While the recent visit of PM Shinzo Abe has naturally triggered a great deal of focus on Japan-Bangladesh economic relations, as part of a broader Look East Policy (LEP), it is important not to overlook the opportunities to continue to develop and deepen our engagement with other Asian economies, whether the largest, China, or the export and innovation champion, Korea.
In this context, I was pleased to have the chance, from September 22-26, to participate in a business delegation to Korea led by the Commerce Minister, Tofael Ahmed MP, that also included the BEPZA Chairman as well as around 30 CEOs from leading Bangladeshi companies.
It had been 13 years since I last visited Seoul and I was curious to see what had changed. In the four days we were there, from meetings with Korean companies and government officials to walking the streets, it was a dramatic lesson on what a country can achieve and what transformation is possible in little over half a decade.
Our visit to the Samsung Innovation Museum in the company’s hometown of Suwon, which just opened in April, gave not only a useful perspective on the evolution of technology but also how far Korea has come in becoming a technological innovation economy.
South Korea’s GDP is now $1.1tn, number 12 globally, and per capita GDP has crossed $25,000. To put the latter number into context, it’s worth bearing in mind that just after the end of the Korean war in 1953, South Korea and Bangladesh had roughly the same per capita income.
This was made possible by 50 years of rapid Korean industrialisation known as “the Miracle on the Han,” in reference to the major river that bisects Seoul, its capital. Exports still account for more than 50% of Korean GDP, an unusually high number for an economy at this income level.
The impact of Korea on the global economic landscape has been astonishing and has been most amply illustrated for most of us by the emergence of Samsung as the largest smartphone and LED TV manufacturer in the world as well as other rapid growth brands such as Hyundai in auto manufacturing as well as shipbuilding and LG in consumer appliances.
It is also a global leader in semiconductor chips and LCD panels and number six in steel production. Its leading port, Busan, ranks 5th globally in terms of shipping container traffic.
The country is ranked first on the Government Broadband Index, a measure of Internet accessibility and speeds. South Korea has the highest smartphone penetration rate in the world – 58% of all Koreans had a smartphone in 2012, compared with 42% in the US and 39% for Western Europe.
We also need to acknowledge that the growing influence of Korean culture has been most prominently reflected in the huge global success of PSY’s “Gangnam Style,” that has achieved more than 2 billion Youtube hits.
But “Hallyu,” or the so called “Korean (cultural) Wave,” has seen much broader impact globally from the success of K-Pop music to the dominance of Korean soap operas in markets as diverse as China to Brazil.
It’s “soft power” has been best illustrated by the fact that Koreans head both the United Nations and the World Bank. There is no doubt that Korea is an economy that has consistently outperformed expectations and has punched above its weight given its population of only 50 million people, less than half of Japan’s 120 million, and of course less than a third of our own population.
A key element in this has been the Korean dominant focus, some might argue obsession, on the importance of education. South Korea’s college entrance rate was the highest in the OECD in 2011, at 71% of secondary school graduates, compared with 64% in the United States and 56% across the OECD nations.
South Korea also led OECD nations in the number of engineering graduates, with 3,555 per 100,000 in 2011, and the nation ranks high in world PISA scores: first in computer literacy, second in reading, fourth in math, and sixth in science (2009).
The resilience of the Korean economy is shown by how far it has come since it was almost facing collapse in 1997 during the Asian Financial Crisis that forced the Korean Government to accept a $53bn IMF emergency loan.
The underlying patriotism of the Korean people was illustrated by the decision of ordinary Koreans at the time to donate their gold jewellery and family heirlooms to bolster reserves. Whilst the absolute amount was modest at $2.6bn, the symbolism was potent when many other countries in the region were suffering from capital flight.
Looking at some of the major drivers of the Korean economic miracle, the first thing to note is that it was driven by an overwhelming focus on export led growth. The overwhelming ethos of President Park Chung Hee’s government in the 1960s and 70s was “nation building through export led growth and the government allocated resources and offered subsidies and bank credit on the basis of not only priority sector but also those companies that achieved their aggressive export targets.
Another notable feature of the Korean model was that growth was focused on a relatively small number of very large business conglomerates known as “chaebols” that exist today such as Samsung and Hyundai. And as we highlighted earlier, there was a strong emphasis on education which accounted for more than 10% of GDP in the 1980s, by far the highest among developing countries.
So, there are many valuable lessons for Bangladeshi policymakers from the Korean economic growth model, regarding the focus on education and the development of the digital economy. But in addition is the potential impact of much larger FDI from Korea to establish Bangladesh as a re-export hub as seen in Vietnam.
South Korea has overtaken Japan as the biggest foreign investor in Vietnam in the first eight months of 2014. Vietnam attracted $10.23bn in foreign direct investment (FDI) from 51 countries and territories between January and August, according to data from the Foreign Investment Agency under the Ministry of Planning and Investment.
South Korea topped the list of foreign investors, with total investment of $3.22bn for its Vietnam projects, accounting for 31.5% of the eight-month FDI inflow. Japan, Vietnam’s largest foreign investor in 2013, fell to second place, with $1.27bn worth of newly, and additionally, registered capital.
In both 2012 and 2013, South Korea was the third largest foreign investor, behind Singapore and Japan. As of the end of last month, South Korean businesses were operating on 3,930 projects collectively worth $32.84bn in the Southeast Asian country, the newspaper said, citing Foreign Investment Agency figures.
Samsung announced that it will increase its investment in two plants in Bac Ninh and Thai Nguyen provinces to US$4.5bn and has invested $8bn so far in Vietnam. LG electronics, another major Korean group, has declared a new project worth $1.5bn in Hai Phong.
It is estimated that Samsung’s investment alone accounts for $20bn of Vietnam’s exports. Moreover, thousands of small projects and satellite investors have followed big corporations like Samsung and LG to Vietnam.
As of March, there were 55 Korean satellite firms with a total registered capital of $2bn operating in Vietnam, according to a report issued by Samsung Electronics Vietnam. For example, Young Sung Precision Vina obtained an investment license for its $400,000 manufacturing plant in Bac Giang.
Haesung Vina, another Korean firm, also inaugurated its second plant, which specialises in producing Samsung’s smartphone cameras, at the Vinh Yen-based Khai Quang Industrial Park.
The integration of Vietnam into regional supply chains, especially in electronic goods and appliances, is something that Bangladesh should aim to emulate. Jaewan Cheong, a Senior Researcher at the Korea Institute for International Economic Policy, noted that the majority of FDI has gone into Vietnam’s basic materials and electronics industries, which have grown rapidly against the backdrop of the changing structure of East Asian production networks.
Previously, East Asian countries like Japan used China and Asean as their production base for exports to the United States and Europe. Now they use China as both a production base and a market.
Asean countries have consequently become a production base for goods exported to China as well as the West. Cheong notes that “One indication of this is that exports from South Korea, Japan and Taiwan to Asean states have mostly been made up of intermediate goods. For example, since the mid-2000s, intermediate goods have made up approximately 80% of South Korean exports to seven major Asean countries.”
Investment from South Korean electronics giants Samsung and LG is accelerating Vietnam’s participation in the global production network. Cheong also states that, “Unlike FDI in the textile and sewing industry, which has mostly taken the form of CMP (cut, make, pack) or CMT (cut, make, trim), FDI in the electronics sector from major companies has activated intra-firm and inter-firm trades between major production bases within East Asia, and made the accompanied investment with the contractors and business partners.”
The percentage of parts and components in South Korean exports to Vietnam has increased substantially since Samsung first started production of mobile phones in 2009, growing from 7.2% in 2008 to 31.4% in 2012.
Let me conclude by addressing one of the most sensitive issues in Korea-Bangladesh economic relations, namely the lack of progress on resolving the KEPZ. This was the first private EPZ that was awarded to YoungOne corporation with over 2000 acres of land in Chittagong.
The lack of progress has variously been attributed to lack of utility connections and land title disputes. Some have criticised YoungOne for not effectively utilising the whole tract of land.
However, as they are a profit-maximising company, one would assume they would certainly do if they could. What incentive would they have for not bringing more Korean companies into the zone if there were not infrastructure and legal impediments?
There has been some suggestions that the land they were allocated should be cut back. In addition to the fact that this may not be legal, from a national perspective this would be a disaster on two fronts.
Firstly, it would most likely short-circuit any attempts to attract additional Korean FDI into Bangladesh. Secondly, it sends a very negative signal to companies from other countries such as Japan or Taiwan that are considering investments into the new Economic Zones that the Government has recently announced.
The Prime Minister, Sheikh Hasina’s historic visit to Japan in May, China in June and most recently Japanese PM Abe’s Dhaka visit on September 6 marks the most effective period of economic diplomacy by any Bangladeshi leader.
I believe through the prime minister’s efforts, Bangladesh’s economy is at a turning point to move into it’s next phase of economic growth. The $6bn promised by PM Abe from Japan will be critical in developing our infrastructure.
But in parallel, attracting Korean and Japanese FDI in the manner that Vietnam has done so effectively, is equally important. Her leadership in resolving the KEPZ issue may well prove to be the catalyst to attract the likes of Samsung to establish manufacturing plants that might yet see electronics and appliances assembly build on our success in RMG as an export engine for the economy.
Let us hope that effective economic dialogue and engagement with Korea, as we have seen so effectively in the case of Japan, can keep momentum in Bangladesh’s new Look East Policy and provide the foundation for the next phase of Bangladesh’s rapid economic growth.
