By Kwon Tae-shin
Ambassador, Permanent Delegation of Korea to the OECD
It has been said _ by the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) among others _ that when it comes to economic growth, Korea is probably the biggest success story in history. In the early 1960's, when Korea set out its plan for economic development, it was one of the poorest countries in the world. Per capita income stood at around $80. Today, it is at over $18,000 with Korea now classified as a high-income country. Indeed, it has been over 10 years now since Korea became a member of the OECD, the so-called ``rich countries' club.''
The miracle started with an industrious labor force that had the advantage of cheap wages. Initially, Korea exported light industrial products such as textiles, wigs, and footwear. The baton then passed from labor to capital. With accumulation of capital from export proceeds Korea invested in heavy and chemical industries in the latter half of the 1970s. Since then, Korea's primary engine of economic growth has changed to high and medium technologies, with major export products _ semiconductors, telecommunications equipment, computers, automobiles and steel.
Korea's competitive edge is, however, now at risk in the wake of emerging economies such as China, India and other Southeastern Asian countries. The so-called BRICs (Brazil, Russia, India and China) are growing at a remarkable pace with enormous populations and abundant natural resources. They are accumulating capital in a large scale and developing technology with astonishing rapidity. China, for example, holds the largest foreign reserves in the world, and spent more on R&D last year than Japan, becoming the world's second largest investor in R&D after the United States. And while China is currently enjoying high rates of growth at around 10 percent, Korea's potential growth rate is estimated to fall to the 5 percent level.
In the face of this challenge, Korea needs to find new locomotives for the next era of sustainable economic growth. Following labor, capital and technology in the sequence of Korean economic locomotives, knowledge is now believed to be the most important factor in economic development. The knowledge-based service industry, along with high-tech industries such as IT and BT, has been highlighted as a key element on the road to further economic development. And the core of knowledge-based services is undeniably the financial industry.
The financial industry is also regarded as a high value added industry due to its ripple effects on other related service industries and across the board in the real sector economy. Luxembourg tops the list in terms of per capita income, which naturally means that living standards are among the highest in the world. About one third of this wealthy country's national income comes from the financial industry.
Based on this recognition of the strategic importance of the financial industry, Korea has been exerting tremendous efforts to transform itself into the financial hub of Northeastern Asia. What are Korea's strong points?
First of all, Korea has a comparative advantage in terms of geography. It is located between China and Japan, who are among the world's top ranking countries in terms of economic size based on purchasing power parity standard. Thus the financial industry in this area of Asia benefits from an excellent economy of scale.
Secondly, Korea has upgraded its related legal and institutional frameworks in order to promote innovation and competition in the financial industry. In the past, its role was limited to supporting the real sectors, which tended to impede its own development. Due to structural weaknesses in the financial system, Korea experienced a serious financial crisis in 1997. This crisis, however, acted as a springboard for financial restructuring allowing for vast improvements in the soundness and efficiency of Korea's financial sector. As a result, the portion of the financial industry in GDP grew from 5.2 percent in 1990 to 7.5 percent last year.
Thirdly, Korea also possesses a competitive advantage in information and communication technology (ICT) and human capital that are necessary to prop up the development of the financial industry. Korea is very proud of its consistently high ranking in the world when it comes to the use of broad-band Internet and the excellent performance of Korean students on the OECD's Program of International Student Assessment (PISA).
It is true, however, that there are several shortcomings Korea must overcome in order to become a leading country in the financial industry. Many of the powerful European nations in this field, including the aforementioned Luxembourg, have established a much more favorable institutional framework in terms of legislation and taxation in the financial sector. Their financial industries offer high quality comprehensive financial services closely linked to legal and accounting fields. These countries also have a long history of openness to neighbors due to geographical proximity, which has naturally increased competitiveness and innovation. Moreover, many citizens in Europe have multilingual skills, meaning that it is of little importance whether their customers' nationality is English, German, or French. Korea will be compelled to face these challenges with concerted efforts on the part of government, the financial circuit, and future financial leaders. Indeed, it has already launched various ambitious measures to address such deficiencies and positive results have begun to appear.
Openness and innovation should also be further reinforced not only in the financial sector but also in every corner of the economy. This will ultimately lead to increased competitiveness and productivity. The recently signed Free Trade Agreement (FTA) with the United States will prove to be valuable in this regard since it will expose Korea to competition with the world's biggest super power and strengthen Korea's own capacities in the process. Additional FTAs with the EU, China, Japan and other major trading partners should also be pursued.
Rather than a policy of isolation and protection under traditional barriers, Korea has opted to continue on its path toward more openness and competition. Korean citizens will therefore need to open their minds and welcome contenders from all over the world, including foreign financial institutions and multinational enterprises. By providing them with a friendlier business environment, before long they will become great contributors not only to the creation of a financial hub in Northeastern Asia but also to the further upgrading of the Korean economy as a whole. The results will be far beyond our expectations as demonstrated in the case of the 1988 Olympics or the 2002 World Cup, and will ultimately lay the cornerstone for the next generation of economic growth.