Happier Economy Better Than Larger Economy

By Anthony Michell
Professor at KDI School of Public Policy and Management & CEO of Korea Associates Business Consultancy

The world is now entering an economic crisis of which the dimensions are beyond anything experienced since the 1930s. This crisis will test every weakness of the country's economy, and the weaknesses of each company's structure.

Anthony Michell Professor at KDI School

Korea is poorly positioned to face this crisis because of its macroeconomic and structural weaknesses, its current maladroit economic administration, and its corporate weaknesses. Most important is that Koreans have a poorly thought out vision of their future, so that appropriate actions will be difficult.

For the last 10 years, both the Korean media and Korean businessmen have shown considerable uncertainty about where Korea is going economically, lacking a suitable role model.

Part of the problem is that Korea still has a "sadaejuui" attitude to the world that you do not find in other mid-sized economies in other parts of the world. (sadaejuui was a term invented by early 20th century Korean nationalists like Shin Chae-ho to explain why Korea failed to enter the 20th century successfully, which was because the ruling class paid too much attention to larger and powerful countries.) The answer is to think small rather than big.

The economic strength of Korea in the 21st century has to be to be more open than its neighbors, Japan and China, to have a lower tax regime, to have better language capabilities and better education and research and design capabilities.

With these endowments Korea can choose industrial specialism which plays to its comparative advantages, and the country will not longer need to produce everything.

Rather it should concentrate on world-class electronics, cars, ships, machinery, steel and petrochemicals among its present capabilities.

All of these need to become future oriented in terms of green technology, and here the example might be Doosan with its dominant world market share in desalination equipment, as well as its leadership in smaller sized construction equipment appropriate to countries like China which need to build, and build and build.

The current government was elected on a ``think big is beautiful policy,'' the 747 economic policy. Although the 747 vision was never airworthy anyway, it was a concept which never played to Korea's 21st century economic strengths because Korea can never be number one in size.

In some of his speeches at the end of his period as Mayor of Seoul, and those before he became a formal candidate for Presidency, Lee Myung-bak outlined some of the essentials of a future strong Korea.

It should be forward looking, and not locked on disputes from the past, that the country should look beyond the borders of Northeast Asia in its relationships, and that Korea must become an attractive place for Koreans and foreigners to live and do business, if it is to prevent an outflow of energy and income in the coming years.

Instead of trying to become the seventh largest economy in the world - always impossible, even if unified with North Korea, Korea needs to become the happiest economy in the world.

Even the seventh happiest economy in the world would be an advance, as on most global rankings measuring various aspects of business and social life, Korea lies in the mid-20s or even lower down the table.

In classic growth theory growth comes from increased labor inputs, increased capital inputs, and where appropriate more land.

In 21st century economic growth comes from increasing the efficiency of the use of inputs and removing barriers to efficiency.
Korea's old economic paradigm was to hold all inputs inside the country. The new paradigm should be to allow a smooth flow inwards and outwards.

The ``happy economy'' was an 18th century concept. The wisdom of those 18th century thinkers, who framed the American constitution and wrote that ``the pursuit of human happiness'' was a constitutional goal of the early U.S., was matched by the ideas of a professor of Moral Philosophy writing in Glasgow at about the same time.

Adam Smith wrote ``No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.'' (Koreans ranked 22nd on the 2007 World Happiness Index, but the U.S. only got to 20th and Japan ranked 16th. The highest-ranking countries are North European countries.)

Smith thought that happiness and national wealth would come from peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.

The happiness index consists of 20 measures grouped in four segments that develop this thesis. In an age of crisis it is these four segments that the government should concentrate on improving in ways that create new possibilities and new jobs in the current crisis.

Peace and security: war and peace, violent deaths, corruption, economic security and human security.

Freedom, democracy, and human rights: democracy, press freedom, women's rights, children's rights and the death penalty.

Quality of life: GDP per capita, GINI coefficient, life expectancy at birth, suicides and clean air.

Education, information, and communication: education, newspapers, TV and the Internet.

The fourth segment, education, information and communication should play to Korea's strengths in terms of the old goal of having 15 million households connected to broadband.

But the aging of Korea is moving the educational market away from the young, and towards adult education. The government has begun to address some aspects of educational reform, but not the factors that drive so many Koreans to send their children abroad for education.

The most important step is for the Ministry of Education to stop trying to control education, and for Korea to move to an open educational system in which diversity is the key.

Successfully achieved, and with more resources given to education, including a British-style student loan system, income now lost to the rest of the world will stay in Korea, and Korea will produce a more skilled community of citizens.

The government attempts to tame the Internet should also cease since the attempts essentially repress diversity of opinion and information. The media market should be finally fully opened to foreigners to allow the creation of proper English language broadcasting institutions.

The reforms needed do not require much money, but a freeing of the multitude of restrictions from textbook approval to curriculum standardization.

Properly instituted the Korean economy will be boosted by new job creation, income support for those who are studying, and new institutions which will produce the brain power that Korea needs in the coming decades.

The third segment of the index concerns income security and distribution, addressing Smith's ``poor and miserable class.'' Despite five years of the avowedly redistribution government under former President Roh Moo-hyun, the Gini coefficient, the broadest measure of income equality, deteriorated steadily in Korea.

Korea's social security net is weakest when it comes to senior citizens, a rapidly growing segment of the population.

Without raising taxes, Korea needs to develop ways to improve the quality of life of old people, and to study how this is done, perhaps even creating a ``University of the Third Age,'' and advancing digital support for the elderly.

This segment also requires Korea to become ``green and great,'' and it is here that government expenditure during the crisis should be concentrated by putting construction companies to work and making resources available for companies to work on green projects.
Here is a sector where value added new jobs can be created for both young and old.

In terms of the efficient use of manpower, Korea scores an extremely low mark amongst the OECD members. The GDP dollar value added per hour worked by Koreans is one of the lowest in the advanced world. This directly affects wages.

Millions of Koreans are earning low wages because the job they do adds so little value added that this is all it is worth to pay them.
Rather than raise efficiency, many industrialists would rather import almost a million workers from Asia and pay them less than Koreans. The Korean management system of relay management and of higher levels of managers using the company to enhance their own social power and networks is one of the reasons why the Korean economy is not as efficient as it should be.

The second segment is about Smith's ``tolerable administration of justice.''

Here the problem is the lack of challenge that the Korean judicial system receives through closing off Korea to the foreign legal profession, which also forces Samsung, Hyundai and other corporations to send millions of dollars in legal fees to Hong Kong and the rest of the world because foreign lawyers cannot freely practice in Korea.

Women's rights, the national security law and the death penalty come into this review.

The first segment addresses the question of economic security and peace, Smith's first precondition for happiness.

The solution to the North Korean nuclear issue has never been confrontation. But progresses toward the goal of a peace treaty to end the Korean War, something hardly mentioned until the North-South summit of 2007.

South Korea has to stop trying to overthrow North Korea, and vice versa. Confrontation increases the misery of the North Korean population, and reduces the regime's ability to change, and diverts South Korean government's resources to non-productive uses.

Finally, how can economic security be achieved in global economy storm? Mainly by removing the economic distortions that are created by the continuing regulation of what should not be regulated.

The present exchange rate regime is one of those factors that forces up the demand for dollars and reduces the store of value that the won represents.

The government system still demonstrates an ability to turn a market opening move into an increase in regulations, nowhere more evident than in the mess that the new documentary requirements for foreign English teachers created in a growing and necessary segment.

The concept of positive lists rather than negative lists still abounds and doubtless will slow or destroy many government initiatives in the current crisis.

Starting from the premise that Korea should be creating a happy economy and does not need to be a big economy, the agenda for a new macro-economic policy, which creates jobs and raises wages by raising the value added that employees bring to their labor, could be constructed easily.

It will allow the government to tackle both short-term issues through an economic stimulus ― for instance, student loans ― through building Korea's secure long-term future as a center of excellence in the world.

Suggestions
Instead of trying to become the seventh largest economy, Korea should become the seventh happiest in the world.

Following the 20 factors that make up the World Happiness Index would create a government agenda for action during the current global crisis that would stimulate the economy by emphasizing new areas of economic endeavor, creating an economic stimulus though a student loan system, concentrating on creating value added jobs, and reducing value destroying management in both the private and government sectors.

These factors are:

Peace and security: war and peace, violent deaths, corruption, economic security and human security.

Freedom, democracy, and human rights: democracy, press freedom, women's rights, children's rights and the death penalty.

Quality of life: GDP per capita, GINI coefficient, life expectancy at birth, suicides and clean air.

Education, information and communication: education, newspapers, TV and the Internet.

This strategy would both help Korea through the current global crisis, and produce a Korea which could compete more effectively in the future.

Since much of the process is about removing barriers to efficiency, creativity and diversity, for example by removing control of the educational content of schools, it would allow the reduction of corporate and personal tax at the same time.

Who is Anthony Michell?
Anthony Michell is a visiting professor at KDI School of Policy and Management, and president of Korea Associates Business Consultancy, one of the oldest foreign consultancies in Korea. In this capacity, he is a convener of the Korea Business Forum, a seminar for multinationals and diplomats.

He first came to Korea in 1978 and decided to work for the Economic Planning Board with the charismatic economic policy maker Kim Jae-ik.

He has worked for the International Labor Organization, the World Bank, the UNDP, as well as a number of foreign and Korean corporations over the decades.

During the 1997-98 Asian financial crisis, he coauthored the ``Million Jobs'' report and helped start the consequent campaign to create new jobs. He has a Ph.D from Cambridge University.