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Permalink Reply by stephanemot on September 16, 2010 at 9:54am

I remember that 20 years ago, benchmarking Japan was on all Korean minds. Even when it came to importing consumer goods ("Did you launch there ? Did it sell there ?").

But anyway Japan was the place to benchmark back in the late 80s, particularly for a neighboring country with a special common history. We're simply witnessing the consequences.

Other fads followed (or preceded, think of the Chicago boys), but Korea's benchmarkmania remains. Which is good, but to a certain point : to me, too many Korean businessmen, obsessed with global and local peer pressure, forget to think by themselves and venture into new territories. Hopefully some do, because as I often say, in networked economies, you simply cannot afford waiting for others to play before making your own moves. You cannot at the same time remain a follower and aim for leadership.

Permalink Reply by Peter A. Underwood on September 16, 2010 at 2:32pm

Certainly there are many valid comparisons between Korea’s development and that of Japan. However, I would like to point out some of the differences.

Japan, at the end of WWII was already an industrialized nation having started down that road nearly a century earlier. They were building modern ships and planes that took on the ‘developed’ Western world in a great war. Even at the end of WWII, in spite of the fire bombing of Tokyo (much more devastating than the atomic bombs), their industrial output was double what it was at the start of the war. More importantly, at the end of the war, they had a huge, disciplined, experienced workforce to man their factories. By contrast, Korea was an agrarian country when Park, Chung-hee launched industrialization in the 1960s.

Korea did its share of reverse engineering, that is no doubt true but has also developed its own, proprietary technology. After several years of producing CKD cars under license, in 1972, as an alternative to licensing technology, Hyundai Motors hired George Turnbull to develop the Pony – a simple, easy to build car suitable to Korea’s level of development. To this day, in every industry, companies strive to develop their ‘own technology’ (which I concede probably involves considerable reverse engineering). Korea’s investment in R&D as a ratio to GDP has gone from near the bottom of the OECD average to 4th highest (after #3 Japan).

Another major difference from Japan is the policy of severing the banks from the conglomerates. Dependent on the government controlled banks for capital, industry had to obey the central dictates. (I suggest that the breakdown of this system in the 1990’s contributed to Korea’s susceptibility to the Asian Financial Crisis).

Politically too, Korea has had many more changes of leadership than Japan – be it sometimes peaceful and sometimes otherwise.

Finally, ‘Japan did not have Japan to compete with’. Japan was the first ‘export driven development model’ and had largely bloated and inefficient competitors to defeat. The Koreans in contrast had a much tougher path – they had to compete against the Japanese.

Korean businessmen seem to seek out challenges and don’t shirk from risk (it’s scary sometimes!!). I fully share the concerns about Korea needing to ‘change its paradigm’ in order to continue its track record of success but that is exactly what it has done time and time again in response to the ever changing global economy over the past 4 decades. I wouldn’t bet on Korea stumbling just yet!!

Permalink Reply by Robert Eberenz on September 16, 2010 at 3:33pm

Thanks so much Stephane and Peter for your personal insights. I was hoping this week's piece would bring some experienced foreign residents into the discussion and it seems we hit the mark...

The point brought up by Peter, concerning the differing histories of Japan and Korea prior to their respective wars, is extremely relevant and worth pointing out!

However, I believe that Korea should be thankful that its banks were broken away from industry during the Asian financial crisis, because this allowed the banks to enter and exit bankruptcy or attract free market investors who were willing to inject liquidity. Daewoo Securities for example was bought by Lone Star, a Venture Capitalist firm from Texas, and since then Daewoo has bought most of the shares back from the Texas firm. Japan's banks were essentially bailed out in USA (Circa 2008) fashion, and because of that, Japan has an immense load of debt to manage and a never ending dependency on government stimulus.

Korea seems much leaner, as they should being a younger economy, but it will take some time to see whether Korea can stay lean while still investing heavily in R&D to keep their competitive edge.

Permalink Reply by Peter A. Underwood on September 16, 2010 at 3:59pm

Banks were in a difficult position in the late 1990s. The government had withdrawn their explicit guarantees but still saddled them with lending requirements (so called 'policy loans'). They were caught holding the bag in 1997!!

You are absolutely correct that Korea's solution - to take the hit and clear the bad debts - was the tough decision that Japan has not taken to this date. (It will be interesting to see how China reacts when they face a similar situation in the future.) It has brought about some fundamental changes in Korea's economy with much greater equity participation by foreign firms. Today, 20% of Korea's banks are foreign owned and run as businesses rather than as an instrument for implementing government policy. A similar pattern can be seen across much of Korean industry.

It will be interesting to see how Korea develops - it always has been interesting!!

Permalink Reply by Steven S. Bammel on September 16, 2010 at 5:09pm

Wow, fascinating discussion today!

I was particularly interested to read Peter's insight about how Japan was an industrialized nation after WWII but that Korea was agrarian. China was also agrarian before its economic reforms.

To take the subject a bit further, I remember from the KBC interview with Marcus Nolan in the spring, he was talking about how North Korea, if they ever start down the road of economic liberalization, won't be able to just copy the S. Korea or China models since North Korea is largely (inefficiently!) industrialized.

Finally, don't forget the contribution of the Korean War to the Japanese development process in the 1950s or the Vietnam War to the Korean economy of the 1960s. Both of these events were big boosters to economic development in the respective countries.