Opinion – Samuel Pessôa: Still South Korea

Last Sunday (10th), I showed that the difference in labor productivity between Brazil and South Korea, of 2.4 times, can be explained by the greater accumulation of physical capital and by the greater and better education of the workforce. The intrinsic productivity of South Korea, that is, that which does not depend on physical capital and the education of the workforce, is not different from that of Brazil.

If we make the same comparison between the Brazilian economy and the US, the result will be different. In this case, the intrinsic productivity of the American economy will be 60% higher than that of Brazil. That is, if the American economy operated with the same amounts of capital and schooling observed in Brazil, they would produce 60% more per hour than the Brazilian worker. The calculations are here.

Of course, American labor productivity is 4.2 times ours, not just 1.6. The distance between 1.6 and 4.2 is due to capital and education.

But it is a fact that the productive structure of South Korea is very different from that of Brazil. Their economic growth was accompanied by a continuous process of alteration and increase in the complexity of the goods and services produced by the country.

Additionally, it is a fact that the public sector has intervened a lot in the process of building this productive complexity.

It is perfectly possible to understand South Korean government action and growth from conventional theory. The following steps organize the argument:

First, the productive comparative advantage of each country is given by the endowment of productive factors relative to the average endowment in the world economy. If capital is abundant, the economy will tend to export products whose production is capital intensive.

Second step: if there is a continuous process of capital accumulation and education of the workforce, there is in this economy a continuous process of changing the endowment of factors.

Step Three: Consequently, if factor endowments are changing rapidly, static comparative advantage is continually changing.

From this last fact it follows that the productive structure needs to change continuously. This is the fourth step.
We know that the process of technological innovation in an economic space is full of imperfections.

As Justin Lin wrote, “Economic innovations—whether they succeed or fail—generate information about profitable and unprofitable market opportunities. But because much of this information is available not only to the innovators themselves but also to competitors and potential imitators, who bear none of the costs of innovation, it will tend to be insufficiently supplied by the market”.

Evidently, for the public sector to be able to help the private sector to adjust, over time, the productive structure to the new static comparative advantages, it is necessary for the State to have management capacity.

The State will have to be close enough to the productive sector to understand the issues and correct market failures; but far enough away to insulate itself from the interests of pressure groups. The state must have what Peter Evans called “embedded autonomy”.

People who are scholars and enthusiasts of sectoral development policies need to assess our past experiences, both successful and unsuccessful, and manage to establish minimum protocols.

Without learning from our mistakes and successes, we will not have the breath, due to the high fiscal costs, to implement industrial development policies.