A Conversation with KDI’s Joon-Kyung Kim on Korea’s Growth Potential

February 25, 2015

By Dylan Davis

Last week, Joon-Kyung Kim, president of leading economic policy think tank, the Korea Development Institute (KDI) and the KDI School of Public Policy and Management, visited The Asia Foundation’s headquarters in San Francisco for a signing ceremony to extend the Memorandum of Understanding (MOU) on “South-South Development Cooperation Dialogue” between KDI and the Foundation (read more about this partnership). Asia Foundation incoming country representative in Korea, Dylan Davis, spoke with Kim during his visit about Korea’s economic potential and challenges, an aging population, and the role of innovation in advancing the country’s reforms.

Since taking the helm of KDI in 2013, what are some examples of the biggest opportunities and challenges to achieving the Institute’s goal of creating greater prosperity for Korea?

Korea’s economic growth rate has been on a declining trend in the last 10 years, falling to 3 percent in 2013. So Korea is in a low-growth period. This is an economic fact. We have not entered a deflation period like Japan, but I believe there is a high risk of Japan-style low growth. So the number one policy priority is restoring Korea’s growth and prosperity.

How can Korea increase its growth?

I believe the key is real structural reforms. Without reforms, we cannot realize the benefits of monetary and fiscal stimulus. If you look at the Korean case after the 1997 Asian Financial Crisis, Korea’s economy rebounded rapidly after major reforms in the financial and corporate sector, and companies like Samsung and Hyundai became internationalized. The 1997 crisis was very painful for Korea. Many companies went bankrupt and many people lost their jobs, similar to the U.S. after the 2008 global crisis. Similarly, the U.S. economy is starting to grow after years of economic and social restructuring. And the opposite is true in Japan where there have been no reforms and no growth, only large monetary and fiscal stimulus.

What kinds of structural reforms?

In the short-term, I think we need to restore entrepreneurship and risk-taking by reforming the SME sector to promote job creation and growth. This means implementing a fair and competitive system for promoting SMEs. By competitive, I mean supporting innovative and profitable companies while exiting unprofitable companies. By fair, I mean regulating monopolistic behavior and providing access to finance and markets so that smaller companies can compete and grow.

I also think it is critical to upgrade Korea’s R&D. Samsung and Hyundai invest billions in R&D, and that’s why they remain competitive and innovative in the global market. These companies have established their own basic science R&D capacity. However, Korean SMEs, and even large-sized companies, do not have the resources to invest in R&D. Moreover, there is very little linkage between Korean companies, public research institutes, and universities. So it is difficult to make innovation happen and to produce globally competitive products. For the Korean economy to grow and to create jobs, Korean companies need to stay competitive and profitable.

In the longer term, I believe that reforms such as changing the seniority-based pay system and changes in education that promote 21st-century methods like project-based learning are important. We also need to address governance reform in Korea to ensure better policy results. In Korea, confidence in government and the political system is relatively low compared to other OECD member countries. So the government must take a leadership role in improving governance and upgrading key legal/regulatory, social, and political institutions.

Speaking of challenges, a recent pioneering study conducted by KDI showed that South Korea’s rapidly aging population could steadily weaken the country’s growth potential. What are your thoughts on this?

Korea’s rapidly aging population is the biggest challenge, with huge social and economic impact. Korea has a very high elderly dependency ratio. In 12 years, the elderly population will make up 20 percent, which will be greater than Japan. A little known economic fact is that nearly 50 percent of adults in Korea over the age of 65 live in poverty. This is a major social issue that needs to be addressed before it is too late. Many countries are dealing with the impact of aging. So there are a lot of policy ideas and research around this issue. However, there hasn’t been much success in slowing the impact of aging on the economy, besides expanding the welfare system (Japan and Europe) or opening the country to immigration (U.S. and Singapore). These are policy choices Korea will have to consider. I also think we need to do more research on aging and establishing a welfare system that works for Koreans and is designed by Koreans.

In 2010, Korea became the first Asian country and the first non-G-7 member to host a G20 summit. How do you think Korea’s role as an industrialized economy has changed in the five years since then?

Hosting the G20 summit was a great achievement for Korea. I don’t think Korea’s economy has changed much in last five years. However, I think Korea’s role and responsibility in the international community has increased significantly, especially since the Seoul G20 sought to promote a new approach to development – The Seoul Development Consensus for Shared Growth. Korea will have to show more leadership in achieving greater cooperation among countries to promote a development framework that is more collaborative, more inclusive, and broad-based.

The Asia Foundation and KDI have a very special relationship. In Seoul in 2010, KDI and The Asia Foundation jointly hosted the first in a series of dialogues focusing on Asian approaches to development cooperation in the lead-up to the 2011 Fourth High Level Forum on Aid Effectiveness (HLF-4) in Busan, Korea. As the aid landscape changes dramatically and Asian donors play an increasingly larger role in aid delivery, what do you see as Korea’s unique role in improving aid effectiveness throughout the developing world?

Being a country that went from an aid recipient to an aid donor, Korea has a special place in history and the world. I firmly believe Korea can promote greater development cooperation and effectiveness by playing the role as a bridge between North and South countries. Korea can also play an important role in facilitating knowledge sharing. Today, development aid is increasingly knowledge-driven, and Korea has many valuable lessons and experiences from its development that we can share with developing countries.

Seoul is often called the world’s most connected city and is a trailblazer for finding innovative approaches to green development. What lessons can Korea’s capital offer other cities across Asia and the world?

I think Korea can help to address green growth issues and climate change by playing a bridge role between rich and poor countries, such as through the Green Climate Fund (GCF) and Global Green Growth Institute (GGGI), which will be located in Songdo. Songdo was developed as a “smart city” that uses new technologies and designs to promote more green and sustainable development.

Can you talk about how innovation plays a role in shaping Korea’s social and economic future?

Korea has made many innovations in technology, culture, and society. But Korea has to do more to promote its capacity to innovate. Korea still has a strong dynamism and entrepreneurial spirit; people want to work hard and be number one. But we need to create an environment that rewards hard work and innovation and promotes job creators instead of job seekers. This means promoting an education system that gets our students ready for the 21st-century economy that rewards knowledge and innovation. This also means improving governance to make sure everyone plays by the same rules of the game.

While Korea’s development success is often held up as a model for developing countries, much like other countries in the region, it struggles to address rising inequality of income and wealth, which some warn could lead to greater societal instability. Can you talk about what this inequality looks like in Korea today, and describe some examples of ways that Korea is working to address this challenge?

At this time, this is a big social and political issue rather than an economic issue in Korea. After 50 years of rapid development, Koreans are enjoying a higher standard of living. And Korea’s rapid development was relatively broad-based due to the policies like rural community-driven development (Saemaul Undong) in the 1970s. Since the 1990s, Korea’s income inequality has worsened significantly, particularly after the 1997 crisis. Compared to other OECD countries as measured by Gini Coefficient, Korea’s income inequality is relatively high. This is largely due to the decline in the competitiveness of SMEs, which pay lower wages. And if we assess distribution by including wealth such as real estate and financial assets, economic inequality becomes much bigger. This is very much in line with Thomas Piketty’s argument. In addressing economic inequality, KDI advocates establishing a targeted and fiscally efficient and sustainable welfare system that helps the most impacted, and promoting job training and education programs that give workers the skills demanded in the marketplace. For me, I would like to see a balanced approach to addressing social inequality, because too much welfare or equality can also decrease incentives for hard work and innovation.

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