2-3 ins growthsty oct0114 final chun seunghun

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Overcoming Middle Income Trap, and Industrial Relations in Indonesia

Seung-Hun Chun, [email protected]

Korea Institute for Development Strategy (KDS)

www.kds.re.kr

mailto:[email protected]

Korea Institute for Development Strategy2

Growth trend in international comparison and middle income trap

In the race for the growth of income, only a few countries have succeeded in

overcoming middle income trap (MIT).

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.

※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.

Source: Chosun-ilbo (10.6. 2014)

30,000

USD

26,205

USD

Republic of Korea

50m.

50

million

Income PopulationPopulationIncome

Korea Institute for Development Strategy

USD 40.16 b.

363b.

Trade balance and export in Korea

Overview of Korea’s Economic Development

Trade

balance

Export

volume

USD Δ 311 m.

31m.

Export

item

Fish,

plywood,

fabrics,

etc.

Automobile

5th largest

Shipbuilding

Top

shipbuilder

Steel

Global

top-level

Petrochemical

5th largest

-40

-20

0

20

40

60

1957

Unit: Billions of USD

Trade balance

Source: OECD.stat

3

IT

Top in TV,

Semi-

conductor

chips,

smartphone


The rise of income and industrial dispute in Korea

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.

0

500

1000

1500

2000

2500

3000

3500

4000

0.00

5000.00

10000.00

15000.00

20000.00

25000.00

Number of disputesCurrent USD

GDP per capita

Frequency of labordispute


Stage of

mouth

Stage of

arms & legs

Stage of

eyes

Stage of

brain

• Work hard

• Follow gov’t

• Still work hard

• Follow gov’t

• Relative

deprivation

• Seek less work,

luxurious life

• Spiritual

satisfactionCause of the MIT: Four stages of human desire

Hum

an D

esire

Income

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.

Source: Itogawa Hideo (Tokyo University)


At the risk of breaking the gourd at “the stage of eyes,” Korean government launched

bold strategies to ensure sustainable growth.

I. Diversification

of

competitiveness

sources

IV. Development

of institutions for

sound industrial

relations

III. Promotion of

transparency in

business

accounting and

activities

II. Upgrade of

labor skills and

techniques for

productivity

increase

The policy package for not breaking the gourd at the stage of eyes

MIT: Wage hike

& losing

growth

resilience


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.

7

Base material industry

Strong push for heavy &

chemical industry

• From light industry to heavy

& petrochemical industry

• USD 10b. investment plan

when total export was 1.8b.

(1972)

Industrial & technology

development capacity

• Korean Institute for Science

& Technology (KIST, 1966)

- Salary: 3times higher than

local professors

- Full budget support with

audit exemption

- Hongreung nobles

I. Diversification of competitiveness sources

Int’l criticism:

No economic

feasibility

Global top-level

competitiveness

: the fifth

producer in the

world

• 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


Presidential

commitment

Model Technical

High School

Expansion of the

model

Outcome

Renovation of

labor market

• Faculty: best in Asia

• Students: Upper 10% of junior high schools

• Full scholarship

• Education philosophy: Three “Jeong Principle”

- Devotion (JeongSung)

- Accuracy (JeongMill)

- Honesty (JeongJik)

• 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

“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

• Skilled workers are national treasures!

• Establishment of TQS(Technical Qualification Standard) and

PES(Public Employment Service)


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

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.


IV. Development of indigenous IR institution

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.

• 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

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• 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

ILO Standard

Progression

Consequence


Development for Industrial Relations institutions in Korea

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.

Period IR Laws Effects Consequences

US Military Rule

(1945-47)

Syngman Rhee

(1948-60)

Park Chung Hee 1st

(1961-72)

Park Chung Hee 2nd

(1972-79)

Chun Doo Hwan

(1979-87)

Financial Crisis

(1997) and after

• Wagner Act

• Pro-union institution

• Taft-Hartley Act

• Industrial union system

• Suspension of labor

activity

• Under martial law

• Enterprise union system

• Prohibit 3rd party

engagement

• Adjustment of laws

• Allow 3rd party

engagement

• Allow one company multi-

unions

• Unions show a struggle for

classes

• Serious social instability

• Prohibit unions’ political

activity

• Struggle against

ideological unions

• Control on illegal labor

dispute

• Strict control on unions• High season for rapid

industrialization

• Est. basic labor system

• So far, underdeveloped by

ILO standard

• Indigenous IR system

• In accordance with ILO

standard

• Post-war economic

recovery

• Base for industrial

development

• Good lesson from financial

crisis

• Unions become more

active

• Strict control on union

• Resistance from the union


The development and industrial policies and IR institutions in Korea

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.

IP

IR

LP

BT

Light

industryBase

industry

HCI drive Market opening

OECD membership

IMF crisis

Opening of capital market

0

1000

2000

3000

4000

0

10,000

20,000

30,000

1960 1970 1980 1990 2000 2010

Number of disputesCurrent USD

GDP per capita

Frequency of labor dispute

Minimum wage

TVETKumoh THS

Authoritarian rule on union

Industrial union system

Prohibit labor

dispute Enterprise union

Authoritative

regime Gradual adjustment of labor laws to ILO standard

TAR

NTS

TQS, PES

Fair Trade & Anti-Monopoly Act Real name financial transaction act

Money Laundry Prevention

Act & Financial Information

Analysis Center

OJT system


National tasks of Indonesia

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.

Sustainable &

equitable

growth

Sound base of

manufacturing

industry

National

integration

High living

standard for the

people

Defense capacity

Population:

253,609,643Islands:

13,466Ethnics: 360

Territory:

1,811,569 sq

km

National

endowment

National tasks

Conditions


Growth trend in comparison and middle income trap

Economic Growth

Labor intensive

industry in a form

of FDI

Market

accessibility

Wage

competitive

ness↓

• Struggle for more

dividend

• Wage hike

• Industrial dispute

• Over-evaluation

• High wage cost

Sta

kehold

ers

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.

Exchange R

ate

Economic

Growth

Resource

accessibility


P.II Indigenous IR

institutions

P.III Settlement of

economic

transparency

P.IV Diversified

competitiveness

sources

Unemployment rate

under target figure

Sound industrial

base

Reduction of

unemployment rate

Sound base for

sustainable growth

ILO standard right

of labor with

prevalent

employment

P.I Upgrade labor

skill & technique

Infrastructure

FDI

P.II Peaceful IR

P.III Economic

transparency

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


Ⅱ Ⅲ ⅣP.I. Upgrading

labor skill & techniques

• Establish a model TVET institution benchmarking the global best

practice

• Underline labor discipline and mindset of labor

• Secure global-level competitiveness in labor skill and technique

Policy recommendations (P.I)

• Establish TQS (Technical Qualification System) and PES (Public

Employment System)

• Secure efficient matching between labor supply and demand

National drive

for TVET

Renovation of

labor market


Ⅰ Ⅲ ⅣⅡ. Develop indigenous

IR institutions

Policy recommendations (P.II)

• Concentrate national capacity on prior-establishment of sound

industrial base and extension of employment

• In-depth study for the history of industrial development and labor

institutions in the world

• Establish philosophy on “industrial development” and “IR

institution.”

• 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

Basic approach

Development of

indigenous

labor

institutions


Ⅱ ⅣⅢ. Transparency in business

accounting & activitiesⅠ

• 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

• Long-term plan for transparency in financial and property

transactions in line with economic development

• Establish institutions for anti-corruption

Tax

administration

reform

Institution for

economic

transparency

Policy recommendations (P.III)


Ⅱ Ⅲ

Ⅳ. Diversification of

competitiveness sources

other than wage

Ⅰ

• Upgraded labor skills and technique

• 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

• Global level R&D institutions

• Long-term development plan for the enormous bio-environment

asset

Policy recommendations (P.IV)

Preconditions

Opportunities


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.


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.


The flag of the Asian Games was handed over from Incheon Korea

to Jakarta Indonesia in October 2014.


KDS Global Network

KDS HQSeoul, Korea

Mongolian Development InstituteUlaanbaatar, Mongolia

OverseasDevelopment Institute*

London, UK

UNECA*Addis Ababa,

Ethiopia

Ministry of Industry and Trade

Maputo, Mozambique

Joaquim Chissano Foundation

Maputo, Mozambique

ASEAN Foundation*Jakarta, Indonesia

Ministry of Industry Quito, Ecuador

Economic Research Institute

Astana, Kazakhstan

JordanInvestment BoardAmman, Jordan

Federal Ministry of Science &Technology

Abuja, Nigeria

Ministry of Agriculture, Animal Industry &

Fisheries, Kampala, Uganda

Ministry of Planning, Erbil, Kurdistan Region, Iraq

* Currently under discussion for cooperation


Thank you!

Seung-Hun Chun, [email protected]

Korea Institute for Development Strategy (KDS)

www.kds.re.kr

mailto:[email protected]

2-3 ins growthsty oct0114 final chun seunghun

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