Korea’s 3 key challenges

Citigroup recently predicted that South Korea would have the fourth highest GDP per capita in the world by 2050 based on purchasing power parity calculations. Korea with an estimated GDP per capita of $107,752 would be among an Asian gang of four that would top the global league along with Singapore ($137,710), Hong Kong ($116,639) and Taiwan ($114,093). The U.S. would rank fifth at $100,802.

That would be an extraordinary historic achievement when one considers that hundred years earlier in 1950 Korea was a poverty-stricken country that was plunging into a devastating civil war that would leave millions homeless and destroy much of its infrastructure.

Moreover, the Citi forecast seems to assume that Korea’s economy will continue to expand at a healthy pace over the next four decades since the country is not now among the global top 10 in terms of GDP per capita, although Singapore and Hong Kong are.
The problem though is that such long-term forecasts are notoriously unreliable. If Korea is actually able to enjoy such wealth, it must tackle three key challenges: growth, demographics and innovation.

The first challenge, growth, relates to whether Korea’s economic expansion can continue to outpace those of competitors in both Asia and the developed world. On this score, Korea’s growth rate is already slowing to that of an advanced industrial economy rather than an emerging market one.

Korea’s rapid growth over the last four decades was mainly due to the creation of powerful export industries in cars, electronics and shipbuilding among other sectors. The problem is that Korea’s fate remains highly correlated to conditions in the rich developed countries as well as China, which are its main customers. The eurozone crisis and the economic slowdowns in the U.S. and China are reminders that the Korean economy remains vulnerable despite its success in escaping the “middle income trap” that threatens many emerging countries today.

For Korea to sustain a healthy rate of economic growth, it must reduce its export dependence and encourage greater domestic demand. Korea has several advantages in rebalancing its economy. It has made great progress, for example, in improving the government’s financial position, one of the strongest among the OECD countries. This will make it easier for Seoul to tap overseas financial markets and help develop its own capital markets to finance projects at home.

Local demand would receive an additional boost by South Korea participating in the reconstruction of the North Korean economy if Pyongyang under Kim Jong-un decides to pursue Chinese-style structural reforms.

But the government must also tackle vested interests, including the dominance of the chaebol, that have stifled domestic demand by curbing market competition.

The second challenge, demography, also poses a threat to rebalancing the economy and relying more on domestic demand for growth. Korea has the world’s fastest growing aging population. That represents a huge future financial burden for the government in terms of providing adequate healthcare, pensions and other social support for the elderly.

Moreover, a country’s economic growth rate normally slows along with a decline in the working-age population. An ageing population does not spend but instead saves for retirement. A further curb on consumer spending is Korea’s very high household debt burden. Korea is heading for a period of deleveraging, where consumers will focus on paying down debts rather than buying products or homes.

The appalling demographic trends will mean that Korea will have to retool its economic model to achieve growth through improvements in productivity, which is poor in some areas, such as the services industries.

Whether Korea can succeed in this regard depends on mastering its third challenge, innovation, and there is cause for optimism here. Korea has an extremely well-educated population as seen in its top global ranking when it comes to test scores for science and mathematics. Although local universities are often dismissed as mediocre compared to those in the U.S. and the U.K., Korea’s primary and secondary education system is better in terms of delivering the fundamentals.

What Korea needs is a change in its cultural mindset to unleash the full benefits of the education system, which is still dominated by rote memory and an environment that discourages questions or free thought. That is a problem if one wants to create an entrepreneurial culture that is also highly productive.

In other respects, Korea is making great strides in promoting innovation. Companies such as Samsung Electronics are spending huge amounts on R&D, with a corresponding increase in the number of patents being filed. The protection of intellectual property rights has also improved. And a university education still remains affordable, unlike in the U.S., where sky-high education costs and student debts threaten to cripple the system.

Korea has not yet produced anything approaching a Silicon Valley. But if it succeeds in improving its education system to produce future generations of bright, talented and, most importantly, creative people, innovation will prove to be the deciding factor that will allow Korea to have one of the world’s richest populations despite the challenges ahead. <The Korea Times/John Button>

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