January 13, 2006

January 13, 2006 | Commentary on Asia

Time for Korea to Free Its Economy

It has become an annual disappointment. The 12th edition of the "Index of Economic Freedom" came out recently, and once again, it exposes lost potential in South Korea.

South Korea is safely in the "mostly free" category of the index, which is produced jointly by The Heritage Foundation, a Washington, D.C.-based research institute, and The Wall Street Journal, the United States' leading financial newspaper. It ranks 45th among 157 countries rated. Its score of 2.63 (on a 1-5 scale, with one being best) ranks ahead of both the average (3.18) and median (3.28) of the Asia-Pacific region.

Since 2000, South Korea's exports have climbed from $172 billion to $284 billion, its imports from $160 billion to $261 billion, meaning total trade has topped the $500 billion mark.

But its overall score of economic freedom is .08 worse than it was in the 2000 index, and its economy continues to fluctuate within the "mostly free" category of economic freedom. What is the problem? Why can't South Korea achieve the same reputation as a leader in trade and commerce as its regional competitors, such as Hong Kong, Singapore, Japan and, increasingly, China?

Why must South Korea settle for a "mostly free" economy while Ireland, Estonia, and, again, even China, have been marching toward higher economic freedom and greater prosperity? After all, countries that show the biggest improvement in their index scores grow at 2 -1/2 times the rate of those that show the biggest decline. What holds South Korea's economy back?

Consider: South Korea's corporate tax rate stands at 25 percent thanks to a reduction from 27 percent approved by the National Assembly.

Its weighted average tariff stands at 10 percent, according to the World Bank. Moreover, the tariff process is complicated, export subsidies are robust, and more than 1,000 items are forbidden to enter its ports to protect domestic businesses.

Compare that to Ireland, a country that, about 15 years ago, embraced economic freedom with pro-growth policies that encouraged entrepreneurial activity and investment. Thanks to this turnabout, Ireland has gone from the Sick Man of Europe, with double-digit unemployment, negligible growth and a declining tax base, to a net importer of workers and the continent's healthiest economy.

With barely 1 percent of the European Union's population, Ireland receives a third of all U.S. investment in Europe and now stands as the world's largest exporter per capita. In short, Ireland is to Europe what South Korea should, and could, be to the Asia-Pacific region - a bustling, growing hotbed of economic activity.

In Ireland, the top income tax bracket is still 42 percent. But the corporate tax bracket has been reduced to 12 percent and the average weighted tariff to 1.3 percent. Foreign investment has grown by a quarter in six years. All of this has led to growth that totaled 80 percent through the 1990s, stood at 10 percent or more as recently as two years ago and, only last year, "cooled" to around 4.5 percent.

Workers in countries with "free" economies such as Ireland earn more than twice what those in "mostly free" economies earn and nearly seven times what those in "mostly unfree" or "repressed" economies earn.

Economic freedom is necessary for people to prosper. By eliminating obstacles, it creates a framework in which innovation is welcomed and economic growth is enhanced. Around the world, countries with a higher degree of and strong commitment to economic freedom enjoy higher standard of living through more opportunities.

In other words, as Hong Kong and Ireland have demonstrated, economic freedom creates opportunity for local entrepreneurs and international investors, whose capital only amplifies the creativity and dynamism of South Koreans.

South Koreans should be the last people who need to hear this message. Bold entrepreneurship spurred the businesses that now sustain its formidable economy. But as those businesses - and the workers whose powerful unions staff them - have become entrenched, the temptation has been to enact policies that maintain the status quo.

But no country is ensured of future success, even those who use formulas found successful in the past. The government should reduce regulation, loosen labor-market restrictions and move toward a freer, more flexible economy.

The role of government is not to create and distribute wealth. It is to clear the way for people to create their own wealth. It's time for South Korea to join in the success story its neighbors and others are living.

Anthony B. Kim is research associate in the Center for International Trade and Economics at the Heritage Foundation

About the Author

Anthony B. Kim Research Manager, Index of Economic Freedom, and Senior Policy Analyst
Center for Trade and Economics (CTE)

First appeared in The Korea Herald