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In 1961, the per capita income of India and South Korea was similar at $85.4 and $93.8. In 2019, there was a huge difference as they stood at $2,104.1 and $31,762, respectively. How did that happen and what can India learn from it? Mint explains

What has happened between 1950s to now?

As Arvind Panagariya, the first vice-chairman of NITI Aayog, writes in India Unlimited: “In the early 1950s, South Korea, Taiwan, Singapore, China, and India had comparable per capita incomes. The first three switched to outward oriented policies in the early to mid 1960s, resulting in wholesale economic transformation." Export oriented policies ensured that South Korea grew at 8.97% per year between 1960-2000, with the GDP (in constant 2010 US dollars) jumping from $23.3 billion to $724.6 billion. The fast growth was due to labour-intensive exports, which by 1972 accounted for 72.5% of Korea’s goods exports.

What labour-intensive exports are these?

As Panagariya writes in Free Trade and Prosperity: “Most products whose exports grew rapidly during the 1960s were labour-intensive. These included plywood, woven cotton fabrics, clothing, footwear and wigs... In the later years it only intensified, with new, unexpected items such as wigs and human hair emerging as major exports." This expansion of labour-intensive exports led to the creation of jobs, which helped people move away from agriculture towards manufacturing jobs. This led to income levels rising and that created a demand for services. In the process, a large part of the economy was rapidly urbanized.

Trade miracle
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Trade miracle

What else did Korea do right to drive fast growth?

The labour markets were flexible. Policy changes weren’t random. Education was given the highest priority. Panagariya writes: “An important reform in 1965 raised deposit interest rates to encourage savings. This change plus rising incomes contributed to increased savings." The higher savings were channelized to build more industry and raise incomes.

Where did India go wrong vis-à-vis Korea?

Up until 1991, India had an inward-looking import substitution policy. Even after opening up, we haven’t been able to get labour intensive exports going. In the last 15 years, India’s engineering exports have been more than labour-intensive exports of leather, textiles and readymade  garments, put together. Only when we add agricultural and allied products exports to the labour intensive exports, does the situation change. Nevertheless, in the last two years, engineering exports have been more even after adding agricultural exports.

Why has India’s export growth been lagging?

A major reason for this is that Indian firms in manufacturing are small. As the Economic Survey of 2019-20 points out: “Most firms face [a] complex architecture of the Indian governance framework. Manufacturing units have to conform with 6,796 compliance items, which is a… time consuming task." Of course, every unit does not have to conform to every item, but this is a long list nonetheless. This is where economic reform is needed. Vivek Kaul is the author of Bad Money.

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