The decline of the BRICs, but the rise of Korea?

lang: en

In an article in Foreign Affairs, Ruchir Sharma blows apart the notion of the BRIC nations (Brazil, Russia, India and China) as the leading economic forces in the coming century. He emphasizes the demographic issues facing China, the rising concentration of wealth in Russia, as well as the slowing growth rates across all four countries to argue that the BRIC acronym should really be retired.

He moves beyond analyzing just the BRIC nations though, instead briefly noting the facts of development over the past 50 years. Sadly, despite some notable exceptions, Sharma notes that few countries have made any progress in their rise (in terms of real per capita incomes) in the past half century. Economic evidence demonstrates that countries can rarely grow at high sustained rates for more than a decade, since few countries have been able to adapt to the changing politics and technology that confront their economy. Sharma aggressively targets China in this regard, arguing that its bureaucracy simply cannot handle the combination of a changing economic landscape with the dual trends of urbanization and an aging population.

It is Sharma's comments on Korea that interests me most:

In the past, Asian states tended to look to Japan as a paradigm, nations from the Baltics to the Balkans looked to the European Union, and nearly all countries to some extent looked to the United States. But the crisis of 2008 has undermined the credibility of all these role models. Tokyo's recent mistakes have made South Korea, which is still rising as a manufacturing powerhouse, a much more appealing Asian model than Japan.

And this is something that I completely agree with:

Among countries with per capita incomes in the $20,000 to $25,000 range, only two have a good chance of matching or exceeding three percent annual growth over the next decade: the Czech Republic and South Korea.

Really, Korea remains one of the most exceptional cases of economic growth in the last century, even among its cohort of Asian tigers. I am currently reading an excellent economic history of Korea (Asia's Next Giant by Alice H. Amsden) that describes the political economic decisions made by the South Korean government from 1954-1980 or so.

Some of the early take-aways from this book seem so directly relevant to the case of China that it is interesting that the connection has not been made more clearly by economic analysts. Amsden describes the constant push by the Korean government to increase exports, with the government driving much of the national strategy and lending capital to business leaders to execute that strategy. Not surprisingly, the close relations between the corporations and the government could easily have led to high levels of corruption in the opaque decision-making of the military dictatorship.

Yet, such corruption never became endemic. Amsden describes a system in which the government would set strict standards on growth and operations performance, and would threaten companies with economic bankruptcy if they couldn't follow through. Amazingly, the government did follow through, consistently moving money to the best performing managers and companies, who received substantial profits from their success. As Amsden writes, "[...] the big business groups had to deliver."

Can we make the same claims about the approach that China's leadership has taken? When we see the riches that have been amassed by some of China's top leaders (the New York Times reports that its premier has access to close to $2.7 billion), it is hard to imagine a system that is carefully calibrating its targets and holding firms accountable. Interestingly, both the governments of China today and of South Korea in the 1970s faced the same problem, namely legitimacy. High growth ensured that the demands for liberalization would be quieter, a sort of Faustian bargain between ruler and ruled.

South Korea's success story continues to this day. While analysts are still undervaluing the country, it will be interesting to see the next decade and whether the country can reach the potential that its fundamental statistics would seem to indicate are attainable.