Opinion – Samuel Pessôa: What does South Korea have?

According to the IMF’s World Economic Outlook database, South Korea’s per capita income in 2019 reached US$ 44.5 thousand (R$ 211.4 thousand), and that of Brazil , US$ 15.4 thousand (R$ 73.1 thousand). Data are in international dollars, controlled for systematic differences in cost of living across countries. In other words, South Korea has a production per person that is triple that of Brazil.

But output per capita is different from output per hour worked. The number of workers as a proportion of the population can be different, and the working day, that is, the number of hours per year each person works, can also be different.

According to data from the Conference Board, the ratio of output per hour worked is 2.4, not 3. That is, the difference in labor productivity is 2.4. An hour worked in South Korea results in 2.4 times more product than an hour worked in Brazil.

We know that the savings rate in South Korea is much higher, and with it the investment rate. According to data from the World Economic Outlook, the investment rate in the country is 1.8 times the investment rate in Brazil. The simplest model we have suggests that this ratio of investment rates explains a 34% higher labor productivity, or a labor productivity ratio of 1.34. Much is still missing.

But we know that schooling is much better in South Korea. And we know that schooling raises labor productivity. In general, each additional year of schooling raises wages by 10%. And today there is a lot of evidence that this gain is due to the higher productivity resulting from the efficiency increases of the more educated worker.

According to the Barro and Lee database, in 2015, the population aged 25 and over in South Korea had an average of 12.8 years of schooling, and that of Brazil, 8.7. But our students’ performance in the Pisa tests (the OECD’s international proficiency exam) is 80% of the performance of South Koreans. In other words, Brazil has 6.8 years of schooling (with Korean quality), if there is linearity between the PISA result and worker efficiency. Brazil, therefore, has six years less schooling than the population aged 25 and over. This difference of six years more, with a return of 10%, explains the South Korean productivity, as a reason for the Brazilian, to be 1.8.

Thus, physical capital explains a difference in productivity of 34%, the difference in schooling explains 80%, and, multiplying 1.34 by 1.8, we have 2.5, slightly greater than 2.4!

In other words, the entire difference in labor productivity between Brazil and South Korea can be explained by the higher rates of investment there and by the better and greater education of the workforce.

The intrinsic productivity of South Korea, that is, that which is not due to the greater degree of capitalization and the greater quantity and better quality of schooling of the population, is equal to that of Brazil.

This is a fact well established in the literature. The growth of Asian tigers has a lot of brute force. Lots of savings, lots of school and lots of work. Intrinsic productivity is no big deal.
Does that mean it’s easy to replicate the Asian experience? I think not. Their great merit was to accumulate this immense amount of capital efficiently. In general, when you accumulate a lot of capital and a lot of human capital, there is a loss of quality and allocative efficiency.

The South Koreans are far from having the intrinsic efficiency of the American economy, but they manage to maintain the same intrinsic efficiency of Brazil with much more capital and education of the workforce.