Power to the people

It is no longer news that the Korean economy is looking at a lengthy slowdown that is structural, not temporary. The economy grew by an average annual rate of 8 percent between 1961 and 2007, the fastest among the members of the Organization for Economic Cooperation and Development (OECD). From 2007 to 2013, Korea ranked fifth in growth on the OECD scale. Korea ranked high in the OECD for investment, education, research and development - the typical recipe for growth - yet did not get what it expected from its investments. And things could be heading further south, undermining per capita income.

If per capita income is stuck in a bottleneck, an economy can collapse. The socialist block of the former Soviet Union and Eastern European nations crumbled when per capita income could not exceed $10,000. The per capita income of Greece, which peaked at over $30,000, has sunk to just above $20,000. Italy’s per capita income is stuck at $30,000. Japan, whose GDP per person exceeded $40,000 during its heyday in the mid-1990s, has slipped into the $30,000 range.

There is a common thread to these countries and their economies. Their civil society credentials - the level of freedom, creativity, cleanness and credibility - were lacking. The old school of economics believed that an economy can prosper primarily through sustained levels of investment, education and research and development. A newer school believes good systems and a particular set of cultural values create economic growth. When an economy is rooted in a solid system and a good culture, free will and creativity will bear the fruit of innovation. Only in such a habitat can an economy be able to generate per capita GNPs of over $40,000.

During a transitional period, the state can play an important role driving economic growth by pooling resources and appropriating them. But statism - in which the central government commands everything - can end up crippling innovation. To get to the innovative stage, the power of the state needs to be passed on to the private sector so that autonomy can nurture creativity. Japan failed to elevate itself despite high levels of craftsmanship and technology precisely because of such deficiencies.

Korea is little different. Its primitive approach to civil society is what causes its economy to run at high cost and low efficiency. Policy makers still cling to the old school’s tenets and fail to understand the fundamental problems. That is why the only solutions they come up with to economic challenges are pork-barrel projects and fiscal stimuli. Policies are interrupted and changed every five years after an election puts in a new president and government and that has come at the cost of messing up our economy.

Korea is an expert at statism. For example, the government rates independent studies. No other country has quasi-government organizations rate academic journals. There is a lot of work involved in the ranking of academic journals. The number of reviewers and regional appropriations of publishers need to be scrutinized for objective assessments of the quality of scholarly findings and publications. Journal reviews in the United States are done independently by academic circles. University research work in Britain is reviewed by accredited scholars. Professors do not have to waste time preparing and filling out all kinds of documents just to get their papers reviewed as in Korea. To champion a creative economy in a country where statism is prevalent is like expecting innovation in a socialist economy.

Statism hampers progress in civil society. Koreans tend to be suspicious of others. To raise trust, people need to talk things out and come to an agreement or compromise. But the trust-building process is entirely ignored. The state and the prosecutors or courts make all the decisions for them. Civilians have little chance to improve their aptitude for solving problems or conflicts amongst themselves. They even require the judiciary or administrative mediation in order to pick a representative of an apartment block.

A weak sense of citizenship undermines economic growth. Back in the mid-1990s, Russian businessmen were asked if they would buy a product if a total stranger offered it at 10 percent discount. Only 1.4 percent of Russians said they would buy it. When the same question was asked to Polish people, 42.5 percent answered positively. During the transition from a socialist to capitalist economy, Russians saw their national income plunge by more than 40 percent. The fall stopped at 10 percent for Poland. Russians were distrustful of one another and demanded a number of documents to do any business. The economy was inefficient as a result. Dominant state power and low credibility are also a recipe for corruption. One study said Korea’s annual economic growth rate would gain an extra 1.3 percentage points if Korea’s confidence and cleanness reached America’s level.

Korea needs to change its growth engines. It must build its civil society, accept the autonomy and confidence of its individuals. The government and legislature cut incentives for charitable donations - which are a barometer of a true civil society. When the spirit and power of citizenship is activated, the economy will regain life.

Translation by the Korea JoognAng Daily staff JoongAng Ilbo, July 30, Page 31

*The author is an economics professor at Seoul National University.

BY Kim Byung-yeon