NUMBER 145 A~~ Oprt:n ED Precis * Operations Evaluation Department April 199 The Development of Korea's Cholla Region Thefirst regional development pro- Through the 1960s, as the country's Kwangju, the provincial capital, to gram supported by the World Bank, economy expanded at a rate of pursue the expansion of industrial carried out in Korea between 1975 nearly 10 percent a year, regional development on its own through and 1990, was among thefirst to income disparities grew between follow-up projects. The third project demonstrate how the Bank can bring Cholla and the two most industrial- extended the regional development together the public and private sectors ized regions, Seoul and Kyungsang. model to Chonju and Iri (now called in the interest of development. The In the 1970s, despite government Iksan) in North Cholla, In effect, program triggered industrialization policies aimed at spreading popula- the three projects together followed in South Cholla, which until that tion and jobs to less developed ar- a secluential model-piloting be- time had lagged behind the rest of eas, industries seldom relocated fore mainstreaming-which did the country. It transformed the econo- to South Cholla, the country's not become widely accepted prac- mies of two islands and had a pro- poorest region. tice until years later and today is found impact on that region's considered an important approach institutional development. Between 1975 and 1984, the World in many Bank operations. Bank approved three projects (see An OED impact evaluation study* Box 1) to help the government Direct impacts of the program's three projects found develop Cholla and reduce inter- that-in addition to their direct im- regional inequalities. The projects The impacts of the projects' vari- pacts-the projects sparked a series were very complex, together cover- ous investment components (such of side effects, which enhanced the ing seven cities and five islands in as roads and water distribution long-term impact of the projects them- two provinces, South Cholla and networks) today are difficult to ob- selves. Above all, the program created North Cholla, with a total of 22 serve because the region has grown the opportunityfor institutions to components. These included indus- so much that assets created by the evolve, as the legal and regulatory trial, housing, and tourism estates projects-and which once stood frameworkfor industrial growth (including national parks); city mar- out in the landscape-blend into changed over time. Local governments kets; bridges connecting islands the urban environment. For ex- in South Cholla learned so much that to the mainland; fisheries; and ur- they have since created three more ban services such as water supply, large-scale industrial estates, without sanitation, and roads. *Impact evaluation report: "De- any help from either the Bank or the layed Development of the Cholla central government. While Korea's The projects became the Bank's Region: An Institutional Study," economic development has distinctive first-ever regional development by Kyu Sik Lee, Report No. 16211 7, characteristics, the study confirms program, which to this day remains December 31, 1996. Available that entrepreneurs will respond posi- unique in its sustained effort and to Bank executive directors and tively to laws and regulations that in the way it was carried out. sltaff rom the Inftreal Documents provide appropriate incentives Unit andfrom regional informa- for investment. Piloting before mainstreaming tion service centers, and to the publicfrom ilte Public Informa- The projects The first project was a pilot car- tion Center: 1-202/458-5454, ried out in South Cholla. The sec- fax 1-202/522-1500, e-mail For nearly three decades, Korea's ond project introduced the initial pic@worldbank.org. Precis economic miracle did not include industrial estate component and written by Stefano Petrucci. the southern region of Cholla. allowed the city government of tially with help from central gov- Had the Bank agreed to build a Box 1: The three Bank projects ernment agencies and later by much larger industrial estate in the (Bank loan amounts) themselves, with strong private initial phase, local authorities would sector participation. not have had the same opportunity Kwangju I, 1975-80 ($15 million) to learn about industrial planning Industrialization and construction. Goal: help establish a regional development program in Kwangju, A solid industrial base has been The local officials who imple- South Cholla. established. With the first indus- mented the Bank's projects reported Components: prepare housing trial estate project, local and pro- that they are using the approaches sites; build a fishery harbor com- vincial governments successfully and methods they learned from the plex, a city market, and access attracted some large "anchor" firms Bank projects to prepare, appraise, roads; help local and central au- to the new industrial estates. Small- and implement programs. Formal thorities develop policies, work and medium-sized firms soon fol- feasibility studies, engineering de- programr. evaluations, feasibilit) lowed, investing in new plants and sign, and economic analysis, none studies, and training. equipment. Subcontracting firms of which existed in the region before quickly cropped up. Demand for the projects, are now standard prac- Kwangju II, 1979-85 ($65 million) space grew so quickly that even tice. The 57 Bank missions to the before the first Bank-assisted in- region over a 20-year period also Goal: further enhance the devel- dustrial estate was fully occupied provided many learning opportuni- opment of the K%vangiu region in 1984, it became clear that an ties for both sides. Components: construction, de- expansion would be needed.The results of this learning pro- velopment, and improvements in Industrial infrastructure has ex- cess were spectacular. The first in- housing. an industrial estate, water panded to more than five times dustrial estate at Hanam, in Kwangju supply, transport, and fisheries; the project's original investment city, was fully occupied by 1984. Its technical assistance. in the industrial estate of Kwangju. size, 1.5 million square meters, was Chonju, 1984-90 ($60 million) The study team found that the almost as large as those of all the supply of electricity was better previously existing industrial areas Goal: help promote development in the project area than outside. put together. Local authorities began and job opportunities in Chonju Firms also reported that utilities work on an extension in 1986 (com- and Iri (now Iksan), North Cholla. and other infrastructure services pleted in 1988), without the help of had improved for them inside the either the government or the Bank. Components: conmmercial plots, project's industrial estate. In inter- The city alone launched a third public facilities, and low-income views with the study team, private phase in 1989, completed in 1991. All plots; industrial estates; water sup- industrialists always stressed the the third phase sites were sold out ply, drainage. transport, and flood Bank's catalytic role in initiating before completion, and 85 percent control works; development of the development process in the of them were occupied by 1995. The three national park resort areas; region and the way that the projects second and third areas together are technical assistance. brought together the public and private sectors. Box 2: Daewoo Electronics ample, access roads to the business Institutional learning and industrial linkages district of Yeosu are now in the heart of a fully developed city cen- One of the most significant, yet established a plant in the Hanam ter. The study focused on the im- unexpected, impacts of the pro- industrial estate. In little oer 10 pacts of two main components: gram was the extensive and rapid ears, the company ha.. become industrial estates and two bridges learning achieved by local authori- one of the largest appliance pro- connecting the islands of Tolsan ties, who had to operate project ducers in Korea. w% ith annual and Chindo to the mainland. facilities and expand them urgently sales of $2 billion in 1995. The to meet additional demand. The main plant at Hanam employs The projects had both short-term, projects offered both national and 1.800 people, but Daew oo has direct impacts and long-term side local government officials the first established 1,200 subcontracting effects that ensured the sustainability opportunity of its kind to learn firm,, oi %%,h-ich 180 are located in of the projects' impacts. They had project preparation and implemen- Kwangju and 35 in Hanam. The two major direct impacts: they trig- tation for development of the re- remamnder are in Seoul and Pusan gered industrialization in the re- gion. They also gave local officials The company has 22 tactornes gion and created the opportunity their first chance to work with overseas and 47 dealerships for local officials to learn and man- central government officials as worldwide. age the development process, ini- a team. April 1997 three times larger than the first. This sequence of massive indus- Box 3: The impacts of two island bridges trial development in little over a decade by the city alone is a re- The study assessed the impacts Today, Tolsan is an urban commut- markable achievement. of two bridges built under the sec- ers' island. ond project. At the time, Tolsan By 1992, Kwangju had become and Chindo were the two largest On Chindo, the bridge allowed the fastest growing city in Korea. and most heavily populated is- the economy and community to South Cholla and North Cholla lands still without permanent ac- develop in much the same way as rankeduthCho and North respeCtely, cess to the mainland. Both were those in other rural areas of the ranked 8th and 11th, respectively, somewhat isolated and relied country, without the benefit of a among the country's 15 regions in mainly on subsistence agriculture large urban center nearby. Never- per capita gross regional product. and fishing. Tolsan already pro- theless, production shifted to highly Of the six largest cities in Korea, duced cash crops on a small scale, mechanized, higher-value cash Kwangju was the only one where but Chindo's farmers, who did crops for sale to the mainland. La- manufacturing employment grew not have access to good transport, bor-intensive subsistence farming between 1988 and 1993. South were unable to supply mainland has almost vanished, and a much Cholla and Kyonggi, where Seoul markets and thus faced falling smaller portion of the population is located, were the only regions demand. The bridges, identical in is engaged in agriculture. that gained output shares during design, connected the islands to that period. Although this outcome the mainland and opened to traf- The study notes that the bridges cannot be attributed solely to the fic in 1985. themselves were not a sufficient Bank projects, they were the cata- condition for growth. Tolsan's pros- lyst that triggered the industrial The bridges allowed both is- perity over the past decade would dvlyst t rcssi hol.lands to be incorporated into the not have occurred without the rapid development process in Cholla. country's economy, but their im- growth of Yeosu's urban economy. pacts were different. As Tolsan Chindo's transformation would not Side effects lies close to the city of Yeosu, the have taken place without the rapid bridge made it possible for the economic development that has Some side effects of development island to become an extension continued in Korea over the past projects can actually become essen- of Yeosu's larger urban area. decade. tial for the projects' success, and may even become crucial for their sustainability. The experience in trial development and employment and changes in laws and regula- the Cholla region illustrates clearly in the region. Two thirds of the tions, which induced a positive Albert Hirschman's theory of the manufacturing firms in Hanam response from the private sector. centrality of side effects (Development make some of their products for Projects Observed, The Brookings other companies in the estate, and National and local governments Institution, 1995). more than one fourth sell all of their changed the laws and regulations gov- products to other industries; four erning private enterprise, increasing Industrial linkages fifths of them use products made the incentivesfor industrial investments by others. in the Cholla region. At the same time, The best example of a side effect the city of Kwangju made planning becoming key to a project's out- Only seven out of 395 firms in and zoning changes that encouraged come is the back-ward and forward Hanam have more than 300 em- small- and medium-sized firms to linkages created by industries in ployees; all the rest are small- and relocate with capital gains from the the estates. A forward linkage is medium-sized. Assuming that each old industrial areas of the city to created, for example, when a new of the large firms has subcontract- the new industrial estate. subsidiary produces parts and ing arrangements with 20 to 30 materials (such as automobile small companies, more than half the Local public officials became very parts) for a parent company. A small firms at Hanam may have know,ledgeable in industrial develop- backward linkage is created, for benefited from linkage effects with- ment and played a key role in enhanc- example, when a new company out any subsidiary relationships. ing thefunctioning of the market in the that produces finished consumer region. Working together, local and goods (such as household appli- Institutional side effects central governments promoted ances) uses the products of another the Cholla region, successfully industry as inputs. Central and local authorities es- luring the first three large "anchor" tablished a new working relation- firms there. In the industrial estate of Hanam, ship and tight coordination. This created by the second Bank-assisted side effect in turn sparked others: The local governments' commitment project, the linkages that developed local government commitment to to growth increased the confidence of had a cumulative effect on indus- and participation in the projects, the private sector. As a result, local OED Precis authorities forged healthy alliances The city government in Kwangju been slashed, the industrialists re- with private entrepreneurs. For has evolved in its capacity to man- ported. In fact, the Hanam Indus- example, coalitions of government age industrial development. In trial Estate Management Office has agencies and private entrepreneurs 1985, the city created a special In- been substantially reduced in size established joint delegations to dustrial Estates Planning Subdivi- and now limits its functions to reg- lobby for the interests of the region sion to plan, finance, and market istering applications, which are au- at central government agencies the estates. Two years later, the tomatically approved. Many of its and business conglomerates in Hanam Industrial Estate Manage- previous functions are now left to the capital, Seoul. ment Office was created as a "one- the markets. stop shop" to assess the economic Incentivesfor the private sector and financial feasibility of proposed Transferability operations and to promote the sale Industrialists interviewed by of plots. Also in 1987, the city raised The study confirms that indi- the study team reported that local the status of the Industrial Devel- vidual entrepreneurs will respond government procedures now re- opment Section to a division of positively to incentives for indus- quire far less red tape than in the city government, responsible for trial development. The challenge 1960s and 1970s, when obtaining promotion and marketing. is to find a mechanism, political building permits and licenses was or otherwise, that will trigger the described as very challenging. Over the years, the "rules of the process of institutional learning. Over the last two decades, this has game"-the institutional frame- In Korea, as in many other East changed. Obtaining permits and work for industry, including laws Asian countries, such changes were licenses is much easier today, and and regulations-have become made by policy makers who did city governments have become more market-friendly, the bureau- not merely wait for opportunity adept at land zoning. cracy has shrunk, and red tape has to come knocking at their door. OED Pr&is is produced by the Operations Evaluation Department of the World Bank to help disseminate recent evaluation findings to development professionals within and outside the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. This and other OED publications can be found on the Internet, at http:// www.worldbank.org/html/oed. Please address comments and inquiries to the managing editor, OED, tel: 1-202/458-4497, fax: 1-202/522- 3200, e-mail: eline@worldbank.org April 1997