Economist at the Finance Ministry
The Indonesia-Korea Business Summit 2017 held in Jakarta recently should not only have provided Indonesia with a good opportunity to attract investments but also to learn about economic modernization from South Korea.South Korea is regarded as a good model for economic modernization, which has enabled it to catch up with developed countries.
On top of that, it has also successfully avoided the middle-income trap, which is an issue that should be addressed in the near future to bring the Indonesian economy to the next level.
In the 1980s, the IMF’s World Economic Outlook showed that South Korea’s GDP per capita based on purchasing power parity (PPP) was about US$2,184, similar to Bolivia ($2,158). While Indonesia’s GDP per capita was $1,394 at that time. After 35 years, South Korea evolved to be a more advanced and industrialized economy with GDP per capita of around $36,612, which surpasses New Zealand ($36,136) and gets closer to Japan ($38,142). Whereas Indonesia and Bolivia are left behind with GDPs per capita of $11,149 and $6,954, respectively.
What is “the secret recipe” by which South Korea created its magnificent economic transformation? Two main ingredients are innovation and technology advancement, combined with supportive “seasoning ” such as a huge labor force with high productivity, a low dependency ratio and investment-friendly institutions.
The 2016 Bloomberg Innovation Index enthroned South Korea as the world’s most innovative economy, surpassing Germany (second) and Sweden (third). This index measured innovation by scoring the countries in terms of, but not limited to, research and development (R&D) spending and concentration of hightech public companies.
In five of seven factors that are scored by the index South Korea was in the top ranks, including R&D intensity (second), manufacturing value-added (first), high-tech density (second), tertiary efficiency (first), as well as patent activity (second).
R&D intensity, for example, is measured by the expenditure allocated for R&D as a percentage of GDP. Based on the World Bank’s world development indicators, South Korea’s R&D was 4.15 percent of GDP in 2013, almost double its figure in 1996 (2.24 percent), and surpassing Japan (3.47 percent), Sweden (3.31 percent), Germany (2.83 percent) and the United States (2.73 percent).
On the other hand, Indonesia’s R&D was quite stable, but unfortunately very low at 0.08 percent of GDP from 1999 until 2013. This portion is far below the world’s average R&D, which is 2.12 percent of GDP.
Furthermore, we should investigate another component of innovation index such as tertiary efficiency, which is measured by the total enrolment in tertiary education, Indonesia is also left behind South Korea.
OECD data show that the proportion of individuals in South Korea who attain tertiary education is much higher than Indonesia’s proportion in every age group, particularly in the category of 25 to 34 years old.
In 2013, 67.1 percent of South Koreans in this age group had tertiary education, by contrast only 10.6 percent of Indonesians in this age group have tertiary education.
These two figures obviously reflect how serious South Korea is in the sense of maintaining its economic progress underlined by innovation and technology. On the other hand, they also show that Indonesia still needs to buckle down to accelerate and to modernize its economy by improving the innovation and technology-advancement aspects.
South Korea started its modernization in the 1960s, right after the Korean War ended. With the dominant intervention by an authoritarian government led by Park Chung-hee, a lot of money was invested by the government in preferred industries, through either subsidies or loans with low-interest rates.
As a result, it now has several world-class companies such as Samsung and Hyundai. The bottom lines here are maintaining political stability and committing to expand the focused industries that produce the highest added value.
What is more, it also implemented policies that encouraged domestic savings in support of capital accumulation for development. It successfully expanded domestic savings at that time. For example, from 1976 to 1986, the domestic savings ratio to the country’s investment increased to 90.8 percent.
However, the amount was still not enough to meet the investments needs. Not until after 1986, did domestic savings exceed gross investment. The ratio of domestic savings to domestic investment rose to 124.3 percent in 1987 and 126.4 percent in 1988. It was this period when South Korea started to be a net exporter.
South Korea created its “quantum leaps” in modernizing its economy by having innovative, high-tech minded individuals. That is to say, it increased the number of people who had higher educations, thereby promoting innovation and productivity. It also put huge efforts into creating institutions and policies that were supportive of capital formation for investing in hightech industries.
Indonesia already possesses the supportive “seasonings”, including a huge labor force as a result of its demographic dividend, and a low dependency ratio, not to mention the progress toward investment-friendly institutions. However, we still lack the main ingredients of South Korea’s secret recipe for economic modernization.
Regardless of the industries that we are going to focus on, innovation and technology advancement, mixed with highly productive individuals, are the backbone because they promote the production of high valueadded goods or services. And South Korea is the best country that we can learn from.