May 31 (Bloomberg) -- South Korea’s economy has yet to catch up to its people. They are the world’s most-wired citizenry and the most advanced at using smartphones. Korean stars are Asia’s most popular; Korean gadgets and fashions the coolest.
Yet at home, huge manufacturing conglomerates, or chaebol, such as Hyundai Motor Group, Samsung Group and LG Group remain the mainstays of an export-focused system established after the Korean War by strongman Park Chung Hee. In fact, as the July edition of Bloomberg Markets magazine points out, the chaebols have become even more dominant. Sales of the top 30 conglomerates accounted for 82 percent of South Korea’s gross domestic product in 2012, compared with 53 percent in 2002.
As in other parts of Asia, in Korea a top-heavy system no longer delivers for ordinary citizens. Wage growth has slowed, while the costs of housing and education have jumped: According to the McKinsey Global Institute, most middle-income Korean households are now cash-flow constrained. The ranks of the middle class have shrunk from more than three-quarters of the population to about two-thirds.
To make matters worse, a plummeting yen has eroded the competitiveness of South Korean exports. Last month the country’s finance minister warned that Japan’s currency posed a nastier threat to Koreans’ well-being than Kim Jong Un’s regime in Pyongyang.
Park’s daughter, South Korean President Park Geun Hye, understands that something needs to change. She wants to transform Korea into a “creative economy,” based more on services than on manufacturing, on innovation rather than industrial brawn. The goal is the right one: Most Asian countries will eventually need to head in a similar direction. To achieve that goal, though, Park can’t rely on her father’s methods.
In recent weeks, Park’s government has begun rolling out welcome measures to foster innovation and startup companies. The government plans to spend 200 billion won ($176 million) on startups directly and 300 billion won on mergers and acquisitions. Angel investors will receive generous tax incentives. Highly skilled foreigners will be offered entrepreneur visas to start businesses. The government estimates that its measures will ultimately unlock 4.3 trillion won in funding.
Yet unlike automobile factories or steel plants, transformative technologies can’t just be ordered up by the government. However fine Park’s intentions may be, midlevel bureaucrats will be the ones putting her grand plans into action. They are all too likely to stifle the creativity they’re meant to promote.
Korean entrepreneurs are already warning that all this state money comes wrapped in red tape. Prospective angel investors -- often successful businessmen themselves -- have to undergo certification before they can draw on matching state funds. Government-sponsored incubators close at fixed hours that make late-night coding sessions tough. Too often money flows to “grantrepreneurs,” who are more skilled at writing proposals than code.
The generation of Asian leaders to which Park’s father belonged could define and direct whole industries. Now, though, a lingering urge to oversee development just gets in the way. Korea still sets highly specific rules governing Internet development and usage, for instance. Such regulations cut off Korean developers from the kind of cross-fertilization that spurs new ideas -- an isolation that’s been dubbed the “Galapagos syndrome.” Online innovations developed for the Korean market can’t be scaled up globally.
A shift in mindset is needed, not just money. Instead of trying to police fast-changing technologies, the government should lay out clear principles and allow independent regulators to adapt rules as necessary. At the same time, Park should take aim at the maze of laws and regulations that inhibit risk-taking in Korea. According to the World Bank, starting a business in South Korea is harder than in Belarus or Madagascar. Tax laws encourage small businesses to stay small rather than grow. Bankruptcy laws raise rather than lower the price of failure.
The state does have another critical role to play in this transition. Traditional societies like Korea’s still prize respectability above all: Parents push their children to memorize their way into the best schools, to pad their resumes with advanced degrees, and then to seek jobs in the government or at one of the chaebols. Starting a company isn’t seen as a sign of daring, but of failure. And if one does fail -- as almost all successful entrepreneurs do at some point -- the shame can be debilitating. Few dare to try again.
Leaders like Park need to be cheerleaders, helping to break down cultural barriers to innovation. By declaring creativity to be a critical national priority, she’s helping to reassure Korean mothers that their app-designing offspring are contributing to the nation’s well-being.
This was the secret to Asia’s postwar miracle: Leaders like Park’s father transformed their countries by persuading citizens to sacrifice and strive as part of the push to industrialize. If his daughter wants to start her own revolution, she should set the goal -- and then let her people lead the way.
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