By Andrei Lankov
Korea Times Columnist
These days there is much talk about Korea's economic future, and quite often this talk sounds quite pessimistic. For example, Lee Kun-hee, chairman of the Samsung group, said that Korea is comparable to a sandwich, jammed in between China and Japan, where China is rapidly catching up and Japan is fast stepping ahead.
Indeed, the worries about being ``sandwiched'' are very common these days. The new worries cannot be understood without a quick look back, to the history of the Korean economy.
When in the early 1960s Seoul declared that it aimed at transforming South Korea into a major regional economy, few outside observers took this statement seriously. In 1961, South Korea had the lowest per capita income in Asia. It was lagging behind nearly all African countries and even well behind Papua New Guinea.
Nonetheless, we all know that Seoul planners meant business. Throughout the three decades between 1961 and 1989 Korean maintained the world's fastest economic growth, averaging some 8.5 percent a year. As a result of this, South Korea graduated to an OECD member country, becoming one of the world's major economic powerhouses ― an exceptional success for a former ``developing nation.''
How was this success achieved? Korea's initial predicament was aggravated by the nearly complete absence of natural resources. This did not leave policy planners much choice. The only conceivable strategy was that of export-oriented growth. Korea imported raw materials in order to produce the manufactured goods for export.
In the early days of the Korean breakthrough, the country had neither capital nor workforce to handle complicated technologies, so in the 1960s the ``Korean miracle'' began from light industry. In the countless sweatshops the workers, predominantly countryside girls, spend 12 hours a day sewing shirts, making toys and wigs. The conditions were harsh and pay was meager, but this made the products cheap and easily saleable on the world's market.
This strategy was much influenced by the earlier Japanese experience (albeit Koreans are reluctant to admit this), but Korea necessarily lagged much behind its eastern neighbor: naturally enough, since Japan began its modernization so much earlier.
In the 1970s the Korean strategy changed slightly. The experience and capital accumulated in the booming 1960s made possible a gradual switch to heavy industry. From the 1970s Korea became a major producer of steel, cars and ships. Since all these new industries tended to be labor-intensive, the low wages remained an essential component of the economic strategy. Korean workers of the 1970s and 1980s were making good money by the standards of their fathers, destitute subsistent farmers, but they were paid worse than people doing similar work elsewhere. The authoritarian governments did not tolerate independent trade unions and were ever ready to suppress popular discontent.
However, in 1987 the unavoidable happened. The mass popular protests led to the resignation of the military regime and the switch to democracy. The new freedom and a wave of labor unrest predictably drove wages up. However, the economy survived the wage shock reasonably well.
Still, troubles were looming ahead. In spite of all impressive achievements, Korea has remained a manufacturer of labor-intensive mid-tech items. Of course, Samsung and LG have achieved some important technological breakthrough, but on average Korea is still well behind Japan, Europe and US when it comes to advanced technologies. On the other hand, it cannot compete with China and some other emerging economies when it comes to the price of labor. After all, in 2007 the average monthly wage in urban China was $250, roughly ten times below the South Korean level.
However, until recently it was not seen as a major challenge. The world's consumers need not only Japanese-made robots or Chinese-made T-shirts. Somebody has to manufacture cargo ships, cars and consumer electronics, and this was what the Koreans were doing very well. The Chinese could do some similar things, but the quality often leaves much to be desired. Japanese goods might be perfect, but way too expensive for most consumers. Of course, South Korean light industry could not compete with the cheap Chinese labor and largely died out, but by the 1990s it had ceased to play a major role in Korea's economy, so its demise was not much noticed.
However, by 2000 it became clear that China was catching up faster than most people expected. Chinese companies moved into areas that for two decades had been dominated by the Korean conglomerates. China is a major player on the steel market, and it has a growing share in shipbuilding and also produces cars.
Right now, Chinese cars are not ready to compete with Koreans models. They are cheap, to be sure, but also badly made and remarkably unsafe. However, the same could be said about Korean cars thirty years ago, and the growth of the Chinese automotive industry is remarkable.
In shipbuilding, things seem to be worse. China now is the world's second largest shipbuilder, and it seems to be a question of time before it will overtake Korea. In terms of new orders, China was actually the world's largest in 2007, totaling 42 percent of global demand. The buyers prefer Chinese ships because they cost less (a byproduct of cheaper labor, of course).
Steel production is another area where Chinese competition is being increasingly felt. Manufacturing costs of the cold-rolled steel in China are $393 per ton. In Korea, the cost is $414, and in Japan it is $470. This difference matters.
All this means that Korean manufacturers feel increasing pressure from ``below,'' from growing China. Since they cannot possible decrease wages, the only possible strategy is to move up to the hi-tech industry. But this is not easy either, since the hi-tech market requires decades of educating and training personnel, and also a rather particular kind of society.
It also needs sophisticated research infrastructure. Japanese hi-tech industries began to grow decades ago, and in Europe hi-tech has even longer traditions. It is clear that Koreans are doing their best to catch up, but it remains to be seen if they succeed. Gone are days when the future of Korea was determined by crowds of obedient and hard working countryside girls, who were willing to spend 12 hours a day toiling in tiny shops for a meager salary. The future belongs to the rebellious and creative engineers and designers (many of whom are grandchildren of those girls, by the way). The question is: How much time does Korea have to train those people and place them into positions of leadership?
So far, the situation looks relatively grim. Korea's market niche is shrinking fast. The Chinese are learning to manufacture better items, while Japanese brands are in firm control of the market's top segment. But it should not be too much panic as Koreans have found ways out of much worse situations. However, the challenge is real.
The writer is an associate professor of Kookmin University. He can be reached at anlankov@yahoo.com