11. The Korean Economy: Creating Space Between China and Japan

Asia’s fourth-largest economy, South Korea, has been facing a unique situation: to create an economic space between Japan and China. The situation has become harder due to China’s enhanced technological progress and rapid catch-up growth, which poses a competitive challenge to major Korean exporting industries. Japan, on the other hand, also has price competitiveness stemming from the lower yen and its technological superiority. The study finds that the recent ‘nut in a new nutcracker’ situation has posed totally different predicaments to the Korean economy from the previous one in the late 1990s. In the past, Korea has carried out structural reform and technological innovation to overcome its current predicaments and to avoid secular stagnation. As Korea’s manufacturing industry has been developed sufficiently, it should find opportunities in service sectors and higher value-added industries. It should also reform to enhance supply-side efficiency since structural problems—chaebol, the educational system and dependence on old industries—hamper gains and growth.