This year marks the 10th anniversary of the Asian financial crisis, better known as the “IMF crisis” in South Korea. It forced South Korea to renounce its government-controlled economic strategies and to embrace firm market principles.
Surely, this transformation was a loud wake-up call for South Korea, which had enjoyed spectacular economic growth over the previous two decades under government’s heavy hands.
As painful as it was, though, the aftermath of the crisis helped South Korea’s leaders realize what is lacking in South Korea: economic freedom.
Economic freedom is essential for an economy to prosper, as the Heritage Foundation/Wall Street Journal Index of Economic Freedom documents annually. Economic freedom encompasses all liberties and rights associated with the production, distribution or consumption of goods and services. It includes the protection of basic rights, such as property ownership, and commercial freedoms, such as unfettered movement of labor, capital and goods.
By eliminating obstacles, economic freedom creates a framework in which innovation is welcomed and economic prosperity is enhanced and sustained. One critical Index finding -- replicated year after year -- is the stunningly high correlation between economic freedom and prosperity. The general rule, simply put, is this: The higher the degree of economic freedom a people enjoy, the greater their economic opportunity and therefore prosperity.
In the aftermath of the financial meltdown, South Korea’s willingness to undertake tough reforms to adopt more economic freedom has indeed allowed the economy to swiftly bounce back from the economic turmoil. Many reform measures have been employed to revamp the weakness that led to the crisis. Non-performing loans have been effectively dealt with through extensive financial reforms, and the banking sector has been strengthened. South Korea has slashed its regulations by more than half (from 17,000 in 1998) and cut corporate tax rates to be a more competitive economy.
Today, according to the 2007 Index, South Korea's economy is 68.6 percent free, making it the world’s 36th freest economy. Unfortunately, however, a closer look reveals that South Korea’s level of economic freedom is neither as comprehensive nor as concrete as it should be.
For example, although its regulatory process has improved, bureaucracy and lack of transparency still hinders entrepreneurial activities. Interventionist government policies still linger. South Korea’s labor freedom is also shackled by restrictive employment regulations that hamper employment and productivity growth. Militant labor unions make the situation worse, disrupting the rule of law and undermining productivity.
As a result, opportunities have eluded entrepreneurs and consumers have been harmed. Uncertainty and lack of opportunity frustrates people, particularly the young, and small and medium-sized companies. Anti-business sentiment and populist attacks on free market and globalization become more frequent. These developments, in turn, make it harder for South Korea to expand economic freedom.
How should South Korea respond? Rather than just talking, seriousness about enhancing South Korea’s economic freedom should mean matching rhetoric with more concrete actions in modernizing and upgrading economic system. The role of government is not to create and distribute wealth. It’s to clear the way for people to create their own wealth.
More importantly, South Korea must start with a bigger change -- a change in mindset. Globalization is a fact of life in Korea. It is happening in the economy, but it should also happen in the way of thinking so that South Korea looks outward, not inward. Indeed, many of the positive changes South Korea has achieved since the crisis can be attributed to discarding the old way of thinking.
A truly dynamic Korea should embrace more economic freedom in order to adapt its social model to global realities. Protectionist and extreme nationalistic sentiment recently shown in the violent protests against ongoing FTA negotiations with the United States is shameful and shouldn’t be tolerated.
A failure to carry through on necessary economic reform with strong leadership may add to growing international concerns over Seoul’s receptivity to foreign business investment. The danger isn’t that the South Korean economy will collapse but that it will become less attractive to investors who will increasingly bypass South Korea to invest elsewhere, including competitive rival China.
This 10th anniversary of the “IMF crisis” is also a year in which South Korea will hold a presidential election -- an election that will shape its economic direction. It should be the year for a frank national discussion on how to continue and enhance South Korea’s prosperity. South Korea must not shy away from the challenge of pursuing more economic freedom.
Anthony Kim is a research data specialist in the Center for International Trade and Economics at The Heritage Foundation.