South Korea needs to improve the institutional environment if it wants to achieve sustained growth

Recently, Korea hosted an international conference in Seoul addressing sustained growth in Asia. Surprisingly, Korea’s economic growth model is quite similar to the Japanese model.

Although Korea has maintained conservative monetary policy and fiscal balance, the nation does not have sufficient resources to support its aging population.

Policymakers are concerned about Japanese-style stagnation if Korea cannot maintain a moderate rate of growth in the coming years. Experts have talked about potential new sources of growth, other than capital and labor, and suggested improving the institutional environment as an alternative.

As demonstrated in developing and advanced economies around world, reforming institutions that govern labor, financial and product markets enhances growth by making resource allocation more efficient.

Why did Korea follow the Japanese model of growth? Interestingly, Korea’s leading policymakers -- mostly economists -- earned their doctoral degrees at universities in the US and Europe. However, changes in Korea’s population growth rate, industry structure, GDP growth rate, and inflation rate since the 1980s are quite similar to those Japan has experienced since the 1960s.

For several decades, big corporations did not dare to expand investment, production, and have reluctant to spend more on procurement from their suppliers. GDP growth rates have gradually declined in recent decades. This pattern of growth is very much the same as Japan in 20 years apart.

While living in the US over three decades, I had mixed feelings of surprise and regret during my visits to Korea. Economic growth, market concentration and retiring traditional craft products have all happened at remarkable speed. Nevertheless, the culture of Koreans’ daily lives have remained homogeneous.

Korean culture is more similar to Japanese culture in many aspects than it is to Western culture. Institutions governing Korean society appear to have not changed much from those of the Japanese colonial rule. When the 1997 financial crisis hit Korea and Asia, I thought of a Korean man wearing a “gat,” a traditional hat of gentry class men worn during the Yi Dynasty, and a gentleman’s suit of English speaking nations.

The culture of everyday life — ways of thinking and behaving — does not change in one year or two. It forms institutions, and institutions constrain everyday life. Koreans’ approach to the nuclear family is not unrelated to the declining birth rate. The institution of the Korean nuclear family defined choices of potential mothers regarding the costs of child rearing. Availability of day care facilities could have generated starkly different outcomes. Simply put, Korea welcomed western lifestyles without fully understanding western culture, related institutions of child care, family and supporting policies.

Improving the institutional environment is a must for a sustained growth. Identifying quality institutions being demanded by this generation is the first task required of policymakers. Introducing proper incentives is another important task to direct behavior of economic agents, consumers and producers alike. Moreover, implementation of institutional reforms requires shared risk-taking among key stakeholders, including government, corporations, citizens and others. 


By Annabel D. Lee

International Consultant and Visiting Professor at KDI School of Public Policy and Management