Where Korea is weak

By John Burton

I first came to live in Korea in 1992 and during these past 20 or so years I have watched the country complete its transition from a developing to a developed economy.

Many of the elements that account for Korea’s astonishing success are still present. One is its industrial flexibility and rapid product development. An example is the smartphone. Five years ago, smartphone were practically non-existent in Korea. Now the country is the world’s leading producer. That nimbleness reflects two other Korean characteristics: a strong work ethic and respect for educational achievement.

But will these features be enough to see Korea through the next 20 years as it shifts toward a services-oriented economy, the path followed by other advanced and maturing countries? In that respect, I have some doubts.

Korea faces two big challenges in the years ahead. One is its rapidly aging population that threatens to reduce economic productivity, the single most important factor determining a country’s prosperity.

The other is the disappearance of a high household savings rate. Koreans are now among the most indebted people in the world due to excessive spending on housing and education. That bodes ill for sustaining strong domestic demand.

The impressive improvement in Korea’s infrastructure over the last two decades has helped bolster domestic growth and contributed to productivity gains with the appearance of a first-class transport network. But government spending on these projects will likely ease as more resources are shifted to social programs as the population grows older.

As a result, Korea will be forced to continue to rely on exports rather than domestic demand as the main engine for future growth. One significant change that Korea has undertaken in the past 20 years has been reducing its dependence on the U.S. as its main overseas market and successfully diversifying its exports to China and other emerging markets.

But this has not solved what could become a growing structural weakness for Korea, namely its narrow range of export products that largely consist of vehicles, electronics and ships. Korea does not much of a presence in global markets so far when it comes to aircraft, pharmaceuticals, food, energy or armaments.

Korea’s focus on a few export products leaves it vulnerable to increased competition from developing countries as they begin to produce more sophisticated products at a cheaper price. For example, smartphones and display screens, two leading consumer electronics products for Korea, are rapidly being commoditized as China steps up production in these sectors. China has not yet made much a dent when it comes to producing world-class cars or ships, but it will eventually master these as well just as Korea did.

So the only alternative for Korea is to create more value-added and technically sophisticated products as well as develop globally competitive service industries. And success in this depends on importing ideas and improving its knowledge of technology.

Korea may boast of having lots of patents, which would suggest that the country is quite innovative. But most of them pertain to improvements and refinements in technology production rather than scientific or product breakthroughs. Korea is not known for discovering new drugs or chemicals or developing leading computer software. No Korean has won a Nobel Prize in the natural sciences.

A similar criticism can be made of its services sector. Korea lacks a competitive financial industry, for example. The only services industry that appears to be thriving is entertainment associated with the Korean wave, but revenue from this represents only a drop in the bucket compared to cars or electronics.

In the end, this lack of progress can be blamed on educational attitudes that are still focused on students scoring well in exams rather than promoting critical thinking. Korea’s education system has been superb in producing a well-trained workforce and competent administrators, but has significantly failed to produce many original thinkers. The education system is geared to promote incremental advancements, rather than sudden breakthroughs.

This will prove to be a great handicap if Korea wants to maintain competitiveness with the likes of the U.S. or Germany. So can Korea make another great leap forward, similar to its rapid industrialization?

The answer is yes, but only if it promotes individual creativity. Doing so will be difficult since much depends on changing cultural attitudes, particularly the country’s adherence to it neo-Confucian tradition and resulting top-down management.

Nonetheless, there are hopes for optimism. Look at Korea’s artists for inspiration. The country has become influential in global art-house cinema in the last two decades, while its contemporary artists are among the world’s best, although sadly underappreciated.

What artists are good at are breaking down barriers and questioning the status quo. In that way, they perform a practical service, although they are often dismissed as being unproductive dreamers. Adopting their habits of thinking and associated risk-taking would truly lead to the formation of the “creative economy.”

John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant. He can be reached at john.burton@insightcomms.com.