Japan’s economy has been in a deep funk for two decades. China is in desperate need of a new economic and political model. And yet Korea keeps going from strength to strength, and is on track to overtake Japan’s income per capita.

Korea’s economic catch-up has been nothing short of miraculous. Its income per capita has jumped from less than 20 percent of Japan’s four decades ago to 90 percent today. The catch-up vis-a-vis the U.S. is equally impressive ― from about 10 percent of U.S. income per capita in 1970 to 64 percent today.

But the “Land of the Morning Calm” faces some potential turbulence in the form of a very rapidly aging population, threats to social cohesion and the possibility of political change in North Korea. The country that has done so well needs to lift its game even further to realize its full potential and be prepared for risks ahead.

Most recently, the great strength of the Korean economy is evident in its excellent track record through the global financial and European sovereign debt crises. Korea recovered faster and more vigorously than most OECD countries and enjoys a low unemployment rate of 3.4 percent and modest government debt. Economic growth is projected at around 3 1/2 percent in 2012.

This strong performance builds on five decades of economic miracle. As the country climbed the development ladder, it graduated from low-tech to high-tech exports, and Korean companies like Samsung have become global industrial leaders.

Financial and economic crises were seized upon by the Korean government as moments for reform and relaunching economic development.

In contrast to Japan, Korea did not seek to keep its economy afloat on frequent fiscal stimulus. Korea’s public debt of 33 percent of GDP is the envy of most advanced OECD countries (whose average is 100 percent), and most notably the envy of Japan which tops the OECD list with public debt of more than 200 percent of GDP.

In its recent report, the OECD highlights a number of priorities for policy action areas to continue the catch-up process and prepare for risks ahead.

Korea’s population is ageing more rapidly than any other OECD country, reflecting its birthrate of only 1.2 children per woman, among the lowest in the world. While it now has the OECD’s third youngest population, by 2050 it will have the second oldest, imposing a heavy burden on workers to finance social spending.

To counter population ageing, it is essential to offer more work opportunities for women, whose participation in the work force is the third lowest in the OECD group, such as through better child care facilities and more family friendly work places. Older workers, who often retire at 55, are another hidden resource which could be unlocked through more flexible wage and employment systems.

There is also great scope to improve labor productivity which is only half that of the OECD’s more advanced countries. Perhaps surprisingly, a reorientation of Korea’s education is necessary here.

The OECD’s PISA study has shown Korea to have one of the OECD’s very best education systems. But in Korea there is too much emphasis on the prestige of acquiring a university higher education. This has led to an oversupply of university graduates (one-quarter of tertiary graduates under 30 are not working), and there is now a greater need for vocational training to address job shortages in this area.

Like Japan before it, and China today, Korea has focused its development on the manufacturing sector, and forgotten the importance of the services sector, whose productivity is about half that of manufacturing. Services could become a dynamic second engine of growth by eliminating barriers to entry, regulatory reform, and reducing trade and investment barriers.

Korea’s growth also needs to become more inclusive. Like most OECD countries, Korea is experiencing a widening gap between rich and poor, and rising “relative poverty,” meaning the share of the population living on less than half the median wage.

Contributing to these disturbing trends is the fact that one-third of all employees have non-regular contracts and two-thirds are not covered by the social insurance systems. It is necessary to achieve more balanced treatment between regular and non-regular workers.

Well-targeted increases in social spending, in particular for low income groups, are also necessary.

Korea has the chance to be located between the two giants of Japan and China, and to benefit from their many experiences. Japan has experienced weak leadership for more than two decades, and its economy and society are suffering from it. As the World Bank highlighted in its recent “China 2030,” while it is urgent for China to implement a new development strategy, China also now has many vested interests which are stifling necessary reforms.

Korea does not have the luxury of avoiding reform, and has demonstrated the capacity to lead in areas like information and communications technology, and education. More recently, President Lee showed admirable leadership when he proclaimed “Low Carbon, Green Growth” as the vision to guide Korea’s development during the next 50 years.

It is with the benefit of such enlightened leadership that Korea could be on track to become the leading star of East Asia.

By John West

John West is editor-in-chief of MrGlobalization, and used to work at the OECD and the Asian Development Bank Institute. ― Ed.