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.