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Getting Past the Middle Income Trap: The Unprecedented Challenge of the Park Geun-Hye Administration in South Korea

Yukiko Fukagawa
Professor on the Faculty of Political Science and Economics, Waseda University

Globalization, especially free trade, soaring Foreign Direct Investment (FDI), access to international finance, and freer movement of persons, has completely changed the environment for economic development. Countries and cities that have ridden the wave of globalization have managed to make newly industrialized countries within a short period of time through intensive accumulation of economic resources. The World Bank defines a newly industrialized country as a country with a per-capita income of approximately USD 1,000 to 1,200. However, many countries remain stuck at this level, with the few exception of Asian NIEs, that have managed to grow beyond this stage, escaping from the middle income trap. Among these countries, the progress of South Korea with its population of 50 million has gained much attention.

The per-capita income of South Korea, which used to be far lower than that of Mexico, Turkey, and Malaysia, reached USD 23,000 in 2012. The consistent driver of growth for South Korea has been exports, and South Korea became the eighth largest exporter in the world during 2012. According to the analysis of international organizations such as the World Bank, which raised the issue of the middle income trap, in its 2007 report, South Korea’s effort in increasing R&D expenditures has exceptionally enabled the country to evolve into a technology-oriented nation. In fact, South Korea’s ratio of R&D expenditures to GDP is the fourth highest in the OECD, and it has the fourth highest number of international patent applications following China, the US, and Japan. According to the IMD’s 2012 World Competitiveness Rankings which measure the development of the business environment for global companies, South Korea ranked 22nd, outperforming the 29th-ranked Japan. According to the World Economic Forum (WEF) which defines competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country, South Korea ranked 19th. While this fell below Japan’s ranking, it was higher than the ranking for France and Australia. South Korea’s strengths include its high education standard and intensive penetration of IT in the socieety, which have reinforced its image as a technology-oriented nation.

However, social benchmarks also present a different face. According to comparable OECD statistics, South Korea fell in the bottom-ranking group along with countries including Mexico, Turkey, and Hungary for metrics such as the length of working hours, gender-based wage differences, and social cohesion index, which is indicated by interest towards volunteer work. According to the Gini coefficient which indicates inequality, although South Korea was ranked higher than Japan, which represents the OECD average, South Korea fell in the bottom ranking for the ratio accounted for by social policy expenditures (such as pensions) of public finances, suggesting that the stability of society has been almost wholeheartedly supported by growth. One of the characteristics of modern emerging nations in globalization today is the combination of a strong desire for growth and weak social policy, and South Korea is still no exception. While the social safety net was strengthened following the Asian currency crisis through the provision of unemployment insurance, this was only a complement to structural reform.

The Park Geun-hye administration commenced in February 2013, and the freshest aspect of this administration is not the president’s position as the first female president of South Korea, but rather the president’s goal of achieving happy society for the people and for being the first administration in history to push social policy rather than growth strategy. Certainly at the macro level, large conglomerate-affiliated companies have contributed much to growth through large investments including R&D. However, based on a policy of profits first, investments also extended overseas, and accordingly positive impact on domestic employment were rather limited. Unstable and shortened employment continued since the labor market reform under the liberal administrations of Kim Dae-jung, continued even during the Roh Moo-hyun, and improving the quality of employment became virtually neglected under the Lee Myung-bak administration with its accelerating growth policy. During that time, politicians were forced to address social policy concerns as as the deep scars left behind by the financial crisis in late 1990s, combined with recently added issues of rapid expansion of household debt, and aging. Traditionally Korean politics were dominated by disputes over the tensions with North Korea, but recently deepened conflicts between left and right have emerged in economic debates.

Contrary to the soundness of the government sector, debt in the household sector exceeded KRW 959 trillion at the end of 2012, accounting for 80% of GDP. As exports performed strongly, major companies continued to build up liquidity, and funds with nowhere else to go has led to volatility in the real estate market. In face of employment and housing uncertainties, households have had to increase borrowings for real estate and education investment. While the birth rate drops due to the younger generation delaying marriage and having children in face of employment uncertainties, more and more people born during the baby boom generation following the Korean War are beginning to retire and enjoy longer lives, making the development of sufficient pension and medical insurance systems a pressing issue. Pensions are only guaranteed for the military, civil servants, and teachers, and the minimum basic pension plan that provides less than JPY 8,000 is in need of fundamental re-design. Although the pressing issue is coming up sources of funds and prioritizing allocation, the business society comiated by big conglomerates complain that excessive tax burdens and the tightening of regulations in the name of strengthening protection of small-to-medium-size businesses destroy competitiveness, which has made the sharp conflict with calls for social distribution of funds. During the ten year liberal administration, the sunshine diplomacy was promoted to make certain people, especially younger generation feel ethnic sympathy towards North Korea. The emergence of the left wing that views the conglomerates with hostility as the old guard and the Park Chung-hee administration (father of Park Geun-hye) that established the foundation for conglomerates has served to increase the severity of social conflict.

Thus the political and economic environment has been harsh from the very beginning for the Park Geun-hye administration and its aim to achieve happy society for the people. Delays in cabinet appointments have caused setbacks for policies such as the eradication of the black economy and promotion of fair trade between large companies and small-to-medium-size businesses, and it is likely that further political maneuvering will be required to secure funding for full-fledged social security. At some point in the growth process, almost all developed countries have gone through the process of creating social distribution programs and strengthening social infrastructure, and in this aspect South Korea has truly stepped into the graduation phase of a newly industrialized country. However, there have not been any developed countries that have experienced an aging society at such an early stage, and other current emerging nations including China, Thailand and other Asian countires are also facing this problem at a stage with income levels far lower than South Korea. Although globalization has brought about an unprecedented acceleration in growth, it is also causing South Korea to face unprecedented challenges. The success or failure of the economic policies of the Park Geun-hye administration will likely have a large impact on modern emerging nations.

Yukiko Fukagawa
Professor on the Faculty of Political Science and Economics, Waseda University

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After graduating from Waseda University, she became a member of the Japan External Trade Organization (JETRO). She has been at her current position since April 2006 after working for the Long-Term Credit Bank of Japan Research Institute and serving as a professor for the Aoyama Gakuin University College of Economics and the University of Tokyo Graduate School of Arts and Sciences, College of Arts and Sciences. She was a member of the 13th Science Council of Japan. During this period she has served concurrently on a number of government committees, including the Foreign Exchange Council, the Agriculture and Forestry Council, Industrial Structure Council (as an extraordinary member), and the Korea-Japan FTA Study Group. She has completed the Yale University’s master’s degree program in international and development economics, and Waseda University’s Ph.D. program in commerce. She has also served as a visiting fellow at Korea Institute for Industrial Economics and Trade (KIET), Columbia University, and Korea University. Her coedited works include the Global Political Economy and Japan, United States, and China (Toyo Keizai Shinbunsha, 2010) and she also writes a regular column for Chosun Ilbo.