This paper compares the industrial policy experiences of South Korea and Nigeria. While the former has been acclaimed as a "developmental state", Nigeria's industrial policies have been less successful at driving industrialization. Despite their different starting points and political settlements, the divergent performance between the two countries may be attributed to an anti-export bias and import-substitution orientation in Nigeria compared to export-orientation in South Korea, more consistent and rational use of trade policy and the use of currency devaluation in South Korea, larger firms driving industrial and productivity growth in South Korea, and an more inefficient state-led industrialization drive in Nigeria from the 1970s especially.
COMPARING THE INDUSTRIAL POLICY EXPERIENCES OF SOUTH KOREA AND NIGERIA
Abel B.S. Gaiya
1. lntroduction
South Korea has been widely acclaimed as a model development success story since the late 20 th century. As a major example of the "East Asian miracle", its success has been attributed to the wide range of policies and strategies adopted by its "developmental state". Nonetheless, this experience has often been contrasted with less successful countries, especially in Sub- Saharan Africa and Latin America. Nigeria has often been deemed a failure in industrialization and diversification. Various explanations have been proffered for the limitations and failures of industrial policy in these countries. This essay aims to draw from these explanatory traditions to focus particularly on the nature of industrial policy used in South Korea from the 1960s in contrast to the nature of industrial policy used by Nigeria from the same period. The paper argues that, the differential growth experiences of South Korea (that is, positive) and Nigeria (that is, limited to negative) may be explained by the differences in industrial policies employed, differences in political settlements which limited the appropriate use of certain policies, different initial conditions which limited the growth performance that could be incited from industrial policy, and external constraints. The essay begins by briefly outlining the theoretical underpinnings of industrial policy as a development tool.
2. The Rationale for lndustrial Policy and Conditions for Success
Given the constraints of space and the need to explore the empirics more deeply, this section is kept brief, as much abounds in the literature on the rationales for industrial policy (see ECA, 2016, 41-45; Lin, 2012).
Following Pack and Saggi (2006, 267-268), industrial policy here refers to "any type of selective government intervention or policy that attempts to alter the structure of production in favour of sectors that are expected to offer better prospects for economic growth in a way that would not occur in the absence of such intervention in the market equilibrium." Economic development is anything but automatic, and it is about structural transformation (Rodrik, 2008, 4). There are various theoretical reasons for the importance and the historical ubiquity of industrial policy to facilitate this process; most of which are based on various notions of market imperfections or failures. These rationales range from demand complementarities and coordination problems, informational and other types of externalities (ECA, 2016, 41-45), as well as technological learning (Khan, 2013). There are also two broad strategies for industrialization: import-substitution industrialization (ISI) and export-promotimg industrialization (EPI).
The more technologically-intensive the industry, the greater the benefits of targeting it, as it would be most able to produce Keynesian and Schumpeterian efficiencies (ECLAC, 2012); but also the more costly and risky to do so (Lin and Chang, 2009). There are certain "key design features" which industrial policy needs to improve the odds of success: "embeddedness, carrots and sticks, and accountability" (Rodrik, 2008, 3). Without these, industrial policy can fall into capture by non-growth-enhancing activities and actors, who continue receiving rents from the state without improving economic performance or international competitiveness. The ability to discipline firms receiving rents from the state in turn depends on the political settlement of the society (Khan, 2004). Additionally, because developing countries are capital constrained (whereas late industrialization requires imports of capital goods), countries that have access to foreign capital inflows (such as foreign aid,
foreign direct investment, or foreign credit) face less balance of payments constraints and are better able to conduct industrial policy with success (Fischer, 2009).
3. lnitial Conditions of South Korea and Nigeria
South Korea and Nigeria were substantially different by 1960. First, the process of industrialization Africa began from a relatively lower base, with gross industry value added as a share of GDP in 1960 being 8% (with manufacturing being 4%) in Nigeria and 16% (with manufacturing being 10%) in South Korea (Szirmai, 2012, 409). This was owing to differential colonial legacies (Amsden, 2007, 26-27), as well as the more intensive use of industrial policy in South Korea before 1960 under the Syngman Rhee regime. Similarly, by 1960, GDP per capita (current US Dollars) in South Korea was $158.24, while in Nigeria it stood at $92.96 (World Bank, 2019a); although GDP was higher in Nigeria. Human capital was also more developed in South Korea, with literacy rate in Nigeria in 1960 being 25% (Hagan, 1979, 186), whereas it was 71% in South Korea (Rodrik et al, 1995, 76). Furthermore, the two countries have different growth "regimes". Nigeria's growth, like many SSA countries, has occurred in episodes - spurts and reversals (Jerven, 2010). Its longest uninterrupted period of growth is 1966-1974 (Maddison, 2009, cited in Jerven, 2010, 153). For lack of space, the analysis will be limited to the period 1960 to 1990, with particular focus on 1960 to 1980.
The countries' political settlements also (Khan, 2004) differed substantially, making developmental statism more viable (Khan, 2018, 650) in South Korea (Wade, 1990) than in Nigeria with its unstable federation (Roy, 2017, 20). On the external front, with South Korea it is observed that because of its geostrategic value to the United States (and geo-economic proximity to Japan), its export-oriented growth was supported by these external forces (Stubbs, 1999). Whereas Nigeria did not benefit from such critical external forces.
It is important to keep these iniitial conditions in mind, and to understand that, ex ante, it could be expected that industrial policy would produce less spectacular results in Nigeria than in South Korea, even if it did produce positive results.
4. lndustrial Policy in Nigeria
Nigeria's First National Development Plan (1962-1968) focused emphasized the establishment of light manufacturing and assembly (of mostly consumer goods), and until 1985, was based on ISI strategy (Ekpo, 2018, 14). Because of the lower literacy rate in Nigeria, the government accorded high priority to education in the development plan. But this demonstrates how the cumulative unfavourable initial conditions increased the burden upon Nigeria. Forrest (1963, 11) called the education programme an "immense undertaking".
Building on the ISI policies of Syngman Rhee, Park Chung Hee widely used export subsidies and other policies after coming to power in 1961. He initiated export-promoting (EOI) policies in an organized way and sought to reverse the biases that existed against export activities (Chaudhuri, 1996, 19). There was a prioritization of giving import licences to exporters with conditions of export performance set (Rodrik, 1995, 61). Other export incentives used were currency devaluation and abolishment of indirect taxes on domestic inputs used for exports (Chaudhuri, 1996, 19). In contrast, between 1960 and 1966 nearly 70% of Nigerian government revenues came from import duties (Suckow, 1966, 198). Hence there was a trend towards higher import duties (Biersteker, 1978, 71) that was therefore not as strongly linked to industrialization efforts because they served to raise government revenue and ease balance of payments problems (Schatzl, 1973, 29). This was not wholly irrational, as the country had a huge infrastructural deficit to correct; and while the First National Development Plan assumed that half of public investment would be financed by foreign aid, only a third of this was received (Bevan et al, 1999, 29). In contrast to South Korea which received generous aid from the United States (Stubbs, 1999, 345). This erratic protectionism by the Nigerian government worsened during the civil war (1967-1970) which brought balance of payments problems due to large arms purchases from abroad (Biersteker, 1978, 72). Exports were still largely driven by the agricultural sector until the 1970s when the oil sector rapidly took over. There was therefore an "excessive protection for domestic industry" (Schatzl, 1973, 29). This import-substitution policy had the effect of changing the orientation of manufacturing. Hence, whereas in 1958 about half of manufacturing VA was contributed to by firms processing or semi-processing primary products for exports, by 1967 this fell to a quarter (Bertrand and Kelk, 1971, 5).
With high levels of protection which were only weakly linked to firms' performance, profitability estimates for 1963 and 1968 show that there was a relative rise in returns to the new import- substituting industries on the back of higher protection (Bertrand and Kelk, 1971, 8). This is consistent with Akyuz and Gore (2000, 276) who notes that in many SSA countries profits depended on subsidies and protection, and there was little re-investment occurring - thereby stifling the profit-investment-export nexus that drove South Korean industrialization. Therefore, in Nigeria, firms were not subject to systematic pressures to improve productivity and international competitiveness.
In 1972, amidst the take-off of the oil sector, import duties were cut dramatically in response to rising domestic inflation (Schatzl, 1973, 29). In addition to this, and in contrast to South Korea which provided export incentives, Bertrand and Kelk (1971) argued that Nigeria's industrial tariff protection structure discriminated against export processing, compared with import substitution industry.
Despite its failures, the state managed to foster the emergence of enterprises like the Port Harcourt refinery, the paper mill at Jebba, and the Bacita sugar company (Anah, 2014, 102). Manufacturing as a share of GDP actually rose in Nigeria from 3.6% in 1960 to 9.5% in 1970,
and began to fall from then onward (Falola, 2004, 170). However, manufacturing as a share of exports remained much muted (Figure 9) as a result of the nature of the inward-orientation of industrial policies.
As a result of the proactivity of the South Korean state in fostering industrial growth, GDP and GDP per capita rose substantially (Figures 1 and 2), and the manufacturing sector increased in size (Figure 3) - industrialization was occurring.
Illustrations are not included in the reading sample.
Figure 1: Real GDP per capita comparison (World Bank, 2019a)
Figure 2: Real GDP comparison (World Bank, 2019b)
Figure 3: Manufacturing VA (percentage of GDP) comparison (World Bank, 2019c)
Figure 4: Real GDP per capita, Nigeria (World Bank, 2019a)
GDP growth rates were also much higher and more stable over the decades in South Korea than they were in Nigeria (Table 1)
Illustrations are not included in the reading sample.
Figure 5: GDP annual growth rate (percent) (World Bank, 2019d).
Table 1: Average GDP growth rate (percent) - Author's computation from World Bank (2019d).
While GDP per capita rose in South Korea, it rose moderately in Nigeria from 1960 to 1965, fell afterwards due to the civil war (1967-1970) and began to rise again from 1968. However, it was surpassed by South Korea's growth, particularly from around 1974.
Growth in South Korea has been driven mostly by capital accumulation (Rodrik, 1995, 60). From 1963 to 1979, the public sector share to total domestic investment averaged 40%, with the majority being spent on infrastructural and social overhead investments (Kim, 1991, 11- 14). This left the majority of domestic investment to be driven by the private sector (Akyuz and Gore, 1996), after having impediments to investment removed and coordination failures addressed by industrial policy (Rodrik, 1995). It is this investment growth (Figure 6) that led export growth (Rodrik, 1995). Foreign Direct Investment (FDI) was relatively small in South Korea. However, as a result of the productive capabilities fostered by industrial policy and more favourable initial conditions, the manufacturing sector was the largest recipient of FDI between 1962-1986 in Korea (67.4% of inward FDI) (Kim and Hwang, 2000, 270). This is in contrast to Nigeria where between 1960 and 1970, the manufacturing share of total new foreign investment in Nigeria was 23.2% as most of the foreign private investment went into resource-extractive activities, particularly mining (Biersteker, 1978, 78). The Nigerian government had provided various incentives to foreign investors, including tax holidays, relief from import duties, tariff protections, and assurance of profit repatriation (Falola, 2004, 169).
In Nigeria, there was an "investment boom" between 1960 and 1967 whereby Gross fixed capital formation (GFCF) rose from 10% to 15% of GDP, and this was driven largely by private, mostly foreign investment (Bevan et al, 1999, 23). An estimated 58% of paid-up share capital of manufacturing limited companies in 1972 was supplied by foreign private capital (Biersteker, 1978, 80).
Rodrik (1995) argues that due to the pressures to import capital goods to sustain domestic investment, export growth was sought; and so export-led growth through industrial goods was driven partly by foreign exchange pressures. However, for Nigeria, with the rise of oil rents from the 1970s, the pressure to export non-commodities to fund capital goods imports was eased.
Illustrations are not included in the reading sample.
Figure 6: Gross Fixed Capital Formation (percentage of GDP) (World Bank, 2019e).
Despite the structural changes occurring within the Nigerian economy, total factor productivity was actually declining from 1960 until about 1983 when it bottomed out. This means that the government's industrial policies were not producing productivity growth. The opposite was the case for South Korea where TFP rose steadily (Figure 7).
In Nigeria, as Figure Total Factor Productivity (TFP) had been falling since 1960, and only plateaued at a low level around 1985, and recovering from 2001. Whereas South Korea's TFP has been on a modest upward trend since 1955 and accelerating in 1968. Firms' enjoyment of protection from foreign competition means that there was little pressure to improve productivity. Moreover, even with protection, the Nigerian government failed to adequately address coordination problems which detracted from firms' organizational capabilities - an example is the supply chain problems faced by agro-processing factories around the country (Falola, 2004, 172). Perhaps some part of this poor productivity performance could also be explained by the size of the firms. Although estimates are Carter (1963, 42) mentions that in the late period before independence, an estimated 60% of the "industrial product of the nation" was produced by the "very small firm type, particularly one and two-man establishments". In contrast, in South Korea, large business groups, chaebol, were the backbone of South Korea's industrialization efforts (Jones and Sakong, 1980). It could therefore be surmised that Nigerian firms were unable to exploit scale economies, especially given that they were domestically- oriented.
Illustrations are not included in the reading sample.
Figure 7: TFP growth rate (percent) (University of Groningen, 2019)
Low-technology industries have dominated industrial investments in Nigeria (Table 2). Examples are "textiles, cement, beer brewing, tobacco products, soap and cosmetics" (Biersteker, 1978, 79). The relatively meagre natural resources in South Korea, combined with its better human capital, made manufactures a better comparative advantage for it than it was for Nigeria (Rodrik, 1995, 78). Nonetheless, Nigeria should have been able to develop competitive advantage in agro-processing given its agricultural capabilities, or at least in oil refining. While South Korea's investment in high-technology industries rose rapidly, "High- technology" industry - or engineering industries (Falola, 2004, 171) - in Nigeria has made up a small component of total manufacturing activity (Biersteker, 1978, 79).
Illustrations are not included in the reading sample.
Table 2: Composition of Nigeria's manufacturing sector by technological content (Biersteker, 1978, 80)
Due to the bias against exports characterizing the incentive system, it is no surprise that the share of exports in GDP did not rise until the oil boom (Figure 8), and neither did the manufacturing share of export rise meaningfully at all (Figure 9)
Illustrations are not included in the reading sample.
Figure 8: Exports of goods and services (percentage of GDP) (World Bank, 2019f)
Figure 9: Share of manufacturing exports of total exports (percent) (World Bank, 2019g).
The country fell trap to the Dutch Disease and, unlike Indonesia for example which also faced exuberant oil rents, Nigeria failed to use oil funds to invest adequately, even in agriculture where there was comparative advantage (Gala et al, 2017, 24). Whereas in South Korea devaluation occurred which acted as a subsidy for the tradable sector (Rodrik, 1995), for most of the 1970s until the mid-1980s the exchange rate in Nigeria was "grossly overvalued" (Chete and Adenikinju, 2002, 30). This therefore stimulated imports of consumer goods while discouraging exports. This is visible in Figures 10 and 11. Whereas the export structure of South Korea diversified and included higher-technology manufactured consumer and capital goods from 1962 to 1980, the opposite occurred for Nigeria (Figure 10); while imports consisted mainly of consumer goods and machinery by 1980 for Nigeria and intermediate goods for South Korea (Figure 11).
Illustrations are not included in the reading sample.
Figure 10: Composition of exports in 1962 (upper) and 1980 (lower) (OEC, 2019).
The oil boom made the Nigerian government over-ambitious. In its second National Development Plan (1970-1974), it sought to establish costly industrial core projects (ICPS) in iron and steel production, aluminium smelting, crude oil refining, petrochemical and fertilizer production, paper and cement production, and so on to stimulate non-traditional exports (Ekpo, 2014, 1; Oyelaran-Oyeyinka, 1997). There was a greater priority given to stimulating exports (Bertrand and Kelk, 1971, 6). However, these were characterized by high import content of inputs, capacity utilization was low, cost of production remained high, and there was limited linkages with other economic sectors (Obioma and Ozughalu, 2005). Given that oil revenues had then increasingly dominated government revenues, there was also a shift to public-sector- led industrialization (Chete et al, 2016, 119). This continued with the Third National Development Plan (1975-1980), and substantial subsidies were given to public enterprises (Chete et al, 2016, 119). Similarly, in 1973, South Korea launched its heavy and chemical industries (HCI) drive,
As Rodrik (1995, 72-74) observes, capital goods were being imported to fuel industrial growth in South Korea (while it also produces domestic capital goods), while imports in Nigeria comprised mostly of consumer goods, although with capital goods and raw materials also being prominent. The strong correlation between imports as a percentage of GDP and GFCF as a percentage of GDP indicates this for South Korea (Figure 11). While the weak correlation in Nigeria's case shows that import composition was not associated with the capital formation occurring (Figure 12).
Illustrations are not included in the reading sample.
Figure 11: Imports and GFCF Compared for South Korea (World Bank, 2019h)
Figure 12: Imports and GFCF Compared for Nigeria (World Bank, 2019h)
South Korea also received much more official foreign aid than Nigeria did, with the former receiving $250.7 million (in current prices) net ODA, and the latter receiving $32.6 million (Figure 13). This was due to South Korea's greater geostrategic value to the United States within the context of the Cold War (Stubbs, 1999). This eased the balance of payments constraints on South Korea (Fischer, 2012). For Nigeria, from 1960 to 1965, Nigeria had a trade deficit arising from the decline in agricultural prices and also from the fact that 22% of imports was of machinery for industrial development (Oshikoya, 1990, 69). From 1966, this reversed to a BoP surplus as crude oil rose to be "the most significant revenue yielding export commodity" (Akindele, 1986, 13).
Illustrations are not included in the reading sample.
Figure 13: Net ODA and foreign aid received (World Bank, 2019i).
It was due to the ability of South Korea's industrial policy to make its manufacturing sector international competitive that allowed the sector to survive the liberalization drive of the 1990s; whereas the inability of Nigeria to do the same ensured that its manufacturing sector declined as liberalization occurred from the 1980s. Until today, the country's MVA as a percentage of GDP remains below 10%, and exports are still not diversified.
5. Conclusion
Industrial policy has never been easy; yet it is a necessary. While South Korea built on the pre-1960s ISI policies to promote domestic investment and export-orientation, Nigeria focused on ISI policies, and did not create sufficient incentives and an adequate environment to promote export growth. The result was an industrial sector that failed to become internationally competitive and was destroyed during the liberalization period. Even after considering the more favourable initial conditions enjoyed by South Korea, much of the poor performance of the Nigerian non-oil industrial sector can still be attributed to policy failures. Given that it still struggles today with oil dependence, it is necessary for the country to remember the mistakes of its past, look with caution at the future, and seek to change its present conditions in light of these.
6. References
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Frequently Asked Questions
What is the focus of the paper "Comparing the Industrial Policy Experiences of South Korea and Nigeria"?
The paper compares the industrial policy experiences of South Korea and Nigeria from the 1960s onwards. It argues that the differing growth outcomes (positive in South Korea, limited or negative in Nigeria) can be attributed to differences in industrial policies, political settlements, initial conditions, and external constraints.
What is the definition of industrial policy used in the paper?
The paper defines industrial policy as any selective government intervention or policy that aims to alter the structure of production in favor of sectors expected to offer better economic growth prospects than would occur without such intervention.
What are the key design features for successful industrial policy according to the paper?
The key design features include "embeddedness, carrots and sticks, and accountability." Without these, industrial policy is prone to capture by non-growth-enhancing activities and actors.
What were the initial conditions of South Korea and Nigeria in 1960?
South Korea had a higher level of industrialization, GDP per capita, and literacy rate compared to Nigeria in 1960. South Korea also benefited from a more stable political settlement and external support from the United States due to its geostrategic value.
What was the industrial policy strategy adopted by Nigeria initially?
Nigeria's First National Development Plan (1962-1968) focused on import-substitution industrialization (ISI), emphasizing the establishment of light manufacturing and assembly of consumer goods.
How did South Korea's industrial policy differ from Nigeria's?
South Korea shifted towards export-oriented industrialization (EOI) after 1961, using export subsidies and other policies to promote export activities. Nigeria, on the other hand, relied heavily on import duties for government revenue and faced balance of payments problems, leading to excessive protection for domestic industry.
What was the impact of the oil sector on Nigeria's industrial policy?
The rise of the oil sector in Nigeria in the 1970s eased the pressure to export non-commodities and led to an overvalued exchange rate, stimulating imports of consumer goods and discouraging exports. This contributed to the Dutch Disease phenomenon.
How did the performance of Total Factor Productivity (TFP) differ between South Korea and Nigeria?
South Korea experienced a steady rise in TFP, indicating productivity growth driven by industrial policies. In contrast, Nigeria's TFP declined from 1960 until around 1983, suggesting that government policies were not effectively promoting productivity improvements.
What were the key sectors for Foreign Direct Investment (FDI) in South Korea and Nigeria?
In South Korea, the manufacturing sector was the largest recipient of FDI. In Nigeria, most of the foreign private investment went into resource-extractive activities, particularly mining, reflecting differing comparative advantages and investment priorities.
What is the paper's conclusion on the industrial policy experiences of South Korea and Nigeria?
The paper concludes that while industrial policy is necessary, South Korea built on pre-1960s ISI policies to promote domestic investment and export-orientation. Nigeria focused on ISI policies without creating sufficient incentives to promote export growth. Policy failures in Nigeria, combined with less favorable initial conditions, contributed to the poor performance of its non-oil industrial sector and its vulnerability during liberalization.
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