Differences in Growth Trajectory between Korea and China

I have discussed the similarities between Korea and China in terms of their innovation and growth trajectories.

What has been the difference, then?

One of the major differences lies in that high levels of capital inflows have played a major role in China’s exponential growth, while international capital inflows to Korea had been limited until the 1997 financial crisis. Of course, capital in both countries has been controlled by the state.

China has built its industrial capacity quiet fast. How has China been able to become the world’s largest export country in a relatively short timeframe?

Firms in the East like Japan and Korea and in the West like the U.S. started to move parts of their manufacturing operations to China largely due to the currency and tax policy of the U.S.

The MNCs have used China to increase their profits and China has built its industrial base in return for that.

Cheap money has been both the source of rapid growth and potential problems facing China.

China has bought the U.S. debt, which has been driving their low-cost export industry. Their wealth has been largely based on their surplus of the USD. China has used cheap capital on productive economy since they needed the means of production. In the meantime, they have squandered them on unproductive asset bubbles.

China has embarked on the faster development path than Korea. Yes, they have built their industrial capacity on their own terms. And yet, their economic model is under stress due to the very underlying factors which have made their exponential growth possible.

In a sense, Korea became a victim of its own success. So did Japan. Korea’s case in terms of the financial crisis and high tech development they have experienced can provide useful insights into the current conundrums of China.

Again, innovation, industrial capacity building, and economic growth in a country are closely intertwined with political economy and policy undertaking, along with geopolitical dynamics.