Comment on “Korea's Growth Performance: Past and Future”
Version of Record online: 1 JUN 2012
© 2012 The Author. Asian Economic Policy Review © 2012 Japan Center for Economic Research
Asian Economic Policy Review
Volume 7, Issue 1, pages 45–46, June 2012
How to Cite
ARIFF, M. (2012), Comment on “Korea's Growth Performance: Past and Future”. Asian Economic Policy Review, 7: 45–46. doi: 10.1111/j.1748-3131.2012.01214.x
- Issue online: 1 JUN 2012
- Version of Record online: 1 JUN 2012
Korea's growth track record is truly extraordinary by any measure. It is not easy to explore Korea's astounding development trajectory amidst the many obstacles that stood in its way or to gaze into the crystal ball for a glimpse of its future, given the numerous challenges and uncertainties that stare in its face. Noland (2012) has skilfully carried out this task. His excellent analysis bears testimony to his deep understanding of Korea's history, psyche, and growth strategy.
Korea's growth model was by no means seamless. In fact, Korea had its own share of mistakes which resulted in hyperinflation, an overvalued currency, unbridled cronyism, rent seeking, etc. Indeed, developing countries have much to learn from Korea's failures as much as from its successes. The lack of natural resources was a blessing in disguise for Korea, which ensured that Korea could not slip into complacency or fall into the clutches of the Dutch disease. Korea was good at transforming obstacles into opportunities, turning a resource-scarce economy into a resourceful one.
Japan was Korea's role model, which was also the case for Taiwan and Singapore, given the common denominator of a lack of natural resources, although their growth strategies were markedly different, especially with respect to the role of conglomerates as opposed to small and medium enterprises and the role of foreign direct investment versus homegrown investment. In a sense, Korea's development model was a carbon copy of Japan's, with chaebols as its counterparts for Japan's zaibatsus, based on government patronage and driven by domestic investment.
The Korean economy grew on the coattails of the USA during the Cold War. Had it not been for the rapid expansion of the US economy with fairly liberal market access, Korea could not have leapfrogged to where it stands today. While Japan was a source of inspiration cum peer pressure for Korea, it is to the USA that Korea owes the most. This observation is highly pertinent not only for explaining the meteoric rise of Korea thus far, but also for understanding its future challenges.
Korea's policy missteps, too, provide valuable lessons for other economies, to avoid costly mistakes, which include such practices as “picking winners,” price distortions, short-term borrowing for long-term investment, high levels of financial leverage, and an unholy trinity among the state, businesses, and banks. All these had arguably led to poor governance which culminated in a major financial crisis in 1997. Be that as it may, credit must be given to Korea for managing its crisis extremely well: while it is important to note that the International Monetary Fund (IMF) saved Korea in 1997, it is equally important to underline that Korea saved the IMF 2 years later by proving that IMF policies could work.
As Noland has pointed out, the Korean development experience cannot be replicated, although other economies can draw useful lessons, good or bad, from it. What worked for Korea may not work for others, since Korea's history and geography have had a great impact on the country's psyche, the main driver in its development efforts. Moreover, times have changed: what had worked for Korea in the past may not work in the future. The world has changed beyond recognition. The old equations no longer hold.
Moving forward, Korea faces huge challenges. The relatively easy phase is clearly over. Although Korea's special relationship with the USA is likely to continue, Korea can no longer bank on the US market for its exports, now that the US economy is on the decline. The rise of China provides a breathing space for Korea, which has taken advantage of its geographical proximity to upstage itself in the Chinese market. This new equation will hold so long as China's manufacturing sector remains complementary to that of Korea's. As China moves up the value chain and technology ladder, Korea will face intense competition from China, with the latter having an immense advantage owing to favorable factor endowments.
Korea needs to reinvent its economy, to move gradually away from manufacturing toward services. Unfortunately, Korea's services sector remains very inefficient and uncompetitive. While Korea's high levels of human capital relative to physical capital bode well for total factor productivity growth, it does not obviate the need for serious reforms, which must include changes in labor market regulations and liberalization of the financial sector, as mentioned by Noland.
The preceding discussion implicitly equates Korea with South Korea, for a reunified Korea is likely to resemble the South rather than the North. However, a reunification of the Korean peninsula in whatever form will have serious economic repercussions, which are clearly favorable in the long term, but woefully challenging in the short term. Noland has handled the reunification issue in a noncontroversial manner by looking at the likely costs and benefits. The northward movement of capital and southward movement of labor after reunification will contribute to the equalization of factor prices and incomes. However, costs and benefits are likely to be shared unevenly, with the South shouldering a disproportionate share of the costs in terms of sacrifices, while the North will get the lion's share of the benefits in terms of improved living standards. In any case, the peace dividend from an integrated Korean peninsula will be a boon to the region.