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|Korea -- Asia's rising star|
|Sunday, 20 May 2012 22:01|
Japan's economy has been in a deep funk for two decades. China is in desperate need of a new economic and political model.
At the same time, Korea keeps going from strength to strength, and is on track to overtake Japan's income per capita.
Korea's economic catchup has been nothing short of miraculous. Its income per capita has jumped from less than 20% of Japan's four decades ago to 90% today. The catchup vis-a-vis the US is equally impressive -- from about 10% of US income per capita in 1970 to 64% today.
But the "Land of the Morning Calm" faces some potential turbulence in the form of a very rapidly ageing population, threats to social cohesion, and the possibility of political change in North Korea. The country that has done so so well, needs to lift its game even further to realize its full potential and be prepared for risks ahead.
Most recently, the great strength of the Korean economy is evident in its excellent track record through the global financial and European sovereign debt crises. Korea recovered faster and more vigorously than most OECD countries and enjoys a low unemployment rate of 3.4% and modest government debt. While growth slowed in late 2011, reflecting the deterioration in the world economy, it is projected at around 3 1/2 per cent in 2012 thanks in part to continued momentum in China. Korea is however highly exposed to the volatility of the world economy, since exports now account for more than half of GDP.
This strong performance builds on five decades of economic miracle. To achieve this, government and business worked hand-in-hand to upgrade the economy's industrial structure. The economy benefited from an export-oriented strategy, good education and sound macroeconomic management.
The development strategy initially focused on the country's comparative advantage in labor-intensive manufacturing. And as the country climbed the development ladder, it graduated from low-tech to high-tech exports. Korean companies like Samsung have become the region's industrial leaders.
Financial and economic crises were seized upon by the Korean government as moments for reform and relaunching economic development. In contrast to its neighbor Japan, Korea did not seek to keep its economy afloat on frequent fiscal stimulus. Korea's public debt of 33% of GDP is the envy of most advanced OECD countries (whose average is 100%), and most notably the envy of Japan which tops the OECD list with public debt of over 200% of GDP.
In its recent report, the OECD highlights a number of priorities for policy action areas to continue the catchup process.
Korea's population is ageing more rapidly than any other OECD country, reflecting its birthrate of only 1.2 children per woman, among the lowest in the world. While it is now the OECD's third youngest population, by 2050 it will have the second oldest. By that point, based on current participation rates, there would be only 1.2 persons in the labor force per elderly person, compared with 4.5 in 2010, imposing a heavy burden on workers to finance social spending.
To counter population ageing, it is essential to offer more work opportunities for women, whose participation in the work force is the third lowest in the OECD group, such as through better child care facilities and more family friendly work places. Older workers, who often retire at 55, are another hidden resource which could be unlocked through more flexible wage and employment systems.
There is also great scope to improve labor productivity which is only half that of the OECD's more advanced countries. Perhaps surprisingly, a reorientation of Korea's education is necessary here. The OECD's PISA study has shown Korea to have one of the OECD's very best education systems. But there is severe competition to enter the top universities driven by academic credentialism -- the emphasis on where a person studied rather than on their abilities, accomplishments and potential. This has led to an oversupply of university graduates, and there is now a greater need for vocational training to address job shortages in this area. In 2009 25% of tertiary graduates under the age of 30 were inactive, engaged neither in employment, nor in education, double the OECD average.
Addressing the problem of overemphasis on tertiary education is difficult because great emphasis is attached to academic credentials. But it is necessary to shift the focus from chasing the prestige of high-ranking universities to rewarding the acquisition of skills demanded by firms.
Like Japan before it, and China today, Korea has focused its development on the manufacturing sector, and forgotten the importance of the services sector, whose productivity is about half that of manufacturing. Services could become a dynamic second engine of growth by eliminating barriers to entry, regulatory reform, and reducing trade and investment barriers. Korea's integration in the world economy is still very low in terms of import penetration, the share of foreign workers and the stock of FDI.
Korea's growth also needs to become more inclusive -- economic growth is necessary, but not sufficient to achieve social cohesion. Like most OECD countries, Korea is experiencing a widening gap between rich and poor, and rising "relative poverty", meaning the share of the population living on less than half the median wage.
Contributing to these disturbing trends is the fact that one-third of all employees have non-regular contracts and two-thirds are not covered by the social insurance systems. It is necessary to achieve more balanced treatment between regular and non-regular workers. Education can also contribute to more inclusive growth especially by ensuring better access to high-quality pre-primary education. Well-targeted increases in social spending, in particular for low income groups, are also necessary. This must be done with caution since the effect of population ageing alone will automatically lead to substantial increases in public spending.
Most importantly, inclusive growth is not just a question of social cohesion. If economic opportunity is fully open to all citizens, the economy itself will be all the stronger.
Korea has the chance to be located between the two giants of Japan and China, and to benefit from their many experiences. Japan has experienced weak leadership for more than two decades, and its economy and society are suffering from it. As the World Bank highlighted in its recent "China 2030", while it is urgent for China to implement a new development strategy, China also now has many vested interests which are stifling necessary reforms.
Korea does not have the luxury of avoiding reform, and has demonstrated the capacity to lead in areas like information and communications technology, and education. More recently, President Lee showed admirable leadership when he proclaimed "Low Carbon, Green Growth" as the vision to guide Korea's development during the next 50 years.
It is with the benefit of such enlightened leadership that Korea could be on track to become the leading star of East Asia.
OECD. "Further reforms needed to sustain Korean growth and social cohesion".