Turning Japanese

Is this the end of the South Korean miracle?

Can China avoid becoming Japan? In a few decades' time, we may be talking about how today's up-and-coming economic superpower is starting to look like the Land of the Rising Sun and Falling Expectations. But before that, another country is first in line: the Republic of Korea.

Despite differences in politics and size, China can be seen as representing South Korea's past and Japan its possible future. Like China, Korea prospered by picking the low-hanging fruit of globalization; its growth was driven by the rural-to-urban migration of its population and the successful pursuit of export markets using low-wage labor. And as in Japan's case, Korea's exports started out with a less-than-savory reputation -- such as when Hyundai cars first reached the United States -- but eventually became accepted global brands. But after Japan exhausted the economic engines of urbanization and low-cost exports, it stopped growing -- and now may be slipping into recession again.

In some ways, South Korea is already on the same track. There are a number of ominous parallels: Korea's rate of economic growth has been falling since the early 1990s, and its overall trend tracks Japan's with a delay of about 20 years. In terms of urbanization, the lag may be closer to 15 years, but the resemblance is clear. Also, the age profile of Korea's population 15 years from now will likely be very close to Japan's today. You can make similar comparisons between Korea and China, which sits another 15 or 20 years behind.

These countries have more in common than their geography and economic trends. In all three, the biggest spurts of industrial growth were managed by their central governments. During these spurts, their living standards converged quickly to those of more economically advanced countries -- up to a point.

The hard part has been closing the remaining gap. Beginning with the government of Prime Minister Junichiro Koizumi, Japan has made a halfhearted effort to find a new path by embracing free markets, dismantling the corporate behemoths known as keiretsu, cracking down on corruption, and even teaching its young people the value of competition. Ultimately, however, Japan has failed to become a global hub for entrepreneurship -- an essential driver of post-convergence growth. With a rapidly aging population that will soon begin to shrink, the prospects for further expansion in the Japanese economy are less than sunny.

Korea is next in line to face these challenges. Like Japan's economy and the keiretsu, Korea's economy is dominated by a handful of chaebol -- enormous conglomerates that cover many industries (excluding banks) and whose share of GDP, after climbing steadily for the past 10 years, may be higher than 75 percent. At the very moment that Korea needs dynamic small and medium-sized businesses to flourish, the private sector as a whole is becoming more dominated by lumbering oligopolies.

In addition to the chaebol's dominance, Koreans should be worried about the state of their underlying economic institutions. Academics and think tanks rate South Korea's level of economic freedom, the robustness of its property rights, and its protection of equity investors below those of Japan, Taiwan, and many other wealthy countries. Although the day-to-day processes of doing business may be relatively easy in Korea, its economic environment offers few advantages to a small contender pitted against much bigger players.

Other traditional gripes about the East Asian powerhouses also apply to Korea. Its business culture has Confucian roots, so seniority and personal networks can mean more than merit and written contracts. Its education system emphasizes memorization, instills a pressure to conform, and mainly prepares students to work as cogs in big corporate or government machines. Its creative class is underdeveloped by international standards, and its culture is reticent about new ideas and new people, though immigration has ticked upward thanks to the policies of former President Roh Moo-hyun.

Of course, Korea has many economic assets as well. Its scientific research institutions rank among the best funded and most productive in the world, and its education system does produce high scores in science, math, and problem-solving. Its people's work ethic and their commitment to the national project are exceptional. In fact, the latter can be fervent enough to recall the republic's estranged neighbor to the north, which seems at times to differ in ideology but little else.

Yet the best thing Korea has going for it may be the opportunity to see and learn from its neighbors' mistakes. Japan had the chance to reinvent its economy and chose, explicitly or otherwise, not to follow through. China arguably has it tougher than Korea: Its political system may still be entrenched after its breakneck growth subsides, constraining the free flow of capital and ideas.

Korea, in contrast, is a democracy with several years left to prepare for the next stage of its economic development. If all goes well, the big question in East Asia will change from, "Can China avoid becoming Japan?" to "Can China follow Korea?"


Daniel Altman

If Markets Picked Presidents

Who would be better for the global economy: Barack Obama or Mitt Romney?

Are international markets invested in who wins the U.S. presidential election? They certainly should be. There are huge differences in how Barack Obama and Mitt Romney would handle the global economy. But if the election were decided on these issues alone, it would be a pretty tough choice. Here are my appraisals of the candidates' points of view on the main issues:


The Obama administration's record on trade is nothing to write home about. Two years after resigning as U.S. trade representative, Susan Schwab wrote a 2011 article in Foreign Affairs essentially arguing that Washington should give up on negotiations through the World Trade Organization to open foreign markets. She was right -- the Doha Round of talks is dead. With this in mind, the White House should have pursued more bilateral and regional deals.

Instead, the administration played it safe. It pushed existing agreements signed with Colombia, South Korea, and Panama through Congress -- but that was par for the course. The United States should be trying to secure more deals in economically and strategically important regions such as Latin America and Southeast Asia. In the latter, such a strategy would have fit well with the administration's much-publicized "pivot to Asia." The talks for a "Trans-Pacific Partnership," which would create a free trade zone in the Asia-Pacific, are a start -- but half of the countries involved already have free trade agreements with the United States.

With former U.S. Trade Representative Rob Portman among his top advisors, Romney is likely to seek new deals much more actively. He has pledged to request trade promotion authority from Congress, which would allow him to sign new agreements without legislative approval. Yet despite the huge benefits Romney has reaped from the global economy, he has taken a bizarrely protectionist stance on one of America's biggest trading partners: China.

Romney has said that he will label China a currency manipulator on his first day in office. ("They will recognize that if they cheat, there is a price to pay," he warned.) But though China's exchange rate can only move within a band set by Beijing, to call China a currency manipulator is now a stretch. The yuan has gained 19 percent against the dollar and 33 percent against the euro in the past five years as demand for Chinese securities has risen. Meanwhile, Chinese trade surpluses have shrunk to just 2 or 3 percent of GDP. Also, antagonizing China does the United States no good at all, as American consumers enjoy higher living standards thanks to cheap Chinese exports. Rather than demonizing China, the next U.S. president should be building a stronger economic relationship -- with more exchanges of people, ideas, goods, and services, not less.

Most disappointingly, neither candidate has a plan for managing the ongoing challenges of globalization. While pursuing gains from trade with varying avidity, successive administrations have done next to nothing for Americans whose jobs have disappeared or become uncompetitive. Reintegrating them into the workforce is a task as great as the reassimilation of veterans after World War II, yet no presidential candidate has proposed anything as ambitious as, say, the GI Bill.

Verdict: Tie

Foreign Aid

Obama and Romney recently responded to a request from the ONE Campaign, a global anti-poverty organization, to lay out their thoughts on foreign aid. Refreshingly, both said such assistance is an important part of U.S. foreign policy and economic policy, and both referred to aid using variations of the term "investment."

But Romney embraced the investment approach, which has advantages in both rigor and effectiveness, more fully than Obama. His emphasis was on laying the groundwork for private enterprise in poor countries: eliminating barriers to trade and investment, and, crucially, solidifying property rights and the rule of law. These are some of the same policies that allowed China to lift hundreds of millions of people out of poverty and jump-started growth in sub-Saharan Africa, even in countries without enormous natural resources.

Unfortunately, however, Romney made only passing reference to global health programs, even though health is a prerequisite for development. One also hopes that his emphasis on faith-based aid organizations would not exclude non-faith-based but equally meritorious groups.

In contrast, Obama's point of view on foreign assistance seemed outmoded and narrow, hinging solely on interventions targeting hunger and health. These can indeed be useful, even essential, but by themselves do little to support a broader environment conducive to economic growth. Voters can also examine Obama's record. His administration's Feed the Future initiative has promoted some helpful agricultural programs, especially in helping poor farmers get better access to markets and information. But because agriculture is most efficient when it is capital-intensive, not labor-intensive, it's just as important to generate options for people who want to get off the farm.

On global health, Obama mentioned epidemics, family planning, and human trafficking. Yet the biggest need in most poor countries is for regular, primary care delivered by efficient health systems. Right now, too much funding is tied to just a few diseases. In this area, the president's thinking needs an update.

Verdict: Advantage Romney

Financial Stability

Only a few years have passed since the global economy came under threat from forces that originated mainly in the United States -- abuses of the derivatives markets and a flood of cheap credit. In the next four years, the United States will have a correspondingly large role in fostering the financial stability it once helped destroy. That means keeping its own house in order while working to create a global regulatory structure capable of monitoring and controlling systemic risks.

Putting Romney in charge of financial regulation might be akin to letting the fox guard the henhouse or, alternatively, using a mob informant to determine where the bodies are buried. The Republican presidential hopeful comes from the world of high finance, and he has made use of some sophisticated dodges of financial regulations in order to increase his fortune. Glenn Hubbard, one of his top economic advisors and potentially his choice for Treasury secretary, has recognized the failures of regulation but is wary of the burden new rules might place on the financial sector. So far, Romney has said little about how he would help resolve the crisis in the eurozone, which is arguably the economic problem that will affect Americans most in the coming years.

Obama hasn't said much either, but he has emerged as a team player on the global economic stage by supporting the Basel III international banking standards through the G-20. This decision did not endear him to finance's high and mighty, but others may have. For one thing, his administration has done little to punish the highfliers whose negligence or malfeasance contributed to the financial crisis. He has also stuck by his Treasury secretary, Timothy Geithner, through accusations of pandering to Wall Street, and he could have taken a stronger line on consumer protection while Congress concocted the Dodd-Frank legislation, which reformed financial institutions.

Yet Obama seems more committed to ensuring the stability of the federal government, which is part of the bedrock of the global financial system. Last year, when Republicans in Congress almost caused the Treasury to default on its debt, Republican vice-presidential nominee Paul Ryan said it would be no big deal. On the contrary, it would have been a very big deal, and the idea that a Romney administration would play along with such a radical Congress should strike fear into markets around the world.

Verdict: Advantage Obama

So far, neither candidate seems like the ideal choice to put the global economy back on track. There is one more factor that could tip the balance, however. Back in 2003, I polled economists around the United States about George W. Bush's influence over the economy. Most said that there was little the president could do to affect the economic cycle, but they did note that his foreign policy -- namely, the slow march toward war in Iraq -- was probably hurting growth.

The Obama administration has shown a lot of reluctance to engage the United States in another major conflict, but some of Romney's cohorts have spoken openly about attacking Iran. Another war, especially in the Middle East, would create enormous uncertainty throughout the global economy. Given the daunting challenges we already face, that's something the world could definitely do without. Obama may not be a star when it comes to global economics, but he looks like a safer bet than the alternative.

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