South Korea’s Shifting Industrial Policy and Economic Geography

By Andrew Ju

South Korea is well known for its tightly managed government policies that resulted in rapid economic ascension, but this blog post will focus on the lesser known effects that such policies have had on uneven wealth distribution and the ongoing shift in policy to address this problem.

Korea’s rapid economic growth was achieved through government planned-and-led policies which emphasized heavy industrialization such as manufacturing and chemical production for the purpose of export. The plan, measured by deliberate economic policies, resulted in a high level of infrastructure, an equally highly educated and skilled workforce, and the boom of strategic industries. Despite the careful planning, however, the economic organization of Korea was dramatically changed in ways unforeseen. Korea’s highly centralized economic policy had fostered growth in the Capital Region (Seoul and Gyeonggi-do) and coastal areas while largely ignoring other regions resulting in a highly uneven distribution of wealth and economic opportunity across Korea. The neglected regions, with little autonomy in governance and financial resources, had few means to improve themselves, thus exacerbating the uneven economic geography.

This situation is clearly undesirable for social, political, and cultural reasons – studies show that high levels of inequity result in greater political unrest, higher crime rates, lower political and cultural participation, and a decrease in human health.

What is perhaps more surprising and just as distressing is that such an uneven economic state is also adverse to the economy. While South Korea’s centralized and closely managed policies of the past were conducive to the “catch-up” economics that it engaged in when it was a developing economy, they are no longer viable. Korea, now among the developed and most technologically advanced economies, can no longer be led by the government down an established economic path – it must forge its own. Instead of a centralized economy, it needs a frontier one, and a decentralized economy with different regions and industries innovating independently and competing amongst themselves is the most advantageous for this new challenge.

Korea in recent years has risen to the challenge. Each presidential administration from 1998 on has experimented with different approaches in decentralizing the economy and the evolution of this process can be roughly traced accordingly. The first phase, under President Kim Dae-Jung between 1998 and 2003, attempted to achieve this goal by extending the former economic model of promoting specific industries to previously undeveloped regions, such as textiles in Daegu and machinery in Gyeongnam. It was only under President Roh Moo-Hyun, from 2003 to 2008, that a truly new model for balanced regional growth emerged with laws enacted to enable a national policy on the matter. Indeed, in 2003 a special Presidential Committee on Regional Development (PCRD) was established specifically to create feasible plans for regional growth, followed in 2004 by the Special Account for Regional Development (SARD), an annually increasing budget dedicated solely to the task at hand. Most recently, President Lee Myung-Bak (2008-2013) has augmented his predecessor’s policies by focusing on bottom-up initiatives to allow greater autonomy at the local level. To this end, Economic Regional Committees were created and the Ministry of Knowledge Economy implemented programs for cross-regional collaboration.

As Korea slowly transitions into a decentralized economy, there has been considerable difficulty as it struggles to match regional economic goals with broader national economic policies. This is seen clearly, and with direct relevance to my Fulbright research topic, in green technology. Under President Lee Myung-Bak’s trademark grand strategy, Low Carbon Green Growth, Korea designated the profitable production and export of various world-class green technologies as a national priority. This falls squarely into the pattern of classic moves in Korea’s economic playbook, with similar designations in the past for shipbuilding, semiconductors, electronics, and virtually every powerhouse industry in the Korean economy. What is noteworthy, however, is that for the first time Korea must consider regional development as it moves to achieve this familiar goal. This makes green technology a fascinating case study for how Korea will balance the necessities of ceding a certain degree of control to regional governments for a more innovative economy with the pressures of producing a competitive high-tech export industry. In other words, Korea must break from its tried-and-true formula of centralized economic planning without faltering in creating another successful export industry.

The “Framework Act on Low Carbon Green Growth”, the main legislation underlying green technology’s industrial goals and most of President Lee’s grand strategy, reveals the first attempts at how Korea might match national goals with local interests. Specifically, Articles 5, 11, and 20 address, respectively: the responsibilities of local governments; the establishment and implementation of action plans by local governments; and the composition and operation of local committees on green growth. These articles provide a framework under which regional governments are to create and enforce their own initiatives, complete with local action plans and local committees on green growth, as long as they comply with certain measures to realize low carbon emissions and green growth. This degree of autonomy, both in governance and financial means, is unique in Korean economic endeavors.

(Full Text of the Framework Act on Low Carbon Green Growth:

http://www.moleg.go.kr/english/korLawEng?pstSeq=54792)

With the green technology industry still in its infancy, scant data is yet available to measure the success of the industry and the policy. Predictably, however, some difficulties have been encountered and are telling for the future of Korean economic policies. Indeed, despite early legislation’s attempts to create a structure under which national and local goals synergize, redundancy expected of such an experiment is evident. One example is full-throttled creation of an “Asian Solar Valley” (also known as Solar Route 36) in the Chungbuk region despite the federal government’s selection of Dongnam and Honam as the primary region to lead Korea’s solar industries. Decentralization efforts are nonetheless encouraging, for even with this overlap, Chungbuk, through the local government’s newfound power and support, expects 32,000 new jobs and a profit of six trillion won (roughly five and a half billion dollars) by 2015.

Though the future of green technologies as the main priority for the Korean economy is in question with President Park championing her own economic program, the trends observed in this blog post are likely to continue into the future. Few concrete details are available for President Park’s flagship initiative, “The Creative Economy”, but it will almost certainly continue to experiment with the decentralization of the economy.

It should also be noted that though this post focused on Korea, decentralization is a phenomenon occurring around the world. The Organization for Economic Cooperation and Development (OECD), European Union, and United Nations Economic Commission for Latin America and the Caribbean have all stressed the importance of domestic regions in national economic strategies. Countries such as Germany, Italy, and Spain have all embarked on their own decentralization journeys and Korea’s experience, though unique, is part of a global economic movement.

One country that is an exemplary model for a successful, innovative, decentralized economy is the United States. The fifty states are diverse, competitive, and dynamic. I highly recommend reading this Forbes article (http://www.forbes.com/sites/joelkotkin/2013/09/04/a-map-of-americas-future-where-growth-will-be-over-the-next-decade/), or at least looking through the fantastic map, to see what an ideal decentralized economy looks like.

As always, comments, clarifications, and questions are welcomed.

References

“Income Inequality and Participation.” The Equality Trust, Research Update No. 4. (2012).

“Industrial Policy and Territorial Development: Lessons from Korea.” manuscript., Organization for Economic Cooperation and Development, 2012. .

Lancee, Bram, and Herman van de Werfhorst. “Income Inequality and Participation: A Comparison of 24 European Countries.” Growing Inequalities Impact.

Lee, Matthew R., and William B. Bankston. “political structure, economic inequality,and homicide: a cross-national analysis.” Deviant Behavior. no. 1 (1999): 27-55.

Park, Chang-Suk, Chang-Hoon Lee, Sun-Ju Choi, and Jae-Woong Lee. Regional Green Growth in Korea. Seoul: Yaewon Creative House, Inc., 2011.

Presidential Committee on Regional Development, “A New Paradigm of Development.” Accessed January 23, 2014. http://eng.region.go.kr/index.jsp.