2008-03-06 18:05:11
Korea needs a new development paradigm
The following is the 12th installment in a series of articles intended to analyze the external and internal challenges facing Korea's new government. We will invite foreign and Korean experts to this project, hoping that their insightful analyses will help policymakers craft a new national strategy to meet these challenges. - Ed.
The Lee Myung-Bak government's vision of Korea in the 21st century calls for national advancement based on a free democracy and market economic system. He declared the year 2008 as the first year for national advancement.
It is evident that national advancement is the natural direction Korea should take, since it has succeeded in achieving industrialization and democratization within a short amount of time. However, the problem is that succeeding in national advancement is not an easy task - especially considering that there was only one nation in the entire 20th century that moved to a developed country from a developing country.
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Another problem is that time is running out for Korea to become a developed country. This is because Korea will become an aged society near 2019. When this happens, some economists forecast the potential growth rate to fall below 2 percent. This means that unless Korea becomes a developed country before 2019, it will likely never move up to developed-country status.
Time is of the essence. Korea's potential growth rate has already fallen below 5 percent, which is the required average growth rate to attain a per capita GDP of $30,000 - a necessary condition for an economically developed country. Therefore, the most urgent task Korea faces is to raise potential growth over 5 percent, which is historically extremely challenging for an economy as large as Korea's. Korea currently ranks 13th in world GDP.
A new development system
President Lee's new national development system, if successful, will enable Korea to achieve a grand second take-off for national advancement. National advancement implies the processes a nation undertakes to have national sectors - political, economical, societal, cultural, social welfare and legal - reach those of developed countries. However, such a national surge requires not only revolutionary change, but also a great transformation in the way people think.
It will indeed be a challenging task. Citizens of Korea have been brainwashed over the last 10 years to think that equality and distribution are more valuable than efficiency and growth. It will also be very difficult to reform trade unions, which are accustomed to illegal and violent strikes.
Concerning changes in national systems, advancing the country's economic system will be the most urgent task. This is because national sectors can not move forward without the economy taking the first step.
Economic advancement - the attainment of a per capita GDP of $30,000 - is impossible without great change in our economic system. Korea needs a new economic paradigm.
The new economic paradigm
The new economic paradigm implies a complete shift in our economic systems. This is well summarized by the new government motto: "Small government and large markets." Firstly, we have to change the nature of growth, from quantity-based growth, depending on the input of production factors, to quality-based growth, based on productivity. In order to do this, we need to dramatically increase the level of research and development investment, the manpower in high-tech industries and the openness of the economy.
Secondly, we have to move from a government-initiated economy to a market-oriented economy. This also means that the government must undertake market-friendly policies instead of anti-market policies. In order to do this, we have to make the government small and efficient. More specifically, we have to reduce the size of government and the number of civil servants. Under this rationale, it is obvious why the new government tried to reduce the size of the government from 18 ministries to 13 ministries.
But due to strong objections from opposition parties, and as the result of political negotiations, the new government ended up with 15 ministries. We also have to streamline regulations. The new government has promised to streamline regulations on a large scale.
We also have to reduce the size of the government's budget. The new government promised to cut the budget by 10 percent.
Privatization of public corporations is also necessary. This is because a big government tends to intervene in the operation of market forces, distorting the distribution of resources in the economy. Market-friendly policies include abolishing or reducing regulations on chaebol and capital-region regulations. The government should also decrease, not increase, environmental regulations.
They also include reducing the tax burden on corporations, real-estate tax, income tax and estate tax, et cetera. For example, the new government plans to reduce corporation tax rates by 5 percent and reduce capital gains taxes.
It will be possible for the central government to reduce the burden of the comprehensive real estate tax later, even though the government is very careful to do so now because of possible increases in housing prices.
Thirdly, we have to change the welfare policy from "growth through welfare" to "welfare through growth." It is important to balance growth and distribution.
However, it is not possible to achieve high growth through redistribution and social welfare. Such policies always reduce corporate investment and overly burden high income classes. That, in turn, reduces economic growth, damaging lower income classes.
Growth reduces unemployment and increases tax revenues. The government will be able to take care of lower income classes more effectively with increased tax revenues. This means that while balancing growth and welfare, before the government determines welfare spending and policies, it should first focus on sound economic growth.
Fourthly, we have to change the policy of balanced local development from a top-down balance-oriented structure, to sustainable local development. The hitherto balanced local development - which depended on heavy regulations on capital-region investment, the transfer of the capital, the transfer of public corporations to local regions and wasted tax revenues - only increased imbalances between the capital and local regions.
Therefore, we need to reduce capital-region regulations so that the capital region can grow more freely, which again will help local regions grow. At the same time we have to provide local regions with incentives for corporate investments. Without man-power, companies will not invest in local regions.
Local regions must be allowed to have their own education systems. The central government must also give more autonomy to the local governments.
The new government promised to reorganize the local autonomy system, in a way that the size of localities will be enlarged so that the entire nation will be divided into five large economic zones. This is because the size of local governments must be larger than a certain minimum scale, in order for it to have full autonomy in terms of developmental policies and taxing power.
The new government will also encourage Seoul to raise competitiveness against rival capital cities of other countries by removing unnecessary regulations on investment.
Fifth, we have to change our attitude towards economics from the an inward-looking to an outward-looking approach. Economies are global. All national markets are very much open and well connected to each other. In this open system, the definition of monopoly or oligopoly must be changed. A company that used to enjoy monopolistic power in closed markets can no longer do so in the global market. The new government should remove all regulations on the chaebol that used to effectively cornered them against other countries' large multinational companies.
Restrictions include regulations on total volume of investment of chaebol subsidiaries and on corporate governance. In the outward-looking approach, we should regard foreign labor markets and foreign natural resources as our own. Thus, the new government should encourage our workers to seek jobs in international markets, and give Korean companies incentives to actively participate in exploiting natural resources worldwide.
President Lee indicated that the new prime minister should play an active role in these areas.
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Raising the potential growth rate
In order to reach per capita GDP of $30,000 before 2019, the economy has to grow at least 5 percent annually for the next ten years. In order to do this, we have to raise the potential growth rate, which has already fallen to below 5 percent - and will keep falling if no action is taken. In order to raise the potential growth rate, the new government has to increase the factors which influence it. Such factors include the quantity and the quality of labor, and the quantity and the quality of capital. Firstly, in order to raise the quantity of labor - which is shrinking due to the very low birth rate - the new government has to find ways to increase the birth rate and to utilize the elderly. Solutions will include improving nursery systems, education subsidies, and so on.
Employing more foreign workers will also help ease the problems. More flexible labor markets will be required, as well.
Secondly, in order to raise the quality of labor, the new government should reform the education system. It will emphasize efficiency and excellence in education - more than it had before. It should abolish the so-called "3 No's," which did not allow independent grading systems for university preparation tests, universities' own selection tests, and donation-based recruitment.
It should also introduce self-regulating private high schools and allow full autonomy for universities concerning recruitment and academic affairs. It should also expand scholarships and government-guaranteed loans for tuition fees to give more opportunities for students of low-income classes, and introduce the public education of English in order to raise the ability of English conversation for the whole population. The new government will regard human capital as the most important factor for growth. This is because Korea has almost no natural resources.
Thirdly, in order to increase the quantity of capital, the new government should find ways to increase savings and corporate investment. It should reduce tax rates for interest income in order to increase savings. To increase investment, it should reduce regulations and reduce corporate tax rates.
In particular, it must abolish regulations on total investment volume of Chaebol and investment of industrial capital into banking sectors.
While streamlining regulations as much as possible, the government must also try to improve the transparency of corporation governance and management. It should reduce the corporate tax rate by 5 percent from the current 25 percent to 20 percent for the next five years. It must also give incentives to attract more foreign direct investment, including tax incentives and one-stop services.
Fourthly, in order to raise the quality of capital, namely productivity, the new government ought to invest more money into R&D and expand the openness of the Korean economy. It ought to try to ratify the FTA with the United States and to expand FTA agreements.
Upgrading industrial structure
Korea still depends more on traditional manufacturing industries. However, in order to move to a developed country, industrial structure will have to adapt to those of developed countries. This means that Korea will have to depend more on new growth industries, such as knowledge-based service industries, including IT, BT, ET, education, finance, culture and tourism. In order to do this, the new government will have to find ways to revitalize venture companies, which are necessary for knowledge-based service industries.
The new government should make the traditionally subsidized industries - agriculture, finance, education and environment - into future growth engines. Subsidies for these industries should be reduced and their markets should be more open.
Finally, the new government must build a great Korean canal to improve the transportation infrastructure. There is intense debate concerning the economic validity of the network of canals. The government so far has failed to persuade Korean the population that the economic benefits outweigh the huge costs. However, a network of canals would not only improve national transportation, but will also increase efficient use of water resources, would boost tourism, and would create jobs.
By Na Seong-lin
2008.03.05
2008.03.05
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