Turning Japanese - Is this the end of the South Korean miracle?

BY DANIEL ALTMAN | NOVEMBER 12, 2012

Can China avoid becoming Japan? In a few decades' time, we may be talking about how today's up-and-coming economic superpower is starting to look like the Land of the Rising Sun and Falling Expectations. But before that, another country is first in line: the Republic of Korea.

Despite differences in politics and size, China can be seen as representing South Korea's past and Japan its possible future. Like China, Korea prospered by picking the low-hanging fruit of globalization; its growth was driven by the rural-to-urban migration of its population and the successful pursuit of export markets using low-wage labor. And as in Japan's case, Korea's exports started out with a less-than-savory reputation -- such as when Hyundai cars first reached the United States -- but eventually became accepted global brands. But after Japan exhausted the economic engines of urbanization and low-cost exports, it stopped growing -- and now may be slipping into recession again.

In some ways, South Korea is already on the same track. There are a number of ominous parallels: Korea's rate of economic growth has been falling since the early 1990s, and its overall trend tracks Japan's with a delay of about 20 years. In terms of urbanization, the lag may be closer to 15 years, but the resemblance is clear. Also, the age profile of Korea's population 15 years from now will likely be very close to Japan's today. You can make similar comparisons between Korea and China, which sits another 15 or 20 years behind.

These countries have more in common than their geography and economic trends. In all three, the biggest spurts of industrial growth were managed by their central governments. During these spurts, their living standards converged quickly to those of more economically advanced countries -- up to a point.

The hard part has been closing the remaining gap. Beginning with the government of Prime Minister Junichiro Koizumi, Japan has made a halfhearted effort to find a new path by embracing free markets, dismantling the corporate behemoths known as keiretsu, cracking down on corruption, and even teaching its young people the value of competition. Ultimately, however, Japan has failed to become a global hub for entrepreneurship -- an essential driver of post-convergence growth. With a rapidly aging population that will soon begin to shrink, the prospects for further expansion in the Japanese economy are less than sunny.

Korea is next in line to face these challenges. Like Japan's economy and the keiretsu, Korea's economy is dominated by a handful of chaebol -- enormous conglomerates that cover many industries (excluding banks) and whose share of GDP, after climbing steadily for the past 10 years, may be higher than 75 percent. At the very moment that Korea needs dynamic small and medium-sized businesses to flourish, the private sector as a whole is becoming more dominated by lumbering oligopolies.

In addition to the chaebol's dominance, Koreans should be worried about the state of their underlying economic institutions. Academics and think tanks rate South Korea's level of economic freedom, the robustness of its property rights, and its protection of equity investors below those of Japan, Taiwan, and many other wealthy countries. Although the day-to-day processes of doing business may be relatively easy in Korea, its economic environment offers few advantages to a small contender pitted against much bigger players.

Other traditional gripes about the East Asian powerhouses also apply to Korea. Its business culture has Confucian roots, so seniority and personal networks can mean more than merit and written contracts. Its education system emphasizes memorization, instills a pressure to conform, and mainly prepares students to work as cogs in big corporate or government machines. Its creative class is underdeveloped by international standards, and its culture is reticent about new ideas and new people, though immigration has ticked upward thanks to the policies of former President Roh Moo-hyun.

Of course, Korea has many economic assets as well. Its scientific research institutions rank among the best funded and most productive in the world, and its education system does produce high scores in science, math, and problem-solving. Its people's work ethic and their commitment to the national project are exceptional. In fact, the latter can be fervent enough to recall the republic's estranged neighbor to the north, which seems at times to differ in ideology but little else.

Yet the best thing Korea has going for it may be the opportunity to see and learn from its neighbors' mistakes. Japan had the chance to reinvent its economy and chose, explicitly or otherwise, not to follow through. China arguably has it tougher than Korea: Its political system may still be entrenched after its breakneck growth subsides, constraining the free flow of capital and ideas.

Korea, in contrast, is a democracy with several years left to prepare for the next stage of its economic development. If all goes well, the big question in East Asia will change from, "Can China avoid becoming Japan?" to "Can China follow Korea?" 

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