Bracing for the East European era

Kim Byung-yeon
The author is a chair professor of economics and the head of the Institute of Future Strategy at Seoul National University.

I was intrigued by what the presidents of Hungarian state-run universities told me when they visited Seoul National University earlier this year. They said that Korean was the most popular second language their students applied to learn after English. The university presidents wished to strengthen ties with Korean universities amid the frenzy over Korea.

The Korean Wave led by K-pop is not the only reason. Proficiency in Korean helped their job qualifications. In fact, Poland and Hungary are credited for the largest year-on-year export growth for Korea until September this year. The two countries have been the biggest investment destinations for Korea over recent years. To the Czech Republic and Slovakia, Korea is the biggest non-European investor.

The Eastern bloc is on the rise. Of 27 member countries of the European Union (EU), 11 are converts to capitalism from socialism. They are populated by around 100 million combined, accounting for 22 percent of the total EU population. Their combined GDP is just 11 percent of the EU’s GDP. That means that much growth potential. As the state-led economic system lacks efficiency by about 40 percent compared to capitalism, the efficiency goes up when it shifts to capitalism. The front group on the eastern bloc dubbed the Visegrad Group — or the Czech Republic, Hungary, Poland and Slovakia — are expected to outpace Spain in GDP per capita within 20 years.

Korean companies have started to notice Eastern Europe for two primary reasons. First, they can make cheaper manufacturing bases for broader access to the European market. The labor in eastern European countries costs less than half the levels in Western Europe, although their productivity hovers at 70 to 80 percent. The difference in labor cost defines their competitiveness. The human capital of Eastern Europe is excellent. According to the World Bank, the human capital index of the Visegrad Group is at 0.71, standing between China’s 0.65 and Germany’s 0.75 and a little bit lower than 0.73 of Spain. Yet their average wage is only 53 to 75 percent of Spain and 30 to 50 percent of Germany. The average wages in Romania and Bulgaria are even lower. As they are EU members, products made in these countries can be sold in the tariff-free eurozone.

Another reason is that they can replace China for investment. China is a colossal market encompassing a rich labor force and infrastructure across all industries. To substitute China, a global manufacturer must divide the production bases across Southeast Asian countries like Vietnam, India and Eastern Europe depending on the level of industry and technology. Eastern Europe has emerged as an investment destination for high-level technologies requiring quality workers’ pools and industrial bases. This is why the location has become the Korean base in Europe for batteries, electric vehicles, nuclear plants, renewable energy and appliances. Korean investments in Eastern Europe are fueled by the two factors of the China risk and the East European competitiveness.

Eastern Europe will gain more strategic importance once Ukraine joins the EU after the war with Russia ends. Geographically, it would become the economic epicenter of Europe. Economic restoration activities accompanied by shipping and transportation constructions can make the area the most dynamic part of the EU. Advancing to Eastern Europe is important for Korean companies readying to join the projects to rebuild Ukraine.

Korea must deepen its strategic relationship with Eastern Europe. It could use the region for research and development. East Europeans are talented in basic and applied sciences. Thanks to the low labor cost, R&D activities can be conducted more cheaply than in Western Europe. Poland and Hungary are home to 19 and 15 Nobel Prize laureates, respectively, more than 29 of Japan when combined. Post-communism youths are as open and venturous as their peers in Western Europe.

The government must leverage corporate and the K-wave power in Eastern Europe to build on national-level strategic interests. The region can be an important asset to Korea on diplomatic, economic and security fronts. Seoul must devise a strategy to create economic synergy and strengthen security alliances with the countries in the region. The government must assign an R&D budget after assessing the level and scale of the talent pool needed for the industry and the science and technology field. Korea can help buttress democracy in the region, too. A policymaker from an East European country frankly told me that South Korea poses as a more appealing and safer investor than China due to the risks related to the latter. Does the Korean government have a strategy to pivot Eastern Europe?

Sadly, Korea lacks a longer-term national strategy. It is the world’s 10th biggest economy, with supremacy in high-tech hardware and soft power. But the state lacks a strategy to capitalize on the power. Politics are engrossed in never-ending wrangling, and the government is too busy to address day-to-day challenges. Korea, like a ship sailing without a map, sways at every wave. The country must build a national strategy to use Eastern Europe as a pillar before it is too late.

Translation by the Korea JoongAng Daily staff.