[Column] The state is back — but is it in business?

Posted on : 2024-05-06 09:49 KST Modified on : 2024-05-06 09:53 KST
After an era of pax globalization, we’re returning to a system where state actors are central, making their policies all the more important
Monitors at an electronics shop in Seoul’s Yongsan area display news broadcasts about the meeting between President Yoon Suk-yeol and Democratic Party leader Lee Jae-myung on April 29, 2024. (Yonhap)
Monitors at an electronics shop in Seoul’s Yongsan area display news broadcasts about the meeting between President Yoon Suk-yeol and Democratic Party leader Lee Jae-myung on April 29, 2024. (Yonhap)

By Kim Yang-hee, professor of economics and finance at Daegu University

We are entering a new era, one without peace. True, one could say war has always prevailed throughout the world, but this is different. Right now, we are witnessing two major conflicts that are serving as proxy wars for major superpowers. This is the first time this has happened since World War II. If a third conflict erupts, it will most likely involve the Taiwan Strait or the Korean Peninsula. The security and survival of the Korean people are at stake. These are critical times. 

We are also entering an era of protectionism. Naturally, one could say such trends have always existed, but this time, it’s different. “National security” has become such an overused and hackneyed guise for justifying protectionism and dividing the world according to ideological lines. 

In attempts to revive its cutting-edge industry, the US has delved into its deck and retrieved the old card of industrial policy. Countries around the world are playing their own cards in a global subsidy contest. Policy leaders are claiming that such measures are created in response to hostile regimes fortifying their own walls, yet the result seems to be more walls protecting bigger yards inaccessible to those on the outside. What are we supposed to do? 

The clearest signal in these changing times marks the return of the state. The most important question, then, is one that concerns the capability and capacity of an individual state. In other words, the effectiveness of their policies. 

The International Monetary Fund warns us in its 2024 Fiscal Monitor report that industrial policy isn’t magic. Policies need to address reducing our carbon footprints, spreading knowledge and awareness throughout various industrial sectors, creating social value, and disbanding discrimination against foreign companies. In other words, the policies need to focus on effectiveness. 

In their book “Producing Prosperity: Why America Needs a Manufacturing Renaissance,” economists Gary Pisano and Willy Shih argue that industrial actors must adopt a long-term perspective, which requires them to invest in public education and create an “industrial commons” that benefits society as a whole. In short, the creation of social value over private value. The creation of such value is the role of the state. In “How Asia Works: Success and Failure in the World's Most Dynamic Region,” American journalist Joe Studwell praises the success of the industrial policies of China, Japan and Taiwan. 

South Korea is displaying some warning signs. On June 28, 2023, President Yoon Suk-yeol ordered a financial audit of the budgets of state research and development institutes, citing the need to clear the field of “special interest cartels.” This resulted in a 14.7% reduction in state-sponsored R&D institutes in 2024, with 1,069 out of 1,623 projects taking cuts in funding. This was the first such occurrence since 1991. 

Facing unilateral budget cuts, the R&D sector lashed out. Yet the administration has announced even bigger cuts for this year. The stated reason is to maximize efficiency, but it’s unclear as to whether that will happen. The only guaranteed result is a reduction in the predictability of the administration’s industrial policy, as well as the public’s trust in it. 

In an era of war, protectionism, and ideological conflict, South Korea needs to amplify its state power so that it can stand on its own and not be swayed by major powers. This means fostering its cutting-edge industries, recovering supply lines, and sharpening the competitive edge of materials, components, and equipment manufacturing. This is all in direct conflict with budget cuts in R&D. 

I’ve always argued that the future of South Korea’s economic security relies on our manufacturing sector. Manufacturing serves as our economic identity and our lifeline. Korean manufacturing comprised 27.6% of the national GDP in 1988. In 2021, this figure had fallen to 25.5%. However, this is still well above the OECD average of 14%.  

Since data started being available for comparison in 1991, Korea has always been the runner up to China in the rankings of manufacturing powerhouses. Korea boasts the No. 6 spot in the globe in terms of manufacturing output (as of 2023) and ranks No. 4 in the world on the competitive industrial performance index (as of 2021). It’s the only country in the world that’s able to pursue manufacturing cooperation on three of the four key items around which the US has signaled its intent to reshuffle supply chains: semiconductors, rechargeable batteries, pharmaceuticals — though not critical minerals. 

But now that China has essentially caught up on everything except for memory chips, the erosion of Korea’s manufacturing sector poses a major threat. As Yang Seung-hun painstakingly describes in detail in his book “Ulsan Dystopia: The Anxious Future of a Manufacturing Powerhouse,” when the manufacturing situation deteriorates to the point that Ulsan is struggling, there’s no hope for the rest of Korea. For the Korea of today to hold onto its place as a cutting-edge manufacturing capital, it must base and pursue its policies for basic research and industrial commons on clear-cut and reasonable plans. 

The general elections are over. Once the opposition’s majority became more concrete, the president finally sat down for a meeting with the leader of the nation’s top opposition party. If it recognizes the grave circumstances Korea finds itself in, both at home and abroad, the opposition party must take a principled stand and reject the cash handout pledge it ran on in the election. A capable state cannot be made by the ruling party alone. 

Please direct questions or comments to [english@hani.co.kr]


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