Overcoming Structural Barriers: Steel Industries in ...

Overcoming Structural Barriers: Steel Industries in Brazil, India and Korea Author(s): Anthony P. D'Costa Source: Economic and Political Weekly, Vol. 34, No. 9 (Feb. 27 - Mar. 5, 1999), pp. M2-M16 Published by: Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4407700 . Accessed: 15/12/2014 21:19 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp

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Overcoming Structural Barriers Steel Industriesin Brazil,India and Korea Anthony P D'Costa In examining state-led industrialisation, we find that state-ownership guaranteed capacity bhuild-upin the steel industry in Korea, India and Brazil. But only Korea achieved rapid industrial change by maintaining investment momentum. A bureaucratic approach to industrial governance and populist policies limited the development of the Brazilian and Indian state-owned steel industries. A comparative study of the these late industrialising countries tells us that both innovative behaviour and institutional capability are necessary to organise capitalist production. I Introduction THISarticleexaminesthe technological and institutionalbasis for overcoming in structuralbarriersto industrialisation countries.Using threelateindustrialising thesteelindustryas theempiricalreferent, the articleadoptsa historicalapproachto accountfor uneven industrialchange in thethreecountries.It alsounderscoresthe importanceof a strategicindustrialpolicy forstrengthening technologicalcapability and maintainingan investmentmomentum. The c4assic late industrialisation experienceof Japan,wherebynew innovationswererapidlyadoptedandthestate workedwith the privatesector in indusbecame a model of trialtransformation, sortsfor the others.However,the immediate structuraland geopolitical factors conditionedtheactualacquisitionof technologyandits effectivedeployment.The autonomyof the state was critical for securingmoder technologyandsustaining the high rate of capacityexpansion. The monopolisationof the more expensive, integratedsegment ratherthan the smallerscrap-basedminimillsin Brazil, India, and Korea indicates the state's privilegedroleinnationaleconomictransformation.Capitalscarcityand access to technology have been daunting entry barriersfor privatecapital.lAt the same time,thestate,withgreaterresources,has on attemptedto regulateindustrialisation its own termsthroughdirectparticipation in large-scale,integratedmills. Clearly, late industrialisationhas a bearing on capacityexpansion.Thequestionis under what conditionsdoes state intervention guaranteesuccessful industrialtransformation. By exploring state-led capitalist industrialisation inBrazil,IndiaandKorea we are able to demonstratethat state interventionper se does not guarantee technologicalprogress.Brazil and India

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share'lateness'withKorea.However,the institutionalweaknessfoundin Braziland Indiasets themapartfromthe east Asian duo of KoreaandJapan.The weak institutionalbasisof the stateunderminedthe developmentof atechnologicallydynamic steel industry.Paradoxically,the private sector steel mills have not been at the cutting edge either. From this we can deducethatinstitutionalbarrierscanbe as much structuralas they are policy inthe Koreancase duced.By differentiating fromtheIndianandBraziliancases we are able to obtaina nuancedview of uneven diffusion of technology and industrial change. Thearticleis dividedintosix mainparts. SectionII presentsstate-ledindustrialisationin BrazilandIndia- coveringstateownershipof the industry,publicbailout of privatesteel firms, and regulationof steel prices. The Koreanexperience is discussedforcomparativepurposes.SectionIIIshowshowthestate,in bothBrazil and India, overcame initial structural dependenceto set up a domestic steel industry.By negotiatingtechnologyand finance with foreignsuppliers,the state succeededincreatingnewindustrialcapacity andexpandingit gradually.However, the initialmomentumin establishingthe weakness industrywaslostas institutional underminedthe ability to keep up with changingtechnology.The slowerpaceof changeinBrazilandIndiarelativeto Korea is examined in Section IV. The high investmentrequirementfor new innovations associatedwithrisingeconomiesof scale made it difficult for the state to mobilisesufficientresources.The effects of these constraintshave been project delays, escalating debts, and economic losses. SectionV comparestechnological changeand its diffusionin the threelate industrialisingcountries,clearlydemonstratingthe superiortechnologicalcapability on the part of the Korean stateowned enterpriseSection VI concludes.

II State-led Capitalist Industrialisation STATE-OWNERSHIP AND INDUSTRIAL POLICY

State-ownershipof steel plantsin independentIndiabegan in the 1950s. Three large, privately-heldplantsexisted prior to India'sindependencein 1947.InBrazil directstate involvementcame muchearlier.By 1941theNationalSteelCompany (CSN) was formed;by 1948Brazil'sfirst coke-based integratedplant was completed. In Korea, the state created the nationalsteel companyPOSCOin 1968. The circumstances and the conditions underwhich the state intervenedin these countrieshavevariedin detail.In all three countries,reducingimportdependencehas always been a nationalobjective. In the post-warperiodeach statedominatedits respectivesteel industryandonly recentlyhas therebeena dilutionof stateownership.With few exceptions, stateownershiphas been largely confined to large-scale, integratedmills, producing high value addedflat products.The private sectoris active in the muchsmaller, scrap-basedEAFunits,producingcheaper longproducts.Inallthreecountriesroughly 60 per cent of total steel outputis under state-ownedmills(SteelAuthorityof India. Instituto Brasileiro Siderurgica, and PohangIronand Steel Company,various issues). In the mid-1980s,the sharesfor Brazil and India were even higher- 75 and70 percentrespectively.Althoughthe bulkof Brazil's integratedmills are now in privatehands, nearly 80 per cent of Brazil's steel capacity was under the governmentpriorto privatisationin the early 1990s. In India state-ownershipin 1996-97stood at 56 percent [JointPlant Committee 1997]. Thedivisionof labourbetweenthestate andprivatesectorwasquiteclear-cut.The formerproducedtlat productsusing the integratedprocess, while the latterproduced long productsusing electric arc

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income concentrationpolicies and lowpricedsteel. With sluggish domesticdemand in the 1980s, export competitiveness necessitatedcheap steel (personal interview, Acominas, Belo Horizonte, December 1987).2 As the auto industry controlsa large numberof jobs and is a majorforeignexchangeearnerits power and influence has been substantial.3 Thestrongrelationship betweenthestate and private (foreign) capital to foster capitalist development was succinctly capturedby a Brazilianscholar: The productionof capitalandconsumer goods was promotedby the bourgeoisie andbythemilitaryontheassumption that it wouldcreatethe necessaryeconomic Now thereis structurefor accumulation. a strong,well diversifiedeconomicstructurebutwhichis highlyinternationalised ...The creationof BNDE [the National Bankfor EconomicDevelopment] was a clearmanifestation of an industrialpush and the underwriting of privatecapital accumulation.Now we have the triple alliancewiththe statecontrollinga large partof the economy.The debateis how to destaticise.But the bourgeoisiewants thestate(personal interview,Otaviolanni. CatholicUniversity,Sao Paulo,NovemPRICECONTROL ANDINDUSTRIALISATION ber 1987). In contrast, the Korean strategy for Perhapsthe most effective form of intervention to promote capitalist industriali- accumulationattemptedto interfacenasation has been price ceilings for critical tionally-ownedupstreamanddownstream industrial inputs. The general Brazilian economic activities. By keeping prices policy has been to keep prices as low as low, the state-ownedcompanyfollowed metalpossible [Dahlman 1978:95]. With 1969 theJapaneseexampleof supporting as the base, Brazilian steel prices until working industries and infrastructure 1987 without exception have varied nega- sectors.Kimnotesthat"inadditionto the tively from this base (personal interview, constructionand shipbuildingindustries, SIDERBRAS, Brasilia, December 1987). the [government'sattention]turnedto the The World Bank, in one of its internal automotiveindustry"(1985: 10).POSCO's reports, remarkedthat price controls cost cost competitivenesswas passed on to Braziliansteel producersover$ 14.5 billion steel-usingindustriesin theformof lower duringthe 1977-88 period(1992:60), while prices.4There is a tacit understanding another state employee in 1987 claimed betweenthegovernmentandPOSCOthat BAILING OUTPRIVATELY-OWNED a loss of $ 6.5 billion solely due to price prices must be maintainedat 'competiSTEEL FIRMS

furnaces.TheIndianstatesectorcontrolled roughly48 per cent of flat productsin 1979-80.By 1996-97the statesectorhad increasedits outputof flat products,such as plates,coils, andsheetsto 78 percent. Privately-ownedTISCO, with an integratedplant,also producedflat products. However,57 per cent of its total output wasdevotedto longproducts,suchas bars and rods [TataIron and Steel Company 1987].IntheBraziliancase,priortoprivatisation,virtually100 per cent of flat productproductionwasunderthestate.Three integratedmills in Brazil, formerlyall state-owned,alsoproducednearly100per centof flatproducts.In Koreatheindustry structureis similar- withPOSCOproducing the bulk of flat products.All three countriesexhibitrisingshareof flat productsin the overallproduct-mix,indicating greatercomplexityin industrialstructure. Industrialpolicy in all threecountries alsoregulatedthenumberof playersin the industry,effectively by barringentry of privatecapital,domesticandforeign.Brazil was the only countryamong the three whereminorforeignownershipwas permitted in the integratedsegment. The Indiangovernmentinearly1950sallowed TISCOto expandcapacityto 2 mtbutwas prudentenoughto makesurethatTISCO did not enterthe flat productsmarketin a big way. This would have undermined productionat state-ownedRourkelaand Bokaroplants.It also denied the Birlas, one of the largestfamily-owned,highly diversifiedbusinesshouses,an entryinto the steel business IKrishna Moorthy 1984:60].InKorea,Hyundai'srequeststo entertheintegratedsteelsegmenthasbeen deniedforfearof overcapacity, repeatedly even though state-owned POSCO has continuedto expandoutput.

In additionto restrictingthe numberof firms in the industry- a classic form of capitalistregulation- each late industrialisingcountryalso designedpolicies to supportprivatesector development,including firms in the privatesector. For example, the Indian Industrial Policy Resolutionsof 1948and 1956reservedall newcapacityin theironandsteel industry forthe state.But privateoperations,such as TISCOandIISCO,were sparedfrom nationalisation. Thegovernment, by virtue of a nationalisedfinancialsystem since 1969, also owns 37 per cent of TISCO's shares[KrishnaMoorthy1984:308].After severalyearsof disastrousperformance, in 1972 IISCOwas nationalised.State


intervention in bailing out private firms is also part of capitalist regulation, even if prompted by the immediacy of a political crisis. In Brazil the government was forced to purchase several loss-making firms, such as Piratini, Cofavi, Cosim, and Usiba. In othercases,althoughlimitedforeignownership was permitted, over time the government had to inject needed funds, increasing its equity by default [SIDERBRAS 1987:4; and personal interview, SIDERBRAS, Brasilia, December 1987]. Even the Korean government has been engaged in bailing out private sector steel firms. As recently as 1997 the Korean government was engaged in rescuing Hanbo Steel, a privately-held minimill, from a colossal debt of $ 5.8 billion by finding a buyer. POSCO also purchased the $ 1.2 billion debt-ridden Sammi Steel, a specialty steel producer in the private sector. In all of these cases the state undertook production and assisted private capital in their commercial viability, serving as the basis of capitalist transformation and by extension, contributing to global restructuringof the steel industry.

controls(personalinterview,SIDERBRAS, Brasilia December 1987). These losses have been a part and parcel of state-led capitalist regulation. The symbiotic relationship between the state and private capital was pronounced in Brazil as the state propped up transnationalcapital for industrial transformation [Evans 1979]. By third world standards the Brazilian state has successfully fostered a relatively large auto industry [Mericle 19841. From a mere 38,000 units in 1960 its output jumped to 7,31,000 by 1989, representing an average annual growth of 63 per cent [Dicken 1992:271]. In 1995 Brazil produced 1.7 million vehicles, spurredon by various incentives offered in the past to the foreign-owned auto sector, such as

tive' levels. The raison d'etre for capital-

ist transformationis not high financial surplusper se. Rather.it is the creation of anindustrialfoundation onwhichcapital as a whole expands.5Insteadof propping up foreigncapitalas in Brazilor incurring heavy losses as in India,the Koreanstate steel companyby beingcompetitivenurtured a dynamiccapitalistclass. III Overcoming Structural Dependence ESTABLISHINGA DOMESTICSTEEL INDUSTRY

As lateindustrialisers, India,Braziland Koreawereableto enterthesteelindustry by bargaining and exploiting any oppor-

tunity that arose in the international

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geopolitical situation. Korea was the most successful in rapidly establishing an internationallycompetitive industry (Figure1).Thegrowthandexpansionhas beenspearheaded by POSCO- the stateowned firm, However, Korea's private sectorin the lastdecadealso addedsignificantcapacity,nearly 10 mt. Sincethelate1960sBrazilianintegrated capacity has also grown significantly (Table1),withanincrementaladditionof nearly10 mt of capacityin the 1970s.In threephases,spanningtwo decades,the Brazilian state added a net integrated capacityof 14.5 mt. The statecontrolled five largeintegratedfacilitiesalong with a few smallernon-integrated units,which hadresultedfrombailoutsof privatefirms. The integratedsegment'soutputin 1996 stood at 18 mt. TheIndianstateactivelypromotedheavy industry through its five-year plans (Table2). Fromlessthan2 percentof total publicsectoroutlayduringthe FirstPlan, the Indiansteel industrysteadily gained nearly8 per cent of total outlays in the ThirdFive-YearPlan.Whilesteel's share of publicsectoroutlaysfell, overalloutlays in nominaltermsroughlydoubledin eachsuccessiveplanperiod.Correspondingly state's steel-makingcapacity increasedfrom 3 mt to nearly 15 mt, capturingover 80 per cent of the country's integratedcapacity.FromtheFourthPlan onward,investmentin the Indian steel industryremainedsluggishuntilthe mid1980s. Threemillion tonnes of capacity was addedbetweenthe Sixth (1981-85) and the SeventhPlan (1986-90). MOBIISINGFINANCEANDACQUIRING TECHNOLOGY FOREIGN

Inthe 1920sBrazilimportednearly100 percentof itsdomesticconsumption[Baer 1969:61].By 1936Brazilwas producing about74,000 tonnesof steel, somewhat reducingits importshare.Local production in the 1920s was confinedto small charcoal-basedunitswithBelgo Mineira, a foreigncompany,producingthe largest shareof Brazilianoutput.Rising imports andtherefusalof BelgoMineirato expand capacity prompted state intervention. International tensionspriortosecondworld war, which restrictedthe access to steel technologyfromthe worldmarket,compelledthe militaryto investigatethe possibilitiesof establishinga steel industry in Brazil[Hilton 1982].6Underpresident GetulioVargas,theministerofwarin1931 createdthe NationalSteel Commission. Althoughlocal capitalistswere wary of thegovernment'sattemptsto setupa large coke-basedintegratedworks they were

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neverexcluded [Evans1979:89].However, thescaleof investmentandthecomplexity of integratedsteel productionwas much too dauntingfor Brazilianprivatecapital. Bargainingwith the governmentsof Germanyand the US in late 1930s to obtaincapitalequipmentultimatelypaid off for Brazil, a typical strategy late countriesresortto to overindustrialising ridestructuraldependence.However.US Steel withdrewfrom the projectwhen it failed to secure equity control.This reflected the generalvulnerabilityof borrowersof technology.Similarto theJapanese unwillingnessto transfertechnology to Korea,US Steel also found it against itsinteresttotransfertechnology andforego exportsto the growingBrazilianmarket.7 However,lesttheGermansclinchthedeal, theUS Export-Import Bankin 1940promised to provide$ 20 millionto financethe project[Baer1969:76].Theloanwasraised to $ 45 million.Stateinvolvementof the suppliercountryis also typical of such transactions,aimed to promotenational capital,in this case Americanequipment suppliers. In 1941 the National Steel Company(CSN) at Volta Redondain the stateof Rio de Janeirowas formed.About 50 per cent of the initial investmentrequirementof $ 25 million was provided by the savings and pensionbanks [Baer

1969: 76]. The supply of slabbing and rolling mills was delayedby Mesta Machine of Pittsburghas internationalwarlike conditionsemerged.As a resultthe cost of the project increasedby 60 per cent.In 1948thefirstintegratedplantwith a capacity of 0.27 mt ingots was completed. The Indian experience with external suppliershas been similarto Brazil's in terms of financialdependence,scale of plants,and processtechnologyacquired. Westerncountriesandinternational agencies, particularlythe WorldBank,did not favour state-sponsoredheavy industrialisationin India.8TISCOnotwithstanding, India's technological capacity and financial resources were limited. However, the government'splanswere ambitious, targetingthree 1.0 mt plants.Strategic bargainingby the Indianstate with foreignplayerswasessential.Britain,when first approached, immediately turned down the request.Soon thereaftera West Germanconsortiumoffered to construct a half-a-million-tonneplantat Rourkela in theeasternstateof Orissa.TheGermans offeredonlyverysmallblastfurnaces.Not to be outdone,primeministerJawaharlal Nehru successfully signed an agreement with the Soviet Union for a I mt plantat Bhilai in centralIndia.9Both Britainand

TABLE 1: INTEGRATEDSTEEL CAPACITY EXPANSION IN BRAZIL

Plants

Initial Capacity Phase I 1967-74

CSN (0.27)* COSIPA USIMINAS CST ACOMINAS

1.4mt 0.5 Int 0.5 mt -

1.7 Int 1.0 mt 1.4 mt -

Phase II 1970-79

Phase III 1973-88

4.6 mt 2.5 mt 3.5 mt 2.3 Int 2.4 mt 3.5 Int - 3.3 mt (1976-83) - 2.0 Int (1975-86)

1996 Output 4.4 3.6 4.0 3.6 2.4

mt Int mt mt Int

Note: * initial capacity. Source: Soares (1987) and Instituto Brasileiro Siderurgica (1997). PUBLICAND PRIVATESECTORSTEELINDUSTRY TABLE2: INVESTMENiANDEXPANSIONOF INDIA'SINIEGRATED

Five-Year Overall Plans (FYP) Allocation (Rs Billion)

37.60 Ist (1951-56) 2nd (1956-61) 77.20 3rd (1961-66) 126.71 4th (1969-75) 247.59 5th (1975-81) 671.45 6th (1981-85) 1,722.10 7th (1986-90) 3.481.48 8th (1992-97) 7,980.00

Share of Share of Annual Rated Capacity of Crude Share of Public Public Public Steel at the end of FYP Sector Sector Sector Steel (Million Tonnes) Steel Outlay Steel Outlay to Total Total to Total Public Public Private to Total Sector Sector Sector Outlay Outlay (Per Cent) (Per Cent) Outlay (Per Cent) 52.3 60.52 67.69 63.73 59.72 56.62 51.70 45.24

0.88 4.53 5.29 4.53 3.33 2.32 1.84 1.83

1.68 7.49 7.81 7.10 5.58 4.10 3.57 4.04

3.0h 5.9 6.9 8.6 9.4 12.4 14.85

1.5a

3.0C 3.0 2.0 2.0 2.2 2.3 3.1

1.5 6.0 8.9 8.9 10.6 11.6 14.7 17.9

Notes: Total of six public sector intcegratedplants and one private sector plant, - negligible, a Two privatesector plants (TISCO 1.0 mntand IISCO0.5 mt); h Three 1.0 mt public sector plants; c capacity expansion TISCO 2 mntand IISCO I mt;d IISCO's capacity phased out to 0.45 mt, new greenfield Vizag with 3.0 mt coOninissioned. Source: Steel Authority India Limited (1996).



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STEEL INDUSTRY BYTHEKOREAN EXPANSION ANDCAPACITY 1: OUTPUT FIGURE 4500040000 35000 30000 | 250000

2000015000 10000 5000 -

N

e'

', NO

l

', No

e ONO

ON-

-

rO_ O

O

00

O_ON 00 000o ON

00 0N

ON

0

0%

--- Power (Korea)

---POSCO

Korea

Ot

Note: Data for POSCOfor selective years. 'Power (Korea)' is a linearisedtrendfor Koreanoutput. Source: Korea Iron and Steel Association, various years; and Pohang Iron and Steel Company, personal communication

WestGermanyagreedto providetechnical and capital assistance. The West Germanconsortiumwentfurtherby drastically alteringthe design of the plantin favourof largerblast furnacesand introducedIndia'sfirstBOFs.However,doubling the designedcapacityfor the Germanplantto one milliontonnesentailed inordinate delays.Theirengineeringskills the Germanssqueezed notwithstanding, the additionalcapacityinto the original plantlayout,congestingand effectively curtailingfuturepossibilities.10The British-aidedplant had no Detailed Project Reports,reflectingthe weakness of the Indianstateinbargainingwithtechnology suppliers.The projectwas also plagued by constructiondelays. All three 1.0 mt plantscommissionedin Indiawiththeaid of British,German,andSovietassistance exhibitedvaryingtechnologicala!ndfinancialattributes. The post-warexpansion of the steel industryin Brazilwas state-ownedmore by default than by design. Unable to marshallresources,the industrialistsof Sao Paulo,with the stateof Sao Pauloas a partner,yieldedto federalfinancingfor the COSIPAplant near the city of Sao Paulo. Loans from the government's NationalBank for Economic Developmentthat set up the new steel company in 1953 were progressivelyconvertedto equity [Baer 1995:249]. The plant was finally completed in 1965. Ratherthan completelyrelying on foreign suppliers for the COSIPA plant, the state-owned CSN workedwith Americanand British suppliersto equip the plant.The participation of a local firm indicated local technologicalcapability.However, like


other plants of the time, COSIPA installed very small BOFs. Initially firms from advanced capitalist countries were heavily involved in late industrialising countries as both suppliers of capital and technology. Foreign ownership, however, was restricted. As Japan continued to expand capacity at home, its need for ensuring secure sources for raw materialsbecame critical. Brazil and India with high-quality iron ore deposits were considered importantsites. Japanese firms selectively invested in mines in both countries and in Brazil even participated in a steel project. In addition to COSIPA, anotherintegratedsteel plant.USIMINAS, was proposed in the Brazilian state of Minas Gerais. I After creating the company in 1956, negotiations were held with the Japanese, Germans, and some east European countries. Nippon Steel of Japan headed the consortium for the construction of half-a-million-tonne capacity plant. Production was started in 1962. In lieu of planning and equipment supply, the Japanese agreed to 40 per cent of equity [Baer 1969: 81]. They also provided 60 per cent of equipment credits at 6 per cent interest payable over 15 years,

with interest-free loans for the first three years. Such soft terms were a result of Japan's coming of (industrial) age and USIMINAS was designed to be a showcase project [Dahlman 1978:45]. It was a modem plant, incorporating 50-tonne BOFs. It may be recalled that in the late 1960s the Japanese also participated in Korea's first integrated steel project in Pohang. They supplied capital and technology but unlike in Brazil were barred from owning equity.12 The pattern of ownership in Brazil, however, remained skewed in favour of state-ownership. Structural dependence implied that shortfalls arising from construction delays must ultimately be borne by the state. This was true in the Brazilian case, even with foreign capital participation. As in the case of the COSIPA plant in Brazil, when Japaneseconstructioncosts escalated, the National Bank forEconomic Development (BNDE) was compelled to inject additional funding. As a result Japanese equity was diluted to about 20 per cent [Fischer et al 1988:167], falling to about 13 per cent before COSIPA's privatisation in 1991. The federal government, throughBNDE, had over 50 percent equity of both COSIPA and USIMINAS. The local state governments owned about 24 per cent each in their respective plants. Government companies, including steel firms and the state-owned mineral proTABLE 4: EMPLOYMENTIN THE STEEL INDUSTRY

1988-89 India Five Plants (excluding 219,997 Vizag) Vizag TISCO 41,422 IISCO 38,032 Brazil 167,414 (1989) South Koreah 62,128 POSCO 22,621 (1989)

1994-95

183,459 16,656a 44,736 18,833 77,547 (1996) 72,099 (1993) 20,397 (1995)

Notes: a operations, township, and captive mines. h Iron and Steel Industries. Source: Korea Iron and Steel Association, SPOSCO, Steel Authority of India, InstitutoBrasileiroSiderurgica,various issues.

TABLE 3: COMPARISONOF INTEGRATEDGREENFIELDSIN BRAZIL, INDIA AND KOREA

Country Cost/Ton Blast Furnace BOF Size (m3)

Plant

CC Capacity Location

$1,043 $3,050

3,707 2,294

2x280 2x200

Noa No

3.3 2.0h

India $3,000 Vizag Kwangyang Korea $637' Notes: a Underconstruction;h

3,200 3,800

3x130 2x250

Yes Yes

3.0 2.7

CST Acomninas

Brazil Brazil

Main Products

Coastal Slabs Inland Semi-finished Products Coastal Long Products Coastal Flat Products

rolling mills purchasedbut not installed,c other estimates arc $480, $605, and $ 1,000 per tonne (See Table 3.3), d first phase only, total capacity today is 14 mt.

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ducer CVRD, and some small private groupscontrolledthe remainingshares. Increasingly,however, with successive expansion of its integrated plants, SIDERBRAS- the state steel holding company- absorbedthefinancialliability of these plants. Financingof Indian plants was relaThe bulk of the tively straightforward. fundscamefromthestatetreasury,therest from foreign sources. India's economic status and its geopolitical alliances ensuredrelativelyeasytermsandconditions for financingcapital equipmentfor the firstthree1.0mtplants.Theyvariedfrom 2.5 per cent to 6.3 per cent interestrate withrepayment periodsrangingfromthree to 25 years [KrishnaMoorthy1984:87]. West Germanyhad the most stringent conditionsandalsoentailedagreatershare of foreignexchangerequirement(56 per cent) while the Soviet Unionofferedthe easiest termsat 2.5 per cent interestfor 12 yearswitha foreignexchangecomponent of 49 per cent [KrishnaMoorthy 1984:90]. Forthethree1.0mt plants,the foreignexchangecomponentwas around 51 percentof the initialinvestments.The first expansionof these plants reduced the foreignexchangecomponentto about 47 per cent. G;ROWTIIOF STEEL-MAKINGCAPACITY

In 1971the FirstNationalSteel Planof Braziloutlinedan installedcapacityof 20 mtby 1980.Thistargetwas notmet,even thoughthe rate of expansionwas quite rapidBetween1960and1970,steeloutput tripledfrom 1.9 mt to nearly6 mt, while between 1970 and 1980 output tripled Botelho,Teixeira againto 15.3mt[Guerra, 1989:40].Investmentwas high, picking up from 1976 until 1979 and declining TheBraziliandebtcrisisdampthereafter. ened the investmentmomentumin the 1980s,pickingupagainin theearly1990s. Nearly$ 21 billion was investedwith an annualaverageof nearly $ 1.5 billion. Aside fromcapacityexpansionof existing plants, two greenfields (CST and Acominas)were constructed.CST is a technologicallymodernplantwith major equipmentfromJapanandItaly.Kawasaki Steel of Japanand Finsider(partof the Italianstate-ownedItalisider)have 13 per cent each capital participationin CST (personalcommunicationfromCST,May Acominas 1988).Priorto its privatisation, was 100 per cent state-owned. For India's fourth integratedplant in Bokaro,the Soviets came forwardwith assistanceafterpresidentKennedycould not persuadethe US Congress nor the Americansteel industryto participatein

MNI-0

FIGURE2: CAPACITY UTILISATION IN INDIA

120100 -

x

"

"_

-

80 604020

0\

r' 0\

r-r

0%

----. Public Sector

F 0%

rN 0%

--

0%

r-

%

0%

- TISCO

-

00

a0

00

0%

Bhilai

-

00

0%

00

0

00

0%

Durgapur

Note: Bhilai and Durgapurrepresent India's two widely varying performers.TISCO is the private sector company. Source: KrishnaMoorthy (1984), Steel Authorityof India, Statistics for Iron and Steel Industryin India, various years.

Indian state ventures. US Steel had insisted that management of the plant be entrustedto them for at least 10 years. This was unacceptable to the Indian government and India withdrew its request for US aid. 13Even Tata of TISCO, the private sector integrated firm, tried to convince the US of the inability of the Indianprivate sectorto raisethe necessarycapital.Negotiations were renewed with Britain, West Germany, Japan, and the Soviet Union with the expectation thatno single country would be able to finance the entire project and at the same time India would not have to depend on any one country. The Soviet Union, however, offered to provide financial and technical assistance for the entire project. In subsequent years India also upgraded its three 1.0 mt plants and added two integrated greenfields - at Bokaro in the eastern state of Bihar and at Vishakapatnam in the southern state of Andhra Pradesh as partof its steel expansion plan. The Soviets also participated in the Vishakapatnam(Vizag) plant. It is India's most modern integrated plant. Of the total project cost of Rs 60,000 million (equivalent to $ 4,615 million) only 6.5 per cent has been provided by the Soviet Union (personal interview, Rashtriya Ispat Nigam, New Delhi, July 1987).14 While an Indian consultancy firm has been retained to oversee the construction of the Vizag plant, reliance on foreign technology and capital has continued.15 Up to the steel-making stage the Soviet Union has collaboratedon the project.Two rolling mills were providedby the formerCzechoslovakia and the third-one by formerWest Germany. The collaboration with the

formerEastBloc countryhas been based purelyon financialconditions.Its financial package is a soft loan carryingan interestrateof 2.5 percentrepayableover 20-25 years. It is also payablein Indian rupeesthroughbartertrade.On the other hand, the West Germanloan carriesan interestrate of 14 per cent. IV Institutional Challenges to Industrial Change Withouta doubt,the statesin all three late industrialiser:, overcamethe problem of resourcemobilisationand technology availability,albeitfromdifferentsources and in differentdegrees. They successfully addedcapacity,contributingto the generalshiftof productivecapacityaway from the advancedcapitalistcountries. However, the expansion in Brazil and Indiahas not gone unchallenged.Several arisen,mainly problemshavesubsequently in the areas of technologicalcapability andfinancialperformance.Statesin these twocountries,despitetheirheavyinvolvement in the economy and industry,have been subject to institutionalweakness. This was in spite of the independenceof Indianbusinessesandthe statefromforeign capital [Encarnation1989]. This institutionalweakness is differentfrom 'social capability',which centreson the development of human capital [Abramovitz 1989]. Ratherinstitutionalincoherenceis a resultof the penetrationof politicalandsocial forcesthateffectively underminethe state'sregulatorycapacity to organise industrialproduction.This could be in the formof politicalappoint-

economic and Political Weekly


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ments of state sector personnel, often resulting in the lack of continuity in management.Both BrazilandIndiahave been subjectto such forcesandtherefore exhibitfargreaterdegreeof organisational and institutionalweaknessthan Korea. The Korean government was quite successful in keeping popularforces at bay.Historywasonitssideas well.Korean stateautonomyevolvedfromthe dissolutionof archaicsocialstructures[Hamilton 1986, 1983, Kwon 1991, Amsden 1989: 27-5] and IJS geopoliticalinterest[Haggard1992J.Relyingon state-guidedcapitalistindustrialisation [Lim 1985:35],the under ParkChungHee militaryleadership forged new institutionalarrangements between the state and workers. State supportof dynamicyet state-dependent industrialgroupsandrepressionof labour werethe two mainfoundationsof capital Stateautonomywasenhanaccumulation. ced by sacking officials and creatinga centralised,technocraticEconomicPlanning Board(EPB) and nationalisingand the bankingsector[Kooand reorganising Kim 1992:125-26,Haggard1992:64-65). Dissentandoppositionwere silencedby both force and rapid growth, making economicmanagementrelabureaucratic tivelyeasy [Ogle 1990,Deyo 1989, 1989, Lim 1985:71-72]. As in theBrazilianandIndiancases,the wasgrounded ideologyof industrialisation in nationalism.However, unlike India, Koreadidnotshutoutforeigncapital,and unlikeBrazilit preferredloans over foreign directinvestment[Griffin1991: 122thestate'saccessto and 23]. Additionally, controlof foreignexchange extraordinary allowed it to select investmentprojects and orchestratebig business expansion. UnlikeKorea,wherethemilitarystatewas insulatedfromeverydaypolitics,theBrazilianandIndianstateshavebeencaptured bycapitalistsandorganisedworkersalike. While privatecapitalin Brazil,domestic and foreign, sought to extractstate largesse, such as subsidies, public sector unionsin India,withthe helpof the state, protectedtheirrelativelyhigh-payingjobs. of thestatetheperformance Consequently, owned sectors in Brazil and India have beenless thanspectacular,despitesignificantcapacityadditions.Howinstitutional incapacityhas technologicallyandfinancially hamstrungthe steel industriesof Brazil and India is discussedbelow.

India's three 1.0 mt plantsin the 1950s and 1960s were ambitiousby most standards.However,blastfurnaceinnovations by the Japanesehadraisedthe minimum efficient scale significantly. Related changesin rollingmill technologyadded furtherto overall scale of production.It was not unusualto find integratedplants rangingfrom2.0 to 10.0mt annualcapacity. Consequentlytotal capital requirements also increaseddramatically,running into the billions of dollars. The evolutionof capacityexpansionin Brazil and India shows that neitherone has been able to keep up with changing economies of scale. By 1973 Brazil's largestplantwasunder2 mtandtheaverage size of threestate-ownedintegratedmills was 1.37 mt. On the otherhand,India's Bhilai plantbuilt by the Soviets had alreadyreached2.5 mt by 1967.The average size in the 1970sfor the fouroriginal state-ownedintegratedplantswas 1.9 mt, considerablylargerthanthose of Brazil. However,bothaveragesfell considerably shortof the prevailingJapaneseaverage of 7.6 mt[NationalAcademyof Engineering 1985:34]. In the past two and half decades both BrazilandIndiaincreasedtheirplantsize butcouldnotmaintainbest-practicescale economies.Withfurtherinvestment,Brazil wascloserto attainingeconomicscales with averageplantsize of over 3.5 mt of crude steel capacity.This was attained over severalyearsin severalphases.The Indianaverage,ontheotherhand,dropped drasticallyfor wantof investmentfunds, technicalproblemswithexistingcapacity, bailingouto f IISCO, andthegovernment's a technologicallyobsolete firm. In the mid-1990s India's average plant size, includingIndia'smost recentgreenfield, stoodat2.56 mt.Thisaverageis considerablylowerif realcapabilityis considered. For example, two plants located in the easternstateof West Bengal,IISCOand DurgapurSteel, have been unable to produceat theirdesignedcapacity.On an

averagethey have hada utilisationrateof only47 percentduringthe 1988-93period [computedfrom Steel Authorityof India Limited1994:21].It is instructiveto note that POSCO,Korea's state-ownedfirm, began with a 1.03 mt capacityin its first stageconstructionof Pohangandattained a size of 5.5 mt by 1978.By 1995average integratedplant size stood at 11.5 mt, exceeding the J'apaneseaverage. Withdecliningdemandin theadvanced industrialisedcountriesandtechnological obsolescence in the 1970s and 1980s in the maturecountries,Koreacould induce competitionamong equipmentsuppliers and extractstate-of-the-arttechnologyat low cost for its integrated mills. For example, POSCOpurchaseda blast furnace from Davy McKee, a Britishfirm, at an interest rate of 4 per cent below OECDstandards.Withincreasedcompetition amongequipmentsuppliers,ironically the sellershave also becomedependenton creditworthybuyers.16This ability to bargainwith equipmentsuppliers could not be reproducedin Brazil and Indiabecauseof a lackin strategicvision. Theinstitutionaldelaysin projectcompletion also underminedbargainingeffectiveness.Bothcountriessetupgreenfields, CST and Acominasin Brazil, and Vizag in Indiain the 1980s,the decadein which POSCO's KwangyangWorks was constructed.Yet a closer examinationshows that plants in Brazil and India, despite theirrecentvintage,displayvarioussymptoms of poorplanning.17These arein the areasof technologychoice, productmix, siting, and investmentcosts. Comparingcosts internationallyis difficult.Thereluctanceof firmstodivulgethe actualtermsandconditionsmakethenumbersat best reasonableestimates.Brazil's greenfieldCST,witha 3 mtof annualslab capacity (without continuous casters) has beenestimatedto costa massive$3.13 billion, an average of $ 1043/tonne (Table3). Seventypercent of this outlay was for construction and equipment,

CASTINGb BOF' ANDCONTINUOUS OFMODERNTECHNOLOGY: TABLE5: DIFFUSION

US Japan Brazil India S. Korea

1970

1975

1985

1980

1960

1965

3.7 14.9 13.3 -

19.4 55.8(3.7) 74.3(9.1) 83.9 (20.3) 69.0 95.0(5.6) 98.7(31.1) 100.0 (59.5) 30.9 45.9(0.8) 58.3(5.7) 87.7 (33.4) 18.8 30.5 11.4 11.1d 93.5c (19.7) 98.4(32.4)

1990

1995

89.0(44.4) 94.3(67.1) 100.0(91.0) 100.0(91.1) 100.0(93.9) 100.0(95.8) 95.2 (43.7) 97.1 (58.5) 100.0'(71.6) 44.6 57.0 66.1(21.7) 100.0 (63.3) 100.0 (96.1) 100.0(98.2)

Notes: a BOF share as percentage of non-electric furnace steel-making; h continuous casting shares in parenthesis; NEW TECHNOLOGY ANDINSTITUTIONAL BOF share nearly 100 per cent and CC figure for 1996; d WEAKNESS figure for 1968; c integrated production in Korea began in 1973; The relatively early entry of Brazil and - not applicable. Indiaunderstandablyresultedin small plant Source: LUcke(1993); InternationalIronand Steel Institute(1996); InstitutoBrasileiro Sidenirgica size, typically under one million tonnes. (1997).


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whilethe remaining30 percent was for site preparationand interestpayments duringthe constructionperiod.'8CST's equipment,up to the hot metalstage, is 'worldclass',witha blastfurnacecapacity of 3.285 mt witha yield rateabout89 per cent (from the ingot up to the slabbing stage). However, CST did not produce high gradeproductsand il was commissioned earlierthan Korea'sKwangyang Works.Yet its investmentcostwas higher thanKorea'sKwangyangWorksof $ 637/ tonne, less than two-thirdsthe cost of CST.19 POSCO also claimed that the second phaseof another2.7 mt capacity cost only $ 370/tonne.Such a low cost has been attributedto the completionof mostof theinfrastructure irthefirstphase. The average investmentper tonne for 5.4 mtworkedoutto only $480. Thetotal investmentbeing a little morethan two and a half billion dollars. TechnologicallyBrazil'sCST,Korea's andIndia'sVizagplantsshare Kwangyang, similarcharacteristics- modern,largescaleblastfurnaces,BOFs,andcomputerised processcontrols.However,thereare severalglaringshortcomingswhen CST andVizagplantscomparedtoKwangyang. First,the investmentcost per tonne. All thenon-Koreanplantshavea muchhigher cost thanKwangyang,with Vizag's cost at $ 3,000 pertonne.Admittedly,thereis overPOSCO's considerable disagreement claimsof $ 637/ton(personalinterviews, NipponSteelCorporation, NipponKokan, JapanIronand Steel Federation,Tokyo, October 1987; SIDERBRAS, Brazilia, December1987).However,if we use the marketrateof $ 1,000 per tonne,we still find POSCOto be investmentcompetitive. ThoughCST's costs are marginally higher,its plantand equipmentare well below Kwangyang's technologically. Unlike Kwangyang'swide rangeof flat products,CST produced semi-finished slabsfortheexportmarket.Untilrecently, CSTreliedon thetraditionalingotcasting method,therebybypassinginvestmentin expensivecontinuouscastersandrolling/ finishingmills. Second, Acominas is located inland whereasCST is not. Japan,followed by Korea,has demonstratedthe efficacy of tidewaterlocationsto importraw materialsandexportfinishedproducts.Coastal locationsalso havebuilt-ineconomiesof scale as exportmarketscanbe potentially tappedshould the need arise. CST was designed for the export market and Kawasaki'sparticipation has had a bearing on its siting. For Acominason the otherhand,thenearestportandmostmajor marketsare over 400 km away. It relies

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able to reduceits dependenceon foreign capitalandenhanceits financialstrength. Forexample,POSCOreducedthe foreign loan componentfrom 53.4 per cent for Pohangto 29.3 per cent for Kwangyang [PohangIronandSteelCompany1987:4]. Whereasself-financingwas 75 per cent for Pohang, it was 100 per cent for Kwangyang, clearly reflecting greater availability of internal resources [US TradeCommission1988:10International 16].AlmostallforeignloansforthePohang planthave been repaidandonly about40 per cent ($ 676 million) for Kwangyang remained unpaid in the early 1990s [PohangIronandSteelCompany1992:8]. POSCO also raised revenues through stocks. In March 1988 POSCOreleased morethan25 percentof its stockthatwas owned by private banks to the general public.Threemonthslatertheyweretraded at nearlytriplethe originalvalue (Metal Bulletin,June 16, 1988:31).The valueof 21 per cent of POSCO's 91.8 million shareswas approximately$ 8.34 billion (717 won/US dollar). This represented nearly6 percent of the valueof all shares listedon theSeoulExchangeatthetime.22 While normalprofits have been low by privatesector standards,POSCO'soffer of stock dividends in lieu of cash dividends was readily accepted [US InternationalTradeCommission1988:10-16]. Standard and Poor granted POSCO an A- credit rating,the highest attained by any South Koreancompany or any steel-maker in the world [Business Times 1992:67-68].Raisingloans on the ft reigncreditmarketis no longera problem for the South Koreansteel industry noris POSCOdependenton the Korean Treasury. Unlike the institutionalparalysisfound in India,the articulatenessof the Korean strategyspeaks volumes for institutional capacity. POSCO, with the help of the state, maintainedan investmentmomentumandkeptupwithtechnologicalchange. The Korean comphny found ingenious methods to create a world class steel industry. With instillt.onal autonomy POSCOcould resortto 'delaytactics'to securebest-practice technologies(personal interview, POSCO, Pohang, October 1987). One delay tactic entaileda negotiating process whereby POSCO first progressively stiffened the terms and conditions of purchasingtechnologyto eliminateall butone potentialsupplierand then negotiateda technologytransferat favourableprices. Once the terms were accepted,they were quicklyfollowedup Unlikethe Brazilianstate-ownedfirm, for effective transferand absorptionof theKoreanstate-ownedcompanyhasbeen technology [Enos and Park 1988:234].

on imported coke that has to be transported over long distances by rail.20 Third, the product mix of output either deviated from actual market demand or was simply poorly planned.21All the nonKoreangreenfields produce relatively low value added products, such as semi-finished slabs, billets, and long products, such as wire rods. While slabs can always be finished into high quality flat products, including coated sheets, billets and long products are essentially destined for the construction market where quality is not a major requirement. India's latest integrated greenfield at Vishakapatnam has been one of the most expensive plants in the world. Its choice of product mix (long products) is questionable as well, given cheaper alternative technologies for such products. Acominas' product mix was designed to meet the emerging railway productsmarketbut the Brazilian National Railway Project never took off. This is not surprisinggiven the powerful transnational automobile industry lobby. The huge investment incurred for the wrong products when there are far less expensive alternative technologies, such as DRI/ scrap-based processes, reflects the institutional weakness of the two governments. The inability of both the Indian and Brazilian governments to avoid such elementaryyet very costly technical blunders can be attributed to the lack of state autonomy. Whereas POSCO could bargain hard with foreign suppliers precisely because of its insulation from political and bureaucratic meddling, Brazil and India were beholden to various political forces and regional rivalries. The inefficiency of the Indian public sector steel company was partly a result of bureaucratic regulation that underminedcoherent decisionmaking. Numerous government agencies worked at cross purposes, slowing the investment momentum and creating a technologically deficient industry. The haphazardmanner of technology upgrading is evident from the fact that new technology such as BOF-CC is adopted for expansion without scrapping the old technology such as the OH and ingot casting. The Soviet-assisted Bhilai plant is a classic example where both old and new technology coexist, leading to technological fragmentation [D'Costa 1998]. While such decisions are based on cost considerations they do not address the establishment of long-term viability of capital accumulation throughtechnologyinduced productivity increases [Sengupta 1984:207-08].



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Thiskindof autonomywas missingin the Indianand Braziliansteel companies.

a total output of less than 1.5 mt per industrial sector, particularly those under annum,with averageoutputin 1992-93 the public sector, have benefited from this of less than50 tonnesperemployeea year relationship. Generating employment and INSTITUTIONAL CAPACITY ANDINDUSTRIAL [Steel Authorityof IndiaLimited1994]. maintaininghigh wages in the public sector RELATIONS This is about6 percent of POSCO's835 as state objectives have subsequently The recentgreenfieldsconstructedby tonnes per employee output in 1992 followed, creating institutional impediBraziland India,thoughtechnologically [PohangIronand Steel Company1996]. ments to technology-based restructuring. notfarbehindKorea's,sufferfroma host Differentvintagesof capitalequipment, Even as early as 1967 when the First of commercialand financial problems. capital-intensityof the productionpro- National Steel Plan was being formulated, The expansionof steel capacityin Brazil cess, and the degree of subcontracting the Special Advisory Group on the Steel andIndiahas been also accompaniedby have a bearingon such productivitydif- Industry reported that there was surplus unfetteredgrowthin employmentat the ferentials.Bothof theseplantsin the state manpower in the industry [Dahlman Whileemploymentgrowth of West Bengal are labour-intensive and 1978:78]. High levels ofemployment have industry-level. is difficultto check undera rapidinvest- employedobsoleteplantand equipment. continued in the state-owned steel plants. ment programme,Korea has not suc- However, politicisation also has been In 1990, the five state-owned integrated cumbedto the pressuresof maximising rampant,accountingfor nearly 100 per plants had an employment level of 59,635 employmenteven thoughPOSCO'spub- centof all themajorsteel-industryrelated [World Bank 1992:86] and total crude lic sectorstatusmakeslabourredundancy industrialdisruptionsin Indiain the late steel output of 15.81 mt in 1991 [Instituto ditt'icult(Table4). In contrast,Indiaand 1960sandearly 1970s [KrishnaMoorthy Brasileiro Siderurgica 1996:1/7]. Roughly, Brazilhave followed a growthpaththat 1984:336].23 per employee output was 265 tonnes per is quiteoutof linewithindustrystandards. Lately,industrialrelationshavebeenon year or 32 per cent of POSCO's output The five Indianintegratedplantswith an the mendbutexcess manpowerhas been per employee. In the late 1980s the Brazilian state steel aggregatecrude ,ieel outputof 9.83 mt a heavy institutional legacy in India employed nearli 1,85,000 employees, [Rudolphand Rudolph1987:260-62].A industry apparently employed 40 per cent toPOSCO's23,951foranoutput 'sons of the soil' policy by which local more labour than actually required (percompared of 20 mtin 1992.India'sprivateintegrated residentsare employedwith the gradual sonal interview, SIDERBRAS, Brasilia, of contract(construction) labour December 1987). To be more competitive firm,TISCO,was marginallybetterthan absorption the statesectorwith 43,324 workerspro- as permanentemployeeshasaddedto the industry officials at Acominas opined that to productiv- manpower should be reduced by 10 per ducing2.5 mtof crudesteel.Thisaverage payrollwithoutcontributing of 57 tonnesper workerperyearis close ity.24For example,Vizag, India's most cent (personal interview, SIDERBRAS, to SAIL's53 tonnesperworkerperyear. recentgreenfield,which boasts state-of- Brasilia, December 1987). In individual The 1992averageperemployeeoutputfor the-arttechnology,wascompelledby local plants, such as Acominas, industry offitheBraziliansteelindustrywas218tonnes politicalgroupsto hirea largenumberof cials suggested that as much as 30 per cent peryearcomparedto Korea's420 tonnes thelocalpopulationdisplacedbytheplant. of non-productionstaff of 2,000 was excess per year [InstitutoBrasileiroSiderurgica Nearly25 percentof themwereilliterate manpower(personalinterview, Acominas, 1997; KoreaIron and Steel Association [Venkata Ratnam et al 1995:269]. As Belo Horizonte, December 1987). But at 1995].Japaneseoutputperemployeewas project delays mounted nearly 13,000 the same time state managers pointed out 602 tonnesof crudesteelfor 1995,reflect- individualsclaimedto bedisplaced.Vizag that retrenching labour was counter to the ing greaterautomationandmoreefficient already employs 15,000 workers, with 'social' objective of maintaining employoperations. averageoutputperemployeeof 200tonnes ment. This implied a low diffusion rate of The large discrepancyin employment a year.Grantedthis is nearlytwo to four automation on the one hand and reduced between India and the others, and by timestheaverageof olderintegrated plants, autonomy of the state enterprisein expandcanbeexplained bothstateandprivate,butis abouta fourth ing best-practice technologies on the other. implicationproductivity, Korea's POSCO faced a very different by both technologicaland institutional of POSCO'saverage.The Indianprivate factors.We have alreadyexaminedthe sector integratedcompany,TISCO, did industrial relations system. The state esbarriersassociatedwith structuraldepen- not escape this 'compassionate'hiring tablished the Federation of Korean Trade denceandthechallengesemanatingfrom practicefound in the Indianstate-sector Unions (FKTU) to consolidate all unions institutionalweakness.Indianrestructur- andoften fuelledby populistpolitics.At under a single agency and most unions hardhitfromthis the time of its 1980s modernisation were co-opted [Deyo 1987:185].26Labouringhasbeenparticularly weakness,compoundedby the demands programme,it recruited2,000 local un- management councils were set up at the of publicsectorsteel workersin alliance skilled and unemployedworkers. behest of company management underthe with variouspoliticalparties.Unionsare Brazil also suffers from institutional state dominated Korean industrial relaneitherable to aggregatetheircollective deficiencies,albeiton a lesser scale than tions [Im 1992]. Strikes were banned, interestnor, given their veto power, do India.The presenceof foreigncapitaland particularlyin public sector firms. In 1987 they allow the state enterpriseto make theirlocal partnerswithinthe framework national labour laws permitted union decisionsthatare relativelyindependent of a corporatistregime [Bordin 1986, formation. But they neither undermined of politicalinterference. Wesson and Fleischer1983:56]has lim- the FKTU nor eliminated the consent of The over-politicisation of industrial ited the capacityof the Brazilianstateto the ministry of labour for forming unions. relations,particularlyby externalagents, empowerstate-ownedfirms to maintain Evidence of an anti-labour stance perhas led to severe overstaffingon the one commercialviability.On the one hand, sisted even as Korea in 1991 became a handandlabourstrife,albeitdeclining,on labourhas been repressedundermilitary memberof the Geneva-based International theotherinmanystate-ownedsteelplants. regimesand on the other,pamperedinto Labour Organisation. Two of themin the stateof West Bengal participatingin the corporatistarrange- Until 1988, POSCO's employees were employednearly50,000 employeeswith ment.25Thus the favouredunions in the non-unionised. All grievances were


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handled by labour-management councils thatmet once a month. POSCO' s management has been insulated from the government, thus enabling POSCO to arbitrate labourdisputes effectively. In August 1987 when most of Korea's heavy industrial "workerswent on strike demanding higher wages, POSCO's employees were conspicuously absent [Business Korea 1987:11-12; personal interview, POSCO, Pohang, October 1987]. The demands of POSCO labour,despite widespread strikes in other related sectors, were contained by anumberof strategies.First,POSCO wages have been maintained at twice the manufacturing average and employment is lifetime. POSCO employees also get excellent non-pecuniarybenefits, such as housing and children's schooling. Second, as a significant portion of the work is contracted out [Amsden 1989: 209] and POSCO jobs are coveted, wage demands are stabilised through higher wages for regular workers. The threat of further subcontracting dampens many labour demands. Workers themselves are quite conservative,especially olderones. Third, POSCOmanagementhas distributedabout 10 per cent of its stock to its employees. These strategies, in conjunction with a highly regimented workforce, have made POSCO strike-free and highly competitive. Its employees log an average of over 55 hours per week, higher than most other Korean industries (personal interview, POSCO, Pohang, October 1987).27 Absenteeism is very low and paid leave extremely limited [Amsden 1989:212]. With recent democratisation of Korean politics [Hart-Landsberg 1993:279], independentunionisation in POSCO did not catch on [Innace and Dress 1992:176]. Formed in 1988 POSCO's union lasted just three years, indicating the weight of 'patriarchal company welfarism' [Hoon and Park nd:5] in stifling collective dissent. DEBTSANDDEFICITS DELAYS, Inexperience with large-scale projects can understandably lead to delays, cost overruns, and losses. But as we have seen, even after overcoming structural dependence, institutional weakness has been a continuing feature in Brazil and India. Korea on the other hand mostly avoided these difficulties. In contrast to Brazil and India, where project delays and cost overrunswere common, POSCO contained constructioncosts by completing projects on time. Modem facilities notwithstanding, several greenfield projects in India and Brazil have been white elephants. For example, the costs incurred for Acominas

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andVizag weretoo highrelativeto internationalnorms and did not justify the scale, location, or product mix. With respectto the industryas a whole, while Koreanarrowed thetechnologicalgapwith Japan,severalIndianplantsbecametechnologicallyobsolete.Itis evidentthateven as the stateco-ordinatedinvestmentsand expandedsteel-makingcapacity it was beset with institutionalincapacity.28 Comparedto Brazil,the Koreanexperience has been different.For example, POSCO securedcheap suppliercredits with 5-7 percent interestand 10-20 year repayment periods[PaineWebber1985:19]. Lowwageratesforconstruction,round the clock constructionwork, and timely completion of projects contributedto POSCO'slower costs, especially by reducingtheinterestburden.Incontrast,the Brazilianauthoritieshave not been very effective in negotiatingwith foreignsuppliers. Stringentfinancialterms and the generaldelaysin projectimplementation raisedcosts significantly.29Furtherrefinancingwasneededthatcarriedevenstiffer conditions[CST 1985:15].30Cost overrunswerehigherin thecase of Acominas, Brazil'snewestgreenfieldplant.Most of theequipmentwasobtainedfromEurope, mainlyBritainandFrance.Commissioning the plant took nearly a decade and Phase I remainedincompleteas late as 1988. Millions of dollarsof rolling mill equipmentlay idle at the plant site for several years. Shortage of funds and conflicts over siting nearlydoubledthe originalestimates.In 1978 the estimated costwas$ 2.7 billion.By thetimetheplant wascompletedintheearly1980stotalcost was over $ 6 billion.Its interestpayment alonewas$2.246billion[Acominas1986], anamountexceedingPOSCO'sfirststage investmentfor Kwangyang. Institutionalweaknesshas also meant financialdependence oninterationalfirms and negative returnon investment.For example,CST reliedon routinesupplier credits(or tied loans) to finance equipment imports. But in exchange, SIDERBRAS,thestateholdingcompany, permittedforeignequity.Partof theagreement also included supplying a fixed amountof slabs fromCST to be sold to Kawasakiand Finsider,its foreignpartners. These commercial arrangements, while providinga captive marketand a sourceforforeignexchangeearnings,were not necessarilythe best option for CST. For example, in the first half of 1988 CST s averageslabexportpricewasabout $ 192/tonwhile the domestic price was $ 223 (calculatedfromMetalBulletinJuly 21, 1988:25).

While exportmarketsbouyedcapacity utilisationandgeneratedforeignexchange reserves, lower export prices translated into signficant losses for the firm and mounting debts as well. In 1987, SIDERBRAS,the state-ownedholding companyhad over $ 17 billion in loans. Its profitability,measuredin termsof net profitsas a percentageof sales, from1979 to 1985 has been consistentlynegative. The highestloss was negative75 percent in 1985 [SIDERBRAS1987:38]. Nor has the Indiansteel industrybeen immune from financial hemorrhaging. Variousconstructiondelays - over three years for the German-assistedRourkela plant- andcost overrunshavebeentypical. Investmentcost for Rourkela,estimatedin 1955, increasedby over 80 per centby 1963.At theendof 1982-83,with delaysin projectexecution,theexpansion cost for Bhilai for an additional1.5 mt increasedby nearly200 per cent within eight years [KrishnaMoorty 1984:107]. Althoughthe foreign exchangecomponentdeclinedto 11percent,theadditional expansionwas again underopen hearth process, a technology that was already obsolete.TheSoviet-assistedBokaroplant also suffered delays and cost increases and, despite easy credit terms from the Soviet Union, could secureneitherlarge BOFsnoranycontinuouscasters.31After years of indecision,the Vizag plantwas finally completed at double the investmentnorm.ThefeasibilityreportforVizag was preparedin 1971 and the Detailed ProjectReportin 1977, but actualconstructiondidnotbeginuntilthemid-1980s. The 3.0 million expansionstage of the Vizag plant was completedin the mid1990s.Itsproductmixof low valuebillets, bars, structurals,and wire rods is, comfor mercially-speaking, quiteinappropriate a capital-intensiveintegratedprocess.It is apparentthat the projectwas hastily conceived, despite years of bureaucratic wrangling.32 Like SIDERBRAS,the Indian stateholding company, SAIL, sufferedfrom andcommercial poorprojectmanagement planning.SAIL has been profitable,as measuredby net profit(afterdepreciation and interestbut before taxes). However, its accumulatedend-of-yearbalance,including adjustmentsmade for dissolved companies,has been consistentlynegative during the 1972-86 period [Steel Authorityof India Limited 1987a:25]. Between 1982 and 1984 the company rackedup net losses of over Rs 3 billion. SAIL'sinteral resourcepositionhasbeen precarious.The problemhas been exacerbatedas governmentcommitmentfor



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steel investmentshas been waning.33In the Seventh Five-YearPlan (1985-90), only 1.84 percentof the totalplanoutlay was devotedto steel [Pingle 1996:229], only25 percentof estimated representing funds (personalinterview,SAIL, required New Delhi,July 1987).A pricehike was the only way thatSAILcould redressits financialpredicament (personalinterview, JointPlantCommittee,New Delhi, July 1987),underminingthe very mechanism by which state-ledcapitalaccumulation was to take place. In contrast,the Koreansteel company hadanannualaverage233.85 billionwon (nearly$ 300 million)net earningsafter taxesduringthedecadebeginningin 1986. POSCO'sreturnon assets, though low, has been positive, reflectingon the one handmoder plantandequipmentandon theothermaintenanceof lowerpricesfor the largeraccumulation process.Its internal resourceshave been large enoughto maintaina fairlyhighrateof investment. From 1992 to 1996, POSCOinvested a total of $ 10.69 billion (at won 800/$ ), or an annualaverageof $ 2.13 billion (personalcommunication,POSCO, December 1997). In the same period, the Koreanindustryas a wholeinvestedtwice as muchas POSCO. V

Technology Diffusion and Capability Aside from institutionalimpediments thatdelayprojectplanningandexecution, low capacityutilisationalso hampersthe learningprocess.However,technicaldifficulties arising from the adaptationof foreign technologiesto local conditions can be a sourcefortechnologicalcapability. With accumulatedindustrialexperiencetechnologydiffusioncanbeexpected to be speededup.Whiletherateof investmentcan be the basis for learning,learning also dependson capacityutilisation [ Ramamurti1987]. Demanddetermines the rateof utilisationof plantandequipment. Plantsdesignedwith largeeconomies of scale imply long productionruns and hence greater susceptibility to utilisationrates.To maintainhighratesof utilisationBrazilian and Koreanplants havetappeddomesticandexportmarkets. Consequentlytheirutilisationrateshave been high, despite the cyclical natureof thesteelindustry.InmostyearsBrazilhad over 90 per cent utilisationrate, while Korea'sPOSCOhadclose to or over 100 per cent [PaineWebber 1987:Table17; Innace and Dress 1992:250]. India's utilisationrates have been much lower, anywherefromunder40 per cent in the


case of IISCO to over 90 per cent in Bokaro(Figure2). India'scapacityutilisationhasbeenlow mainlydue to deteriorationof plantand equipment.Slackeningdemandhadoccasionaleffect as well. Capacityutilisation for Rourkeladuring1959-60to 1967-68 averagedonly 67 per cent. Later,IISCO andDurgapur facedsevereproblems.Their combinedcapacityutilisationfrom 197475 to 1993-92averaged60 percent [Steel Authorityof India Limited 1994]. The state-ownedBhilaiplanthas consistently maintainedhighutilisationrates,whereas the publicsectoras a wholeandthe stateownedDurgapurplanthavefacedconsiderabledifficulties(Figure2). India'sactualproductionhassharplydeviatedfrom the ratedcapacity.Whereasthe Detailed ProjectReportcapacityrefersto the installed capacityas stated in the project reportit is often an engineeringartifact. The age of these plants,inadequatetechtheirrelianceonpoor nologicalupgrading, quality raw materials, and inadequate maintenancehave renderedthem incapable of achievinga high utilisationof designedcapacity.Thustheratedcapacity for Durgapur,Rourkela,and IISCO is questionable.Basedon actualproduction, s capacitypriortomodernisation Durgapur' was less than0.75 mt, Rourkelais 1.41 mt, and IISCO, a mere 0.37 mt [Steel Authorityof India Limited 1994]. Not doggedby the institutionalincapacity of the Indianstate-ownedindustry, the privatesteel firm TISCOperformed muchbettercommercially. Technologically, however,it faced similarproblemsof plantandequipmentobsolescence,excess employment,and low productivity.Its commercialsuccessesrestedon its managerialautonomybut also on its participation in the state-ledpricecartelin a sheltereddomesticmarket.It too faced technological fragmentation,with several small, ageing blast furnaces,and a steel melting shop using obsolete OHFs and more recent BOFs. After recent andupgradingof facilities modernisation bothingotcastingandcontinuouscasting coexist.Thoughthe planthas averageda high capacityutilisationof over 97 per cent [Steel Authorityof India Limited 1994:28] and high profits [Krishna Moorthy1984:172],its labourproductivity is very low comparedto the Brazilian andKoreanaverages.In 1992-93itsoutput peremployeewasonly65 tonnesperyear. Theinabilityof Indianintegratedplants to obtainmaximumoutputfromplantand equipment,among other things, is also dependent on periodic investment in In the Indiancase investmodernisation.

ment in the steel industryhas been quite erratic.For the first threefive-yearplans (1951-66) investmentfunds allocatedto the public sector steel plants increased dramatically[Steel Authority of India Limited1987b:143,see alsoTable2]. But with the fourthFYP onwardthe importance of the steel sectorconsistentlydiminished.In the SeventhFYP (1985-90) the shareof totalgovernmentoutlaysfor the steel sector was a mere 1.8 per cent and3.5 percent of totalplanoutlaysand total public sector outlays respectively. Most of these expenditureshave been directedtowardcapacityexpansion;only about5 percent has been spenton updating technology[Steel Authorityof India Limited1987b:144]. Korea,on the other hand,rapidlyadoptedlargeblastfurnaces andoptedfor BOFs andcontinuouscasting (Table 5). In contrast, partly because of earlier entry and partlybecause of institutional incapacity,Indiawassaddledwithsmaller blastfurnaces,obsoleteBessemerandopen hearthfurnaces,and lagged significantly behind Korea and Brazil in continuous casting.Expansionand modenisationof plants took place in fits an startswith industrialperformance. For unremarkable example,IISCO,establishedin 1939,used the Duplex-Bessemerand OH process. Until 1965-66 capacity utilisationaveraged 90 per cent; recently it has been hoveringaround40 per cent of the original.AlthoughtheBessmerconverters were in than out more 1988, thereby phased doublingcapacityutilisationthe plantis technologically obsolete.- Plans to moderniseit have remainedon paperfor several years. An internationalcomparisonof diffusion of moder technology,such as the BOFandCC,revealsthatamongthethree late industrialisingcountriesKorea'srate of diffusionhasbeenthefastest By 1975, over 93 per cent of Korea's integrated outputas a shareof non-electricfurnace outputwas underthe BOF, comparedto Brazil's 58 per cent and India's 19 per cent. Since thenBrazilhascosed the gap with Korea,while Indiastill lags behind. In 1995, both Brazil and Koreahad 100 percent integratedoutputunderthe BOF comparedto India's66 per cent. In continuouscasting,KoreamatchedJapanese standardsby 1990witha96percent ratio, whileIndiahadapaltry22 percent Brazil narrowedthe CC gap in the 1990s to nearly 72 per cent in 1996. India still lagged behind with only 34 per cent The inabilityto keep up with modern technologies was also compoundedby learningdifficulties[D'Costa1998].The

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adoption of different processes from diverse sources, varying plant size, and institutional bottlenecks made building technological capabilitya challenging task. For example, the Rourkela blast furnaces took five years to reach the rated capacity [Krishna Moorthy 1984:92-94], whereas POSCO's first blast furnace took less than two years. The frequent changes in technical parameters of the equipment supplied by different foreign companies (particularly by the Soviet Union for three of the five state-owned integrated plants) resulted in fragmentation constituting varying vintages of capital equipment, belonging to different processes, of different sizes, and from different suppliers.34 The gradual leaming-by-doing by Indian firms accomplished in the last three decades was considerably reversed [D'Mello 1986:182]. POSCO's technology strategy has been quite different. It sourced similar types of equipment from the same supplier. Thus Davy McKee supplied POSCO with nearly all of its identical blast furnaces. The second phase expansion of Kwangyang was a virtual reproductionof phase one. It cut down on site preparationand eliminated any potential new problems that could have arisen with different plant and equipment. Capacity expansion based on duplicating modern facilities and repeating imports of similar equipment thus placed Korea's learning on a higher level.35 The successive installation of similar-sized blast furnacesexhibit increasingly shorterlearning cycles. For example, the second BF took two months to reach a 1,500 tonnes/ day/m3tapping ratiocompared to the third BF reaching nearly 2,000 tonnes in the same period. Technological capability is also demonstrated by the extent of capacity 'stretching', thatis, producing output thatexceeds designed capacity [Dahlmanand Westphal 1982]. Mastering technology, improving operating procedures, and reducing costs allowed both Brazil and Korea to exhibit various degrees of capacity stretching [Enos and Park 1988:190-207]. Among the three integrated plants in Brazil, USIMINAS was the most successful in stretching capacity and attaining the best productivity rates. In 1977 its output per employee per year of 261 tonnes exceeded US productivityof 255 [Dahlman 1978:6]. Similarly, in the early 1980s, Pohang's fourth phase expansion entailed capacity 'stretching' by 0.6 mt beyond the designed capacity of 3 mt. In the final phase of Kwangyang expansion, POSCO was able to add an additional 1.0 mt POSCO's overall 'incremental' output stood at over

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2 mt (plantvisit, Pohang,August 1995). Thisoutputdidnotrequiremajorexpenses of capitalequipment.Insteadsmall steps such as decreasingtap to tap time from fourminutesto one minutein steel-making shops, reducing ladle thickness to increasethe size of the charge, and increasingthenumberof workingdayswere behindthis incrementalchange. Technological capability is also enhancedby backwardintegrationwhereby local firmsbecomeimportantsuppliersto the industry[Taniura1986].In the early increasing stagesof late industrialisation local contentis difficult. All three governmentsin the 1960s and 1970s establishedcapitalgoods producingfirmsin the publicandprivatesector.In Indiathe Heavy EngineeringCorporation(HEC), an East Bloc-aidedproject, was set up with the sole objectiveof supplyingsteel equipment. However, with continued importsof most steel-makingequipment, HEC'stechnologicalcapabilitywas limited. With poor sales. HEC's worsening financialsituationwas exacerbatedby its alreadyweak technologicalfoundation, the veryobjectivefor which undermining the governmenthad set up the corporation. Forfinancialreasons,perfectlycapable domesticfirmsarealsounableto compete withforeignsuppliers(personalinterview, Acominas, Belo Horizonte, December 1987).In the mid-1980swhenAcominas, Brazil'snewestgreenfieldwasconstructed, theBrazilianstate-ownedequipmentproducer,USIMEC,was helplesslysidelined for want of long-termfinancing.Brazil has the technicalskills for capitalgoods productionbut like India its learning processhas been stuntedbecauseof externalfinancingof plantand equipment. Brazil'slocalcontentratioforengineering is very high for the productionof steelmakingequipmentbut very weak in the finishingequipmentarea.Of the 35 areas underfive categoriesof finishing,Brazil has engineeringcapability in only six [Guerraet al 1989:57:de Oliveira1989]. Korea,on the otherhand,was able to increaseits local contentrapidly.For its Pohang Works, Stage I entailed over 1,19,000 foreign engineerhours, which by Stage III was reducedto 491 and by StageIV, to zero. Value of local content was 12.5 percent in Stage I, risingto 35 per cent in Stage IV [Kang 1994: 182]. Virtuallyall areasof planning,construction, andengineeringcould now be done by Koreans [Amsden 1989:309]. For was high. Kwangyang,localparticipation Fifteenfirmsrepresenting50 per cent of plant and equipment were involved

[PohangIronandSteelCompany1987:2]. To ensure local technologicalcapability for the future,POSCOinsistedthatforeign firms affiliate with domesticones. At the plantlevel, POSCOtook several stepsto ensuretechnologicallearningand high capacityutilisation.Enos and Park (1988:183-207)documentedseveralcases of improvementsin importedequipment design and operating procedures in POSCO'splants.Severalinnovationson the shop-floor were introduced. Two schemes introducedin POSCO's plants that contributedto learningwere 'zero defects'and'improvement proposal'.The formerensuredstrictqualitycontrolwhile the lattersoughtemployeesuggestionsto enhance operating efficiency. Both schemes resultedin significantcost savingsandproductivityincreases,ultimately allowing the assimilation of imported technology [see also Amsden 1990:2627]. In-housetrainingand overseaseducationin bothtechnicalandnon-technical areaswas providedfor a vast numberof POSCO's employees [Kang 1994:181]. Duringthe 1970sandupto themid-1980s, POSCO sent about 1,900 employees overseasfortraining[PaineWebber1987: 1-3],withemphasison generalratherthan 1989:210-11].36 specifictraining[Amsden In the 1990s, the Indiansteel industry, confrontedwiththeprospectsof increased foreign competition,introduceda major suggestionsscheme [VenkataRatnamet al 1995:271-80]. By creating a multiskilledworkforce,the Indiansteel industry has been tryingto restructureon the lines of the Ko, an one [VenkataRatnam 1995].In 1992-93,the numberof suggestions increased 20 times, resulting in savings of Rs 1,300 million. The Indian steel industryhas extended its training programmesto cover more employees. During 1988-89 to 1992-93, the number of traineesmore thandoubled,while the numbersent abroadalmosttripled,from 282 to 757 [Sengupta1995:78]. However, India's technologicalproblemsremain.WhilePOSCOhasbeenable to rely on its customersto improveproducts, by an extensive feedbacksystem (plantvisits, PohangCoatedSteel Company and Pohang Steel IndustryCompany, Pohang,August 1995), the Indian state-ownedfirm is unable to crack the domestic market in the face of rising competition.For example, Union Steel, using POSCO'shot rolledcoil produces galvanisedsheets,whicharethenusedby SamsungElectronicCompanyfor refrigerators.By using the productand providing feedback,POSCOhas been able to make better hot rolled coils. In the



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Indiancase,thesuccessfulMaruti-Suzuki technologies as well as for sourcing techautomobilejoint venture between the nical information. The cycle of technological capability is governmentand SuzukiMotorsof Japan doesnot sourcesteel for autopanelsfrom complete when the technology importer Indianplants.Insteadall pressedsteel has ultimately becomes a technology exporter. been suppliedby Japan(personalinter- In this regard South Korea is still weak view, MarutiUdyog, Gurgaonand New in design capability [Chudnovsky et al Delhi,July1987,July 1991).The factthat 1983; Chudnovsky 1986; Griffin 1991]. state-owneddomestic steel industry is However, as a result of its emphasis on unable to producethe quality steel re- technological learning and its success in quiredby a state-ownedautofirm,reflects mastering the engineering processes, not only an institutionalweakness but POSCO has made some forays into techhighlightsthe state of technologyin ex- nology supplies. Training of Taiwanese isting plants.37 personnel from China Steel, installing a The emphasison technologicalcapa- computerised system in Indonesia, and bilityis furtherrevealedby POSCO'sin- setting up a joint-venture with US Steel vestmentsinR andD. In 1977,1.13billion in California are examples of reverse flow won was spenton R andD, representing of technology from POSCO [D'Costa 7.3 percentof POSCO'sprofits[Enosand 1993]. Foreign technology manufacturers Park 1988:210].In 1983 the correspond- are also engaged in the productionof steel ing tigureswere9.78 billionwonand 12.5 hardware using Korean skilled workers percentor roughly$ 12 million.Though and local equipment suppliers. Several far shortof Japanesenormof around2.5 Korean firms are subcontractedto design percentof totalsales,POSCOinthe 1990s steel equipment, such as continuous casthas doubledits spendingfrom I to 2 per ers, on behalf of foreign firms. centof sales.ThisnormfarexceedsIndia's VI share of under 0.5 per cent [Sengupta Conclusion the immediate For Korea, 1995:80].38 In examining state-led industrialisation, impactof R and D has been declining royaltypayments.In the case of Pohang, we find that in Brazil and India there have royalty payments for constructionand been institutional impediments to technooperatingtechnologydeclinedby 6.5 per logical dynamism. While both countries cent, 17.2 per cent, and 100 per cent in have been successful in establishing and the second, third, and fourth stages of expanding steel-making capacity, thus construction[Enos and Park 1988:189]. contributing to the general shift in global These reductionsare remarkableconsid- production capacity, they have not been eringthateachphaseinvolvedincreasing able to match Korea's investment momentum. Technologically theirindustrieshave size and complexityof hardware. To addmoremuscleto its technological not been as robust as Korea's. Although capability,POSCOestablishedthePohang early entry to the steel industry may have Institute of Science and Technology contributed to the retarded development (POSTECH),patternedloosely afterthe of the industry, the problems with more MassachusettsInstitute of Technology recent steel projects in both Brazil and andthe CaliforniaInstituteof Techno- India indicate otherwise. Timing of inlogy. It includes all engineering and vestments was important for Korea only instrumentation fields relevant to iron to the extent thatthe Koreanstate had such and steel making (plant visit, Pohang an opportunity. But exploiting windows October 1987; POSTECH Prospectus of opportunityin its external environment, 1991-92,POSTECHvisit,PohangAugust such as the competitive technology mar1995). In 1987 the ResearchInstituteof ket, was clearly a product of strategic Industrial ScienceandTechnology(RIST) intervention. The autonomy of the state, wasestablishedto developnew technolo- which was also extended to POSCO, gies. POSTECHandRISTtraintechnical definitely played a role in capturing the graduatesandact as a sourcefor innova- benefitsof changingtechnologies. All three tion for Korean industry as a whole. countries had some variant of industrial POSTECHcan be seen as providinga policy but only Korea could use it to build collective good as its trainingof high a technologically superiorindustry.Brazil skilledlabourbenefitsotherrelatedindus- and India did not have the institutional tries.39In 1994 and 1995 POSCO also capacity to invest in modern technology. foundedtwo overseasresearchcentres- An overtly bureaucratic approach to inPOSCOTokyoResearchLaboratories and dustrial governance and populist policies, POSCO Research Centre Europe in such as employment creation limited the Dusseldorf,Germany.They have been development of the Brazilian and Indian establishedforconductingresearchincore state-owned steel industries.

Lconomic and Political Weekly

State-ownership guaranteed capacity build-up in all three countries but ensured rapid industrial change only in Korea because of its ability to maintain an investment momentumandtherebycontinuously take advantage of new innovations. The effective utilisation of imported technologies contributed to local technological capability. However, the state, in attempting to foster capitalist development, could not act like a capitalist. Prices had to be kept low to develop downstream activities. Capitalist regulation required state initiative to develop an industrythatwould provide a key industrialinput at controlled prices. The problem with this approachfor capitalist development has been the inability of state-owned firms to generate internalresources and secure moder technologies on a continuing basis. India fared the worst because of the heaviness of the state sector. Low administered prices effectively subsidised a bloating public sector, serving private capital less than the downstream industries under government tutelage. Heavy losses of the state-owned public sector reduced internal savings and thus reduced investments in the industry. Technological obsolescence in India has been rampant and only recently has the government announced investments in the sector. The uneven adoption of innovations created a technological gap even among the three industrialising countries. The implications of the uneven diffusion of technology are many. Four points are worth noting. First, different technological trajectories arise principally because of strategic choice and institutional capability. The US, Japan, and Korea can be seen as dictating the direction of industrial change - the US and more recently Japantoward reducing capacity and reorganisingthe restin variousways, Korea and previously Japan by adding technologically-superior steel-making capacity at a rapid rate. Both Brazil and India attempted to transform the industry with limited success. Second, strategic choice and institutional capability are interdependent. Without a coherent institutional arrangement,such as state autonomy the Indian industry could not formulate a technology strategy let alone keep abreast of recent innovations. Third, past stratecould gies and institutional impediments induce new institutional arrangements, such as a greater state role in the US when falling behind technologically or an increasedrole of the privatesector in Brazil and India as they too find keeping up with innovations challenging. Finally, both innovative behaviour andinstitutionalcapability are necessary to organise capitalist

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Onewithouttheotheris likely production. to diffuse technologyunevenly, leading to changingcompetitivenessand varying ratesof industrialtransformation.

loanof$ 127.5 millionto the privateintegrated companies [Liedholm 1972:20]. 9 The Soviet Union declined to offer BOFs for the Bhilai plant as the technology in the Soviet Union was still unproven,a response which paradoxicallybore significant affinity Notes to US industry's technology strategy. 10 Oneis remindedof the difficultiestheJapanese I The entrepreneurJamshedTata, the founder faced with German know-how for the turnof Tata Iron and Steel Company (TISCO) Yawata Works:cost overruns of-the-century failed to raise capital in London at the turn were five-fold and the design faulty [Morrisof the centurybut could do so later in India Suzuki 1994:80]. itself [Etienne et al 1992:49]. 11 When the state of Minas Gerais learned 2 The sectoral distribution of uncoated flat of federal state involvement in the COSIPA products,items producedby the state-owned plant located in Sao Paulo state, it too shows that 21.4 cent of 1986 enterprises, per demanded one, leading to the creation of output was absorbed by the transportation USIMINAS. The rivalry between the two sector [InstitutoBrasileiroSiderurgica 1987: states is legendary. 2/4]. Close to 20 per cent of total output of 12 The Korean company, unlike USIMINAS, this product is directly related to vehicle rejected the initial Japanese offer of small Brasileiro [Instituto production Siderurgica blast furnaces. However, given Japan's 1987:2/6]. In 1995 the Brazilianauto industry growing industrial might, Korea was not absorbed 14 per cent of total domestic sales, perceived to be an economic threat. As a representing 23 per cent of flat products result the Japanese also treated the Pohang Brasileiro 1996: 2/4[Instituto Siderurgica proiect as a public relations opportunity. 2/5]. Though privatised in the 1990s, the 13 Dasturco,an Indianconsulting firm, and US suppliersof these productsare the erstwhile Steel, at the request of US Agency for state-owned firms. International Development, prepared the 3 The creationof Auto Latina in the 1980s by feasibility reportsfor the Bokaroplant.There Volkswagen, Ford, and GM testifies to this were differences in the engineering details influence. In 1987 the Braziliangovernment and break-evenpoints in the two reports.The imposedpriceceilings on automobiles,which Soviet Union rejected Dasturco's project VW and others blatantlydefied. The governreport and prepareda new Detailed Project ment threatenedto sue the offending parties Report.The Soviet cost estimateswere nearly but later withdrew the charges. twice as high as Dasturco's. The Indian 4 Typically in a monopoly situation price government accepted the report without gouging is routine and the dependence of furtherscrutiny and the Soviet Union, as a steel users on steel producersexceptionally token gesture, reducedthe estimated 'excess' high. This dependence was echoed by one cost by 5 per cent. However, this time the major customer of POSCO (personal interSoviet Union offered BOFs, which were view, Union Steel, Pusan, October 1987). smaller than the industrystandard,but shied However,it appearsit hadless to do with high away from continuous casters for the plant. prices and more to do with supply rationing 14 This plant technically does not fall under during boom periods. SAIL management,the holding company for 5 For example, in Korea, the construction state-owned plants. As execution of a steel an indicator of infrastructural (itself industry project requires large doses of investment development) comprised over 50 per cent capital, according to a SAIL staff, it is of domestic demand while automobiles, preferableto have the project directly under machineryand the appliance industrieshave the control of the ministry of steel. Multiple increasinglyabsorbedremainingsteel output. centres for project execution is anothersign With 1980 as the base, the index of steel of institutional incoherence. consuming sectors in June 1987 were as 15 Importcontentbased on FOB prices has been follows: total manufacturing 454.5, metal estimated to vary from 22.9 per cent for the products 275.6, machinery 531.7, electrical firststage steel melting shop (BOFs and CCs) and machinery 602.1, transportationequipto 69.9 percent for the blast furnace[D'Mello mient374.3 [KoreaIronand Steel Association 1986: 183]. 1987:55, 57]. 16 In the course of an interview, a Nippon Steel 6 Percival Farquar,a Brazilian entrepreneur, staff lamentedthat as of October 1987 there attemptedto set up a large-scale, coke-based were no majorordersfor equipment(personal steel mill prior to World War I. However, interviewwith Nippon Steel, Tokyo, October regional and internationalpolitics, and the 1987). reluctance of foreign finance to 'disturb 17 Some authors,such as Trebat (1983: 96-98) establishedmarkets'thwartedsuch a venture rated SIDERBRAS as highly autonomous. [Dahlman 1978:35]. This is doubtfulgiven the disastrousfinancial 7 In addition, US Steel feared nationalisation position of the company by the end of the of productiveinvestments in Brazil as it had 1980s. recently lost its nickel operation in Finland 18 Construction cost can be roughly disbecause of Russian invasion. aggregatedinto site preparationcosts, cost of 8 Korea also faced a similar hurdle at a later and associated internal infraequipment date. In the Indiancase, the World Bank did structure,externalinfrastructural development agree to provide funds for the private sector expenditures,manpowertraining,andinterest on the condition that the plant expansion payments during the period of construction Indian government underwrite these loans for borrowedcapital. Infrastructuredevelop[KrishnaMoorthy1984:86]. Inthe mid-1950s ment can be divided into three levels: plant and early 1960s the World Bank extended a offices, laboratories, maintenance and

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machine shops, warehouses, etc; housing, energy supply (not production),watersystem, road/railways, etc; and energy production, upstream activities, harbors, etc, [Astier 1985:5-9]. The final expenditure on a steel plant can escalate significantly if there are delays in decision-making, financing and equipment, as well as currency fluctuations. 19 Of the total investmentof won 1,649.4 billion for Kwangyang's 2.7 mt capacity, $ 479 million was obtained as foreign credits [Pohang Iron and Steel Company 1987:3-4]. About $ 200 million was 'saved' because of fierce bidding among equipment suppliers [Paine Webber 1985:1-6] and roughly $ 38 million was to be paid as compensation to Kwangyang village [Paine Webber 1985: 2-6]. POSCO proudly declared that its investmentcdst of $ 637/tonne was less than 43 per cent of the standard$ 1,500/tonnecost in the world economy [PohangIronand Steel Company 1987:6]. But infrastructuralexpenditures on roads and harborsfor Kwangyang incurred by several governmental agencies have not been included in POSCO's figures. 20 It is doubtful that the volume of exports of ironore fromthe region is equal to the imports of coking coal for the plant.Thus the location of the plant justified on the basis of transportation costs is questionable. 21 The new plate mill in the Bhilai plant was installed at a time when the demand for the product was quite weak. 22 With the recent depreciation of the Korean won, POSCO's asset value is likely to be considerablylower. However,technologically POSCO is solid and hence its market value may be understated. 23 SAIL is over 95 per cent unionisedunder220 unions and officer associations nationwide [Venkata Ratnam et al 1995: 260]. 24 During expansion of capacity when workers are engaged in constructionwork for several years they are likely to demand permanent employment. The wage between regularand contractworkersis significantlydifferentwith the contract workers entitled to a minimum wage with no benefits. But it is public knowledge that a portion of the minimum wage is pocketed by unscrupulous contractors. 25 In the past the ministry of labour firmly controlledall prominentunions of Brazil. All activities of unions were subordinatedto the 'national' interest through the Consolidated Labor Laws (CLT) of 1943. In the event of a perceived threat to national interest the ministry of labour had jurisdiction to take over the administration of the unions by dismissingelected officers andreplacingthem by state appointees. Workers annually contributeda day's worthof wages to the ministry of labour, which was redistributedto unions on the basis of membership. Since total workers exceeded the number of union members in a specific industrialbranchand as the funds were used for the benefitof union membersonly therewas no incentiveto recruit more members [Keck 1984:27]. Under no circumstancescould these monies be used as a strike fund. 26 During 1955-60, the average numberof work stoppages numbered79, during the 1963-71 periodthe averagedroppedto 15 [Deyo 1987: 186]. The 1986-89 the average was nearly



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1,900 as workersbecame increasingly aware of their rights and their solid contributionto the Korean economy [Im 1992:17]. 27 From 1977 to 1986, the average number of hoursworked per week in Korea was consistently over 52 and increasednearly4 per cent duringthis period[InternationalLabourOrganisation 1987]. Womenworkershave worked even harderin the manufacturingsector. In the iron and steel industry, South Korean workers on the average have worked nearly 40 per cent more thantheir Japanesecounterparts. See also Chakravarty (1987) for a discussionof the relationshipbetweennumber of hours worked and capital accumulation. 28 Poor countries are particularlyvulnerableto such institutionalweaknesses. For example, Bangladesh in 1967 received Japanese assistance to set up a steel mill on a turnkey basis. Three 60 tonnes OHFs were supplied with a capacity of 1.50,000 tonnes. Later, anotherOHF was added and the 'designed' capacity raisedto 2,50,000 tonnes. The plant never attainedmore than 1,35,000 tonnes. It is ludicrous to imagine how a single 60tonnes OHF could produce 1,00,000 tonnes when threeof them were designedto produce 1,50,000 tonnes [Mujtahid 1997:2]. This is clearly an example of recycling obsolete technology by the Japanese,imposing a form of structuraldependence,andthe institutional and technological incompetenceof the local authorities. 29 For the initial loan of $ 700 million, the repaymentperiod was six years and interest at Libor (London InterbankOffer Rate) plus 1.25-1.375 spread [CST 1985:14]. Although loansfromdomesticsourcescarriedrepayment periodsof 16-132 monthsat 5.5-10.5'percent therewas littlecapitalequipmentboughtfrom domestic sources. The high cost of the plant along with domestic price controls added to the financialburden,compellingthe Kawasaki Steel Groupandthe FinsiderGroupto reduce their voting stock to about 5.25 per cent [Metal Bulletin, January 18, 1988:27]. 30 Interestingly,CST initially had a lease-back agreementon its coal yardand coke batteries, which ultimatelyhad to be bought with cash with the help of Japanese banks. It may be recalled that the Japanese-aidedUSIMINAS also experienced cost overruns. In 1982 USIMINASunsuccessfullytriedto sell bonds worth $ 43 million to the Japanese. The Japanesedid not perceive the rate of return to be adequate. 31 It is not that Indian planners and engineers were not aware of the technological possibilities. In fact Dastur and Company, the Indian steel consultants, had recommended 200-300 ton BOFs and requestedcontinuous casters. Instead the Bokaro plant obtained 100 ton BOFs and no CC [Lall 1987:86]. 32 It may be mentioned that site selection has been partly influenced by a major agitation in 1966 in Vishakapatnam,demanding that a steel plant be located there. Another integratedplantto have been builtin Paradeep on the eastern coast involved several negotiations with suppliers, particularly British and West German, with various terms and conditions that were frequentlyrevised. This was at a time when the advanced capitalist countrieswere undergoinga severe recession. No technical study was conducted and


ultimately the site proved to be unsuitable. 33 Of the six integratedplants in the country, only Bhilai of SAIL andTISCO,the privately owned plant,have been profitable.Only since 1985-86 has the Bokaro plant earned a large enough profit to wipe out its accumulated losses. The two plants with the worst record have been Durgapurand IISCO in the state of West Bengal. The performanceof these two plantshas been so poor that the accumulated losses now exceed the value of capital assets employed. Productioncould continue only with subsidies. It was politically infeasible to write off these plants. 34 Local content in plantconstructionincreased from 34 per cent in 1961 for the first three 1.0 mt plants to 64 per cent in 1978 and 90 per cent in 1988 for Bokaro'sfirstand second stagesrespectively[Kojima1991:6].TISCO's local content achievements were similar to those of Bokaro. 35 POSCO obtained the normal rate of output from its first blast furnace in 107 days, six months earlier than what the Japanese had anticipated from their experience [Kang 1994:184-85]. Designed capacity was easily exceeded after the fourth month. Similarly, the time takento attainnormalcapacity from start-up became shorter - 80 days for the second blast furnace,70 for the third,and 29 for the fourth. For Kwangyang's first blast furnace it was only 23 days. 36 Typically,new employees attendhighschools to cover technical and steel related subjects. Technicians and other skilled workers who operate equipment are generally recruited with engineeringqualificationsand are given a combinationof severalyearsof plant-specific experience and trainingby foreign suppliers. Other more skill-demanding activities such as incrementalimprovementsin technology, purchasingof foreignequipment,anddesigning process and products require additional years of experience [Enos 1991:81]. 37 Since annualIndianvehicle productionis still low, the productionof high qualityautosheets may not be feasible due to economies of scale requirements.However, this reasoning does not take into account the possibility of enlarging markets by exporting. 38 TISCO, with a third of SAIL's production exceeded SAIL's R andD spendingof Rs 5.22 billion by Rs 1.7 billion. 39 Enos and Park (1988: 210-11) show that many employees who quit POSCO subsequently work for Korean firms that are also suppliers to POSCO. In this sense one can speak of diffusion of skills, with POSCO a leadingcentreforhumancapitaldevelopment.

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