Democracy (and a market economy) alone does not automatically set the nation on the path to economic prosperity. There are perhaps no better contrasting examples that underscore this than the economic developments in two countries — South Africa and South Korea. We will attempt to highlight and present the facts, the countries’ similarities and importantly, their differences, and the underlying causes that set them on completely different economic trajectories in the past three decades.
A bit of history
Both countries have endured difficult histories, riven by conquest, war, destruction, colonisation by others, and suffering — before achieving democracy around the same time, in the early 1990s.
In South Africa, the National Party came into power in 1948 and implemented apartheid as the official policy. As we all know, apartheid is a system of racial segregation and political-economic discrimination against the non-white South Africans. It included the forcible removal of millions from their homes and communities to designated townships based on social stratification, limiting their employment opportunities, rights and freedom. A separate, inferior education system was established for non-whites, training them for mostly manual labour and menial jobs. The majority black South Africans suffered under this oppressive, at times violent, white minority rule.
Over time, the regime faced increasing international isolation and economic sanctions, which eventually led to negotiations for the transition to democracy. This institutionalised economic exploitation finally ended on April 27, 1994, the day the country’s first democratic election was held and won by the African National Congress. A fortnight later, Nelson Mandela, a global icon and 1993 Nobel Peace Prize recipient who was imprisoned for 27 years fighting against apartheid, was sworn in as South Africa’s first democratically elected president. Expectations were high that he could unite the divided nation and foster reconciliation between different racial and ethnic groups, to build South Africa on the principles of equality, democracy and justice.
South Korea was one of the poorest countries in the world at the end of World War II, after 35 years of brutal Japanese colonisation and economic exploitation. It was established as a republic in 1948 and promptly embroiled in the devastating Korean War from 1950 to 1953. Millions of people were killed and there was extensive property and infrastructure destruction. Following a ceasefire agreement, signed in July 1953, the country was, for several decades, subject to authoritarian military rule, marked by political suppression, media censorship as well as limited civil liberties and opportunities to participate in the political process.
Pro-democracy movements in the country gathered momentum through the 1980s. Under increasing international pressure as well as widespread domestic protest, an amendment was made to the constitution in 1987, which included restoration for direct presidential elections. This was a key turning point in its political history. That same year, Roh Taewoo, a former military general, was “democratically” elected as the new president. In 1993, Kim Young-sam, a long-time democracy activist, became the first civilian president of South Korea. He played a crucial role in cementing South Korea’s transition from military rule to a fully democratic system. His legacy includes the push for greater government transparency, accountability and strengthening of democratic institutions as well as anti-corruption campaigns. He also sought to break up the power of large conglomerates (chaebols) that had driven and dominated the economy’s industrialisation since the 1960s.
Aside from achieving democracy around the same time, both countries have similar population size. South Africa, though, has significantly larger land mass and is far richer in natural resources. Their economic progress since democratisation, however, has taken very different paths.
Two very different economic trajectories
See also: Education was, is and always will be the great equaliser
South Korea is one of the four high-growth economies (together with Taiwan, Hong Kong and Singapore) collectively known as the Asian Tigers. Its transformation from being one of the poorest to one of the richest nations in the world is widely viewed as an economic miracle, through the period of industrialisation since the 1960s and especially in the aftermath of the Asian financial crisis (AFC) in 1997.
At the outset of the AFC, structural weakness in the financial sector and over-reliance on foreign money and short-term capital to finance the growth of the chaebols sent the economy into a tailspin. The government of South Korea, under the leadership of Kim Young-sam, turned to the International Monetary Fund (IMF) for a bailout, with commitment for reforms. The economy contracted sharply in a recession, its currency devalued and there were widespread bankruptcies and a surge in unemployment.
However, South Korea’s quick and strong recovery over the next couple of years represents one of the most successful economic transformations in recent history. It is today the 13th largest economy in the world (by GDP), a major exporter with globally respected household brand names for electronics and consumer goods and, in recent years, fashion, entertainment and media (TV shows, films, music and pop icons). Its population is highly educated and highly productive.
South Africa, on the other hand, enjoyed improved economic growth in the first 15 years after the official end of apartheid — GDP expanded at a decent compound annual growth rate (CAGR) of 5.3% on average from 1994 to 2008. Despite the deep flaws of apartheid, the country had inherited good infrastructure and a well-developed financial system. This growth, however, failed to generate sufficient jobs to materially reduce chronic high unemployment. Unemployment rate fell only marginally, from 20.8% to 19.5% over this period.
Since then, growth has slowed sharply — to just 1.6% per annum, on average, from 2009-2022 — and the economy is now teetering on the brink, crippled by rolling power cuts after years of mismanagement and systemic corruption. Unemployment has risen to a record high, with nearly one in three persons jobless.
Income-wealth inequality has soared to the highest in the world, as measured by the Gini coefficient at 63 — worse than it was back in 1993. One in five South African live in extreme poverty (on less than US$2.15 per day) and nearly 62% of its population live below the international poverty line (less than US$6.85 per day). Meanwhile, two-thirds of the nation’s pre-tax income accrue to the top 10% of the population. Crime rates have surged to the third highest in the world, according to the World Population Review.
Democracy is not the silver bullet
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Clearly, democracy is not the silver bullet, as promoted by liberal Westerners! Yes, democracy improves inclusiveness, giving citizens the right to vote and participate in the political process and institutions. But democracy on its own does not lead to economic progress. As we wrote previously, the decisions made by political institutions will determine the course of the country’s economic development through the economic institutions (inclusive or extractive) they put in place (“Get the politics right, and all else will follow”, published on June 19, 2023).
One of the biggest challenges for democracy and continued economic progress is the formulation of policies that not only promote sustainable growth — but critically, the equitable distribution of the resulting income-wealth. High equality and low unemployment are key ingredients to sustain consumption, drive economic growth — and reduce crime rates.
Food for thought: It is inequality, more so than absolute poverty, that leads the average person to commit criminal acts, including white collar crimes and yes, bribery and public corruption. A 2002 World Bank study shows that crime rates and inequality are positively correlated within countries and also between countries. According to the paper, in accordance with the theory of relative deprivation, “the feeling of disadvantage and unfairness leads the poor to seek compensation and satisfaction by all means, including committing crimes against both poor and rich”.
More food for thought: As the economy advances, is it inevitable that economic disparity will grow? There is certainly evidence of this. Over the past three decades, the share of national income for firms (capital) has widened over that for labour globally. According to a study by the IMF, increased corporate market power has led to market-wide price mark-ups over marginal cost since 2000 across the developed world and, to a lesser extent, emerging countries. This is usually attributed to a confluence of factors including globalisation, technological advances, regulatory changes, reduction in unionisation and financialisation of the economy. Indeed, one of the reasons behind the current persistent inflation in the US is consumer price increases, over that of input costs inflation, underscoring the pricing power of large companies. Profit margins for the S&P 500 companies are hovering near the highest levels since at least 2008.
As inequality becomes increasingly apparent in the eyes of the people — whether real or perceived — it will lead to resentment and anger against the establishment and elites, and, in turn, precipitate social unrest and political instability. In other words, policies that directly address redistribution of income are critical to maintain confidence and trust in public institutions and increase the likelihood of economic success.
Yet, we also know people are motivated by incentives and disincentives. Unjust redistribution will inevitably lead not just to slower economic growth and progression but also even to a shrinking pie. Wherein lies the balance? This three-part article hopes to shed some light or, at least, initiate an intellectual discourse.
At the dawn of democracy in both countries, South Korea’s GDP was 2.6 times larger than that of South Africa. In 2022, its economy has grown to 4.1 times the size of the latter, on the back of outsized productivity gains. Even more stark is the people’s income (a measure of standard of living) growth over this period — which increased from 2.5 times to 5.3 times higher (see Table and Chart). Equally important is how this economic growth has been relatively equitably shared — South Korea is ranked 30 of 163 countries by the World Bank in terms of equality, with a Gini coefficient of 31.4 (the lower the score, the lesser the inequality). South Africa, as we noted earlier, has the worst Gini coefficient in the world at 63.
Their sharp divergence in economic progress, after barely three decades of democratic rule in both countries, is hugely fascinating — and we think, instructive.
We are not experts on either country nor are we qualified development economists, though we are more honest and better analysts than most. But we are naturally curious, we like to read and we strive to learn. We are certain there are lessons we can learn from the experiences of others. Next week, we will highlight some of the key factors behind the economic success and failure of South Korea and South Africa, collated from a wide range of publications and research materials. And in Part 3, we will try to bring these lessons together and relate them to Malaysia. The aim is to enrich knowledge and wisdom.
Hopefully, we can all gain a better understanding of what it takes to bring economic progress, prosperity and jobs that will improve the well-being of the masses, not just the small group of elites and privileged. (This is the first of a three-part series).
The Malaysian Portfolio fell 0.3% last week, paring total portfolio returns to 158.2% since inception. Shares for Insas gained 3.7% while Star Media Group fell 2.3%. Hartalega and KUB Malaysia traded unchanged. We disposed of all our holdings in ABF SG Bond Index Fund ETF, raising cash holdings to 29.4% of total portfolio value. This portfolio continues to outperform the benchmark FBM KLCI, which is down 23.3%, by a long, long way.
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