East Asian Squid Game Economies

“Squid Game”, a dystopian South Korean drama on Netflix, is one of the world’s most watched television series. Like “Parasite,” which won the Best Picture at the 2020 Oscars, “Squid Game” highlights the growing gap between the rich and the poor in South Korea. A similar disparity now exists in many, if not most, developed economies.

It may seem puzzling that South Korea is troubled by such injustice, as the country’s high growth and low inequalities were at the heart of the “East Asian miracle.” Between 1960 and 1990, the region’s economies supported the so-called Kuznets hypothesis that economic growth in industrializing countries would first worsen inequalities but then reduce them in a context of sustained expansion. But such equalizing growth stopped in the early 2000s, if not sooner.

Nowadays, South Korean capitalism looks more harmful – perhaps because it has converged with the Anglo-Saxon liberal model, which is associated with low investment, slow growth, and high inequality. In fact, recent data suggests that South Korea and Japan are converging with the Anglo-Saxon camp. For example, the share of national income going to the richest 10% has increased globally, but particularly in the United States and East Asia. In the 2010s, the United States had the highest ratio, at over 45%, followed closely by South Korea (45%) and Japan (40%).

Further support for the convergence thesis comes from the World Inequality Report 2022 produced by the World Inequality Lab. South Korea’s per capita income (on a purchasing power parity basis), according to the report, is € 33,000 (€ 37,250) – similar to UK (€ 32,700) and somewhat lower France (€ 36,300), but higher than Italy (€ 29,100) or Japan (€ 30,500). But when it comes to income inequality, South Korea’s richest 10% earn on average 14 times more than the poorest 50% – a multiple closer to that in the United States (17 times) or Japan (13 times) than that of Italy (eight times), France (seven times) and Sweden (six times).

In addition, South Korea’s gross domestic product growth has gradually declined over the past two decades, replicating the Japanese experience. After an expansion of 6-7% per year in the 1980s and 1990s, the potential growth rate of the economy fell to around 5% in the early 2000s and then to 3.7% in the late 2000s , to 3.4% at the beginning of the 2010s and to 2.8%. in late 2010. My colleague Se-jik Kim even proposed a “law” according to which South Korea’s potential GDP growth rate declines by 1 percentage point every five years.

What is driving the convergence of East Asian economies towards the American model? One answer may be financialization, long a key feature of American capitalism, where the financial sector accounts for a growing share of GDP and dividend payments exceed reinvested corporate earnings.

Since South Korea implemented financialization as a condition of its rescue plan for the International Monetary Fund during the Asian financial crisis of 1997, the country’s economic model has turned to US-style shareholder capitalism. One of South Korea’s first reforms was a radical opening up of financial markets that lifted the ban on share buybacks and encouraged more dividend payments, contrary to the established practice in East Asia of to keep the profits to reinvest them.

As a result, the share of investment in South Korea’s GDP has since declined by 5 percentage points, reducing domestic growth and job creation. Meanwhile, the share of foreign investors in South Korean stocks fell from less than 5% in the mid-1990s to around 40% in the early 2000s.

While many have long viewed low dividend payments as one of the reasons for ‘Korean discounts’ in company valuations, leading companies such as Samsung are now embracing US practices by paying out around 40% of their net profits. to shareholders. And in 2017, Samsung started paying dividends quarterly rather than once a year – a big change, given that annual dividends were once seen as a virtue of East Asian capitalism over Anglo-short-termism. Saxon.

But East Asian capitalism now needs a rebalancing. Here, policymakers can learn from Europe, which has launched several reforms to curb the negative influence of shareholder capitalism. In 2015, for example, the European Parliament enacted corporate governance reforms allowing European Union companies to grant more voting rights or pay higher dividends to shareholders who hold their shares more than two years.

Likewise, the United States allows newly listed companies to issue dual class shares that give their founders special voting rights. This has enabled many high-tech companies, including Google and Facebook, to take a long-term management perspective and aggressively pursue new, innovative projects.

Such benefits are part of the reason why South Korean e-commerce platform Coupang decided earlier this year to list on the New York Stock Exchange rather than the KOSDAQ national market. As a result, South Korea’s National Assembly is finally on the verge of passing a long overdue law allowing start-ups or small and medium-sized businesses – but not large corporations or chaebols – to issue double shares. class.

East Asian countries should see the COVID-19 crisis as an opportunity to reshape their economies by curbing financialization and restoring their manufacturing strength, which previously brought high growth and greater equity. But rather than simply reverting to the past, the region’s economies should embrace a hybrid model that includes elements of the shareholder and stakeholder models. Such reform is also in line with the global adoption of environmental, social and governance principles, which the South Korean business sector strongly supports.

While East Asia’s convergence towards Anglo-Saxon capitalism may seem shocking, the data does not lie. But with the right measures, policymakers can help ensure that the region’s economic future is brighter than its recent on-screen portrayals suggest.

Keun Lee, vice chairman of the National Economic Advisory Council to the President of South Korea, is a distinguished professor of economics at Seoul National University. © Project Syndicate, 2021

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