South Korea’s secret for growth? Keep manufacturing

Every government wants to breed unicorns. Across Asia, policy wonks are wondering how to build the next Silicon Valley and grow the next great billion dollar software startup.

This is all well and good, says Dr Youngrak Choi. But if governments really want to ensure resilient economies in an age of disruption, they should focus on manufacturing. It may be unfashionable, but the former head of Korea’s government-run Science and Technology Policy Institute says that this sector is far more important for creating jobs and growing an economy.

GovInsider spoke with him about Korea’s economic miracle, the role of government in creating innovation, and the next big challenge for the nation.

Build it and they will come

Choi points to four resilient economies that have survived even through global recessions: Germany, Korea, Japan and the United States. They may have strong high tech or software companies, but manufacturing remains their base. “Basically, we can see that Germany and Japan have kept a strong economy for a long time because their base is manufacturing and production,” Choi says.

Countries may be tempted to pursue new and glossier industries. This is a folly, he feels. “If the manufacturing is weak, companies want to move to other countries. That's the base of international competitiveness and if a country cannot keep this strong manufacturing capability, it means less competitiveness.”

Developing countries should focus on developing a competitive manufacturing sector to attract foreign investors, and then promote high-tech manufacturing, he says. “In the past, Singapore and Korea started from cheap labour. But that is no longer the case. They now have strong technical capabilities, and their sources of competitiveness is changed to other areas.”

Choi also feels that government must play a strong role in building a country’s economy. “The role of government is the most critical factor to try to promote strong private manufacturing enterprises. Therefore, free market systems cannot achieve such a matter. The government in developing countries should adopt the strategic intents and choices for establishing a long-term and concrete plans of industrial development.”

South Korea’s success

This is the lesson from South Korea, he says, which prioritised manufacturing development as it pursued its economic miracle. Giant conglomerates such as Samsung, Hyundai and LG make up more than half of the country’s total GDP today. It was the government’s deliberate investments into these companies that allowed them to thrive, he says.

In the 70s and 80s, Choi says the government played the role of an economic script writer, and big companies followed their lines. “Between the two, there have been very close cooperation, mainly because there is a kind of division of labour. The government is kind of planner and designer, conglomerates are the key players and implement.”

The science policy expert says having a demand from the private sector is the most important part of industry planning. If the application side or the demand side is not clear, It's very difficult to develop - they need a concrete industrial development roadmap”. In other words, tech development is all well and good, but the government must plan how companies can take this research and use it to sell products.

Against ‘neoliberalism’

The lessons of Korea buck the”so-called neoliberal” ideas where a free market determines what industry is worth developing, he says. This is also true in the United States, he adds, the land of free markets. “If we think of America and the Internet, and all these major technology companies. Their origin comes from the government R&D, particularly for military purposes. That's the base of the Internet.”

Choi builds up a head of steam as he advises developing nations to ensure that they build up their own capacities. “The neo-liberal perspective assumes that every actor has already accumulated a sufficient level of capabilities in Science, Technology and Innovation (STI). However, in the real world, what we need is to enhance STI capabilities”.

STI should be promoted by government because it is likely not given enough investment by the private sector. Investors are often more focused on short term returns and committed to the growth of individual companies, rather than a sector and a technology as a whole.

Korea’s research mindset has now seeped into the private sector, he notes. About three quarters of the R&D efforts and South Korea are currently led by the private sector. But even in advanced economies, the government still has a role to play. “If an economy advances so much like Singapore and people think, ‘Oh, we need not know more about the government’, that's wrong. Singapore and Korea need new competencies for the creation of new industries, and that's the role of government,”he says.

Preparing for the next transition in Korea

Korea tops the charts when it comes to connectivity. It boasts the fastest broadband connection in the world, and is the first country to launch a national 5G network. It has been named Bloomberg’s most innovative economy for five years running.