the big push theory case study of south korea and its application on vietnam

Implementation of the Big Push theory in South Korea .... Introduction to The Big Push Theory The "Big Push" theory, also called the "balanced growth theory," suggests that in certain si

HO CHI MINH CITY CAMPUS

-*** -MID-TERM REPORT

Subject: Economic Development

KOREA AND ITS APPLICATION ON VIETNAM

Ho Chi Minh City, September 2023

LIST OF TABLES AND FIGURES …

CHAPTER 1 INTRODUCTION TO THE BIG PUSH THEORY 1

1.1 Introduction to The Big Push Theory 1

1.2 Requirements of The Big Push Theory 1

1.2.1 Indivisibility of Production function 1

1.2.2 Indivisibility of demand 2

1.2.3 Indivisibility of Savings 4

1.3 Critical appraisal of the theory of Big Push 4

CHAPTER 2 APPLICATIONS OF BIG PUSH THEORY IN SOUTH KOREA 5

2.1 Introduction to South Korea and its economic challenges 5

2.2 Implementation of the Big Push theory in South Korea 6

2.2.1 Industrialization 6

2.2.2 Education 7

2.2.3 Technology advancement 8

2.2.4 Infrastructure 9

2.2.5 Export-Oriented Growth 10

2.3 Positive Outcomes of application of Big Push Theory in South Korea 11

2.3.1 Rapid economic growth 11

2.3.2 Education 11

2.3.3 Infrastructure 12

2.3.4 Technological advancement 12

CHAPTER 3 APPLICATIONS OF BIG PUSH THEORY AND CHALLENGES FOR VIETNAM 13

3.1 Application of Big Push Theory in Vietnam 13

3.1.1 Infrastructure Development 13

3.1.2 Human Capital Development 13

3.1.3 Key industry development 14

3.1.4 Regional Development 15

3.2 Challenges and lessons learned for Vietnam 16

3.2.1 Financial challenges 16

3.2.2 Governance and project management capabilities 16

CONCLUSION 18 REFERENCES 19

Figure 1.1 Illustration of The Big Push Theory 3 Figure 2.1 Policy initiatives responsible for Korea’s technology development 9 Figure 2.2 Sources of Infrastructure Financing, South Korea, 1993-2010 10

CHAPTER 1 INTRODUCTION TO THE BIG PUSH THEORY

1.1 Introduction to The Big Push Theory

The "Big Push" theory, also called the "balanced growth theory," suggests that

in certain situations, a coordinated and substantial increase in investment across various sectors of an economy can kickstart sustainable growth This theory was proposed by economists Paul Rosenstein-Rodan, Albert Hirschman, and Nurkse in the mid-20th century

The core concept is that developing economies often get trapped in “vicious

circle of poverty” They lack the necessary infrastructure and conditions to attract

private investment and stimulate economic growth Conversely, without growth, it's hard to generate the resources needed to build the required infrastructure The Big Push theory proposes that a significant, coordinated investment effort across sectors like infrastructure, education, healthcare, and industry can break this cycle Developing multiple sectors simultaneously can create positive spillover effects, where progress in one area benefits others, creating a cycle of growth and development

While the Big Push theory doesn't explain all aspects of economic development,

it highlights the importance of coordinated investment, infrastructure development, and building institutional capacity for fostering long-term growth in developing economies 1.2 Requirements of The Big Push Theory

The core idea of the 'big-push' approach is to gain advantages from external economies by setting up many industries that depend on each other However, before this can happen, we need to tackle economic indivisibilities Prof Rodan has distinguished three kinds of indivisibilities and externalities with a view to specify the areas where big push needs to be applied:

1 Indivisibilities in the production function, i.e., lumpiness of capital, especially in the creation of social overhead capital

2 Indivisibility of demand, i.e., complementarity of demand

3 Indivisibility of savings, i.e., bend in the supply of savings curve

1.2.1 Indivisibility of Production function

The production function explains how technology transforms inputs into outputs, leading to increased production, economies of scale, and externalities In this context,

social overhead capital (SOC), which includes infrastructure like transport, power, and communications, plays a crucial role

Investing in SOC is more important than directly productive activities (DPA), especially in underdeveloped countries (UDCs) SOC acts as a foundation for generating DPAs quickly and offers greater production returns However, initial investment in SOC is substantial, which may lead to unused capacity initially

It is possible to distinguish four types of indivisibilities of creating social overhead capital:

1 Indivisibility of Time: The creation of social overhead capital must precede other directly productive industries so that it is irreversible or indivisible in time

2 Indivisibility of Durability: The infrastructures generally last long The overhead capital with lesser durability is either technically not feasible or is very poor in efficiency

3 Indivisibility of Long Gestation Periods: The investments in socia l overhead capital, by all counts, involve a highly protracted period of time for their fruition

as compared with investments in other directly productive channels

4 Indivisibility of an Irreducible Industry Mix of Public Utilities: Social overhead capital must grow collectively There is an irreducibly minimum industry mix of different public utilities that have to be created all at one stroke

These indivisibilities in supplying social overhead capital pose significant obstacles to development in underdeveloped countries Private investors are often hesitant to invest in SOC due to these challenges Therefore, the theory emphasizes the crucial role of the government in promoting economic development by taking on the responsibility of investing in and developing SOC

1.2.2 Indivisibility of demand

This refers to the complementarity of demand arising from the diversity of human wants It means that to kickstart and accelerate development, countries need to establish interconnected industries simultaneously Indivisibility of demand creates links between investment decisions If each investment project is done independently, it's likely to fail because there's uncertainty about finding a market

In underdeveloped countries (UDCs), limited market size hinders production scale and leads to underutilized capacity The theory suggests that by investing in various industries catering to related demands, markets can grow, allowing for cost-effective mass production This approach also encourages practices like specialization, which saves time and resources and encourages innovation This, in turn, enhances the competitiveness of local industries against foreign competitors

Figure 1.1 Illustration of The Big Push Theory

(Source: abhipedia) The figure above shows the average and marginal revenue curves of a firm when investment is made in this single firm, named D1 and MR1 This firm sells OQ1 quantity and charges OP1 price Here it faces losses equal to P1cab But if investment

is made in so many industries, the market will be extended In this way, the demand will increase as shown by D4 and corresponding marginal revenue curve is MR4 Now the equilibrium takes place at E where OQ4 quantity is produced and OPb price is charged As a result, the industries having profits equal to P4RST It means that the greater investment in so many industries may convert the losses into profits

However, expanding the production capacity of small-scale and cottage industries can be challenging To ensure that the benefits are widespread, the growth of these smaller industries is also important Therefore, the policy framework that a

government adopts to support and incentivize these industries becomes crucial for overall market growth and development

1.2.3 Indivisibility of Savings

In developing countries, a key challenge to economic growth is the lack of capital for machinery, equipment, and infrastructure due to low savings caused by low incomes

To break this cycle, Rosenstein-Rodan suggests gradually increasing savings over time

to build a larger capital pool

However, having capital isn't enough; it's crucial to use it effectively for productive purposes, which requires generating and sharing ideas In essence, it's not just about having money; it's about putting it to good use in projects that create value

In this context, ideas and knowledge are often more important than capital alone in driving economic development

In summary, the idea is that incremental or piecemeal investments might not be sufficient to address the interconnected challenges in underdeveloped countries Instead, a substantia l and unified push in the form of a high minimum quantity of investment is necessary to propel them past these economic obstacles and onto a path

of sustainable development

1.3 Critical appraisal of the theory of Big Push

Rosenstein theory is better in the sense that it identified that market imperfections are the big obstacles in the way of economic development Therefore, a big amount of investment will solve the problem of limited markets, rather than depending upon market mechanism, and such heavy amounts of investment will become helpful for economic growth However, Prof Rosenstein-Rodan’s all-or-nothing approach is not perfect in itself in all respects It has several shortcomings

1 Negligible economies in export, and import substitute sectors: The main foundation of the 'big push' theory is the idea of benefiting from external economies Professor Viner has pointed out that international trade can bring about more of these external economies compared to domestic investments However, developing countries, primarily focused on producing raw materials, allocate a significant portion of their investments for exports and small-scale

import replacements These areas don't tend to yield substantial external economies

2 Negligible economies in agricultural sector: The ‘big push’ theory concentrates

mainly on the industrial sector But in the developing countries, the most dominant sector is composed of agricultural and primary production For a balanced growth of the economy, agriculture also requires a corresponding ‘big push’ Any neglect of the agricultural sector in these countries is bound to

jeopardise the ‘big push’ effort

3 Inflationary pressure: If the funds for investment in UDCs are raised through foreign loans and by printing new notes, they will create inflation in the economy Moreover, in the context of UDCs, since the provision of SOC is expensive, the state has to channelize resources from other developmental projects to SOC This might create imbalances in terms of shortage of certain goods and services In addition, there could be inflationary pressures in the economy

4 Administrative and institutional difficulties: This theory stresses upon state investment to remove deficiency of capital But in case of UDCs the machinery

is corrupt There exist a lot of problems in state machinery The private and public sectors compete with each other, rather supporting each other Consequently, there will not be the balanced growth in the economy

CHAPTER 2 APPLICATIONS OF BIG PUSH THEORY IN SOUTH KOREA

2.1 Introduction to South Korea and its economic challenges

South Korea, a nation located on the Korean Peninsula in East Asia, has captured the world's attention with its remarkable economic transformation This thriving nation, known for its technological prowess and vibrant culture, was once faced with significant economic challenges that seemed insurmountable

In the wake of the Korean War in the early 1950s, South Korea found itself grappling with daunting economic challenges The nation was marked by widespread poverty, where a significant portion of the population struggled to meet their basic needs The devastation of the war had left the country's infrastructure in ruins, with vital elements such as roads, bridges, and factories severely damaged South Korea's

industrial base was underdeveloped, and its economy leaned heavily on agriculture Additionally, the education system was limited, hindering the formation of a skilled workforce Compounding these issues was the scarcity of natural resources, leaving the nation with limited means for economic advancement Moreover, foreign exchange reserves were minimal, making it challenging to finance imports or attract foreign investment This confluence of challenges set the stage for a remarkable economic transformation of South Korea's dynamic journey, particularly its implementation of the Big Push theory, as it sought to address these formidable economic hurdles and pave the way for a brighter future

2.2 Implementation of the Big Push theory in South Korea

In 1973, the government revised the Foreign Capital Inducement Law of 1966, which provided substantial privileges for the Strategic sector Additionally, South Korean banks provided policy loans at below-market interest rates to the HCI companies Among the numerous poliÏey loans, the National Investment Fund (NIF) was created in December 1973, and the government mobilized all public employee pension funds and transferred 30% of their deposits to the Fund These funds were managed by state controlled banks and were channeled to government-favored heavy industrial projects at very low interest rates, which in most cases, were negative in real terms These policy loans comprised more than 35% of total manufacturing investment from 1973 to 1980 In 1975, the National Investment Fund lent 66% of its portfolio to

HCI projects This continuation of the HCI policy assured private firms of limited risks and provided an excellent opportunity for expansion

In order to promote ‘big push’ industrialization, the Korean state mobilized financial resources through domestic and foreign savings to nurture the chaebol through the mediation of state-owned banks Policy loans that carried exceedingly low interest rates were granted to the chaebols The rise of the chaebol was therefore a logical outcome of the Korean state’s big push strategy, and the result was that the economy

became dominated by a small number of chaebols The top 43 chaebols accounted for nearly 41 per cent of all manufacturing sales in 1989 and contributed considerably more than 50 per cent of all export sales Due to the state’s ‘unlimited supply of capital’, the

South Korean chaebol had the ability to assimilate existing technologies rapidly The best example involves the development of the semiconductor industry Bolstered by the state’s financial support, Samsung, Hyundai and Goldstar in 1982 announced major

involvements in the mass-production of chips The four major players at the time, Samsung, Goldstar, Hyundai and Daewoo, committed more than $1.2 billion to this task between 1983 and 1986, or 10 times the scale of investment in Taiwan’s semiconductor

industry over the same period Through their own efforts, Samsung, Daewoo, Hyundai and Goldstar all developed their DRAM technologies independently By the late 1980s they had shown their capacity to develop their own new products, such as 4M DRAM, with little (Goldstar) or no reliance (Samsung, Hyundai) on imported designs or technology Samsung subsequently became a major global player in the international market for semiconductors and by 1993 was the world’s largest supplier of DRAM

chips

2.2.2 Education

Korea’s remarkable investment in education has been at the heart of its

remarkable economic transformation over the past 60 ye ars This fostered a highly skilled workforce that could support industrial growth and technological advancement

An estimated US $100 million alone went into education and training during the Korean War reconstruction period The foreign assistance in education was administered by the Armed Forces Aid to Korea (AFAK) and UNKRA during the early years of post-war reconstruction The goals of the assistance efforts in Korean education

post-after 1953 centered on: classroom construction, secondary and vocational education, teacher training, and higher education There was also a good deal of technical assistance carried in the military Government expenditure on education has been generous In 1975 it was W220 billion (for value of the won), the equivalent of 2.2 %

of the gross national product (GNP), or 13.9 % of total government expenditure By

1986 education expenditure had reached 3.76 trillion won, or 4.5 % of the GNP, and 27.3 % of government budget allocations

2.2.3 Technology advancement

The technological sector makes up a significant part of South Korea's economy, accounting for over 30% of its exports Tech also enables productivity gains across other industries South Korea invests over 4% of its GDP in R&D, one of the highest levels in the world It ranks 11th in the world in the number of scientific research articles published Technology was seen as essential to the success of industrialization and export competitiveness MOST (Ministry of Science and Technology) and KIST (Korea Institute of Science and Technology) were established in order to promote technology transfer and absorption by Korea’s nascent manufacturing sector Incremental

institutional additions continued through the 1970s and the 1980s with the creation of the Korea Advanced Institute of Science (now KAIST, the leading S&T university), as well as a flock of specialized government research institutes (GRIs), housing public and private research entities employing thousands of highly trained professionals Figure 2.2 shows a range of policies: interventionist support for manufacturing, but also development of human capital (including heavy use of vocational training, science and technology education, and overseas training and education), strong support for research and development; and policies to bring technology from around the world and diffuse

it into Korean firms