At an economic crossroadsThere is nothing new in the latest report on South Korea from McKinsey Global Institute and a recent feature in the U.S. magazine Foreign Policy. The two articles - the former titled “Beyond Korean Style: Shaping a New Economic Growth Formula” and the latter “Stalled Miracle” - highlighted the slow-moving growth of what was once one of the world’s most resilient economies, and the challenges of a collapsing middle class and rapidly aging society.
The biggest danger and downside risk for the economy is the shrinking middle class - heavily burdened with housing and education costs. In the meantime, the export-oriented economy powered by manufacturing still generates growth, albeit less meaningful and at a snail’s pace, helping little to boost employment as more companies shift industrial operations abroad. Apart from a handful of household names - Samsung Electronics, LG Electronics and Hyundai Motor - most local companies lag far behind in global competitiveness.
Some shrugged off the analysis as a fear-based marketing strategy. It had warned of debt profligacy of large companies 15 years ago in its first report on Korea which was a harbinger of the country’s economic crisis that exacted an international bailout.
Like it or not, the most recent report hit the nail on the head. It addressed too fine a point that we chose to neglect. The consulting agency warned that the Korean economy is like a frog in a pot of slowly boiling water, dying without sensing its fatal end. It said the stalled economic growth engine is a bigger danger than the nuclear threat from North Korea. The economy cannot be sustained if it does not reinvent itself.
The prescriptions are simple. Korea must revive the middle class, increase domestic demand and develop new growth engines. Regulations should be eased and the service sector reinvigorated. Large companies like Samsung and LG must create vocational schools so Koreans no longer waste so many resources on university educations that no longer are a guarantee of decent paying jobs.
Yet authorities are bashing companies. South Korea’s per capita income has been stuck at $20,000 for five years. In contrast, Singapore’s per capita income doubled over 13 years to $56,532. While South Korea dragged its feet on liberalizing and building the service sector, Singapore has allowed casinos, revamped education and opened up the services sector. The different path of the two countries spells out our current direction and the task ahead.