Asia’s EconomyI. Economy of ChinaII. Economy of South

Asia’s Economy
    Welcome to Asia’s economy 101. After studying the case of China, I would like to focus on a country whose economy is as vibrant if much smaller. During this lecture, you’ll know how South Korea’s economy strode and what challenges it is facing now.
    First, let’s have a look at the significant progress of South Korea’s economy and its characteristics.
    In 1960, in the aftermath of the Korean war, South Korea was one of the poorest countries in the world, with an income per head on a par with the poorest parts of Africa. By the end of 2011 it had been richer than the European Union average, with a gross domestic product per person of $31,750, calculated on a basis of purchasing-power parity (PPP), compared with $31,550 for the EU. South Korea is the only country that has so far managed to go from being the recipient of a lot of development aid to being rich within a working life.
    For most poor countries, South Korea is a model of growth. It’s a better exemplar than China, which is too vast to copy, and better, too, than Singapore or Hong Kong. Both are richer than South Korea but both are exceptions: Singapore and Hong Kong are city states.
    South Korea has not merely grown fast. (3) It has combined growth with democracy. For those of you familiar with South Korea’s history you might say that its spurt began under a military dictator, Park Chung-hee. That’s true, but for the past 25 years the country has had a vibrant parliamentary system. South Korea scores the same as Japan in the democracy tally kept by Freedom House, a think-tank in Washington, DC. No other Asian country does as well.
    At the same time South Korea has combined growth with equity. Between 1980 and 1997, its Gini coefficient, fell from 0.33 to an exceptionally low 0.28, before rising back up during the 1997-98 Asian crisis. In 2010, the level was 0.31. This is a bit worse than Scandinavian countries, a bit better than Canada. By the way, if you don’t know what Gini coefficient means, you might want to listen to the next lecture, during which I will explain it in detail.
    Now South Korea can add resilience to its roster of achievements. It was walloped during the global financial crisis, but recovered faster than any other rich country. Between June 2008 and February 2009, South Korea lost 1.2 million jobs. In September 2011, foreigners withdrew over 1.3 trillion won ($1.1 billion) from the stock market and the currency slumped 10%.
    Yet in 2010, GDP grew by 6%. The unemployment rate is now only 3%. Some of the recovery is the result of South Korea’s happy dependence on China. It exports more capital goods to China relative to the size of its economy than anyone else. But this is only part of the explanation. The government also initiated a public-works scheme that is mopping up over 2% of the labour force. It introduced an old-age pension and began an earned-income tax credit.
    South Korea is catching up with America’s standard of living. China’s dollar GDP per person would have to grow at 7.5%-8% a year for 20 years to reach the heights South Korea has already scaled.
    The South Korean model had three distinctive features: an industrious workforce; powerful conglomerates; and relatively weak smaller firms.
    Let’s take a look one by one.
    First, South Koreans lay great store by education and hard work. They put in 2,200 hours of work a year, half as much again as the Dutch or Germans. Their reaction to the 2008 slump was to work harder still. During the 2009-10 recovery, South Korea had the second-largest increase in hours worked in manufacturing.
    But it is harder to generate further jumps in income from big increases in hours and skills. On some estimates, half of recent graduates are failing to find full-time jobs and are going into further study or part-time employment. So while general education remains good, some industrial skills may be declining.
    Second, much of South Korea’s miracle has been the work of big conglomerates. Samsung Electronics, one of 83 constituent parts of the Samsung Empire, sells more smartphones than Apple. South Korea’s large companies employ slightly less than a quarter of the workforce and produce more than half the country’s output.
    These conglomerates are called chaebol in Korean. (7) The drawback of the chaebol system is that it’s prone to fraud, dodgy accounting and illegal political contributions. Moreover, there are signs that the chaebol may be stifling innovation and entrepreneurship. They have proved expert at applying and improving existing technology. But except in some internet businesses and computer gaming, South Korea has few start-ups or cutting-edge technology firms.
    Third, compared with Korea’s export-oriented chaebol, small and medium-sized firms, or SEMs (small and medium-sized firms), which dominate services appear weak. SMEs’ operating profits were 4.5% of sales in 2007. They were 7% for large firms. South Korea, in short, has first-world manufacturing exporters and third-world services.
    There are several reasons for the mismatch. Small firms are crowded out of markets for people and skills by the conglomerates. (9) Small firms have also been coddled by the government. South Korea maintains various entry barriers to shelter small stores from competition. Government support to SMEs rose from under 6 trillion won in 2008 to 10 trillion in 2009. All this help has made SMEs less efficient and damaged competitiveness.
    OK, we’ve learned the progress of South Korea’s economy, three features of the South Korean model and their drawbacks or reasons respectively. (10) Now you can take a short break, after which we are going to discuss how the model can be improved to maintain South Korea’s growth. See you in five minutes.