Buildinga Knowledge Based

Economy:the Case of Korea

Feb. 2002Professor Eul Yong Park

Handong University

Korean Economy: Background and Legacy

• Korean economy; 1960s-1980s =>The government-, investment-, and export-led

growth. Rapid sustained long term growth.

• In 1960, Korea’s per capita income was $80, one of the lowest in the world. Not many people had hope for sustained growth.

• Korea did not have capital, technology or natural

resources. Only human resources.

• High absorption capacity backed by strong achievement mentality and education.

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1975 1980 1985 1990 1995 1999 2000

US

Japan

Ireland

Korea

Singapore

Hong Kong

Malaysia

Finland

Per Capita GDP (PPP, current international $)

The Causes of the Crisis of 1997-1998

• Mismanagement of foreign debt.• Structural causes: neglected

reforms of major issues as globalization process accelerated.

• Needed paradigm shift in development strategy; from government-led to market-led.

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1995 1996 1997 1998 1999 2000 2001

Korea's Overall International Competitiveness

(Rank of IMD's World Competitiveness Report)

Updating the Economic and Institutional Regime

• Greater openness to trade, and competition

• Financial sector/corporate reform

• Improving labor market flexibility and retraining

• Restructured government compatible with the information age

• Rule of law, fairness, anticorruption, equal opportunity

Specific Issues in the Economic and Institutional

Regime•Dealing with risk of increasing

inequality– Social safety nets

– Opportunities for life-long learning

•Strengthening intellectual property

•Venture capital for technology based firms

• Industrial structure issues

Industrial Structure Issues

•Strengths and weakness of the chaebol

•Promoting small and medium industries

•Role of foreign firms

•Encouraging high value service activities

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1980 1985 1995 1997 1999

Share of World Manufactured Exports

Korea

China

Singapore

Hong Kong

Taiwan

The Reform Agenda: Government Sector

• Deregulation; Government restructuring; Rule of law.

• Strengthening local autonomy• Correct bureaucratic red tape;

Lack of transparency in decision making process.

The Reform Agenda: Private Corporate Sector

• Strengthening corporate financing system: reduction of debt level. .

• Reforming competition policy: large firms vs. SMEs.

• Reform of corporate governance. • Promoting ventures, high-value

services, SMEs and foreign direct investment.

The Reform Agenda: Financial Sector

• Legacy of strong government influence led to weak financial system.

• New role of government: liberalization with close prudential supervision and monitoring.

• Preparing for globalized financial system.

The Reform Agenda: Labor Sector

• Labor market flexibility.• Coordination among government,

labor union and management.• Reform of compensation system:

Linking company performance with the compensation for workers (U.S. experience).

Developing Human Resources for the KBE

• Korea has tremendous assets in high educational investment & attainment

• But problems with quality and creativity

• Challenge is to re-deploy resources to get more out of large investments.

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1980 1997/98

Korea

Singapore

Hong Kong

Malaysia

Tertiary Enrollment

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1980 1997/98

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Finland

Japan

Ireland

Specific HR Issues• Quality of formal education.

– too academic, not practical or creative.

– ineffective use of resources.

– over-regulation: quotas, testing, content.

– poor links to labor market.

• Adult learning opportunities limited.

• Gender inequity in higher ed and jobs.

HR Reform Agenda

• From mass uniform education to that of diversity and choice.

• Deregulation and competition.• New role of government: from controller

to designer and supporter.• Urgent needs of university reform.• Promoting life long learning and linkage

with job-training.• International linkage.

Innovation System

• Strengths– Korea high spender on R&D– Most R&D financed by private sector

• Weaknessess– R&D output not commensurate with inputs– Quality and allocation of local S&E talent– Linkages between universities, public research

institutes and firms– Linkages to global knowledge– Low regard for value of knowledge

R&D Expenditures:% of GNP, 1981-97

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3.5

1981 1985 1990 1991 1993 1995 1996 1997

Finland

Japan

Ireland

Korea

Taiwan

US

Patent Applications(Residents), 1996(per million population)

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Promotion of Venture Firms

• Rapid growth in new ventures (6,000 established 1998-2000)

• Large number of technology-based startups• Concentrated in IT sector(34%),

telecom(11%), electronics(12%), and mechanical engineering(10%). ( Jul. 2001).

• Key issues: the role of venture capital, government supporting system, role of universities, GRIs and venture incubation centers.

Challenges to the Innovation System

• Improving internal efficiency of R&D effort.--Role and efficiency of Government research institutes. -- Efficiency of private R&D efforts.

• Improving external efficiency of R&D effort.

• Strengthening intellectual property rights.

• Improving links to global knowledge.

• Improving knowledge management in firms.

Information Infrastructure

•A dynamic information infrastructure is critical to take advantage of the knowledge and information

•Korea has made big strides

•Korea has potential to leapfrog to leadership position and leverage economy

PC per 1,000 people

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1990 1995 1999

US

Finland

Japan

Ireland

Korea

Singapore

Hong Kong

Malaysia

Telephones (fixed lines + mobile) per 1,000 people

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1980 1985 1990 1995 1997 1998 1999

US

Finland

Japan

Ireland

KoreaSingapore

Hong Kong

Malaysia

Information Infrastructure

• Active role of government in investment in infrastructure.

• Internet subscribers: 26 million (55% of total population).

• High speed broad band connections (ADSL etc.): 6.7 million households.

• Promoting e-government and e-business.

Key Issues of Information Infrastructure

• Digital divide.• Development of database and

networking.• Development of skills to utilize the

new information infrastructure.

Issues of the Reform Implementation

• Consensus building among major stake-holders is important.

• Awareness of what is at stake.• Mission, goals and priority setting.• Trying to implement too quickly

causes waste and inefficiencies.

Lessons 1

• Importance of human-centered development strategy => investment in people, providing equal opportunities.

• Importance of intangibles.• Promotion of clusters and networks.

Lessons 2

• Role of government: From controller to designer of KBE.

• Leap-frogging development through exploiting global market and knowledge.

• Importance of continuous learning, innovation and reform.