South Korea’s economy grew 2.01 percent in 2019, just over the government goal of 2 percent. The growth rate is the lowest since 2009, when the world economy was reeling from the effects of the 2008 financial crisis. Increased government spending helped offset weak exports and private investment. Government spending may help boost the economy over the short term, but it is not sustainable over the long term.
Compared to many advanced nations, 2 percent growth is an admirable achievement. In 2019, the eurozone, which makes up the second-largest economy in the world, grew only 1.2 percent. Japan grew a mere 1.1 percent. The US did better slightly better, growing at an estimated 2.3 percent. By contrast, China and India, along with many other developing countries in Asia and Africa grew by 5 percent or more in 2019.
Like everything else, views of economic growth are becoming increasingly polarized. The left has become increasingly critical of capitalism and, by extension, economic growth. The right, meanwhile, believes that capitalism and free markets create prosperity and that growth is a sign of economic success. At the heart of the division is a different view of how an economic should work. The left views the economy as a tool to create social equality, whereas the right views the economy as a reflection of individual effort.
Both stands of thought exist in Korea, but the distinction is less than in many other advanced countries. The purpose of export-led industrialization in the 1960s was to strengthen the nation to counter the North Korean threat. Policies initially pushed aggressive economic growth to lift people out of poverty. As growth roared, the focus shifted to creating a strong middle class, which included a focus on social equality. In 2012, the World Bank Gini index for South Korea was 31.6, which is lower than many other advanced countries.
The problem for Korea is that economic growth is increasingly dependent on the large business conglomerates, or chaebol. The chaebol are primarily producers of goods, not services. To maintain their edge, they invest heavily in research and development, but increasingly move production away from Korea. At the same time, they rely on dominance over the domestic market for steady profits, which inhibits the growth of job-creating small and middle-sized firms.
To boost growth, Korea will need to find new sources of growth. One obvious source is the domestic economy. Government regulations that support cartels sap the economy of dynamism, as in attempts to limit the growth of Tada, a popular Uber-like ride company. Throughout the economy, regulations create entry barriers that protect existing businesses, many of which are related to chaebol.
At times in the past, the government has taken an interest in promoting small and medium-sized firms. The biggest push happened in 1998 as a response to the near collapse of the economy after the 1997 financial crisis. Under the administration of President Kim Dae-jung, the government focused on promoting information technology venture businesses. At the time, the internet was new, creating an opportunity for new firms. A combination of government policy and domestic demand helped turn Korea into an IT superpower that attracted global attention.
More than 20 years later, Korea has lost its edge in IT. Internet speeds and cellphone coverage remain near the top, but regulations and lack of competition have hurt Korea’s competitiveness. The death of Cyworld, a once thriving social media platform, at the hands of Facebook is an apt metaphor for the decline of Korea as an IT superpower.
In recent years, many local governments have developed programs to promote “local markets” and “youth employment.” Local governments offer public spaces to young craftsman and others to sell their wares. They also run seminars and provide counseling services to young entrepreneurs. This may look good, but it ignores two key difficulties that most entrepreneurs face: rent and access to capital. To address these basic issues, local governments need to take the long view and develop policies that help business grow.
To avoid years of slow growth and eventual hollowing out of the economic as the chaebol shift jobs overseas, Korea needs to boost the domestic economic and service industries. To do so, it must eliminate cartel-supporting regulations while promoting efforts to support entrepreneurs. Above all, it must adopt measure to limit the influence of the chaebol to stimulate competition. This will take great political will and strong leadership, but history shows that there is no task too difficult for Korea.
Robert J. Fouser
Robert J. Fouser, a former associate professor of Korean language education at Seoul National University, writes on Korea from Pawtucket, Rhode Island. He can be reached at email@example.com -- Ed.