Last updated on August 16, 2024
The turn of every year brings with it a torrent of reviews of the outgoing year and predictions for the incoming one. The tone of the articles reflects the times: they are upbeat in good times, brooding in bad. Despites increased tension with North Korea, the tone in the Korean media this year has been decidedly positive, with articles focusing on the good economic news and Korea’s growing standing in the world.
In contrast, turn-of-the-year articles from major Japanese newspapers have been extremely pessimistic. The Asahi Shimbun and the Nihon Keizai Shimbun, two leading national dailies, have been running articles on the debt and demographic time bombs facing Japan. The tone is one of crisis and collapse.
The end-of-the-year oppositeness between Korea and Japan could not be greater, but it is somewhat ironic because the two nations have followed similar paths to success. Out of the rubble of World War II, Japan began an export-led manufacturing drive in the 1950s that lasted for 20 years until the 1973 oil crisis. Strong economic growth resumed after a short period of adjustment and remained strong until the early 1990s. Korea began its export drive about 10 years later, but the results were the same: 20 years of rapid economic growth. Political turmoil in the 1980 caused a short downturn, but growth resumed quickly and continued until the 1997 Asian financial crisis.
Korea followed the Japanese model closely. The first generation of leaders of the Korean industry were born and educated during the Japanese colonial period and many had connections to Japan. Above all, President Park Chung-hee, the father of Korean economic development, was a graduate of the Army War College in Japan and spent time as an officer in the Japanese Army in Manchuria. Park observed first-hand the large-scale developments in infrastructure and wartime industry. His focus on infrastructure and heavy industry in the early stages of economic growth reflects this influence.
The 1997 Asian financial crisis marked the beginning of divergence between Korea and Japan. For Korea, the crisis was the most difficult one the nation faced since the Korean War. With the economy on verge of collapse, Korea was forced to turn to the IMF for financial assistance. In return, the IMF demanded deep structural changes in the financial system. The depth of the crisis made it clear that Korea had to change a great deal to overcome the situation. The activist leadership of President Kim Dae-jung helped the nation accept reality and move toward becoming “Dynamic Korea.”
The end of the bubble economy in Japan in 1991 brought a sharp economic slowdown, but nothing like the near collapse that Korea experienced in 1997. Instead of facing the issue head-on, Japan tried to muddle through with a series of government-sponsored economic stimulus packages. The financial sector improved over time, but tepid economic growth has led to a sense of hopelessness that is now called the “Lost Twenty Years.”
“Dynamic Korea” versus the “Lost Twenty Years” explains the difference in mood at the beginning of 2011. Korea emerged from the Asian financial crisis stronger and with greater self-confidence. The crisis also taught Korea the importance of flexibility and a sense of urgency, both of which helped it to recover quickly from the 2008 global financial crisis. Japan, by contrast, has experienced a slow-motion crisis that has sapped its self-confidence, leaving it slow to adapt to change. Weak political leadership, except for the five-year term of Koizumi Junichiro, has left the country without a sense of direction.
Now is a good time for the two nations to look closely at one another. For Korea, the growing burden of a rapidly increasing population on the economy is a warning of potential problems Korea may face toward the end of this new decade and beyond. For Japan, the flexibility, both of government and business, of Korea in dealing with change offers a model for Japan.
For all the divergence since 1997, both countries share many similarities; a strong manufacturing base, similar demographic trends, monocultural social cohesion, and, of course, historical isolation. There is one important difference: dependence on exports. In 2010, exports accounted for 45 percent of Korea’s GDP, whereas they accounted for only 12 percent of Japan’s GDP. Of the G20 nations, Korea has the highest dependence on exports. Imports, many of which are raw materials, make up 40 percent of GDP, meaning that trade accounts for 85 percent of GDP. Imports in Japan, meanwhile, account for 10 percent of GDP.
The huge difference ― 85 percent for Korea versus 22 percent for Japan ― in dependency on trade explains why Korea is more flexible and responsive to change. It has to be, lest it lose out in the world market place. It also explains why Korea should be able to avoid the worst of the demographic drag in the future: the domestic economy is already a small percentage of GDP. The biggest challenge for Korea, then, is managing its unique role as the most trade-dependent nation in the G20. The task is easier for Japan, one of Korea’s strongest competitor’s, mired in domestic pessimism.