[BOK Focus] "We Must Implement Structural Reforms Japan Could Not... No Model to Follow"

Yoon Je Cho, Member of the Monetary Policy Committee: "Structural Change Over Economic Response"
Long-Term Growth Limited by Fiscal and Monetary Policies
Companies Growing Under Government-Controlled Finance
Must Increase Operating Profit Margins Through Technological Innovation

"Structural change is far more important than counter-cyclical policies. Since Japan failed to do this, there is no model to follow. Now, we have to take the lead. Who else would we entrust this to? The Swedish or Dutch models? Haven't we experienced that applying them to us results in Korean-specific variations? Therefore, we must now pursue practical reforms based on reality, considering our history, market, and institutions." (June, Jo Yoon-je, Monetary Policy Board Member of the Bank of Korea)

Since his appointment, Jo Yoon-je, a Monetary Policy Board member of the Bank of Korea who rarely voiced harsh criticism, emphasized 'structural reform' as a task for the Korean economy during a special lecture titled "Era of Great Transformation: Past, Present, and Future of the Korean Economy" given to Bank of Korea employees in early June. Jo pointed out, "I believe the economy develops and evolves on two pillars: not only the economic base but also the non-economic base," and criticized, "Although our country is in the $35,000 per capita income era, we still lag behind advanced countries in social sciences." He identified the politicization of economic policy, entrenchment of social classes, and rent-seeking through civil service exams, academic background, and regionalism as vulnerabilities in Korea's non-economic foundations.

In a phase marked by low growth in the 1% range, near-zero birth rates, and recession-type trade surpluses, Jo's lecture resonated strongly. Although initially held privately for executives and staff, the lecture was later released on YouTube at the request of Bank of Korea employees.

Yoonje Cho, Member of the Monetary Policy Committee of the Bank of Korea. [Image source=Yonhap News]

"Within 10 Years, National Governance Structure Must Be Reformed Through Cooperation and Social Grand Compromise"

In his lecture, Jo reviewed Korea's economic development over the past 60 years. He cited 'timing (Cheonsi, 天時)', 'geography (Jiri, 地利)', and 'harmony among people (Inhwa, 人和)' as the driving forces behind the rapid economic growth until the 1980s.

Jo particularly emphasized 'Inhwa,' which signifies the collapse of the social class order, as the most decisive factor. He explained, "Korea's caste system, which lasted over 2,000 years, collapsed in the late 19th century," adding, "Legally, since the 1912 Joseon Civil Code, 'human rights' became inviolable private property." The abolition of social status equalized citizens' starting points, fueling a surge in educational enthusiasm and enabling anyone to realize their potential and dynamism.

He described the General Agreement on Tariffs and Trade (GATT) and the Bretton Woods system's establishment after World War II, which significantly lowered tariffs and eased import-export restrictions, as 'timing (Cheonsi).' Jo noted, "At that time, it was expected that emerging powers like Chile, India, and Brazil in the Third World would rise, but ultimately, the four Asian Tigers (Republic of Korea, Hong Kong, Singapore, Taiwan) with abundant human resources seized the opportunity."

Regarding 'geography (Jiri),' he explained that Korea was favorably positioned to secure foreign capital. Jo said, "Although Korea experienced the devastating Korean War during the Cold War era, this became a momentum to form alliances with the U.S., such as the Korea-U.S. Mutual Defense Treaty, making it easier to obtain foreign currency," adding, "Despite low domestic savings rates at the time, Korea attracted substantial investment and achieved high growth rates."

Jo pointed out the need for 'structural reform' because Korea's internal and external environment changed from the 1990s onward, with China's rapid rise and the Asian financial crisis. He mentioned, "After the new Cold War system, Korea faced China's pursuit, causing a decline in manufacturing growth and insufficient time to develop knowledge-based services," and cited issues such as income distribution, excessive debt, accelerated population aging, economic concentration, and soaring real estate prices.

For Korea's economic future, he identified three tasks to be accomplished within the next decade: ▲ reforming the national governance structure ▲ restructuring the overall incentive system ▲ innovating the public sector.

Regarding national governance reform, Jo emphasized that a successful government requires leadership, vision, capable aides, and political power. He stated, "For any government to succeed, the leader must have a vision aligned with the demands of the era, supported by competent aides who can translate it into realistic policies, and a political force to push it through," highlighting political power as the most crucial. However, given Korea's current situation, he added that political power is hard to obtain, so cooperation and social grand compromise are necessary.

He also mentioned that thorough job analysis and proper job evaluation are essential for a desirable performance-based pay system. Jo said, "We need to create a system where evaluations can be linked to personnel decisions and promotions," emphasizing the importance of innovating personnel systems starting with public institutions.

Jo suggested that the public sector must move away from the current bureaucratic system and embrace competition. He said, "Korea is a country with a per capita GDP of $35,000 and a population of 50 million," adding, "Practically, we must compete with the G7 countries. To do so, we must be able to compete with their elites, and our government and politics must reach their level."

Operating Profit Margins Declining Since the 1960s... Need for Corporate Debt Management and Technological Innovation

Jo recently expressed that corporate management must also change compared to the past 60 years. Together with Choi Yeon-kyo, head of the Monetary and Credit Research Team, he published a report titled "Changes in the Economic Environment and Financial Indicators of Korean Companies Over the Past 60 Years" at the end of last month, pointing out, "Operating profit margins of Korean companies have gradually declined since the 1960s."

According to the report, especially in the 2010s, U.S. companies' operating profit margins have significantly surpassed those of Korean firms. This phenomenon is related to companies like Google, Microsoft, and Amazon, which possess cutting-edge technology and competitiveness, enjoying monopolistic positions worldwide. Jo indicated, "For our companies to increase operating profit margins, efforts in various areas such as cost reduction are necessary, but it suggests that without technological innovation and development to secure somewhat unique technologies in the global market, like our semiconductor and automobile companies currently do, it will be difficult."

Jo also analyzed that Korean companies have grown under the protection of government-directed finance over the past 60 years. He said, "Past government financial intervention and excessive policy support undermined the stability of large corporations, making them vulnerable to external shocks and economic fluctuations, eventually leading to a debt crisis," and warned, "Attention should also be paid to the relatively high debt dependence, debt ratios, and low interest coverage ratios of Korea's small and medium-sized enterprises, which continue to persist."

This content was produced with the assistance of AI translation services.