A fresh start

By John Burton

The recent reshuffle of the Cabinet and Blue House senior staff in the wake of the Sewol tragedy has given President Park Geun-hye the opportunity to make a fresh start in achieving what could be the biggest legacy of her administration: creating "the creative economy."

The Sewol disaster has given impetus to this goal since the event once again revealed the extensive web of corrupt ties between government regulators and businessmen that have prevented the changes needed for economic innovation and Korea's future growth.

President Park had already identified these problems even before the Sewol accident, but unfortunately actions have failed to match the rhetoric. She now needs to renew efforts to tackle public sector reforms, boost domestic demand and promote small and medium-sized enterprises (SMEs) as sources of future national competitiveness and innovation.

It is increasingly clear that Korea needs to change the direction of its economic policy if it wants to continue to thrive. Korea mastered the art of being a "fast follower" of developed countries in building up industries, but this strategy is now reaching its sell-by date as China and other emerging countries adopt similar tactics.

Korea's future depends on promoting innovation and entrepreneurship, with the convergence of science, technology, culture and industry creating new paradigms. That is a tall order for a society that retains a strong and conservative hierarchical mindset and a preference for centralization.

But if Korea does not undergo a radical shift, it faces a troubling future, one of falling productivity, slowing economic growth, a rising gap between rich and poor, an inability to support fully an aging population, and increased dissatisfaction among a highly educated youth population that has problems finding good jobs.

Korea has world-class brainpower, technology knowhow and production expertise to succeed. But the problem is that most of these resources are sucked up by the chaebol, leaving SMEs at a disadvantage. While SMEs have become a major source of innovative products, business models and new jobs in the U.S. economy, SMEs in Korea suffer from a lack of capital to finance research and development and boost manufacturing productivity. Creating an environment that encourages people to take risks is essential to the success of the creative economy.

In her election campaign, President Park claimed she would curb the family power of the chaebol. But since then there has been little evidence of that happening. It is perhaps natural that the Park administration would be hesitant in reining in the chaebol since big business is among the strongest supporters of the ruling party.

An interesting test will be to see how the Park administration responds to the anticipated transfer of power within the Samsung Group's founding Lee family and whether it will use the opportunity to break the hallmark circular ownership structure that allows most chaebol families to control their business groups with only minority shareholdings. How strict, for example, would this or future governments apply inheritance taxes on the transfer of assets to the children of Samsung Chairman Lee Kun-hee? Some analysts believe that it is possible that the Lee family could face a tax bill of nearly $6 billion, which would dilute its ownership control.

In the near term, the focus should be on accelerating implementation of the creative economy blueprint that was announced a year ago. The plan included increasing the financing of SMEs, which normally are starved of capital. The government must also resist demands for more regulation of business that have been made in the wake of the Sewol disaster, which happened not because of a lack of regulations but rather the poor implementation of current rules.

The government needs to confront other daunting challenges if it wants to achieve the creative economy. It must promote labor market reforms in the face of strong trade union resistance. Strict bankruptcy laws must be changed to avoid punishing business failures, a factor that has discouraged start-ups.

Regulatory measures should be eliminated that inhibit the adoption of new technologies and products. An interesting test case is whether Uber, the taxi service app that has become a symbol of the growing global "sharing economy," will be allowed to operate legally in Korea despite the opposition of taxi drivers and regulators.

But perhaps the most fundamental challenge is to overhaul the education system. Koreans are an entrepreneurial people, but often lack the administrative and technical skills to support start-ups. This reflects the overwhelming emphasis on passing university exams rather than encouraging practical courses of study. The government has pointed to its "Meister" program of vocational training, based on the German apprentice model, as helping solve these problems. But a German diplomat, who has examined the program, recently told me it was more form than substance.

The recent wholesale election of liberal education chiefs could be taken as an encouraging sign since they support a restructuring of the university entry process. The Park administration should support these efforts.

John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant. He can be reached at john.burton@insightcomms.com.