Saturday, May 22, 2010

The Korean story

Back in university when I did my undergraduate studies, I used to read about the East Asian success stories; that South Korea, Taiwan, Hong Kong, and Singapore as the four Asian tigers. I used to write papers on the success of these nations, how they have managed to achieve high economic growth through advancement in education, and capital accumulation. Since then, I’ve visited Singapore (one of the tigers), several times. Recently, I’ve got the opportunity to visit Korea, and see for myself the development of the country. I’ve to say, most of the things I saw and experienced beat all expectations, and I couldn’t help writing about the success of this developed country. Firstly, let’s look at the facts:

The per capita GDP was about $100 in the early 1960s, and back then it was among the least developed countries in the world. However, today it’s over $20,000. Korea has become the 4th largest economy in Asia, and is also the world’s 8th largest exporter. It has a very high human development index, and education index. The gross capital formation in 2008 was about 30 percent (world average 22 percent) of GDP, and exports are 53 percent (world average is 29 percent) of GDP. (World Bank)

I can still remember one article written by the famous economist, Paul Krugman, saying that Asian economies’ success is mainly due to the accumulation of inputs, with less technological growth. (Paul Krugman, 1995). While it can be true for Singapore, it seems that its not exactly the case for Korea. Unlike Singapore and most other Asian countries, Korea has internationally successful brands like Samsung, LG, and Hyundai-Kia. And these firms spend huge amounts annually on R&D, thus achieving further innovation.

So, how did South Korea achieve all this? Definitely it has to do with innovation and technological growth. The country is now ranked as the most innovative country in the world in the Global Innovation Index. South Korea has been able to achieve high export-led growth through their innovation. I spent an year in America, and visited many states in the country, visited many universities and institutions. I was amazed by the level of efficiency and technology usage. Believe me, I could feel the same thing in Korea. In some aspects, it beats even America; that we can see even from the numbers. The gross capital formation in America is about 18 percent of GDP, compared to 30 percent in Korea. I'm not by any means saying that Korea is superior to America in terms of technology, but rather trying to express my amazement.

What I’ve noticed through the few days in Korea is that, unlike Singapore, there aren't many expatriate workers around. Unlike USA or UK, I don’t see many immigrants in Seoul. Ok, Korea already has a population of over 50 million, so we can’t compare it to Singapore. However, in terms of attracting international talent, America and Britain have done a great job. The growth in national total factor productivity (TFP) in those countries surely has been influenced by the influx of talented workers from all over the world. But, it’s not the case in Korea. It is one of most demographically homogenous society, with about 99 percent Korean ethnicity. I could notice this by walking around. They also have a well-developed language, and this I could see from their book stores as most of the books were in their own language. I couldn’t find too many books in English from a huge book store in Seoul.

So, back to the success story; What are the lessons that we can learn from Korea? One: Great economic progress can be achieved through effective and efficient utilization of foreign aid by investing on productive industries that can earn foreign exchange to the country. Even if we incur huge external debt, if those funds are wisely invested on productive income generating activities, the country will be getting the benefits of it.

Lesson number two: for economic progress, we need an efficient governing system, with less political conflicts. One could do a good control experiment, if we consider the neighboring North Korea, almost identical in terms of resources, ethnicity and climate; with the main difference in their governing system. One could see the huge difference between the two countries in terms of economic power.

Lesson three: emphasis should be on developing the private sector, and the private sector should be the engine of economic growth.

These are all important lessons for all other developing countries. As for Maldives, surely we don’t have 50 million people, and enough land. However, most of our economic problems facing today, are due to our low focus on developing the private sector, and the over-reliance on the government. When we come to think of it, many of highly educated youth are employed in the government and engaged in economically unproductive work. In order to achieve economic progress, we need productive investments in the private sector. We citizens need to focus more on economic activities, rather than wasting our time on unproductive political fights. If we need to pressure the government, it has to be on developing the private sectors, so that we can earn an income, rather than asking the government to give us subsidies to pay our bills. Most of all, we need a strategic macroeconomic vision, and a master plan for the future.

Saturday, May 8, 2010

Greece would have been better off without euro?

The crisis in Greece has done much damage to the mighty euro, which has reached 1.25 to a US dollar on May 06th 2010, which had a rate of about 1.40 at the end of January. With the adoption of euro, the Greek economy attracted a lot of foreign financing inflows, and international investors became overly optimistic about the Greek economy. With the global economic down-turn, these inflows almost stopped, and Greece had to face the reality. A reality in which its government spending has escalated, prices and wages have increased dramatically. The government deficit as a percentage of GDP has reached to unsustainable levels.

So, why has Greece become so helpless with its high debt? The answer is simple; it is tied with the euro, and it does not have the luxury of an independent monetary policy. Had Greece had its own currency, its central bank would have had the chance to have an independent monetary policy. It would have been able to have a monetary expansion, or devalue its currency in order to obtain some degree of international competitiveness.

But now, Greece is forced to be dependent on the strong European nations to provide the needed assistance, and if they fail to do so, there is less hope that Greek economy can come out of this crisis. Hence, even now it might be best for Greece and also for the rest of euro-countries, if Greece abandon the euro, and have its own currency once again.

What have we learnt from all this? One;, in order to have a common currency we need synchronized fiscal policies and fiscal discipline. If it cannot be achieved, it will be almost impossible to have a common monetary policy. Afterall, at the end of the day, Its Mostly Fiscal (IMF). Two;, it is extremely difficult to have a common monetary policy and monetary union (with common currency), without political union or common sovereignty. As people in countries like Germany will be less willing to finance the fiscal irresponsibilities of other countries, like Greece. If the whole euro area was one single sovereign state like that of United States, it would have been politically plausible to provide federal funds or assistance to those states with difficulties.

But now, when the crisis has hit Greece, its government is not able to act with an independent monetary policy. And, its too much to expect that all the other european countries will go on providing assistance to Greece. I wonder, if it'll be better for Greece to let go of euro, and have its own currency.

Wednesday, May 5, 2010

Maldives economy is far from recovery

We’ve been hearing news about the American economy recovering from the economic recession that was hit two years back, and at the same time, there have been some queries as to whether the economy of Maldives is coming out of recession as well.

Maldives economy entered into a state of economic ‘crisis’ in 2008, coinciding with the global economic downturn. However, the ‘sickness’ in our economy is mostly of our own making, as our government spending reached Rf8 billion in 2007, followed by Rf10 billion in 2008. The government deficit stood at 17 percent of GDP in 2008, which is an unsustainable level of deficit even in international standards. In 2009, the deficit reached an alarming 26 percent of GDP. Until August 2009, part of the deficit was financed through printing Rufiyaa, which then led to increased circulation of Rufiyaa in the economy, and hiking inflation in 2008 to 12.3 percent. Although inflation has dropped to about 4 percent in 2010, we are still not recovered from the most dangerous sickness that we’ve inflicted. The unsustainable level of government spending, the resulting fiscal deficit, which was about one third of the GDP in 2009. We’ve still not started to live within our means. The estimated deficit for this year is about Rf4 billion, and it is estimated to be about 19 percent of GDP, which is much higher than that of Greece (12 percent).
It was relieving news that Maldives entered into a stand-by arrangement with the IMF last year, and that there were some macro economic performance criteria set and agreed by the government. However, we still have a long way to go. We still have yet to introduce measures to increase government revenue, through an effective tax system. We still have yet to revive our private sector investments in order to achieve higher economic growth. We still have got the task of reducing government expenditure and deficit. We still got to reduce our foreign currency spending. We still got to start living within our means.

According to the available statistics, the growth in lending to private sector by the commercial banks is on a declining trend, in fact, there was an annual decline by 5 percent as at end of February 2010. Meanwhile, lending to the government by the banks has increased by 13 percent during the same period. This means, unless there is a way to reduce government expenditure, banks may not be lending to the private sector, and we might not see an active private sector in the near future.

Bottom line is, in order to see economic recovery, we need to put our house in order, and start living within our means.

Data Source: Maldives Monetary Authority, Monthly Statistics, April 2010,