Back to the Future of the South Korean Economy and Society

This paper examines the various potential paths of economic growth to understand the development of the economy and the transformation of the society in South Korea. Based on the endogenous growth theory, we describe the engine of economic growth in the South Korean economy over the last fifty years. We also demonstrate how this fast economic growth has molded the country’s sociopoliticocultural life and, in doing so at an semianthropological and pseudoethnographical approach, help readers to better understand the contemporary life style of average South Koreans. The experience of economic growth in South Korea is unprecedented in human history and provides a role model for the design of strategies for economic growth and development, as well as for associated government policies, for recently developing economies. We then show that the economy and society in South Korea provides an example of a living laboratory to understand better both developing and advanced economies. The “growing pain” of fastgrowing economies and the “geriatric symptom” of advanced economies coexist in contemporary South Korea

Back to the Future of the South Korean Economy and Society*1)

2)Minjoo Oh (오민주)**Professor, Department of Sociology and Anthropology, University of Mississippi

3)Hyun Park (박현)***Professor, Department of Economics, Kyung Hee UniversityABSTRACT

This paper examines the various potential paths of economic growth to understand the development

of the economy and the transformation of the society in South Korea Based on the endogenous growth theory, we describe the engine of economic growth in the South Korean economy over the last fifty years We also demonstrate how this fast economic growth has molded the country’s socio-politico-cultural life and, in doing so at an semi-anthropological and pseudo-ethnographical approach, help readers to better understand the contemporary life style of average South Koreans The experience of economic growth in South Korea is unprecedented in human history and provides a role model for the design of strategies for economic growth and development, as well as for associated government policies, for recently developing economies We then show that the economy and society in South Korea provides an example of a living laboratory to understand better both developing and advanced economies The “growing pain” of fast-growing economies and the “geriatric symptom” of advanced economies coexist in contemporary South Korea.

Key Words: Economic Growth and Development; Endogenous Growth Theory;

Socio-Politico-Cultural Fundamentals; South Korean Economy and Society

* We thank Sunghoon Cha, George Economides, Jeffrey Greenwood, Tetsu Haruyama, Jeffrey Jackson, Heayoung Jung, Yeongyo Jung, Han Goo Lee, Apostolis Phillippopulos, and Vanghelis Vassilatos for their helpful comments and suggestions We also extend our thanks to seminar participants at Athens University of Economics and Business, International Monetary Fund, Kobe University, Macau University, University of Alabama, and University of Pennsylvania Park gratefully acknowledge the financial support of SSK (2014S1A3A2044459) in Korea Research Foundation.

** Professor Minjoo Oh, Department of Sociology and Anthropology, University of Mississippi, Room 510 Lamar Hall, 615 Grove Loop, University, MS 38677; Phone: +1-662-915-3454; email: minjoo@olemiss.edu

*** Corresponding Author: Professor Hyun Park, Department of Economics, Kyung Hee University, 001 Hoegi-Dong, Dongdaemoon-Gu, Seoul 130-701, South Korea; Phone: +82-2-961-9375; email: econhyun@khu.ac.kr

Ⅰ Introduction

As when visiting any foreign country for the first time, we as a first-time visitor are most likely

to encounter the basic outlook of South Korea We may observe how this outlook shapes views on weather, food, streets, traffic, buildings, trees and flowers and then we may go on to explore its everyday lifestyle―its dress code, facial expressions, and public manner―and come to understand these facets by comparing them with the ones of our own country We then further explore the unique aspects of the country’s customs and culture at the levels of its technology and political institutions Inevitably, we also try to sense the advance of its unacquainted economic standing beyond the statistics and official level of gross domestic product (GDP), by comparing it with the advance of our own economy That is to say, we imagine ourselves as a foreigner as if we were visiting South Korea for the first time in our life We then set up a working hypothesis to explain a few selected observations in respect to the South Korean economy, which has largely enjoyed the resilience of fast-moving economic growth over the past fifty years

Our modest intention in this study is to offer you, the reader, a “Travelers’ Guide to the Contemporary South Korean Economy and Society.” We intend to take a few directions in “what to look at and how to look at the past and present South Korean economy and society” In particular,

we will travel “back to the future” of the South Korea, and revisit theoretical arguments and practical observations made during the economic growth and development progress that South Korea has experienced and that has led the average South Korean to become about sixty times richer than s/he was after the Korean War The slightly more ambitious intention in this paper is to design a simple road map for a current developing economy to follow by differentiating between the general and unique nature of aspects of the South Korean economy We then show that the South Korean economy provides an excellent example of a living laboratory that may be used to understand both developing or advanced economies, for example, the United States and Japan on the one hand, and India and Republic of Congo on the other hand Due to the amazing accomplishment of an industrial revolution completed within a fifty-year lifetime, we can witness that the seemingly contradictory characteristics of these two polarized groups of economies coexist together in the contemporary South Korean economy This paper also intends that by traveling “back to the future” in South Korea we gain a greater understanding of what to expect for the future of developing economies and reconstructing their corresponding societies in the next ten or twenty years

First, we argue that the fast economic growth of the South Korean economy is unprecedented in the world economy since the first wave of the eighteenth-century industrial revolution South Korea also has demonstrated her resilience of economic performance during the two financial crises: 1997~1998 in Asia and 2008~2009 globally Her economic success has been accompanied with equitable income distribution and accomplished democratization We then illustrate how the endogenous growth theory helps us to understand the Korean economic miracle and democratization,1) so that we may be able to duplicate her experiences in recently developing economies For example, this paper differentiates growth elements in short-term and long-term periods: input factors of production, productivity and efficiency, technology, institutions, and government, international interdependence, urbanization, climates, environment, and many others

Furthermore, the paper explores how preferences in households affect the economic performance of the South Korean economy We find that an envy and jealousy preference formation plays a significant role for persistent economic growth in South Korea during the past half century More specifically, envy and jealousy explain the pattern of individual and collective decisions: consumption and saving behaviors, work ethics and motivations, learning and imitation, international competition, and many other elements of the socioeconomic changes of South Korea during the rapid industrialization period Therefore, we conclude that intertemporal and interpersonal preferences are as critical as nondecreasing returns technology for persistent economic growth The South Korean economy exhibits her preferences satisfying the joint condition with persistent economic growth The scope of the paper is extended fundamentals of economic growth to socio-politico-cultural phenomena in contemporary South Korea We then argue that noneconomic episodes are closely related with the rapid industrialization, urbanization, economic transformation and achievement, and democratization It is because we observe the causal relations between economic and socio-politico-cultural changes in a fast-growing economy, say at the nine percent rate of growth, whose per capita income doubles every eight years Hence, it is inevitable that the cultural changes in the South Korean society are followed by economic development, and vice versa; otherwise, economic growth cannot be sustainable in the long term We thus proffer a tentative linkage between economic growth and socio-politico-cultural changes in contemporary South Korea

The method in this paper is not conventional in the economic literature, in the sense that the paper presents theoretical explanation and empirical evidence in a semi-anthropological and 1) See Acemoglu (2009) for the excellent survey on the endogenous growth theory and Acemoglu and Robinson (2012) for the historical aspects of the interconnection between economic and political institutions

pseudo-ethnographical method The first formal approach shows how South Korea has been able to grow persistently over the last five decades, whereas the latter speculates on how South Korean society has changed throughout the process of her rapid economic growth More specifically, the paper introduces a few socio-politico-cultural episodes that capture the correlation between persistent economic changes in a relatively short period and the events in question We, nevertheless, have no intention to claim that these episodes occurred solely due to economic changes and success, but identify them to illustrate that “fast” economic growth is critically responsible for a few seemingly puzzling everyday-life phenomena in South Korea.

We begin by presenting some episodes that, we believe, signify some defining characteristics of the socio-politico-cultural phenomena of South Koreans’ experience of a fast-growing economy over the past fifty years These episodes, we speculate, are equally likely to surprise most foreign visitors

to South Korea, be they from either developing or developed countries As mentioned before, the main objective of the paper is not to conduct a scientific analysis but to suggestively conjecture on the relation between a fast-growing economy and socio-politico-cultural phenomena What follows is a list of interrogatories based on anthropological and ethnographical observations concerning the everyday lifestyle in South Korea:

How is it that South Koreans have come to prefer to live in high-rise apartment complexes in both rural areas and cities? Why are those apartment complexes consistently and repetitively named after large, well-known companies,2) for example: “Hyundai Apartments” built by the automaker Hyundai; “Samsung Apartments” built by the electronics company the Samsung Group; “SK Apartments” built by SK Telecom; “LG Apartments” built by LG Electronics;

“Daewoo Apartments” built by the heavy-industrial company the Daewoo Group; or any other conglomerate?

How is it that one can often see a white-collar, middle-aged Samsung or Hyundai businessman drunk with a group of coworkers at midnight―acting like a freshman with a group of college friend―walking in the middle of a major street in the Kangnam District of Seoul?

Why is it that you may easily encounter groups of teenaged, high-school girls snacking on a cup of instant noodles in front of convenience stores, Tomato, Seven-eleven, GS25, etc., as late

as midnight?

2) We hope that, without violating academic integrity, we may reference specific South Korean companies to make these episodes more realistic and down-to-earth for readers

Why are there so many Starbucks, one at almost every intersection of Chongro streets in Seoul, even though the price of an Americano in Starbucks in South Korea is at least four-times more expensive in terms of real income than one sold in Chicago?

How is an average college student in South Korea able to afford to buy expensive designer items: clothes, bags, watches, shoes, etc., produced by MaxMara, Giovanni, Fendi, Gucci, Prada, Luis Vuitton, and many other luxury brands?

Why are South Koreans on their cellular phones including instant KakaoTalk messages all the time? Why do South Koreans seemingly fear to be alone and why do they have an almost impulsive desire to be connected with each other at all times?

Why do South Koreans engage in regular, seemingly militant demonstrations in the Kwangwhamoon Square in Seoul, e.g., the 2008 Candle-Light-Demonstrations against beef imports, motivated by fears of mad-cow disease, and the ratification of a free-trade agreement (FTA) with the U.S.?

How does the Demilitarized Zone (DMZ) become one of South Korea’s tourist attractions? How

is it that we may be able to find various kinds of travel brochures for trips to the DMZ in the lobbies of major international hotels in Seoul?

This paper hypothesizes that the experience of fast economic growth is a critical, if not complete, cause of the above representative phenomena in contemporary South Korea The brief precipitate explanations this paper provides are summarized as the following First, in order of the above episodes, fast industrialization without financial development has forced many conglomerate companies

to diversify their manufactured products by becoming involved in the construction of residential apartment blocks Additionally, South Koreans seeking quality assurance believe they are reducing the risk of poor-quality products by choosing well-known brands, that is, a brand effect Second, the working habits formed in agriculture remain even though there has been rapid urbanization, so that we may observe the social behavior of agricultural farmers replicated in a manufacturing sector Third, a high valuation of private education in the context of low public-education spending by the federal government prevails, and thus from elementary school through college a student must privately spend

to meet changes in the demand for new human-capital requirements along with technological changes Fourth, the scarcity of land influences the prices of commodities and services, for example, a relatively expensive Americano at Starbucks Yet, such a fixed cost does not deter long-run economic performance in South Korea

Fifth, the South Korean economy verifies that human-capital accumulation, including an advance of science and technology, is the main essence of the economic growth and development Education plays an important role of forming a future orientation perspective across overlapping generations Success in achieving fast economic growth within an average lifetime has improved South Koreans’ health and longevity; for instance, the average South Korean has become more than four inches taller over the past fifty years Such physical change leads to the fashion consciousness; parents are willing

to incur additional expenses on appearances as if competing themselves

Sixth, social integration is heavily valued in Korean society as a defense mechanism to fear and insecurity amid rapid social changes This leads to broad connections among families, alumni, church members, sports clubs, and many other public and private associations Seventh, along with economic success, South Korea has also achieved the transition to a democratic society in a short period This transition is closely related to how the South Korean society has maintained a healthy level of socioeconomic diversities, for example, income disparity―better than the income inequality in Canada, for example On the other hand, the recent stagnation of growth has pricked sensitivity to income inequality, along with envy/jealousy or altruism/admiration in preferences Finally, there is no doubt that North Korea has caused additional uncertainty in the current South Korean economy and society and is most likely a factor to shape the future of South Korea But the impact is not necessarily through the threat of another Korean War, but in the manner that the South Korea crafts a fiscal response to any future unification of the two Korean economies The rest of the paper explores in details for the above conjectures

The remainder of the paper is organized as follows In section 2, the paper outlines the present status of the South Korean economy, comparing it with economically advanced and developing countries, for example the United States and the Philippines, respectively Understanding the present South Korean economy inevitably requires reaching back into the country’s contemporary socio-economic history; and thus we will focus on the main events and policies influential on its growth and developmental processes in section 3 Section 4 discusses the production input factors for economic growth, better understanding the bumpy paths of industrial transformation We explicate that those input factors in the South Korean economy affect only its short-run growth but not necessarily its long-run economic growth and social changes In section 5, we examine the main elements necessary to maintain persistent economic growth and social changes in the long term By applying the endogenous growth theory, we also discuss the engine of persistent long-run growth In section 6,

we find the correlation of economic growth with the ultimate variables, for example, envy/jealousy,

openness, impatience, work ethic, and many others in the society In section 7, we begin to construct

a definition of the engine of growth, which is essential to examine the future South Korean economy and society The paper concludes in section 8

Ⅱ The Present Status of the South Korean Economy

In this section, we offer a few indicative pieces of empirical evidence to provide a better understanding of the contemporary South Korean economy and society The following evidences demonstrate how South Korea has outperformed expectations over the past fifty years South Korea has reached the point where it is the tenth largest economy, its international trade volume is the eleventh largest in the world, and the average income of a South Korean is in the top of fifteen percent globally in terms of per capita GDP (Heston, Summer, and Aten, 2002)

The per capita income of South Korea is 31,950 USD, as compared with per capita income of 51,700 USD in the U.S., and is slightly higher than the average per capita income of the European Union at 31,570 USD It is about 2.7 times the average per capita income, 11,964 USD, of the world economy―based on Purchasing Power Parity calculated in 2012 (International Monetary Fund and World Bank, 2012)

In addition, a rough outline of the South Korean economy can be illustrated as follows:

South Korea has the eleventh largest economy by volume, 250 million USD per day of international trade among countries including China, Germany and the U.S (South Korea International Trade Association, 2007) That is, South Korea is one of the most open economies

in the world―with total exports accounting for more than forty-four percent of GDP―followed

by Germany, in which exports account for about forty-two percent of its GDP

The following South Korean industries are at the top of global production: ship building and ship yards; mobile communications products; the LCD/PDP/computer and the DREM-chips industries in information technology The country’s steel industry is ranked second in global steel production; electronic goods are produced at the fourth largest rate in the world market;

and automobile production is ranked fifth in the world (South Korea International Trade Association, 2007; Statistics of South Korea, 2008)

The multinational companies Samsung, LG Electronics, Hyundai Automobile, and the SK Group are all in the Fortune 500 Moreover, fifty-nine South Korean companies are ranked in the top share of their markets, out of 1,175 companies throughout the world market

Surmounting these corporate statistics, the average South Korean has become roughly forty times richer since the 1960s Imagining that we had traveled to South Korea fifty years ago, we would have found that she was as poor as Ethiopia and poorer than the Philippines Returning to the present, we are surprised by the fact that the average contemporary South Koreans are as rich as residents in Spain and above the average for citizens of European Union countries Hence, an important question arises―one that is not merely for academic curiosity but also related to an unavoidable practical inquiry in the history of human development How was South Korea able to achieve this astonishing economic success in one person’s lifetime? Why do so many people in the world continuously suffer from the failure to escape from absolute poverty? In the presence of advanced technology in already developed economies, how is it so difficult to achieve an industrial revolution in underdeveloped countries? To put it differently, what can we learn and duplicate from South Korean’s growth experience for other recently developing economies? Is there any socioeconomic framework for understanding the South Korean phenomenon so that we can avoid development policy mistakes when implementing a course of growth strategies?

Although there is no doubt that the outlook for the South Korean economy may be impressive to anyone from a developing economy (e.g., for visitors from India, Brazil, the Philippines, Chile, the Republic of Congo, or even from Argentina), South Korea is still in the process of catching up with advanced economies (e.g., the U.S., Japan, German, or Sweden) The per capita income of South Korea is about sixty-two percent that of the U.S., eighty percent that of Sweden, and eight-four percent that of Japan We then ask whether South Korea has a potential engine of economic growth capable of joining the club of the most-advanced economies in the near future Or, is the recent slowdown of her growth such a hindrance to the momentum of past economic growth and development that South Korea has run its course and lost the chase? The following sections address these inquiries based on the endogenous economic growth theory

Ⅲ The Contemporary History of the

South Korean Economy

Let us start with a thought experiment to illustrate how a small difference of growth rates alters

an individual’s economic situation within a lifetime Imagine your income increases to fifteen times larger than it is now; say to one-half million USD (500 million Won) per year within thirty years, say by the time that you are fifty-five years old You may feel “not too bad at all!” In fact, average South Koreans from the previous generation experienced a wage increase far better than the one we have imagined: for our imaginary household, the Korean growth rate resulted in a thirty-fold increase

in their personal income within thirty working years! This would translate into an extra 1 million USD (1 billion Won) above the current thirty years of income Now, we trace how South Korea’s achievement evolves into its current position in the world economy in 2014 More ambitiously, we trace how her lifestyle, including various socio-politico-cultural aspects, has been transformed during this fast-growing period

In the early 1950s, South Korea’s GDP, 520 USD per capita was close to the GDP per capita

of Ethiopia Note that the contemporary Ethiopian is earning 830 USD per capita and that more than sixty-five percent of its population is living below 1 USD per day Indeed, a one out of six persons in the current world population is living in such a destitute condition Also, note that China―even though it is the fastest-growing economy over the last twenty-five years and now the largest economy in the world―still has ten percent of its population living on per capital income below 1 USD per day, compared with an average South Korean who now spends about 85 USD per day

In 1962, per capita income in South Korea was 1,200 USD, which was around one-half the per capita income of the Philippines By 2014, per capita income in the Philippines is 3,500 USD, which is roughly one-tenth the per capita income in South Korea, 31,950 USD

The 1961~1962 World Bank Annual Report concluded that the Philippines had a better growth capacity than South Korea for future economic development The report detailed its conclusion as follows: (1) Filipinos were more educated than South Koreans―twice its population was in tertiary education (2) Filipinos were more diligent than South Koreans due to a sincere work ethic, based on

Catholic vs Confucian philosophy, respectively (3) Filipinos were scientific due to the influence of Roman Catholicism, whereas South Koreans, influenced by Buddhism, were superstitious (4) The Filipino government was more democratic than the South Korean government and thus the Philippines

is more politically stable (5) The Philippines has richer natural resources than South Korea Based on those reasons in the broad aspects, the World Bank offered reconstruction and development program

to the Philippines but not to South Korea The history proves otherwise that the Bank’s prediction for the future of the South Korean economy did not come true―this is obviously good news for South Korea but bad news for the Philippines Also bad news to some economists? However, the report provides us an important lesson in why the essential economic elements that many development economists have considered fail to produce economic development, and often mislead us in predicting the future course of developing countries The following sections of this paper suggest how to interpret this report by applying the endogenous growth model, where the long-run engine of economic growth operates differently from the short-run engine of economic growth

In 1985, per capita income in South Korea was close to 7,500 USD per capita, similar to that

of Brazil or Mexico All three countries had fast growth experiences during the 1970s, but South Korea significantly slowed down after the late 1980s In 2014, the average income of Brazil or Mexico is about 12,000 USD, which is 2.5 times less than the current GDP per capita of South Korea It was the first time in South Korean history that per capita income rose above the average for the world economy

In this present decade, South Korea’s economy has been catching up to a few of the member

of countries of the Organization for Economic Co-operation and Development (OECD), for example, Portugal in 2000 and Greece in 2010, and South Korea overtook the per capita GDP (and thus the quality of an everyday life) of Spain in 2014

In addition, the development of South Korea has resulted in a socio-politico-cultural transformation

in aspects of the country’s everyday life This observation is plausible since South Korea has experienced fast economic growth and development in a very short time period.3) The two following

3) This argument is rather unconventional in the literature A usual causality is believed to be the reverse, based on a hypothesis that the culture changes more slowly than does the economic development (Weber, 1958) We, however, argue that fast economic growth affects culture because economic growth is not otherwise sustainable without a change in the cultural elements influencing the economy

observations illustrate this argument

First, the South Korean life expectancy is now eighty-two years in 2008, compared to fifty-eight years in 1952 (OECD, 2008) Along with GDP growth, an increase in life expectancy is an alternative measure of an increase in welfare of an economy The dramatic increase seen in the life expectancy reflects the level of economic success in South Korea Recently, this increase in longevity, along with South Korea’s low fertility rate (lowest among the OECD countries) has raised a public concern about the future of the South Korean economy We, however, may recall various kinds of population control policies as applied as part of development policy in developing economies: the “two-child policy” in South Korea, the “one-child policy” in China, various birth-control policies in India, and those of many African countries When we review those birth-control policies, we cannot help but wonder whether the tradeoff between longevity and fertility is conducive or detrimental to economic growth and development (Blackburn and Cipriani, 2002) The dynamics of a human-capital accumulation are affected by individual and intergenerational time horizons, and thus the joint effect of longevity and fertility is not definite The effect involves both the cost of education and the labor market participation of intertemporally overlapping generations (De la Croix and Michel, 2002)

The second observation is that economic growth improves the health of a population As result of the health improvement, it is not at all surprising that an average South Korean has become taller as

a fruit of her economic success

The average height of South Koreans has increased about four inches during the past forty years (Sohn, 2000) Britons had taken about 125 years and Japanese about seventy-five years (Fogel, 1997) to achieve the same height changes Fascinatingly, these numbers coincide with the number of years that each country took to complete its industrial revolution Moreover, at a personal level, a one percent difference in height is associated with a one percent difference in the wage rate in the United States, whereas it is a 7.7 percent difference in the wage rate in Brazil (Strauss and Thomas, 1998)

One implication of the rapid economic growth in South Korea is illustrated in the following

Intermezzo,4) which extends the economic scope of growth and human capital to a socio-cultural

4) Each Intermezzo presented here is from our casual observations, rather than from rigorous scientific analysis that we

believe However, throughout the paper, we will describe a few other social phenomena related to the case of South Korea’s rapid economic development

episode of consumption behaviors in contemporary South Korea

Intermezzo: Average South Koreans, including college students, are very keen on how they

appear to others and are willing to spend to acquire expensive designer clothes, bags, shoes, and many other luxury items This may be because their bodily structure has been changed due

to the fact that, as mentioned, the average height for South Koreans has increased four inches over a lifetime The combination of improved physical health and this fast economic growth in

a single generation can be considered as an indicator of personal achievement: not simply an accomplishment in economic status but also in social status.5) However, this perception of achievement has also lead to the practice of plastic surgery as a quick and easy alteration of one’s physical appearance often in the attempt to change one’s economic and social status in a short time period Parents have also taken their children’s seeming-less-attractive appearance as the parents’ personal responsibility to “improve”, so that they are willing to pay for surgery

As consequence, thirty-three percent of South Koreans have undergone elective plastic surgery, a rate followed by Greeks, at twenty-seven percent (The Economist, 2013).

Although South Korea experienced the 1997~1998 Asian financial crisis, Brazil, Mexico, Portugal, and Greece also struggled to emerge from similar financial crises during their own development process through the 1970s~1980s It is beyond the focus of this paper to discuss in detail what caused these financial crises or how each country has dealt with and recovered from its own crisis Although South Korea’s recovery from the 1997~1998 Asian financial crisis was exceptionally swift and solid, some economists have argued that this Asian financial crisis caused permanent structural changes in the South Korea’s economy They also argue that South Korea’s economic growth slowed after the crisis It is, however, clear that South Korea has demonstrated the resilience of its roster of achievements, after recovering from the loss of 1.2 million jobs during the 2008~2009 global financial crisis, which may be seen as impressive among both the groups of developing or of developed economies Based on the experiences of developing and developed economies, our conjecture is that these financial crises might be more painful and involve delayed recovery when connected with a government’s structural fiscal deficit We often observe that many attempts at recovery from these

5) This episode is viewed as “the reflexivity of the self in modernity” in Giddens (1991), who argued that there are close connections between personal aspects of bodily development and global factors including medical intervention, genetic engineering, and socio-economic choices and options

financial crises become tangled with political processes and decisions, and as a result slower recoveries and permanent structural damage occur in both developing and developed economies It suggests that a sound fiscal balance is a necessary condition for a healthy economy Italy and Spain, recently Greece, shows otherwise after the 2008~2009 global financial crisis It seems that South Korea has satisfied this condition during the country’s development process

The Experience of Fast Economic Growth in South Korea is Unprecedented: There is no doubt

that South Korea is one of a very few countries that have succeeded in achieving an industrial revolution in the late twentieth century Recall that the first wave of Industrial Revolution that occurred in Great Britain in the middle of the eighteenth century did not occur in neighboring European countries or their colonies until at the end of the nineteenth century Also, note that all the present advanced economies have a European origin, except Japan: Great Britain, its neighboring European countries, and their former offshoot colonies (the U.S., Canada, Australia, and New Zealand) In fact, they were the only ones that had succeeded in achieving their industrial revolutions

up until the first quarter of the twentieth century The “Four Tigers”―South Korea, Taiwan, Hong Kong and Singapore―started in the middle of the twentieth century and followed the industrial revolutions of Japan and Russia (the former Soviet Union) in 1860s and 1910s, respectively In particular, Japan grew slowly at 1.5 percent between 1860~1950 from the beginning of its industrial revolution and accelerated to 4.5 percent from 1950~1959, and further noticeable growth at 8.1 percent occurred during the 1959~1970 period (Maddison, 1991).6) The Japanese growth experience much more resembles the experiences in the European economies except for the decade of rapid growth during 1959~1970 that resulted in Japan’s convergence with the other most-advanced economies The Soviet Union’s economic growth took off in the 1910s, but began to collapse during the 1980s; as a result, contemporary Russia has failed to join the group of advanced economies Argentina was in one of the most-advanced economies in the early twentieth century but its present GDP per capita is below the world’s average GDP per capita Other countries experiencing industrial revolutions

in the 1970s―for example, Brazil, Mexico, Turkey, Thailand, and Indonesia―have also failed to maintain a continuous development process and thus have not converged with the other advanced economies Hence, economic growth and development in the South Korean economy is exceptional in the sense that, along with the diversification of her economy.7) The country has not only escaped 6) Note that Japanese GNP per capita was one-quarter of US GNP in 1960.

7) Broadly speaking, Taiwan also belongs in these categories, but a Sino-economy has its own characteristics and needs to be

from poverty comparable to the poorest economies but also has the potential to join the ranks of the most-advanced economies within the next two decades Therefore, the growth experience of South Korea is unprecedented in human history and can be a role model for designing growth and development strategies for currently developing economies.

Ⅳ Elements of Economic Development and

The economic growth theories explain economic growth and development mainly by considering the input factors in production and the determinants of efficiency in terms of the total productivity: (1) Input factors in production include labor, capital, and natural resources; (2) the total productivity consists partially of science and technology, and partially of human-capital accumulation; and (3) the other determinants of efficiency include institutional and governmental, and socio-politic-cultural considered as a separate case for the development process Singapore and Hong Kong, which had close ties with the U.K., are presumably too small to be seen as an example for the duplication of economic development experiences.

elements, e.g., preferences, beliefs, trust, rules of law and game, corruption, and many other qualitative features We examine the proximate variables in (1) and (2), and the ultimate variables in (3) for economic growth and development.8) The two sets of variables are convenient to distinguish causality from correlation between a relevant variable and economic growth and development

The rest of this section focuses on the proximate variables

Labor Market: The most important input factor of production is labor The total cost of production

is approximately seventy percent labor input and thirty percent capital stocks in production The factor share of production is approximately persistent regardless of the stage of development or of industrial composition The lack of factor inputs, e.g., labor and capital, is correlated with the symptoms of an underdeveloped economy Among many economic activities, chronic unemployment is the most detrimental vice for economic performance In the 1960s, the first South Korean development program was designed to reduce unemployment through sector-structural change and urbanization (the movement from an agricultural to a manufactured sector) More than sixty percent of the workforce was in the agricultural sector in 1950s; and more than forty percent of agricultural workers were seasonally and structurally unemployed Along with the rapid industrial transformation accompanied by urbanization in South Korea during 1960s~1980s, the total labor force in the agricultural sector was shucked, which led to astonishingly fast structural economic changes in a short period The South Korean government assisted a shrinking agricultural sector under the program, called Saemauel (New Village) Campaign The National Statistics Office (http://www.kois.kr) reports that, as of 2014, less than four percent of employment is in the agriculture sector

Under a series of “Five Year Development Plans” adopted by the government, South Korea seemed to be able to retain a relatively low wage rate relative to labor productivity This policy was intended to help the country in international competition throughout the period of her industrial revolution Once the structure of employment was liberalized after the 1997~1998 Asian financial crisis, the average worker’s full-time working hours have been the longest working hours in the OECD, though this is accompanied by a relative high rate of increases in wages in comparison with the average wage increase in the OECD overall Now “temporary” workers are a new feature in the South Korean labor market, although it is a form of employment prevalent in advanced economies due to

8) Following Maddison (1999), we define a “proximate variable” as a variable that is correlated with economic growth, whereas an “ultimate variable” is a variable that affects or causes the economic growth Later in the paper, we define a

“fundamental variable” as an exogenous variable in a working-horse model that dictates economic growth and development.

the demand for labor market flexibility.9) Arguably, unlike the first generation of industrial-revolution economies, the South Korean economy has not experienced the economic depression and massive

unemployment of Fordism in the labor market What follows in the next Intermezzo captures the

portrait of the work spirit of contemporary South Korean

Intermezzo: We often witness many small groups of drunken white-collar, middle-aged men

and women around midnight in the city of Seoul There is no doubt that they are working late hours at their companies and that, after work, corporate culture involves (partially voluntarily

or partially involuntarily) participation in drinking parties with their bosses and coworkers It seems that their attitude towards work is not too different from that of their parent’s or grandparent’s generation, which labored in the rice field about fifty years ago That is, their parents’ agricultural lifestyle, in which long working hours in a rice field is meritorious, has remained with them, and there is less focus on the effectiveness of their work at a manufacturer

or office Productivity in South Korea, therefore, is lower on average than productivity in the other OECD countries Moreover, an unintentional consequence of long hours is the damage of

a balanced relationship between work and private life

In 1987~1989, along with the establishment of a newly democratic (although not complete) government, labor unions also dramatically increased their memberships from one million to two million members However, from 1990~1995, the pendulum swung back as the companies were given new strategic management and a systematic legal basis, and the government implemented labor laws; and thus the labor movement became significantly weaker Since then, the total rate of union membership has stabilized at around twelve percent of total employment (OECD: http://wwwstats.oecd.org) Yet, we often encounter a sequence of ritual strikes and protests, some of which become extremely aggressive and often become militant in the main streets of Seoul and in other major cities In a rough observation, one could conclude that the labor movement has obtained increases in the average wage rate, but those increases outpaced the increase in labor productivity and thus international competitiveness has been weaker during those periods (National Statistical Office,

9) Temporary employment contracts were uncommon in South Korea before the 1997~1998 financial crisis although such contracts are very common in other OECD economies South Korea’s rate of temporary labor contract (24.7 percent of total employment) is close to the OECD average (OECD, 2003), but less than Japan’s rate (37.7 percent of total employment) Both South Korea and Japan have advocated for the guarantee of lifetime employment, but recent employment trends seemingly are moving in the opposite direction

hppt://www.kosis.kr) We have learnt that the fast increase in the wage rates with respect to the total factor productivity injured international competition and has slowed down the short-run, if not long-run, economic growth before the 1997~1998 Asian financial crisis

Capital Accumulation: The other main input in production employs capital stocks Capital stock is

accumulated by the collection of aggregate net savings from the forgoing of current consumption When an economy is too poor, a household can be trapped at a survival level of consumption; thus it cannot save for future investment because an individual needs all his capital to maintain a subsistence level of consumption This scenario was the exact economic condition South Korea faced in the 1960s In order to overcome this lack of capital, South Korea opened up her economy to the world market in order to earn hard currencies for future investment South Korea engaged in an export-oriented trade policy for manufacturing and agricultural products Even though the country produced these goods in poor quality and at low prices, trade continued so long as foreign markets’ demand existed South Korea began to accumulate capital by increasingly exporting low-technical manufactured goods, raw-cultivated agriculture goods, and minerals: for example, necklaces, wigs, T-shirts, seaweed, and plywood in its earlier stage of development Through these export-oriented policies, South Korea intended to attract foreign currencies and thus accumulate capital stocks Retrospectively, these policies were bold in a newly developing economy South Korea, however, was successful in increasing investment and maintained the rate of investment at twenty-five to thirty percent of GDP throughout the industrial revolution period of the 1960s~1990s In the detailed stages

of development,10) 1962~1972 was the period of export-driven growth; 1973~1979 focused on heavy and chemical industry policies; 1980~1986 was the sustainability and stability period; and 1987~1996 was the extension into the world market Then the 1997~1998 Asian financial crisis dominated the environment of the entire South Korean economy After this crisis, investment declined to seventeen percent of GDP, which could explain the slowdown of growth and employment in recent years A main concern is that if investment is persistently low it could prevent the country from joining the other advanced economies in the near future However, based on the endogenous growth theory (see Romer, 1986; Aghion and Howitt, 2007), physical capital is an input that affects only short-run economic growth, not necessarily long-run growth; decreasing investment might not be a cause but consequence of the recent slowdown of economic growth in South Korea (see further arguments in

10) See Koh (2013) for alternative periodic classifications of the development stages in South Korea

the later sections).

After the early success of the development strategy of export-orientated international trade policies, the manufacturing industries switched from light industries to heavy and chemical industries during 1973~1979 This transition signified the path of manufacturing that started with fabrics and clothes; then, moved to plastics and steel; to electronics; to ships and automobiles; to pharmaceutical and chemical industries; to computer chips and digital goods, including computer software; and to mobile and smart phones and the IT industries (Koh, 2013) We also notice that the South Korean economy

is diversified into a wide range of intermediate input goods in many industrial sectors and has a broad service sector while there has been a reduction in the agricultural sector The following

Intermezzo shows how the dynamic transformation was of the South Korean economy and society

This caricature captures the lifetime path of a typical worker of our generation during the past fifty years in the manufacture sectors

Intermezzo: Imagine that my younger brother and I grew up watching my parents working

in a rice field; then, I began to make tooth picks at the age of twenty-six after completing my military service I then was asked to transfer to a newly set-up multinational U.S company to make Nike shoes at age thirty-two I began to assemble bicycles for export at age thirty-seven, and then, at age forty-five, supervised my junior coworkers who assembled microwaves and TVs Then, at age fifty-three, I changed industries to ships and shipyards and shifted focus again to infrastructure, e.g., roads, housing, industrial sites to send construction workers to foreign countries, including Egypt, Saudi Arabia, and Lybia At age fifty-eight, I oversaw a U.S automobile production plant in Alabama that sells its products in multinational markets, while

my younger brother produced a mobile phone for both domestic and foreign markets.

The most controversial stage of South Korean development was the implementation of the government’s industrial policies for heavy and chemical industrialization during 1973~1979.11) The government’s policy-driven economic transition was subject to open criticism and these South Korean development policies were labeled as a state-oriented (authoritarian) development program In order to carry out the development project at the early stage of industrialization, companies aggressively sought international financing backed by a state guarantee of international loans and borrowings (Koh, 2013) 11) By causal observation, this policy choice can be seen in contrast to the Taiwanese economy, which continuously emphasized small- and medium-sized manufacturing industries.

This state-guarantee loan policy is responsible for the both positive and negative public views on the conglomerates’ role in the economic success, and the average South Korean has become worried about the tight relation between policy makers in the government and conglomerates in the business world The deep-rooted negative view unceasingly dominates the public opinion of government policies; the role of conglomerates on the health of the economy is an ongoing debate in South Korea It may take a while for the South Korean government to restore its consistency, accountability, and credibility with the public for effective implementation of government policies.

Nevertheless, during this industrial transition to the manufacturing sector, corporate winners include Samsung, Hyundai, SK, POSCO, Hanwha, HanJin, Lotte, and LG The former third largest―Daewoo

in the 1990s―no longer exists It is interesting to identify characteristics of those winners in the competitive economy with government interventions One of the companies’ success strategies has been to create an “economics of scale” for competing in the domestic and international markets: whether it is true or not either theoretically or empirically, it is believed in South Korea that bigger equals more competitive and more successful This idea has created a unique conglomeration model

called JaeBeol (conglomerate) in South Korea We can find similar phenomena in other areas in South Korea―the coming Intermezzo illustrates a few examples Basic economic theory justifies the formation of JaeBeol because, when an economy develops at a fast growth rate but has a weak

financial sector, a firm has to manage its risk due to self-financing for project investment A similar

“body-building strategy” was used in the U.S and in Japan until the early twentieth century; however, those companies gradually disappeared once the industrial development reached a mature state, companies specialized with firm-specific technologies, and a mature financial market developed under the established fair-competition and antitrust laws in a competitive market economy

Intermezzo: I notice that, for example, the electronic company Samsung, the famous

department store Lotte, and the automaker Hyundai are involved in the construction business by building apartment complexes in the major cities of South Korea I have not heard of an Apple

or GE Apartment Complex in Chicago, or a Toyota or Mitsubishi Apartment Complex in Tokyo

A big size with diversified products is believed to be a portfolio-insurance policy for the survival

of companies in South Korea Noticeably, academic institutions, say colleges and universities, are not an exception to this phenomenon; the average size of colleges and universities is relatively bigger than that in the U.S or the U.K Consequently, many South Koreans have a love-hate feeling toward the large scale of organizations in business and any other areas.

A handsome number of South Koreans believe that the success of conglomerates was not due to their efforts and abilities, management skills, creativities, or innovation and invention, but rather due to their corrupt business practices under government favoritism As far as we know, this belief has not been proven empirically in South Korea Microeconomic theory in relation to industrial organization justifies the emergence of conglomerates, which are dealing with the market uncertainty of investment

in a stage of under developed financial markets However, the conglomerates lack transparency or stake holders’ participation in the companies’ decision and governance (Left, 1999) The most serious criticism of the conglomerates is one of economic inefficiency because they always have the temptation to threaten market competition and thereby the future of innovation and invention.12) In addition, such monopolies are often blamed for discouraging work incentives and income disparity in the South Korean society The emergence of conglomerates is an example of a growing pain of a fast growing economy

Natural Resources: The average South Korean believes that the country has a scarcity of essential

natural resources needed for economic growth and development For example, this perception arises from the fact that 100 percent of the country’s petroleum is imported and minerals are not sufficient for the needs of industrial production The agricultural land is also scarce, given that seventy-five percent of the mainland of the Korean peninsula is composed of mountainous areas Only 2.5 percent

of land is permitted for use in residential construction―compared to fifteen percent in the U.S It is true that the land scarcity causes the rental cost of business space and residential housing to be higher than the average cost for other OECD countries It takes about ten years of average salary to purchase an average house in Seoul and about thirteen years for purchase of a residence south of the Han River in Seoul, as compared with seven years in London and about eight years in New York City Hence, there is little choice for South Koreans that reside in a high-rise apartment complex in either the urban cities or the rural areas in the country

Yet despite the high residential costs, the majority of South Koreans prefer to live in cities One out of four residents live in Seoul, and half of all South Koreans live in major cities As well known

in urban economics, better opportunities for job searches exist in a major city; the highest quality of education and easy access to information are available In addition, the quality of newly built

12) Olson (1982) pointed out that interest groups, including monopolists, slow down the social process of decision making, erect entry barriers, produce complex legal and regulatory frameworks, and complicate the role of government Hence, they also seek their political and economic rents, including income redistribution, and thereby slow down economic growth

apartments is improved by the incorporation of technological changes in the construction industry, which thereby reduces the real cost of city houses Therefore, residential cost did not deter the speed

of rapid urbanization

From an economist’s point of view, the issue of housing prices, we believe, is overstated in South Korea The value of a house is heterogeneous with the combination of a hedonic value and an expected return to speculative investment This issue of housing prices is also related to the general belief―not necessarily correct in economic theory―that there is a scarcity of land and a high population density in South Korea This also reflects on the financial market constraints and policy instabilities Moreover, the territorial development policies increase the price of land during the economic development period However, the major portion of the land price is a fixed―rather than a variable―cost in production and the fixed cost of an input factor affects short-run growth but has a minor impact on long-run economic performance Moreover, since the quality of land is not nonrenewable in general, the physical land size becomes less constrained because investment in the land reduces its constraints for sustainable economic growth That is, we also observe that the major proportion of the land has not been used in South Korea, or in the other parts of the world, and that the reduction of transportation costs, for example, improves the quality of the land in the medium and

long term Nevertheless, we report in the next Intermezzo how a user cost of the land affects the

purchasing power―driven not by production, but by preferences―in the South Korean economy

Intermezzo: The price of an Americano, one cup, in a Starbucks is the combination of the

input costs (employee’s wage, coffee beans, and other material input costs), the royalty paid to Starbucks, and the rental cost of stores In particular, the average rental cost of a Starbucks in Myung Dong Area consists of over twenty percent of the total production cost of an Americano

―which is much higher than the average of seven percent attributed to the rental cost in

Chicago in the U.S This difference may partially justify a relatively expensive Americano in Starbucks in Seoul Also, the cultural capitalization (Bourdieu,1972) of globalization (here, Americanization) may partially explain the difference between the price of an Americano in Seoul and one in Chicago

In addition, we should not overlook the other important natural resources, water, climate, seacoast, and many others that are present in South Korea For example, the presence of the frozen point, the zero degree in Celsius, is critical for agricultural production (Gallup, 1998) Also, the degree of access

to the sea coast determines the transportation costs for international trade (Maddison, 1991) and helps South Korea to open international markets We conclude that any consideration of the abundance of natural resources must include the geographical advantage and temperature of countries Therefore, unlike the commonly held perception, South Korea is not a country with poor natural resources to hinder economic growth, since the temperate zone in South Korea has a positive effect on the country’s agricultural product; and the presence of the seacoast reduces the transportation costs for international trade.13)

Everyday Living Costs: In this subsection we digress to reflect upon the general level of the cost

of living in South Korea At the end, the living cost in South Korea is not as high as in the other OECD economies: based on a living-cost-index, which gives 100 to South Korea; the United States, 109; the United Kingdom, 130; Germany, 141; France, 145; Norway, 193 (OECD, 2008) Moreover,

in South Korea, the consumption pattern consists of twenty-five percent for food; seventeen percent for transportation; seven percent for education including R&D; five percent for medical expenses (including Medicare and Medicaid); and 3.5 percent for housing (National Statistical Office of South Korea: http://www.kosis.kr,2010)

Household expenditures in this analysis include, first, the cost of education and, then, medical expenses, each of which apparently is much smaller than in the U.S The average tuition of four-year colleges equals about the two-month average salary or income in South Korea Is this average college tuition expensive compared to other countries? The answer depends on whether colleges are funded either privately or publically across various countries The average tuition of four-year colleges in the U.S is about 33,000 USD, which equals about eight months’ salary or sixty-five percent of the average annual income in the U.S Although most European colleges are publically funded; structural reforms in the United Kingdom are moving from state funding to a private funding system as a result

of a three-fold increase in tuition in the past five years While the U.K takes a bold or radical reformation, the public opinion in South Korea moves in the opposite direction and has called for greater public funding of the education system For instance, the last presidential election opened a discussion on the cost sharing between public and private funding for tertiary education

The tricky point is not really public and private shares of the cost of education, but on

13) The debate on the impact of geography and institutions on economic growth is an ongoing subject in the literature Acemoglu, Johnson, and Robinson (2000) found that adding latitude to their regression does not affect the relationship between geography and income per capita in the former European colonies.

understanding of whether education is a public or private good in the market economy In general, up-to-high-school education is considered as a public good and thus the collective public funding provided is socially efficient But tertiary education is a local public good not a pure public good, so that the combination of private and public funding improves social efficiency better than full scale of public funding improves it Therefore, the public funding by the federal government causes social inefficiency in the overall economy For another example, the average South Korean student spends an average of eight hours and 400 USD per month for private lessons from elementary through college school years Pre-preparation of a regular curriculum before the formal school classes, an uncertified license for impractical skills, a status-seeking degree program, preparation course for examinations: TOFEL, GRE, LSAT, College entrance examination, certifications, and so forth is under open criticism

on informal-private education sector However, a critique on inefficiency of the informal-private education sector in South Korea requires a scientific analysis and a rigorous empirical study

It is still on a public debate whether a public funding program for replacing the private education sector could improve the quality of education The education cost, in terms of the proportion of GDP,

in South Korea is about the same as the average proportion for other OECD countries The difference

is that private spending is roughly fifty percent of the cost, versus thirty-five percent in other OECD countries As far as we understand, there is no theoretical or practical consensus on the most efficient and equitable division of education costs between the public and private sector (Glomm and Ravikumar, 1992) The elusive inquiry concerning the role of government in education exists in this case as well Education, unlike what economists used to believe, is not a panacea for persistent economic growth, given the fact that the causality can be reversed; economic growth also increases

the level of education, not vice versa (Easterly, 2002) This Intermezzo pictures how much private

tutoring prevails in the everyday life in South Korea

Intermezzo: Almost all junior or high school students participate in private lessons after

their regular school hours and take a study break by getting an instant cup-noodle eat a convenient shop near the private education institution, as well as their apartment complex, at close to midnight If one is not familiar with contemporary South Korean culture, it can be strange to find a group of teenage girls hanging out around midnight Again, many college students also attend a private education institute with the goal of earning various extra-curricular certificates (called “SPEC” from ‘specifics’ in résumé) in addition to their college diplomas, for their job applications Their feeling is that college studies are not enough

to increase their job prospects This perceived inadequacy in institutions is one of the causes for the increase in private spending for education

We now briefly examine South Korean medical expenditures, which shape the everyday lives of contemporary South Koreans About five percent of GDP goes for medical expenditures in South Korea, which is slightly lower than the OECD average of seven percent Noticeably, the U.S has exceptionally high medical expenditures, around fourteen percent of GDP As society ages, South Korea has become concerned about how to retain the low medical costs and how to balance those costs with social investment for the next generation This is an example of a growing pain as well as geriatric symptom in the South Korean economy As there is a low fertility rate, common support for

an increase in the fertility rate as opposed to providing medical support for the elderly demands close investigation and analysis: the cost of rearing and educating children should not be underestimated, whereas support for the elderly population is often overestimated because the human-capital accumulation tends to increase on the lifetime horizon (Becker, Murphy, and Tamura, 1990) It is because the cost of education per child is not necessarily one-to-one for the quantity of children; the quality of children significantly increases when the number of children decreases.14) On the other hand, an increase in longevity is most likely to lead to increase in the human-capital accumulation, a longer period of employment, and a delay in retirement Therefore, the recent demographic trend implicates the complex intercorrelation between the economic, social, and cultural changes in South Korea

Ⅴ Long-Run Growth in the South Korean Economy

So far, we have examined the role of production factors on economic growth―capital, labor, and natural resources including land We now consider the elements for persistent long-run growth and their implication in the South Korean society We found that these input factors are correlated with short-run growth but not with long-run growth (Solow, 1956) The fundamentals for long-run economic growth in the endogenous economic growth theory include renewable factors―human capital,

14) The endogenous growth theory, as in e.g., Becker, Murphy, and Tamura (1990), shows the relation between economic growth and fertility, which depends on substitutability between the quantity and quality of children in the socioeconomic conditions including health, income, culture, religion, institutions, and government policies.

technology, and public infrastructure—culture, openness, and institutions

Skeptical Views on Persistent Economic Growth: Based on Young’s (1992) empirical paper, Paul

Krugman (1994), a Nobel Prize Winner and New York Times columnist, pointed out that the newly

industrialized economies―the Four Tigers: South Korea, Taiwan, Singapore, and Hong Kong―have grown mainly by accumulating the input factors of production as discussed in the previous section Thus, as Krugman argued, this suggests that their growth engine would vanish in the near future, once they would reach a steady state with a zero-growth rate, as the former Soviet Union, for instance, experienced from the 1940s to up to the 1980s This apocalyptic prediction for the Four Tigers has been proven to be incorrect; moreover, all of them have converged towards, and in the end have joined with, the club of the advanced, e.g., OECD, economies

Although Krugman’s (1994) prediction has proven empirically incorrect by now in 2015, the essence of his argument is quite useful to understand long-run economic growth Krugman reminds us that production input factors influence short-run growth, but contribute no more in long-run economic growth Hence, to understand long-run economic growth, we shall examine the economic fundamentals that affect the total factor of productivity―for example, simultaneously increase the productivity of each factor of production The fundamentals overcome the detrimental effect of decreasing returns to scale in the long-term of production The fundamentals for economic growth also include the endogenous elements of individual preferences on interpersonal and intertemporal decisions in the society The endogenous preferences allow us to explain not only long-run economic growth but also

to conjecture about cultural aspects of a fast-growing economy

No economy can enjoy long-run economic growth without an increase in total factor productivity, which consists of many dimensional aspects such as hard work, time-impatience, learning-by-doing, human capital, technology, imitation and innovation, openness to the international market, and quality

of institutions with government policies in a competitive market economy (1) Being hardworking in preferences improves the product efficiency and economic growth even though it can be correlated with the decreasing returns to input factors (2) The rate of time-impatience influences saving-investment behaviors, occupation choices, and intergeneration coordination.15) (3) Technology increases the efficiency of both capital and labor, as well as the capacity of production (4) Human capital supplies the intensity of productivity along with learning-by-doing and imitation and innovatio

15) See Turnovsky and Monteiro (2007).

n.16) (5) Institutions provide productive public infrastructure and ensure the rule of law for economic competition in decentralized markets.17) More importantly, an inclusive institution facilitates the constructive destruction mechanism, for example, Sherman Antitrust Act (6) Opening up to international markets improves efficiency in production to meet the global competition and obtains advanced technology by learning and imitation.18) In what follows, we will discuss these aspects in details

Human Capital: As physical capital, human capital increases in the final output But, human

capital has the nature of a public good, which is nonrival and thus exhibits no decreasing returns to scale in production (Lucas, 1988) Even though there is no doubt that human capital is strongly correlated with short-run and long-run economic growth, the empirical evidence of the causality of human capital on economic growth is sparse in the literature We also find no clear empirical evidence for the positive effect of education policies in developing countries (Easterly, 2002) This lack of clear evidence is partially because the measurement of human capital is difficult: First, the empirical results depend on whether human capital is measured by the flow or by stock Second, the quality of education, learning-by-doing, and job training is difficult to capture in the data Third, the effect of government expenditure on education is nonlinear so that the productivity measure of education spending can be misinterpreted under overspending in education Fourth, as long as education is a normal good, an increase in income due to economic growth can create an increase in education The reverse causality arises in education and causes trouble for an econometrician attempting to justify empirical significance Finally, the effect of human capital has a time lag in relation to economic growth Nevertheless, it is inevitable that South Korea is a country that has enjoyed successful human-capital accumulation through the process of economic transformation The illiteracy rate is close to zero and college enrollment rose to about eighty percent by 2014 This is an

amazing achievement as illustrated in the next Intermezzo if we note that less than six percent of

South Korean high school graduates enrolled in a college in the 1960s

Intermezzo: Both my grandparents had no formal education and could barely read or write;

16) See Goldin and Katz (1998).

17) See North, Wallis, and Weingast (2009).

18) See Grossman and Helpman (1991) Coe and Helpman (1995) also found that trade openness has a significant influence on productivity, and the larger a foreign country’s R&D capital stock, the larger its productivity gains That is, although a developing country performs negligible amounts of R&D itself, it benefits from the R&D performed in industrial countries.