Foreign Policy has an article that basically offers the opposite view of Korea's economic growth that I presented yesterday. Daniel Altman argues that Korea's best days are behind it already, and that the country is tracking the arc of Japan's rise quite well:
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.
Altman is generally correct - there are a lot of close correlations with the Japanese and Chinese cases. However, it is interesting that an article that focuses so clearly on economic growth rates would seem to miss mentioning the Asian Financial Crisis and the Tokyo real estate bubble.
These crises were very important for moving the East Asian nations away from unsustainable policies. Much as the dot-com bubble eventually led to today's vibrant and strong internet entrepreneur culture in Silicon Valley (they are actually businesses this time!) Tokyo and Seoul faced many problems internally with their models of development, and their respective crises both set off reforms.
Unfortunately, Japan has never fully followed through with its reforms, for a host of reasons. Most importantly, the inability of its political leadership to fundamentally alter the balance of power between the central ministries and the business leaders that run Japan's companies has undermined the country's entrepreneurial goals, preventing Japan's investors from gaining the economic freedom they need to build the next Sony. Japan now faces so many problems (and has faced them now for two decades), that it seems like there is never going to be a light at the end of the tunnel.
Seoul developed its own approach to structural reforms in concert with the IMF in 1997 and later, but it has so far shown an unwillingness to move beyond basic protectionist orthodoxy to a more free-trade centric model. This is often a hard transition, but countries like Israel have shown that there remains a hybrid approach that creates a free-trade centered economy while maintaining strong social security and state intervention in the economy.
Despite its negativity, the article does end on a bit of a high note, arguing that Korea has an opportunity to change its trajectory since it can view the outcomes of its East Asian neighbors:
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.
Let's hope that the country takes its opportunity seriously.
Posted on November 12, 2012