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Posted : 2012-11-01 20:55
Updated : 2012-11-01 20:55

Korea in need of creative reset



By Kim Tong-hyung

The sorry state of world economics has a growing number of economists writing eulogies for the globalization model. Hans-Paul Burkner, president and CEO of the Boston Consulting Group, disagrees, to put it mildly.


The German-born financial expert claimed it will be critical for developed economies to continue to commit in encouraging migration and the flow of goods, services and capital in face of daunting economic challenges.

The financial crisis triggered by the collapse of Lehman Brothers in 2008 has exposed the structural flaws in rich nations, such as increasingly top-heavy population structures and declining productivity. However, Burkner believes this also accelerated the transfer of economic and political power to emerging markets, or in his words, ''the East and the South,'' a rebalancing that has so far defined globalization.

Korea has enjoyed rapid economic growth in the past decades, thanks to export-oriented industrialization strategies that produced a magnitude of change that took a whole century for Western economies. Now it must find ways to avoid the structural problems being suffered now in Europe and Japan, Burkner said.

Korea is already one of the fastest aging societies on the planet and its ineptitude in fostering a strong consumer economy to balance its strength in exports continues to sting. It's also critical for Korean leaders in government and companies to discard their outdated brand of unilateral leadership and embrace diversity in ideas and decision-making processes.

''Korea needs to recognize that the country needs a reset,'' Burkner, 60, said in a recent interview with The Korea Times.

''Historically, a top-down direction setting and systems to enforce acceptance and adherence to such leadership was the prevailing mindset. This was the case in both the political and corporate domains. It certainly was an effective way to bring Korea from poverty to the economic power it is today,'' he continued.

''Today Korea is a $20,000-plus gross domestic product (GDP) per capita economy. People will no longer be willing to accept one right way of doing things. Leadership in government and at companies needs to become more diversified and participative. Rules and laws need to be applied to everyone in the same way. Creativity needs to be fostered, beginning through the education system. People need to be exposed to a more diverse set of issues and beliefs.''

The global economy has been battered by a heady mix of negatives, highlighted by the financial turmoil in Europe, faltering recovery in the United States and a lethargic China, and concerns continue to rise as the slowdown spreads around the world.

This appears to be the true test for globalization, which by supporters had been credited for the rapid economic growth and improved living standards around the world since the 1970s.

The weakening of economic activity worldwide has been coupled with a sharp pullback in the growth of global trade, according to reports from the World Trade Organization (WTO) and other influential think tanks, threatening to victimize developing nations that are more dependent on exports.

There is increasing bickering over currency manipulation as major economies rush to compete for trade advantages. The free flow of capital appears to be disrupted by regulatory barriers erected in countries after the crisis, and the diminished presence of European banks has sucked the juice out of trade finance.

Burkner still believes globalization is a model that works.

''While the relative weight of the developed economies will decline, it must not be an absolute decline, if they open up or stay open to the developments of globalization, such as more migration, more flow of goods and services and of capital. People and capital will go where there are opportunities to make a better living. They will also move from the rural areas to urban areas. These movements will increase productivity and thus help to increase the standard of living,'' he said.

''Today more people have a decent living, nutrition, housing, education, health care, etc. than ever before. As companies and countries embrace globalization this positive trend will continue, though of course we have to address the needs for more reduces, the impact on the environment and other issues.

''We see the role of developing countries, both economically and politically, increasing. It already has led to more economic equality across nations. As with any adjustments, this will be painful for those who are losing relative weight. but overall, a world where not just a minority, but a large majority earns a decent living and where billions of people, rather than just one billion, can shape their destiny is a much better world for everybody.''

That said, it might take longer than feared for damaged rich world economies to right themselves.

''In Europe, and also Japan, we will see low growth for many years to come because of the underlying structural problems. Addressing the structural problems will take decades, not just year,'' Burkner said.

''The North American economy will pick up over the next several years as it has better demographics and a more entrepreneurial spirit. We will see strong growth in the developing countries because of the high aspiration of billions of people and their willingness to invest in their future and the future of their children.''


Promoting openness and new initiative critical


Korea Times (KT): Since the collapse of Lehman Brothers in 2008, the global economy has been reshaped rapidly, dramatically and perhaps irrevocably. What do you think are the most important developments within these changes and how will these influence developed and developing countries? How can they author their strategies for growth both for the immediate and long-term?

Burkner: The financial crisis has put the spotlight on some fundamental structural weaknesses in many developed markets and shifted the balance of economic and political power towards the East and the South.

Increasingly, the developed countries, especially Europe and Japan and less so North America, are suffering from three major structural problems, such as poor demographics, stagnating or even declining population, and therefore an aging population with rising pension and health care liabilities.

There is also the strong sense of entitlement, such as the expectation that the state is responsible to provide all kinds of benefits and cover for all kinds of risks in life, such as unemployment and illness, but also housing, education, culture and others. There is also the decline relative productivity and therefore also a declining competitiveness in various countries and in various sectors, such as factories closing, companies going bankrupt and jobs getting lost.

When almost 50 percent of the population are above the age of 50, the focus is on protecting the status quo and the willingness to address these structural problems is limited. This means that structural change will be slow.

In contrast, the people in the developing countries want to improve their lives and therefore they make huge efforts and investment to build a better status. This is the main driver of growth in the developing countries. People become entrepreneurs, workers, consumers and fundamentally change their lives and their societies.

The trend towards the East and the South is irreversible as 50 to a 100 million people in the emerging markets enter the world economy every year. It is a win-win for the developed markets and the developing markets if we are open to the changes and continue to adapt continuously.

KT: Do you think the aforementioned changes are altering the face of globalization? How are companies readjusting their strategies in attempting to integrate their businesses internationally? What do you think of the movements by nations, particularly developed economies,

Burkner: Companies who are embracing globalization are winning, irrespective of whether they are from the old or the new economies. They find ample opportunities to broaden their customer footprint and to thrive.

This is also true for economies. While the relative weight of the developed economies will decline, it must not be an absolute decline, if they open up or stay open to the developments of globalization: more migration, more flow of goods and services and of capital. People and capital will go where there are opportunities to make a better living. They will also move from the rural areas to the urban areas. These movements will increase productivity and thus help to increase the standard of living.

Today more people have a decent living, nutrition, housing, education, health care, etc. than ever before. As companies and countries embrace globalization this positive trend will continue, though of course we have to address the needs for more reduces, the impact on the environment and other issues.

KT: There had been expectations that the prolonged economic crisis will accelerate the process of a global rebalancing with the economic center of gravity shifting from the West to more toward the East. However, with the European problem showing signs of being chronic and the slowdown spreading to developing economies, it appears that the rebalancing act is going through severe growing pains. How do you think the crisis has been changing the complexion of global growth and will the world economy eventually be more balanced and stronger for it?

Burkner: Clearly, we see the role of developing countries, both economically and politically, increasing. It already has led to more economic equality across nations. As with any adjustments, this will be painful for those who are losing relative weight. but overall, a world were not just a minority, but a large majority earns a decent living and where billions of people, rather than just one billion, can shape their destiny is a much better world for everybody.

KT: How soon do you think the global economy can right itself?

In Europe, and also Japan, we will see low growth for many years to come because of the underlying structural problems I have described. Addressing the structural problems will take decades, not just years, the North America economy will pick up over the next several years as it has better demographics and a more entrepreneurial spirit. We will see strong growth in the developing countries because of the high aspiration of billions of people and their willingness to invest in their future and the future of their children.

KT: As countries, particularly developed ones, intensify their efforts to re-shore jobs, do you think protectionism becomes a threat to globalization and the growth prospects of developing economies? If it is a threat, how serious of a threat is it?

Burkner: There is always a tendency for those who lose out initially to try to protect the status quo. But it will only accelerate the decline. Overall, we have benefitted enormously from more openness. This will continue, even though, fo course, there will always be initiatives of protectionisms. Globalization is a wavelike process, with an upward trajectory.

KT: Korea has depended on its relatively cheap labor and manufacturing prowess for its rapid economic growth in the past several decades. However, there are also worries that these strengths are beginning to be duplicated by neighboring countries like China, when Korea has yet to make a Germany or Japan-like technology jump in terms of manufacturing. The Apple-Samsung saga also exposes the ineptitude of Korean companies in terms of injecting creative input to their products and services. What do you think is the new type of business leadership required for Korean companies for innovation?

Burkner: Korean companies have demonstrated that the combination of hard work, good quality and also innovation will ultimately win. I would put Korea already in the same category as Japan and Europe. Indeed, Korea must be careful not to suffer from the same structural problems that I described for Europe and Japan. Korean companies must continue to globalize, to become more open also to people from other countries, and to continue to drive innovation.

KT: As an economy, Korea already seems to be in the midst of an inevitable transition from a sprinter to plodder. The country needs another growth engine than exports, but stagnant income, spiraling household debt, unemployment and a population aging in dog years don't inspire confidence. It's critical that the country finds a way to boost incomes more broadly, spur entrepreneurship, reduce the gap between the tradeable and non-tradeable sectors of the economy and increase the labor participation of women. The country has been failing on all fronts. With Koreans preparing to elect a new president in December, what are the suggestions you can make in policies and direction for the new government?

Burkner: Korea needs to recognize that the country needs a reset: historically, a top down direction setting and systems to enforce acceptance and adherence to such leadership was the prevailing mindset. This was the case in both the political and corporate domains. It certainly was an effective way to bring Korea from poverty to the economic power it is today. Today Korea is a $20,000 plus GDP per capita economy. People will no longer be willing to accept 'one right way' of doing things. Leadership at the government and companies needs to become more diversified and participative. Rules and laws need to be applied to everyone in the same way. Creativity needs to be fostered, beginning through the education system. People need to be exposed to a more diverse set of issues and beliefs.

Korea must be become a more open society, be a place where people from all over the world like to live and work. Its companies must become truly international companies with international leadership and staff. It must foster entrepreneurship and provide opportunities for new companies to be set up and to succeed. It must do away of rules and regulations and restrictions that have been a straight jacket and prevented openness and new initiatives.



Who is Hans-Paul Burkner?

Hans-Paul Burkner has been president and chief executive officer of BCG since 2003. He joined the firm in 1981 and was a member of teams that opened BCG's Dusseldorf (1982) and Frankfurt (1991) offices. Before becoming the firm's first CEO from Europe, he was head of BCG's global Financial Services practice.

During his 30 years at BCG, he has consulted many of the world's leading financial institutions. Burkner has worked with them to redefine their strategies, spearheaded major global expansion initiatives, and supported them in fundamental restructuring.

He studied economics, business administration, and Chinese, receiving a diploma from the University of Bochum, a Master of Arts degree from Yale University, and a Doctor of Philosophy degree from the University of Oxford, where he was a Rhodes Scholar.

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