[Column] In desperate need of a Korean revolution

Weakness in non-economic foundations cannot be cured overnight. Reforms must be carried out with a farsighted and consistent resolve.

Cho Yoon-je

The author, an honorary professor of Sogang University, is a member of the Monetary Policy Board of the Bank of Korea. Korea has miraculously transformed from one of the world’s poorest countries to close to being in the top 10 economies over the last 70 years. But prospects for its future are not so bright. It seems that drawing up better economic policies alone can hardly ensure sustainable growth for the economy. For a further leap forward, not only Korea’s economic foundations, but also its non-economic infrastructure should be revamped. The country must tackle the new challenge today.

An economy prospers on two pillars: Economic and non-economic infrastructure. Economic foundations include human and physical capital, manufacturing facilities, industrial technology, structures like bridges and ports, financial systems and the government’s fiscal, tax and policy frameworks. Non-economic factors cover the intelligence level of a country, rationality in its decision-making structure, culture and ethos, civic awareness, national governance, social trust, the capability and morality of leaders, fairness in the judiciary system, politics and the media culture.

Korea was among the poorest countries in the world until the 1960s. But its economic and non-economic fundamentals were stronger than African and Southeast Asian countries who were richer at the time. In fact, Korea had maintained the centralized government system for at least 1,500 years with a rich academic heritage.

Korea has not experienced the kind of racial or religious conflict common among newly independent countries. It also has kept up good human resources and achieved a relative balance in income and wealth distribution through land reform and other innovative steps — also a distinctive feature in global comparison. In their joint 1967 publication entitled “Society, Politics, and Economic Development: A Quantitative Approach,” authors Irma Adelman and Cynthia Morris reached the conclusion that the Korean per capita income should be at least five times bigger than the level at the time, given its human and systematic foundations and income distribution levels.

After its economic policy framework took the right direction in the 1960s, Korea bolstered investment in manufacturing facilities and infrastructure along with system upgrades. The effort fed its economic growth and helped fill the gap in income and a gap between economic and non-economic foundations. Upon discovering weaknesses in economic foundations amid a fast increase in income, the government implemented a set of economic reforms to pave the way for a further rise in income. Korea managed to cover most of the gaps during the economic boom in the 1980s.

But Korea’s economic foundations failed to keep up with the superficial leap through joining the OECD and acceleration in globalization and liberalization in the 1990s, which led to a foreign reserve crisis. Sweeping economic reforms, restructuring in the corporate and financial sectors, dwindling corporate debt and improved governance structure in the wake of international bailout in 1997 have helped strengthen its economic fundamentals to drive more income growth.

But it seems that economic or non-economic bases of the country today can hardly sustain the income and spending levels of the people. The economic foundations are being challenged by complicated factors — such as the demographic cliff from its ultra-low birth rate, overinflated real estate prices, mounting household debt, long-delayed restructuring in ailing companies, overly rigid labor sector, economic concentration on a few chaebol, deteriorated wealth and income distribution and stagnated productivity, to name a few — to only restrain its economic competitiveness and a further growth. After the 2000s, pressure for reform from outside weakened while domestic politics remained preoccupied with ideological battles. That deferred a much-needed overhaul.

The biggest constraint on further progress in the economy stems from the weakness in the country’s non-economic foundations. Income has nearly reached the level of developed countries, but intelligence and rationality, efficiency in systems and organizational operation, appointment and reward systems, social order and political behavior lag far behind. The judicial system, trust in public institutions and social capital are closer to the levels of a developing category.

At a time when novel technologies are born each day and technology transfer is sped up by globalization and digital revolution, emerging economies are catching up, and fast. Korea needs a revolutionary overhaul not just in economic policy but across society. The reward, incentive, and punishment structure must be fundamentally redesigned along with a colossal revamp of our national governance structure.

Weakness in non-economic foundations cannot be cured overnight. Reforms must be carried out with a farsighted and consistent resolve.

Translation by the Korea JoongAng Daily staff.