South Korea’s economic growth and subsequent structural transformation have been spectacular, moving from low wage, labour-intensive industries to increasingly complex, capital- and technology-intensive ones.
Today, the country vies to be a world leader in innovation, focusing its energies on knowledge-intensive sectors, including cultural industries. Politically, it has moved away from authoritarianism. South Koreans, notwithstanding their strong ethnic identity, are also embracing the idea of a multicultural society. In short, it seems to have achieved it all in just five decades.
But what is less obvious is that social demands have increased while the growth in income has not kept pace with social spending on education, healthcare and welfare. Labour markets are in turmoil, with the rapid increase of temporary, part-time and contract workers impacting the community as a whole. While the broader narrative can mostly explain the rise of South Korea, we don’t have a narrative that explains how to sustain an upwardly mobile economy as new competitors, saturated markets, and domestic economic and social demands increase. What might that narrative contain?
One priority for South Korea is to embrace migrants, who come mostly from Asia. The foreign population roughly doubled between 2005 and 2010 to about one million. Consequently, South Korea is faced with new kinds of social challenges in absorbing, integrating and politically managing foreigners in relatively unskilled 3-D (dirty, dangerous and demeaning) jobs. At the same time, the global war for talent pits South Korea against other innovation-driven countries in attracting highly skilled professionals, including students, for the continued expansion of high-technology sectors.
Clearly, new growth engines have to be fostered through innovation and nurturing new sectors such as green technologies and high-value services such as cultural industries. While South Korea does well on a number of innovation indices, there are some weak areas. The country’s science and technology innovation capacity in 2012 was ranked 9th among 30 OECD countries, with high marks for innovation activities and resources, but quite low scores in innovation environment.
By better mobilising underutilised labour such as women and the elderly, South Korea could partly address its labour shortage. Currently, the female participation rate is considerably lower than the OECD average. Gradually phasing out the present system of mandatory retirement could keep senior workers employed, while better vocational education could reduce youth unemployment. Providing affordable childcare services, full-day schooling options, better benefits for parental and maternity leave as well as flexible employment would likely encourage female labour market participation.
More broadly, South Korea needs to move away from low-value services for the domestic market to high-value, tradable business services such as healthcare, education, finance, content creation and software, MICE (meetings, incentives, conventions and events) and tourism. With 40 Asian cities within a two-hour flight, South Korea could export a wide range of services. The supply of foreign human capital will be critical to this endeavour.
As it seeks out new sources of growth, South Korea also needs to share its prosperity better. Inequality between chaebols and SMEs and between regular and informal workers is widely acknowledged. Both productivity and wages in SMEs lag substantially behind large firms. Only about half of non-regular workers are covered by the various national pension, health and employment insurance schemes, compared to 95 per cent of regular workers.
Similarly, how to tame the country’s conglomerates — the chaebols — without killing the proverbial golden goose needs to be carefully addressed. Moral hazard around chaebols and their supporting banks has led to heavy borrowing, heightened controlling-family interests, and raised both the debt–equity ratio and the level of non-performing assets. Key areas of intervention could include curtailing family management control, separating chaebol-controlled financial institutions from commerce, monitoring inter-subsidiary business deals to prevent unfair practices, improving corporate governance to allow non-family members to participate more effectively, and imposing severe penalties on businesses for theft and accounting fraud.
Creeping inequality is a serious concern since South Korea has been relatively egalitarian over the course of its economic development. South Korea needs to increase social spending, which is currently less than half the OECD average. Enhancing pensions and social security, increasing access to medical care, reducing college tuition, and providing free preschool education and better support for after school day care will consolidate the drive toward shared prosperity.
The dilemma, of course, is funding these programs without increasing the tax burden. Eliminating the underground economy and trimming tax deductions for high-income earners could partly offset the expected rise in public pension spending and help the middle class. Whatever strategy their country embraces, by resolving the challenges of capitalist maturity South Koreans will be better placed to enjoy the fruits of their hard earned prosperity well into the future.
Anthony P. D’Costa is Chair and Professor of Contemporary Indian Studies in the Development Studies Program at the University of Melbourne. He is the editor of “After-Development Dynamics: South Korea’s Contemporary Engagement with Asia” (OUP 2015) and author of “International Mobility, Global Capitalism, and Changing Structures of Accumulation: Transforming the Japan-India IT Relationship” (Routledge 2016).
An extended version of this article first appeared here at Global Asia.
South Koreans pay a price for their economic growth because their bosses constantly fought against labor unions and better wages and working conditions even though the country has prosper and became an economic powerhouse. They also need to put the youth to work as full-time permanent workers. The September 2015 talk about how the youth of South Korea were facing dismal employment prospects even though the Korean companies had recovered from the 1990s economic meltdown. The youth had put off getting married and having kids.
Of course what good is putting them back to work if the automation of jobs continued to increase and those robots even do the dirty, dangerous, demeaning jobs?
Yes those chaebols need to be reined in and if necessary be broken up or dissolved so there is more competition and creation of new companies so the chaebols are not so powerful.
When a country (the Republic of Korea) shares a peninsula with another state (the DPRK) whose people share the same ethnicity, language and history, but which invaded it a decade or so earlier and remains committed to its destruction as a separate entity, it is surely a little unconvincing to claim that that country has a ‘conducive geopolitical environment’.
If the Republic of Korea had enjoyed such a favourable environment, it surely would not have needed thousands of foreign troops to defend it.
It would be more accurate to say that the ROK achieved high economic growth in the face of a forbidding geopolitical environment.
In a short piece such as this it is difficult to convey everything in detail. You are right that the geopolitical environment does not seem stable because of North Korea. But my reference to “conducive” was the period after the Korean War when SK was effectively protected by the US. In fact both Japan and SK as well as Taiwan all benefited from the US security umbrella and the US acting as a captive market for East Asian goods. NK then geopolitically provided the raison detre for SK’s economic growth. Comparatively speaking other developing countries enjoyed no such market access and instead tried to find a way between the two camps of the Cold War.
The Republic of Korea was also occupied by thousands of foreign troops as well when you look at its history.
If you mean post Korean War then yes. And this is what I referred to in providing a favorable economic environment as it reduced Korea’s defense budget. Korea was also occupied by Japan but that has different implications. Colonial exploitation notwithstanding land reforms initiated by the colonial government unwittingly placed Korea on a good footing as it created egalitarianism from the get go. So economic transformation was historically conditioned by many factors and there is no recipe to follow.
I was referring to Chinese, Japanese, and Russian troops as well.
Thanks for an informative summary about the successes and challenges that the ROK has. I have two questions and three comments.
Questions: what are cultural industries? Eg, movies, television, music?
As young people are putting off getting married and often getting hired into part time jobs is the birth rate declining in the ROK?
Comments: IF women and young people are being hired into part time, lesser paid jobs, the country is facing a serious set of challenges. Will the government be able/willing to confront the chaebol and other companies engaging in these practices with enough strength to get them to change what they are doing. Otherwise, the ROK is going to face a downward spiral of chronically problematic demographics.
How can more social services be offered without raising taxes? SOMEBODY has to pay for these things!
All of this is being played out in the context of the threat of the DPRK’s nuclear weapons programs, etc. What a challenge this is!
To answer Richard’s questions: yes those are the sectors that would comprise cultural industries. Plus there is anime, a sector that has become very important for Korea’s media industry and exports. Korean studios are doing more work for Hollywood, in addition for their own market. Witness the popularity of K-pop, something that has infiltrated even NE India!
The fertility rate is declining like Japan but the rate of increase of ageing by some estimates is faster in Korea than in Japan. The changing labor markets is not simply a chaebol problem. It’s a global trend. Chaebols are responsible for rising inequality and abuse of power. Providing employment for the young and women would mean a certain kind of social change, away from patriarchy and male-dominated society. It would also mean greater welfare to support part-time workers since this is the feature is the result of relentless competition and (thus) technological change. Taxes will have to be progressive with greater profit sharing by the chaebols.
I was referring to Chinese, Japanese, and Russian troops as well.
I doubt the chaebols will be interested in profit sharing with the workers and the companies will only be interested in progressive taxes as long as it is not them paying it.
Structurally speaking yes, chaebols will not be interested in sharing their profits. But politically they can be made to through voice and mobilization. At this juncture capital rules worldwide but not completely. Chaebols can be made to do certain things under public pressure, which needs to be mobilized. This will be the century when some adjustments will have to be made between capital and labor, between profits and wages.
As long as the chaebols can still control the government, they will not be interested in doing certain things under public pressure. Even if they do things under public pressure, they will do them only to calm the people temporarily while still keeping control.