This article first appeared in my column with the Business Weekly & Review on February 15-22, 2019
Botswana and South Korea’s economic growth stories have a similar beginning when narrated: “60 years ago we were a dusty, poor country…” and so the legend goes. South Korea’s development story, however, began in the aftermath of the Korean War. By the late 90s South Korea’s economy had expanded by over a 140 times, averaging 2 digit growth rates per year to achieve the most remarkable economic expansion and improvement in living conditions.
There are many distinct differences between these two today. One has faced the unfortunate perils of war, one hasn’t. Both have surpassed expectations. Botswana is an upper middle income diamond-dependent economy, while South Korea is a fast paced high-income economy. Korea has transitioned from low to high income status despite few natural resource endowments and a persistent existential threat from one infamous Kim family dynasty to the North.
Naturally, many think China is Asia’s poster child for substantive economic transformation. Deng Xiaoping’s “opening up strategy” has only achieved less than half of South Korea’s growth in their 4 decades run. Korea’s growth is fascinating and unique in that it’s been broad-based and shared by many. This isn’t to say South Korea enjoys economic equality. Far from it! For a country responsible for impressive gains in household income levels, healthcare and nutrition, it still finds itself with nearly half its older citizens living in relative poverty.
There are many lessons to draw from Korea’s ‘miracle on the Han River’ and many of its Asian counterparts. Koreans have grown their economy through DISRUPTIVE THINKING by a combination of policies that fostered outward-oriented, labor intensive growth while building on human capital and providing sound economic governance. This development strategy has delivered rapid and mostly sustained growth over the years while moving millions out of poverty.
Since the conversation on industrialization, investment attraction and business hubs is at its peak, Asia provides an excellent point of reference. Whether or not models of rapid economic growth from the 60s are still available and valid for today’s transitioning economies is a debate for another day. Economic zone development is a fascinating model worth exploring. Around the world, there are over 4000 SEZs in over 130 countries. Investment hubs in Asia (South Korea, China, Singapore as well as Dubai), have been particularly successful in terms of innovative and dynamic economic growth.
Like Botswana, South Korea’s geographic location made it an excellent hub for a well thought out zone development strategy. Korea has embraced its central location and its proximity to major Asian markets makes it the most efficient economic hub not only for China and Japan (2nd and 3rd largest economic scales in the world), respectively, but for the rest of Asia as well. The country’s Free Economic Zones were developed to take full advantage of this. Korea has eight Free Economic Zones scattered throughout the country to suit the needs of enterprising global businesses. The Incheon Free Economic Zone has had the highest potential for success among the eight due to its advantageous geographical location. Incheon Free Economic Zone is drawing a huge amount of attention in terms of Korean SEZ policy. Based on the presence of world class infrastructure, service industries and high-tech industries have been drawn to set up shop. Today, the Incheon Free Economic Zone serves as a test bed for the introduction of new technologies, as well as a shelter for leading research institutions for R&D, world-class universities, and a number of international organizations. It has transitioned from a mere business hub/ economic zone to a smart city chugging out cutting edge AI, IT, and biotechnology research.
Economic zone competitiveness, in the case of South Korea, has been attributable to a combination of factors. Chief among them is the peninsula’s policy orientation. Korea has Free Trade Agreements (FTAs) with approximately 52 countries, demonstrating its openness to trade and essentially drawing global companies to do business in Korea as opposed to China.
Korea’s zone development strategy is driven primarily by new age economic thinking. They have strategically positioned themselves as leaders in disruptive innovation. Firstly, South Korea’s geographic location makes it a geopolitical jackpot. As Parag Khanna put it, “connectivity is the most revolutionary force of the 21st century.” The Korean peninsula is cradled between the most important economies in the world, even more important than the transatlantic alliance if we consider how Asia is rising to be the most important regional powerhouse in the world. Its location makes it accessible to the 2nd and 3rd largest economies in the world (China and Japan), the most important global financial hub (Hong Kong) and the most important logistics hub (Singapore). Secondly, the Incheon zone is a major transport hub housing one of the busiest airports in the world (with passenger traffic in excess of 67 million people in 2018) and connected to 188 cities. The third aspect owing to zone success in Korea is the human capital. They invest in grooming and attracting top talent from global universities and research institutions.
In general there’s a broad anatomy of economic zones. Special economic zones based on manufacturing industries, the so-called “1st generation of special economic zones,” have less forward and backward industrial effects through linkages with the domestic economy, and are very dependent on government’s financial support. However, in modern times, more and more countries are now introducing new special economic zones in areas which have strong domestic economy linkages and relaxed regulation systems. Special economic zones in China, for example, have functioned well as ‘test-beds’ for new policies and deregulations, as well as for maximized freedom of economic activities. These are the 2nd generation of special economic zones. Global environmental issues have led to a new type of SEZs, a third generation, if you will. This is a convergence of the first and second types of SEZs, additionally pursuing objectives of low carbon, green growth, and eco-industrial parks.
Broadly speaking, regardless of the generation of the special economic zones, success is highly dependent on a certain country’s economic circumstances and comparative advantages. Based on this precondition, the long-term development plan of the country, commercial feasibility, target markets, skilled workers and technical innovation ability have become additional success factors.
Korea’s Masan Free Trade Zone comes to mind. It has contributed to the advancement of Korea’s export industries in conjunction with neighboring industrial clusters, greatly facilitated by the area’s geographical location. It has also contributed to the dynamic growth of Korean companies through job creation, technology transfer, and technical cooperation between domestic and foreign companies such as Sony and Nokia. It is a perfect exemplary model of promoting foreign investment policy for developing countries.
Business hub-type special economic zones are bigger than industrial zones, designated in areas where trade and finance, logistics and services activity is very intense. Korea’s Incheon Free Economic Zone, Hong Kong, Singapore, and Dubai, which aim to be the business hubs of Northeast Asia, serve as logistics and financial hubs as well as the regional headquarters of multinational companies. Hard infrastructures such as ICT, transport and logistics infrastructure, better training conditions, and living environments have been critical to the success of these zones.
Essentially, Asia’s zone development and its success present an excellent role model for transitioning economies. Their ability to attract and retain billions of dollars in local and international investments must mean something.
SEZs are not a panacea for all developing countries’ problems. They must be implemented properly and carefully aligned with a country’s vision and specific circumstances. Establishing a business-friendly environment is the chief policy objective of every successful economic zone. Policy makers and architects of special economic zones must understand that zone development at an early stage will not lead to an overnight economic growth success story. Korea’s most successful industrial zone was set up in 1971. The Incheon free economic zone was inaugurated in 2003. The better part of the early decades was spent patiently building infrastructure and nurturing relationships with potential investors. So if we are to also have fully functioning and productive economic zones in the next 50 years, we must be intentional and deliberate in expediting development of essential infrastructure, transport links etc. We must also guarantee freedom and flexibility of business activities, guarantee strong, independent decision making capabilities for the special economic zones authority. Finally, we must have a sufficiently trained labor force and guarantee them sustained, competitive wage levels. We have a comparative advantage in our location. We are a landlocked country, but we mustn’t be policy and idea-locked as well. Botswana’s unique position makes the ‘transport and logistics hub’ of southern Africa a viable reality. But first, we must build infrastructure, improve our connectivity to major global economic hubs and build on human capital.