Why Korea Got Rich and Brazil Stagnated

South Korea and Brazil followed similar development paths until the mid-1980s. Then, they separated, with South Korea progressing into the club of rich nations while Brazil languished in the “Middle-Income Trap.” South Korea took the arduous path of moving up value chains and conquering global markets for manufacturing exports; Brazil deindustrialized and reverted to its historic dependence on commodities.

Looking back to distant history, both South Korea and Brazil were regional laggards. Korea trailed Japan and Taiwan on the path to industrialization; Brazil fell behind its Southern Cone neighbors, Argentina, Chile, and Uruguay. Korea suffered the collapse of the Joseon Dynasty (1897), Japanese colonization (1910-1945), and a catastrophic civil war (1950-1953), entering the 1960s as one of the poorest nations in the world. Brazil meandered until the 1920s, destabilized by the abolition of slavery (1888) and the collapse of the Empire (1989).

The two charts below show the evolution of GDP per capita for Korea and Brazil relative to that of the United Kingdom, which was the first country to industrialize in the 19th century. Korea is compared to its regional peers—Japan, Taiwan, and Singapore; and Brazil is compared to other “Western Offshoots,” countries closely integrated financially and commercially with the North Atlantic countries leading the process of industrialization (Argentina, New Zealand, Australia, and Chile). In the East, Japan led the way, followed by Singapore and Taiwan. Korea only took off in the 1960s, some 80 years after Japan. For the Western Offshoots, Australia and New Zealand had fully converged with the UK by 1900, and, until the 1920s, Argentina and Chile were close behind. Brazil, set back by political instability and the legacy of slavery, lagged far behind until its take-off in the 1950s, and then caught up with its floundering Latin American neighbors.

The following chart shows GDP per capita (in 2011 USD) for Brazil and Korea over the past century. The two countries followed similar paths until Brazil distanced itself during its “economic miracle” (1950-1979). Korea took off in the 1960s, passed ahead of Brazil in 1982, and then left Brazil far behind during the culmination of the “Miracle on the Han River.”

The next chart shows more recent GDP per capita data, including IMF forecasts through 2028, at which time Korea’s GDP per capita is expected to be 3.1 times Brazil’s. This period for Brazil includes two lost decades (the 1980s and 2010s). Korea recovered quickly from two stumbles—the Asian Financial Crisis (1997) and the Great Financial Crisis (2008).

Over this period (1980-2023), Brazil became the “poster child” for the “Middle-Income Trap.” The Latin American Debt Crisis (1982) and the fall of the military dictatorship (1964-1985) enabled the rise of the socialist left and resulted in the passage of an illiberal and statist “welfare” constitution (1988) that severely debilitated public finances and dramatically increased the political and financial power of rural states at the expense of urbanized industrial states. The new constitution led to rising public sector spending, fiscal incontinence, and a sharp reduction of the capacity of the state to invest in public goods. While government revenues as a percentage of GDP rose from the mid-20s in the 1980s to the low 40s over the past decade, deficits have been chronic, and the capacity of the public sector to invest has fallen to near zero. As shown in the charts below, the contrast with Korea is shocking. The Korean public sector operates with half the revenue of Brazil yet achieves consistent fiscal surpluses and is able to deliver world-class public goods (infrastructure, education, healthcare, and support for cultural institutions).

The collapse in the state’s ability to invest in public goods can be seen in the deterioration of infrastructure and education and human capital. The next charts show the World Bank’s rankings for infrastructure and logistics, the OECD’s rankings for education assessment, and the World Bank’s Human Capital Index. In all these measures, Korea ranks near the top while Brazil does poorly even compared to emerging market peers.

In 1982, the year that Korea passed Brazil in terms of GDP per capita, the two countries were at similar levels of industrialization, with Brazil having a small edge. Both countries, relying on similar models of industrial policy, forced savings, and directed lending, had dominated basic industries (steel, petrochemicals, cement, etc…) and mass manufacturing (autos, appliances, etc…) and had made important strides in the production of capital goods. As the following table shows, a decade later, the situation had changed dramatically. Brazil experienced a significant reduction in its manufacturing value-added to GDP ratio between 1984 and 1994. This period coincides with the passage of the new illiberal constitution in Brazil, economic volatility and hyperinflation, and a widespread belief that the industrial policies and protectionism supported by the military regime had engendered inefficient and coddled oligopolies.

Starting in the early 1980s, the world entered a period of trade hyper-globalization underpinned by the Reagan-Thatcher Neoliberal “Revolution and the “Washington Consensus” for the liberalization of trade and financial flows. Unfortunately, Brazil, unlike Korea, was poorly positioned to benefit from the trend towards open markets. Brazil, in fact, was a primary loser of globalization. If one agrees that a key measure of economic development is the complexity of a country’s exports—the premise of the Economic Complexity Index (ECI) compiled by Harvard’s Growth Lab—then globalization has been a catastrophe for Brazil and a huge boon for Korea. The chart below shows the evolution of the ECI since 1995. While Korea and Brazil were at similar levels of ECI in 1995, by 2020 Korea has moved to the top 5 while Brazil had plummeted. Over this period, Korea became a leading exporter of advanced technologies (semiconductors, digital displays, electric batteries, etc…) while Brazil returned to being almost exclusively an exporter of commodities (Embraer’s regional jets being an exception).

The success of Korea, as well as all the Asian Tiger economies, has been based on capturing export markets for manufacturing goods. Foreign markets have been instrumental in providing both scale and discipline to domestic firms. As shown in the chart below, by 1985 Korea, with an economy less than half the size, already exported more than Brazil.

The accelerated rise of China in the 1990s presented a momentous threat to Korea, which found itself caught in a “sandwich” between advanced economies that dominate the high-end market and Chinese manufacturers that were quickly catching up.

Over the next crucial decade, Korean firms successfully moved up into frontier technologies while Brazil turned away from manufacturing, as shown in the next chart. While both Brazil and Korea have increased their exports to GDP ratio since the 1980s, for Brazil, all the increase has come from commodities, while for Korea, most of the increase has come from manufactured goods.

The deindustrialization of Brazil has had enormous and probably irreversible consequences for labor productivity and consumption. Highly productive and well-remunerated jobs in manufacturing and industry have been replaced by service jobs with low productivity, providing little training. As shown below, though productivity growth in Brazil had been in line with Korea’s, it collapsed in the 1980s and has been near zero over the past decade.

Manufacturing jobs and the training they provide created the middle-class consumer in Brazil. Without the expansion of the middle class, Brazil is now unable to grow as a consumer market unless state welfare handouts increase. We can see this in the inequality data collected by the World Bank and The World Inequality database shown below. Over the past 40 years, Korea has incorporated nearly the entirety of its population into the middle class (measured at annual GDP per capita of over $10,000 in 2015 USD) while Brazil’s middle class still is almost wholly concentrated in the top income decile of the population. This means Korea, with a quarter of Brazil’s population, has more “consumers” than Brazil and grows consumption at a faster pace.

While Brazil missed the boat on trade globalization, it did embrace the opening of financial flows. Unlike Korea, which has maintained capital controls, Brazil abandoned them in 1990, subjecting itself fully to the vicissitudes of “hot money” flows. The concurrent deindustrialization and financialization of the Brazilian economy led to generations of engineering graduates migrating from industry to financial engineering, while in Korea, they continue to build things. In a generation, Sao Paulo has repositioned itself from an industrial powerhouse to a city centered around the “Faria-Lima” financial casino.

Brazil’s economy has returned to a level of dependence on commodities last experienced in the early 1950s. There have been two major drivers of this process. First, while since the 1980s state support for industry has disappeared, support for agriculture has been consistently abundant. Ironically, while Brazil abandoned the East Asia-like state incentives for industry it had under the military regime (subsidies, directed credit, and market protection) for farm commodities, these kinds of policies continue to be embraced by Brasilia, in part because of the increased political clout given to farm states by the 1988 Constitution. Moreover, like in the case of Asian Tigers, state support is now being directed to a sector that is extremely competitive and export oriented. However, unlike Asian manufacturing exports, the commodity sector has low economic complexity and value added and provides few jobs.

The second driver was the discovery of enormous pre-salt offshore oil fields (2005) which have eliminated Brazil’s historical dependency on oil imports. Oil production and exports are expected to ramp up over the next decade providing structural support for the current account and the currency. As in the case of farm commodities, the oil sector is capital intensive and generates few jobs.

Both these commodities have volatile prices that cause economic and currency instability and other ills. The “Commodity Curse” and “Dutch Disease” are terms coined by economists to describe the malign influence commodity dependence has on institutions (law and order, corruption, etc…) and other drivers of growth.

Dependence on commodities creates a vicious cycle of deindustrialization through currency volatility. Manufacturing exporters like Korea manage their currencies to preserve competitiveness. Brazil with its exposure to hot money flows and commodity prices is a volatility machine which makes life impossible for exporters of manufacturing goods. We see this in the chart below. While Brazil’s currency is a roller coaster, soaring and diving in function of commodity prices and hot money flows, the Korean won is managed for stability and competitiveness.

Conclusion – What will the future bring?

Brazil missed the boat on the trade globalization of the past 40 years while Korea was a primary beneficiary. However, the world is now changing, as protectionism and industrial policy cycle back into favor.

Korea’s “sandwich” problem has not gone away, and its reliance on foreign markets may now be a liability. Moreover, Korea faces a severe demographic problem with the prospect of a declining population and workforce for decades to come. Regional geopolitical tensions may also be highly destabilizing. On the positive side, Korean society is highly homogeneous, collective, and collaborative and has proven highly adaptive to change.

Demography is a lesser issue for Brazil, though its “demographic dividend” of the past decades will become a drag in the coming years. Deglobalization and the newfound popularity of industrial policy may provide an opportunity for productive investment. On the negative side, Brazil’s highly heterogeneous population, a total lack of collective and collaborative spirit, and fractured politics do not promise an easy turnaround.