Comment on “Korea's Growth Performance: Past and Future”

Abstract

The Republic of Korea (henceforth Korea) has shown a remarkable economic performance during the past half century. Although the economy was devastated suddenly by the financial crises in 1997–1998 and 2008–2009, it has managed to recover quickly. The startling performance of the Korean economy has raised many challenging questions on the main features of Korea's development strategy. Noland (2012) provides a succinct but informative analysis of Korea's growth performance and analyzes the applicability of its development strategy to other developing countries. The paper also discusses the major challenges facing the Korean economy in sustaining its superior economic performance. Noland's analysis of Korea's growth performance is built on a proposition that it has followed a process of “catching-up.” As in other developing countries, Korea started its development process with a low initial level of output relative to its own long-run potential (or steady-state) level of output. The gap of the existing physical and human capital stock and productivity from their long-run levels provided the opportunity for rapid catching-up that could take place via high rates of physical and human capital accumulation and technology diffusion from advanced economies. However, an important question is, what are the factors that help realize the large potential for catching-up? The growth literature shows that they consist of “good fundamentals” such as a high saving rate, strong human capital, a high degree of trade openness, the maintenance of good institutions (less corruption), and prudent fiscal and monetary management. A number of papers, including my own work (Radelet et al., 2001; Lee, 2005), show that Korea's rapid catch-up over the last 40 years is largely attributed to these “good fundamentals.” Noland discusses the role that some of these “good fundamentals,” such as the high saving rate and strong human capital, have played for Korea's economic growth, but provides little consideration of other factors – notably international trade. The Korean government's policies toward export orientation were largely effective in pushing the pace of change in comparative advantage. Free trade provided access to cheap imported intermediate goods, larger markets, and advanced technologies that were critical for its rapid industrialization. The Korean economy has also maintained relative macroeconomic stability, although it has suffered from severe crises as its high openness made the economy vulnerable to external shocks. Noland (2012) argues that the “Korean model” is “unlikely to be reproducible elsewhere” due to (irreproducible) initial conditions such as Korea's high human capital endowment, its lack of natural resources, and its equal income distribution due to land reform. However, to the extent that Korea's growth performance is explained within the framework of a standard neoclassical growth model or an extended model incorporating the role of technology absorption and innovation, Korea's rapid growth cannot be considered as the result of a unique model of economic development. It would be reproducible in many other developing countries if they were able to embrace policies to build the same “good fundamentals.” It is true that with good human capital, Korea was well positioned for rapid economic growth. But Korea's high level of human capital endowment in 1960 was also observed in other Asian economies. The average years of schooling of the population over 15 years old in Korea in 1960 was similar to that in the Philippines. Human capital can be built up, albeit over a long time, by government efforts. The physical characteristics of a country such as its natural resource intensity and its political environment such as that of instigating land reform are not easily replicable. Nevertheless, I believe that the Korean or East Asian record is broadly transferable to many other developing countries. Noland rightly points out productivity growth is a key challenge for Korea's sustained growth in the future. Korea's swift “catch-up” process is attributed to physical and human capital accumulation for the most part, rather than to total factor productivity growth. Specifically, the poor productivity performance in the service industries, such as finance, construction, and wholesale and retail trade sectors, hampers overall productivity growth in the Korean economy. Thus, as pointed out, service sector liberalization and capital and labor market reform are needed to increase productivity in the service sectors. How the Korean economy can sustain strong growth and job creation must depend on small- and medium-size enterprises in the service industries. The paper also provides good assessments of the possible impacts of unification with North Korea. It would be useful to first discuss whether unification could occur in the immediate future, and explain what risk factors from North Korea can significantly affect the South Korean economy, especially considering that the North Korean leadership succession process may pose significant challenges and risks for both Koreas.