A More Optimistic Take on the 'Seoul Consensus'

♠ Posted by Emmanuel in , at 11/17/2010 12:03:00 AM
There's an interesting article in TIME by its long-serving Asia correspondent Michael Schuman on the re-emergence of South Korea on the world stage. Potentially, it challenges notions of how the country is (still) evolving vis-a-vis what we are familiar with from heterodox economists like Alice Amsden or Ha-Joon Chang. While many would trace the 1988 Seoul Olympic Games as its coming out party, Schuman has other ideas. For him, the real story is not the previous industrialization drive which he believes met its end in the 1997/98 Asian financial crisis. Instead, it's South Korea reinventing itself as a more open society--both politically and economically. Witness the election to the highest office of the former Korean dissident and Nobel Peace Prize winner Kim Dae-Jung [RIP]. Or, consider the emergence of major Korean consumer brands like Samsung and LG for consumer electronics or carmakers like Hyundai and Kia in the commercial realm.

Hearkening to a recent post, you can say Schuman generally acknowledges there is such a thing as a "Seoul Consensus." That is, Ha-Joon Chang's criticism that this consensus does not accurately describe how South Korea developed does not account for its reinvention post-Asian financial crisis:
When I relocated from New York City to Seoul, South Korea's capital, in 1996, I found the city vibrant and fascinating, but also surprisingly provincial. Koreans preferred their fermented kimchi over any other food, and though I grew to enjoy the spicy staple, a longing for familiarity and the feebleness of my digestive system occasionally demanded a respite from the chili-laden cabbage. That proved challenging. Aside from some fast-food joints and wallet-straining restaurants at five-star hotels, foreign cuisine was hard to come by...

A few weeks ago, I returned to my old neighborhood in Seoul for the first time in 10 years, and much to my surprise[,] it wasn't the same place where I shopped in the 1990s...goodies can now readily be found at supermarkets and Costco outlets...

The results are striking. Thirty years ago, Korea was poorer than Malaysia and Mexico. Since then, its GDP per capita has surged by a factor of 10 to $17,000, more than double the levels in those countries. GDP growth was 0.2% in 2009, when much of the rest of the world was contracting, and is estimated to be 6% this year. Yet when I left Korea in 2000, it was an open question whether its success could continue. The embarrassing memories of the 1997 Asian financial crisis were still fresh, and Koreans were worrying that they would lose out to a rising China.

Over the past decade, however, Korea has reinvented itself — it's an Asian miracle again. Korea has become an innovator, an economy that doesn't just make stuff, but designs and develops products, infuses them with the latest technology, and then brands and markets them worldwide, with style and smarts. Samsung and LG, not the Japanese electronics giants, are dominating the hot new LCD-TV business. In 4G phone technology, Samsung is poised to become a leading force, while Hyundai Motor, an industry joke a decade ago, is a top-five automaker, its rising market share fueled by quality cars and nifty marketing. "'Made in Korea' used to be synonymous with cheap and imitative," says Bernie Cho, president of DFSB Kollective, a start-up that markets Korean pop music internationally. "Now it's become premium and innovative." New industries, from online games to pop music, have emerged as powerhouses. Politically as well, Korea is stepping out of Washington's shadow and becoming an influential voice in its own right. Symbolic of that new role, Seoul is hosting the G-20 summit on Nov. 11 and 12, the first Asian country to do so. This nation is a global leader-in-waiting.

Part of Korea's success is simple commitment. Koreans spend some 3.5% of their GDP on R&D, compared with 1.5% in China and less than 1% in Malaysia and India. Innovation, however, isn't something that can be conjured up in government offices or corporate boardrooms. You can tell people to work harder or build a more modern factory, but you can't order them to think better or be more creative. That change has to take place inside people's heads. In Korea, it has. Koreans have become more accepting of diversity and outside influences and quicker to shed old prejudices. Such an outlook was brought about by a fundamental (and continuing) reformation of Korean society. Koreans are breaking down the barriers that held the nation back, a process fostered by political freedom and a passionate embrace of the forces of globalization. Says Cho: "Korea has gone from being a hermit kingdom, from a closed door, to open arms." (See pictures of South Korea's brawling legislators.)

Globalization has always been the engine behind Korea's economic miracle. Beginning in the 1960s, a destitute Korea capitalized on its cheap labor to competitively export toys, shoes and other low-tech goods to consumers in the West. That jump-started income growth; as costs rose, Korea shifted into ships, microchips and other advanced products. Yet to Koreans, globalization was a one-way street. They were happy to sell things to the world, but wanted no more than the profits in return. Koreans didn't care much for foreign cars, foreign investment — or foreigners. Empty taxis would ignore my frantic hails, while locals sometimes swore at me while I walked in Seoul with my Korean-American girlfriend (now wife). Behind its crenellated walls, the Korean economy developed on its own dynamic, and boosted by their unexpected economic success, Koreans came to believe their system was special, even superior. But dangerous problems were festering. Companies were shielded from competition and heavily supported by tight links to the government and banks, allowing them to borrow and invest willy-nilly while building up frightening debt burdens. When I would mention these flaws to businessmen or officials, I got brushed off. The normal rules of economics didn't apply to Korea.
And then the crisis came along:
That self-delusion evaporated during the Asian financial crisis of the late 1990s. As Korea's most prominent companies collapsed into bankruptcy and the government endured a humiliating $58 billion International Monetary Fund bailout, Koreans had to rethink the ways they did business, managed their careers — even their entire economic system. The crisis "was the catalyst" for change, says financier Tom Kang. "The old ways didn't work..."

The 1997 crisis broke apart the cozy government-banking-corporate networks, forcing the big companies to become truly profitable, independent and internationally competitive for the first time. That process was egged on by a new influx of foreign money, ideas and people. Foreign investors began to play a much larger role in the domestic economy, increasing competition. Korean companies brought low by the financial crisis in banking, autos and other industries were sold off to international giants. Storefronts in Seoul now boast more foreign names than I thought possible in the 1990s, from H&M to Kate Spade to Zara. After Apple's sudden success in a Korean economy where foreign handsetmakers had almost no presence — its iPhones claimed more than a quarter of the local smart-phone market in the first half of 2010, according to research firm IDC — Samsung was pressed to accelerate its own product development. The number of foreigners living in Korea has exploded, from fewer than 250,000 in 2000 to more than 870,000 in 2009. Business before the financial crisis "was more like a club," Kang says. Now "there's a lot more competition, and that's forcing people to be innovative. If they don't, they're going to die."
And here's the punchline: Schuman believes the greater political and economic openness which accompanies South Korea's resurgence challenges the so-called "Beijing Consensus" of state-led capitalism. South Korea may have been like that before the crisis, but it is perhaps ironically moving into a more conventional "Washington Consensus" phase that challenges conventional wisdom:
Above all, Korea offers a counterpoint to those political leaders — like China's — who believe "state capitalism" is superior to free enterprise, or that they can create an innovative economy without civil liberties. Of course, that doesn't mean the Korean system is perfect. Despite its progress, Korean society still remains too wary of foreign influence and too biased against women in the workforce. Businessmen complain that too much red tape clogs their way. The outdated education system is so rigid that parents flee the country in droves to put their kids into high schools in the U.S. and elsewhere. The Korean economy is still not a fair place where everyone is governed by the same rules. And North Korea hovers as a relentless threat.
Let's just say I'm not entirely sold on what Schuman writes, but it's certainly food for thought that deserves consideration.