Ministry of Strategy and Finance Government Complex 2, Gwacheon, 427-725, Republic of Korea Tel. 82-2-2150-7732 www.mosf.go.kr Korea Development Institute 130-740, P.O.Box 113 Hoegiro 47 Dongdaemun-gu, Seoul Tel. 82-2-958-4114 www.kdi.re.kr Korea Institute for Development Strategy 135-918, 8th fl. Yuk-Sung Building 706-25 Yuksamdong Gangnamgu Seoul Tel. 82-2-539-0072 www.kds.re.kr
Knowledge Sharing Program, Center for International Development, KDI ● P.O. Box 113 Hoegiro 47 Dongdaemun-gu, Seoul, 130-740 2012 ● Tel. 02-958-4224 MINISTRY OF STRATEGY Korea Development Institute ● cid.kdi.re.kr ● www.facebook.com/cidkdi AND FINANCE
KSP����������_�����.indd 1 2012.6.20 11:56:14 AM Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea
Project Title Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea
Prepared by Korea Institute for Development Strategy (KDS)
Supported by Ministry of Strategy and Finance (MOSF), Republic of Korea Korea Development Institute (KDI)
Prepared for Republic of Gabon
In cooperation with Ministry of Foreign Affairs, International Cooperation and Francophonie, Republic of Gabon
Program Directors MoonJoong Tcha, Executive Director, Center for International Development (CID), KDI Taihee Lee, Director, Division of KSP Consultation, CID, KDI
Program Officer Jaehyun Yoon, Research Associate, Division of KSP Consultation, CID, KDI Soyen Park, Program Officer, International Development Planning Division, KDS
Project Manager Jung Mo Kang, Professor, Kyung Hee University
Authors Chapter 1. Jung Mo Kang, Professor, Kyung Hee University Chapter 2. Hyunseok Oh, President, Academy of Territorial Development Chapter 3. Jae Ho Song, Professor, Jeju National University Chapter 4. Hongmin Chun, Director, Korea Institute for Development Strategy
English Editor Enkoline Co., Ltd.
Government Publications Registration Number 11-1051000-000262-01 ISBN 978-89-8063-651-8 94320 978-89-8063-657-0 (set)
Copyright ⓒ 2012 by Ministry of Strategy and Finance, the Republic of Korea Government Publications Registration Number 11-1051000-000262-01
Knowledge Sharing Program
Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea
2012
MINISTRY OF Korea Development STRATEGY AND FINANCE Institute Preface
In the 21st century, knowledge is one of the key determinants of a country’s level of socio- economic development. Based on this recognition, Korea’s Knowledge Sharing Program (KSP) was launched in 2004 by the Ministry of Strategy and Finance (MOSF) and the Korea Development Institute (KDI). KSP aims to share the development experience and knowledge Korea has accumulated over the past decades to assist in the socio-economic development of the partner countries. Former high-ranking government officials are directly involved in policy consultations to share their intimate knowledge of development challenges, and they complement the analytical work of policy experts and specialists who have extensive experience in their fields. The government officials and practitioners effectively pair up with their counterparts in development partner countries to work jointly on pressing policy challenges and share development knowledge in the process. The Program includes policy research, consultation and capacity-building activities, to provide comprehensive, tailor-made assistance to the partner country in building a stable foundation and fostering capabilities to pursue self-sustainable growth.
2011 is the first year in which the KSP has been conducted with Gabon. Reflecting the Gabonese government’s interests, which were identified in a written demand survey form submitted by the Gabonese government, the KSP with Gabon was launched in June 2011 to focus on the following four sectors: private sector development and industrial diversification, tourism, agriculture and ICT.
I would like to take this opportunity to express my sincere gratitude to the Project Manager Dr. Jung Mo KANG, Sector Experts including Dr. Hyunseok OH, Dr. Jae Ho SONG, and Mr. Hong Min CHUN, and Program Officer Ms. Soyen PARK for their immense efforts in successfully completing the 2011 KSP with Gabon. They were extremely professional, thorough, and courteous. I also would like to extend my warmest thanks to the Ministry of Foreign Affairs, International Cooperation and Francophonie and the Ministry of Economy, Trade, Industry and Tourism of the Republic of Gabon, other Gabonese government agencies, Program Supervisor M. Hugues MBADINGA, Program Coordinator M. Hamidou OKABA, local project consultants, and participants for their active cooperation and great support.
In your hands is the final report of the 2011 KSP with Gabon. I sincerely hope that the Gabonese government fully benefits from the policies recommended by the Korean KSP team to support a prosperous and bright future in Gabon.
Seung-Hun Chun President Korea Institute for Development Strategy Contents
2011 KSP with Gabon 014 Executive Summary 017
Chapter 1 Developing the Private Sector and Diversifying the Industrial Sector in Gabon: Lessons from Korea’s Experience of Economic Development
Summary 030 1. Current Economic Situation 036 1.1. Overview of the Gabonese Economy 036 1.2. Mining, Oil and Gas, and Timber Sectors 038 1.3. Trade 041 1.4. Industrial Base of Private Sector Development and Diversification 042 2. Private Sector Development and Industrial Diversification in Korea 046 2.1. Economic Conditions before Take-Off (1900-Early 1960s) 046 2.2. Economic Transition—The Take-Off 048 3. Institutional Support System for SMEs in Korea 056 3.1. Financial Support for SMEs 056 3.2. Fiscal Support for SMEs 059 3.3. Non-financial /Fiscal Support for SMEs 060 3.4. Policies Protecting SMEs 061 4. Korean Model of Economic Development 062 4.1. The Basic Idea 062 4.2. Korean Model 063 5. Lessons from the Korean Experience and Policy Recommendations 070 5.1. Lessons from the Korean Experience 070 5.2. Policy Recommendation 071 Chapter 2 Development Strategies for the Gabonese Agricultural Industry: Towards Food Security and Diversification of the Industry
Summary 076 1. Current Status and Challenges of Gabon’s Agricultural Industry 079 1.1. Current Status of Gabon’s Agricultural Industry 079 1.2. Challenges for Gabon’s Agricultural Sector 083 1.3. Strategies to Develop the Agricultural Sector in“ Emerging Gabon” 084 1.4. Evaluation of the Agricultural Sector Strategy in Green Gabon 086 2. Experience and Implications of Agricultural Development in Korea 088 2.1. Korea’s Economic Growth and the Development of its Agricultural Sector 088 2.2. Evaluation of Agricultural Development in Korea 092 3. Policy Recommendations for the Development of Gabon’s Agricultural Sector 094 3.1 Integration of Agricultural Technology R&D and Supply 095 and Link to Educational Organizations 3.2. Creating a Korean Model of Comprehensive Agricultural Cooperatives 096 3.3. Creation of a State-owned Firm to Lay Out the Foundation 099 for Agricultural Production 3.4. Creating Agricultural-Industrial Complexes 101 3.5. Jointly Establish and Use a Firm Specialized in Agricultural Equipment 101 through Cooperation with Neighboring Countries 3.6. Multiple Approaches to Attract Foreign Investment 102
Chapter 3 Tourism in Gabon
Summary 104 1. Overview of the Tourism Sector in Gabon 108 Contents
1.1. Tourists: Evolution and Characteristic 108 1.2. Overview of Tourism Resources in Gabon 109 1.3. Overview of the Tourism Industry in Gabon 110 2. Review of the Tourism Development Strategy in Gabon 111 2.1. Opportunities and Challenges for Tourism in Gabon 111 2.2. Review of Tourism Policy in Gabon 112 2.3. Expectation Building 114 3. Tourism Development Experience of Korea 115 3.1. Introduction 115 3.2. Major Tourism and Policy and Development Direction 115 4. Policy Recommendations 123 4.1 Comparative Analysis of Tourism Development in Gabon and Korea 123 4.2. Strengthening Awareness of the Tourism Industry within the Government 126 4.3. Management of Tourism Quality and Labor Force Specialization 129 4.4. Promotion of Ecotourism Using National Parks 130 4.5. Development of Tourism Zones and Creation of a Fund Supporting 133 the Formation of Tourism Companies
Chapter 4 Plans to Improve Gabon’s ICT Industry
Summary 138 1. Overview of Gabon’s ICT Sector 141 1.1. Current Status of the ICT Infrastructure 141 1.2. Current Status of Communication Expenses 145 1.3. ICT Accessibility and Utilization 146 1.4. Current Status of ICT Human Resources 147 1.5. E-Government Readiness 148 2. Review of ICT Sector Development Strategy in Gabon 148 2.1. Review of ICT Strategies of Gabon 148 2.2 Opportunities and Challenges for ICT in Gabon 151 3. Cases of ICT Sector Development in Korea 154 3.1. Overview of ICT Sector in Korea 154 3.2. Development Trends of the ICT Sector in Korea 155 4. Policy Recommendations 158 4.1. Establishment of Legal and Institutional Systems 158 4.2. Preparation of Industrial Base 159 4.3. Fostering Professionals 165 4.4. Preparation of Financial Base 166 Contents | LIST OF Tables
Chapter 1
Industrial Structure 037
Production of Oil and Gas 039
Production and Export of Timber 040
Production and Export of Manganese Ore 040
Gabon’s Main Exports and Imports 041
Products Most Exported and Imported by Gabon 042
Firms by Legal Status 044
Firms by Activities 044
Change in the Structure of Korean Exports 054
Legal and Institutional Bases to Promote the Activities of Korean SMEs 057
Support Programs and Incentives for SMEs in Korea 058
Chapter 2
Agricultural Products : Imports and Production in Gabon 081
Main Statistics for Agricultural Production in Gabon 082
Production and Exports of Cacao and Coffee 083
Major Projects for Agricultural Development 086 in the 2011-2016 Implementation Plan
Changes in Korea’s Agricultural Sector 092
Paradigm Shift in Korea’s Agricultural Policy 093
Chapter 3
Number of Foreign Tourists in Gabon (2000-2008) 108
Statistics of the Tourism Industry in Gabon 110
Production Activity Change of the Hotel Industry (2009-2010) 111
Areas for Policy Improvement 113
Policy Implemented in Each Stage and its Implications 116
The Tourism Promotion and Development Fund (2006-2010) 120
Major Policies (by Stage) to Develop Gabon’s Tourism Industry 125
Gabon’s Eco-tourism Certification Introduction Plan 133
Tourism Fund 134
Chapter 4
Prioritized Programs of Digital Gabon 150
The Legal System of Korea’s ICT Sector 158
Overview of NIA and NIPA 159
Overview of KISDI, KIST and ETRI 160 Contents | LIST OF Figures
Chapter 1
Chapter 2 Strategy Guidance and SWOT Analysis of Gabon’s Agricultural Sector 085 Korea’s Climate and Vegetation 089 Usage of Land 089 Establishing Institutions to Implement Policies to Modernize the 090 Agricultural Sector in Korea Functions and Organization of“ Gabon’s National Center for Agricultural Science” 097 Functions and Structure of a Korean Model Agricultural Cooperative Federation 098 Functions of the Organization Responsible for Developing and Managing Farmland 100
Chapter 3 Trend of Foreign Tourists in Gabon (2000-2008) 108 International Tourists Trends in Korea and Gabon (1989-2010) 124
Chapter 4 Gabon’s Mobile Telephone Subscriptions per 100 Inhabitants 142 Market Shares of Mobile Companies of Gabon (2010 4Q) 143 Gabon’s Fixed Telephone Lines per 100 Inhabitants 143 Gabon’s Fixed Broadband Internet Subscribers per 100 Inhabitants 144 Gabon’s Communication Expenses Compared to Neighboring Countries (fCFA) 145 African Undersea Cables (2013) 145 Percentage of Households with a Computer 146 Percentage of Households with Internet Access at Home 146 Gabon’s Full-Time Telecommunication Employees (Total) 147 E-Government Readiness Ranking 148 Implementation Framework of“ Digital Gabon” 149 Contribution of Korean ICT to the National Economy 154 Composition of ICT Industry in Korea 155 Relevant Laws and Organization of Structures Regarding ICT in Korea 157 Vision and Objectives for“ Cyber Korea 21” 162 Concept of Techno Park 163 Procedures of Establishing a Techno Park 164 Photograph of the Pangyo Techno Valley Construction Site 164 Conceptual View of Pangyo Techno Valley 165 Sources of the Korea ICT Promotion Fund 167 2011 KSP with Gabon
With abundant natural resources, political and social stability, and rapid economic growth, Gabon has emerged as one of the most promising countries in Africa. Since 2005, the country has achieved 3% GDP growth on average, and is expected to achieve a similar rate of growth in the near future. Since President Ali Bongo Ondimba took office in 2009, Gabon has been accelerating its economic and industrial diversification policies; Emerging Gabon a national economic development program, was launched to promote an emerging economy. Under this program, three strategic pillars,“ Green Gabon,”“Industrial Gabon,”and“ Service-oriented Gabon,”were established to diversify the nation’s economy, which is currently heavily dependent on petroleum. These three pillars are expected to enable Gabon to prioritize the sectors that will drive its growth.
During his visit to Korea in October 2010, President Bongo cited Korea as an excellent economic development model and a trustworthy partner of Gabon. While discussing issues of mutual interest, including cooperation in energy and resources development as well as infrastructure construction and cultural exchanges, President Bongo asked Korea to share its economic development experience and to help with Gabon’s industrial diversification policies. On this basis, the Korean government selected Gabon for the 2011 Knowledge Sharing Program. The topic of“ Moving to the Diversification of Gabonese Economy: Lesson Learned from Korea”was suggested by the Gabonese government, and the Korea Institute for Development Strategy (KDS) was selected as an implementation agency.
014·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea As the first stage of the project, a group of Korean experts headed by Dr. Jung Mo Kang, a professor at Kyung Hee University, conducted the“ High-Level Demand Survey and Pilot Study”in Libreville from July 18 to 25, 2011. To identify specific research topics and policy priorities, the Korean experts had a series of meetings and interviews with relevant government ministries and institutes. In addition, a plenary session and a round table meeting were organized by the Ministry of Foreign Affairs (MFA),through which the Korean experts sought to mediate each party’s demands and expectations and to interview local experts who might participate as local consultants. As a result of this visit, the specific research themes and local consultants were determined.
Consultation Topics Korean Researcher Gabonese Researcher Private Sector Development and Dr. Jung Mo Kang Ms. Ruth Dorego Industrial Diversification Agriculture Sector Development Dr. Hyunseok Oh Ms. Sieno Lingombe Ponga Tourism Sector Development Dr. Jae Ho Song Mr. Cesar Assele ICT Sector Development Mr. Hong Min Chun Mr. Edgard Owono Role Name Project Manager for Dr. Jung Mo Kang 2011 KSP with Gabon
From October 4 to 12, 2011 the Gabonese delegation headed by Ambassador Paul Bie Eyene, Secretary General of the MFA, visited Korea to participate in the“ Interim Reporting Session & Policy Practitioners’Workshop.”The workshop was designed to improve the Gabonese delegation’s understanding of Korea’s development experiences. The delegation paid visits to the Korea National Tourism Organization, the Rural Development Administration, Gyeonggi Small-Medium Business Center, Incheon Free Economic Zone, KAIST, Samsung Digital City, and other relevant organizations. During the interim reporting session, Gabonese consultants presented an overview of each sector they were responsible for, and the Korean KSP team presented their interim research findings and policy recommendations. A wide spectrum of insights and comments were received and are reflected in the final report.
As the final stage of the 2011 KSP with Gabon, the Korean KSP team, headed by Mr. Kyo Sik Kim, a former Vice Minister of the Ministry of Gender Equality and Family, visited Libreville from November 29th to December 2nd, 2011 for the “Dissemination Seminar and High Policy Dialogue.” More than 50 senior Gabonese
2011 KSP with Gabon·015 policy-makers, relevant working-level officials, local consultants and other stakeholders from ministries and institutes relevant to private sector development, agriculture, tourism and ICT participated in the dissemination seminar, and policy recommendations to develop these sectors were presented. At the high policy dialogue, Mr. Tongui, Minister of the MFA, Mr. Ngambia, Minister of Economy, Commerce, Industry and Tourism, and Mr. Ndong Sima, Minister of Agriculture, Fishery and Rural Development, thanked the Korean experts for their efforts and showed a deep interest in the policy recommendations. With the successful completion of the events, KDS and the Gabonese authorities expressed their mutual interest in continuing the KSP in 2012, and had discussions on follow-up issues and new topics for next year.
Soyen Park Program Officer for 2011 KSP with Gabon
016·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea Executive Summary
Jung Mo Kang (Kung Hee University)
The purpose of this study on Moving to the Diversification of the Gabonese Economy is to help design industrial policies that are geared towards economic growth and poverty reduction in Gabon. This study examines economic and institutional constraints on the private sector, highlights measures to stimulate or revitalize key diversification sectors and makes recommendations by referring to Korea’s experience of economic development.
In 2010, Gabon had GDP of US$12.2 billion with per capita GDP of US$7,563, due largely to its abundant natural resources and small population. Gabon’s economy is dominated by the extractive sectors of oil, timber and manganese, but the growth of these did not translate into meaningful results in non-extractive exports. The oil sector, which accounts for 50% of GDP, does not provide many direct job opportunities and has not contributed to inter-sector flows. This source of employment is expected to decrease due to the decline in petroleum development, while the number of very young people entering the job market is increasing. This exerts pressure on the training and employment structure.
Until crude petroleum was discovered offshore in the early 1970s, Gabon mainly depended on timber and manganese. In 2009, the shares of GDP held by primary industry, secondary industry, and tertiary industry were 43.9%, 9.0% (4.4% for manufacturing) and 41.7%, respectively. Gabon mainly exports primary products, and mainly imports manufacturing products. In 2010, the amounts of exports and imports were US$7.3 billion and US$2.5 billion, respectively, resulting in a US$4.8 billion trade surplus.
Executive Summary·017 Chapter 1 deals with the development of the private sector and the diversification of the industrial sector by strengthening SMEs in Gabon. The diversification of Gabon’s economy should be pursued by strengthening SMEs, and this is associated with different types of obstacles. Gabon’s industrial structure is very weak, both in terms of the number of firms and in terms of their average size. The large majority of industrial firms are small or micro enterprises operating side by side with a few large- scale (often foreign or state-owned) firms found mostly in the raw material and extractive sectors. A significant proportion of the small and micro enterprises are informal as opposed to formal firms. Furthermore, the Gabonese economy has very few medium-sized firms. Informal firms are those that are not registered with the government and do not pay taxes. They are usually run by individuals with less education, and do not have access to external funds. Something very important from an industrial point of view is that informal and formal firms occupy very different market niches, and the former rarely become formal since there is very little demand by formal firms for informal products. Most importantly, it seems that informal firms do not become formal as they grow. In addition, it is difficult for either micro or small firms to become medium-sized or large firms. With the exception of firms involved in industrial clusters, there is relatively very low interaction. This lack of interaction is a concern, because linkages among firms have positive effects that enhance competitiveness. Both cooperation and agglomeration are beneficial.
Another feature of Gabonese manufacturing is that domestic firms have weak technological capabilities, and are embedded in fragmented learning and innovation systems. Furthermore, most Gabonese enterprises do not make significant investments in technological effort. Consequently, they have difficulties entering into, as well as competing in, export markets for medium and high technology manufacturing.
In short, the obstacles to private sector development and the diversification of the industrial sector are a lack of human capital; a weak national private sector; a weak industrial structure; an unfavorable business environment; high capital and labor costs; few Gabonese entrepreneurs; a lack of connection with the national private sector; a weak technological capability, unmet financing needs for SME/VSME; a lack of infrastructure and basic economic services; a lack of partnership between major foreign companies and the rest of the economy; taxation; and the legal and institutional system.
Factors that prevent economic development are 1) a lack of ability to recognize and seize opportunity and 2) a lack of incentive to exploit an opportunity. How can a backward economy ever overcome the twin hurdles of the absorption (human capital) gap and the incentive gap, either through individual or group efforts? The Korean experience is notable for its close cooperation between private agents and
018·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea the government. Investment in human capital and an outward-looking economic policy have been crucial factors in narrowing the absorption gap.
SMEs continue to be the backbone of the Korean economy, accounting for 99.9% of the total number of companies and 87.3%of the total number of employees in 2009. The government has implemented a variety of policy measures for SME promotion to respond to changing development stages and the international economic environment over the past several decades. SME support policies in Korea can be grouped into two categories: protective policies such as public policies for fair competition and control of monopolies, and supporting policies providing financial and nonfinancial incentives. To provide these incentives, the government has established various systems and agencies, and enacted a series of laws.
The Korean model explains transition from a backward economy to an industrial economy with particular emphasis on the initial stage of development by offering eight propositions. Lessons and policy recommendations from the Korean experience are as follows.
1. A developing country needs a quality stock of human capital and a stable government with an outward orientation. The quality stock of human capital is a measure of the degree of preparedness workers and business and policy makers have for the competitive pressures of the international arena. At the same time, international trade exposure enhances technology and stimulates human capital. Human capital formation is a continuous process. Learning takes time, but is the ultimate key to success. Domestic education is important, but overseas education is also essential. The Korean brand of industrialization has been one of learning and applying technology borrowed from others. Without an abundant and relatively well-trained stock of globally-oriented human resources, the transfer of technology may well be very slow.
2. A realistic development plan must be formulated. The planning process should involve government, business, and academia. The crucial element of the plan is the estimation of the resource requirement. The government must decide how to expand and mobilize domestic savings and induce foreign capital, through foreign borrowing and/or direct foreign investment that may include joint ventures and special economic zones. For this reason, it is necessary to set up a Gabon Development Institute that provides a comprehensive road map for economic development and effective policies.
3. Of all the roles the government may play, none is more important than the creation of an environment conducive to business. After all, entrepreneurship is the engine of growth. The role of the government can be a double-edged sword: it can
Executive Summary·019 foster economic growth, or it can impede economic growth if it is unstable and preoccupied with rent-seeking activities. To considerably improve the business environment, promote economic activities, and increase the national competiveness, it is necessary to supply a highly-qualified workforce, SOC in the form of basic infrastructures, basic economic services, and the legal and institutional system. To do this, it is necessary to establish a statistical institution to collect and diffuse the basic statistics, which are required to make correct diagnoses and take appropriate measures.
4. When government sets up, operates and spreads model factories by sector, it is necessary to support companies in Gabon that have a dynamic comparative advantage by using the strategy of selection-and-concentration as driving forces. The government should underwrite risks that would have been too costly for private investors. Not only is EP/IS a plausible strategy, carefully selected and well- coordinated IS policies may even be necessary for the success of an outwardly- oriented strategy.
5. To decrease the unemployment of domestic workers and the dependence on foreign workers, it is necessary to allocate resources from general education to vocational education. It is also necessary to ensure appropriate motivation by giving preferential treatments and differentiating wages for graduates in order to increase the enrollment rate of primary-secondary schools and decrease the drop-out rate.
6. The small size of Gabon’s domestic markets indicates that it will not be able to sustain an industrialization program without access to external markets. External markets would provide an opportunity for Gabon to expand production as well as exports, and reap the benefits of economies of scale. It would also provide the access to foreign exchange needed to import intermediate inputs and capital goods for domestic industries. In this context, it is important that rather than taking an inward- looking approach, industrial development be part of an overall process of integration into the global economy. This means that both domestic and external markets are important in the industrial process. To reduce companies’risks and uncertainty, the establishment of partnerships with major foreign companies in the global value chains is indispensible for financing, export marketing and technology import.
7. It is necessary to establish a scientific technological institute to strengthen the innovation-learning system, and develop technology and skills. Technology and innovation are important in building the capabilities of domestic firms and preparing them to compete in export markets for advanced manufacturing products. Gabon lags behind other regions in providing technical support and infrastructure to domestic firms.
020·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea 8. In countries with a very weak infrastructure, and an unfriendly business environment, the government should invest in special economic zones such as export processing zones and industrial parks, and attempt to attract foreign firms and domestic firms that are willing to invest in the targeted industries. Industrial clusters play an important role in manufacturing. An industrial cluster may take different forms: in its simplest form, it is an agglomeration of small and medium firms belonging to the same sector. One or more large firms may also be part of the cluster. A major advantage of a cluster is that it reduces geographical and informational costs for firms. This type of organizational form is particularly advantageous in the Gabonese context, which is characterized by poor infrastructure and weak information systems.
9. It is necessary to stimulate the spirit for development, in a manner similar to the New Community Movement in Korea, because the spirit of development is a prerequisite for economic development. The role of government is to erect ED by setting up a system in which“ those who help themselves are helped,”thereby fueling the spirit of development that is needed to drive society towards further economic progress.
Chapter 2 deals with development strategies for Gabon’s agricultural industry. Though it has huge potential, Gabon’s agricultural industry only accounts for about 40% of the food consumption. Urbanization and westernized food consumption patterns have also increased dependence on food imports. It is estimated that less than 1% of Gabon’s land is used for agricultural production. The agricultural sector’s share of the country’s GDP declined from 15% in the 1960s to about 4.4%, including the 1.5% share of the fishing industry, in 2009. Under such circumstances, Gabon’s agricultural sector faces a number of important challenges. Firstly, the production potential of animal husbandry needs to be exploited and expanded for food security. Secondly, to resolve Africa’s widespread starvation and malnutrition, it is necessary to utilize Gabon’s agricultural sector. Thirdly, industries related to the agricultural sector such as processing and distribution need to be developed for the diversification of industries, which in turn will create employment and resolve the problems of urban unemployment and poverty.
“Green Gabon”divides the agricultural sector into three areas: commercial agriculture in the suburbs (root vegetables, fruits and vegetables, poultry, and pork), general agriculture (rice, corn, legumes, etc.), and agricultural and food industries in the private sector with foreign investment (palm oil, coffee, cacao, and rubber). The goals of the 2011-2016 five-year plan include replacing 50% of rice imports (42% of total grain imports), all imports of fruits and vegetables, and approximately 60% of meat by 2016.
Executive Summary·021 The current status of Gabon’s agricultural sector is discussed below, and policy recommendations are provided based on Korea’s agricultural development experience.
1. Integration of Agricultural Technology R&D and Supply and Link to Educational Organizations: The rural advisory function needs to be linked and integrated, with universities at the center of research, as was done in Korea in the 1960s. Education at the youth level needs to be strengthened. Agricultural high schools need to be established and operated to develop the labor force that will take charge of the diversification of agricultural production and the country’s wealth in the future.
2. Creating a Gabonese Model of Comprehensive Agricultural Cooperatives: In most developed industrial countries, modernization and production diversification in the agricultural sector and balanced rural-urban development have been promoted through the organization of producers based on agricultural cooperatives. A comprehensive agricultural cooperative like Korea’s comprehensive agricultural cooperative is appropriate for Gabon’s situation in order to promote diversification and support commercialization in the agricultural sector. A multifunctional agricultural cooperative system that handles policy finance and is involved in financial services in addition to economic activities, such as purchases and sales, needs to be formed. A plan for an industrial structure that links to the food industry and the agricultural materials is also needed.
3. Creation of a State-Owned Firm to Lay the Foundation for Agricultural Production: Currently, the majority of Gabon’s farmland has been obtained from the forests through the slash-and-burn method, with the exception of a few plantation farms. Productivity is very low in the agricultural sector due to primitive farmland, a simple cropping system, and low agricultural technologies. For this reason, it is a national priority to develop a modern cropping system and farmland that utilizes modern production factors. An organization responsible for the reclamation and cultivation of farmland, the construction and maintenance of irrigation systems, building a distribution channel for agricultural products, and improvement of rural living conditions is needed for agricultural policy implementation. A corporation-type organization under the agricultural ministry that will manage the issues related to farmland is needed.
4. Creating an Agricultural-Industrial Complex: On the other hand, a connection between the agricultural sector and the secondary and tertiary industries so that added-value from agricultural production benefits rural areas is needed for modernization. As the processing capabilities for agricultural exports, such as cacao and coffee, exist already, it would be relatively easy to create synergies with the agricultural sector if an agricultural-industrial complex is constructed.
022·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea 5. Jointly Establish and Use a Firm Specialized in Agricultural Equipment through Cooperation with Neighboring Countries: Gabon is limited in terms of the size of the economy and market to develop such industries. Hence, it is necessary to cooperate with neighboring countries with similar conditions for the agricultural sector to achieve economies of scale.
6. Multiple Approaches to Attract Foreign Investment: Recently, coffee imports have risen rapidly in Korea, with the size of the domestic coffee market exceeding 1 trillion won. On the other hand, the government has a budget for storing inventories of rice, the main grain. Promoting international cooperation, in which Gabon and Korea can exchange tropical agricultural products, such as coffee, for rice, will be mutually beneficial. In the process, Gabon needs to investigate ways to attract capital for production, processing, and distribution, as well as the participation of private firms.
Chapter 3 deals with Tourism in Gabon. Most visitors travel to and from Gabon by air. Currently, there are direct flights to Brussels, Paris, Rome, Madrid and Geneva (Europe), as well as flights to Dubai. Of the 331,106 foreign tourists in 2008, the number of international tourist arrivals was 185,572, or 56% of the total, and 10.5% came from the Economic and Monetary Community of Central Africa (CEMAC) while 45.5% came from Europe. Employment growth within the industry is robust, and tourism investment is about 80% of Gabonese assets. Gabon, which has emerged as one of the African tourism destinations, is planning to attract 200,000 foreign tourists within 10 years. If this is accomplished, 100,000 tourists will participate in eco-tourism, and more than 30,000 jobs created.
Gabon possesses rich natural resources such as tropical rainforest and various kinds of animals and plants. However, its national parks are the only areas accessible to tourists. Currently, there are 13 national parks in Gabon, covering 11% of the territory; only three of these, Lope, Loango, and Pongara, are equipped with tourist facilities. About 5,000 tourists visit these three national parks each year, 5% of which participate in eco-tourism. In recent years, there has been a noticeable increase in Japanese and Chinese tourists to these parks.
The Gabonese government is planning to develop eco-tourism products, as Gabonese national parks have unique developmental and environmental conditions and natural and ecological resources. However, the country’s lack of infrastructure is making it difficult. The government is spending a large portion of its budget on national park preservation and is not charging admission fees at the moment. Hence, the government needs to consider policies that can expand tourism revenue and employment through the promotion of eco-tourism; national parks should be much more accessible, and links between national parks need to be systemized and
Executive Summary·023 strengthened. Also, because many local residents actually live within the national parks, it is important to develop eco-tourism that connects to the lives of these residents. Taking into account Gabon’s reality, goals and policies for the pre- development stage (~2012), post-development-stage (2013-2019), and growth stage (2020~) are suggested.
Based on the Korean experience of development, the policy recommendations for the systematic development of Gabon’s tourism industry are as follows:
1. Gabon needs to promote‘ Visit Gabon Year 2014-2015.’In 2012, the announcement on“ Visit Gabon Year”needs to be made, and marketing campaigns for Gabon’s tourism industry should be promoted, both domestically and internationally. Detailed contents should include special events and various discounts. Large-scale tourism facilities need to be opened, and the cutting-edge information system needs to be fully implemented. In order to mobilize public support, a Committee for“ Visit Gabon Year”needs to be formed with members of the government and private sector experts to utilize the creativity and expertise of the private sector. With this organization taking the lead, the committee needs to differentiate themes every two to three years, and promote international events and marketing activities simultaneously.
2. For Gabon’s tourism industry to meet global standards and to promote the development of a specialized labor force in the industry, the rating system for hotels and restaurants needs to be improved and operated efficiently. A service manual should be developed and disseminated to continually provide high quality services, given the importance of the quality of facilities and services. The tourism industry is a knowledge industry dependent on labor, and a labor force with an awareness of services can serve as a driving force to improve industry competitiveness. The government must promote specialization in the tourism industry’s labor force to develop the industry. Methods to specialize the labor force include an education and training system and a licensing system, as well as sending experts overseas for training. The education and training system should select candidates for site management (national parks, in particular), hotel management, and tourism development and investment, and the government should train them for 6 months or 1 year. Once educated, they can work within the country for a certain period of time.
3. The preservation and utilization of Gabon’s 13 national parks needs to be gradually implemented through the existing plan for national parks. For future development, both a long-term (10 years) and a short-term (2-3 years) implementation plan are needed. Currently, the access to national parks is poor, and can only be achieved with the use of planes and helicopters. While the construction
024·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea of railways, the construction of landing fields and the expansion of roads could take place, investments made solely for the purpose of improving access to national parks will have low economic returns. Second, Gabon needs to designate and manage its world natural heritages and geo parks. Gabon has many national parks with tropical forests and superb natural environments, and needs to designate these as biosphere reserves, world natural heritage, and geo parks. Third, it is necessary to promote the vitalization of eco-tourism. In addition to a study of the resources, the designation and management of the absolute preservation zone and eco-preservation zone must be done. To protect these rainforest zones, a system to regulate them must first be established. As the harmful consequences of damage to these zones are significant, the zones must be protected. Eco-tourism certifications are used to prevent damage to the ecosystem caused by careless tourist groups in eco-resources such as national parks and rainforest zones.
4. Gabon needs to create a tourism fund that consists of a promoting fund and an investment fund. These two funds can be managed as one, and it is recommendable for the area in which it will be directly used and the area in which investment is made to be the same. This fund requires a management and administration department. It is better if the government can manage the tourism fund directly at the beginning, but as the financial market becomes more stable and the scale of the fund grows, it is better if the tourism fund is managed by tourism organizations. In both of these situations, a legal foundation should be prepared by establishing a law related to the tourism fund, and clear management should be processed. The use of the tourism fund should rely on policy decisions of the administration department, and to develop Gabon’s tourism, investment and support for the development of complexes and tourism facilities, promotion of the tourism industry, product development, education and improvement of the quality of tourism workforce, tourism promotion and tourism industry R&D should be used.
Chapter 4 deals with plans to improve Gabon’s ICT industry. As Gabon’s ICT field as an industry is still in its infancy, there are few S/W or H/W companies. Internet service companies such as e-commerce, and the content industry are also underdeveloped. Gabon’s communication industry, particularly its wireless communications industry, has developed rapidly since the telecom market was liberalized in 1999. In 2010, Gabon was one of the few African countries with a subscriber rate above 100%. According to Oxford Business Group, the size of Gabon’s communication industry in 2009 was 364.6 billion fCFA(US$554.2 million), showing growth of 48% since 2006. This amounts to 7% of Gabon’s total GDP. On the other hand, there is an urgent need for broadband Internet networks, as Gabon’s Internet subscriber rate remains at 25% by ITU standards. As a result, second fiber-optic cables are to be established by November 2012.
Executive Summary·025 In terms of Gabon’s ICT accessibility and utilization (the percentage of computer and Internet users), the rate of computer and Internet use has increased ten-fold in the last decade, a significant increase that is high compared to other CEMAC countries. However, a large discrepancy stood out when compared to Korea. ITU estimated the total number of ICT workers in Gabon as of 2004 to be 2,165, which is the highest among CEMAC countries except for Cameroon. It is assumed that Gabon's ICT labor force has further expanded, as new service providers have emerged recently.
“Digital Gabon”is one of the pillars of“ Emerging Gabon”, Gabon’s national development strategy. The vision of Digital Gabon is to“ facilitate e-service development that supports Emerging Gabon though the establishment of a nation- wide Digital Infra by the year 2016.”Basic elements of the implementation framework of Digital Gabon include legal and institutional restructuring, establishment of infrastructure and data centers, securing of basic registration data, presentation of e-government, merger with other growth drivers, provision of value- added services, etc. In addition, Digital Gabon is designed to support regionally balanced development and the establishment of regional economic centers by building a modern infrastructure.
Recent legal restructuring regarding ICT has unified policy-making departments, supervision agencies and implementing bodies. First of all, as policy-maker, the Ministry of Digital Economy was made to establish the relevant policies as well as the legal and regulatory frameworks; it also facilitates the implementation of Digital Gabon and the monitoring of its activities. ARTEL is a unified supervision agency responsible for conflict mediation, as well as various fees and penalties. Finally, ANINF implements various programs of Digital Gabon; it establishes the national electronic database, promotes the ICT industry, produces and provides visual education materials, manages and grants the right to use frequencies, prepares programs for civic participation, etc.
Gabon has been trying to improve access to ICT based on the government’s determination to realize an information society as well as on an openness that invites global talent. However, if the weak industrial basis, shortage of experts and insufficient provision of legal, structural and financial basis continue, ICT will remain another invested business for more economic transparency and efficiency, and thus make a limited contribution to the country’s economic development.
For the development of Gabon in the field of ICT, there is a need to establish a legal and institutional system, to train specialists, and to prepare an industrial and financial base.
026·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea 1. Establishment of Legal and Institutional Systems: In the case of Gabon, there is a strong need to implement a legal system that will aid in the progress of informatization and the ICT industry. In South Korea, in relation to informatization, elements such as key policy and governance, personal information protection, cyber security, accreditation of electronic documents, etc. are enforced by specific laws. Also, the laws pertaining to the development of the ICT industry provide legal grounds for diverse means of industry promotion. Gabon’s enforcement agency of its ICT sector is currently unified with ANINF, and manages the construction of infrastructure and management operation, frequency allocations and licensing authorization, and the promotion of the ICT industry. The role of management is an extensive one. In the case of Korea, expert aid has been made available through the formation of aid organizations based on function, as evidenced by KISDI, ETRI, KATS, NIA, KISA, KORPA, and NIPA. In the case of Gabon, we propose that the ANINF’s function be distributed according to specialization, with reference to the functions of NIA and NIPA.
2. Preparation of an Industrial Base: We propose the formation of an exclusive R&D center to aid the development of Gabon ICT’s division of policy planning, execution capabilities and related technology. There is also a need for Gabon not only to realize the informatization society, but also to formulate plans regarding S/W, H/W, and IT services for the development of the ICT industry. Finally, an IT Park should be constructed to establish a single zone through which industry-related functions can be conducted and synergies increased.
3. Development of Professionals: To develop professionals in ICT, there is a need for the Gabonese government to establish professional colleges and graduate programs dedicated to ICT, wherein the government is involved with the nurturing of outstanding specialists, as well as short-term corporate consignment education.
4. Preparation of Financial Base: A lot of resources are exhausted in the process of expanding infrastructure, research development, human resources, and support organizations, to further informatize and nurture the ICT industry. Understanding this, the government of Gabon has formulated plans to establish an ICT development fund (FODEN), but has yet to realize the conclusive components. In 1993, Korea also supported the acceleration of national social informatization, the foundation of telecommunication, the advancement of information and communication research development, in the hope of improving quality of life, while promoting national economic development through the formation of a development fund. This has made Korea what it is today.
Executive Summary·027
Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea Chapter 1
Developing the Private Sector and Diversifying the Industrial Sector in Gabon: Lessons from Korea’s Experience of Economic Development
Summary 1. Current Economic Situation 2. Private Sector Development and Industrial Diversification in Korea 3. Institutional Support System for SMEs in Korea 4. Korean Model of Economic Development 5. Lessons from the Korean Experience and Policy Recommendations ■ Chapter 01
Developing the Private Sector and Diversifying the Industrial Sector in Gabon: Lessons from Korea’s Experience of Economic Development
Dr. Jung Mo Kang (Kyung Hee University)
Summary
The purpose of this study on private sector development and diversifying the industrial sector in Gabon is to help design industrial policies geared towards the development of the private sector, which is the key to industrial diversification, economic growth, and poverty reduction. This study examines economic and institutional constraints on the private sector, highlights measures to stimulate or revitalize key diversification sectors and makes recommendations by referring to Korea’s experience of economic development.
Gabon is a relatively small country, with a population of about 1.5 million people as of 2010. In 2009, 86% of the Gabonese population was urban. Gabon’s economy is dominated by the extractive sectors of oil, timber and manganese, the growth of which has not translated well into meaningful results in non-extractive exports. The Gabonese economy depends mostly on its oil and gas exports. At the end of 2007, Gabon had confirmed oil reserves of 1.995 billion barrels, which represents 0.16% of the world’s reserves. The oil sector accounts for 50% of GDP. In 2010, Gabon had a Gross Domestic Product (GDP) of US$12.2 billion, with a per capita GDP of US$7,563, due largely to its abundant natural resources and its small population. Gabon has 9 years of compulsory education (ages 6-15), and the school enrollment rate is 78%. While the rate of school completion was 62% in 1991, the illiteracy rate was 12% from 2005-2009.
030·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea Until crude petroleum was discovered offshore in the early 1970s, Gabon mainly depended on timber and manganese. The oil sector does not provide many direct job opportunities, and has not contributed to inter-sector flows. This source of employment is expected to decrease due to the decline in petroleum development, but the number of very young people entering the job market is increasing. This puts pressure on the training and employment structure.
The primary industry, secondary industry, and tertiary industry represented 43.9%, 9.0% (4.4% for manufacturing), and 41.7% of Gabon’s GDP in 2009, respectively. Gabon mainly exports primary products, and mainly imports manufacturing products. In 2010, the amounts of exports and imports were US$7.3 billion and US$2.5 billion, respectively, with a US$4.8 billion trade surplus. As of the end of 2010, the external debt was US$2 billion. Despite the abundance of natural resources, poor fiscal management is hobbling the economy.
Private Sector development is the core of economic growth and poverty reduction, as well as economic diversification. Raw materials such as oil and gas, manganese, iron and timber are the reason for the establishment of major international companies and the huge foreign direct investment (FDI) in Gabon. Although the per capita income level is relatively high, the Gabonese economy has some features of a low-income economy. Both Standard & Poor and Fitch rated Gabon BB- in 2010. Income distribution inequality is significant, and poverty remains a problem. The Human Development Index ranked Gabon 103rd out of 182 countries. Doing Business ranked Gabon 156th out of 183 countries in 2011.
Private sector development and diversification of the industrial sector must be realized in order to achieve sustainable, stable and long-term economic development in Gabon. But diversification to stimulate lasting growth faces various obstacles. The weakness of diversification sectors and the private sector is reflected in the low number of Gabonese entrepreneurs. The export-oriented nature of major foreign companies and their lack of complementarities with Gabonese private sector companies deprives the national private sector of outlets and training opportunities, and continues to be an obstacle to diversification.
In Gabon, the industrial structure is very weak, both in terms of the number of firms and in terms of their average size. The large majority of industrial firms are small or micro enterprises operating side by side with a few large-scale (often foreign or state-owned) firms found mostly in the raw materials and extractive sectors. A significant proportion of the small and micro enterprises are informal rather than formal firms. Informal firms are those that are not registered with the government and do not pay taxes. In other words, they operate outside the legal framework. They are usually run by individuals with low levels of education, who do not have
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·031 Lessons from Korea’s Experience of Economic Development·031 access to external funds. Furthermore, the Gabonese economy has very few medium- sized firms. The small average size of Gabonese firms is a problem from the perspective of long-term growth, since small firms tend to be less productive than large firms.
In addition to the size distribution of firms, which is highly skewed toward micro and small firms, it is difficult for either micro or small firms to become medium-sized or large firms. With the exception of firms involved in industrial clusters, there is relatively very low interaction. The lack of interaction is a concern, because linkages among firms have positive effects that enhance competitiveness. Both cooperation and agglomeration are beneficial.
Another feature of Gabonese manufacturing is that domestic firms have weak technological capabilities, and are embedded in fragmented learning and innovation systems. The weak technological capability is caused by a lack of technological support and infrastructure for domestic enterprises. Furthermore, most Gabonese enterprises do not make significant investments in technological development. Consequently, they have difficulties entering into, not to mention competing in, export markets for medium and high technology manufacturing.
The obstacles to private sector development and diversification of the industrial sector are a lack of human capital; a weak national private sector; a weak industrial structure; an unfavorable business environment; high capital and labor costs; few Gabonese entrepreneurs; a lack of connection with the national private sector; a weak technological capability; unmet financing needs for SME/VSME; a lack of infrastructure and basic economic services; lack of partnership between major foreign companies and the rest of the economy; taxation; and the legal and institutional system.
The major obstacle to private sector development and diversification of the industrial sector is the large number of informal micro enterprises that are typically run by individuals with low levels of education and weak technological capability and do not have access to external funds. Furthermore, it is difficult for either micro or very small firms to become small or medium-sized firms. Therefore, private sector development and diversification of the industrial sector in Gabon should be pursued by strengthening these informal micro enterprises, so that they can become formal small and medium-sized enterprises (SMEs). It is not possible to boost such sectors without the support of a dynamic national private sector.
Factors that keep an economy from developing are 1) a lack of ability to recognize and seize opportunities and 2) a lack of incentives to exploit opportunities. How can an economy ever overcome the twin hurdles of the absorption (human capital) gap
032·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea and the incentive gap, either through individual or group efforts? The Korean experience is notable for its close cooperation between private agents and government. Investment in human capital and an outward-looking economic policy have been crucial factors in narrowing the absorption gap. An outward-looking economic policy creates a competitive environment that accelerates the learning process through the absorption of new techniques. In addition, export orientation creates new incentives while enhancing the quality of human and physical capital.
SMEs continue to be the backbone of the Korean economy, accounting for 99.9% of the total number of companies, 87.3% of the total number of employees, 46.3% of manufacturing, and 35% of exports in 2009. The government has implemented a variety of policy measures for SME promotion to respond to the changes in the country’s development and the international economic environment over the past several decades. SME support policies in Korea can be divided into two categories: protective policies, such as public policies for fair competition and control of monopolies; and support policies, which provide financial and nonfinancial incentives. To provide these incentives, the government has established various systems and agencies, and enacted a series of laws. (See Table 1-3-1, Table 1-3-2, and Figure 1-3-1)
The Korean model explains the transition from an underdeveloped economy to an industrial economy with a particular emphasis on the initial stage of development by offering eight propositions. Lessons and policy recommendations from the Korean experience are as follows.
1. A developing country needs a quality stock of human capital and a stable government with an outward orientation. The quality stock of human capital refers to the degree of preparedness that workers, businesses and policy-makers have for the competitive pressures of the international arena. At the same time, international trade exposure enhances technology and stimulates human capital. Human capital formation is a continuous process. Learning takes time, but is the ultimate key to success. Not only is domestic education important; overseas education is also essential. The Korean brand of industrialization has been one of learning and applying technology borrowed from others. Without an abundant and relatively well-trained stock of globally-oriented human resources, the transfer of technology may well be very slow.
2. A realistic development plan must be formulated. The process of planning should involve government, business, and academia. The critical aspect of the plan is the estimation of the resource requirement. The government must decide how to expand and mobilize domestic savings and attract foreign capital, whether through foreign borrowing, direct foreign investment or a combination of the two, which
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·033 Lessons from Korea’s Experience of Economic Development·033 may include joint ventures and special economic zones. Therefore, it is necessary to set up a Gabon Development Institute that provides a comprehensive road map for economic development and effective policies. As a remedy for Gabon, a comprehensive investment project must be put into place simultaneously with investment in infrastructure to create demand and make each investment project profitable. The program must be implemented by an overall planning body if it is to generate a marked increase in investment incentives.
3. Of all the roles the government can play, none is more important than the creation of an environment that is conducive to business. In order to considerably improve the business environment, promote economic activities, and increase the national competitiveness, it is necessary to supply a highly-qualified workforce, the social overhead capital (SOC) as basic infrastructures, basic economic services, and the legal and institutional system. To do this, it is necessary to establish a statistical institution to collect and diffuse the basic statistics, which are required to make correct diagnoses and take the appropriate measures.
4. When government promotes private investors and sets up, operates and spreads model factories by sector, it would be more effective to support companies with the potential to compete in the global arena according to the strategy of selection-and-concentration as driving forces. The government should underwrite risks that would have been too costly for private investors. Not only is EP/IS a plausible strategy, but carefully selected and well-coordinated IS policies may even be necessary for the success of an outwardly-oriented strategy in the early phase of economic development in Gabon.
5. Investment in social overhead capital is an essential part of the“ big push” required to break the vicious circle of poverty in the beginning.
6. Land reform, if not already accomplished, is a crucial prerequisite for the“ big push,”and is important not only for political stability, but also for economic efficiency.
7. It is necessary to shift resources from general education to vocational education in order to decrease unemployment of domestic workers and dependence on foreign workers. It is also necessary to give appropriate motivation by giving preferential treatment and differentiating wages for graduates in order to increase the enrollment rate in primary-secondary school and decrease the drop-out rate.
8. If Gabon is to make significant progress in boosting and sustaining industrialization, it must take effective leadership of the development process. The small size of its domestic markets implies that it will not be able to sustain an
034·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea industrialization program without access to external markets. External markets would provide an opportunity for Gabon to expand production as well as exports, and reap the benefits of economies of scale. It would also provide the access to foreign exchange needed to import intermediate inputs and capital goods for domestic industries. In this context, it is important that industrial development be part of an overall process of integration into the global economy rather than adopting an inward-looking approach. This means that both domestic and external markets are important in the industrial process.
9. To reduce the risks and uncertainties faced by companies, the establishment of partnerships with major foreign companies in the global value chains is indispensible, and supports financing, export marketing and technology imports.
10. It is necessary to establish a scientific technological institute to strengthen the innovation/learning system and develop technology and skills. Technology and innovation are important in building the capabilities of domestic firms and preparing them to compete in export markets for advanced manufacturing products. Gabon lags behind other regions in providing technical support and infrastructure to domestic firms.
11. In countries with a very weak infrastructure and an unfriendly business environment, the government should invest in special economic zones such as export processing zones and industrial parks, and attempt to attract foreign firms and domestic firms that are willing to invest in the targeted industries. Industrial clusters play an important role in manufacturing. An industrial cluster may take different forms: in its simplest form, it is an agglomeration of small and medium-sized firms that belong to the same sector. One or more large firms may also be part of the cluster. A major advantage of a cluster is that it reduces geographical and informational costs for firms. This type of organizational form is particularly advantageous in the Gabonese context, which is characterized by poor infrastructure and weak information systems.
12. It is necessary to stimulate the spirit for development, like the New Community (Saemaul) Movement in Korea, because the spirit of development is a precondition for economic development. The role of government is to build ED by setting up such a system that“ those who help themselves are helped,”thereby fueling the spirit of development that is needed to drive society towards further economic progress.
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·035 Lessons from Korea’s Experience of Economic Development·035 1. Current Economic Situation 1.1. Overview of the Gabonese Economy
Gabon is a relatively small country, with a population of about 1.5 million people1 as of 2010. Libreville is the central city, and the largest, with a population of about 754,000. The oil exporting city of Port Gentil is the second-largest city, with a population of about 140,000. Franceville is the third largest, with a population of about 60,000, at the head of the Trans-Gabonese railway. As of 2009, 86% of the Gabonese population was urban.
Gabon is endowed with very rich natural resources such as oil and gas, manganese, timber, diamond, niobium, uranium and agriculture. The Gabonese economy depends mostly on its oil and gas exports. At the end of 2007, Gabon had confirmed oil reserves of 1.995 billion barrels, representing 0.16% of the world’s reserves. The government is also developing its industrial, agricultural and tourism sectors in order to attract foreign investment. In 2010, Gabon had a Gross Domestic Product (GDP) of US$12.2 billion, with per capita GDP of US$7,563. This level of per capita income is due largely to the country’s abundant natural resources and small population.
Gabon has 9 years of compulsory education (ages 6-15), and the school enrollment rate is 78%. While the rate of school completion was 62% in 1991, the illiteracy rate was 12% from 2005-2009.
Gabon’s structural constraints include its low human capital, its inefficient administration, poor infrastructure, small domestic markets, a low entrepreneurial base, and a lack of communication and understanding between the public sector and the private sector. Human capital is critical to the development of industry. However, Gabon lags behind in skills and vocational training. (African Development Bank: ADB 2010) Infrastructure is critical to the development of manufacturing, but Gabon has a very poor transport and communication infrastructure. With regard to the other structural factors, there is a general recognition that more effort should be geared towards the development of entrepreneurship as well as the building of robust regional markets to address the limitations imposed by the small size of the country’s domestic markets.
Until crude petroleum was discovered offshore in the early 1970s, Gabon mainly
1) IMF estimates 1.82 million people of its population.
036·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea
Sources: DGELF, TABLEAU DE BORD DE L’ÉCONOMIE, 2010. IMF and local authorities’data; e is estimate; p is projection. http://dx.doi.org/10.1787/852034340668 depended on timber and manganese. According to TABLEAU DE BORD DE L’ÉCONOMIE, the shares of Gabonese GDP held by primary industry, secondary industry, and tertiary industry were 43.9% (41.8% for petroleum and 2.1% for mining), 9.0% (4.4%
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·037 Lessons from Korea’s Experience of Economic Development·037 for manufacturing), and 41.7% in 2009, respectively.
Gabon mainly exports primary products, and mainly imports manufacturing products. In 2010, the amounts of exports and imports were US$7.3 billion and US$2.5 billion, respectively, with a US$4.8 billion trade surplus. As of the end of 2010, the external debt was US$2 billion.
Gabon’s economy is dominated by the extractive sectors of oil, timber and manganese, the growth of which did not translate well into meaningful results in non-extractive exports.
The oil sector accounts for 50% of GDP. Gabon continues to experience fluctuating prices for its exports of oil, timber and manganese. Despite the abundance of natural resources, poor fiscal management hobbles the economy. 1.2. Mining, Oil and Gas, and Timber Sectors
The Oil and Gas Sector: Gabon is sub-Saharan Africa’s fourth-largest oil producer, while holding the third-largest oil reserves in the region. As such, the oil industry plays a critical role in the economy. Annual oil production has been declining steadily, from 17.51 million tons in 1998 to 12.43 million tons in 2010. Gabon exported 95% of its production to the U.S. (60%) and Europe (mainly France).“ About 40 foreign oil companies are operating in some 30 onshore and offshore oilfields. So far, oil is not a key sector in the development of inter-sector relations and positive spillover effects in terms of diversification.”(ADB 2010, p.4) Natural gas is a relatively unexploited natural resource in Gabon. However, there is potential for natural gas development, which can lead to the construction of petrochemical complexes and the development of related industry.
Gabon’s largest oil field is Rabi-Kounga, which is operated by Shell and has estimated reserves of 440 million barrels and production of 150,000 barrels per day (bpd), accounting for 40% of national oil production. The second-largest field is Gamba- Ivinga, which is also operated by Shell and has production of 10,000 to 15,000 bpd.
The Timber Sector: The strategy of developing this sector is one of the main measures being considered to cope with the expected decline in the oil sector. Gabon’s forest covers more than 20 million hectares, about 80% of the territory, and includes about sixty species of trees, including okoume and ozigo. Each year, 400 million cubic meters are harvested, and the production of timber accounts for 4% of the Gabonese GDP, and 12% of its total exports. The transportation of logs and setting up of processing plants are impeded by long distances, poor roads and multiple hazards associated with the railway and port handling. Hundreds of
038·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea
Production of Oil and Gas Unit: 1,000 tons 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Production 13,500 12,890 12,563 13,432 13,483 13,300 11,930 12,130 11,810 11,820 12,431 Exports 12,400 12,650 11,640 12,680 12,732 12,490 11,010 11,310 10,890 11,120 11,227 Average Price of Brent 28.46 24.72 24.98 28.84 38.22 54.38 65.13 72.52 96.99 61.51 79.44 (US$/barrel) Average Price of Gabon 27.16 22.77 24.05 27.86 35.75 50.49 61.83 68.87 92.33 58.76 74.74 Oil (US$/barrel) Average Exchange Rate 711.5 733.11 696.5 581.18 528.18 527.84 522.89 479.42 448.41 472.13 495.43 (fCFA/US$)
Source: DGELF, TABLEAU DE BORD DE L'ÉCONOMIE, 2010. companies (75% of which are owned by expatriates) are involved in the timber sector. In early 2010, the government raised the timber processing target to 100% from 2010, compared to an initial target of 75% by 2012. Moving forward, no company will be able to harvest timber without setting up local processing units. Although the obligation to locally process timber would benefit the Gabonese through employment and profit redistribution, the rate of timber processing for export is between 25% and 35% compared to the 100% target. Therefore, the degree of processing must be better specified (ADB 2010).
The export of timber is sensitive to the global economic situation, particularly in Asia (especially China and India), which accounts for about 70% of sales. The more timber is processed, the more directly Gabon competes with Asian countries. The future of this sector depends mainly on the capacity of basic activities to remain competitive under the price conditions of the global market. The capacity to climb the processing ladder depends on easy access to capital and skilled local labor at a reasonable cost.“ The government should strengthen the financial system to overcome the constraints, and eliminate the wide gap between wages and productivity through intensive training for the sector’s workers”(ADB 2010).
The Iron Ore Sector: There are very large iron ore deposits in Belinga (1 billon tons), Bok-Boka (200 million tons), and Milingui (150 million tons). Geological reserves have an iron content of about 60%. There are numerous opportunities for iron ore processing, each of which has its own operational constraints, environmental requirements and permissive factors. This sector is plagued by high infrastructure costs and a lack of skilled local labor, as well as a weak capacity in public-private partnerships.
Manganese ore: With 25% of the world’s manganese reserves, Gabon has the
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·039 Lessons from Korea’s Experience of Economic Development·039
Source: DGELF, TABLEAU DE BORD DE L’ÉCONOMIE, 2010.
sixth-largest manganese reserve in the world. The amount of manganese produced by the company French Comilog is 3.33 million tons, the second-largest in the world.
The establishment of partnerships with foreign companies in mining is indispensible for raising the funds needed for local mineral extraction and development and building infrastructure. Such a partnership would help facilitate export marketing and technology imports. The partnership should seek to mobilize resources as well as develop economic relations between major foreign companies and SMEs/SMIs in Gabon.
Source: DGELF, TABLEAU DE BORD DE L’ÉCONOMIE, 2010.
While resource-based manufacturing exports can contribute to high growth rates, they involve relatively low value addition, and also leave exporting countries highly vulnerable to external shocks. Furthermore, natural-resource-based sectors exhibit
040·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea low productivity growth, and have few linkages with the rest of the economy. To sum up, resource-based manufacturing shows very limited product differentiation, and thus shares several characteristics with commodities. 1.3. Trade
Through the African Growth and Opportunity Act (AGOA), Gabon has quota and duty-free access to the United States. Gabon also benefits from the EVD PSI program, which aims to stimulate durable economic development. PSI reimburses 60% of the investment, to a maximum of US$ 825,000 per project. Under certain conditions, advances can be paid so as not to disrupt the cash flow.
Table 1-1-5 shows the main exporters and importers in Gabon. The United States accounts for 58.5% of Gabonese exports, followed by China (10.6%), France (7.1%), Singapore (5.3%), Switzerland (2.6%), India (2.1%), Thailand (2.1%), South Africa (2.0%), Spain (1.4%), and the United Kingdom (1.2%). France accounts for 40.3% of Gabonese imports, followed by Belgium (14.4%), the United States (7.4%), Cameroon (3.3%), Japan (3.1%), the Netherlands (2.8%), China (2.7%), Spain (2.4%), Germany (2.1%), and the United Kingdom (1.9%).
Gabon’s Main Exports and Imports Unit: % Country Share of Exports Country Share of Imports United States 58.5 France 40.3 China 10.6 Belgium 14.4 France 7.1 United States 7.4 Singapore 5.3 Cameroon 3.3 Switzerland 2.6 Japan 3.1 India 2.1 Netherlands 2.8 Thailand 2.1 China 2.7 South Africa 2.0 Spain 2.4 Spain 1.4 Germany 2.1
United Kingdom 1.2 United Kingdom 1.9
Source: Netherlands-Africa Business Council, Gabon Business Mission Sheet (2010-11), 2011. http://www.nabc.nl/Portals/0/docs/Country%20information%20pdf/GABON%20Fact%20Sheet.pdf
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·041 Lessons from Korea’s Experience of Economic Development·041
Products Most Exported and Imported by Gabon Unit: % Products Exported Share Products Imported Share 8431 Parts for Fork Lifts, Bulldozers & 2709 Crude Oil 27.2 1.7 Graders 2602 Manganese Ores 3.0 8704 Trucks 1.4 4408 Veneer Sheets 0.9 8703 Passenger Vehicles 1.2 4403 Lumber 0.9 2710 Non Crude Oil 1.2 4407 Sawn Wood > 6mm 0.4 7304 Seamless Iron & Steel Tubes & Pipes 1.1 4001 Natural Rubber 0.2 3004 Machines in Doses 0.9 4412 Plywood 0.2 8429 Heavy Construction Equipment 0.6 0306 Shell Fish 0.2 8481 Taps, Cocks & Valves 0.5 2710 Non Crude Oil 0.1 8708 Motor Vehicle Parts 0.5 2302 Cigar & Cigarette 0.1 0207 Chicken 0.5 Source: Netherlands-Africa Business Council, Gabon Business Mission Sheet (2010-11), 2011. http://www.nabc.nl/Portals/0/docs/Country%20information%20pdf/GABON%20Fact%20Sheet.pdf
1.4. Industrial Base of Private Sector Development and Diversification.
Private Sector development is the core of economic growth and poverty reduction, as well as economic diversification. Raw materials such as oil and gas, manganese, iron and timber are the reason for the establishment of major international companies and the huge foreign direct investment (FDI) in Gabon. Although the per capita income level is comparatively high, the Gabonese economy has some features of a low-income economy.
Both Standard & Poor and Fitch rated Gabon BB- in 2010. Income distribution inequality is significant, and poverty remains a problem. The Human Development Index ranked Gabon 103rd out of 182 countries. Doing Business ranked Gabon 156th out of 183 countries in 2011. Gabon has a relative high rank (67th) in issuing building permits, but scores poorly in virtually all other categories.
Diversification to stimulate lasting growth faces different types of obstacles. The weakness of diversification and the private sector is reflected in the low number of Gabonese entrepreneurs. The industrial structure is very weak, both in terms of the number of firms and in terms of their average size. The large majority of industrial firms are small or micro enterprises operating side by side with a few large-scale (often foreign or state-owned) firms, found mostly in the raw materials and extractive sectors. A significant proportion of the small and micro enterprises in
042·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea Gabon are informal as opposed to formal firms. Furthermore, the Gabonese economy has very few medium-sized firms. The small average size of Gabonese firms is a problem from the perspective of long-term growth, since the size of firms is correlated with export activity and productivity. In particular, small firms tend to be less productive than large firms (ADB, 2010).
Informal firms are defined as those that are not registered with the government and do not pay taxes. In other words, they operate outside the legal framework. Informal firms have lower productivity than small formal firms. They are usually run by individuals with less education, and do not have access to external funds. These firms do not advertise their products, but operate by producing to order and sell to informal clients through cash transactions. Something very important from an industrial point of view is that informal and formal firms occupy very different market niches, and it is rare for an informal firm to become formal since there is very little demand by formal firms for informal products. Most importantly, it seems that informal firms do not tend to become formal as they grow.
It should be noted that the informal sector is not homogeneous. In other words, informal firms have a wide range of characteristics. There are various reasons for the informality of firms: it may offer a means of survival in the absence of a social security net, it may be a way to earn income while searching for a formal job, or it may be a strategy to compete with formal firms. A distinction should be made between informal firms that would prefer to be formal if they could (involuntarily informal) and those that choose to be informal as a strategy (voluntarily informal). Policy intervention should take into consideration those two very different types of informality.
In addition to the size distribution of firms, which is highly skewed toward micro and small firms, the business environment is also characterized by an extremely low levels of mobility. In other words, it is difficult for either micro or small firms to become medium-sized or large firms. With the exception of firms involved in industrial clusters, there is relatively very low interaction. This lack of interaction is a concern, because linkages among firms have positive effects that enhance competitiveness. Both cooperation (which allows the exploitation of economies of scale as well as scope, and favors innovation, learning and skills development) and agglomeration (which increases the local availability of skilled labor, inputs and machinery) are beneficial.
Another feature of Gabonese manufacturing is that domestic firms have weak technological capabilities, and are embedded in fragmented learning and innovation systems. Gabon has weak capabilities in mechanical or engineering industries, which are trade-based commodity economies, and are largely users rather than developers of new technologies. The weak technological capability is caused by a lack of technological support and infrastructure for domestic enterprises. Furthermore, most
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·043 Lessons from Korea’s Experience of Economic Development·043 Gabonese enterprises do not make significant investments in technological development. As result, they have difficulties entering into, as well as competing in, export markets for medium and high technology manufacturing.
The number of firms in formal and informal sectors and the corresponding jobs in the private sector is not well known. According to the Gabonese Agency for the Promotion of Private Investments (APIP), 13,197 firms were listed in Gabon during the period of 2006-2009, including 9,051 individual firms and 4,146 companies.2 Firms by activity include 1,736 agro-industry firms, 173 in transport, 74 in telecommunications, 5,901 in commerce, and 5,313 in services. There are 7,000 Gabonese investors and 6,197 foreign investors. The number of firms owned by men and women are 11,350 (86%) and 1,847 (14%), respectively.
According to the Gabonese National Confederation of Employers’Association (CNPG), there are less than 1,000 small and medium-sized enterprises in the formal sector. Of these, only one hundred are medium-sized. Very small and micro enterprises (VSMEs) are more common, and account for about 10,000 firms. Most of these are informal.
Firms by Legal Status 2006 2007 2008 2009 Total Individual firms 1,483 1,965 3,231 2,372 9,051 Companies 988 953 1,087 1,118 4,146 Total 2,471 2,918 4,318 3,490 13,197 Source: Agency for the Promotion of Private Investments (APIP).
Firms by Activities 2006 2007 2008 2009 Total Agro-industry 494 292 500 450 1,736 Transport 173 0 0 0 173 Telecommunication 74 0 0 0 74 Commerce 742 1,459 2,000 1,700 5,901 Services 988 1,167 1,818 1,340 5,313 Total 2,471 2,918 4,318 3,490 13,197 Source: Agency for Promotion of Private Investments (APIP).
2) According to APIP estimates, the number of formal firms is between 2,000 and 10,000, at a start- up rate of 4,000 a year.
044·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea The oil sector does not provide many direct job opportunities, and has not contributed to inter-sector flows. The modern economy employed about 118,000 workers (54,000 in the private sector and 64,000 in the public sector) in 2007, but the General Directorate of the Economy (GDE) shows that oil provided just more than 2,000 jobs at the national level, or less than 2% of the workforce. Its contribution is indirect rather than direct, similar to tradable or public services. This source of employment is expected to decrease due to the decline in petroleum development, but the number of very young people entering the job market is increasing. This exerts pressure on the training and employment structure.
In short, the obstacles are a lack of human capital; a weak national private sector; a weak industrial structure; an unfavorable business environment; high capital and labor costs; few Gabonese entrepreneurs; a lack of connection with the national private sector; a weak technological capability; unmet financing needs for SME/VSME; lack of infrastructure and basic economic services; lack of partnership between major foreign companies and the rest of the economy; taxation; and the legal and institutional system.
In order to overcome these constraints, it is necessary to: 1. Implement in-depth sectoral studies on each diversification sector, particularly timber, and identify obstacles to their growth. 2. Build administration capacity in strengthening public-private partnerships with international and national operators. 3. Shift resources from general education to vocational education, and consider diversification needs. 4. Overcome constraints on SMEs and VSMEs by developing various sources of financing, including micro-finance. 5. Develop a diversification support infrastructure that meets the development needs for sectoral activities.
These recommendations must be detailed, and must be supplemented by thorough examinations of the constraints regarding the institutional mechanism and costs of establishing enterprises.
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·045 Lessons from Korea’s Experience of Economic Development·045 2. Private Sector Development and Industrial Diversification in Korea 2.1. Economic Conditions before Take-Off (1900-Early 1960s)
Economic development entails a process of learning, and learning takes time, seldom evolving in a vacuum. Not all the clues to the secret behind Korea’s rapid transition can be found exclusively in the late fifties and sixties. Indeed, careful attention needs to be given to the conditions that existed prior to this period.
2.1.1. Legacies of the Colonial Period
For Korea, the first meaningful exposure to modern industry and a significant change in social infrastructure occurred with the Japanese colonial rule that lasted for 40 years (1905-1945). Korea’s economic transition under colonial rule began with major changes in agricultural productivity through (a) provision of improved seed varieties and fertilizer, (b) extension and cooperative programs, and (c) investment in infrastructure. Japan’s initial emphasis on agricultural productivity arose from the fact that Japan viewed the colony as a potential breadbasket to feed a growing Japanese population. Korea exported rice, cotton, and silk. In return, Korea served as a market for Japanese textiles and fertilizers. In addition, Japan invested heavily in social infrastructure, particularly transportation and communications networks; promoted public health, thus drastically reducing the mortality rate; and established a modern system of education.
During the 1930s and the first half of the 1940s, the period spanning the second Sino-Japanese War (1930-37) and World War II (1940-45), the strategic importance of the colony grew. Japan began investing more heavily in a non-agricultural sector (light manufacturing in the beginning, and heavy manufacturing later): chemical production in Korea. Manufacturing output in Korea showed significant growth largely due to the increased investment by Japanese firms. But this expansion came primarily from industrial plants owned and operated by the Japanese, and only a limited number of small and medium-sized native-owned firms were permitted to act as subcontractors to large Japanese industries, such as those producing food products, vegetable oils, and processed food. Opportunities for Koreans to learn by doing were thus limited; but nevertheless, during these years a substantial increase in human capital stock did actually occur. However, according to Mason, et al. (1980), Korea’s gains from Japan’s colonial legacy in terms of human capital were not particularly better than those of the more than 100 former Western colonies.
046·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea 2.1.2. The Period of Adjustment: 1945-1950s
A number of political events followed the liberation of Korea from Japanese colonial rule. Liberation resulted in the sudden evacuation of all Japanese entrepreneurs, managers, and technicians, causing a temporary suspension of production activities. The liberation was followed by the partitioning of the country into two, North and South, and the severance of their former economic link. North Korea had most of the heavy industry (chemical industry, in particular) and power plants. This period was one of recovery, of learning how to run a national government and how to manage an economy. Then in 1950 the Korean War broke out, destroying two-thirds of the industrial facilities in the South.
The period from World War II up to the 1950s can be considered one of intermittent recovery and adjustment, due largely to the Korean War (1950-53). The notable accomplishments that occurred during the adjustment period were progress in human capital and land reform.
The role of education in economic development has rightfully received a great deal of attention, because education tends to improve human capital and to promote socioeconomic integration and modernization. One of the major accomplishments of the post-liberalization governments in Korea was the massive investment in human capital. Korea’s literacy rate in 1945 was 13.4%. Since then, illiteracy has been almost completely eradicated, and today, Korea provides nine years of free compulsory education. In fact, by the 1950s the level of human resource development in Korea was comparable to that of countries with per capita GDPs two to three times as high (Cole and Lyman, 1971; Scitovsky, 1986).
In Korea, two significant land reforms were undertaken: the first in 1947 by the U.S. military government, which redistributed the land of departing Japanese landlords; and the second during 1948-50 by the Korean government. Agricultural development and land reform were central features of government policy during the 1950s. Land reform consisted of three steps: (a) a rent reduction program, (b) the sale of public land to cultivators and tenants, and (c) the land-to-the-tiller program, which limited land ownership to current tenants. Land reform proved very successful in directing rural landlords into urban businesses and giving tenants and small farmers the opportunity to purchase properties of their own. Furthermore, this new opportunity gave both groups enormous incentive to use their financial and physical resources efficiently. Land reform greatly improved the distribution of income, promoted better land management, and raised productivity.
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·047 Lessons from Korea’s Experience of Economic Development·047 2.1.3. Economic Conditions on the Eve of the Take-Off: Late 1950s - Early 1960s
Despite the cumulative effects of colonization and the development following the post-liberalization period, just before its economic take-off Korea was among the world’s poorest countries, with a per capita GNP of $82 (in current U.S. dollars) in 1961. In 1961, the share of primary industry (agriculture and forestry) in Korea accounted for 44.1% of the total output, while the secondary industry (manufacturing, mining, and construction) accounted for 17.0%. The structural characteristics of Korea represented a modest advance.
Until the early sixties, exports accounted for just 1-2% of Korea's GNP. Major exports were primary products (i.e. metal ores and concentrates, raw materials of vegetable or animal origin, fish, swine, and raw silk). The only manufactured goods exportable in sizable quantities were raw silk, plywood, and cotton fabrics (Hong, 1976). Since exports and domestic savings were virtually nonexistent in the aftermath of the Korean War, more than 70% of Korea’s reconstruction projects and its imports were financed by U.S. economic aid. 2.2. Economic Transition—The Take-Off
2.2.1. The Primary Import Substitution (IS) (1950s-Early 1970s)
The idea behind Import Substitution (IS) is that by replacing the imports of certain commodities with domestic production, the economy will be more self-sufficient, diversified, and able to meet balance of payment difficulties. The extent of IS is often measured by a change in the ratio of imports to the total availability of output (imports plus domestic output) of a single product or category of products. The declining ratio, over time, signifies that IS is underway in a particular sector. In the early phase of development, the ratio of imports of industry-specific consumer goods may fall, but the ratio of aggregate imports to aggregate output (GNP) may increase, due largely to rising imports of the capital goods needed for further industrialization. This fact will be reflected in the changing composition of output. The IS policy is often accompanied by tariffs and quotas, overvalued domestic currency, and other protective measures to curtail imports and bring the balance of payments under control.
Development is essentially a process of learning and searching through trial and error in a context of continuous change. Learning applies to production—the domestic production of once-imported goods. Other than the balance of payment consideration, the economic rationale for the protection of import substitution
048·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea activities is to extend the opportunities, as well as the duration, of this learning process.
Strictly speaking, IS activities in Korea can be dated back to the colonial period and continued well into 1970s, but the process accelerated in the 1950s. As mentioned above, IS began with a heavy emphasis on the replacement of nondurable consumer goods imports with domestic products. This is called primary (or easy) IS, because it requires less capital and technology than secondary IS, and production closely reflects the initial endowment conditions of a typical developing economy.
Although IS initially had an impact on Korean industrialization, its effects wore off rather quickly due largely to the limited size of the domestic market. The import ratios for processed food, textiles, and finished consumer goods declined from 14.3%, 36.5%, and 20.5% in 1955 to 5.1%, 11.3%, and 2.7% in 1963, respectively. (Kim and Romer, 1979) IS activities also had a major impact on industrialization up to the early 1960s.
From 1955 to 1963, the contribution of IS to food processing, textiles, and finished consumer goods was 16.6%, 53.0% and 15.4%, respectively. But these shares declined drastically, to 0.3%, -8.2% and -3.1%, respectively, during the 1963-1973 period.
If the objective of IS was to solve the balance-of-payment problem, Korea did not succeed. As mentioned above, while the IS process succeeded in reducing the import of consumer goods, it also stimulated the import of intermediate and capital goods needed to further industrialize. In other words, IS, while altering the import structure, did not reduce total imports. Instead, the share of imports in total supply (GDP plus imports) increased. At the same time, Korea’s overvalued currency proved detrimental to export growth, further aggravating the balance-of-payment problem.
The import substitution policy also created a scarcity of imported goods and foreign exchange. In the virtual absence of exports, the only source of foreign exchange was foreign economic aid, which tended primarily to benefit a privileged few that were favored by the government. This practice gave the owner of the scarce foreign exchange an opportunity for windfall profits through the import of scarce commodities. In the end, this type of rent-seeking activity gave rise to rampant corruption, popular discontent, and distrust of the government in Korea.
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·049 Lessons from Korea’s Experience of Economic Development·049 2.2.2. Why the Switch from an IS Regime to Export Promotion (EP)/IS Regime?
Despite the limitations of IS, the switch was extraordinary in the sense that the choice was made in a prevailing international environment of IS - Protectionism and pessimistic views of trade between a developing economy and an industrial economy. It appears that while the choice was motivated by economic rationale, it had an element of fortuity mixed with bravery and naïveté.
As previously indicated, Korea completed its primary phases of IS in the mid- to- late 1950s and early 1960s, respectively. Worth noting is the fact that throughout the IS period, in Korea under the military regime of President Park Chung Hee (in 1961), the policy emphasis shifted from dependency on U.S. aid to a search for a self-reliant economy. The government took the initiative in formulating and implementing economic policy. The First Five-Year Plan (FFYP) catapulted economic policy to the forefront of national policy. Although the FFYP appears to have vaguely signaled a policy shift away from import substitution and toward exports, it is unlikely that the planners initially had a clear notion of its outward looking orientation. More likely, the idea crystallized as a series of export-incentive measures that were put into effect and resulted in unexpected success. Whatever the initial cause may have been, the actual process of turning from an inward to an outward-looking policy stance may not have been as easy as first appears. For a country like Korea, which had no notable export products and no clear notion of the comparative advantages of exporting labor-intensive manufacturing goods, the decision to turn to an outward-looking policy must have been a courageous (or a desperate) act.
2.2.3. Outward-Looking Policy and Coexistence of EP and IS
Under the outward-looking policy, which was to emerge as the central fixture of the new economic policy, several important measures went into effect to promote exports; (a) currency was dramatically devalued; (b) a multiple exchange rate system was replaced with a single, unified, floating exchange rate system; and (c) a variety of tax exemptions, (d) direct subsidies, and (e) foreign exchange loans were allowed, together with (f) a tax rebate on material imported for export production as well as (g) import-export credits. To stimulate business investment, (h) corporate tax incentives were increased and (i) large government-directed loans were given to selected industries.
Equally significant was the higher incentive for productive rather than rent- seeking activities assured by the new policy. Under the new policy, businessmen for the first time saw genuine opportunities to profit from the production and export of
050·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea produced goods. Economic gains from expanded investment and international trade presented themselves as viable alternatives to rent-seeking activities, although rent- seeking still remained a factor.
Once the FFYP was initiated, the government made some crucial management decisions that would ordinarily be made by private entrepreneurs. Through a series of five-year plans, it set ambitious targets for economic growth, including export growth, and used carrot-and-stick and trial-and-error approaches to push private firms into compliance. By the late 1960s, distinctive characteristics unique to the Korean economy had begun to emerge.
The static theory of comparative advantage was applicable to Korea only in the early 1960s, during which time the economy was poorly endowed with capital relative to labor. Not surprisingly, exports consisted primarily of labor-intensive manufactured goods. However, the changing pattern of Korean exports, especially in the 1970s and 1980s, cannot be readily attributed to any underlying advantage of Korea’s. Instead, trade seems to reflect the strategic change in comparative advantage engineered by Korean firms and the government. The EP/IS trade regime was the key instrument in achieving this goal. The EP policy was reinforced by second-stage import substitution (e.g., intermediate materials and capital goods) in the second half of the 1970s (Kwon, 1990).
This experience demonstrates that strategic choices made by the government can determine the structure of industries and the comparative advantages. Korea’s conscious alteration of its comparative advantage was unmatched in speed and intensity. By far the most notable example of this effort was the construction of POSCO (the Pohang Integrated Steel Mill) during the period of 1968-73, a plan initially opposed by the World Bank.
2.2.4. Strategic Restructuring of Comparative Advantage
Once the market imperfections, and hence the scale economies, are accepted, new possibilities arise for the coexistence of an EP/IS regime and for strategic changes in comparative advantage. Under this industrialization cum trade regime, a country can pursue a policy of active EP/IS combination while simultaneously restructuring the comparative advantage. How did Korea move from a phase of primary IS during the 1950s (the pre-take-off period) to the EP/IS combination, and how was this used to alter their comparative advantages?
First, there has been a great deal of ambiguity in defining EP. In the neoclassical sense, it meant a policy-neutrality, where export incentives were roughly equal to those for import substitution activity, or an absence of any policy incentives. On the
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·051 Lessons from Korea’s Experience of Economic Development·051 other hand, from a Korean (or policy activist) perspective, EP denotes the active government promotion of exports over import substitution activity through various subsidies and restrictions. The second problem has to do with the treatment of EP and IS as two mutually exclusive policy options. According to this dichotomy, the successes of the Korean economy can be attributed to outwardly-oriented EP strategies.
Most fundamentally, the orthodox international trade theory underlying the concept of EP is that trade and investment patterns are determined by static comparative advantage. The best policy, then, would be a strict noninterventionist stance. In recent years, mounting evidence suggests that NICs have neither followed the neutral version of EP nor the traditional comparative advantage.
Most economists agree that export growth is essential for economic development; they also agree that there is a valid argument for import substitution. A fundamental policy issue facing Korea is the question of how to protect IS industries while pursuing export growth. An IS strategy is not necessarily anti-export, and import protection is not incompatible with export expansion. Korea’s experience not only demonstrates that EP/IS is a plausible strategy, but also shows that carefully selected and well-coordinated IS policies may even be necessary for the success of an outwardly-oriented strategy in the early phase of economic development.
The following policy actions are worth considering. First, carefully review the list of current export and import items to identify what other commodities are available for future exports and what types and degree of incentives are necessary to expand exports. Second, once potentially exportable items are identified, the newly-selected industries may enter the primary phase of import substitution. These products are initially produced and sold domestically until they become sufficiently competitive to be exported. This is called the Export Promotion (EP)/primary Import Substitution (IS) phase. Third, having succeeded in the primary phase of import substitution and export promotion, a country may now gradually move up the ladder from semi- skilled/labor intensive industries to skilled/capital intensive industries in identifying potential import substitution and export promotion. This is the EP/secondary IS phase. With each process, careful coordination between government and business will be necessary to identify potential EP/IS industries and formulate a package of IS and EP policy. Either general or sector-specific import restrictions are possible during the primary IS period. But once the export promotion policy is in motion, the government has to relax import restrictions on products that are essential for the export promotion. Find an export niche in several product categories, and gain confidence in it.
Korea always had a more sector-specific import substitution policy for the secondary IS (e.g., integrated steel mill, large shipyard, and petrochemical plants)
052·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea than the primary IS policy and the export promotion policies until the mid-1970s when they began actively targeting various selected export industries. Before this period, export promotion policies were by and large applied across industries without a sector-specific focus. By selectively protecting an import-competing industry while promoting it for export, a country may develop its long-run comparative advantage without jeopardizing its current export performance. In addition, by selectively liberalizing import controls for the exportable sector, a country may enjoy gains from trade without endangering those“ infant companies”that deserve temporary protection. In short, LDCs do not have to choose between import protection and export growth.
International markets are typically imperfectly competitive, and trade, to an important degree, is driven by economies of scale rather than comparative advantage. The policy implication of this view is that certain industries with government support may be able to gain a strategic advantage over foreign competitors in the world market. In this sense, the new approach provides a rationale for an activist trade policy. Given the industrial policies widely applied in Korea, it is not difficult to see that the changing pattern of exports largely reflects strategic changes in comparative advantage engineered by firms with the help of the government.
The changing comparative advantage in Korea is clearly discernible in the structural change of Korean exports. From 1960 to 1987, the GNP share of mining and manufacturing increased from 14.4% to 32.3%. During the same period, commodity exports grew at an average annual rate of 40%. Table 1-2-1 shows the changing structure of Korean exports. In 1960, the primary goods category (agricultural, marine, and mineral products) and unfinished materials (raw silk and textile fibers) accounted for 82.1% (32.4% plus 49.7%) of total exports. Fifteen years later (1975), as industrialization proceeded, the share of the same category fell to 16.2% (13.2% to 3.0%); manufactured goods, on the other hand, emerged as the dominant export commodities. During the same period, the shares of mineral fuels and manufactured goods (i.e., plywood, textile yarn, fabrics, iron and steel) went up from 16% in 1960 to 31.2% in 1975. The share of miscellaneous manufacturers rose from 0.3% in 1960 to 37.1% in 1975. Also notable is the rising share of machinery and transport equipment (often used as a barometer of industrialization), which increased from 0.3% in 1960 to 13.8% by 1975 and to 35.7% in 1987. By the 1980s, export commodities became even more capital-intensive, and in the latter part of the 1980s Korea’s exports included computers, semiconductors, color television sets, and automobiles.
In 1961, the ten major commodities exported by rank were (1) metal ores and concentrates; (2) raw silk; (3) fish, salted or dried; (4) swine; (5) cola; (6) vegetable
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·053 Lessons from Korea’s Experience of Economic Development·053 origin materials; (7) fish, fresh or frozen; (8) plywood; (9) animal origin materials; and (10) clay and other minerals. By 1974, we see a considerable change in the export items, with a predominance of manufactured products: (1) clothing, (2) electronics products, (3) ships, (4) textile fabrics, (5) sweaters, (6) plywood, (7) steel plate, (8) cotton goods, and (10) synthetic resin products.
Korea’s outward-looking policy was a far cry from that of a free-trade regime. The export promotion policy, which had considerable export biases with a myriad of subsidies and incentives, was not accompanied by a symmetrical policy of import liberalization. Instead, imports were strictly controlled by quantitative restrictions (Qrs) and tariff barriers. No serious attempts at import liberalization were made until 1978. According to Kim (1990) the degree of liberalization on the basis of Qrs was merely 5% on average until 1966, compared to around 40.5% during the period of 1967-79.
Change in the Structure of Korean Exports Unit: % 1960 1965 1975 1987 Food and Live Animals Beverages and Tobacco 32.4 16.6 13.2 4.6 Animal and Vegetable Oils and Fats Textiles and Minerals 66.0 79.9 71.3 56.7 Mineral Fuels and Unfinished Materials 49.7 21.2 3.0 1.0 (Raw silk and textile fibers) Manufactured Goods 16.0 39.0 31.2 23.2 (Plywood, textile yarn and fabrics, iron and steel) Miscellaneous Manufacturing 0.3 19.7 37.1 32.5 (Clothing and Footwear) Chemical Products 1.3 0.2 1,5 2.7 Machinery and Transport Equipment 0.3 3.1 13.8 35.7 Others - 0.2 0.2 0.3
Total Export Value (U.S.$ million) 22 175 5,081 47,280
Source: Economic Planning Board Source: Major Statistics of Korean Economy, Seoul, Korea, Various Issues
054·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea 2.2.5. Savings, Investments and Finance
Until the early 1960s, neither investment nor savings represented a significant fraction of GDP or GNP - accounting for 2.9% of GNP (gross savings) and 13.2% of GDP for Gross Domestic Investment in 1961. But investment began to pick up almost immediately thereafter. Between 1966 and 1990, the Gross Domestic Investment/GDP ratio shot up from 21.6% to 37.1%, and GDP growth accelerated in response. The Savings/GNP ratio lagged far behind the investment ratio, not reaching double digits until 1966, but eventually picking up steam and breaking the 20% barrier in 1973. Furthermore, the saving-investment gap was closed, by and large, around 1973. In the early 1960s, the saving-investment gap was filled by foreign savings (net borrowing from the rest of the world plus net transfers from the rest of the world).
During much of this period, commercial banks were nationalized and played a passive role in channeling government-directed, low-interest loans to businesses. Interest rates were kept low, with real rates around zero or negative throughout the 1970s. This created a large gap between the official bank interest rate and market rates, which in turn led to a gap between domestic savings and investment demands. The government chose to satisfy the excess demand by resorting to foreign borrowing. Government-directed low-interest loans, together with foreign aid, foreign borrowing, and government expenditures, gave the government direct control over about two-thirds of aggregate investment funds available to the economy in the 1970s. A study by Hong (1990) shows that the annual provision of interest subsidies alone expanded from 3% of GNP in 1962-72 to 10% of GNP in 1972-79.
In Korea, the level of domestic savings was low and the amount of foreign debt higher than the normal international level. The debt-equity ratio for Korean firms was also higher than the average. Foreign savings, which accounted for 83.3% of gross domestic investment in 1962, gradually declined over the years, fluctuating to around 20 to 30% between 1972 and 1982 (Song, 1990).
2.2.6. Entrepreneurial Spirit
Policy makers very early on saw the potential of private business as an engine of economic growth. Likewise, business saw in government a primary source of scarce capital that it badly needed. According to Schumpeter, in a capitalistic society, an economy could maintain its forward momentum only as long as entrepreneurs behaved like knights - or at least pioneers, and the“ driving impetus for economic change came from men of vision and courage who risked their fortunes to implement new ideas, who dared to innovate”(Heilbroner, 1961, p. 278). Certainly,
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·055 Lessons from Korea’s Experience of Economic Development·055 from its earliest development, Korea did not lack the entrepreneurial spirit, nor the mythology and heroics of legendary entrepreneurs such as the founders of Samsung, Hyundai, LG, Daewoo, and so forth.
3. Institutional Support System for SMEs in Korea 3.1. Financial Support for SMEs
A grass-roots economy with small and medium-sized enterprises operated by a single proprietor or family is less concentrated, and benefits the masses through a relatively even distribution of income. In an open and competitive economy, technical diffusion tends to be rapid through imitation from domestic rivals and learning from foreign firms. However, its small scale is not conducive to economies of scale, technological creativity or R&D expenditures.
SMEs continue to be the backbone of the Korean economy, accounting for 99.9% of the total number of companies, 87.3% of the total number of employees, 46.3% of manufacturing, and 35% of exports, as of 2009. The government has implemented a variety of policy measures for SME promotion to respond to changing stages in development and the international economic environments over the past several decades.
SME support policies in Korea can be grouped into two categories: protective policies such as public policies for fair competition and control of monopolies, and supporting policies providing financial and nonfinancial incentives. In order to provide these incentives, the government has established various systems and agencies, and enacted a series of laws (See Tables 1-3-1 and 1-3-2).
The financial policies offering incentives to SMEs began in the 1960s and 1970s, when Korea pursued export-oriented policies. The basic framework of financial support for SMEs is as follows: 1) Loans are based on banking funds and the fund of the Bank of Korea (BOK). 2) Loans are based on government funds, including more than 100 supporting fund programs for SMEs (See Figure 1-3-1).
056·Moving to the Diversification of the Gabonese Economy: Lessons Learned from Korea
Legal and Institutional Bases to Promote the Activities of Korean SMEs Legal and Institutional Bases Date Main Contents Importance of the government’s role SME Basic Law Dec. 1966 and obligation to promote SMEs’ activities Bank of SMEs enacts credit guarantee SME Credit Guarantee Law Mar. 1967 for SMEs
Emergency Decree for Economic Stability and Emergency Decree extends credit Aug. 1974 Growth (8.3 Emergency guarantee for SMEs Measures)
8.3 Emergency Measures confirm the Credit Guarantee Fund Law Dec. 1976 importance of the role and function of credit guarantee system for SMEs
KODIT established as an independent Korea Credit Guarantee Fund organization that is separate from the Jun. 1976 (KODIT) founded Bank of SMEs and fulfills the function of credit guarantee
Law to Support the KODIT enacts the commercialization of Commercialization of New Dec. 1986 new technology from July 1987 Technology
Korea Technology Guarantee Apr. 1989 KIBO is separated from KODIT Fund (KIBO) founded
Each Regional Credit Guarantee Regional Credit Guarantee Foundation provides the credit 1996~2003 Foundation founded guarantee for change of SMEs compatible with HCI
This law was made to promote the Small and Medium Business Dec. 1978 modernization of SMEs, accelerate the Affiliation Promotion Act change of SMEs compatible with HCI
SBC s main task is to provide financing, Small and Medium Business ’ Jan. 1979 technology and a management guide Corporation (SBC) founded to SMEs
Source: Srikant (online) http://cherry.gatech.edu/sim/students/papers97S/scrikantPDF KDS, SME-centered Enterprise Development Strategy for Sustained Economic Development of Kazakhstan, 2011, p. 57.
Chapter 1 _ Developing the Private Sector and Diversifying the Industrial Sector in Gabon:·057 Lessons from Korea’s Experience of Economic Development·057
Support Programs and Incentives for SMEs in Korea Programs Incentives