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India should embrace South Korea

Editor's ChoiceIndia should embrace South Korea

NEW DELHI: Convergence of geo-political  interests should help India partner more closely with this advanced manufacturing and export hub.

ADVANTAGES OF SOUTH KOREA’S ECONOMIC STRATEGY

Despite living under constant duress and an existential threat from its immediate neighbour, South Korea has made remarkable strides in economic development since its inception in 1953. With a GDP of US $1.7 trillion—half of India’s and the world’s fifth-largest economy—its per capita income of $32,500 consistently registers strong growth. The share of industrial production in its GDP is over a third, with manufacturing constituting almost three-quarters of that. Its expanding exports are a phenomenal US $680 bn—about one and half times India’s.

Starting with textiles and other items of mass consumption, South Korea moved up the engineering industry ladder, excelling in both light and heavy sectors, particularly automotive. In the last 25 years, technological innovations have transformed it into a global leader in electronics. With $470 billion of government assistance assured over the next five years in an effort to advance from manufacturing the commonplace semiconductors to more advanced ones, its vibrant private sector can look forward to a prominent place in the sun.

From an overwhelmingly agrarian and mining nation to a predominantly secondary and tertiary economy, South Korea’s journey of transformation over the last seven decades deserves recalling. Despite the widespread damage during the Korean War, highlighted by the fact that its capital city Seoul changed hands four times in as many years, and it was left with no infrastructure intact, the country rose like a phoenix. This was achieved in part by emulating its neighbour Japan, but more by finding its own solutions to multi-fold challenges. The state invested its available resources in its own enterprises rather than foreign ones, with its annual R&D expenditure, one of the highest in the world at almost 5% of GDP, benefiting its own chaebols, or industrial conglomerates.

To overcome the limited size of its local market, due to a small population of 21 million in 1953 (4 million Koreans had been killed in the Korean War between 1949 and 1953), South Korea chose to sell its produce worldwide. Even in the seven decades since then, its population has grown slowly to 51 million—a 250% increase compared to India’s 400% increase from 350 million to 1.4 billion people. The country’s fertility rate—the number of children a woman has in her lifetime—hit a record low of 0.76 last year and is expected to decline to 0.68 in 2024. This contrasts sharply with the desirable rate of 2.1 required to maintain the existing population level. Rather than let population remain a constraint to its aspirations of growth, South Korean leaders made a conscious decision long ago to become an export-led economy.

To remain competitive in overseas markets, South Korea worked assiduously to reap the economies of scale; this included creating optimal capacities rather than remaining small, focusing on quality and standardisation, and putting in place efficient logistical support for trading. The large-scale processing and assembly necessitated correspondingly high levels of import of energy, raw materials, and intermediates. Along with Japan, Taiwan, and Hong Kong, South Korea quickly earned the sobriquet of “Asian Dragons” in the 1960s and 1970s. In a similar vein, its manufacturing strategy since then has constantly focused on moving to higher value-added products and minimized the frittering of its limited workforce. It has set up new plants in overseas markets like China, Russia, and Japan, where either the product-market size was bigger or labour availability was abundant.

South Korea’s manufacturing and export strategy has borne fruit. Its aggregate exports are just under its total import bill of $700 billion. Last year, exports to the United States shot up by 24%, due to demand from smartphone-makers, data-centre operators, and artificial intelligence developers, offsetting the slower growth of 9% to China, its largest trading partner. South Korean companies are part of a wide range of global supply chains, especially in semiconductors, automobiles, and batteries. The country has consciously sought and joined regional trade pacts—24 so far—with three “mini deals” affording insurance against unilateral acts of protectionism in the last two years. While its major trading partners, such as China, Russia, and Japan, are not necessarily geopolitically aligned, this “agnostic” choice of partners demonstrates a high order of pragmatism in economic dealings.

The maintenance of high export levels has kept the South Korean economy ticking despite periodic global headwinds. Its currency, the Won, has not depreciated much, despite heavy reliance on imports of energy and raw materials to assemble export products and the rising tensions with North Korea. The growing investments in US markets by its retail investors have helped stabilize the currency, as has the high level of household savings resulting from a strong sense of community. Interestingly, this stems from the unique practice of Gyemoims based on the country’s social interactions and culture of trust; each member pays a specific contribution decided by the group and yet receives equal benefit as all others. In recent years, it has spilled into retail banking, with friends sharing a bank account in a similar manner, managed by one designated account holder.

MORE BILATERAL TIE-UPS TO RAMP UP INDIAN MANUFACTURING & EXPORTS

To enable South Korea find an adequate number of workers for its economy, India could explore the “export” of skilled and semi-skilled manpower. For the first 5 to 10 years, relocation could be based on employment visas; thereafter, the prospect of Korean citizenship should be offered to the migrant workers and their families. Such migration would need the backing of an intergovernmental agreement, with the basic groundwork being done by the concerned official agencies. This would be particularly significant for the migration of professionals, viz. medical practitioners, oil industry engineers, and computer scientists.

Though South Korea has an elaborate network of community hospitals, its precariousness came to the fore recently during a several-month-long confrontation between the government and doctors over expanding the medical school entrance quota. The measure was aimed to address the shortage of doctors, particularly in rural areas. Ultimately, it led to a nationwide strike and service suspension by the doctor community. In the hydrocarbon industry as well, opportunities for Indian engineers and scientists could be emerging.

Exploratory drilling has been approved for potentially vast oil and gas prospects—estimated at 14 billion barrels—on the east coast near the port of Pohang. This has created a need for procuring qualified professionals at affordable compensation packages.

Biomedicine is yet another industry that presents an opportunity for India to explore. With the basic research and development for new drugs primarily taking place in Europe and the USA, several countries, especially China, Japan, and South Korea, have been competing for Western contracts to manufacture these drugs. Contract development (CDO) services are capital intensive and demand high-quality production and flexibility to meet rigorous FDA requirements. Western contracts have usually been awarded to relatively developed Asian countries like Japan and China, where contractors are chosen based on scalability, modality, and geopolitical stability—often the three pillars in the decision-making process. With China increasingly getting sidelined, India endeavours to secure a share of the business but has had limited success thus far. To win meaningful-sized contracts, the ecosystem must improve its manufacturing capabilities by investing significant capital in large-sized plants that meet the strict international standards of drug manufacturing. Equally important is addressing the demand for strengthening its IPR and revisiting the Patent Act, 2005, which, due to its stringent checks on the “evergreening” of drugs, is considered too onerous. With such persisting roadblocks, India could initially seek to set up joint ventures with South Korean firms such as Samsung Biologics, which in a short period of four years has built up a highly successful CDO business with an annual turnover of $60 billion. A member of the giant Samsung group, it is actively seeking to expand capacity and investing overseas in countries with the requisite capabilities and workforce.

To defend itself against North Korea and build its export-capability, South Korea has become a fast-growing arms developer. With $14 billion in exports of conventional tanks, low-end fighter planes, helicopters, and howitzers, it is already the world’s tenth largest exporter with hopes to become the fourth soon. In conjunction with the government, its largest defence company, Hanwha, is developing an advanced fighter jet engine as the nation works to move up the arms value chain and boost its security self-sufficiency. The company is establishing a $30 billion engine factory in South Korea and research centres in the US and UK. Given the country’s ability to produce high-quality yet affordable arms, it is gradually emerging as an attractive option for buyers in emerging countries. Technological collaboration by Indian naval shipyards, with a small equity stake to a Korean company, could be considered for modernizing its submarine fleet and upgrading tanks, armoured personnel carriers, and howitzers of larger bore field guns. South Korea’s prowess in automobiles, including EVs, would get utilized in such an exercise.

LEARNING FROM PAST MISTAKES

India needs to be cognizant of a couple of past efforts at South Korean collaborations that didn’t go well. The first involved the setting up a comprehensive steel mill with a finished capacity of 6 million tonnes, along with a mine for extracting twice as much iron ore. In an understanding reached by the visiting President of South Korea and the new Indian Prime Minister Manmohan Singh in early 2005, the project envisaged a foreign investment of US $6 billion by POSCO, a Korean entity, in Odisha, where a dedicated port terminal for the export of steel was to be developed later. Despite the Union government’s full involvement in supporting the project, the state government failed to arrange the land required for either the steel mill or the mine. This led the Koreans to abandon the project altogether after two years.

Another more recent embarrassment was the Comprehensive Economic Partnership Agreement (CEPA), which aimed to cover both trade and investment, and was entered into by the two governments after years of negotiations. However, within six years of its implementation, the Indian government sought a joint review in 2015-16 citing the tenuous grounds that it had facilitated a larger increase in Korean exports than Indian ones. The Korean reaction, though muted, was far from favourable. The exports of the two signatory nations depended more on relative competitiveness in both production and the export process than on the reductions in import duties, which in any case were not prohibitively high. The smaller increase in Indian exports was due largely to Indian products being less competitive in terms of costs, and India’s knee-jerk reaction did not win kudos from the South Koreans.

India needs to remain concerned about not being considered a business-friendly country when compared to competitors like Mexico, Turkey, Vietnam, or even Bangladesh. This is reflected in its FDI inflows as well as the quantum of exports. To rival China and get a slice of the global supply chains, India needs to address the issues businesses face in procuring land and labour, while significantly lowering tariffs on imports of raw materials and components. To meet its own social requirements, India could offer monetary and other incentives upfront, such as an advantage in government procurement for companies that exceed the industry norm in employment. It is also essential that domestic and foreign firms establishing anchor industries in designated industrial zones receive financial assistance and help in creating physical infrastructure. This should not be viewed as promoting crony capitalism since it merely reduces the actual costs and mitigates inherent risks.

Such facilitation has to be accompanied by a renewed focus on the creation of physical infrastructure in transportation, energy, and healthcare. All these sectors are amenable to being buoyed by private players, both foreign and domestic. Based on its own interests, India should explore drawing up a list of countries whose firms could be accorded preference in the creation of such infrastructure and in becoming anchor industries. South Korea, with whom India’s geopolitical stances are fully aligned and with which it has seldom had a clash of interests, would eminently qualify to be one such preferred nation.

The relationship with South Korea needs to be developed, irrespective of whether the much-talked-about denuclearization of the Peninsula takes place or not. If wisdom is combined with goodness and ethics, the superpowers China and Russia can succeed in prevailing upon North Korea to return to a path of rectitude. North Korea can be incentivised to “denuclearize” under IAEA’s supervision. For this to happen, these three nations can rightly demand that USA too removes its own nuclear weapons from the region. Only then can the Peninsula hope to become a less tense place to live, resume the much-sought-after social interactions between the residents of the two neighbours, and allow bilateral trade to start. Certain about its own security, a more reassured South Korea would be able to devote greater attention and resources to exploit its economic advantages, especially its known international competitiveness. If, and whenever reunification of any sorts occurs between the two beleaguered nations, all such advantages would be immensely exacerbated.

India, by remaining fairly discreet and not taking sides in the nearly seventy-five-year-old Korean war (despite the 1953 Armistice, the two Koreas formally remain at war with one another), should have little difficulty in adjusting to the changed circumstances. After all, such neutrality helped it benefit from the two Germanys merging and the erstwhile Soviet Union breaking into 14 new republics a few decades ago.

Dr Ajay Dua, a development economist and an ex-Union Secretary, Commerce and Industry, visited South Korea in June 2024 to undertake the ground work for this article.

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