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Is There a New Consensus on Development Policy Under Korea's Knowledge Sharing Program?

Raj Nallari's picture

On October 15, World Bank Group President, Jim Yong Kim, and South Korea’s Minister of Strategy and Finance, Jaewan Bahk, announced the opening of a new World Bank Group Office in Korea in 2013, to deepen joint efforts to find sustainable development solutions for emerging countries around the globe. Following the ceremony, 500 policy makers and practitioners from several different countries attended a two-day event, “Expanding Frontiers in Development Policy Under Korea's Knowledge Sharing Program (KSP),” organized by the Korean Development Institute School in Seoul.

 

President Kim in his key note speech began by emphasizing the need for “solidarity” among all countries and agencies in dealing with economic issues in an inter-dependent world. First, he talked about the global solidarity between all countries in dealing with global public goods, such as security, communicable diseases such as SARS in Asia, climate change, trade and financial contagion among others. Second, he talked about “inter-generational solidarity” which means leaving a better world for our children by addressing issues related to climate change and environment, education and health for all, investments in infrastructure and public deficits and debt. For the international community, the challenge was to “bend the arch of history.” By current trends, absolute poverty will be reduced to 10% of the total population within 10 years. But, through global solidarity we should aim to accelerate our efforts to eradicate poverty. This requires a call for a “science of implementation” by building capacity and sharing knowledge on what works and how it works. A great example is Korea’s development experience over the past fifty years as captured in the case-study discussion on “The Miracle on River Han.”

 

John Williamson of Peterson Institute of International Economics kicked off the discussion with five disagreements among economists and development practitioners. He noted that the Washington Consensus of late-1980s had to do more with the lowest common denominator on what Latin American countries needed to do rather than the consensus being a Development Policy Consensus. With empirical evidence he pointed out that the issue of state vs markets is by and large not so polarized into two ideological extremes as in 1980s-90s, but that we can all agree on a mixed-economy approach which is a middle-path or a third way of a more pragmatic and complementary roles for state and market. In support of this, there were case studies on Korea and Iran’s public-private partnership in production of gas-turbines which underscores how state capacity was a binding constraint initially, but that green growth and other development challenges now need urban and firm-level capabilities as well to complement the state capacity.

 

On the issue of industrial policy, the discussion emphasized that market-orientation is preferred by most policy makers and practitioners, but there may be some unique reasons why governments need to intervene on a timely, temporary and targeted manner to undertake R&D for innovation and to stimulate economic/exports diversification. However, he wondered why legislation that had a more transparent support, including subsidy, to specific firms/industry was not tried rather than resort to discretionary policy of open-ended industry-support as is the common practice particularly after the global crisis of 2008-09. It was felt that governments need to intervene in "Urban Greening" agenda.

 

On the issue of middle-income trap, there was no clear evidence of why some countries in Latin America and East Asia reached a plateau while others (e.g. Chile, Poland and Korea among others) march on in constantly improving per capita incomes of their people. One key message from the country case studies was that low R&D spending and hence low technological innovation and adoption could be the cause of such a trap.

 

On over-valuation of exchange rate, everyone now agrees that it is a bad policy choice. However, under-valuation appears to have helped East Asian economies in maintaining their competitiveness and exports. Evidence of under-valuation is however a difficult task to prove.

 

There was quite a prolonged discussion on the democracy and development linkage. It was felt that there was no clear evidence if rising per capita incomes caused democratic movements or if democratic regimes led to higher GDP growth rates. As pointed out by discussant Sanjay Pradhan of the World Bank, at a more micro-level, citizens are more actively engaged in several developing countries and provide instantaneous feedback on setting budget priorities, on service delivery or the lack of it and are now mobilized into action. Open development and more transparency, more political and economic decentralization, and community-driven development are supporting development as well.

 

The new approach of evaluating the efficacy of programs called Randomized Evaluation, which began in 1995, was presented by Prof. Michael Kremer of Harvard University. In the experimenting on a health immunization program, he found (1) a strong case for free provision to improve medicine take-up rate; and that (2) a small subsidy resulted in large benefits. The conclusion was that more such randomized evaluations were needed because what worked in one geographical area may not work in all areas in different settings. The challenge of this novel approach is how to use the results from few experiments to scale up because the behavioral response varied across time and space.

 

The discussion on financial accelerator by Prof. Kiyotaki concluded that inefficient credit booms through the accelerator process lead to bank runs and debt problems. Capital markets are not the same as markets for traded-goods because there are long periods of time involved when lenders provide money and when borrowers are supposed to pay back.The main conclusion of the session on Governance and Institutions was that differences in quality of institutions and their capacity partially explains the differences in pace of convergence. Institutions can be strengthened or changed by incentives-based performance or by increased competition or by avoidance of "spoiler traps." Reform oriented leaders create their own step-by-step processes for institutional changes. The Korean case study on how tax revenues were dramatically increased since 1966 is a strong example of how severe punishment against tax-avoidance, corruption and bribery resulted in institutional reforms. Such a dramatic increase in tax revenues led to self-reliant economic development of Korea and a move away from foreign aid-dependent approach of other developing countries during the 1960s.

 

The challenge here is that while case study approach to understand institutional reforms is critical, it does not lend itself to scaling up or to universal principles and policy prescriptions. Neither is it possible to use a cross-country regression approach because there is no quantified data on the steps involved in process changes and institutional changes. Case studies on Korean education, community-driven development and greening urban growth all proved useful, but raised doubts about replicability.

 

Is there a new consensus on development policy? The panel discussion reiterated that there is now a broad consensus on issues such as: (1) Orthodox policies of low inflation & budget deficits, trade openness, deregulation, and the privatization of state-owned companies are necessary for economic performance; (2) institutional capacity to manage change is needed; (3) there is a need for social safety nets, conditional cash transfers and other such innovative social programs, but that randomized evaluations should be conducted; (4) there is a need for human capital formation by investments in education, skills and training and health; and (5) there is a need for constant experimentation so as to learn from such pilots and improve implementation. There is not however an agreement on Beijing Consensus of state-capitalism or on Seoul Consensus on primacy of human capital.

 

The resounding success of this event led us to believe that Korea should continue to take the lead in organizing global and regional events as a series on Frontiers in Development Policy under the Korea Knowledge Sharing Program.

 

Raj Nallari is the Manager of Growth and Competitiveness Practice at the World Bank Institute.