From Miracle to Maturity: The Growth of the Korean Economy ed. by Barry Eichengreen, Dwight H. Perkins, Kwanho Shin (review)

The Korean narrative of exceptionalism is a powerful one. Koreans tell a compelling story: their country is a shrimp among whales, squeezed by great powers, surviving repeated foreign invasions thanks to a tenacious can-do national spirit. The continuing division of the country into warring halves has added to the notion of a peninsula under siege—not only is Korea surrounded by unpredictable foreign powers, but the six-decades-long armed standoff on the peninsula means that Koreans have to fear their brother-enemies as well.

In the south—the Republic of Korea (ROK)—extraordinary economic growth beginning after Park Chung Hee’s 1961 coup underpins this narrative. South Korea’s growth rate averaged 9 percent from the 1960s through the mid-1990s. Almost alone among countries whose takeoff took place after 1945, the ROK has succeeded in developing significant international brands, such as Samsung and Hyundai.

Yet the authors of this thorough study argue that, when it comes to economic growth, South Korea is in most respects not altogether unusual. Its economic performance has been very good, but not uniquely so. South Korean growth largely was a textbook case of shifting labor from farm to factory and using foreign technology to close the gap with more advanced countries. Increased educational levels, high investment rates, political predictability, an appropriate exchange rate, and overall openness are the ingredients of high-growth economies. These attributes were not unique to the ROK. Indeed, despite its far larger size, China has grown faster following a similar recipe. Both Japan and Taiwan grew at similar rates.

By the early 1990s, many economists believed that South Korea’s high-growth era was past, yet continued high levels of foreign borrowing allowed the economy to post apparently high growth for longer than would otherwise have been possible. South Korean leaders’ belief that they could ignore economic constraints and stave off the transition to lower growth came at a high cost. Productivity growth slowed, and returns on capital fell in the mid-1990s as the chaebol went into new businesses.

As a result of this artificially high growth, the ROK was dangerously vulnerable in the 1997–1998 financial crisis. Yet South Korean leaders deserve immense credit for their response to that crisis, one that coincidentally occurred just as long-time opposition figure Kim Dae Jung was taking office. Kim’s willingness to adopt far-reaching International Monetary Fund recommendations resulted in significant corporate restructuring. Some chaebol (most significantly Daewoo) disappeared; others emerged from the crisis far stronger (Lotte is a notable example).

South Korea now is looking for a way forward. The authors estimate that the ROK will be fortunate if average growth in coming years approaches 5 percent. Without significant reforms, growth is likely to be far lower. The authors contend that the old textbook approach will not work in a more complex economy. “Most fundamentally, the Korean government remains wedded to an approach to fostering growth that has outlived its usefulness” (p. 309).

The contributors to this perceptive and exhaustively researched book argue that South Korea’s biggest weakness is in services. Service exports represented only 7 percent of the ROK’s gross domestic product in 2010, compared with 10 percent in the average country in the Organization for Economic Cooperation and Development (OECD). Service-sector reform will require a significant cultural adjustment: manufacturing has long been seen as the preferred form of economic development, summed up by Park Chung Hee’s slogan that “Steel is national power.” The obsession with heavy industry allowed South Korea to build world-class capacity in shipbuilding, automobile manufacturing, electronics, and steel. But the continuing sense that services are somehow less legitimate than manufacturing hobbles growth.

The service sector for the most part is protected from competition and, not surprisingly, inefficient. More than one-third of South Korean workers are either self...