By Henrique Schneider
A closer look at the diplomatic actions of Korea on global level reveals that the country has an unusual display of “soft power.”
Whether organizing groups with similar interests in the World Trade Organization or promoting its development model to countries such as Vietnam, Burma/Myanmar or Malaysia, Seoul seems to enjoy its preeminence. Since it hosted the G-20 meeting in 2010, Korea is the new kid on the diplomatic block.
This leadership is grounded on its many successes. The country emerged from occupation and civil war, evolved from military dictatorships into a full-fledged democracy, left olden days of cheap labor and copycat manufacturing behind and developed one of the most innovative economies in the world. Human capital as well as money honors their value with certain payback. And the population is doing well, too: Korea is among the few countries to break the middle-income trap reducing thus poverty and making it possible for virtually everyone to climb the ladder to the top.
These are some of the many reasons for the talk about the Korean economic miracle. As in every miracle, one would not have bet on it before it began and even midway through the process. Growing GDP is a necessary condition, but it’s not sufficient: China, Russia and other countries have it too and are far below Korea’s level of sophistication. Escaping the middle income trap, i.e. pulling its people off poverty and creating the circumstances for the population to prosper is harder than increasing GDP; one might call this the sufficient condition.
Countries like China seem stuck in this trap and even Taiwan has its difficulties escaping it. Escaping the middle-income trap, however, is not enough, since policies should not only guarantee moments of success, but its sustainability. Korea has accomplished that, too. Its political and economic environment seems to meet this durability condition better than, for example, Japan’s.
Because it fulfills these three conditions, the Korean economic model has credibility and Seoul develops a unique form of global leadership, exporting not only goods, but its ideas, serving, thus, as a role model.
What is the “Korea model” anyway?
In a recent discussion, the Seoul-based think-tank Liberty Society explored the true core of the “Korea model” ― and it’s not what we ordinarily think it is!
Normally, the Korean economy is associated with export-promotion, the big conglomerates and the careful planning of the state. The interesting fact, however, is that the leaps forward happened as export-promotion was cut, the state planned less and the conglomerates were drawn back. In other words, what really makes Korean economy advance is its constant liberalization!
There is one crucial episode in Korea’s recent history that helps to clarify this point. In the 1990ies, the country began pushing for more competition, cutting the power of the chaebol, reducing state-planning and liberalizing the flow of capital. This led to accumulation of external debt and ― as the Asian crisis came in 1997 ― to an economic debacle including a bailout.
Most countries would react to this situation by shutting down economic reforms and going back to a state-led economy. Not so Korea! The country not only stuck with liberalization, it increased its pace.
Because of its courage in keeping its way to a free, market-economy, Korea not only mitigated the effects of the 1997 crisis (and of any crisis since) but stepped up to become a leading economy. Free markets can lead to crisis ― that is one lesson learned from the 90s; but only competition can deal with crisis and in order to prevail in competition, liberty, education and innovation are needed ― that is the second and far more important lesson.
Korea is probably the only country to successfully engineer “creative destruction.” This concept, coined by the Austrian Economist Joseph Schumpeter, points at strategies failing if they are not adapted to reality, as economic cycles advance. Korea showed that it can adapt its economic strategies, even if they seem successful and not in need of a change.
And the country is continuing to do it: Instead of relying on the businesses of today, with its ever expanding net of free trade agreements, Korea is preparing the ground for more competition and new things to do.
What is hidden is not the Korean economic miracle, but its cause: in order to succeed, markets should be allowed to work freely. The grimmer the situation, the more liberty they need.
Henrique Schneider is a traveler in Asia as well as a political analyst. He works as a consultant and analyst in Vienna, Austria, and publishes regularly in German and English on economic and security issues related to China and other Asian countries. He can be reached at hschneider@gmx.ch.