South Korea - the Asian "France" or "Germany" of the 21st Century

 K-POP Video on YouTube

 

Overseas trade and the industrial revolution of 19th and 20th centuries

As overseas shipping costs fell during the industrial revolution, it became possible for massive industrial cities to specialise in large-scale production and ship their goods to customers all over the world. The concentration of industry in cities, however, was still largely a product of the fact that it was costly to move goods over land. In a port city, you could bring in inputs, process them into outputs, and ship them back out. If it had been necessary to move intermediate goods well inland for manufacture at any point, costs would have soared, making profitable production impossible.

But transport costs continued falling. Shipping became much cheaper and more efficient. Air freight became an economic possibility. And improvements in trucking and freight rail led to stunning drops in the cost of moving goods over land. And so where once producers had crowded on top of each other in cities to take advantage of specialisation without blowing their budget on transport costs, they now began to spread out: first into the suburbs, then into cheaper regions of the same economy, and then, finally, into vastly cheaper economies abroad. This process facilitated the rapid industrialisation of Asian giants firstly Japan and then South Korea.

South Korea's 20th century economic success
 

In 1960, in the aftermath of a devastating war in the Korean peninsula, the exhausted south was one of the poorest countries in the world, with an income per head on a par with the poorest parts of Africa. At the beginning of 2012 it is richer than the European Union average, with a gross domestic product per person in US dollars of $31,750, calculated on a basis of purchasing-power parity (PPP), compared with $31,550 for the EU. The below graph shows GDP per capita levels projected to 2050.

Goldman Sachs - IPPR: Third Wave of Globalisation Report

 

 

 

Much of South Korea’s economic miracle has been the work of big family run conglomerates, or chaebol. Samsung Electronics, for instance, one of 83 constituent parts of the Samsung empire, has become the market leader with its smartphones overtaking Apple. Korea’s shipyards have just started work on a new class of container ships called the triple E-class which are the largest container ships ever built. Korea’s large companies employ slightly less than a quarter of the workforce and produce more than half the country’s output. 

The chaebol system as with any family business, the moment of greatest danger is when the leadership passes to the next generation. Samsung passed this test in 1987 when the founder handed over to his son, Lee Kun-hee. Now Mr Lee’s son, Jay Y. Lee, has been appointed chief operating officer of Samsung Electronics and a new transition looms. 

The South Korean model of heavy state intervention combined with an aspirational and entrepreneurial culture has brought it huge economic success. The model is being studied closely by Vietnam, Indonesia, Cambodia, Bangladesh and Mongolia as well as the Central Asian republics of Uzbekistan, Kazakhstan and Kyrgyzstan. But aside from the economic success, South Korea dominates the cultural sphere too through the immense popularity of Korean pop (K-pop) (see above video) and television dramas and soap operas in the rest of Asia, as part of the "Korean wave" phenomenon washing across Asia.

Challenges ahead for 21st century

To some extent South Korea’s economic success is dependent on China. South Korea exports more capital goods to China relative to the size of its economy than anyone else, even Germany. 

 

But, there are signs that the chaebol may be stifling innovation and entrepreneurship. They have proved expert at applying and improving existing technology, even the high technology of touch-screen smartphones. But except in some internet businesses and computer gaming, South Korea has few start-ups or cutting-edge technology firms.

South Korea lacks nationwide venture-capital businesses because each chaebol has one of its own. The firms snap up the best and brightest graduates and turn them into company men. In this way the conglomerates act like light-hogging trees in a forest: their canopy may be impressive, but it is hard for anything to grow underneath. As South Korea moves towards the technological frontier, such attitudes will have to change. Innovation is not going to come if everyone shelters from risk in the chaebol.

Furthermore, there is a huge productivity gap between South Korea’s export-oriented chaebol and small and medium-sized firms (SMEs) which dominate services. Value added per worker in small firms is less than half that in large ones. SMEs’ operating profits were 4.5% of sales in 2007, compared with about 7% for large firms. Small firms spend about half as much on research and development as large ones per unit of sales and borrow far more relative to assets. Over time, their performance seems to be getting worse. South Korea, in other words, has first-world manufacturing exporters but currently has third-world services.