How import substitution was carried out in South Korea

18.04.2022       

In South Korea, the import substitution program has gone through four phases of development since 1957. The first phase — industrialization with the help of American investment: the development of labor-intensive industries at the expense of cheap labor. At this time, the state suppressed the activity of trade unions in order to keep the cost of labor low. The second phase was still characterized by an emphasis on cheap labor, but the main focus was the development of light industry.
In the third phase, import substitution efforts were concentrated on the heavy and chemical industries, with significant government support, for example, on limiting the participation of foreign capital and investment in the education of the population. The transition to the fourth phase, starting from the 90s, was characterized by the development of the high-tech industry. It became possible due to the consistent development of the production base, the growth of the qualifications of the labor force and the subsequent rise in labor costs, which stimulated domestic demand.
Taiwan has a similar story — in the 1950s, the government adopted a policy of import substitution. The country went through the same phases of development as South Korea, — from light industry to heavy industry and then to high technology. At first, a high share of state participation in the import substitution program was combined with a large role of small and medium-sized enterprises in general industrialization. State measures to support import substitution included controlling the exchange rate, stimulating domestic demand for their own products by limiting the access of private enterprises to imports.
From an economic point of view, this is a better approach than the emphasis on creating analogues of foreign products, which rarely creates additional value in the production chain, and only the final stage of assembly and branding is localized in the country. In addition, such products are mainly focused on the domestic market, which in the case of Russia is about 2% of the world market and, due to the low level of average income of citizens, provides a steady demand only for basic products and technologies.
The advantages of China and other listed countries was cheap labor, and the development of exports took place in labor-intensive industries. Over time, the accumulated investments were transferred to more capital- and knowledge-intensive industries. The growth in high-tech production in China is also associated with significant investment in the exploration and production of rare earth metals, which are needed in electronics and batteries, as well as tight control over the level of exports of such metals. As a result, China is already engaged in the localization of high-tech technologies. For example, he launched the Made in China 2025 program, in which the state identified 10 priority industries for development.
It is important to note here that the success of these countries' exports is due to the right choice of their competitive advantage in the world market. And it doesn't have to be hard work. For example, a significant advantage of South Korea at some point was the logistical proximity to the theater of operations in Vietnam, which motivated the United States to purchase products for their army there, since it was cheaper. Forbes