Overcoming Middle Income Trap, and Industrial Relations in Indonesia Seung-Hun Chun, Ph.D. [email protected] Korea Institute for Development Strategy (KDS) www.kds.re.kr 1 1 In the race for the growth of income, only a few countries have succeeded in overcoming middle income trap (MIT). Growth trend in international comparison and middle income trap Income Income Population Population 30,000 USD 50 million 26,205 50m. USD Republic of Korea 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. Source: Chosun-ilbo (10.6. 2014) ※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. 2 Korea Institute for Development Strategy Overview of Korea’s Economic Development Trade balance and export in Korea Source: OECD.stat Unit: Billions of USD 60 40 Trade balance 20 0 1957 -20 -40 Trade balance USD Δ 311 m. USD 40.16 b. Export volume 31m. 363b. IT Export item Fish, plywood, fabrics, etc. Automobile Shipbuilding Steel Petrochemical 5th largest Top shipbuilder Global top-level 5th largest 3 Top in TV, Semiconductor chips, smartphone Korea Institute for Development Strategy 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. The rise of income and industrial dispute in Korea Number of disputes Current USD 25000.00 4000 3500 GDP per capita 20000.00 3000 Frequency of labor dispute 2500 15000.00 2000 10000.00 1500 1000 5000.00 500 0.00 0 4 Korea Institute for Development Strategy 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. Cause of the MIT: Four stages of human desire Human Desire • Relative deprivation • Seek less work, luxurious life • Still work hard • Follow gov’t • Work hard • Follow gov’t • Spiritual satisfaction Stage of brain Stage of eyes Stage of arms & legs Stage of mouth Income Source: Itogawa Hideo (Tokyo University) 5 Korea Institute for Development Strategy At the risk of breaking the gourd at “the stage of eyes,” Korean government launched bold strategies to ensure sustainable growth. The policy package for not breaking the gourd at the stage of eyes II. Upgrade of labor skills and techniques for productivity increase I. Diversification of competitiveness sources MIT: Wage hike & losing growth resilience III. Promotion of transparency in business accounting and activities IV. Development of institutions for sound industrial relations 6 Korea Institute for Development Strategy 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. I. Diversification of competitiveness sources Int’l criticism: No economic feasibility • 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 Global top-level competitiveness : the fifth producer in the world Base material industry Industrial & technology development capacity Strong push for heavy & chemical industry • Korean Institute for Science & Technology (KIST, 1966) - Salary: 3times higher than local professors - Full budget support with audit exemption - Hongreung nobles • From light industry to heavy & petrochemical industry • USD 10b. investment plan when total export was 1.8b. (1972) 7 Korea Institute for Development Strategy “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 Presidential commitment Model Technical High School • Skilled workers are national treasures! • • • • Faculty: best in Asia Students: Upper 10% of junior high schools Full scholarship Education philosophy: Three “Jeong Principle” - Devotion (JeongSung) - Accuracy (JeongMill) - Honesty (JeongJik) Expansion of the model Outcome Renovation of labor market • 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 • Establishment of TQS(Technical Qualification Standard) and PES(Public Employment Service) 8 Korea Institute for Development Strategy 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. 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 9 Korea Institute for Development Strategy 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. IV. Development of indigenous IR institution ILO Standard Progression Consequence • 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 • 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 10 Korea Institute for Development Strategy 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. Development for Industrial Relations institutions in Korea Period IR Laws Effects Consequences US Military Rule (1945-47) • Wagner Act • Pro-union institution • Unions show a struggle for classes • Serious social instability • Prohibit unions’ political activity Syngman Rhee (1948-60) • Taft-Hartley Act • Struggle against ideological unions • Post-war economic recovery Park Chung Hee 1st (1961-72) • Industrial union system • Control on illegal labor dispute • Base for industrial development Park Chung Hee 2nd (1972-79) • Suspension of labor activity • Under martial law • Strict control on unions • High season for rapid industrialization Chun Doo Hwan (1979-87) • Enterprise union system • Prohibit 3rd party engagement • Strict control on union • Resistance from the union • Est. basic labor system • So far, underdeveloped by ILO standard Financial Crisis (1997) and after • Adjustment of laws • Allow 3rd party engagement • Allow one company multiunions • Good lesson from financial crisis • Unions become more active • Indigenous IR system • In accordance with ILO standard 11 Korea Institute for Development Strategy 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. The development and industrial policies and IR institutions in Korea Number of disputes 4000 Current USD 30,000 3000 GDP per capita 20,000 Frequency of labor dispute 2000 10,000 1000 0 0 1960 IP IR LP BT 1970 Light industry Base industry Authoritarian rule on union Industrial union system 1980 HCI drive 1990 2000 OECD membership Market opening 2010 Opening of capital market IMF crisis Prohibit labor dispute Authoritative regime Enterprise union Gradual adjustment of labor laws to ILO standard Minimum wage OJT system TVET Kumoh THS TQS, PES TAR NTS Fair Trade & Anti-Monopoly Act 12 Money Laundry Prevention Act & Financial Information Analysis Center Real name financial transaction act Korea Institute for Development Strategy 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. National tasks of Indonesia National endowment National tasks Conditions Population: 253,609,643 Territory: 1,811,569 sq km Islands: 13,466 High living standard for the people National integration Sustainable & equitable growth 13 Ethnics: 360 Defense capacity Sound base of manufacturing industry Korea Institute for Development Strategy 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. Growth trend in comparison and middle income trap Market accessibility Resource accessibility Economic Growth Wage competitive ness↓ 14 • Struggle for more dividend • Wage hike • Industrial dispute • Over-evaluation • High wage cost Exchange Rate Labor intensive industry in a form of FDI Stakeholders Economic Growth Korea Institute for Development Strategy 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 P.I Upgrade labor skill & technique Infrastructure Sound industrial base Reduction of unemployment rate FDI P.IV Diversified competitiveness sources P.II Indigenous IR institutions Unemployment rate under target figure P.III Settlement of economic transparency Sound base for sustainable growth ILO standard right of labor with prevalent employment P.III Economic transparency P.II Peaceful IR 15 Korea Institute for Development Strategy Policy recommendations (P.I) P.I. Upgrading labor skill & techniques Ⅱ Ⅲ Ⅳ • Establish a model TVET institution benchmarking the global best practice National drive for TVET • Underline labor discipline and mindset of labor • Secure global-level competitiveness in labor skill and technique Renovation of labor market • Establish TQS (Technical Qualification System) and PES (Public Employment System) • Secure efficient matching between labor supply and demand 16 Korea Institute for Development Strategy Policy recommendations (P.II) Ⅰ Ⅱ. Develop indigenous IR institutions Ⅲ Ⅳ • Concentrate national capacity on prior-establishment of sound industrial base and extension of employment Basic approach • In-depth study for the history of industrial development and labor institutions in the world • Establish philosophy on “industrial development” and “IR institution.” Development of indigenous labor institutions • 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 17 Korea Institute for Development Strategy Policy recommendations (P.III) Ⅰ Tax administration reform Ⅱ Ⅲ. Transparency in business accounting & activities Ⅳ • 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 Institution for economic transparency • Long-term plan for transparency in financial and property transactions in line with economic development • Establish institutions for anti-corruption 18 Korea Institute for Development Strategy Policy recommendations (P.IV) Ⅰ Ⅱ Ⅲ Ⅳ. Diversification of competitiveness sources other than wage • Upgraded labor skills and technique Preconditions • 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 Opportunities • Global level R&D institutions • Long-term development plan for the enormous bio-environment asset 19 Korea Institute for Development Strategy 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. 20 Korea Institute for Development Strategy 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. 21 Korea Institute for Development Strategy The flag of the Asian Games was handed over from Incheon Korea to Jakarta Indonesia in October 2014. 22 Korea Institute for Development Strategy KDS Global Network Overseas Development Institute* London, UK Jordan Investment Board Amman, Jordan UNECA* Addis Ababa, Ethiopia Ministry of Planning, Erbil, Kurdistan Region, Iraq Federal Ministry of Science &Technology Abuja, Nigeria Mongolian Development Institute Ulaanbaatar, Mongolia Economic Research Institute Astana, Kazakhstan Ministry of Agriculture, Animal Industry & Fisheries, Kampala, Uganda Ministry of Industry Quito, Ecuador KDS HQ Seoul, Korea Joaquim Chissano Foundation Maputo, Mozambique Ministry of Industry and Trade Maputo, Mozambique ASEAN Foundation* Jakarta, Indonesia * Currently under discussion for cooperation 23 Korea Institute for Development Strategy Thank you! Seung-Hun Chun, Ph.D. [email protected] Korea Institute for Development Strategy (KDS) www.kds.re.kr 24 Korea Institute for Development Strategy
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