Over the past two decades, as Japan has gradually slipped down the OECD ladder in terms of GDP per capita, Korea has progressively climbed the same ladder. It's just a matter of time before Korea overtakes its neighbor.
How could this happen?
One important factor has been how the two countries have responded to crises. Japan's economy was struck down by the collapse of its bubble economy two decades ago, and was also badly hit by the global financial crisis in 2008.
Despite many calls for structural reforms, Japan has sought to keep its economy afloat by continued fiscal stimulus, rather than swallowing the necessary bitter medicine. The result is that Japan's public debt is now over 200 per cent of GDP, and the economy is no stronger for it.
Japan has been able to get away with this because it has a compliant group of institutions which have bought the public debt. And its current account surplus and strong external asset position protect it against exchange rate attacks.
Korea has typically had a current account deficit of recent times, which has acted to impose an external market discipline on the country. Thus, Korea has taken its structural reform agenda much more seriously, and is benefiting greatly from it.
-- since 1997, Korea has lifted more restrictions on inward foreign direct investment than any other of the 42 countries surveyed by the OECD. Based on the OECD FDI Regulatory Restrictiveness Index which measures statutory restrictions on both the establishment and operations of foreign firms based on a scale of 0 (open) to 1 (closed), Korea’s score fell from 0.532 in 1997 to 0.143 in 2010.
-- the Korean government has undertaken several waves of regulatory reform (according to the World Bank's Doing Business report) including through lower and simpler taxes, easier trade, greater protections for investors and creditors, easier and cheaper business start-up, and smoother permiting, driven most recently by the Presidential Council on National Competitiveness.
-- following the 1997 financial crisis, corporate governance reforms and government initiated corporate restructuring were implemented in Korea, reports the ILO in its World of Work report. The overall aims of the reforms were to enhance the monitoring function of boards, improve the accountability of management and CEOs, protect (minority) shareholder rights and improve managerial transparency and information disclosure.
-- Korea has made notable progress in fighting bribery according to a new OECD report. It has improved its information and intelligence gathering capacity in foreign bribery cases. It has also successfully prosecuted nine foreign bribery cases since 2002; most of them involved the bribery of foreign military staff on Korean soil.
In none of these important areas of structural reform has Japan made any noticeable progress. Korea has clearly been inspired by the old saying that you should never waste a good crisis. There is much that Japan could learn from the experience of its neighbor.
Organisation for Economic Cooperation and Development -- www.oecd.org
International Labour Organisation -- www.ilo.org
Doing Business 2012: Doing business in a more transparent world.
This article was also published by the Korea Herald on 19 January at:
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