Entrepreneurship is the backbone of the economy

Jaewan Bahk

Chair, Korea Council on Economic Education

Honored guests and Ladies and Gentlemen,

It is a great honor to address this meaningful international forum held in Jinju, the home of patriotism, the cradle of talent, and the source of Korean spiritual culture.

There is a word of Boo-Min-An-Kuk, meaning people living a full and comfortable life in secure and civilized country. To achieve it, two conditions must be in place. The first is collective human competence. With the exception of resource-rich countries, high-income countries invariably have high civic competence: Japan, the Netherlands, Switzerland, and Israel are examples of countries that thrive despite their limited resources. Japan joined the ranks of the great powers by eliminating illiteracy in the early 20th century.

Human competence is divided into three levels. First is the basic (standard) competence such as literacy, numeracy, and computing. Second is the innovative competence of inquiry, risk-taking, creativity, and problem-solving. Third is the convergent competence of cognition, empathy, communication, and collaboration, which is why I used the term “collective” above.

If we are being equipped with such set of competences, is it enough to live well? Unfortunately, that is not the case. A sufficient condition requires a fair system where contribution and reward are well aligned. Let us leave aside the communist bloc here which collapsed due to a serious mismatch of contributions and rewards and rampant privileges. India remains at a stage of development below its potential because its status-oriented Caste system undermines incentives to work hard. Israel, too, struggled a lot as it introduced Kibbutz communities that denied private property shortly after its foundation, and only took off after switching to a market economy in the mid-1980s. Britain in the 1960s and ’70s, plagued by reckless socialist experiments; Argentina, once richer than the United States but reduced to a middle-income country; and the plight of Venezuela today, with the world’s largest oil reserves, are also lessons we can learn from.

If we trace the footsteps of the Korean economy over the past 70 years, we can clearly recognize the conditions of a rich nation. There were two reasons for Korea to be able to leap from being one of the poorest countries to a high-income country in a short period of time. First, the human resources for industrialization were greatly expanded, and second, timely national strategies and a fair system were put in place.

First of all, the country's population surged after liberation, thanks to the repatriation of Korean diaspora, an influx of Korean War refugees, and a postwar birth boom. The quality of the workforce also improved dramatically: the illiteracy rate dropped from 78 percent in 1945 to less than 1 percent in 1966, owing to government and religious groups’ efforts to foster private schools. A large number of STEM graduates became the foundation for the mass-production manufacturing that formed the backbone of the Korean economy. Today, Korea’s science and technology universities have more seats than Germany, the United Kingdom, and France combined. The innovation competence was multiplied as people ventured out of their hometowns and homeland in search of new business opportunities and better jobs and sought creative solutions to problems that arose in the field. The entrepreneurial spirit had sprouted.

The founding fathers chose liberal democracy and a market economy, albeit limited, instead of the socialism and planned economy that flavored the era. They implemented land reform based on the principle of compensated expropriation and distribution on credit. As a result, a cornerstone of the fair system was laid in which anyone could be rewarded for hard work.

The military regime’s insight should not be forgotten as well. It maximized performance by strategically allocating limited resources in a hub-and-spokes style to selective areas such as research and development (R&D), exports, and heavy and chemical industries. Economic policies at that time were mainly in line with expert opinions based on far-sighted visions and national interests with minimal distortions from myopic ‘voters’ rational ignorance’ and partisan politics. Entrepreneurship blossomed on this foundation, innovation took hold, and the “Miracle on the Han River” has been achieved.

Immediately following the division of the Korean Peninsula, North Korea was more than three times richer than South Korea. However, as of 2022, per capita income (GDP) of South Korea is 28.5 times bigger and life expectancy is 13 years longer that the North. As Daron Acemoglu of MIT and James Robinson of the University of Chicago argue in their book “Why Nations Fail”, it’s hard to find a reason for this other than the stark differences in systems between the two Koreas.

In fact, the dramatic improvements in human life over the past 300 years can be also attributed to the innovations spurred by market economies. The new institutions of private property protection, division of labor, trade, corporations, double bookkeeping, and finance have boosted productivity at an exponential rate, and corporations have been at the center of it all. Nobel Prize winning economist Herbert Simon argued that without corporations, we would still be stuck in a medieval agrarian society.

Joseph Schumpeter, the most influential economist of the first half of the 20th century, also viewed corporate innovation as a key driver of growth. He believed that innovation-originated market power can provide better results than the “invisible hand” and price competition. He also argued that temporary monopolies and abnormal profits created by technological innovation should be respected because they would soon be competed away by rivals and imitators and were necessary to provide the incentive for firms to develop new products and processes. Schumpeter, who focused on the “Gale of Creative Destruction” caused by the wild spirits of entrepreneurs, is credited with capturing the essence of the market economy more accurately than anyone else.

Distinguished guests from home and abroad,

But where does Korea stand now? The slow-growth trend is solidifying. This is because human competence and a fair system, which used to be the formula for success, have paradoxically turned into stumbling blocks. Both the necessary and sufficient conditions for living well have stepped backwards. Populations are shrinking and competences are falling behind. Basic competences are still good, but innovative competences are deteriorating. Koreans are good at what they are told, but they are reluctant to find and do the things they are not told to do, and the preference for job security is intensifying. Convergent competences are close to a failing grade, leading to intensified social splitting and conflicts, lax discipline, and rampant anti-corporate sentiment.

Populism is on the rise, and so does “Nanny State” mentality which is based on the claim to support the weak and suppress the strong. In many areas, including business regulation, education, labor, welfare, taxation, and government subsidies, an unfair system that does not meet the standards of advanced countries and that separates contributions and rewards is gaining ground. As a result, the sense of self-support is fading and entrepreneurship is stifled, stalling innovation and the birth of new industries. According to the recent World Values Survey, the proportion of Korean citizens who believe that luck is more important than hard work has risen to the highest level among major countries.

We need to remove these shackles as soon as possible. We need to enhance human competence through bold and steady structural reforms and restore a fair system. We must establish ‘Workfare’ to maximize the use of the available workforce, and hasten education and labor reforms to nurture innovation and convergent competences. Regulatory reform and fiscal discipline that promote private autonomy, creativity and diversity, and strengthen incentives and accountability are also urgently needed.

At the center of it all is the challenge of fostering entrepreneurship. When innovative and convergent competences are enhanced, so is entrepreneurship. Further, entrepreneurship can only flourish when the system is fair. To reiterate, enterprises are the driving force of innovation, the source of jobs, and the root of added value. Therefore, I strongly believe that entrepreneurship is the backbone of the economy.

We have a long way to go before we become a country where entrepreneurship flourishes. But it’s something we should all strive for with all our hearts and all our might. I hope this forum will be that stepping stone and compass for such a journey.

May God’s blessings and favor always be with you in the upcoming holy long march of the Republic of Korea. Thank you.