Social infrastructure is the third growth engine, which controls joining the ranks of advanced countries.

Written By Chang-yang Lee, a professor at KAIST business school

The world economy is entering a low growth period. The U.S., Europe, Japan and other developed countries are already in a low growth path, and the growth of developing countries such as China, India, Brazil, etc. is also slowing down. Low growth in line with economic crisis and income disparity deepens social and economic distress, and gives rise to conflict between income brackets and weakening of the middle class. This is a significant burden to the political system of democracy.

In order to derive appropriate growth strategy in the era of low growth, understanding of the key factors for economic growth necessarily takes the first priority. This is because economic growth theories suggest different growth factors according to each era. The initial growth theory in the 1960s regarded capital accumulation as a key factor in the growth, new growth theory in the 1990s suggested the accumulation of the ideas is the key to sustainable growth. In sum, capital accumulation is necessary for ‘takeoff of the economy’ at first, and then continuous accumulation of ideas should be followed for maintenance of growth.

It looks simple, but there are many examples of unsuccessful economic growth or stagnant growth. The most obvious example is the Soviet Union and its satellite countries in the 1950s which showed a considerable period of high growth by a huge mobilization of capital and labor. Even Western countries believed their high growth would last, and at that time, Khrushchev, the secretary general of the Communist Party of the Soviet Union, made an assertion to Western countries during the UN speech: “We will bury you!” However, the accumulation of capital faces its limitations, and they failed in increasing productivity by accumulation of ideas. Under this circumstance, their economy eventually collapsed.

If so, what do we need for long-term sustainable growth through the accumulation of capital and ideas? In particular, why do countries have very different accumulation of capital and creation of ideas? Recent theories of economic growth point out so-called "social infrastructure’ as the factors for the long-term sustainable growth and innovation.

In general, social infrastructure is defined as the concept covering various institutions and policies. The institutions include the rule of law, private property, the education system, along with transparency and openness of the society, a belief in shared values such as democracy, and social trust, and so on. Meanwhile, policies mean government policies affecting economic incentives such as tax policy. Many studies have shown that there is a close relationship between these factors in social infrastructure and economic innovation and competence

According to recent studies, the quality of social infrastructure, which measured by the level of the rule of law and democracy, economic openness, and the level of corruption is strongly positively correlated with GDP per capita as well as productivity of the economy. According to the Harvard Business Review in 2009, INSEAD Professor Antonio Fatas and Illian Mihov confirmed that the quality of social infrastructure is positively correlated with income levels. Switzerland and Singapore, the Nordic countries had a high level of social infrastructure and the national income whereas African countries and India, China, etc. had a low level of the two indicators.

In their study, noticeable is that among the middle-low income level (approximately $ 12,000 or less), the positive correlation between these two indicators is weak, but, among higher income level, there exists very strong positive correlation between two indicators. This means two things. First, the quality of social infrastructure should exceed a certain level in order to go beyond the middle-low income level. The authors warn that high growth of China and India would face “The Great Wall” if they do not ultimately improve the quality of their social infrastructure. Second, the extremely high-quality of social infrastructure is necessary to join the ranks of advanced countries (income from 30 thousand to 40 thousand U.S. dollars).

According to the flow of economic growth theory, our economic problems are the followings: First, the accumulation of capital is being weakened due to continuous decreasing savings rate. And creative knowledge accumulation foundation is still vulnerable due to the standardization education and avoidance of Science and Engineering. However, considering the current level of our economy, the most desperate one is to improve the quality of our social infrastructure which is an essential factor for sustainable growth. Especially, considering these day’s social circumstances, important social infrastructure factors are the rule of law and social trust, and to the truth on basic values of democracy and market economy.

Specifically, the rule of law is a key component of social infrastructure. However, it is difficult to solve distortions of the rule of law by various forces in our society. While solving social problems and expressing an opinion, many people still ‘ask for the impossible’ and there are many ghost stories. There remain corruption and other evil customs. In addition, community members’ faith on the basic values of democracy and market economy is not strong and steady yet. Moreover, the long-standing regional conflicts together with income tier conflicts and intergenerational conflicts are threatening social trust. As Prof. Francis Fukuyama elucidated, social trust is a fundamental component controlling cooperation and collaboration among community members including countries and corporations.

Improving the quality of social infrastructure is a strategic factor, which cannot be put off anymore for the economic growth and advanced society. The problem is that unlike a material growth, it is not easy to grow rapidly during a short period of time since many elements of social infrastructure have historical and cultural characters. Therefore, the gradual and strategic approaches are needed. Strengthening the substantial rule of law throughout the community is in the first place. At the same time, we have to gradually increase social trust by preventing various fraud and corruption as well as reducing intergenerational conflict and income tier conflicts. Now, whether a country or a corporation, times have changed to compete in its social infrastructure.

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