of Egypt’s Balance of Trade dilemma (Bromley & Bush, 1994).

By 1962, Egypt was paying the Sudanese government reparations for the negative effects of the High Dam, and indemnities to shareholders of the nationalized Suez Canal. These payments, coupled with the cotton crop failure of 1961 forced Egypt to turn to the IMF for help. In the agreement, Egypt begrudgingly devalued its currency in return for 20 million Egyptian pounds of credit (Hansen & Nashashibi, 1975).

The supposedly positive benefits of the currency devaluation did not occur because of the expansive government spending due to military expenditure resulting from the Yemen War. In 1966, another crisis arose and Egypt once again went to the IMF for credit. The fund recommended another further currency devaluation of 40%, a reduction in subsidies, and an increase in domestic taxes (Abdulla, 1984). The 1967 Six Day War made economic woes even worse. The loss of the revenue caused by Israel’s conquest of the oil fields in the Sinai Peninsula, the closure of the Suez Canal, and the drastic decrease in tourism added insult to injury (Hansen & Nashashibi, 1975).

Mubarak’s Reign, 1981-2011 After Hosni Mubarak became president, he continued with the liberalizing

reforms of the previous president. These reforms did little to stem public sector debt. By 1989, servicing the debt on Egypt’s loans was approximately 40% of total foreign exchange revenues. In the fiscal year between 1988 and 1989, the inflation rate had spiraled to 25% and the government was in disagreement over the size of the budget deficit. From an original amount of 7.2 billion to 6.9 billion Egyptian pounds, this was still not enough for the IMF’s 2 billion pounds or less. Planned government expenditure was down, especially cutting into salaries and subsidies, and a 24% increase in revenue was planned based on a consumption tax (Seddon, 1990).

The 1990s saw more privatization neoliberal reforms that benefited mostly the ruling elite who would purchase state assets at bargain prices. The cronyism of the 1990s enriched three sectors of the elite: state officials who implemented reforms, former bureaucrats who were new entrants into the business sector, and the established business elite. The established business elite of Egypt in the 1990s composed of mainly 32 individuals who were importers that benefited from the import substitution policies to stay competitive. These cronies, and others, were instrumental in opposing transparency and anticorruption efforts. They resisted any change in the political environment that would have ended the regime and, thus their privileges.

Differences between Egypt and South Korea Although the South Korean model of development may not be applicable

to other industrializing countries, it certainly invites a great degree of envy. There are a number of similarities between the economic histories of South Korea and Egypt.

Both nations were post-colonial states in the 1960s. Egypt had received its independence from Britain and South Korea had been liberated from Japanese imperialism after the end of World War II. A common rubric for post-colonial, late industrializing states to pursue is import substitution to protect infant industries.

Both nations at the time also had a strong working class within an authoritarian system of government, but the unions in South Korea were much more militant than the Egyptian unions. This is in part due to the implicit social contract between Nasser and the working classes that exchanged benefits for loyalty to the pro-labor regime. In South Korea, however, its militant unions had a limited number of alliances in power, forcing them to become more radical.

The Cold War also played a critical role in the economic policies of both countries. After the US looked as though it might withdraw its soldiers from South Korea, General Park heavily invested into developing defense-based heavy industry. In the case of Egypt, Nasser would play both great powers against one another to gain concessions and aid from both sides, because Egypt was a non-aligned country at the time.

Due to geographic circumstances, South Korea chose an outward orientation and began to aggressively promote exports through subsidies. Much of the minerals and resources on the Korean peninsula are in the North, thus South Korea is resource poor, a primary reason for its outward orientation. In contrast, Egypt maintains large deposits of oil, phosphates, and zinc. It controls the Suez Canal and generates roughly $5 billion in revenue per year, and receives millions of tourists every year who flock to see the country’s ancient remains. Egypt engages in rentier state behavior because of its geographic circumstances as opposed to South Korea.

Government spending in Egypt had some negative consequences because of the crowding-out effect on an economy with an already low marginal propensity to save and this further exacerbated the Balance of Payments deficit. The South Korean economy by the 1970s was heavily driven by exports and did not suffer from a crowding-out effect.

The South Korean economy by the 1970s was heavily driven by exports and did not suffer from a crowding-out effect. This does not mean that the Korean government did not spend heavily, which it did. Instead of wasting away public funds on inefficient projects, the Korean leadership invested greatly in research and development (R&D). By 2007, only 0.2% of Egypt’s GDP was devoted to R&D. Korea on the other hand, spent 3.36% of its GDP on R&D, more than 16 times than Egypt. This lead to advances in high tech industries and generated higher export revenue.

Another distinction between the economies of South Korea and Egypt is the role of crony capitalism in development. This manifested itself differently in the two countries. The chaebol in Korea are powerful, and almost impossible to regulate. This is fundamentally different from the so-called “Whales of the Nile” in Egypt, who are parasitic in their dependence on government contracts and have a visceral hatred of transparency laws.

Ironically, while both nations had to go to the IMF for emergency loans on multiple occasions, they were both hailed as examples of neoliberal reform. South Korea received in 1997, one of the largest IMF bailouts in history. The requirements of the bailout were harsh: the opening of the South Korean market to foreign goods and investors, financial deregulation, and the introduction of new labor laws that lead to the sacking of thousands of people. South Korea quickly recovered from this and its economy has grown almost at a consistent 3-4% per year. When compared to IMF meddling in Egypt, the consequences are not the same. Egyptian policymakers have had several IMF emergency loans, but have yet to capture the rate of growth required

Advantages of Egypt’s political economy growth It brought about improvement in living standards : political economic

growth is an important avenue through which per capita incomes can rise and absolute poverty can be reduced in developing nations. Professor Paul Collier has argued that “growth is not a cure-all; but the absence of growth is a kill-all”

Creation of employment opportunities: it will also create new jobs although the pattern of employment will also change

Greater business confidence: Growth has a positive impact on profits & business confidence

Potential environmental benefits.

Advantages of political economy in South Korea Increased wealth: based on per capita GDP growth rates, developing

countries become wealthier. In the 1960s, non-globalized economies grew at an annual rate of 1.4% while globalized economies grew at 4.7%.This boosted the increase of wealth of South Korea.

Rise of political philosophies: A second argument in favour of political economy growth involved the rise of political philosophies in South Korea.

Better quality of life: It increased the quality of life for South Korea people as well as increasing the quality of infrastructures.

Availability of foreign goods: Through pooling knowledge and exchanging more goods and services, domestic economies in South Korea expanded and benefited from technological and medical developments.

Conclusion

It was concluded that, both nations had a strong working class within an authoritarian system of government, but the unions in South Korea were much more militant than the Egyptian unions. This is in part due to the implicit social contract between Nasser and the working classes that exchanged benefits for loyalty to the pro-labor regime. In South Korea, however, its militant unions had a limited number of alliances in power, forcing them to become more radical.

Globalization played an important role in boosting political economic growth in both countries where South Korea had its development margin larger.