I was asked to review a book on economic development by a former head of the Bank of Korea by a publisher which wondered whether it ought to be published. I thought the book was extremely eccentric but quite worthwhile for all that. It was eventually published but not by them as Supply-Side Development Theory: Growth Policies for Developing Countries Based on Successful Korean and Chinese Economies. But as Mr Park informed me, it was on the strength of this review that he ended up with the book being published. This was the review

Sung Sang Park: Growth Policies for Developing Countries:
Based on Supply Side Economic Development Theory and Successful Korean and Chinese Policy Experiences

To begin at the beginning: I believe this book deserves to be published and ought to have a large and interested readership.

I concede that its arguments go very much against the grain of modern development theories and that some of its proofs are often amateurish and will carry little weight in any serious academic discussion. But the author, rather than being a professional economist, actually helped direct the Korean economy into its present highly successful state. Moreover, he did so following the various precepts that are outlined in the book. Just listening into the way he thinks about the various issues is a strong reason to encourage publication.

But that is only just the start. The book really ought to make economists who are rusted onto existing theories of development take a second look at how one of the architects of an extraordinarily successful economy explains how that economy went from abject poverty to first world living standards in under two generations. The theory may require some refinement and polish to fit into the latest journals, but the common sense and practical value of its specific prescriptions ought to make others take notice.

What makes this book different is that it begins with the assumption that the chronological profile of how the first industrial revolution progressed provides a contour map of what an underdeveloped economy should do today. Why wait for the invisible hand to make visible the structure of growth? Instead, just copy what others have already done. And the basis for this copying is in following through with a series of classical and semi-classical propositions as the guiding principles.

Classical Concepts

The following are the five classical concepts that are used to explain the general approach to development policy. They seem to make an integrated and sensible framework, although far different from anything one might find in a modern text.

Say’s Law – The central proposition is the supply side concept built around Say’s Law. Development can only occur through production of what others want to buy. The continued use of Keynes’s version, “supply creates its own demand”, does emphasise the supply-side nature of his argument. Nevertheless, it would be more accurate to re-phrase the concept as, “supply is the basis of demand where what is supplied is what is demanded” although using Keynes’s expression allows a reader to accept the arguments since this is the standard form of words. Based on supply-side theory and Say’s Law, the author proposes that the government encourages the domestic supply side by encouraging the production of those particular manufactured goods that are both import replacing and exportable.

The proposal requires a very high level of government involvement. Governments control credit growth and foreign exchange and ensure that both are allocated towards productive manufacturers and virtually no one else. Businesses are chosen for their proven ability to produce efficiently and given what amounts to a ten year or more licensed monopoly. The assumption is made that if your most ruthlessly efficient profit maximising businesses are given the right to go ahead and make as much money as possible, that they will do just that, and raise productivity levels for the population at the same time.

The book is also very dismissive of demand-side economic theories which are seen to be inapplicable for developing nations. Will others understand why this is so? The worry is that they will not, but the argument is sound and would apply just as much to a developed economy, although that’s neither here nor there as far as this book is concerned.

Law of Colin Clark – The concept here is that the historic profile of development as agriculture gives way to manufactured goods and then on to services is a pattern that should be expected to play out in any underdeveloped economy. Governments should therefore insist that manufacturing industry is given every assistance as the industry that, if supported, will pull all of the others out of their poverty.

Moreover, he makes the distinction between forms of services. Services to business will form as manufacturing expands. Consumer services will come eventually but are not first in line. Business services will thus expand the proportion of activity that are classified as services but should not be seen as the immediate origins of a service economy. But in this the ontology of the historical pattern will be seen to predominate.

Schumpeter’s Entrepreneurial Class – Found this very interesting and very much like Adam Smith. The book is 100% free market and looks to business people to be the authors of economic prosperity. But at the same time, there is a sense in which these same business people are more of a necessary evil than a virtuous group whose values epitomise the nation. I positively loved this:

“We should not expect private businessmen to follow social ethics and extreme social justice, because the profit-oriented, selfish-motivated, and money power-oriented private businessmen are providing new and better consumer goods that make people richer and provide jobs and income that make the poor people in huts and villages happier. Socialistic idealism-oriented politicians and scholars, who hate rich businessmen, overlook this important contributory role of Schumpeterian businessmen that can benefit the very poor people in their own country.

“In fact, the profit-oriented and rich businessmen actually help poor people more than the noisy socialist-oriented politicians and scholars.” (p. 138)

Entrepreneurs who know how to get things done are the key ingredient. Governments have no role in running businesses and should keep absolutely out of the boardrooms. These business people know how to take care of themselves and will make their businesses profitable. And where they do not, well then, out they go.

The government role is to create an environment in which these sharks of the business world are able to achieve the specific ends the government has in mind. It is not entirely left for businesses to make their own decisions without government poking their noses in to see what they are doing. The government is seen as having a very large interest in making sure that these businesses are following the national plan of developing productive industries where import replacement and export growth are seen as having the highest value. Very collaborative, but once the general direction is set, the government appears to have little further role.

Leontief’s Industrial Linkage Effects – The notion here is that manufacturing is the linchpin of the entire economic system. As goes manufacturing so goes the rest. It is built on his own reading of the lessons from the input-output table. Hard to say if he has this right, but it is not entirely certain whether he has to be right about this for the rest of his programme to work.

Moreover, if he is right, then this is an important contribution. It is for him to put the proposition on the table and for others to perhaps investigate.

Fisher’s Quantity Theory of Money – Presented here is a very different theory of finance and interest rate adjustments from that found I suspect almost anywhere else. The basic theory of saving generation is that the only addition to saving that can come from the economy generally is from households. Governments have their expenditures and business profits get ploughed back into business. But household savings are too paltry to make any serious difference, especially in the early days of trying to generate growth, but even afterwards as well.

This part I found unfortunately more vague than I would have liked, but my understanding is as follows. To supplement the savings available from the population generally, the central bank should just increase the flow of newly created money year by year by around 15%. It should also insist that nominal interest rates are kept low. Both of these principles provide the stimulus for growth. The swing variable that allows a government to do so is to permit, indeed insist on, a continuous fall in the value of the currency.

Allowing credit to expand by 15% or so beyond the actual saving level of the community represents the classical concept of forced saving. Money is put into the hands of businesses whose spending pushes up the price level but also changes the internal terms of trade in their direction. As businesses have the first use of purchasing power, they attract resources more readily than do others, so that there is a bias in the growth of the economy towards productive activity. Definitely inflationary, but as it seems that wages policy is accommodating, workers are bought off through being paid at higher levels, but the growth in wages is kept within relatively tight constraints. Part of the process is to make the head of the trade union movement the Minister of Labour.

Clearly inflation is not allowed to be the core of policy. Instead, policy is driven by the desire to grow the productive side of the economy to the largest extent. And so long as the working population is being allowed to share in the growing prosperity, no one is going to complain.

At the same time, because of the relatively faster inflation rate, the exchange rate is under continuous downwards pressure, and this seems to be a matter of policy. Keeping parity with the US dollar or any other currency is seen as a fool’s game. Better is to allow the currency to fall to promote exports and accommodate the inevitable inflationary pressures that the programme of forced saving must inevitably lead to.

Lastly, nominal interest rates are kept low. I’m not entirely sure how this is done given all else, but the underlying reasoning seems worthy of attention. Business borrowing is a tragedy for any firm that gets locked into the kinds of interest rates that are prevalent in a high interest rate economy. It becomes a game of chasing one’s financial tail and heads a firm into the bankruptcy rocks once it loses control in a world of compounded high rates of interest. This is what the policy attempts to prevent.

Some Comments

The question is this: how much of this book is total nonsense, how much is relevant only to Korea with its own historical circumstance and particular society, and how much is transferable to other economies? Very hard to judge. But at the core of the book are a series of practical ideas that others may find of value. The supply-side orientation based around Say’s Law seems a crucial part of the necessary understanding within any economy that is seeking to find its way into sustained rates of economic growth. Hammering that alone ought to make the book worthy of finding its way into print.

I also found the writing style engaging, but only after a while. It is certainly repetitive, but eventually I found the constant repetition of the various phrases and tag lines pleasant. Perhaps one does not have to hear about “poor people in huts and villages” page after page, but the quote is from John F. Kennedy and it is intended to make a serious point. Others may find it annoying, but I found it sort of Homeric in its constant repetition of these various epithets. (It occurred to me that the book is really a series of essays and speeches he gave in the past which have been tied together since things are stated over and over.) There is work for a good editor in bringing out the underlying concepts and text but without ruining the style of the author. For myself, once I entered into the rhythm of its style, I had no problem reading it through. The question is whether a book that is written in such a relaxed informal way will earn the credits its underlying ideas ought to earn.

However, in regard to his stylised facts found in the various contrived arithmetical examples he provides, I found those worse than unconvincing since they are too superficial to ever prove his point and their very flimsiness will, I think, lead readers to discount the book’s otherwise sound ideas. I think they work against his basic arguments since I think (but on one reading cannot be certain) they are profoundly wrong as he has put them together. They often feel like the sorts of examples that you might find in some early nineteenth century work on economics before there had been any bedding down of the fundamental concepts and ideas. They are hardly necessary and seem misconceived. Someone needs to go through them with the author to make sure that they genuinely do make sense. Certainly, they are not well explained and as found in the text feel wrong.

I might also note that his use of the Will Rogers quote, that mankind’s three greatest inventions have been fire, the wheel and central banking, was a joke and not necessarily intended as a serious comment. Rogers was a humorist and not a social philosopher. Some early indication that this is understood would help with the book’s credibility. Also, I wonder whether the weight put on Antonio as an entrepreneur and on the Merchant of Venice generally as a pivotal presentation that altered the idea of usury is all that sound. Perhaps it doesn’t matter; to me it merely added to the book’s charm.

Let me just finish with this. The first industrial revolution, mainly amongst those nations bordering on the North Atlantic, were basically a trial and error process of floundering within the particular cultural and religious atmosphere of those times. And while these unusual times may well ultimately have permitted free markets to develop and flourish, there is no certainty that this is the only way for an economy to develop now that the course has been charted. Focusing on export-led import-replacing manufacturing industries may be sub-optimal in some cosmic sense in which everything is known in advance. However, where the alternative is prolonged poverty and repeated error, it may make more sense to use the historical knowledge available to policy makers to repeat the same process by force of will rather than repeating the same mistakes of the past 250 years.