[Face to face dialogue]Innovation can save ‘Sandwich Korea’

Mar 21,2007
“Sandwich Korea” has become the latest buzzword among business people here. It refers to being “sandwiched” between developing countries such as China, and economically advanced nations like Japan.
Two economics scholars from Korea and the United States, Jung Chang-young, president of Yonsei University, and Robert Glenn Hubbard, dean of the Columbia Business School, met at a hotel in central Seoul on March 15 to discuss this and other global economic issues.
Mr. Jung said the government and corporate sectors together should invest more to enhance technologies to develop value-added products so that Korean companies can outpace those in less developed nations. Mr. Hubbard asserted that the government should refrain from “controlling the economy” to create a more corporate-friendly environment.
Mr. Jung, who took a masters degree and a Ph.D. in economics from the University of Southern California, is a renowned expert in economic development theory. He was inaugurated as Yonsei president in 2004. Mr. Hubbard, who took the Columbia dean post in 2004, is an outspoken advocate of tax cuts. He served two years as chairman of the Council of Economic Advisors at the White House, starting in 2001. He is a graduate of the University of Central Florida and took a masters degree and a Ph.D. from Harvard University. Mr. Hubbard was in Korea to sign an academic partnership between the business schools of both universities. The following are excerpts from their conversation.

Jung Chang-young: Lead-ers of Korea’s top conglomerates, such as Samsung Group Chairman Lee Kun-hee and SK Group Chairman Chey Tae-won, compare Korea to a sandwich jammed between China and Japan. The social repercussions of the questions they raise are huge. Korean manufacturers have higher costs than China, a country that is economically behind. Retaining a high-cost production system will make it difficult for Korea to overtake Japan, which has achieved low-cost, high-quality production through a decade-long struggle. By contrast, Chinese firms are moving quickly toward the low-cost, high-quality model, ditching its renowned low-cost, medium-quality production policy. That means Chinese firms are increasingly stealing the wind from Korean competitors. Should the trend continue, Korea will fail to achieve an advanced economy.

Robert Glenn Hubbard: China’s challenge is having an immense impact not only on Korea but also on the United States. One thing for sure is the fact that China has a weaker financial infrastructure than Korea, which plans to develop itself into the financial hub of Asia and strive to globalize its financial structures. That means the China threat can be an opportunity for the Korean economy ― especially when Korea puts more focus on intelligence-oriented sectors, such as education, finance and information technology.

Mr. Jung: To escape its sandwich status, Korea should enhance its industrial competitiveness by revising the quality of Korean-made products. That will be possible through advanced technology, which can be achieved through aggressive investment in research and development. The cost for R&D can come from manufacturing reform. For example, companies should build a consensus among staff to spend profits on technology development rather than shareholder benefits or labor cost hikes. You can learn a lesson from Toyota of Japan, which has frozen wages and drastically invested in technology amid high profitability.

Mr. Hubbard: Both government and business should bring innovation. The government will have to create a more corporate friendly environment and offer training to enhance the competitiveness of corporate workers and the jobless. Market opening is equally crucial for smaller firms. Efforts to expand global shares will help improve their competitiveness. With that approach, many companies in the Midwestern part of America have scored great coups.

Mr. Jung: For the Korean economy to make another leap, companies need to more seriously deliberate on the current situation. Most companies today seem to manage “not to go bankrupt” but they fail to add visible value. Now is the time to arm themselves with an innovative venture spirit.

Mr. Hubbard: In order for Korea to see more foreign investment, it will have to resolve labor-management conflicts and lift unnecessary restrictions. Now that the country is facing a presidential election late this year, the government should be an “enabler” but not a “controller.”

Mr. Jung: The comprehensive real estate tax has become a hot potato in Korea. For some apartments, owners are forced to pay this year as much as a third more than they did last year. Disputes surrounding the tax system are mounting and I wonder what you think of this.

Mr. Hubbard: There are various sources of liquidity that spurred real estate prices up. Global liquidity comes from the fact that people in the Middle East and Asia tend to save a large portion of their earnings. Global hedge fund assets have influenced liquidity, too. In my opinion, Korea has undergone a great hike in property prices mainly due to the outflow of liquidity and lower interest rates. In this regard, the country will make a more sophisticated and subtle analysis of the trend. The indiscriminate application of taxes to cool the overheated real estate market seems undesirable. Tax is a “blunt instrument” (when used as a countermeasure).

Mr. Jung: International attention is currently focused on the issue of whether the so-called “yen carry trade” will disappear (borrowing yen to invest in higher-yielding assets). It is predictable that the demand for the yen carry trade will decrease to a large extent, with the Bank of Japan, the country’s central bank, raising the interest rate minimally last month. However, Japan’s interest rate is still lower by more than 2 percentage points than other developed countries. For this reason, it may take time for the carry trade trend to be entirely reversed. Even if it unwinds, its impact on the international financial market will be limited. It is certain that the yen carry trade contributed to global liquidity expansion, but it was not a single source of liquidity. Bigger sources were Asian countries, such as China’s large foreign exchange reserve, and the Middle East’s immense current account surplus.

Mr. Hubbard: Yen carry trade can be considered a risk factor in the global economy, but I project the issue will be resolved gradually. And I don’t see it as a sole cause that will shock the globe.

By Suh Kyung-ho JoongAng Ilbo [spring@joongang.co.kr]

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