South Korea: No Room For Complacency

Business, China, Company Strategy, Economics, Japan, South Korea

By John Richardson

Gangnam-gu_Seoul_South_Korea_-_February_2009I have long loved South Korea, ever since I first visited the country back in the late 1990s. The sheer guts, determination and get-up-and-go of South Koreans have to be admired, especially when you put this into the context of the almost total devastation inflicted by the Korean War.

And South Korea continues to defy expectations. For example, a US military official wrote in 1948: ‘Korea can never attain a high standard of living,’ wrote a US military official. ‘There are virtually no Koreans with the technical training and knowledge to take advantage of the country’s resources.’

At that time, per capita income in South Korea was US$86, on par with Sudan’s. in 2013, the country’s per capita GDP was $33,140, according to the World Bank.

Today’s challenges, some of which I highlighted yesterday, might therefore seem insignificant as the country doesn’t have to start from virtually nothing again, which was the case after the Korean War. It is already an export-focused powerhouse with strong domestic consumption, and has very successfully escaped the “middle income trap”.

But an old friend of mine, a senior civil servant in South Korea, said: “There is no room for complacency here and the danger is that our success has bred a certain degree of complacency.”

He thinks that the today’s challenges are, in many ways, just as great as those confronting neighbouring China. As is the case in China, a radically different, if not entirely new, economic growth model needs to be assembled.

“And the crucial difference is that China has already decided on the model that will, I am sure, ensure its long-term prosperity, whereas there is no political consensus about what needs to be done in South Korea,” added the civil servant.

For details of some of the biggest challenges, and what needs to be done,  he pointed the blog to what he described as an “excellent article”, published in February, by Danny Leipziger, Professor of International Business and International Affairs at George Washington University.

In that article, Professor Leipziger warned that:

  • South Korea’s future is most at risk as a result of demographics. Its working-age population is falling by 1.2% annually – the fastest decline among OECD countries.
  • While there are many reasons for South Korea’s low fertility rate, two economic factors stand out. First, household debt levels are enormous, capturing a quarter of income, with mortgage payments taking the lion’s share. The ratio of housing prices to incomes is more than double that of the United States [as we again discussed yesterday, the Choinomics stimulus programme, which was launched in June, is making this problem worse. Second, South Korean families feel compelled to spend a large share of their income (10%, on average) on education.
  • Female participation in the labour force for women aged 30-39 is 33% among the lowest in the OECD. This partly reflects the difficulty of balancing child rearing with work in South Korea, compared to, say, Europe or the US.

And he recommended that:

  • South Korea should take advantage of its big spending on research and development, and a great determination to remain at the front of technological innovation, in order to improve low productivity in services.
  • Productivity in services is six times lower than in manufacturing.
  • The operations of South Korea’s chaebols – which dominate production, if not employment should be adjusted to support productivity gains in the increasingly dominant services sector.
  • The key here, as in Japan, is to foster greater competition in services. If the chaebols continue to do their own advertising, financing, and IT, they will starve small and medium-sized  (SMEs).
  • A review of industrial concentration is needed, as is a major government effort to grow the role of SMEs in the economy.
  •  More employment in higher-end service jobs, especially for women, would also improve South Korea’s prospects considerably.

But the professor also warned that South Korea had to deal with a rising dependency ratio, which is expected to exceed 50% in 2030. Thirty six per cent of the country’s population would then be over 65 resulting in, of course, a huge increase in healthcare costs.

This underlines what Paul Hodges and I discussed in our e-book, Boom Gloom & The New Normal.

The great thing about ageing populations the world over is that they are largely the result of a “health explosion” due to advantages in medical science. People are living much longer than 50 years ago, we pointed out.

Thus, South Korea can turn its tremendous R&D and innovation strengths towards improving healthcare, obviously, to extend the duration and quality of life even further.

And its manufacturers and service providers should start focusing on making the different kinds of goods of services that old people will require. Perhaps this is less high-end complex smartphones, and instead more smartphones with basic features and bigger buttons.

“All good suggestions about what needs to happen, but this is going to take a decade at least,” said a second South Korean friend, who also works for the civil service.

“In the meantime, to borrow a Western expression, you cannot throw the baby out with the bathwater. We need to protect our existing industries during this transition period. I think that’s what other countries will do as we enter an era of greater trade protectionism and global deflation . This will especially be the case in China.”

This, in a very roundabout way, gets to the subject of petrochemicals. Whilst existing basic petrochemicals capacity might not be expanded, why shut crackers down? They can supply the local raw materials for innovation downstream, as petrochemicals companies work with the goods and services companies in South Korea to make the products and services of the future.

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