Why Japan is less well prepared than South Korea

01.03.17 Publication:

In the second half of the 20th century, no two countries performed better, in terms of raising citizens’ living standards, strengthening political institutions, and making their societies safe, secure and stable, than Japan and South Korea. Long before China came to grab the world’s attention, your two countries were the true stars of long-term political and economic development.

So how well are you 20th century stars shaping up in the 21st century? Generally, such a question is answered by looking at current economic performance, perhaps with an additional look at political stability.

But that can be misleading, because economic performance can be volatile and may reflect regional or worldwide trends. Right now, Japan looks extremely stable politically while Republic of Korea looks unstable, thanks to the impeachment of President Park Geun-Hye.

A better way is to look at data across a broader range of subjects than just GDP, chosen in order to reflect the big trends that we all know are going to be important during this century: technological innovation, demography, the emergence of the knowledge society, globalization, and, crucially, the prevalence of external and internal shocks that are liable to test the resilience of societies’ political and economic institutions.

That is what I have tried to do with a new statistical indicator I have just published through my educational NGO, The Wake Up Foundation, which is called the Wake Up 2050 Index. The indicator is a blend of 25 different data sets for all the 35 countries that are members of the Organisation for Economic Co-operation and Development, with the data grouped under the five themes of demography, innovation, knowledge, openness and resilience.

Japan and South Korea both score well on the 2050 Index: Japan ranks 14th out of 35 countries, but it is still beaten by South Korea, which ranks 6th.

Why do both do well, but Korea better than Japan? The reasons are quite revealing. First of all, both countries have, compared with others, reacted well to the demographic pressures they face from ageing. Birth rates are very low. But more important is that South Korea and Japan are much more advanced than other countries in making it possible and attractive for older people to stay in the workforce.

Both countries have been successful at keeping ageing populations healthy. But on one measure, Korea has an advantage: thanks to widespread use of private pension schemes, it spends only 2% of GDP on public pensions, whereas Japan spends 10% .

Neither country ranks well on openness, although Japan is the more open of the two. Levels of foreign direct investment, for example, are low in both. But where both look rather better is on knowledge and innovation.

The Index measures knowledge both by looking at educational standards and the proportion of the population benefiting from university education, and by trying to guage how well that knowledge is then diffused and exploited, through productivity and measures of gender equality. The rise in female labour-force participation in Japan, which now exceeds that in the US, means that public money spent on educating women is now able to be of greater economic benefit – though more progress could still be made.

Both South Korea and Japan also score well on innovation, which the index measures by using spending on research & development, patent applications, broadband penetration and the regulatory environment for doing business. But, and here is probably the clearest lesson for public policy and corporate boards, South Korea still scores better on innovation than Japan does.

There are many things that need to be done to make Japan one of the stars of the 21stcentury. Making the country more open to ideas, people, trade and technology is one of them. But perhaps the most straightforward area for potential improvement lies in innovation.

The knowledge is there. But it is not being expressed as well as it might be either in actual discoveries and patents or in corporate and public efforts on R&D. Japan has many areas of technological excellence, but that excellence is not generalized, not applied across the whole of society, as well as it is across the Sea of Japan in South Korea.

The World Bank’s rankings for how favourable the regulatory environment in each country is for doing business are an important element of innovation. However good the technological research, it will not be exploited quickly or effectively if the regulatory barriers to doing business are too high.

This provides the clearest contrast between South Korea and Japan. Among all the 190 countries assessed by the World Bank, South Korea ranks 5th in terms of the ease of doing business. Japan ranks 34th. And despite all the promises of Abenomics and the third arrow of structural reform, it actually fell back two places between the 2016 rankings and 2017.

Business should be lobbying the Abe administration much harder to get this changed, to make it easier to start and expand businesses in Japan.