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2 South Korea opts for
mind over matter By Scott B MacDonald
NEW YORK - In the early 21st century, the
service sector is at the commanding heights of the
global economy. Every major advanced economy is
dominated by services, ranging from finance and
insurance to retail and business solutions.
Commercial service exports accounted for
US$2.4 trillion in 2005, a number that is only
expected to grow. Even among the
merchandise-export sector,
services have become an exceedingly critical
element, providing greater cost efficiencies in
terms of inventory control, sales and advertising.
That is creating what can be called the
"manufacturing-services continuum".
This
is certainly true in the case of South Korea,
which is advancing in this direction. As South
Korea is finding, the shift into a knowledge-based
economy, the apex of the service sector, is a
challenging process, with both high risks and
rewards.
In a global economy defined by
the Internet, just-in-time delivery and inventory
control, South Korea has carved out a place as a
leader. Indeed, South Korea has set itself the
ambition of becoming a knowledge-based economy,
and there are some hard-won successes. US
Ambassador to South Korea Alexander Vershbow
stated this month: "Korea is at the cutting edge
of the global information revolution, leading the
world in such measures as broadband penetration,
mobile-phone subscriptions, and Internet use."
But this was not always the case. Starting
with a war-torn country and having lost key
natural resources with the earlier division with
the North, South Korea embarked on a long-term
policy of savings, export-led growth, and
industrialization. This was achieved by close
cooperation among government, state-owned or
-directed banks, and large, often family-owned
conglomerates. Labor was either co-opted or
coerced and domestic demand for consumer goods was
given only secondary attention.
By the
early 1960s, South Korea was beginning to enjoy
rapid economic growth, a rising per capita income,
and an expanding export sector serving key
international markets. Advances on making South
Korea an industrial giant continued through the
1970s and 1980s, despite oil crises and relative
political tensions both with North Korea and
within the South, in terms of a very gradual
opening of the system to allow elected government.
In 1996, South Korea became only the
second Asian nation behind Japan to join the
Organization for Economic Cooperation and
Development (OECD). Despite the financial crisis
of 1997-98, South Korea recovered and joined the
trillion-dollar club of economies in 2004, a
notable achievement for an economy that was at
roughly the same level as Ghana and Sudan in 1960.
While heavy industry was the backbone of
the South Korean economic miracle, the service
sector has gradually gained dominance. Services
account for 55% of South Korea's economy, with
industry taking up 40% and agriculture rounding
out the rest. In terms of employment, some 67% of
the labor force works in services. One key element
of South Korea's export machine is the ability of
its companies to integrate technology and other
services into the productive process. That is a
factor that has kept the East Asian country's
economy ahead of many others, including China and
India.
Considering its lack of natural
resources, South Korea has created a world-class
economy by placing an emphasis on education,
especially in the development of a tech-literate
population, something essential in a period of
globalization and innovation. Indeed, according to
the OECD, South Korean students have one of the
highest educational levels in reading, mathematics
and science. Moreover, this is reflected in the
country's 98% literacy rate.
South Korea
has also made other advances in terms of being a
globalized, more service-based economy. Although
there remains a high degree of sensitivity to
foreign ownership (as there is in many nations), a
survey by the Korea Center for International
Finance revealed that foreign investors held 39.7%
of locally listed Korean companies at year-end
2005, the eighth-highest ratio among 33 major
nations. This is a revealing statistic,
considering that in the period preceding the
1997-98 financial crisis, foreign shareholding of
Korean companies was limited to a ceiling of 33%.
Yet South Korea's transformation into a
fully knowledge-based economy is far from
complete. Challenges clearly remain. Although
services constitute the largest part of the
economy, they have remained roughly at the same
level of gross domestic product since 1990 and are
smaller than those of the United States, Japan and
the more significant European economies.
One area that is receiving considerable
attention is the financial sector. It is widely
recognized inside South Korea that it is
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