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Overcoming Middle Income Trap, and Industrial Relations in Indonesia
Seung-Hun Chun, Ph.D.
sychun@kds.re.kr
Korea Institute for Development
Strategy (KDS)
www.kds.re.kr
1
1
In the race for the growth of income, only a few countries have succeeded in
overcoming middle income trap (MIT).
Growth trend in international comparison and middle income trap
Income
Income
Population
Population
30,000
USD
50
million
26,205 50m.
USD
Republic of Korea
Source: IMF(2013), Growth Slowdowns and the Middle-Income Trap
Note: t=0 is defined as the year when the GDP per capita for a particular
country reached 3000 U.S. dollars in PPP terms.
Source: Chosun-ilbo (10.6. 2014)
※Korea is expected to enter ‘30-50 club’ in 2015, being a sole developing
country to join it next to Japan, USA, UK, Germany, France and Italy.
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Korea Institute for
Development Strategy
Overview of Korea’s Economic Development
Trade balance and export in Korea
Source: OECD.stat
Unit: Billions of USD
60
40
Trade balance
20
0
1957
-20
-40
Trade
balance
USD Δ 311 m.
USD 40.16 b.
Export
volume
31m.
363b.
IT
Export
item
Fish,
plywood,
fabrics,
etc.
Automobile
Shipbuilding
Steel
Petrochemical
5th largest
Top
shipbuilder
Global
top-level
5th largest
3
Top in TV,
Semiconductor
chips,
smartphone
Korea Institute for
Development Strategy
Major obstacles to sustainable growth in Korea were industrial dispute and wage hike.
In that course, Korea had to face the critical point of “breaking the gourd”, which was
successfully overcome in a rare case.
The rise of income and industrial dispute in Korea
Number of disputes
Current USD
25000.00
4000
3500
GDP per capita
20000.00
3000
Frequency of labor
dispute
2500
15000.00
2000
10000.00
1500
1000
5000.00
500
0.00
0
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Korea Institute for
Development Strategy
In line with the rise in income, human desires change, and at “the stage of eyes,”
most countries fall behind due to mutual conflict and dispute struggling for more
dividend from one another.
Cause of the MIT: Four stages of human desire
Human Desire
• Relative
deprivation
• Seek less work,
luxurious life
• Still work hard
• Follow gov’t
• Work hard
• Follow gov’t
• Spiritual
satisfaction
Stage of
brain
Stage of
eyes
Stage of
arms & legs
Stage of
mouth
Income
Source: Itogawa Hideo (Tokyo University)
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Korea Institute for
Development Strategy
At the risk of breaking the gourd at “the stage of eyes,” Korean government launched
bold strategies to ensure sustainable growth.
The policy package for not breaking the gourd at the stage of eyes
II. Upgrade of
labor skills and
techniques for
productivity
increase
I. Diversification
of
competitiveness
sources
MIT: Wage hike
& losing
growth
resilience
III. Promotion of
transparency in
business
accounting and
activities
IV. Development
of institutions for
sound industrial
relations
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Korea Institute for
Development Strategy
Beyond the common knowledge and expectation, President Park Chung Hee ran
the risk of big investment for the future competitiveness sources, which provided a
sound base for sustained economic growth.
I. Diversification of competitiveness sources
Int’l criticism:
No economic
feasibility
• Steel plant (1970-73) 1m. M/T
- Local demand (1961): 100ths M/T
- International Standard: 3m. M/T
• Petrochemical complex (1968-72) 60ths. M/T
- Max. Local demand: 30ths M/T
- International standard: 300ths M/T
Global top-level
competitiveness
: the fifth
producer in the
world
Base material industry
Industrial & technology
development capacity
Strong push for heavy &
chemical industry
• Korean Institute for Science
& Technology (KIST, 1966)
- Salary: 3times higher than
local professors
- Full budget support with
audit exemption
- Hongreung nobles
• From light industry to heavy
& petrochemical industry
• USD 10b. investment plan
when total export was 1.8b.
(1972)
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Korea Institute for
Development Strategy
“All right. If proper education or training is provided, we Koreans can do as the Western
people and Japanese do.” -Korean government
II. National drive for training technicians and labor skills for enhancing productivity
Presidential
commitment
Model Technical
High School
• Skilled workers are national treasures!
•
•
•
•
Faculty: best in Asia
Students: Upper 10% of junior high schools
Full scholarship
Education philosophy: Three “Jeong Principle”
- Devotion (JeongSung)
- Accuracy (JeongMill)
- Honesty (JeongJik)
Expansion of the
model
Outcome
Renovation of
labor market
• Strong discipline similar to a military camp
• International skill contest: Korea > Japan
• Industrial backbone to support sustainable growth
• Since the mid-1970s, Korean technicians have dominated
gold medals in the World Skill Olympics
• Strong base of grass-root industry
• Establishment of TQS(Technical Qualification Standard) and
PES(Public Employment Service)
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Korea Institute for
Development Strategy
Faced with serious labor disputes at the stage of eyes, Korean government realized the
importance of transparency in business management and responsibility of enterprises,
and has taken a series of policy package consecutively.
III. Transparency in business accounting & activities
Institutional
development
Consequences
• Tax administration reform with the establishment of the National Tax
Service (1966)
• Business accounting audit system
• Public Offering Promotion Act (1973)
• Fair Trade & Anti-Monopoly Act (1980)
• Real name financial transaction act (1993)
• Basic Act on Administration Regulations & Establishment of
Regulation Reform Committee (1997)
• Money Laundry Prevention Act & Financial Information Analysis
Center (2001)
• Under the basic policy conditions of developing industries, the
government more or less neglects transparency of management and
responsibility of business firms
• Recently being capable of anything of the owners of conglomerates
was under public criticism
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Korea Institute for
Development Strategy
Under a circumstance of massive unemployment, Korea thought that the best human right
of labor lies in providing employment, rather than in having decent labor institutions in
favor of labor.
IV. Development of indigenous IR institution
ILO Standard
Progression
Consequence
• Unions are free to choose the type of unions
• Political activity of unions is permissible to some extent
• Minimum wage is recommendable
• In the early days, ideal models of advanced countries were introduced
• Which accompanied serious threats to national security and economic
recovery due to ideologies of unions
• Oppressing labor disputes, Korean government strongly supported
industrial development
• Labor dispute was still considered as the major obstacle to sustained
growth
• Minimum wage is not introduced until 1988 in Korea
• In line with sustained economic growth, the government gradually
moved toward the ILO standard of IR
• For considerable period of time, Korea’s IR laws were considered
“underdeveloped” by the ILO standard
• Finally, Korea has succeeded in both founding a strong industrial base
and global standard ILO institutions, which took six decades to be
completed
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Korea Institute for
Development Strategy
The last six decades of Korea’s economic development was the history of struggling and
mediation among unions, employees, and the government with many trials and errors.
Development for Industrial Relations institutions in Korea
Period
IR Laws
Effects
Consequences
US Military Rule
(1945-47)
• Wagner Act
• Pro-union institution
• Unions show a struggle for
classes
• Serious social instability
• Prohibit unions’ political
activity
Syngman Rhee
(1948-60)
• Taft-Hartley Act
• Struggle against
ideological unions
• Post-war economic
recovery
Park Chung Hee 1st
(1961-72)
• Industrial union system
• Control on illegal labor
dispute
• Base for industrial
development
Park Chung Hee 2nd
(1972-79)
• Suspension of labor
activity
• Under martial law
• Strict control on unions
• High season for rapid
industrialization
Chun Doo Hwan
(1979-87)
• Enterprise union system
• Prohibit 3rd party
engagement
• Strict control on union
• Resistance from the union
• Est. basic labor system
• So far, underdeveloped by
ILO standard
Financial Crisis
(1997) and after
• Adjustment of laws
• Allow 3rd party
engagement
• Allow one company multiunions
• Good lesson from financial
crisis
• Unions become more
active
• Indigenous IR system
• In accordance with ILO
standard
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Korea Institute for
Development Strategy
With the philosophy that the best welfare of the labor is “employment,” Korean government
concentrated its full capacity on founding of industrial development, sacrificing all others, and
standing out to international pressure over IR institution.
The development and industrial policies and IR institutions in Korea
Number of disputes
4000
Current USD
30,000
3000
GDP per capita
20,000
Frequency of labor dispute
2000
10,000
1000
0
0
1960
IP
IR
LP
BT
1970
Light
industry
Base
industry
Authoritarian rule on union
Industrial union system
1980
HCI drive
1990
2000
OECD membership
Market opening
2010
Opening of capital market
IMF crisis
Prohibit labor
dispute
Authoritative
regime
Enterprise union
Gradual adjustment of labor laws to ILO standard
Minimum wage
OJT system
TVET
Kumoh THS
TQS, PES
TAR
NTS
Fair Trade & Anti-Monopoly Act
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Money Laundry Prevention
Act & Financial Information
Analysis Center
Real name financial transaction act
Korea Institute for
Development Strategy
Securing sustainable and equitable growth based on strong manufacturing industry is
not only a matter of “well-being”, but also of “being itself” in a big country endowed with
great resources like Indonesia.
National tasks of Indonesia
National
endowment
National tasks
Conditions
Population:
253,609,643
Territory:
1,811,569 sq
km
Islands:
13,466
High living
standard for the
people
National
integration
Sustainable &
equitable
growth
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Ethnics: 360
Defense capacity
Sound base of
manufacturing
industry
Korea Institute for
Development Strategy
Rich resources may cause an easy falling into the middle income trap in Indonesia. However,
the reward of overcoming the trap will be great, not comparable with any other countries.
Growth trend in comparison and middle income trap
Market
accessibility
Resource
accessibility
Economic
Growth
Wage
competitive
ness↓
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• Struggle for more
dividend
• Wage hike
• Industrial dispute
• Over-evaluation
• High wage cost
Exchange Rate
Labor intensive
industry in a form
of FDI
Stakeholders
Economic Growth
Korea Institute for
Development Strategy
Under a circumstance of massive unemployment, the best welfare and human right of the
labor is employment.
National task & policy options in priority under the MIT
P.I Upgrade labor
skill & technique
Infrastructure
Sound industrial
base
Reduction of
unemployment rate
FDI
P.IV Diversified
competitiveness
sources
P.II Indigenous IR
institutions
Unemployment rate
under target figure
P.III Settlement of
economic
transparency
Sound base for
sustainable growth
ILO standard right
of labor with
prevalent
employment
P.III Economic
transparency
P.II Peaceful IR
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Korea Institute for
Development Strategy
Policy recommendations (P.I)
P.I. Upgrading
labor skill & techniques
Ⅱ
Ⅲ
Ⅳ
• Establish a model TVET institution benchmarking the global best
practice
National drive
for TVET
• Underline labor discipline and mindset of labor
• Secure global-level competitiveness in labor skill and technique
Renovation of
labor market
• Establish TQS (Technical Qualification System) and PES (Public
Employment System)
• Secure efficient matching between labor supply and demand
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Korea Institute for
Development Strategy
Policy recommendations (P.II)
Ⅰ
Ⅱ. Develop indigenous
IR institutions
Ⅲ
Ⅳ
• Concentrate national capacity on prior-establishment of sound
industrial base and extension of employment
Basic approach
• In-depth study for the history of industrial development and labor
institutions in the world
• Establish philosophy on “industrial development” and “IR
institution.”
Development of
indigenous
labor
institutions
• In accordance with industrial development and employment
status, develop indigenous IR institutions in a step-wise manner
• At the regional/provincial level, develop a grand compromise of no
industrial dispute among labor, employee and local government
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Korea Institute for
Development Strategy
Policy recommendations (P.III)
Ⅰ
Tax
administration
reform
Ⅱ
Ⅲ. Transparency in business
accounting & activities
Ⅳ
• In consideration of large informal sector, tax administration reform
(TAR) seems the most urgent task
• Establish the National Tax Service for expertise of taxation, under
the Ministry of finance
• Build institutions for transparency in business accounting and
audit system
Institution for
economic
transparency
• Long-term plan for transparency in financial and property
transactions in line with economic development
• Establish institutions for anti-corruption
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Korea Institute for
Development Strategy
Policy recommendations (P.IV)
Ⅰ
Ⅱ
Ⅲ
Ⅳ. Diversification of
competitiveness sources
other than wage
• Upgraded labor skills and technique
Preconditions
• Peaceful IR
• Strong leadership to surpass the wall of advanced countries
• Under the rapid technological innovation, the huge bio and
agricultural resources may be invaluable future assets
• Strategic plan for development of base material industries
Opportunities
• Global level R&D institutions
• Long-term development plan for the enormous bio-environment
asset
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Korea Institute for
Development Strategy
This might be the right time for Indonesian people to make resolution and design a
grand plan for not breaking the gourd, and securing sustainable growth in the long-run.
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Korea Institute for
Development Strategy
In order for a butterfly to fly as a butterfly,
it has to undergo the pain of breaking out
of its chrysalis.
Only the people who stand up to the pain
of being reborn may enjoy sustainable
and equitable growth in the long-run.
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Korea Institute for
Development Strategy
The flag of the Asian Games was handed over from Incheon Korea
to Jakarta Indonesia in October 2014.
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Korea Institute for
Development Strategy
KDS Global Network
Overseas
Development Institute*
London, UK
Jordan
Investment Board
Amman, Jordan
UNECA*
Addis Ababa,
Ethiopia
Ministry of Planning,
Erbil, Kurdistan Region, Iraq
Federal Ministry of
Science &Technology
Abuja, Nigeria
Mongolian
Development Institute
Ulaanbaatar, Mongolia
Economic Research
Institute
Astana, Kazakhstan
Ministry of Agriculture,
Animal Industry &
Fisheries,
Kampala, Uganda
Ministry of Industry
Quito, Ecuador
KDS HQ
Seoul, Korea
Joaquim Chissano
Foundation
Maputo, Mozambique
Ministry of Industry and
Trade
Maputo, Mozambique
ASEAN Foundation*
Jakarta, Indonesia
* Currently under discussion for cooperation
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Korea Institute for
Development Strategy
Thank you!
Seung-Hun Chun, Ph.D.
sychun@kds.re.kr
Korea Institute for Development
Strategy (KDS)
www.kds.re.kr
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Korea Institute for
Development Strategy