Abstract
There is a widespread perception that the Republic of Korea’s service sector lags behind its dynamic world-class manufacturing sector. We empirically analyze the past performance of the Republic of Korea’s service sector in order to assess its prospects as an engine of growth. Our analysis resoundingly confirms the conventional wisdom of an underperforming service sector. In light of the Republic of Korea’s high income and development level, the poor performance of modern services is of particular concern. We identify a number of factors underlying the poor performance, and set forth policy recommendations for addressing them. Overall, the Republic of Korea faces a challenging but navigable road ahead in developing a high value-added service sector.
Highlights
By any measure, the Republic of Korea has been one of the most successful economies in the postwar period.1 Export-oriented industrialization endowed the country with a highly competitive manufacturing sector which produces and exports, among others, mobile phones, automobiles, electronics products, ships, and steel, to all corners of the world
The service sector’s productivity remains low compared to advanced economies—it was second lowest among Organisation for Economic Cooperation and Development (OECD) economies, after Poland—so there is plenty of scope for productivity improvement
Distance is collected from Centre d'Etudes Prospectives et d'Informations Internationales (CEPII), population and per capita gross domestic product (GDP) from Penn World 7.0, regional trade agreement from CEPII and World Trade Organization (WTO), and other data from Rose and Spiegel (2011)
Summary
The Republic of Korea has been one of the most successful economies in the postwar period. Export-oriented industrialization endowed the country with a highly competitive manufacturing sector which produces and exports, among others, mobile phones, automobiles, electronics products, ships, and steel, to all corners of the world. Put differently, developing the hitherto underdeveloped service sector can help to sustain growth at a time when the manufacturing sector is maturing and subject to growing competitive pressures from less developed countries such as the People’s Republic of China (PRC) and elsewhere. It will facilitate the Republic of Korea’s transition to a post-industrial, services-led economy. At the same time, growing income inequality points to a need to expand social spending In this connection, public services, which enhance the productivity of low-income groups through education, training, and re-training and improve equality of opportunity, are critical
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