Economic Transformation in ‘Second Generation' High Income Economies: A Comparative Analysis of Spain and Korea

The 2008 crisis raised the stakes of understanding economic transformation in high income economies as many of them re-examine their models in search for more sustainable paths to growth. Inspired by this challenge, this paper presents the preliminary argument of a book that develops a conceptual framework to think through the roles of states and large firms in fostering economic transformation in the context of ‘second generation’ high income economies, or countries that transitioned from mid to high-income economies in the 1980s and 1990s.

The framework is based on comparative qualitative analysis of Spain and Korea’s strategies for economic transformation since the mid-1980s. These are the two largest and most complex ‘second generation’ high income economies. Spain and Korea industrialised in the 1960s and 1970s through state directed models that emphasized the development of heavy manufacturing industries. Both initiated significant transformations in the 1980s within the context of their transitions to democracy, and later, the rise of competition in standard outputs resulting from globalization. But Spain and Korea responded to these challenges differently. Spain took a “horizontal” or cross-sector strategy under which firms in complex service sectors such as banking and telecommunications overcame historical competitive disadvantages and gained global stature. However, between 1982 and 2009 Spain also lost more than half of its industrial production capacity. By contrast, Korea pursued a “vertical” strategy consisting of moving upwards within the value chains of existing manufacturing sectors such as electronics or automotive. As a result, Korea became a manufacturing powerhouse, although its service sectors have remained underdeveloped and underperforming.

Spain and Korea’s choice of transformation strategies have important implications today. Spain’s loss of manufacturing capacity translated into lower demand for technical skills and low incentives for non-academically oriented Spaniards to further their education. Today, 43 per cent of working-age Spaniards have capped their education below upper secondary school levels. Korea’s imbalance between manufacturing and services resulted in a dual labour market with stark cleavages between regular and non-regular jobs. The high cost of obtaining the education necessary to qualify for corporate jobs has considerable impact on household debt. Labour duality also sustains a corporate culture that demands long working days at the expense of productivity and excludes women from the workforce.

This paper asks what historical and institutional factors shaped Spain and Korea’s strategic choices and presents an argument to answer this question. I contend that transformation in Spain and Korea relied on three common features: proactive states that provided focus and direction for transformation, coherent state structures able to withstand pressure from firms and prevent capture, and symbiotic or co-dependent state-firm relationships. Despite these commonalities, I argue that state-firm coordination in Spain and Korea presented critical differences that shaped each country’s preferences for upgrading strategies. These differences stemmed from historically embedded dissimilarities in the capabilities and resources of each actor and affected the negotiation processes through which national institutions developed and consolidated. Specifically, my analysis explores variations in capacities along three dimensions: financial resources, long-term strategic planning and cross-sector dialogue.