57664 Korea and the Knowledge-based Economy MAKING THE TRANSITION INFORMATION SOCIETY WORLD BANK INSTITUTE Promoting knowledge and learning for a better world Edited by Carl Dahlman and Thomas Andersson Korea and the Knowledge-based Economy Making the Transition THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTrrHE WORLD BANK ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION FOR ECONOMIC CO~OPERATION AND DEVELOPMENT Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960. and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed: - to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; - to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; and - to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations, The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece. Iceland. Ireland, Italy, Luxembourg, the Netherlands, Norway. Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971). New Zealand (29th May 1973), Mexico (18th May (994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996) and Korea (12th December 1996). The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention). WORLD BANK INSTITUTE The World Bank Institute (WBO provides training and other learning activities that support the world Bank's mission to reduce poverty and improve living standards in the developing world. WBI's programs help build the capacity of World Bank borrowers, staff, and other partners in the skills and knowledge that are critical to economic and social development. WBI is located at World Bank headquarters in Washington, DC. Many of its activities are held in member countries in cooperation with regional and national development agencies and education and training institutions. The Institute's distance education unit conducts interactive courses via satellite links worldwide. While most of WBl's work is conducted in English, it also operates in Arabic, Chinese, French, Portuguese, Russian, and Spanish (www.worldhank,orglwbi), Library of Congress Cataloging-in-Publication Data has been applied for. The findings. interpretations, and conclusions expressed in this book are entirely those of the contributors and should not be attributed in any manner to the World Bank and the Organisation for the Economic Co-operation and Development, to their affiliated organizations, orto members oftheir Boards of Executive Directors or the countries they represent. This edition © The International Bank for Reconstruction and Developmentffhe World Bank and the Organisation for Economic Co-operation and Development 2000 The knowledge assessment framework and the knowledge scorecards used in this edition © The International Bank for Reconstruction and Developmentffhe World Bank 2000 Foreword Knowledge is fast becoming a key factor in economic and social development worldwide. Rapid innovations in science, communications and computing technologies are opening up new opportunities for countries to harness knowledge and participate more fully in the global economy. Developing coun- tries that successfully make the transition to the knowledge-based economy will have unprecedented possibilities to become more competitive in world markets and to participate in the global information society. New technologies can also extend the benefits of knowledge to all segments of society and help countries close the gap in living standards among their citizens. This book defines a knowledge-based economy as one where knowledge is created, acquired, transmitted and used effectively by enterprises, organizations, individuals and communities. It does not focus narrowly on high-technology industries or on information and communications technologies, but rather presents a framework for analyzing a range of policy options in education, information infra- structure and innovation systems that can help usher in the knowledge economy. It also makes the case for better co-ordination among the government. the private sector and civil society to enhance competitive- ness and advance economic and social development. The book, which is based on a joint study by the World Bank and the Organisation for Economic Co-operation and Development, breaks new ground in its attempt to develop a comprehensive set of national policy responses to the knowledge revolution. The study focuses on Korea, a country with limited natural resources which has developed mainly through an outward-oriented, industry-led strategy based on large firms and economies of scale. Today, however, this industrial paradigm is being challenged by the rapid rise of knowledge as the principal driver of competitiveness. We believe that Korea and the Knowledge-based Economy proVides useful lessons for other countries as they move away from old paradigms toward new models of development. Vinod Thomas Herwig Schlogl Vice-President of the World Bank Institute Deputy Secretary-General of the OECD Acknowledgements This study was prepared at the request of the Ministry of Finance and Economy of the Government of Korea as an input to its strategy for becoming an advanced knowledge-based economy. The timing of the study was appropriate as the government was in the final stages of preparation of its three-year Master Plan, following the announcement by President Kim in January 2000. It is the result of a collabo- rative effort between the world Bank and the OECD, with the bulk of the funding being provided by the world Bank's Korea country program budget. During the preparation of this study over the past year, several missions made up of World Bank and OECD staff visited Korea and held discussions with various government counterparts, representa- tives from think tanks, the private sector and civil society, to obtain a better understanding of the issues confronting Korea in its transition to a knowledge-based economy. During these meetings, the team gained valuable insights on the process, time line and details of the Korean vision and strategy. Carl Dahlman undertook the overall co-ordination of the report and headed the World Bank team, which included Saha Dhevan Meyanathan, Anuja Adhar Utz, Jean-Eric Aubert (on secondment from the OECD), Moon Kyu Bang, Xiaonan Cao, Swati Ghosh, Denis Gilhooly, Charles Kenny and Eul Yong Park (consultant) . The OECD team was headed by Thomas Andersson, and included Peter Avery, Zhang Gang, Jean Guinet, Abrar Hasan, Daniel Malkin and Joonghae Suh (consultant). Valuable contributions and comments were received from World Bank colleagues, including Charles Abelmann, Sri-Ram Aiyer, Jacqueline Baptist, Gillian Brown, Bruce Harris, Emma Hooper, Masahiro Kawai, Homi Kharas, Eun Jeong Kim, Bruno Laporte, KatherineMarshall, John Middleton, Richard Newfarmer, Zia Oureshi, Christopher Thomas, and Shahid Yusuf, as well as from Randall Jones and Dimitri Ypsilanti of the OECD. Research assistance was provided by Sean White and Zhihua Zeng. Administrative assistance was provided by Megan Breece. We would like to express our appreciation to our Korean counterparts for their many insightful com- ments, notably those received, at the time of writing, from Mr. Kun Kyung Lee, Deputy Minister, Ministry of Finance and Economy, Mr. Yong Lin Moon, Minister of Education, Mr. Nyum Jjn, Minister of Planning and Budget, Mr. Oh Seok Hyun, Managing Director of the National Economic Advisory Council to the President of Korea, Mr. Jin Soon Lee, President, Korea Development Institute, Mr. Jungho Yoo, Vice President, Korea Development Institute, and Mr. Cheonsik Woo, Korea Development Institute. Table of Contents Currency Equivalents.......................................................................................................................................................... 9 Abbreviations .................................................................................................................................................................... .. 9 Executive Summary............................................................... .................................... ............................... ................ ........... II A. The knowledge revolution: the challenge to Korea's development strategy ................................................ II B. The framework of the knowledge-based economy............................................................................................ 13 C. Issues in the four key areas.................................. ...... ........................... ....................................... ......................... 14 D. Industry-related reforms ....................................................................................................................................... 16 E. Implementation of the reforms ............................................................................................................................ 17 F. Executive summary matrix: main findings and remaining issues .................................................................... 18 Chapter I. The Knowledge Revolution: A Challenge to Korea's Development Strategy ....................................... 25 A. The current context................................................................................................................................................ 25 B. The knowledge and information revolution ............................................................................................ ........... 25 C. Challenges to Korea's future deve]opment........................................ ...... .......................................................... 28 D. Korea's new development strategy ..................................................................................................................... 31 E. The concept of a knowledge-based economy.................................................................................................... 31 F. Definition and framework.................. ........................... ... ... ... ....................................................................... ......... 32 Notes ..................................................................................................................................................................................... 37 References ...... ..... .................... .............................. ........... ......... ................ ........................................... ....... .............. ........... 39 Chapter 2. Updating the Economic Incentive and Institutional Regime .................................................................. 41 A. Introduction ............................................................................................................................................................ 41 B. Redefining the role of government.... ................................................................... ........ ...................... ................. 41 C. Opening up the economy and promoting competition .................................. .................................................. 42 D. Increasing the soundness and efficiency offinancial markets ......................................................................... 45 E. Enhancing labor flexibility and strengthening social safety nets .................................. ...... ............................ 46 F. Addressing the risks of the "digital divide" ........................................................................................................ 47 G. Updating the institutional regime........................................................................................................................ 50 H. Condusion............................................................................................................................................................... 52 Notes ..................................................................................................................................................................................... 53 References ......................... ........... .................................... ......................... ....................................... .................................... 56 Chapter 3. Developing Human Resources for the Knowledge~based Economy..................................................... 57 A. Introduction ....... .......................................................................... ... ............................................................... ......... 57 B. Educational achievements and recent education reforms in Korea .............................................. ................. 57 C. The paradigm shift in education .................................... ...................................................................................... 60 D. Challenges to the Korean education system and possible responses........................................................... 61 E. Conclusions............................................................................................................................................................. 71 Notes ..................................................................................................................................................................................... 73 References .......................................................................... ,........ .......................................................... ... ... ... ...................... 76 Korea and the Knowledge-based Economy: Making the Transition Chapter 4. Ensuring a Dynamic Information Infrastructure........................................................................................ 79 A. Background...... ...... ................................. ....................................... ................... ........... ........................................... 79 B. Recent sector growth. ........................................................ ................... ...................... ........................................... 79 C. Remaining challenges .............................................. .................................................. .............................. ............. 82 D. Cyber Korea 21: Targets and initiatives .............................................................................. ...................... ............. 83 E. Next-generation policy and regulatory role for government.................................... ........................................ 84 F. Ensuring access and overcoming the digital divide ........... ............................................................................... 89 G. Using leTs to improve the performance of government ......................................................... .......................... 90 H. Conclusions............................................................................................................................................................. 91 Notes ..................................................................................................................................................................................... 93 References.. ........................ ...... ......... ......................... .............................. ........... ....................................... ................ .......... 94 Chapter 5. Improving the Korean Innovation System .............................. .................................................................... 95 A. Introduction ............................................................................................................................................................ 95 B. Profile of science, technology and innovation activities..................... ........ ...................................................... 95 C. Main features and weaknesses of the Korean innovation system.... ............. ......... .............. ........... ............... 98 D. The new policy agenda ......................................................................................................................................... 103 E. ConcIusions............................................................................................................................................................. 110 Notes ..................................................................................................................................................................................... III References.......... .................. ........................ .............. ........... ............. .............. ............................................ ......... ............... 113 Chapter 6. Promoting Knowledge-based Activities. ........ ...... ........ ........... ........... ............. ....................... ........ ............. 115 A. Introduction..... ..... ............ ............................ ..................................................................................... ..................... 115 B. Reforming the chaebol........................................... ................ ...... ..... ................. ........... ............... ............. ............... 116 C. Improving conditions for small and medium-sized enterprises (SMEs) ........................................................ 120 D. Strengthening the contribution of foreign firms................................................................................................. 123 E. Promotion of high-value-added services ............................... ,...................................................... " .. ,................. 124 F. Promoting investment in intangible assets .............. .............................. .................................... ........................ 126 G. Conclusion .. .................................................................. ...... .............................. .................................... ... ............... 128 Appendix Most Important Bottlenecks in Production and Technologicallmprovement....................................... 129 Notes .................................................................. ,.................................................................................................. ,............... 130 References........................................... ................. .............. ......................... ...................... ......................................... .......... i 3i Chapter 7. Implementing Korea's Strategy for a Knowledge-based Economy.................................................................. 133 A. Introduction ............................................................................................................................................................ 133 B. Broadening and deepening the consultations................................................................................................... 133 C. Working out the implementation details ........................ ............................................ ..... ...................... ............. 136 Notes ..................................................................................................................................................................................... 140 References .......... ................. ....................................... ...................... ........................... .............. ......................... .................. 142 Annexes I. Preliminary Assessment of the Knowledge-based Economy in Korea................................................................ 143 II. Closing the Digital Divide: Some Country Examples ............................................................................................. 147 III. Some Reflections on the Challenges of Policy Implementation ........................................................................... 151 List of Boxes 1.1. The new economy........................... ............... ................ ......... ............. ........... ................. .................... ........ ........... .... 26 1.2. The national innovation system ........ .............................. ................. ............................................... .......................... 35 3.1. New Zealand's experience with decentralization ................................................................................................... 64 5.1. The under-utilization of national R&D results - STEPI report............................................................................... 102 5.2. KIS for the transition to a knowledge-based economy ................................ ,......................................................... 104 5.3. From a sectoral to a cluster approach: innovation and technology policy in the knowledge-based economy...... 109 6.1. Components of investment in intangible assets ..................... ,.............................................................................. 127 Table of Contents 7.1. Finland's broad consultations ................................................................................................................................... 134 7.2. Implementation and financing: The Irish case ........................................................................................................ 137 7.3. Korea's medium-term fiscal plan .......................... ............................ ........ ................................................................ 138 7.4. Finland's rolling strategy ..................................................... ...................................................................................... 139 List of Tables 1.1. Total factor productivity growth estimates for Korea ............................................... ............................................. 29 2.1. Total outstanding venture capital investments in Korea ....................................................................................... 46 3.1. Public expenditure on education as a percentage of GOP, 1995.......................................................................... 59 4.1. Korean investment in information infrastructure. 1991-99 ........................................................ ............................ 82 5.1. Income and technological performance. 1998......................................................................................................... 96 5.2. Flows of R&D funds in Korea. 1997 ........................................................................................................................... 97 6.1. Main characteristics of selected knowledge-intensive industries in Korea ........................................................ 117 6.2. Measures to improve the general policy environment for business in Korea .................................................... 119 6.3. Basic characteristics of Korean manufacturing establishments. by size .................... ................................. ......... 121 6.4. Trend of start-ups and bankruptcies. 1993-99..... .................................................. ....... .................................... ...... 121 List of Figures 1.1. International trade by type of good. 1976 and 1996.................... ...... ...................... .............................. ...... ........... 27 1.2. East Asian countries' share of world manufactured exports .......................... ............................................. ........... 30 1.3. The changing composition of East Asian manufactured exports. 1985 and 1995................................................ 30 2.1. Foreign direct investment in Korea, by sector........................................................................................................ 43 2.2. Services as a percentage of GOP, 1995-98................................................................................................................ 44 3.1. Education indicators: Korea ...................................................................................................................................... 58 3.2. Student teacher ratio (secondary levell................................................................................................................... 58 4.1. Past and predicted growth in mobile phones ......................................................................................................... 80 4.2. Total Internet subscribers. past and predicted....................................................................................................... 83 5.1. Basic research as a percentage of GOP by sector of performance. 1997............................................................. 99 5.2. Higher education expenditure on R&D per researcher ......................................................................................... 100 6.1. Share oftotal business·sector value added by knowledge· based industries.................................................... 116 6.2. Real value-added growth by the total business sector and by knowledge-based industries.......................... 116 Annex Figures la. Knowledge assessment scorecard: Korea ............................................................................................................... 144 1b. Knowledge assessment scorecard: United States ..................................................... ......... .................................... 144 1c. Knowledge assessment scorecard: Singapore. ............................................. .......................................................... 144 ld. Knowledge assessment scorecard: Japan ................................................................................................................ 144 Currency Equivalents As of 21 June 2000 Currency unit Won (KRW) USD 1.00 KRW I 119.20 KRW 1.00 = USD 0.000893 Ab breviations ADSL Asymmetric Digital Subscriber Line KSMBA Korea Small and Medium Business Administration ANVAR Agence nation ale de valorisation de la recherche KT Korea Telecom (French Innovation Agency) CDMA Code Division Multiple Access LCD Liquid Crystal Display Chaebol Conglomerate MIC Ministry of Information and Communications CNRS Centre national de la recherche MNC Multinational Corporation scientifique(National Center for Scientific Research) DDSA Door-to-door Sales Act MOCIE Ministry of Commerce, Industry and Energy EPCC Economic Policy Co-ordinating Committee MOE Ministry of Education ERC Engineering Research Center MOFE Ministry of Finance and Economy FDI Foreign Direct Investment MPB Ministry of Planning and Budget FSC Financial Supervisory Commission NEAC National Economic Advisory Council FTA Fair Trade Act Nil National Information Infrastructure GDI Gender-related Development Index NIS National Innovation System GDP Gross Domestic Product NPL Non-Performing Loan GEM Gender Empowerment Measure NRDP National R&D Program GNP Gross National Product OECD Organization for Economic Co-operation and Development GRI Government Research Institute PC Personal Computer GSM Global System for Mobile Communications PCER Presidential Commission on Education Reform ICT Information and Communication Technology POSTECH Pohang Science and Technology Institute IMD Intemationallnstitute for Management PPP Purchasing Power Parity Development R&D Research and Development IMTS-2000 International Mobile Telecommunication RRC Regional Research Center Standard 2000 ISDN Integrated Services Digital Network SAT Scholastic Achievement Test ISO International Standards Organization SCI Science Citation Index KAIST Korean Advanced Institute for Science SME Small and Medium Enterprise and Technology KAMCO Korea Asset Management Corporation SNU Seoul National University KBE Knowledge-based Economy SRC Science Research Center KCC Korean Communications Commission STEP) Science and Technology Policy Institute KDI Korea Development Institute STI Science Technology and Innovation KED! Korea Education Development Institute STSP Specialized Telecom Service Provider KEPCO Korea Electric Power Company TFP Total Factor Productivity KFTC Korea Fair Trade Commission TMA Trademark Act KIET Korea Institute for Industrial Economics and Trade TRIPS Trade-Related Aspects of Intellectual Property Rights KINITI Korea Institute of Industry and Technology UI Unemployment Insurance Information KIS Korea's Innovation System UNCPC United Nations Central Products Classification Scheme KITA Korea Industrial Technology Association VolP Voice over Internet Protocol KOSDAQ Korea Securities Dealers Automated Quotation WIPO World Intellectual Property Organization (a NASDAQ-like stock exchangel KOTRA Korea Trade Promotion Corporation WTO World Trade Organization KSE Korea Stock Exchange ~ Executive Summary This executive summary provides an overview of the study. The first section summarizes the chal- lenge of the knowledge revolution to Korea's development strategy. Section B describes the analytical and policy framework for a knowledge-based economy used in this report. Section C highlights the main issues in the four key areas of the framework: the economic incentive and institutional regime; educa- tion, training and human resource management; information infrastructure; and the innovation system. Section D discusses industry-related issues and Section E makes some observations on the implemen- tation of these reforms in Korea, based on the experiences of other countries. Details on the specific findings and recommendations are presented in the matrix in Section F.' A. The knowledge revolution: the challenge to Korea's development strategy Korea's achievements. Korea has achieved one of the fastest rates of economic development of any country in the world. Between 1966 and 1996, its per capita income grew by an average of 6.8% per annum," and it became an OECD Member in 1996. Towards the end of 1997, however, Korea experi- enced its worst economic crisis since the Korean War. Nonetheless, Korea made a remarkable recovery from the crisis and its economy grew at 10.7% in 1999. The government expects some 8% growth in 2000 and around 6% in the follOWing few years. However, this performance may not be sustainable. Irrespective of the crisis, Korea faces a difficult and competitive global environment. Its wages have risen and it is experiencing increasing competition from lower-wage countries in East Asia. Although its manufactured exports have been expanding rapidly, it is being squeezed between the developed OECD countries at the higher end, and China and other East Asian developing countries at the lower end. As a result of these developments and the increasing importance of knowledge, Korea is con- fronted with the unprecedented challenge of transforming itself into a knowledge-based economy. Tlie global knowledge revolution. Increases in scientific understanding and very rapid advances in infor- mation and communication technologies (lCTs) mean that knowledge and information have become key to competitiveness. Technical progress and reductions in transportation and communications costs are leading to a more interdependent and competitive world. Investors are increaSingly seeking first-mover advantages, new products and services in response to customers' diverse and rapidly changing demands, speed to the market, and first-rate access to customers and sources of information. The rapid development of ICTs and the Internet is exposing inefficiencies in the functioning of markets, firms and institutions, putting downward pressure on prices and accelerating the need to restructure and adapt to changing conditions. ICTs are also improving the efficiency of interaction among government agencies and the delivery of government services, as well as facilitating consultation with the public. This is bringing a new potential for the fe-organisation of administrative and political institutions and for dra- matic reductions in the cost of delivering services. In addition, new ways and means of networking are altering social patterns of work, shopping, education, leisure and communications. These changes have given rise to three overarching challenges for Korea's future development strategy. * The matrix distinguishes the situation prior to the crisis in Korea, outlines ongoing reforms and identifies the outstanding issues that need to be addressed. *. In constant 1995 USD. Korea and the Knowledge-based Economy: Making the Transition The first challenge is to increase overall productivity. In the past. Korea's growth was based on high capital investments and growth in labor inputs. However, the development model predicated on input- driven growth and the rapid expansion of the large chaebol had begun to reach its limits by the early 1990s. Although the measured rate of total factor productivity growth over the past 30 years has been respectable, it has been small relative to the rapid growth of output. Most of Korea's economic growth over the past decades has been underpinned by strong capital accumulation, made possible by a high savings rate and increases in labor input. Total factor productivity growth declined in both manufactur- ing and services during the 1990s. [n sectors such as finance, insurance and business services, and wholesale and retail trades, total factor productivity growth actually turned negative. Growth in the future will need to be more productivity-based, requiring an increase in the efficiency of investments in physical capital and knowledge. In Korea, investments in education, information infrastructure, and research and development (R&D) as a percentage of GDP are among the highest of the OECD economies. However, the country is not getting the full benefit of these investments because of problems with the overall economic incen- tive and institutional regime, as well as due to issues specific to each of these three areas. Reasons for this include: · Inadequate conditions for generation and exploitation of knowledge and information (e.g. intellectual property rights and the regulatory framework with relation to IT). · Insufficient competition, flexibility and diversity (e.g. the chaebol, the financial and education systems). · Misallocation of investments (e.g. duplication of public investment in R&D, insufficient public investment in basic R&D, over-investment in an education system which is geared to simply passing exams). These problems are serious since they cast doubt on Korea's capability to sustain its development process in the long term, despite the resources invested and recent achievements. Korea has to move to a strategy of achieving greater productivity across the board. Specific areas for concern are summa- rized in Section C, and developed in more detail in the attached matrix, and in the subsequent chap- ters of the report. The second challenge is the need for Korea to hecome more internationalized in the context of an increas- ingly glolialized and interdependent world. This includes not only opening up to trade and foreign invest- ment. but actually striving to become more integrated in the global system. This involves: · Developing alliances with world-class universities, fostering the exchange of professors and stu- dents, and enhancing knowledge of foreign languages and culture. · Tapping more effectively into global knowledge systems through joint research, joint submis- sions to international journals, strategic alliances, inward and outward FDI, and contracting of foreign research institutes. · More active participation and leadership in international forums and institutions, especially those that are setting the rules and practices for the new economy, such as the WTO, the World Intellectual Property Organization (W[PO), the International Standards Association (ISO). the OECD, etc. · Ensuring harmonization with evolving international standards, including more active participa- tion in the International Telecommunications Union, etc. The third challenge is that, in the dynamic context of the knowledge revolution and the networked econ~ omy, the role of the Korean Government will need to be redefined. The Korean Government has played a key role in the country's rapid development and will indeed need to play an important role in the tran- sition to the knowledge-based economy. However, it must move away from the interventionist policies of a government-led strategy based on the growth of large-scale industry, especially the chaebol. The Korean system has been over-regulated in the sense that the behavior of a number of actors has been constrained by "dirigiste" procedures and rigid and detailed rules. At the same time, the "rules of the game" for a competitive, transparent, equitable economy are not sufficiently developed or enforced. Executive SUlnmarv Meeting the requirements of the knowledge-based economy means making markets function more effectively so that they can facilitate the constant redeployment of resources. This simply cannot be done through heavy government intervention in the economy. The key elements of the new role for government in this context are: · Unleashing the creative power of markets. · Providing legal and regulatory underpinnings for freer and more competitive markets - rule of law. standards for transparency and accountability. modern regulatory institutions. · Building a modern legal infrastructure for the knowledge-based economy intellectual property rights; cyber laws covering privacy. security. and digital transactions. · Continuing to provide public goods (education. basic research) while addressing missing or underdeveloped markets (information networks). · Fostering policies and institutions conducive to entrepreneurship and enterprise development (facilitating entry and exit in a number of areas. including the removal of onerous regulations hin- dering the start-up of new businesses especially in the service sector. promotion of high-value- added services. valuation of intangibles). A new and important role for government will be to address the risks of the "digital divide". The ICT revolution brings with it not only opportunities. but also the risk of creating a "digital divide" between those who have access to the potential benefits of ICTs and knowledge. and those who do not. To offset the risks of a growing digital and knowledge divide. the Korean Government needs to adopt proactive policies aimed at fostering the availability of information and knowledge services. and spurring widely spread entrepreneurial activity. It should pay special attention to using ICTs and new technologies to provide opportunities for rural and poor urban communities and the disabled. In addition. the govern- ment must modernize itself in order to capture efficiency gains by improving the quality and effective- ness of public services and strengthening government information flows. Since the crisis. the Korean Government has made a very impressive start in this direction. The next step will be for it to become a facilitator of change. fostering broad participation consistent with the distributed power arrangements of the networked economy. Korea's new vision. The Asian financial crisis has brought about a re-examination of Korea's structural problems. and a new willingness and energy to change the Korean economy and society. At the begin- ning of this year. the government articulated a long-term vision to transform Korea into an advanced knowledge-based nation. Goals include: · Making Korea into one of the world's top-ten information and knowledge superpowers. · Developing the next-generation Internet and the information superhighway by 2005. · Promoting the use of computers by students. teachers and the military. · Conducting radical reforms in education to arm the country for its transformation into a knowledge- based economy. · Envisioning the dawning of an Internet society. where civil society will participate in the gover- nance process though lCT in a democracy based on human rights. · Closing the development divide through productive welfare and balanced regional development. B. The framework of the knowledge-based economy This report does not focus narrowly on high-technology industries or lCTs. but on the broader con- text. i.e. the extent to which an economy is effectively tapping and using the potential of the growing stock of knowledge and advances in !CT. A knowledge-based economy is defined as one where knowledge (codified and tacit) is created. acquired. transmitted and used more effectively by enterprises. organi- sations. individuals and communities for greater economic and social development It calls for: 3 Korea and the Knowledge-based Economy: Making the Transition · An economic and institutional regime that provides incentives for the efficient use of existing knowledge, for the creation of new knowledge, for the dismantling of obsolete activities and for the start-up of more efficient new ones. · An educated and entrepreneurial population that can both create and use new knowledge. · A dynamic information infrastructure that can facilitate effective communication, dissemination and processing of information. · An efficient innovation system comprising firms, science and research centers, universities, think tanks, consultants and other organisations that can interact and tap into the growing stock of global knowl- edge; assimilate and adapt it to local needs; and use it to create new knowledge and technology. The economic incentive and institutional regime is explicitly included in this definition because it is central to the overall ability of an economy to make effective use of knowledge and is critical to the effectiveness of the three other key areas. For example, pressing on with the reforms of the economic incentive regime will induce the chaebol to become leaner, more competitive and more knowledge- based. It will force the exit of non-viable economic activities while providing opportunities for new entries, open up demand in the education and information infrastructure sectors, and unleash the inno- vativeness, creativity and entrepreneurship of the Korean people. This framework is used in the report to take stock of where Korea currently stands and to suggest further measures to facilitate its transition to an advanced knowledge-based economy. C. Issues in the four key areas The challenges identified above are systemic in nature. A major task for the government is to adopt a more comprehensive and consistent approach which encompasses all the relevant policy domains. As an essential component of such an approach, reforms are necessary in the four areas discussed below, each of which contains deficiencies which have implications for Korea's ability to benefit from the knowledge-based economy. Economic incentive and institutional regime. The main challenge is to move away from direct inter- vention and to foster a flexible, adaptive, market-based economy and a creative society, compatible with the knowledge-based networked economy. This means placing high priority on reforms that will enhance competition and flexibility in the economy and unleash efficiency gains and innovation. It will require measures that can bring about a fundamental upgrading of the economy's capacity for sponta- neous adjustment to changing competitive pressures and opportunities and for the effective utilization and creation of knowledge. Some traditional areas will have to be deregulated, while there is a need for establishing modern regulatory oversight in certain new areas in order to strengthen markets. While the government has already started on a series of important reforms, it needs to embark on a systemic agenda for reform across a number of areas, including: · Product markets: strengthen foreign and domestic competition, consumer protection and standards. · Financial markets: ensure greater transparency and disclosure, strengthen corporate govemance, accounting rules, prudential supervision; improve equity and venture capital markets. · Labor markets: improve labor relations; make worker benefits portable and remove employment biases against women. · Knowledge market: strengthen intellectual property rights, their enforcement, and the promotion and valuation of intangible assets. · Industrial restructuring and entrepreneurship: put in place policies and institutions for spontaneous industrial restructuring and development, including the fostering of entrepreneurship and a more favorable performance of small and medium-sized enterprises. · Social issues: mitigate the risks of the "digital divide" by upgrading social safety nets, strengthening opportunities for retraining, and extending access to education and information infrastructure to ~ poor urban and rural communities and to the disabled. Executive "tllnm",rv Education, training and human resource management. During its drive for industrialization, the Korean educational system, with its emphasis on primary and secondary education and equal access to educa- tional opportunities, served the country well and produced students of fairly high average quality. One of the main strengths of the Korean system is the high investment in education. A weakness, however, is that these investments have not been put to the most efficient use. currently, the share of public financing in education is roughly 4.4% of GDP, lower than the OECD average of 4.9% in 1995. However, this level is sup- plemented by much larger investment in education by the private sector: parents contribute an additional 2.3% of GDP to tuition and other expenses at both public and private schools, from the primary to the ter- tiary level. In addition, lack of choice and large class size in the public sector, combined with a very strict national university admissions system, have led parents to invest another 3.2% of GDP on private tutoring for their children. An estimated additional 3.4% consists of general expenses, including the purchase of study materials, books and stationery, uniforms, transportation fees, lodging, food and other costs. As a result, Korea actually spends 13.3% of GDP on education probably the highest share for any country at its level of development. The current environment of greater competition and rapid technical change requires that such investments be put to better use in the future, allOWing people to learn and upgrade their skills so that they function more effectively in the knowledge-based economy. The time is thus ripe for Korea to switch to a new model of education that promotes quality, cre- ativity and lifelong learning, and that emphasizes not just formal schooling, but overall human resource development. This will entail major deregulation, decentralization and diversification of the Korean education system and enhancement of competition. The urgency of this task calls for closer and more effective co-operation between the relevant ministries, notably the Ministries of Education, Labor, Health and Welfare, Industry, Science and Technology, and Information and Communications. President Kim's recent decision to reform and reorganize the human resource development sector by setting up the post of a Deputy Prime Minister for Education is a move in the right direction. In addition, the task requires an expansion of the focus beyond the Ministry of Education to that of Human Resource Devel- opment or a Ministry of Knowledge. Some areas of the government's reform agenda that are critical for responding to the needs of the knowledge-based economy include: · Deregulating the education system and increasing autonomy for private secondary and higher education, involving changes in curriculum and tuition, and permitting universities to set their own admission requirements, number of places, etc . · Integrating the current formal, vocational, adult and distance education and training systems to meet the growing needs of lifelong learning. · Reorienting the use of public and private resources to emphasize improvements in the quality of education at all levels. In addition, more scholarships should be made available for poor stu- dents to address the equity issues that will result from the growth and improvement of private education. Furthermore, special efforts should be made by the government to encourage more women to enter into higher education and into technical and scientific fields. This should be cou- pled with special initiatives to open up more professional employment opportunities for women. · Introducing outcome-driven governance systems in education with clearly defined autonomy and accountability at the institutional levels and decentralization to enhance local decision making at schools and universities. · Strengthening Korea's links to the global educational system. Universities should be encouraged to develop strategic alliances with world-class universities and encourage faculty exchange and joint courses, as has been done in Singapore. In addition, the curriculum in English and ICTs should be strengthened to facilitate global communication and international links in order to bet- ter prepare Korean students for a globalized world. Information infrastructure. The ICT revolution will increaSingly affect the efficiency and functioning of all economic and social activities. Korea has moved a long way toward liberalizing the leT sector and is thereby capturing many of the benefits of advancing technologies. In addition, there has been a very rapid uptake of new information technologies such as mobile phones and the Internet. However. the Korea and the Knowledge-based Economy: Making the Transition country has a regulatory regime that may constrain continued fast development: the Ministry of Informa- tion and Communications (MIC) still tries to orchestrate much of the sector's development when, in real- ity, the market is moving more rapidly than the regulator can successfully anticipate. Thus, the MIC should move further toward facilitating private provision of services and addressing areas of market fail- ure. In particular, it should: · Liberalize the telecommunications service industry, unbundle local loop services, set up an inde- pendent regulatory agency, and open up to greater foreign investment. · Develop a modern regulatory oversight for telecommunications that includes interconnection standards, service quality and auctioning of spectrum. · Implement legislation on regulation of e-commerce that is harmonized with evolving interna- tional standards. Innovation system. Korea reportedly spends more on R&D than most other OECD countries as a percentage of GDP (2.8%). However, the productivity of this effort is questionable. There are some inherent weaknesses in the Korean innovation system that need to be addressed. The government has recognized the challenge and has announced plans to increase R&D expenditures to 5% of the national budget - an ambitious target which signals the seriousness of its resolve. However, it is not so much a matter of the amount of money spent as the way in which it is spent. Key issues include: · Encouraging greater interaction among firms, universities, government research programs and Government Research Institutes (GRIs). · Clearly justifying the rationale for public intervention and providing subsidies in a transparent and non-discriminatory manner. · Providing support to R&D in large companies on stricter conditions, assisting only when they would not have undertaken the concerned projects in the absence of support, and stimulating partnerships with other actors (enterprises, university and public laboratories). etc. · Increasing the basic research effort. This measure should principally target the universities, which should receive larger resources; it implies reforming regulations and practices that discourage research activities. · Reorienting the GRls since their activities tend to duplicate those of industry. The GRIs have to be re-positioned to do more upstream research or to become more focused on research of col- lective interest (e.g. health, transport, etc). A larger part of their budget has to be secured in the form of institutional funding. · Improving support to innovation in SMEs, with emphasis on effective networking and clustering, and the involvement of local authorities. · Strongly encouraging all actors to increase their contacts with foreign counterparts, through aca- demic and research exchanges, technological co-operation, industrial joint ventures, participa- tion in international regulatory bodies, etc. · Enforcing co-ordination procedures involving key ministries. · Implementing evaluation exercises, including an international review of the country's basic research capacities. D. Industry-related issues In addition to the four key areas described above, a number of industry-related problems interact to reduce pressure for change and limit the ability of firms to respond to the opportunities offered by the knowledge-based economy. For Korea to successfully master its transition to tke KBE, the government will need to take action on the following issues: ~ · The dominating position and limited responsiveness of the chaebol. Executive · The untapped potential of SMEs . · Remaining barriers to investments by foreign firms. · Impediments to high-value-added services. The lack of incentives for firms to invest in intangible assets. E. Implementation of the reforms The reform strategy outlined above has to be systemic and must involve the design and imple- mentation of measures which are consistent across different. traditionally disparate areas of policy mak- ing. While piecemeal reform of individual elements can yield some improvements. the results will not be as promising as if a series of reforms are jointly undertaken. This is particularly relevant in the knowledge- based economy where networking and horizontal interactions among policies as well as actors take on greater importance. The government has a significant role to play in making sure that all groups are well informed about the trends and forces affecting them and the need for change. We do not underestimate the challenges - short-. medium- and long-term - that developing and effectively implementing such a systemic strategy will entail. Based on the experience of other coun- tries that have crafted and implemented broad strategies. such as Canada. the United Kingdom. Ireland and Finland. it is clear that the development of the strategy must be undertaken in consultation with the private sector and civil society. This is particularly relevant for Korea. given the current social and political change that is taking place and the vision for the country in the 21 5t century enunciated by the government. The public hearings and consultations with think tanks and the private sector on national policies and reforms that have taken place so far represent an encouraging trend. However. building consensus and buy-in from stakeholders on the desired measures requires a greater effort of dissemination. explanation and consultation with the wider public. including civil soci- ety. To illustrate. the education sector must implement major reforms - many of which have already been formulated by Korean think tanks and concerned groups. Much initial resistance is likely to come from the education agencies and from teachers. as both parties would lose some degree of power and control. It will be important to convince these groups of the benefits of the reforms. Implementation of the strategies should also focus on whether the infrastructure to implement reforms is in place. Too often. across countries. strategies and initiatives are announced without the adequate evaluation systems and staff in place. Because of the dynamic nature of the knowledge and information revolution and the global economy. it is important to set up a monitoring and evaluation system as an integral part of the implementation process. It will also be necessary to build in provisions for adjustments to plans and actions in light of ongoing developments, including the findings of impact evaluations. There is a tension between the need for some centralized locus of responsibility for overall co- ordination of the strategy and its implementation. on the one hand. and the distributed power arrange- ments of a networked economy. on the other. An appropriate balance has to be found in the Korean context. These are preliminary suggestions and should be treated as points for more intensive discussions. This report reviews some of the key challenges facing a very dynamic system. seen from the perspec- tive of two international institutions which have the advantage of a broader perspective of cross-country experiences, but which are not as knowledgeable about the specifics and details of the Korean context as the Koreans themselves. It should thus be interpreted as a first step in a broader reform process which Korea has to set up for itself, analyzing where it currently stands. where it wants to go. and how it is going to get there. Such a process has to be owned not only by the Korean Government. but by the Korean people. ~ m III ::I F. Executive summary matrix: main findings and remaining issues ... Q. :::r t'i) Situation up to crisis Ongoing reforms Remaining issues I. Economic incentive and institutional regime Redefining the role of government · The government tended to be highly · Since the crisis, the government has announced that it is · The government should move away from direct interventionist, and "dirigiste", especially in to the moving more towards market-based principles. It has intervention to the provision of an incentive and financial and industrial sectors. ater openness and competition, encouraged regulatory framework that buttresses well-functioning of selected groups in policy discussions, and markets while addressing market failures and gaps in paid attention to social and safety-net issues. Greater markets, promoting public goods, and dealing with the market discipline forms the core of the new policy inequities that may result. paradigms, Some industrial targeting remains in the · It should foster greater entrepreneurship and spontaneous telecommunications manufacturing sector, industrial restructuring and enterprise development. · The government should participate more actively in international forums and institutions, especially those that are setting rules for the new economy (WTO, WIPO, ISO, OECD, etc,). ;. t'i) Opening up the economy and promoting competition · A number of policy measures constrained the competitive' ""vprnmpnt has been reducing tariff and non-tariff · The government should continue with liberalization, g ::I environment, including controls on the price and especially with further deregulation in services ~ of credit; entry barriers and investment restrictions; · It has also strengthened antitrust actions through the Fair (telecommunications, financial news, and legal services). 0' ::I and non-tariff barriers; restrictions on FDI; and weak Trade Commission (FTC). · Antitrust actions and enforcement of competition policies mechanisms for exit, · Deregulation efforts came with the Regulatory Reform in general should be strengthened Committee in 1998 which has a broad mandate across analytic and enforcement power to sectors. · The bankruptcy regime should be further improved, and · In the area of insolvency and creditors' rights, the capacity needs to be increased in the bankruptcy division government has taken steps to improve the handling of of the Seoul District Court to handle its caseload. bankruptcy cases in the court system. Foreign direct investment · Historically, foreign direct investment (FDI) has been re5;tri(:tiClns have been considerably liberalized · There should be greater liberalization of FOI into the highly restricted. Foreign Investment Promotion Act of 1998. service sector in order to increase domestic competition · Restrictions on FDI were gradually liberalized during the investment has increased from an average of and provide better management models. 19805, including the adoption of the negative list, billion in 1991-95, toUSD 8 billion in 1998 and reforms in comorate abolishing performance requirements, and easing USD 15.5 billion in 1999. friendly cross-border M&As. · Restrictions on foreign land ownership were lifted in 1998. Improving the soundness and efficiency of financial markets · Financial policies toward the chaebol, together with a lack 0 Since the financial crisis, Korea has made steady progress' Korea still has to resolve the overhang of non-performing of investment alternatives, channeled considerable in restructuring and reforming the financial system, loans (NPLs). adequately recapitalize banking private household savings into banks. This setting up mechanisms for institutions, improve the credit culture of banks, and turned into bank loans for the chaebol and large systematize regulatory oversight of the financial sector. Banks had little incentive to develop their institutional _ standards and practices have o It should further open the financial sector to FDI to capacity to analyze credit and risks. and the institutions responsible for more competition to domestic banks, and to · The non-bank sector was also compromised when the Strengthening Intellectual property rights and enforcement · A sizeable portion of the public had little understanding · Intellectual Property Right ([PR) law was strengthened in · Korea needs to mount advocacy campaigns and create of the criminal nature of actions which amount to 1998. although its enforcement is still weak. greater public awareness of the importance of IPRs. infringement of intellectual property rights. · Much of the public still considers knowledge to be a free improve documentation and knowledge databases. and good. thus creating a disincentive for private producers of upgrade the Korea Institute of Industry and Technology knowledge. Information (KINITI). · It must further improve the administration and enforcement of the laws governing IPR. II. Education and skills Educational achievements and recent education reforms in Korea · Korea obtained high educational achievements · The Presidential Commission on Education Reforms 1995 · A systemic and profound reform of the current education compared with other OECD countries. However. the (PCER) made a number of recommendations. but system is necessary to spur the development of creative .... =- II> system served to constrain entrepreneurial behavior and implementation has not reached a desired level. citizens with the necessary skills to underpin the lacked flexibility and incentives for further improvement. Programs like Brail! Korea 21 have started to address this knowledge-based economy. ::;t III The public share of education financing in Korea was 4.4% issue. There is a need for awareness campaigns to inform the = i!!. of GDP in 1998. lower than the OECD average of 4.9% in · The government plans to increase the public share of public of the benefits of the proposed changes in the g. 1995. Parents spend an additional 3.2% on tutoring. education to 5% of GDP. education system. = · Korea had a tradition of insularity. with few strong · It has begun efforts to strengthen foreign-language · The educational environment should be improved to the associations with the outside world. education in the country. level of the OECD countries (e.g. in terms of class size, · The recent decision by President Kim to set up the public expenditures. and participation of women in position of a Deputy Prime Minister for Education to science and technology). The government should reduce co-ordinate human resource development policies is a the financial burden on parents. while maintaining quality positive move. and equity in the education system. It should also examine the efficiency and allocation of public and private sector resources. Deregulation and decentrall:zation · Rigid government control over the education system · PCER proposes the creation of an "autonomous school · The government should continue its deregulation efforts included curriculum, examination system, tuition fees. including the implementation of school and encourage competition. and the number of students by discipline. for both public councils and open recruitment procedures for principals · [t should implement an outcome-driven governance and private institutions. and teachers. system with clearly defined autonomy and accountability · Resources were used ineffectively and inefficiently and · peER intends to establish curriculum and assessment at the the system lacked accountability. cen ters for schools. · It should increase institutional alltnnnmv · PCER aims to link financial support to universities with decision making at schools and performance evaluation. · The government should ensure equity in the system by · At the primary and secondary levels. responsibilities investing in schemes to help students from poorer have been divided among the central and provincial families. and schools in designing and implementing. it should establish a sound accreditation system; national curriculum. To a colleges outside undertake assessments to judge the quality of teachers Seoul are allowed to determine own tuition fees. and programs; track and monitor quality over time; and student quotas and curriculum. make this information available to the public. Situation up to crisis Ongoing reforms Remaining issues Diversification · There was an over-emphasis on homogeneity of · The government intends to give greater autonomy to · Korea needs to promote diversity and specialization in types and curriculum. universities in admissions (student quotas) and academic the system through a few universities that provide was also a geographical concentration of affairs. It has begun approving new specialized colleges. comprehensive programs in a broad range of subjects, universities around SeouL · It has started reforming the college entrance examination and other universities that provide specialized programs · All students in both private and public schools were to expand student choice. to meet different learning needs of students. It needs to subject to the same curriculum, and there was no · Brail! Korea 21 plans to nurture leading regional ensure greater possibilities for students, ensuring self- streaming by ability in the general secondary school universities to meet the needs of local industry by determination and choice of subject as well as system. allocating KRW 350 billion from 1999 to 2005; changing the mobility within the system to fulfill the of lifelong requirements for university entrance; and recruiting more learning. equity and efficienrv professors. · [t should develop "double · The government has started to experiment with ability- pathways" that can lead to based grouping at the primary level and is planning to vocational education or the introduce such streaming at the secondary level in 2002. Relevance, quality and gender · There has been a shortage of training in new skills and an · According to the 7'h curricular revision that came into · Korea should integrate the curriculum to include training over-emphasis on quantitative reasoning. practice at the beginning of this year, some curriculum in new skills such as communication skills and capability · Educational output was inadequately related to industrial reform is currently underway (e.g. a decrease in the to utilize ICTs, and should increase possibilities for number of required subjects and an increase in the gaining field experience. were insufficient linkages between the Ministry of number of elective courses). · [t should enhance pedagogical training with emphasis on Education and other relevant ministries. · Proposals include reform of textbooks and teaching new knowledge and leTs; provide incentives for teachers, · There is also a deeply embedded bias against methods. and the use of a variety of educational including outcome- and performance-based pay women in Korean culture and technologies. schemes; and develop knowledge sharing systems. · Brail! Korea 2 [ aims to give a greater research focus to · It should implement strategies to increase the number of universities by nurturing world-class graduate schools. women participating in the economy. and change the KRW [.4 trillion has been allocated for [999-2005. To entrenched mind-set greater labor force participate in this program. universities will be participation of women Korean society. to reform their student admission system; reduce · Th", OClvpmmpnt "hClllld encourage university and undergraduate student ratio in return for financial In addition to support; and develop curriculum and research programs support, with the world's leading universities. Performance-based university boards and participate promotion for professors will be also be introduced. development. · [t should encourage the expansion of exchange programs between Korean and foreign educational institutions; encourage entry of foreign university branches; and allow twinning arrangements. · It should strengthen the link between the Ministries of Education, of Labor, of Commerce, Industry and Energy, and of Science and Technology in order to better co-ordinate the needs of the labor market and industry with the supply of education. Lifelong learning · Too much emphasis was placed on formal education · The Education Credit Bank system has been introduced, · The government should establish the lifelong learning compared with informal education and lifelong learning. enabling credits earned through the system by integrating the formal education system with · There was insufficient job-related training for the working- system to be recognized as distance, adult and vocational educational systems. age population. degree. · [t should strengthen informal lifelong education programs · Korea has increased its efforts to promote adult and provide incentives and for those who education attached to universities. have left school to reintegrate system whenever · [t is also focusing on ICTs (e.g. by wiring schoolsl. necessary. It should fully implement the Education Credit · PCER intends to provide greater opportunities for job training for women and the elderly. The Ministry of Bank proposal. · [t should assist education institutions to build up their ~ n Education will also set up a Lifelong Education Center. ICT infrastructure to enable them to deliver educational training on demand. f ~ o til I» I» Situation up to crisis Ongoing reforms 6.. Remaining issues ;. !) III. Information Infrastructure The current situation · Until the crisis, Korea lagged significantly in terms of · Korea has undertaken very rapid investment in certain · Korea has the potential to become a world leader in information-related infrastructure for an economy at its telecommunication service areas in the last few years. In information infrastructure if it can introduce the necessary level of GNP per capita. 1999, mobile phones surpassed fixed lines. Internet institutional and regulatory reforms to enhance prices are low for off-peak times and Internet use has ('omnptition in the telecommunications sector and been growing fast. Public access to the Internet is the recommendations below. However, it · Cyber Korea 21 and related initiatives to make a sharper distinction between the Kim's New Year Policy Speech) layout an ambitious advantages of the production of ICT hardware and to be met by 2002, including: technologies and those of its effective use and fJrnvlClinJ> universal service access at speeds of 2 Mbps. application. There appears to be too much emphasis on g 10 400 schools to the Internet. the former and not enough on exploring the potential of Teaching 900 000 civil servants, 10 million students and the latter. 600000 military personnel to use computers. · In general. more open competition and investment policies are required. Korea has the potential to become ;. !) a regional logistics hu b as a complement to the expansion of ICT services. ~ ;:I Regulation ,,; r~ Q ~ DI 6. Situation up to crisis Ongoing reforms Remaining issues !:t- tl> Government policies t;: · The Korean Government promoted R&D through various · The 1999 Law for the Establishment, Administration and · The government should complement market forces where policies including tax and financial incentives, Promotion of the GRls has taken many of the GRls out of R&D will yield highest social returns. ~ procurement, technical information, human resources, the direct control of their ministries and made them · The public sector's R&D programs should place greater [ co-operative research, SME support, support for R&D accountable to the National Research Council Boards. emphasis on diffusion and on strengthening systemic commercialization, and public R&D labs. · There has been little objective evaluation. Despite some success stories, most national R&D programs and · Nevertheless, the processes for allocating funding on a more competitive basis and for making institutes more accountable for results are not sufficiently developed. linkages. The government should: - Provide incentives for the GRls to diffuse and commercialize their results. 1 ~ government research institutes have suffered from · The government has begun to think about redefining the Develop bridging institutions, such as a university- Q. duplication with the private sector. role of the GRls. industry interface. specialized research firm spin-ofts. ~ · Overlap in R&D support and R&D programs among The government should redefine the role of the GRIs by: Q ::I different ministries has been pervasive. Redirecting them toward more basic and long-term Q research through secure public funding. a Repositioning them with respect to universities and the ~ private sector to reduce overlaps. s: DI · The government should move from sectoral promotion ::: toward a duster approach, as found in other OECD ::I <.fQ countries, and improve co-ordination between national and regional policies. !:t- tl> · It should increase the mobility of human resources in S&T through the removal of regulatory obstacles that impair mobility of researchers between the public and private ~ ::I sectors; and encourage foreign research and management 2!. c: talent (as found in Singapore). 0' ::I Weak global linkages · Korea has had both formal and informal barriers against - The chaebol have been setting up research centers abroad · It is necessary to re-examine policy measures in order to: inward FDI, and there have been few linkages with foreign as a way of directly tapping into foreign knowledge. Encourage firms to tap effectively into the global public or private research, - The chaebol have also developed some strategic knowledge base through FDI. international business · Korea has not participated actively in international public alliances with foreign firms, but they need to develop alliances, and joint research programs. research programs. more aggressive strategic alliances with technologically Attract foreign scholars to research universities and strong foreign firms. institutes through scholarships and grants. - Korea is beginning to develop co-operative and public. The government should use technology forecasting to obtain research programs with other countries. a better appreciation of trends in science and technology. V. Strategy for knowle~e-based development Implementing the strategy · Prior to the crisis. a number of initiatives were taken by · A new vision for transforming Korea into a knowledge- · In crafting the strategy and action plans. a number of the government on issues affecting education. science based economy was announced by the President on issues should be taken into account. such as; and technology. etc. However, these were not integrated 3 January 2000. The role of government as facilitator and co-ordinator. into a knowledge-based development strategy. · The task of mapping out the details of the strategy was Reform should be systemic and involve design and given to the National Economic Advisory Council (NEAC), implementation of measures which are consistent which was formed towards the end of 1999. across different areas of policy making. · There is an encouraging trend toward building consensus Build consensus and buy-in from key stakeholders. in the policy design process through public hearings, Open up traditionalist attitudes for critical reflection consultations with wide-ranging think tanks and the among the public at large (e.g. education reforms. private sector. entrepreneurship. risk taking). Address implementation concerns such as the respective responsibilities of agencies. institutions and private sector. - Address co-ordination issues with adequate resources and a clear focus. Make provisions for monitoring and evaluation (e.g. by the NEAC). Establish an institutional set-up and process to balance stability with the need for continuous adjustment of the strategy. Chapter I The Knowledge Revolution: A Challenge to Korea's Development Strategy A. The current context Korea has achieved one of the fastest rates of economic development in the world. Between 1966 and 1996, its per capita income grew by an average of 6.8% annually, I from under USD 100 in the 1950s to USD 10 550 by 1997. Life expectancy has risen to 72 years, just short of the OECD average of 76. Pri- mary and secondary education were universal by the 1990s and, by 1996, Korea's tertiary enrolment rate was higher than for most OECD countries. Towards the end of 1997, however, Korea experienced its worst economic crisis since the Korean War. As a result of the East Asian financial crisis, GDP contracted by almost 6% in 1998. Unemployment, which was less than 2.5% in the second quarter of 1997, rose to a peak of 8.6% in February 1999, and for- eign exchange reserves fell to less than USD 5 billion in December 1997. Nonetheless, Korea made a remarkable recovery and the economy grew by 10.7% in 1999. The Korean Government expects the economy to grow by about 8% in 2000 and by around 6% in the following few years. The recovery has its roots in many factors, including improving investor confidence in East Asia, and corrections to initial overshooting by the international capital markets. The government's macro- economic adjustment policies and the accompanying structural reforms have been at the core of the recovery process: as a result of the crisis, the Korean Government began a series of significant reforms in the financial, industrial, labor, business environment and social sectors. Those that are most relevant for this report are summarized in the policy matrix attached to the Executive Summary, and are covered in the respective chapters. Despite the very rapid recovery, there is concern about the prospects for sustained future growth. The 1997 economic shocks and 1998 crisis revealed fundamental structural weaknesses in the Korean economy. The country's input-driven growth strategy had already led to declining total factor productiv- ity growth from the beginning of the decade. 2 In the financial sector, rapid credit growth based on weak credit evaluation and inadequate prudential regulation and supervision had made the banking system vulnerable to shocks. Conglomerates had become greatly overextended because of extensive diversifi- cation based on excessive leveraging. The concern over future growth also stems from an increasing awareness that the global marketplace is becoming more competitive and that radical changes are tak- ing place in the production, exchange and use of goods and services, driven by what can be described as a knowledge revolution. B. The knowledge and information revolution Awareness that knowledge is a critical element of economic growth and increased welfare is not new. What is new is the speed of changes in the production and dissemination of knowledge made pos- sible by the increase in scientific understanding and very rapid advances in information and communi- cations technologies (ICTs). Advances in scientific understanding and in the codification of knowledge are facilitating the rapid development of new technologies. Scientists are now at the stage where they can begin to engineer materials at the molecular level and even life forms, and our economies are in the Korea and the Knowledge-based Economy: Making the Transition middle of a revolution in information, computing and communication technologies. The cost of voice transmission circuits has dropped by a factor of 10 000 over the last 20 years and computing power per dollar invested has risen by a factor of 10 000 over that same period. The leT revolution, in turn, is increasing the speed and decreasing the cost of developing tools and instruments for basic research (prototypes, demonstrators, simulation techniques). as well as extending the power of electronic net- works as research tools, permitting the generation of a larger set of new technologies. At the same time, investment in leTs has expanded. 3 Growth in connectivity has fueled the rise of the Internet. As more suppliers and customers go on line, the benefits of participating expand and the penalties for non-participation increase. The direct linkages between producers and customers imply a reduced role for intermediaries in many markets, including consumer goods, food, manufactured com- ponents and primary products. Entirely new markets are being created through networking (e.g. personalized information services, online securities trading). In addition, the impact of networking in the public sector has become enormous, with the potential for dramatic reductions in the cost of delivering services such as health and education, and with major effects on governance through the re-organisation of administrative and political institutions. The Internet is also likely to fundamentally alter social trends through its impacts on day-to-day activities, like working, shopping, communicating, and even leisure. The pervasiveness of these changes and their impact even at the macroeconomic level has given rise to the concept of the "new economy" (see Box 1.1). The leT revolution involves significant reallocation of jobs across industries, and changes in the skill and occupational composition of the workforce. In OEeD countries, low-technology manufacturing jobs Box 1.1. The new economy In parallel with these developments, substantial changes in economic growth have fuelled the notion of a "new economy". First, there are observed changes in the pattern of economic growth. Attention has focused on the United States, which is currently experiencing its most prolonged boom ever. Although productivity performance continues to be exceptionally strong and unemployment has fallen way below what used to be viewed as compatible with price stability, there is little sign of inflationary pressure. In a number of other countries there is similarly surprisingly little evidence of inflationary pressures. At the same time, comparing across countries, it appears that the forces pushing toward convergence in growth rates have given way to increasing divergence. Broadly speaking, countries which are doing well seem to be gaining ground relative to the followers. There are signs of growing income differences within as well between countries (Wilson and Rodriguez, 1999; Analysys Inc., 2000). Second, there appear to be important changes in the sources of growth. Traditional determinants of growth, such as macroeconomic policies and the functioning of labor markets, continue to affect the perfor- mance rates observed in the late 1990s. In parallel, however, there is a pervasive influence of "new fac- tors". This applies most notably to investment in ICTs, which was long observed to show up "everywhere but in productivity figures". Today, the contribution of ICTs to output and productivity growth is visible, significant and rising in many OECD countries. In Canada, the United Kingdom and the United States, the growth contribution of ICT equipment amounts to about half of the entire growth contribution of fixed cap- ital. In France, Germany and Japan, the contribution of ICTs to output growth has been somewhat smaller, but is still significant (Schreyer, 2000). A number of smaller OECD countries are witnessing similarly strong benefits. These developments appear to play an important role in changing price behavior, since improved access to information is accompanied by stronger competitive pressures at the micro level and reduced prices across a broad spectrum of industrial activities. At the same time, investment in ICTs is not the whole story. On the contrary, it appears that the "new economy" has brought about a more complex interplay between different factors, with, at its core, the dif- fusion and use of knowledge. Among all OECD countries, those which have strong growth rates tend to demonstrate an upsurge in multi-factor productivity. While it is difficult to determine the underlying sources and mechanisms, the evidence points to the crucial interplay between investment in ICTs, changes in innovation processes, organisational changes and upgrading of human skills (OECD, 2000). The Knowledge Revolution: A Challenge to Korea's Development Strategy have declined, while the effects on jobs in high-technology manufacturing have been mixed. Overall employment in the OECD countries has been shifting away from manufacturing and into services. Within services, there has been strong growth in high-value-added service sectors such as finance. insurance, real estate, and business services, which tend to be the most skill- and information-intensive. As demand for low-skilled workers declines, the overall occupational structure of the workforce in OECD countries is mov- ing toward higher skills in both industry and services. High-skilled, white-collar workers make up an increasing proportion of the workforce, and account for between 25 and 35% of total employment. Significant investments have taken place in training; these are aimed at helping workers make use of the new technologies and perform new functions (OECD, I 998a, pp. 42-45). There are also important investments in other intangibles: expenditures on R&D in the OECD countries account for 2.2% of GDP on average. meaning that R&D investment makes up more than 10% of gross domestic investment. When other investments in intangibles, such as in patents and licensing, design. marketing. education, training and software are added, investment in intangibles may represent as much as gross domestic investment (see Chapter 6 for a discussion of these issues). The rapid development and spread of knowledge facilitated by technical progress and the lCT rev- olution is creating a more competitive and interdependent world. The share of world trade (exports and imports) in world GOP increased from 28% in 1970 to 45% in 1997 (World Bank. 2000). indicating increased globalization and competition. Beyond trade. there is greater interdependency through an increase in foreign direct investments, international sourcing of production inputs and inter-firm alli- ances. including the internationalization of R&D and technology licensing activities. Increased availabil- ity of ICTs; deregulation of financial and product markets; and the liberalization of trade. investment. and capital movements are accelerating this process. Increased international competition in turn spurs firms to create new products and adopt more efficient production processes. The expansion of interna- tional trade and production provides firms with the resources to finance innovative efforts. especially in countries with small domestic markets. The direct role of technology in this process is reflected in the changing patterns of international trade. Between 1976 and 1996, the share of high- and medium-technology products increased from 33 to 54% of total goods traded (Figure 1.1). On the other hand, the share of other primary commodities fell Figure 1.1. International trade by type ot good, 1976 and 1996 1976 1996 Resource- Resource- based based Miscellaneous Other product High technology Note: The technology intenSity of manufactured products is determined by the share of R&D to sales. where high-technology products are those with the highest shares. Source: Adapted from World Bank (1999b), Figure 2.2, p. 28. based on World Bank Comtrade database. ~ Korea and the Knowledge-based Economy: Making the Transition from 34 to just 13%, while that of resource-based products remained constant. These trends have major implications for developing countries which are exporters of primary commodities. Not only the vol- ume, but also the prices of their exports have been falling over the last five decades. These figures, however, highlight only the most visible aspect of the relationship between technol- ogy and globalization. Technological change combines with increased economic interdependency to intensify and alter the nature of global competition across a widening spectrum of industries. In indus- tries characterized as low- or medium-technology, the increase in technical knowledge and associated organisational changes increasingly provide an edge in productivity and enable product differentiation, significantly shaping competitiveness and value added. At the same time, globalization adds to pres- sures for adjustment and restructuring, and can thus adversely affect unskilled workers as well as firms in industries vulnerable to foreign competition. While, in principle, the globalization of trade, finance and information flows may make it easier to narrow knowledge gaps across countries, the accelerating pace of change and the difficulties of many developing countries in getting started may, in effect, bring about the opposite result - a widening knowledge gap or "knowledge divide". If the knowledge gap were to widen, the world would be split even further, not only by disparities in capital and other resources, but also by disparities in knowledge. Increasingly, capital and other resources might flow to those countries with stronger knowledge bases, reinforcing inequality in a vicious circle (World Bank, 1999b). There is also the danger of widening knowledge gaps within countries. The OECD economies are seriously concerned that the rapid advances in knowledge may be adversely affecting unskilled workers and increasing unemployment. In a number of countries, there is evidence to show that technology and technology-related organisational change is widening wage disparities between skilled and unskilled workers (OECD, 1998b). Such impacts are likely to be felt even more strongly in developing countries, where access to education and ICT infrastructure is far more differentiated and where formal safety nets are less prevalent. The rural areas and the poor are being left behind and thus run the risk of becoming marginalized in the knowledge-based economy (see Chapter 2 for a description of the situation relating to Korea). C. Challenges to Korea's future development Korea's rapid economic growth has been largely the result of high savings and investment rates. Studies of total factor productivity (TFP) growth indicate that although Korea's TFP has been respect- able compared to that of other countries, it has been low compared to overall growth in outputs and inputs. 4 A recent study, for example, shows that of the 7.5% per capita growth between 1970 and 1995, 55% was due to growth in capital inputs, 20% to growth in labor inputs, and 25% - or nearly two percent- age points - was due to TFP growth (Table 1.'). Estimates of TFP depend very much on the methodology used for the calculations and most do not adjust for increasing returns to scale or to price mark-ups which are characteristic of markets with imper- fect competition (such as those in Korea). When these adjustments are made, the contribution of TFP falls to less than I%. Moreover, there is concern that per capita income growth will slow down as the con- tribution to growth due to increases in the working-age population and rising labor force participation, as well as from rapid increases in educational attainment, reaches its limits.5 A theme that will be developed throughout this report is that Korea needs to achieve higher produc- tivity from its considerable investments in physical and human capital. This includes obtaining higher returns on the substantial resources invested in information infrastructure and in research and develop- ment (R&D). In the context ofthe rapid changes taking place as a result of the knowledge revolution and a very dynamic and interdependent global economy, achieving these higher returns will depend on rede- fining the role of the Korean Government and re-orienting its overall development strategy. Korea's development model has largely relied on a government-led strategy based on the growth of large-scale industry. This model started in the early 1960s with the nationalization of key industries ~ and banks. Control over the allocation of credit and a strong licensing and permit system allowed the The Knowledge Revolution: A Challenge to Korea's Development Strategy Table 1.1. Total factor productivity growth estimates for Korea Contribution to GDP growth per capita per annum 01 75% for 1970-95 lassuming constant returns to scale and competitive markets) Labor inputs per capita 20.5% Capital inputs per capita 54.5% Measured TFP 25.0% GOP per capita 100% Disaggregation 01 TFP growth of 3.6% per annum for 1975-95 Iwhen adjustments are made for increasing returns and imperfect competition) Mark-ups 60,0% Scale effects 17.9% Technical change 173% Other 4.8% Source: World Bank 119990), p, 47, government to influence the industrial structure. The key focus in the 19605 was a strong export drive, which was successful in transforming Korea into an export-oriented economy. This was followed by the heavy and chemicals industry drive in the 1970s. During this period, there was an increasing concentra- tion of economic activity in the chaebol as it was easier for the government to implement its policies through a smaller number of firms. These firms, however, grew larger and became more diversified, ben- efiting from privileged access to subsidized state finance and favorable regulatory and administrative interventions from the government. In the 1980s, a series of policy measures were taken which aimed at strengthening market mecha- nisms. These included some trade liberalization, passing of the competition law, deregulation, and some privatization. Nevertheless, the role of the state and the reliance on the chaebol remained strong. Access to low-cost loans allowed the cliaebol to continue their rapid expansion and to diversify into numerous industries - at the expense of profitability (Claessens et al., 1998). This is corroborated by the declining rate of return on corporate assets in the 1990s.6 In addition, despite declining profitability, the chaebol steadily increased their leverage ratios during the 1990s as they continued to access cheap government-controlled credit. Korea's development paradigm is now at a crossroads. The development model predicated on input-driven growth and the rapid expansion of the cliaebol had played its role and had begun to falter by the early 1990s. While the financial crisis in Korea was triggered by regional contagion, capital flight from the local currency and a weak financial system with poor prudential regulation and supervision, it was in large part also a corporate crisis, driven by excessive corporate debt and associated structural problems (OECD, J999a). Beyond its recovery, Korea is confronted with serious structural issues. According to the IMD World Competitiveness Yearbook ranking, Korea fell from 26th place in 1995 to 38 th in 1999 as a result of weakening structural factors that culminated in the 1997/98 crisis. 7 For the year 2000, it moved back up to 28 th place due to the many structural reforms that have been undertaken, although it continued to rank lower in finance, management, infrastructure, and internationalization. Meanwhile, there will be increaSingly fierce international competition from advancing low-cost countries as well as in the advanced, knowl- edge-intensive areas. The changing composition of manufactured exports from the East Asian economies highlights the challenges facing Korea. Over the period 1980 through 1997, Korea's share of world manufactured exports roughly doubled to about 3%. However, China increased its share of exports from about 05% of world manufactured exports in 1985 to nearly 4% in 1997, surpassing Korea, Singapore, Chinese Taipei and Hong Kong (China), the former developing country leaders (Figure 1.2).8 Meanwhile, China has shown a dramatic fall in resource-based exports and a very significant increase in medium- and high- ~ Korea and the Knowledge-based Economy: Making the Transition Figure 1.2. East Asian countries' share of world manufactured exports --China - - - - - - Hong Kong Singapore - - Korea - - Chinese Taipei - - - Malaysia - - -. Indonesia ·· - _.. Philippines - -- Thailand % % 4.50 4.50 4.00 4.00 3.50 3.50 3.00 3.00 ,---------- 2.50 2.50 2.00 2.00 1.50 .--------- 1.50 1.00 '" .--------- 1.00 0.50 ...... --.-:::::::::..--~=::::.:.;..: --.--~::~::--:-:-.. ...... -........ 0.50 .. :::::::.-~.-.-- .. -..... -.. ---- .. --. o o 1980 1985 1990 1995 1997 Source: UN Comtrade database. Figure 1.3. The changing composition of East Asian manufactured exports, 1985 and 1995 _ Resource-i>asoo o Low technology E Medium technology _ High technology 0/0 % 100 100 80 80 60 60 40 40 20 20 o o 19851995 19851995 19851995 19851995 19851995 19851995 19851995 19851995 19851995 China Hong Kong Singapore Korea Chinese Taipei Malaysia Philippines Thailand Indonesia ~ Source: Lan elal. (1999). ________T.;...h.;...e.;...K_n..;...owledge Revolution: A Challenge to Kor~iI's Development Strategy technology industries (Figure 1.3).9 China's very rapid upward shift is exerting significant pressure, not only on developing economy exporters of labor-intensive manufactures, but also on developing and advanced country exporters of medium- and high-technology products. All the other East Asian econo- mies also show a significant expansion of medium- and high-technology exports, with the exception of Hong Kong, which has the largest share of low-technology exports. Singapore, Malaysia and the Philippines stand out due to their dramatic changes in export structures towards medium- and high-technology indus- tries. These developments were largely enabled by export-oriented foreign investment, a strategy which, until recently, Korea had foregone because of its restrictions on direct foreign investment. D. Korea's new development strategy Caught between the rapid advance of the export-oriented developing countries in the region, and especially China, on the one hand, and the G7 countries, on the other, Korea is currently under strong pressure to shift its development strategy. Prior to the crisis, some analysts were already predicting that the growth of the Korean economy, and indeed that of the other East Asian economies, was not sustain- able (Krugman, 1994). The Korean press highlighted the risks facing the nation in a series of reports cen- tered on the theme of change and the need for productivity-based growth and a vision for the future based on knowledge .10 The press also initiated discussions and dialogue with civil society and business groups on these issues. The government for its part, has intensified its efforts to develop an overall knowledge-based development strategy. This has included consultations with leading think tanks (the Korea Development Institute and others), as well as public hearings. The task of mapping out the details of the strategy and the new vision, including that for the knowl- edge-based economy, was given to the National Economic Advisory Council (NEACl. 11 During its second meeting on 19 January 2000, the NEAC unveiled a proposal for a three-year master plan that will serve as the blueprint for Korea's transformation into a knowledge-based economy. The meeting, which was chaired by the President, presented three goals: i) make Korea one of the top-ten knowledge and infor- mation powers through a massive upgrading of the national information infrastructure; ii) improve the education system to meet OECD standards; and iii) enhance the Korean science and technology base to the level ofthe G7 nations. 12 As Korea emerges from the crisis, now is the ideal time to take stock of where the country is, and what needs to be done to maintain a robust and sustainable recovery, remain competitive and increase the quality of life and welfare of its citizens in the 2 pt century. The remainder of this chapter develops the concept of the knowledge-based economy (KBE) and sets out a framework for analyzing the four main pillars that need to be addressed by Korea in its transition to an advanced knowledge-based economy. The four subsequent chapters summarize the key issues relating to each of these pillars. Chapter 6 sets out a program for the promotion of knowledge-based activities. Chapter 7 concludes with the importance of developing a consultative process for building national consensus to address the outstanding issues, and suggests elements for an integrated implementation strategy. E. The concept of a knowledge~based economy The OECD defines knowledge-based economies as "economies which are directly based on the production, distribution and use of knowledge and information". In fact, by that definition, all econo- mies are knowledge-based. What is different, today, however, is that our rapidly growing economies are becoming increasingly dependent on the effective creation, acquisition, distribution and use of knowl- edge which is, to a large extent, enabled by the rapid advances of the science base and the ICT revolu- tion. The effective use of knowledge and information is becoming the most important factor for international competitiveness, as well as for the creation of wealth and improved social well-being (Thurow, 1999). The increasing spread of the "knowledge" sector in an economy can be measured in various ways. The pioneering attempt on this issue was made by Fritz Machlup in 1962. Machlup distinguished five broad categories of information activity: education, communications media, information machines, information services, and other information activities. He calculated that, in 1958, the knowledge sector Korea and the Knowledge-based Economy: Making the Transition accounted for about 29% of GOP in the United States, and about 32% of the labor force. Following the same methodology, Rubin and Taylor (1984) found that, by 1980, the share of the knowledge sector in GOP had increased to 32%. The OECD has also undertaken a number of studies of the knowledge econ- omy, concluding that in the post-war period there has been a clear trend toward an economy where the share of the labor force engaged in the production, distribution and use of information is much greater than the share handling tangible goods (Foray and Lundvall, 1996, pp. 15-16). Another way to trace the rise of the knowledge sector is to look at the share of various knowledge- based industries. The OECD defines knowledge-based industries and services as those which are rela- tively intensive in their inputs of technology and human capital. The narrowest category is high-technol- ogy manufacturing; that is, manufacturing where R&D accounts for a high percentage of sales. Its share of value added in the business sector in OECD countries averages 3 to 5%. A broader measure includes ICT manufacture and services. Using this measure, the share ranges from 5% in the United States to 10% in Japan, and has remained more or less constant, or fallen slightly, over the period 1985-94, reflecting in part the declining share of manufacturing in value added and a decrease in defense spending (OECD, 1998a). A still broader approach, which has been used most recently by the OECD, is to add communi- cation services; finance, insurance, real estate and business services; and community, social, and per- sonal services 13 (see Chapter 6). Over the past several years, Korea has been developing a foundation for its knowledge-based or "new" economy by developing information and communications-related technologies, and by promot- ing computer literacy and the use of the Internet. Knowledge-based industries have played a leading role in Korea's economic growth. According to the Ministry of Finance and Economy (MOFE), between 1991 and 1999, the average annual real growth rate of Korea's knowledge-based industries was 13.7%, 9.6 percentage points higher than the 4.1 % recorded by other industries. 14 In 1999, knowledge-based industries accounted for 45.6% of the nation's annual GOP growth rate. From 1991 to 1999, Korea's knowledge-based exports increased by an average of 26.4% annually, higher than the 11.3% recorded by other industries. These indicators reveal the increasing importance of knowledge-based industries. In recognition of this, the government is taking additional measures to optimize conditions for the knowl- edge-based economy. These measures are set out in the recently released "Three-year Information Technology plan" and include: continuous expansion of investment in R&D and human capital; develop- ing a high-speed communications network infrastructure; and encouraging foreign direct investment from technology-intensive companies (Ministry of Finance and Economy, 2000). F. Definition and framework Due to rapid technical progress, the development and application of ICTs and globalization, the acquisition and use of knowledge is becoming more central than ever to economic and social develop- ment. A knowledge-based economy is one that encourages its organisations and people to acquire, create, disseminate and use (codified and tacit) knowledge more effectively for greater economic and social development. 15 The KBE calls for: · An economic and institutional regime that provides incentives for the efficient use of existing knowledge, the creation of new knowledge and entrepreneurship.16 · An educated and skilled population that can create and use knowledge. · A dynamic information infrastructure that can facilitate the effective communication, dissemina- tion and processing of information. · A system of research centers, universities, think tanks, consultants, firms and other organisations that can tap into the growing stock of global knowledge, assimilate and adapt it to local needs, and create new knowledge. These are the necessary conditions for increasing the efficiency, flexibility and resilience of the economy and its ability to restructure, respond to new challenges, permit the emergence of new firms and take advantage of new opportunities to ensure that the benefits of growth are broadly shared by ~ society. The rationale for the focus on each of these factors is discussed below. The following four chap- The Knowledge Revolution: A Challenge to Korea's Development Strategy ----------------------------------------------~------ ters will evaluate Korea's position in each and identify the key issues that need to be addressed in the transition to an advanced knowledge-based economy. Annex 1 benchmarks Korea against a group of 61 countries (28 developed and 33 developing countries), using a scorecard of basic indicators for each of the four areas. The highlights are summarized at the end of each section. Chapter 6 notes the interac- tions of these four pillars in terms of industrial structure and examines five structural policy areas that need to be addressed in promoting knowledge-based activities. I. A new economic incentive and institutional regime Whether or not the vast and rapidly growing stock of global knowledge is tapped and used effi- ciently by a country depends to a large extent on the economic incentive regime and institutional set- up in place. The incentive regime depends on the structural and market and non-market institutional arrangements within an economy. A competitive environment induces firms and individuals to seek out knowledge in order to produce goods or services more efficiently or to produce new goods and ser- vices. The general competitive environment and the pressures for more efficient firms to expand and for less efficient ones to shrink or disappear have a direct bearing on the diffusion of knowledge in an economy. Taking advantage of the potential offered by the knowledge revolution requires a flexible society and economy, able to successfully cope with the need for constant change. This hinges on the existence of effective economic incentive regimes and institutions that promote and facilitate the constant rede- ployment of resources from less efficient to more efficient uses. This, in turn, means good macroeco- nomic, competition and regulatory poliCies and the existence of financial systems that can allocate resources to promising new opportunities (including venture capital) and re-deploy assets from failed enterprises to more productive uses. It also requires conditions that are conducive to entrepreneurship and risk-taking, the expansion of small enterprises, an adequate exchange of information between sci- ence and industry, and labor markets that are sufficiently flexible to ease the redeployment of labor. It implies the development of appropriate social safety nets to facilitate the constant relocation and retraining of people for new jobs, and to assist those people who are adversely affected by such restructuring. The ways in which people access relevant knowledge and the incentives for them to gather, pro- vide and use it are also affected by the institutional structure of a society. This involves relationships between legal rules and procedures, social conventions, organisations such as firms, and government and non-government organisations and markets. Equally important are the institutions that govern the rules and procedures in a society, which in turn determine how decisions are made and actions taken. A key feature is the quality of government, as its integrity and effectiveness determine the basic rules of a society. Another important element is the extent to which the legal system supports basic rules and property rights. The creation and dissemination of knowledge, for example, is strongly affected by the degree to which intellectual property is valued and its rights protected and enforced. Finally, the ICT revolution will also have implications for governance systems which need to cope with the many demands that constant restructuring and redeployment place on the rules of the game, both at the international and the national level. Globalization and the trend toward a global innovation system is intensifying pressure for international harmonization in the treatment of intellectual property protection. competition policy and taxation. At the same time, the move towards greater democratiza- tion, transparency, accountability and decentralization in government, which are in part facilitated by the JeT revolution, will raise new challenges related to responding to local needs in an increasingly glo- balized environment. Compared to the most advanced countries, Korea still has some way to go on many aspects of the economic and institutional regime (see Annex I). However, the Korean Govern- ment is using the pressures created by its recent financial crisis to undertake a major overhaul of its economic incentive and institutional regime and move toward a new knowledge-based development strategy. In Chapter 2, we analyze the progress made to date in the economic incentive and institutional regime, and highlight areas that still require attention. In Chapter 6, we analyze some of the key issues that need to be addressed to further promote knowledge-based activities. ~ Korea and the Knowledge-based Economy: Making the Transition 2. Skilled and creative human resources for the knowledge economy Skilled and adaptive people playa crucial role in taking advantage of the potential offered by the explosion of new knowledge and accelerating technical change. Ensuring that expenditures on educa- tion are allocated efficiently and that the entire population has the knowledge and skills necessary to participate in the knowledge-based economy, requires particular attention. Education is the basis for creating, acquiring, adapting, disseminating, sharing and using knowledge. Basic education increases peoples' capacity to learn and to use information. But this is just the beginning. Increasingly, it is also necessary to have technical secondary-level education, as well as higher education in engineering and scientific areas, to monitor technological trends, assess what is relevant for the firm or the economy and use the new technologies. The production of new knowledge and its adaptation to a particular economic setting is generally associated with higher-level teaching and research. In industrial economies, univer- sity research accounts for a large share of domestic R&D; in Korea, however, universities carry out very little research. In the context of rapid development and dissemination of new knowledge. opportunities for life- long learning are essential. Creating a culture of continuous learning and openness to new ideas is criti- cal for a knowledge-based economy. This should not be limited to learning on the job, but should be expanded to foster learning in multiple environments: at home, at school, and at work through struc- tured continuing education courses, self-learning through the Internet, or computer-assisted instruction. In addition, in order to use the new technologies, and in particular the fast-evolving ICTs, workers and firms need new skills. Firms are investing heavily in training. Korean firms complain that they have to invest in retraining college graduates entering the workforce - an indication that. despite high levels of educational attainment, the educational system is failing to meet the needs of the knowledge-based economy. In Chapter 3, we take a critical look at the educational and skills issues facing Korea from the per- spective of the needs of the knowledge-based economy. Korea ranks favorably in educational attain- ment, even when compared to advanced countries (see Annex I). However, the surprising conclusion is that, despite the very high levels of investment in education and skills, this is the area that requires the most fundamental reform and restructuring to put Korea in a position to take full advantage of the KBE. 3. A dynamic information infrastructure The rapid advances in leTs are dramatically affecting economic and social activities, as well as the acquisition, creation, dissemination and use of knowledge. These advances affect the way in which man- ufacturers, service providers and governments are organized, and how they perform their functions. Increased access to ICTs is affecting the ways in which people work. learn, play and communicate. As knowledge becomes an increasingly important element of competitiveness, use of leTs is redUcing transaction costs, time and space barriers, allowing the mass production of customized goods and ser- vices, and substituting for limited factors of production. With ICT use becoming all-pervasive and its impacts transformational, ICTs have become the backbone of the knowledge-based economy. To sup- port Internet-based economic activities, countries need to ensure competitive pricing of Internet ser- vices and provide an appropriate legal infrastructure to deal with online transactions. The National Information Infrastructure (Nil) consists of telecommunications networks, strategic information systems, the policy and legal frameworks affecting their deployment, as well as the skilled human resources needed to develop and use the infrastructure. Developing a strong Nil requires the mobilization of the many stakeholders involved in its deployment and use government, business, individual users, telecommunications and information service providers, and so on. The formulation of an Nil strategy involves identifying the opportunities and needs for information and communications infrastructure in the economy. It also involves assessing existing information systems in the economy to identify common constraints and difficulties, and formulating goals and visions for the Nil. The latter are political roles around which to rally the resources of society. As such, the government has a very impor- tant role in the articulation of its vision, although this should be done in a consultative process with ~ other stakeholders. The Knowledge Revolution: A Challenge to Korea's Development Strategy ----------------------- It is also essential to assess the knowledge and skills required to design, implement and use the new ICTs. This requires researchers and technicians across a spectrum of information technologies, a workforce that can use the new production technologies and a general population that can use elec- tronic products, computers, software and information selVices effectively. Addressing these needs will require developing education and training policies, institutions and programs to prepare the appropri- ate human resources. While the government does not need to provide any of these selVices itself, it can playa key co-ordination role in identifying needs and weaknesses, ensuring that the necessary skills are developed and setting in motion the mechanisms to achieve these goals. In Chapter 4, we analyze Korea's information infrastructure. In the scorecard indicators (see Annex I), it became apparent that, based on data for 1997, Korea did not rank well compared to the advanced countries. However, the Korean Government has developed a comprehensive and ambitious plan with significant investments in this area, and much progress has been made to date. Nevertheless, there are still some major issues to be addressed in the regulatory and legal regime, which, if properly dealt with, could speed up progress in this critical area. 4. An effective innovation system An innovation system consists of the network of institutions, rules and procedures that affect how a country acquires, creates, disseminates and uses knowledge (see Box 1.2). Currently, the bulk of techni- cal knowledge is produced in the developed countries. Estimates show that roughly 88% of total R&D expenditures are undertaken by developed countries and these countries also account for roughly the same percentage of patenting or the production of scientific and technical papers. On a per capita basis, the disparity in the production of technical knowledge is greater than the disparity of income between developed and developing countries. Fortunately, developing countries do not have to rein- vent the wheel: there are many ways in which they can tap into and use the knowledge created in developed countries. Developing countries need to establish effective institutions in order to create, adopt and dissemi- nate knowledge locally. Key components in the creation of knowledge include universities, public and private research centers, and policy think tanks. And, to the extent that they also produce new knowl- edge, non-government organisations, private firms and the government are also part of the innovation system. Some of the institutions central to the dissemination of knowledge include agricultural and industrial extension selVices, engineering consulting firms, economic and management consulting firms and, in the case of Korea, the GRls. However, the mere existence of these organisations is not sufficient. What counts is the extent to which they are effective in creating, adapting and disseminating knowledge Box 1.2. The national innovation system There is no single accepted definition of a national innovation system; what is important is the web of interaction or the system as a whole. The concept of national innovation systems rests on the premise that understanding the linkages among the actors involved in innovation is key to improving a country's tech- nological performance. Innovation and technical progress are the result of a complex set of relationships among actors producing. disseminating, acquiring and applying various kinds of knowledge. The innova- tive performance of a country depends to a large extent on how these actors relate to each other as ele- ments of a collective system of knowledge acquisition, creation and use. These actors are primarily private enterprises, universities and public research institutes and the people within them. Linkages can take the form of joint research, personnel exchanges, cross-patenting, licensing of technology, purchase of equip- ment and a variety of other channels. Source: Expanded definition based on that used in OECD 11997). Korea and the Knowledge-based Economy: Making the Transition to the firms, government, other organisations and people who put it to use. Therefore, networking and interactions among the different organisations, firms and individuals are critically important. The inten- sity of these networks, as well as the incentives for acquiring, creating and sharing knowledge, are also influenced by the economic incentive regime in general. They are affected by specific policies relating, for example, to imports of foreign technology through technology licensing, direct foreign investment, foreign collaboration and policies on the protection of intellectual property. In Chapter 5, we analyze these issues in the Korean context. According to official Korean data, the country actually spends more on R&D as a share of GDP than most other OECD countries (2.8% of GDP during \985-95). However, the scorecard indicators (Annex I) suggest that Korea does not appear to be getting full value for its money. Its broader innovation system must therefore be improved to take advantage, not only of the creation of new knowledge at home, but also for the acquisition of knowledge from abroad, and for the dissemination and effective use of knowledge regardless of where it is created. Over the past few years, Korean industry has been fairly successful in its attempts to more effec- tively exploit knowledge in its economic activities. However, challenges remain. In Chapter 6, we out- line the limitations to further improvements in Korea's industrial profile. To provide favorable conditions for the promotion of knowledge-based activities, the government will need to rectify a num- ber of weaknesses in industry-related issues. Unless properly addressed, these weaknesses will dampen pressure for change and blunt the responsiveness of the private sector to new market open- ings. We also propose specific measures which could be used to promote knowledge-based activities, and highlight the trend among OECD countries toward providing an institutional set-up aimed at strengthening the capacity of industry and providing incentives for firms to respond to changing market conditions. Given its high educational attainment, heavy investments in R&D, and very rapid progress in developing its information infrastructure, Korea is on its way to becoming a knowledge-based economy. Chapters 2-6 show that much work remains to be done to provide adequate conditions for this transi- tion. Chapter 7 highlights some of the issues that need to be addressed in order to implement a suc- cessful development strategy. The Knowledge Revolution: A Challenge to Korea's Development Strategy Notes I. In constant 1995 USD. 2. See World Bank (1999a). and Section C for details. 3. In a recent study of 60 major telecommunications markets worldwide (covering 90% of the telecommunications market), Pyramid Research estimated that in the 1991-94 period, communication service providers in those countries connected 118 million telephone lines, 40 million mobile subscribers and 6 million leased lines. Between 1995-98, these figures increased to 171 million new telephone lines, 238 million mobile subscribers and 8 million leased lines. Cumulative investments in ICT infrastructure in all the countries examined for the Pyramid study totalled USD 327 billion between 1991-94. Between 1995-98, such investments nearly doubled, to USD 572 billion. Pyramid Research also forecast a number of technological advances over the next ten years that will fuel rapid expansion in the virtual economy, with global consequences. As an example, the worldwide e-commerce market is forecast to expand from USD 26 billion in 1997 to USD I trillion by 2002. And Cyfier Korea 21 predicts that the size of the e-commerce market will expand from KRW 55 billion to KRW 3.8 trillion between 1998 and 2002. 4. Total factor productivity (TFP) allows growth in value added to be broken down into the contribution of growth in capital and labor inputs and a residual that is attributed to technical change. The results of the decomposi- tion depend on the type of production function assumed and on the degree of adjustments made to the qual- ity of inputs (e.g. education of the labor force) or the quality and utilization rate of capital. For estimates of TFP for Korea, see Young (I993); McKinsey Global Institute (I 998!; World Bank (I 999a). 5. One factor that still has strong potential is increasing labor force participation by women, an issue which will be developed in Chapter 2. 6. World Bank (I 999al. pp. 46-47 and Figure 4.5. 7. The IMD methodology ranks a country based on structural factors and annual surveys of entrepreneurs. It cov- ers eight factors: domestic economy, internationalization, government, finance, infrastructure, management, science and technology, and people. 8. It is striking that Hong Kong's share in world manufactured exports has actually fallen by half, to only about 0.6%, while all the other East Asian economies have increased their shares. This reflects its declining competi- tiveness in manufacturing as well as its shift toward a service economy. However, Singapore has also shifted towards a knowledge-intensive service economy, while at the same time increasing its share of manufactured exports. 9. Technology intensity is defined by the share of R&D to sales in each sector, as determined by an average R&D to sales ratio for the OECD countries. Although Korea has a stronger technological base than all other East Asian economies (with the exception of Japan), many other East Asian economies appear to show higher tech- nological intensity in their exports because they rely on imported inputs with high technological components that are assembled locally and re-exported. Much of this is carried out by foreign firms using these countries as export platforms. There are also differences in product mix between Korea and the other countries. 10. The Maeil Economic Daily, for example, has sponsored three reports: Booz Allen Hamilton (1997); McKinsey (1998); and Monitor Company (1998). I L The NEAC was legally created in November 1999 to focus mainly on future-oriented policy directions, in con- trast to the more short-term policies that come under the purview of the Economic Policy Co-ordination Com- mittee in the Prime Minister's Office. A further round of consultations took place within government agencies and research institutions to chart out the various action plans as part of the implementation strategy. This part of the process is expected to be completed in March 2000. Preliminary details of the plan were announced at the beginning of April 2000. 12. See Chapter 7 for the most recent developments in the institutional responsibilities surrounding implementa- tion of the knowledge-based development strategy. 13. The financial sector is perhaps the most information-intensive sector in the economy. It aggregates information on the use of resources in order to allocate capital to the most efficient utilizations. It is also the most intensive user of ICTs and was the first to operate on a global dimension in real time, thanks to advances in ICTs. Korea and the Knowledge-based Economy: Making the Transition 14. The definition used by the MOFE appears to be based on the OECD's 1998 definition which includes high-tech- nology manufacturing, communication services, and finance, insurance and business services, but excludes the two other categories medium-high-technology manufacturing and community, social and personal services which the OECD added in 1999. By this definition, according to the MOFE, knowledge-based industries in Korea increased from 14.7% of GDP in 1991 to 20.5% in 1999 (compared to 34% in the United States forthe latter year). 15. The terms "new economy", "digital economy" and "knowledge economy" are currently used interchangeably, and usually focus on the creation and use of ICTs. In this report, we have chosen a broader definition of the knowledge-based economy that includes not only ICTs and industries dependent on high and medium R&D, but also covers the effective use of technical, policy and social knowledge for economic activities. However, this not as broad as other definitions, for example, that of the "knowledge society", which includes spiritual, social, intellectual and philosophical knowledge. 16. The economic institutional regime allows organisations, people and institutions to adjust to changing opportu- nities and demands in flexible and innovative ways. In a sense, it is the fundamental pillar of the knowledge- based economy, since in the absence of a strong economic incentive and institutional regime that deploys these resources to productive uses, it is possible to have a strong educational base and/or a highly developed R&D infrastructure (as is the case in Russia, for example), but to miss out on the full benefits of these achieve- ments. Thus, it is the nature and quality of interactions among the four pillars of the framework that are impor- tant for the knowledge-based economy, as broadly defined in this report. The Knf,w\,,,tI,,,,,, Revolution: A to Korea's References Analysys Inc. (2000), The Networked Revolution and the Developing Wor/d, report prepared for infoDev, Washington, DC: World Bank, http://www.infodev.orgllibraryI400.doc. Booz Allen Hamilton (19971. Revitalizing the Koreatl Economy Toward the 2151 Century, Seoul: Maeil Business Newspaper. Claessens, Stijn, S. Djankov, /. Fan, and L. Lang et al. (19981, "Resolution of Corporate Distress: Evidence from East Asia's Financial Crisis", World Bank Policy Research Working Paper, No. 2017, Washington, DC: World Bank. Foray, Dominique, and Bengt Ake Lundvall (19961. "The Knowledge-based Economy: From the Economics of Knowledge to the Learning Economy", in OECD, Employment and Growth in the Knowledge-based Economy, pp. 15- 16, Paris: OECD. Ministry of Finance and Economy (Korea) (20001- Korea Economic Update, newsletter of the Korean Ministry of Finance and Economy, 20 April (Vol. 30, No.5, p. 1J. Krugman, Paul (1994), "The Myth of Asia's Miracle", Foreign Affairs, November. Lall, Sanjaya, Manuel Albadejo, and Enrique Aldaz (1999). "East Asian Exports: Competitiveness, Technological Structure and Strategies", paper prepared for ASEM (Asia Europe Meetingl Regional Economist's Workshop: From Recovery to Sustainable Development. Machlup, F. (19621. The Production and Distribution of Knowledge in the United States. Princeton: Princeton University Press. Machlup, Fritz (1984), Knowledge: Its Creation. Distribution and Economic Signi~cance. Vots. I, 2, 3. Princeton: Princeton University Press. McKinsey Global Institute (19981. Productivity-led Growth in Korea, Seoul. Washington: McKinsey Global Institute. Monitor Company (1998). Knowledge for Action. OECD ( 1997), "National Innovation Systems", free brochure, Paris: OEeD. OECD (1998a1. Science. Technology and Industry Outlook, Paris: OECD. OECD (I 998b), Techn%gy, Productivity and Job Creation Best Policy Practices, Paris: OECD. OECD (1999a), Asia and the Global Crisis: The Industrial Dimension, Paris: OECD. OECD (1 999bl. Science, Technology and Industry Scoreboard 1999: Benchmarking Knowledge-Based Economies, Paris: OECD. OECD (20001. 15 There a New Economy? The Changing Role of Innovation and Information Technology in Growth, Paris: OECD. Rubin, M.R., and M. Taylor (1984), The Knowledge Industry in the United States: 1960-1980, Princeton: Princeton University Press. Shreyer, Paul (20001, "The Contribution of Information of Communication Technology to Output Growth: A Study of the G7 Coun- tries", STI Working Papers, 2000/2, Paris: OECD. Thurow, Lester. C. (1999), Building Wealth: New Rules for Individuals, Companies. Nations in a Knowledge Based Economy, New York: Harper Collins. Korea and the Knowledge-based Economy: Making the Transition Wilson, E., and F. Rodriguez (1999), Are Poor Countries Losing tlie Internet Revolution?, report prepared for infoDev, University of Maryland. College Park. World Bank (1999a), Korea, Establisliing a New and Sustained Foundation for Sustained Growtli, Washington, DC: World Bank. World Bank (1999b), World Development Reportl998/99: Knowledge for Development. Washington. DC: World Bank. World Bank (20001. World Development Indicators 2000, Washington, DC: World Bank. Young, Alwyn ( 1993), "Lessons from East Asian NICs: A Contrarian View", NBER Working Paper, No. 4482, October, Cambridge, Mass. Chapter 2 Updating the Economic Incentive and Institutional Regime A. Introduction The 1997 crisis clearly demonstrated the need to fe-examine the economic incentive and institu- tional regime in Korea. The main challenge facing Korea is to move away from past interventionist poli- cies to foster a flexible, adaptable, market-based networked economy and creative society. The broad agenda presented in this chapter requires completing the structural reforms started in the wake of the crisis and putting these into practice, including redefining the role of government, creat- ing conditions to support the entry of more new players in the economy, improving the soundness and efficiency of the financial system, increasing the flexibility of the labor market. preventing the potential "knowledge and digital divide", strengthening the basic institutional infrastructure and fortifying the rule of law. B. Redefining the role of government The Korean Government has played a key part in the country's rapid development, and will indeed playa critical role in the transition to the knowledge-based economy. However, this new role calls for the interventionist poliCies of the past to be abandoned. Meeting the requirements of the knowledge- based economy means making markets work more effectively. This will facilitate the constant redeploy- ment of the resources that enter into the creation and implementation of new and better ways of doing things and the rejection of outmoded methods. However, it cannot be handled through heavy govern- ment intervention. The central elements of the changed role for government in this context are: · Promoting competition and entrepreneurship, and deregulating the market to unleash the cre- ative energy of individuals and the private sector, while at the same time providing a modem regulatory framework to support the efficient and equitable functioning of markets. · Securing the rule of law and providing greater transparency, disclosure of information, and accountability for market players, as well as for government. · Building and harnessing a modern legal and institutional infrastructure relevant for the knowl- edge economy, in such areas as intellectual property rights, valuation of intangible assets, cyber Jaws covering privacy, security and digital transactions. · Addressing the access and equity issues that may result from greater reliance on stronger market forces, from continuous restructuring and from the risk of a growing digital divide. · Providing public goods such as basic education and basic research. · Addressing missing or underdeveloped markets and networks, including acting as a catalyzer for a high-speed Internet backbone,' promoting new technoiogies,2 facilitating networking (e.g. between univerSities, researchers, and firms), while being careful to foster market-led mech- anisms rather than impede them. In addition, the government must modernize and restructure itself in order to capture efficiency gains by: improving the quality, efficiency and delivery of public services; strengthening government information flows; and building strategic information systems. 3 Since the Asian crisis, the Korean Gov- ernment has made a very impressive start in this direction. Reforms in the corporate, financial and labor ~ Korea and the the Transition markets are being supported by a restructured public sector consisting of a "small. efficient and service~ oriented government" which will be achieved through improved public sector management. including the tax system and administration; more transparency in expenditures and budget processes and human resource management; and greater outsourcing to the private sector. Over the coming years, Korea will need to address a number of issues in this area. The program will entail completing government reforms to achieve a civil service that is knowledgeable and compatible with the information age through: an appropriate level of salaries; new modalities for policy making in the context of greater globalization; the creation of a knowledge-based government through extensive training, the building of government information networks and better methods of knowledge sharing;4 and the definition of the role of government in knowledge-based activities. In addition, there is a need for privatization of state~owned enterprises, especially in the information infrastructure sector, in order to provide reliable. efficient and low-cost services through the effects of competition underpinned by the modern regulatory oversight found in other OECD countries. There is still a strong sentiment in the private sector that the government sector has not changed enough - it is primarily perceived as a regu- latory institution rather than one that is supportive of individual creativity and fully engaged in encour- aging the growth of the private sector. The government will have to become a facilitator of change, fostering broad participation consistent with the distributed power arrangements of the networked, knowledge-based economy. While the government plays a critical role in creating the appropriate incentive regime and in strengthening the education and information base, entrepreneurship and innovation are central to the knowledge~based economy. These activities are carried out primarily by individuals, firms and non- government organisations. An essential element concerns spurring greater "technopreneurship", i.e. entrepreneurship combined with the use and development of ICTs in a broad span of sectors. including services. There are still fiscal and other barriers to entrepreneurship, however, and despite the rapid development of venture capital markets in recent years, challenges remain as regards the per- formance of new and small firms more generally and the degree of entrepreneurship among individuals (see further Chapter 6). A culture of entrepreneurship also involves a change in attitudes as regards fail- ure. One reason for the high level of innovativeness and dynamism in the United States is that honest failure is socially acceptable. Many successful entrepreneurs failed several times in trying to bring inno- vative ideas to the market before finally succeeding. For Korea to achieve such a change in mind-set and foster a more entrepreneurial culture (World Bank, 1999) will require common action on the part of the education system, the media and society at large. C. Opening up the economy and promoting competition Opening up to trade: reducing tariff and non-tariff barriers. During the 1980s and 1990s, Korea embarked on a selective liberalization and deregulation of the economy. This resulted in a decline in the percentage of product markets in which the top-three firms together accounted for more than half of total sales: from 88% in 198 I to 76% in 1994. However, the degree of competition was relatively limited prior to the crisis, as evidenced by measures of the mark~up of prices over costs: relative to other countries, mark- ups were significantly higher in Korea in a large number of manufacturing sectors. Moreover, these mark-ups were found to be negatively correlated with TFP growth, suggesting that the lack of import competition had significant negative impacts on productive efficiency (World Bank. 1999). Since the crisis, however, there has been further liberalization of the Korean trade regime. The sim~ pie effective tariff rate, which had declined from 6.8% in 1988 to about 4.5% in 1996, was brought down further in 1998 and, by 1999, 90% of the rates were under 10% and the effective tariff rate had fallen to 2.8%. Progress had also been made on non~tariff barriers and further deregulation is planned. Opening up to foreign investment. After joining the OECD in 1996, Korea streamlined previously restric- tive regulations and brought them up to internationally accepted levels. Since the crisis, it has under- taken major liberalization of foreign investment through the New Foreign Investment Promotion Act (1998, revised in 1999). As of May 2000, of a total 1 148 classified sectors, only four remained closed to FDL The 14 partially closed sectors and three of the closed sectors are expected to be further liberal- Ind"tir,,, the Economic Incentive and Institutional ized in 2000. Market access has been expanded through the liberalization of sectoral restrictions and the facilitation of cross-border mergers and acquisitions. As a result of the liberalization and the requirement that over-leveraged domestic firms reduce debt equity ratios to 200% by the end of 1997. FDI more than doubled between \997 and 1999 as domestic firms sold off assets (Figure 2.1). Most of the restricted sectors are in the service industries. 5 Some of the affected sectors that directly relate to knowledge diffusion are broadcasting. television and cable broadcasting. news agency activities. pub- lishing of newspapers and periodicals. and telecommunications. Korea now needs to focus on becoming more proactive in attracting the FDI that can contribute most to its present stage of development and on maximizing the positive spillovers from such invest- ments in the economy. especially the knowledge-intensive industries and the service sector. 6 Much will depend on the extent to which the industrial structures. workforce competencies and institutional con- ditions. such as intellectual property rights. induce foreign firms to transfer skills. technologies and management practices. and allow domestic enterprises and individuals to capture spillover effects. The experience of countries such as Ireland and Singapore are particularly relevant in this area. Chapter 6 further develops some of these issues. Deregulation. The first important step towards domestic regulation came with the passage of the Basic Act on Administrative Regulations in 1997. In 1998. the Regulatory Reform Committee was estab- lished under the Office of the Prime Minister. By Iuly 1999. a total of 5 480 regulations had been elimi- nated. 5695 had been streamlined and 7707 regulations emanating from 934 subordinate laws had been revised. [n addition, I 466 out of I 840 informal regulations had been abolished. Although signifi- cant progress has been made in liberalizing the trade and foreign investment regime. Korean markets are still encumbered with vague and complicated regulations. especially in the service sector. Excessive regulation is one of the reasons why the service sector remains relatively underdeveloped compared to countries such as Singapore. the United Kingdom. the United States and Japan (Figure 2.21.7 Figure 2.1. Foreign direct investment in Korea, by sector USD million - - Manufacturing - - -- - - Services - - - Others ---Total 18000 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ 18000 16000 16000 14 000 14000 12000 12000 10000 10000 8000 8 000 6000 4 000 4000 .. --- 2 000 2000 .. '" ...... ...--- .. -- .. _----:::-::: ............... _- .---" o J ". - -- --I- · n n - - - -1- - = I J _d ____ d __ a 1962-90 1991 1992 1993 1994 1995 1996 1997 1998 1999 Source: Ministry of Commerce. Industry and Energy. Korea and the Knowledge-based Economy: Making the Transition Figure 2.2. Services as a percentage of GOP, 1995-98 90 ______________________________________________________________________ 90 Hong Kong 80 _________________________________________________________________________ 80 y = 8.5622x + 25.064 R2 =0.2249 70 N-57 · United StatesC"la~ ------------------------------~------·-:.-.ln 'E--.-.-.-.-~;a''' : ; : " . . .. .... 50 40 ______________________________--....---:.:-'-v""iet!!.!n""am'-'--'~~~.~.~--~~i' · 40 China Malaysia 30 _________________________________________________________________________ 30 · 20 _________________________________________________________________________ 20 · 10 10 o ______________ ____________ ____________ ______________L______________ ~ ~ ~ 0 o 2 3 4 5 Per capita GDP (USD 1995, log) Source: World Bank. Maintaining the momentum of deregulation will be crucial in order to ensure the more competitive environment that would facilitate greater knowledge acquisition. diffusion and use. As will be devel- oped in subsequent chapters. deregulation should also focus on other areas central to the knowledge economy education and human resources. information infrastructure. and the science. technology and innovation system. While each Ministry is empowered to carry out its own deregulation mandate. over- lapping areas have not yet been successfully resolved. Also. "informal guidance" should be under- pinned by legal foundation and the regulatory oversight of infrastructure sectors should be brought up to the level of the DECO models. The strengthening of skills in the area of regulatory reform and mod- ern regulatory oversight will be necessary as the country moves into the next phase of its transition to a knowledge-based economy. Increasing domestic competition and entry. The recent trade and FDI liberalization and many of the cur- rent regulatory reforms should serve to improve the competitive structure of the economy. Korea's lib- eralization effort has in fact significantly increased the potential for foreign competition across the board. These actions will discipline industrial behavior. provide a more level playing field for new entrants and thus usher in a new industrial structure consistent with the development of the market economy. The challenge is to ensure that the reform effort is sustained and that continued progress is made in promoting a more competitive environment. The next step is to build capacity among regula- tory institutions to shape a fair and efficient market system. The Korean Fair Trade Commission (KFTC) established in 1980 which is in charge of enforcing the Monopoly Regulation and Fair Trade Act (FTA) - has been strengthened over the past few years.8 In terms of overall competencies. the KFTC ranks well with other OECD and developed countries. However. to effectively fulfil its competition objectives. the KFTC needs strengthened capabilities in some areas. particularly with respect to investigative skills and 44 enforcement capacities. 9 the Economic Incentive and Institutional Korea's industrial development and present structure has been much influenced by government support for the chaebol, and the impediments confronting foreign competitors as well as small and young companies in Korea. The government has implemented a range of measures to create a more favorable business environment, but there is still a strong element of command policies rather than measures which can put in place the mechanisms for spontaneous change. Also. much remains to be done with respect to the implementation and consolidation of existing policies. These issues are returned to in Chapter 6. Bankruptcy and re~organisation. The Korean Government has reviewed measures to remove impedi- ments to the effective implementation of bankruptcy and re-organisation laws. A New Bankruptcy Act has been passed and 99 companies from 21 chaebol have been placed under court supervision since 1997. of these, 59 were placed under court receivership. which entailed a loss of ownership and man- agement control, and 40 are in the process of re-organisation. Some asset transfers have also been com- pleted. including the sale of Kia to Hyundai. or are under final negotiation. The Korean Government has been encouraging market-led workout programs. To improve the efficiency of restructuring under court supervision, in December 1999 the National Assembly passed amendments to the Korean insolvency laws, including the Corporate Re-organisation Act and Composition Act. Some important changes are: i) a shortening of the maximum period for courts to decide whether to accept a re-organisation petition, from five months to one month; ii) a reduction in the requirement for the approval of are-organisation plan from 80 to 75% of the secured creditors; and iii) automatic application of the liquidation process in cases where a re-organisation plan fails. The amendment will be effective three months after its promul- gation. The remaining issue here is the more effective implementation of the procedures and. over time, the move toward an increased reliance on market-based remedies through the legal system. D. Increasing the soundness and efficiency of financial markets Bank and non-banking institutions. Since the beginning of the crisis in November 1997, Korea has made significant progress in restructuring its financial system and reestablishing the solvency of banking insti- tutions and has begun to lay the foundations for a sound and efficient financial system. Distressed banks are in the process of being restructured, viable banking institutions have been recapitalized. non-performing loans (NPLs) acquired from distressed institutions are being sold and a new regulatory and supervisory framework is being established. A major turnaround was made in terms of phasing out all policy loans, a cornerstone of the previous development strategy.1O While these achievements are remarkable. the agenda for financial sector reform over the short term remains unfinished. The success of the financial sector restructuring program will depend upon the reduction of the still high leverage of domestic enterprises. A lack of significant progress in corporate sector restructuring will undermine any improvement in the health of financial institutions. Among the most important issues faced by the gov- ernment in the short term are: resolution of NPLs; asset disposal by the Korea Asset Management Com- pany (KAMCO); recapitalization of banking institutions; resolution and restructuring of Non Bank Financial Institutions (NBFls), especially the merchant banks. finance companies, insurance and invest- ment trust companies; and privatization of nationalized banks. Despite significant improvements in the framework, additional changes are necessary to ensure that the financial sector promotes efficient mobilization and (reJaliocation of funds to new and emerging knowledge-intensive sectors, and that markets and institutions exercise due diligence over corpora- tions. including improved corporate governance practices. Moreover, improving accounting and disclo- sure standards. and minimizing moral hazard through the use of public funds for financial sector restructuring. remain a medium-term issue on the agenda. While these actions would be necessary to improve the financial markets, the longer-term chal- lenge is the creation of a sophisticated market-based financial system that will fundamentally alter the incentives and institutional framework influencing the behavior of banks and other financial institutions, enterprises and policy makers. Four sets of policies appear to hold the key to promoting a broader, more efficient and adaptable financial sector over time: continued strengthening of the incentive frame- work for the governance of financial institutions; promotion of securities markets (especially through Korea and the the Transition Table 2.1. Total outstanding venture capital investments in Korea KRW billion December 1997 December 1998 December 1999 Total fund 2501 2606 4691 Investment outstanding 1833 1 511 2188 %ofGDP 0.40 0.34 0.44 Source: MOFE. good corporate governance, accounting and legal frameworks): II further opening of the financial sector; and strengthening of legal codes and prudential regulation (see World Bank, 1999, for more details). Venture capital. In Korea, the emphasis is placed on collateral-based debt rather than on equity. This practice presents a bias against small start-up firms in knowledge-based industries which can incur high costs for knowledge gathering, but which hold little physical collateral. Improving access to equity capi- tal is important to the success of knowledge-based businesses. 12 Total venture capital investments out- standing amounted to KRW 2 188 billion at the end of 1999, or about 0.4% of GDP (Table 2.1).13 In contrast. in the United States, outstanding venture capital investments amounted to about USD 95 billion, or over 1% of GDP. To improve the venture capital market. Korea should strengthen regulatory oversight and informa- tion disclosure, ease restrictions on capital funds and open up to full participation of foreign investors. It is also important to further encourage a culture of entrepreneurship and "technopreneurship" 14 and to overcome the social stigma associated with business failure. Policies that promote the development of the public (stock) market may also provide an impetus for the (private) venture capital markets. E. Enhancing labor flexibility and strengthening social safety nets Enhancing labor market flexibility. The Korean labor market has been excessively rigid in the past, as measured by layoffs. Labor legislation, labor relations, and industrial and market structures have all contributed to labor market rigidities. Such rigidities hamper the ability of the country to respond rap- idly to changing market needs and opportunities resulting from restructuring pressures and those brought about by the knowledge revolution. A number of initiatives have been implemented since the crisis with the aim of creating a more flexible labor market. The government has revised the labor law to legalize layoffs; introduced a legal framework for manpower-leasing services; relaxed restrictions on private employment agencies; extended unemployment insurance to cover workers in all firms, including temporary and part-time workers; and introduced measures to improve the efficiency of active labor market policies. However, more work needs to be done in this area. The issues include overcoming labor's resistance to reform; revising employee benefits to make them fully portable; reorienting training schemes to meet the demands of the flexible economy of the 21 st century (including the service sector) and multi-skilling of school-Ieavers and university graduates (see Chapter 3). A focus on these issues will certainly yield high payoffs in the knowledge-based economy through the creation of a labor force which is adaptable to new skill needs and lifelong learning. More recently, following the recovery, Korean labor unions have stepped up their opposition to further adjustments. Although a change in outlook has been achieved in other countries like Singapore, modifying the opposition of the labor unions to issues such as produc- tivity, reskilling and retraining remains a challenge for Korea. Strengthening social safety nets. Korea has also begun to strengthen its social safety nets an important factor in enhancing labor market flexibility. As labor markets become more flexible, the risk of loss of employment and income for workers increases. The government has an important role in providing credible insurance against these risks, not only for reasons of equity but also to encourage appropriate ~ risk-taking by individuals, thereby promoting labor market flexibility. Unemployment insurance, well- the Economic Incentive and Institutional functioning pension systems and targeted poverty programs all form part of the overall insurance pack- age. Since the crisis, the benefits structure and coverage of the unemployment insurance (UI) program have significantly improved. Coverage of UI now extends to all firms; the duration of benefits has been increased by two months for all categories of eligibility; and the minimum replacement rate has been raised from 50 to 70% of the minimum wage. Korea has also embarked on a reform of its pension system. This has been motivated by several objectives: the social goal of securing adequate income support for the elderly; the fiscal need to ensure financial viability of the pension schemes; and the broader economic objectives of supporting capital market development and an efficient labor market. Enhancing labor market flexibility is contingent on continued reform. Building on important steps that have been taken since the crisis, labor flexibility needs to be increased through better enforcement of exist- ing legislation, further easing of legal restrictions, improvements in active labor market policies and the strengthening of social protection. In particular: · Legislation on firing should be fully enforced to allow firms the flexibility to restructure in response to changing conditions. · Restrictions that continue to apply to temporary workers should be removed to allow for a lower cost structure and the outsourcing of non-core activities. Besides the economic efficiency argu- ment, there is an equity argument for removing these labor market rigidities which protect the interests of a minority of the workforce that is unionized at the expense of interests of the vast majority of the workers who are not unionized and who typically earn much less. · Strengthening the social safety net will go some way to protecting workers from the higher fric- tional unemployment associated with more flexible markets. Although the payroll contribution rate of the UI was increased from 0.6 to I % in 1998, it needs to be re-evaluated to assure its finan- cial viability over the longer term. Similarly, the financial viability of the pension system needs to be guaranteed. Ensuring the portability of different pension schemes to allow workers to main- tain their benefits when switching jobs is also crucial. One of the constraints to portability is the difference in the benefit formula applied to the NPS and the three occupational schemes. Thus, a comprehensive reform strategy needs to integrate the private and public pension schemes in a coherent framework. F. Addressing the risks of the "digital divide" The knowledge-based economy brings with it the risk that social inequality will increase due to rapid technological change, as a bias may be created toward specific production factors and because workers' preparedness for change differs. 15 Accordingly, Korea needs to pay more attention to the (re)training of workers, an area in which it has no significant institutional public program. The govern- ment needs to establish a comprehensive training/retraining plan to meet the requirements of the knowledge-based economy.16 Sound industrial relations are also a prerequisite for productivity improvement. Korea has rightly been hailed for its success in redUCing poverty levels over the past three and more decades. Between 1965 and 1995, the absolute poverty rate declined from 41 % to approximately 7%. With the economic and social crisis, which spread to the country in late 1997, poverty rates increased substantially, but the latest evidence (Kakwani and Prescott, 1999) is that these rates are once again on the decline. As a result of the crisis, however, unemployment, poverty and inequality increased in Korea. The percentage of the population living in poverty increased from 85% in 1997 to 22.9% in the third quarter of 1998. Due to government income programs and the economic recovery, the rate came down sharply to 14.7% by the first quarter of 1999. Unemployment fell from a peak of 8.7% in February 1999 to 4.4% in November 1999. However, real wages, which fell by 125% from mid-1997 to the end of 1998, are still below their pre-crisis levels, despite substantial recovery in 1999. The Gini coefficient for urban incomes increased from .27 in 1997 to .30 in 1998. The National Statistical Office also reports that the Korea and the the Transition ratio of incomes between the top and the bottom deciles of urban households widened to 8.5 in 1998 compared to 6.9 in 1997. There is also concern that many of the new jobs that have contributed to the falling unemployment rates are temporary and therefore less secure and less well paid. Women were significantly affected (see below) as they tended to be laid off before their male counterparts and, when rehired, their contracts tended to be short term. Continued income disparities in Korea mean that the knowledge economy could create a "digital divide" such as that identified by the US Department of Commerce: a gap between those who have suf- ficient income and education to gain access to the potential benefits from IT, and those who do not. 17 During most of the period between 1965-95, the primary strategy for poverty reduction focused on the maintenance of macroeconomic stability in the context of steady economic growth. This approach has proven to be very successful in reducing overall poverty levels. However, even as overall levels of pov- erty continue to shrink, the hard-core poor remain poverty-stricken. IB This group faces challenges that cannot be overcome through the somewhat indirect expedient of steady economic growth. The Korean Government recently recognized the limitations of the existing welfare system and is now developing a new "productive" welfare system which stresses the provision of basic education, medical and housing support. The rationale for the new system is to help the poor pull themselves out of the poverty trap by supporting their basic needs and implementing programs to develop their ability to work. New legisla- tion, such as the Civil Basic Livelihood Secure Act, will become effective in October 2000. Directions for future poverty reduction. A major question to be addressed is the potential impact of a knowledge-based economy on groups which are SOcially and economically vulnerable - the poor, par- ticularly the rural poor; the disabled; and the uneducated - and the potential of ICT as a component of a poverty-reduction strategy. Such an analysis will make it possible to design better strategic approaches for assisting vulnerable groups to benefit from the knowledge-based economy and reduce their social and economic exclusion. The challenge facing Korea today is to understand the dimensions and nature of hard-core poverty, how this population is changing over time as a result of the economic and social transformations in Korea, and how best to design programs and interventions which can improve the lot of the poor in the context of these transformations. Use of ICTs to assist targeted poverty reduction. The relationship between access to information and level of income is strong and becoming stronger at both the national and the international levels (US Depart- ment of Commerce, 1999; Thurow. 1999). The ICT revolution threatens to increase inequity. but it also provides tools to reduce poverty. Rural and poor urban communities can be integrated into economic life and their income levels raised through information services and electronic transactions. Appropri- ate regulatory incentives can be designed to encourage provision of rural telecommunications on a commercial basis. Satellite networks, wireless communications. public telephones and community information centers are effective arrangements. Public access "telecenters" can provide employment. training for school-children in basic computing skills. assistance in local government planning and co-ordination. support for maintenance of locallCT equipment, support for farmers (both price informa- tion and extension support), and outlets for the sale and production of electronic goodS. 19 Information and communications technologies can also be used to monitor the poor and evaluate the extent to which such programs are affecting their lives. Community information centers can extend the reach of information services to under-served rural and urban areas. 20 In the United States, a report on the "Digital Divide" recommended the extension of Internet access centers which provide ICT facilities for those who lack access at home and work. Other outreach measures being explored in the United States include: low-cost basic telephone service; cable connections for public institutions at little or no charge; regulatory mechanisms to enhance the avail- ability of advanced telecommunications services to all educational and health-care institutions and libraries through mechanisms such as preferential rates for telecommunications services; and adoption of communications reform legislation which increases competition to make low-cost, high-quality ser- vices and equipment widely available, and to advance both rapid infrastructure modernization and expanded universal services for disadvantaged users. high cost or rural areas (see Annex 2). Such ~ options could also be examined in the Korean context. 21 the Economic Incentive and Institutional Addressing employment biases against women. Despite considerable progress in the quantitative expan- sion of women's economic opportunities, including their increased access to education and training, improved health conditions, as reflected in significant declines in mortality rates and increased life expectancy, and advances in legal status, Korean women still lag behind men as regards opportunities for higher education and better employment. They continue to be discriminated against in recruitment and wage levels. 22 In addition to the moral argument against inequity of access by women to economic opportunities, there is also an economic argument. By not addressing such discrimination and by con- tinuing to misallocate human capital resources that are vital for its competitiveness and sustained growth, Korea is missing out on the potential contribution of women to the workforce and hence to the nation's productivity. As noted in Chapter 1, the rate of growth is likely to be lower in Korea because the earlier contributions to productivity growth from increased educational attainment and increased labor force participation will essentially be exhausted unless there is an increase in educational attainment and labor force participation by Korean women. Korea ranks 24th out of 29 countries on the UN Gender- related Development Index (GOI) and 78th out of 102 countries in the Gender Empowerment Measure (GEM). Overall, women are concentrated in services (60% of the total). agricultural and clerical occupations (47%), and constitute about one-third of professionals (32%).23 The women's labor force participation rate in Korea was 47.4% at the end of 1999, down 2.1% from 1997. By comparison, men's labor force par- ticipation was 75.6%, down 0.4% over the previous year. In absolute numbers, more men than women lost their jobs due to the crisis. However, the percentage of the female labor force that was negatively affected by the crisis is higher than that of the male labor force. Women enter the labor market and become employed earlier in life than men but there is a tendency for women to withdraw from the labor force immediately after marriage, presumably for socio-cultural reasons (National Statistical Office, 1999, Tables 2.1 and 2.2). Support services for working women are limited: there are few childcare facili- ties and those that do exist are expensive. Many women, especially the educated, leave work after hav- ing children and choose to stay at home. President Kim's Government is actively promoting greater participation of women in the workforce and in politics. The legal framework has been established in the form of the Equal Employment Oppor- tunity Act of 1987, which has been amended three times, the last time in 1999 when the Anti-Discrimina- tion Bill was introducedY He also announced a new women's cabinet position in January 2000. However, despite the firm legal background and positive policies, women make up only 3% of national and local government. and discrimination against women in the workforce remains widespread. Strategies for gender-related access to tne benefits of tfte knowledge economy. Given that the gender equity problems that exist in Korea could potentially be exacerbated by the transition to a knowledge-based economy, affirmative measures in the workplace could incIude: 25 · leTs have the potential to open up alternative and more flexible working arrangements that would help women juggle their dual roles and reduce work stress on men. IntrodUcing this flexi- bility into such a rigid work culture will be challenging, and should be done in such a way as to ensure that the benefits are felt by men as well as women. · Opportunities for entrepreneurship through the Internet - used by women in other countries to enable them to work from their homes - should be explored. Linkages with international net- works of women in business should be developed, and training provided for women entrepre- neurs in Internet-based commerce. International linkages should also be developed through NGO networks such as the Women's Information Network for Asia and the Pacific. · Provision of improved, less costly childcare facilities, including those in private sector enter- prises. · Consensus-building between the public and private sectors, labor unions and women's organisa- tions on enhancing the contribution of Korean women to the economy and society. ~ Korea and the the Transition · Developing consensus-based measures to eliminate discrimination in personnel management systems including promotion and wages, using the example of efforts made in this area by lead- ing private and public sector industries in developed economies. · Giving public recognition to firms and government agencies employing substantial numbers of women in professional and managerial positions. · Supporting policy initiatives on new ways of doing business, including telecommuting and other flexible arrangements such as working from home, part-time work and job-sharing, global sourc- ing arrangements, new training and education capabilities. 26 In a survey of women-owned enter- prises conducted by the Small and Medium Business Administration between October and November 1999, it was found that over 70% of women-owned enterprises had personal comput- ers (PCs) and on average each enterprise had 4.4. computers; 11.1 % of women-owned enterprises managed their own homepage. However, the same survey showed that 64% of women business owners used PCs only for simple office work, 21.4% of them used the computer for Internet search, while 44.4% of women entrepreneurs are computer illiterate (SMBA, 1999). · Promoting the utilization of such innovations, particularly among women, the poor and other vul- nerable groups, through outreach efforts involving a wide range of stakeholder organisations and networks, particularly targeting rural areas. G. Updating the institutional regime The increasing importance of knowledge and the greater ease of acquiring, processing and dissem- inating information are creating pressures to update many areas of the legal and regulatory structures in order to enhance the flexibility of markets and provide incentives for the creation, diffusion and use of knowledge. An area in need of immediate attention is intellectual property. However, more generally, reforms are also necessary to the institutional regime pertaining to information disclosure; transpar- ency; accountability; rule of law, as well as the structure and functioning of government, including issues of governance and the reduction of corruption. Strengthening intellectual property rights laws and their enforcement. The protection of intellectual property rights (IPRs) is becoming increasingly important in knowledge-based economiesY This is being driven by the mounting costs of R&D for new products or processes, the shortening of the product life cycle, the rapid growth in international trade in high-technology products and the internationalization of the research process. 28 This trend presents a major challenge for Korea as it moves from the knowledge acquisition and adaptation phase of the past, to becoming a generator and user of new knowledge and technologies. In the 1999 World Competitiveness Index produced annually by IMD, Korea ranked 4 JSt out of 47 countries in terms of patent and copyright protection. Quite apart from the obligations of global treaties that deal with IPRs (the TRIPs agreement). the incentive to develop knowledge is weakened if that knowledge is not protected. Patents and copyrights are a compromise between the need to provide an incentive for the creation of new knowledge and the social goal of disseminating knowledge at little or no cost. Giving property rights for a specified period of time provides the incentive to create the new knowledge. Requiring the publication of the knowledge in question partially fulfills the objective of announcing to the public that the knowledge has been created. IPRs are important because: i) they provide incentives for innovation that cover the costs of creation; ii) they are an essential vehicle for transferring technologies and investment in high-technology industries, if the correct price is paid for sharing technologies; and iii) they help to attract funding for innovation and knowledge creation - sharing the risks and costs of R&D and encouraging collaborative research between domestic firms, universities and research institutions, and between domestic and foreign research consor- tia. 29 All of these factors are very relevant for Korea, given its strong R&D capability, its advanced indus- trial structure and its strong desire to become a knowledge-based economy. Intellectual property rights create bundles of rights that lend themselves to efficient exploitation through the market - production responsibilities can be divided among large and small firms and businesses - which is essential for the competitive development of Korea's high-technology small and medium businesses. the Economic Incentive and Institutional It used to be a generally held belief among Koreans that information and knowledge are public goods, thereby constraining the incentives for knowledge creation and provision. This thinking has been changing recently with strong support given to IPR issues. Korea is classified with "Priority watch list" status under the special 301 proVision of the US Office of the Special Trade Representative, which does an annual classification of intellectual property rights regimes as they affect us trade and invest- ment. Advocacy and education in IPR issues has been advancing. The Korean Government recently took the stance of valuing intellectual properties - technologies, knowledge, intellectual assets, and so on - and using them as materials for evaluating companies (and their viability).3o and for new ways of calculating GNP. The government is also cognizant of the fact that, with globalization and the spread of ICTs, technical disputes in high-value technologies have emerged between domestic firms and between domestic and foreign firms. Recent amendments in legislation should improve the overall protection and enforcement of IPRs in Korea. In particular, the Patent Court and the amendments to the Trademark Act (TMA) have been established, and both took effect in March 1998. These have already yielded positive changes. 31 The media is also playing a positive role in publicizing the enforcement efforts and in reinforcing govern- mental efforts. The bankruptcy of Hangul and Computer Co. tHCC) gave a valuable lesson that if intel- lectual property is not respected and protected, knowledge-creating activities will not be sustained. HCC had been the leader in Korea's word-processing software market until its bankruptcy in 1998. Even Microsoft, with its aggressive marketing campaign, could not outpace HCC. One of the reasons for HCC's bankruptcy was the frequency of pirated copies. Following the news of HCC's bankruptcy, the Korean public initiated voluntary campaigns to buy original products, and these have helped to resuscitate the Hangul software. Despite the efforts that have been undertaken so far in this area, a number of outstanding issues remain: · A sizeable portion of the public does not understand the criminal nature of actions which amount to infringement. Advocacy of IPRs to demonstrate their value to firms and their role in the stimu- lation of intellectual creation therefore needs to be strengthened. This has to be done jointly through co-ordinated efforts among government agencies, and through collaboration between government and private research institutes and the media. · The Korean Government should increase public information services to enable better use of and access to new knowledge, whether patented or not. It should increase its efforts to produce more effective documentation and to compile knowledge in such areas through databases. The quality of institutions providing information services, such as the Korea Institute of Industry and Technol- ogy Information (KINITI), should be upgraded. · There is a need to further extend the IPR laws and the administration of the new IPR laws copy- right protection - to pre-existing works and sound recordings (as part of the TRIPS Agreement); patent protection for pharmaceuticals and the protection of data for pharmaceuticals; protection of trademarks; software protection (there is a need to amend the Computer Program Protection Act); improved implementation of the Patent Act and Utility Model Act to streamline the exami- nation and appellate process; and protection of trade secrets that are divulged by foreign busi- nesses in business plans or on products as part of the requirements for entry to Korean markets. · Current administrative structures for protecting IPRs need to be streamlined. The Korean Intel- lectual Property Office (formerly the Korean Patent Office) is in charge of patents, utilities and trademarks; the Ministry of Culture is responsible for copyright; the Ministry of Information and Communication (MOIC) is in charge of computer programs; and the Ministry of Agriculture is responsible for plant seeds. · The courts, prosecutors, police and other government agencies have increased enforcement of IPR laws and are maintaining or increasing funding and resources to combat IPR infringement. Protection of IPRs can be improved through progressively oriented judicial activism in the inter- pretation of the laws, through enforcement of the laws, and through the proactive involvement of the prosecutor's office and other government agencies. ~ Korea and the the Transition Rule of law, fairness, anti-corruption campaign, equal opportunity. Following the February 1998 elections, the Korean Government embarked on an ambitious program to reduce corruption in the public sector. On 17 August 1999, a comprehensive package of anti-corruption measures was announced. The package includes specific targets or measures such as increasing the salaries of public servants so that they match those of private industries within five years, compensating whistleblowers with cash rewards amounting to 5 to 15% of the government's recovered revenues, launching inspections of large local gov- ernments such as those in metropolitan cities and provinces upon the request of I 000 or more citizens, and making it obligatory provide information on the content and use of political funds. As an indicator of a just and fair society, the government aims to become "transparent" by 2003, which implies a consid- erable improvement from the country's current 43 rd position to 20 th position in the ranking of Transpar- ency International. 32 Progress is also indicated by the growth of many new non-government organisations (NGOs) which are pushing for greater transparency and accountability for government and society at large. The issue here is the timely implementation of the measures, including the announce- ment of the scorecard of success. In addition, upholding the rule of law to protect the poor, women and the disabled will be important. Norms, standards, consumer protection. A knowledge-based economy is predicated on norms and stan- dards that facilitate production and transactions while protecting consumers. This is an area where Korea needs to consolidate its strengths. As in other East Asian economies, the Korean regime was tilted in favor of production compared to transactions and consumption. The typical sequence in the industrial sector was to buy standard hardware technologies from abroad, use and adapt these technologies, and then follow-up with standardized production and exports. The scope and domestic development of (product) standards, certification, codification and accreditation were limited. Building such capabilities in the pub- lic and private sectors and moving towards international benchmarks in these areas will be crucial for Korea's next phase of quality- and innovation-based competitiveness and will also assist in the greater diffusion and commercialization of technologies. The role, functions and actions of the Consumer Protec- tion Bureau need to be better understood, including its legal and institutional framework. Although the Consumer Protection Act was passed in 1980, it was only after it was revised in ! 987 with the establish- ment of the Consumer Protection Board that attention was paid to the issue. While the Board has investi- gative powers, its capacity needs to be strengthened for advocacy, testing for consumer safety and investigative functions. product information disclosures have been made mandatory. In 1999, more than 300 cases of unfair advertising were filed with the Board and more cases are sur- facing in the service sector relating to finance, e-commerce and cellular phones. The generic issue here is one of asymmetric information between consumers and sellers. A related issue is co-ordination of the functions that are now shared between the KFTC. MOFE and MOCIE. The formation of the National Con- sumer Policy Review Committee, headed by MOFE and composed of ministers, representatives of con- sumer groups and professors, is a step in the right direction. H. Conclusion To achieve a significant shift toward the knowledge economy, it is necessary for Korea to undertake a broad-based and interlinked reform package that covers the four pillars developed in Chapter I. However, it is suggested that the highest priority be accorded to updating the incentive and institu- tional regime: this is critical to enable Korea to position itself on a new and sustainable growth path. These reforms are central to the overall functioning and flexibility required by the knowledge-based economy and the other three components of the framework. For example, pressing on with the reform of the incentive regime will induce the chaebol to become leaner, transform themselves into knowledge- based entities, make them more competitive in terms of innovation and encourage them to increase the productivity of their R&D efforts. This will promote Korean "technopreneurship" and at the same time create a market for the valuation of intangible assets. The incentive and institutional regime changes discussed in this chapter would also open up the education, training and information infra- structure markets. Chapter 3 discusses the education and human resource needs for Korea's transition to the knowledge-based economy. the Economic Incentive and Institutional Notes 1. In large infrastructures, such as the high-speed Internet backbone, profits depend on economies of scale and scope and on complex arrangements influenced by laws and regulations, and benefits may consist of public goods that are not captured as profits. 2. Including, for example, policies to encourage the use of computers and Internet among the population. 3. This includes sector-wide information systems for education, health, public sector management, transport, electronic payments, university and science networks, trade facilitation, property and business registries, disaster prevention and national statistics. 4. Some of detailed measures contemplated by the government include: iJ strengthening co-operation between government ministries by raiSing the level of the Ministers of Finance and Economy, and of Education to that of deputy Prime Minister in charge of co-ordinating other ministries, a development committee for human resources and a ministers' meeting on welfare policies, voluntary reengineering of each ministry; ii) accomplishing e-government in the short term, through a knowledge management system and the introduc- tion of e-administration (e-mail reports. electronic approval systems and electronic data interchange and train- ing; civil affairs office to provide 24 hour service over the Internet); iii) improving the budget management institutions (by increasing the efficiency of public spending, including that of local governments); Iv) proceeding with deregulation; and v) reforming state-owned enterprises and privatization (Ministry of Finance and Economy. 2000J, 5. The 14 partially restricted sectors are: cereal grains production. newspaper publishing. publishing of periodi- cals. coastal water passenger transport, coastal water freight transport. scheduled air transport. non-scheduled air transport, wire telecommunications, wireless telecommunications, domestic banking, trust companies, cable broadcasting, and electric power generation (Ministry of Commerce, Industry and Energy. 1999). 6. In discussions with KOTRA, ambiguous tax laws and cumbersome regulations on customs and import proce- dures were identified as the most serious impediment to foreign investment. 7. In the retail trade, retail banking, telecommunications, and construction sectors, for example, product market regulations appear to have limited the degree of competition (McKinsey Global Institute, 1998). In the tele- communications sector. although long-distance and the international services were deregulated. government interventions on pricing decisions have limited the ability of new entrants to compete against the incumbent on price. and a lack of equal access to subscribers has further impeded their efforts to compete. The deregula- tion of the services sector is particularly important. given the large productivity gains that can be reaped through deregulation (in the us communications sector. for example. deregulation has brought productivity gains that have exceeded the economy-wide average by two-thirds over the last 20 years) and the important synergies between the manufacturing and services sectors that can be explOited. Many such anti-competitive regulations are now being eliminated. The government has also announced a privatization program, the first phase of which includes Korea Electric Power (KEPCO) and Korea Telecom (KTj. The intention is to introduce effective competition. and the Ministry of Budget and Planning recognizes that regulatory oversight will need to be developed before any significant privatization transaction takes place. 8. So far, the KFTC has focused largely on unfair trade practices, which include predatory pricing and cross-subsi- dization of subsidiaries, false advertising and refusal to sell. It has done less in the areas of abuse of dominant position and resale price maintenance, areas which require more analytical skills. Also, monitoring of mergers and acquisitions (M&As) has been generally limited to responding to pre-notifications. Capacity needs to be built to assess more complex M&A cases where enhanced efficiencies of M&A outweigh the effects of competi- tion restriction. 9. For more detail. see World Bank 1.1999) and OECD (2000). 10. Policy loans were given under the directives of the Ministry of Finance to selected sectors, especially to the heavy and chemical industry sectors. II. Financial - and in particular capital market development appears to be positively affected by good corporate governance. Korea has made great strides in strengthening corporate governance since the crisis. The issues involved fall in the broad categories of: il shareholders' rights, particularly those of minority shareholders; Korea and the the Transition ii) institutional and strategic investors' rights; iii) creditors' rights; ivl accountability and functioning of corporate Boards of Directors; vI improving the legal system, including better insolvency procedures; and vi) improving the transparency of financial information and ensuring accountability (see Chapter 6 of this report and World Bank, 1999, for a more detailed discussion). As these reforms take hold and are deepened, they should pro- vide further impetus to the development of Korea's stock markets. 12. Venture capital has enabled the growth of new knowledge-based industries in sectors ranging from computer technology to pharmaceuticals to biotechnology. The explosion in the Internet and telecommunications in the United States was facilitated by the presence of robust venture capital. Venture capital provides the financial foundation for innovation that is driving knowledge-based economies. 13. Even in larger industrial countries the importance of venture capital varies significantly. In the United States, Canada and the United Kingdom, where venture capital markets are the largest, new venture capital invest- ments averaged 0.15-0.185% of GOP. In many other countries, such as Germany, France or Italy, however, annual venture capital investments have been of the order of 0.04-0.06% of GOP. 14. Some countries, such as the United Kingdom, have explicitly made an effort to teach entrepreneurship in schools. See UK Department of Trade and Industry (1998). Singapore has since the early 19905 engaged in the teaching of "technopreneurship" at the National University of Singapore. See littp;//www.ec.gov.sg for initiatives in this area. 15. This is also the case for Korea. During the 1980s, technological change widened the educational wage differen- tial across industries (Choi, 1993). 16. For example, in collaboration with universities, government could introduce study courses for workers. Austria utilizes its FacliliochscflUlen system to this end. Finland also uses public/private partnership programs to enhance professional education. 17. Other factors that can lead to such a gap are geographical location and language barriers and outmoded mind- sets. 18. The share of the Korean population that is below the international poverty line of USD 1 per day is less than 2%. See World Bank (2000). 19. There are also some inherent poverty and income inequality issues in relation to access: computer technology is expensive, with the result that unless specific action is taken to redress the imbalance, the rich will be in a better position than the poor to take up the opportunities proVided by ICT. To increase the alternatives avail- able to poor and vulnerable groups, parallel initiatives will need to be undertaken in the areas of small and medium enterprise development, access to credit, service and tourist industries, and cottage industry devel- opment and marketing. 20. In Amsterdam in 1994, a government-sponsored project created the Digital City (De Digitale Stad) as a virtual market and town center to facilitate community participation in government. In the first few weeks, ) 00 000 people joined. In North America, Freenets with similar purposes have been created in about 50 cities. With government support, the effort is being extended to rural areas of the United States. The Nordic telecottages provide isolated village communities with access to information resources for distance working, distance edu- cation and other capabilities. The Community Learning Utility project provides distance learning in Europe, and similar initiatives have started for some developing countries. 21. In March 2000, the Korean Government launched a nationwide campaign to teach Internet to one million housewives over a period of 18 months. In Seoul and nearby cities, nearly 70% of private computer institutes joined this program and are fully booked through July 2000. The program provides 20 hours of Internet courses per month for just KRW 30 000, far below the going market rate of KRW 100000. 22. While the average life expectancy for men in Korea increased to 67.2 years in 1990-95, nonetheless Korean men have a shorter life expectancy than men in other DECO countries; Japanese men live 8 years longer on average. Meanwhile Korean (and Japanese) women have life expectancies (currently 74.8 years). that are among the highest in the world, rivaling and sometimes exceeding those in OECD countries. 23. National Statistical Office (1999), Table 9. The status and occupation of a worker is also differentiated by gen- der. Fewer women than men are self-employed (20% compared to 34% of men). and many more are unpaid family workers (22% of women compared to 2% of men). The distribution of employees is similarly gender-dif- ferentiated: a much higher proportion of women (43%) are in temporary employment (the share for men is 2 I %1. 24. Women's wages are lower than men's despite the 1987 Equal Opportunity Act which guarantees equality between men and women in employment. and its 1989 revisions which include provisions of equal pay for equal work regardless of sex. In 1992, the average monthly wage of female workers was only about 56% of those of males, although this figure represents a 12 percentage point increase since 1972. 25. Initiatives that can be taken at the school and university level are addressed in Chapter 4. 26. In much of the industrialized world and specifically in the United States, it is largely the private sector which creates the information, develops applications and services, constructs facilities, and trains others to tap its the Economic Incentive and Institutional potential. All these areas offer flexible employment opportunities for Korean women. The need for adequate technical support can provide considerable job openings for women trainees, including flexible working hours which could accommodate their dual roles. The involvement of women's networks in the non-governmental sector, in academia and among students should be actively sought to promote take-up of such training. 27. Intellectual property consists of creative works, inventions, trade secrets and business goodwill. The scope and nature of intellectual property rights vary depending upon the rights concerned. Some of the rights protect ideas, some the expression of the idea, some rights give the limited form of monopoly right, while others merely give a right to prevent copying, and so on. In general there are seven types of rights patent, copyright, registered trademarks, registered designs, plant variety rights, confidential information and circuit layouts. 28. At the conclusion of the 1994 Uruguay Round of multilateral trade negotiations that led to the creation of the World Trade Organization (WTO], a new agreement on trade-related aspects of intellectual property rights (TRIPs) strengthened IPRs in WTO member countries and gave developing countries a transition period to make the adjustment. 29. A study of Brazil and Mexico showed that in both countries, prior to the strengthening of IPRs, researchers tended to leave their countries as soon as research results became promising and take out patents in devel- oped countries offering adequate I PR protection. Venture capital start-up was slow to develop as small start-up businesses feared that the venture capital firms might appropriate their knowledge; and knowledge inter- change among researchers and technicians was constrained as researchers had no way of protecting their find- ings (Park, 1998). 30. In 1977, the Korea Technology Guarantee Fund (KOTEC) created the Technology Appraisal Centers in Seoul, Pusan, Taejon and Suwon to evaluate technologies owned by venture start-up companies. Made up of teams of experts in engineering, business and accounting, the Centers evaluate technologies owned by companies in terms of monetary value and business prospects. These assessments are used to provide credit guarantees by KOTEC or as collateral for loans from financial institutions. Patent rights, design rights, rPRs and commercial- ized technologies are appraised. 31. The amendments to the TMA were intended to streamline registration and recording procedures and to meet the necessary international standards for Korea's accession to the Trademark Law Treaty adopted by the WIPO. KIPO has mounted its advocacy function through education and training. 32. In recent years there has been a surge of interest in the consequences of governance for development. In a recent paper, Kaufmann et al. (1999) construct six aggregate indicators corresponding to six fundamental gover- nance concepts. The authors define governance broadly as the traditions and institutions by which authority in a country is exercised. This includes: i) the process by which governments are selected, monitored and replaced - the two clusters of indicators used as indices for this are labeled "Voice and Accountability" and "Political Instability and Violence"; iil the capacity of governments to effectively formulate and implement sound policies, reflected by two clusters referred to as "Government Effectiveness" and "Regulatory Burden"; and iii) the respect shown by citizens and the state for the institutions that govern economic and social interac- tions among them - the two clusters labeled "Rule of Law" and "Graft". A preliminary examination of the data in these six clusters shows that Korea does relatively well (compared to the United States and Japan) in the "Voice and Accountability" and "Rule of Law" clusters. It is comparable to Japan in "Regulatory Burden", but has some way to go in "Govemment Effectiveness", "Political Instability and Violence" and "Graft". Korea and the the Transition References Choi, Kang-Shik (1993), "Technological Change and Educational Wage Differentials in Korea", Economic Growth Center Discussion Paper, No. 698, Yale University. Kakwani, Nanak, and N. Prescott (1999), "Impact of Economic Crisis on Poverty and Inequality in Korea", background paper prepared for the World Bank. Kaufmann, Daniel, Aart Kraay, and Pablo zoido-Lobaton (1999), "Governance Matters", Washington, DC: World Bank, August. McKinsey Global Institute (1998), Productivity-led Growth in Korea. Ministry of Commerce, Industry and Energy (Korea) (1999), Shaping a New Investment Environment: Korea prepares for the 21 st Century, September. Ministry of Finance and Economy (Korea) (2000), Korea Economic Update, newsletter of the Ministry of Finance and Economy, 28 February. National Statistical Office (Korea) (1999), Annual Report on the Economically Active Population Survey, Seoul. OECD (2000), Regulatory Reform: Korea, Paris: OECD. Park. Dong-Hyun (\ 998), "Intellectual Property Regime and the Developing Countries", STEPI, November. Small and Medium Business Administration (Koreal (1999). Survey on 5MBs, 27 October to 30 November, Seoul: 5MBA. Thurow. Lester, C. (1999). Building Wealth: New Rules for Individuals, Companies, Nations in a Knowledge Based Economy. Harper Collins. UK Department of Trade and Industry (1998). Our Competitive Future: Building the Knowledge-driven Economy, December. US Department of Commerce {I 999), "Falling through the Net: Defining the Digital Divide". World Bank (1999), Korea: Establishing a New Foundation for Sustained Growth, Washington, DC: World Bank. World Bank (2000), World Development Indicators 2000, Washington, DC: World Bank. Chapter 3 Developing Human Resources for the Knowledge-based Economy A. Introduction Increasing overall productivity and adaptability will be fundamental for Korea's transition to an advanced knowledge-based economy. Developing the appropriate human resources will be the linchpin of such a transformation. Ensuring the flexibility of the education system, both formal and informal, will thus be critical for developing creative, knowledgeable and better-skilled citizens for the 21 st century. Korea has attained remarkable achievements in education over the past three decades, and the quality of its basic education has been internationally acclaimed. In recent years, Korea has embarked upon a series of educational reforms. The challenge is whether the well-established Korean education system will be able to maintain its excellence, undertake the necessary reforms and provide the needed human resources for its transition to an advanced knowledge-based economy. To meet this challenge, Korea needs to make its education system more flexible and more relevant to the new glo- bal environment by focusing on learning rather than on schooling, creating an enabling environment for promoting creativity, improving the quality of higher education and providing opportunities for lifelong learning. Over-regulation and the continued emphasis on homogeneity throughout the system are observed to be the main obstacles to progress, making a profound and systemic education reform focusing on deregulation and diversification and a new role for government a central requirement. A reformed education system would integrate and update the existing education and training systems, and facilitate learning by anyone, anywhere and at any time. This chapter provides a brief review of Korea's achievements and recent reforms in education. It then discusses the paradigm shift in education and learning brought about by the new global economy, highlights the challenges facing the Korean education system and proposes possible responses. B. Educational achievements and recent education reforms in Korea Korea has a unique education system characterized by much larger private sector representation and investment, and a relatively small publicly financed sector compared to other industrialized nations. In the past three decades, the government has, through its highly regulated and centralized governing system, attained remarkable educational achievements. Since 1970, Korea has maintained full enrolment in primary education (see Figure 3.1). Illiteracy declined from over 10% in 1970 to virtu- ally nil in J997 (World Bank, 1999a). Gross enrolments in secondary education increased from 40% in 1970 to become almost universal by 1997. At the tertiary level, Korea ranks third among the OECD coun- tries in the educational attainment of its population, and 84% of its high-school graduates entered a uni- versityor a college in 1998 (Ministry of Education, 1998). Schools around the country have very low drop-out rates: 0.8% for middle school, 2.1 % for high school and 2.5% for higher education. Due to this rapid expansion in schooling. gender disparities have been eliminated at both the primary and second- ary levels, although they still exist at the tertiary level (Section 031. At the same time, class sizes have fallen for all levels of education and pupil teacher ratios have become smaller. although they remain considerably higher than the average in certain OECD and other advanced countries (see Figure 3.2 for this ratio in secondary education). ~ Korea and the Knowledge-based Economy: Making the Transition Figure 3.1. Education indicators: Korea - - Illiteracy rate, adult total (% of people 15+) · · ·· ·· School enrollment, primary (% net) - - - School enrollment. secondary (% net) _ . - School enrollment. tertiary (% gross) 120 120 lQO 100 80 _ _ -------' 80 60 --- 60 40 40 20 20 /' ___ I <.--- . ~ o 0 1970 1975 1980 1985 1990 1995 1996 1997 Source: World Bank (1999a). Figure 3.2. Student teacher ratio (secondary level) -Singapore ...... Finland - - - Korea - - - Australia _ ··. United Kingdom 50 50 40 40 30 30 ---.--- .. ----- 20 20 10 10 o o 1970 1975 1980 1985 1990 1995 1996 1997 ~ Source: World Bank (1999a). ________________________D_ev_e_lo...::p_ln....:g==-H_u_m_a_n_R_e_sources for the Knowledge-based Economy Korea also shows remarkable achievements in other international comparisons. According to the TJMSS study, Korean students at the 4th and 8 th grades performed significantly better than the OECD average. In mathematics, for example. Korean students obtained the highest scores among all partici- pating countries. followed by Japan. The transition from school to work is also relatively smooth in Korea - the unemployment rate for young adults (20-24 year-oIds) is in the low range among OECD countries. And in tertiary education, although countries like the United States. Australia. and Finland are ahead of Korea with enrolment rates close to 84%. Korea has overtaken Japan and the United King- dom which had higher tertiary education rates in 1970 but have now fallen behind. Korea's female ter- tiary enrolment has also surpassed that of Japan and Singapore. In addition. Korea has the highest growth rate in scientific publications among the OECD countries. Over the past three decades, public expenditure per student as a percentage of GNP per capita in Korea has fallen significantly for tertiary education and increased for primary and secondary education. The total education expenditure increased from 8.8% of GDP in 1966 to 13.3% in 1998 (Korea Education Development Institute, 1998), the highest share for any country at this level of development. Of this. however, only 4.4% was the share of public financing. which is even lower than the OECD average of 4.9% in 1995 (Table 3.1 ).1 Such relatively low public investment in education has led parents to spend more on education and, to certain degree. has reduced the strength of the public education system in Korean society. Parents spend 2.3% of GDP on tuition and school supporting association fees for formal education in both public and private schools from the primary to the tertiary leveL In Korea. more than 35% of sec- ondary schools and almost 90% of institutions at the tertiary level are private. In percentage terms. Korean households contribute almost 84% of the costs of tertiary education, significantly more than in any other OECD country. However, lack of choice and large class size in the public sector, combined with a very strict national university admission system, have led parents to invest another 3.2% of GDP on private tutoring for their children. The remaining 3.4% consists of general expenses, including the pur- chase of study materials, books and stationary, uniforms. transportation fees, lodging. food and other costs). The Korean Government has embarked upon a series of reforms in education since the early I 990s; these were enumerated in detail in the Presidential Commission on Education Reform (PCER) initiative of 1995, as well as in subsequent revisions. 2 Some 120 tasks for reform have been proposed. Some examples of the reform agenda include: greater autonomy for universities in admissions and academic affairs, including deregulating student admission and enrolment quotas; nurturing leading regional uni- versities to meet the needs of local industry; establishing education and research networks with leading world universities to stimulate research at Korean universities; and realizing the vision of an open edu- cational system through a new Education Credit Bank system. For various reasons, especially the lack of consensus-building in this process, these reforms have not been fully implemented as envisaged J Table 3.1. Public expenditure on education as a percentage of GDp, 1995 Australia 45 Greece 3.7 Finland 6.6 Korea 3.6 Norway 6.8 Sweden 6.6 Turkey 2.2 United States 5.0 OECD average 4.9 Source: OECD (2000); World Bank (I 999a). Korea and the Knowledge-based Economy: Making the Transition Given its national zeal for education, Korea has great potential and is well positioned to forge ahead in today's world where knowledge and information are becoming the most critical factors in creat- ing value added. However, a number of serious questions need to be addressed: How can both the quality of learning and opportunities for lifelong learning be improved when the government invests only one-third of the total expenditure on education, and yet controls almost every aspect of its opera- tion? How can educational institutions be more responsive to the needs of the knowledge-based econ- omy while at the same time being constrained by regulations affecting student admission quotas, curriculum, hiring of teachers, and tuition? How can creativity be developed in both teaching and learn- ing when the incentives are such that they overwhelmingly encourage students to pass rigid college entrance exams to obtain admission into the elite schools? Without a massive deregulation and diversi- fication of the existing education system, Korea will be unable to bring about the kinds of changes in the quality of learning required by the knowledge-based economy or the opportunities for lifelong learning that are fundamental for enhancing creativity and productivity in the new economy. The current reform programs do not seem to go far enough in this regard. C. The paradigm shift in education Korea's present education system has responded well to the basic educational needs of the popu- lation and was successful in delivering the manpower needed for its industrialization efforts. However, the system was developed to serve the needs of the organisation of production in an industrial society which featured rule-driven, routine production processes controlled by management with little require- ment for creativity on the part of workers. The new knowledge-based economy requires a different type of organisation of production, which calls for changes in the relationships of worker to work, worker to worker and worker to consumer, and seeks to stimulate continuous improvements in productivity by giving workers greater control over production (Drucker, 1999). Technological improvements made by workers during the production process are as significant as those resulting from design changes by engi- neers and scientists. Thus, the knowledge-based economy requires an education system which not only permits learning throughout the lifetime of its citizens and encourages their creativity, but more impor- tantly, is sufficiently flexible to adapt to the changing demands of a knowledge-based economy_ Such a system has to be based on continuous learning - from providing basic skills, to developing core skills that encourage creative and critical thinking for problem-solving, to developing specialized skills for specific professional careers and tasks - and should take place in multiple environments: at home, at school and at work. This new environment requires a different approach to work and a different mind- set, including not only formal education and the ability to acquire and apply theoretical and analytical knowledge, but above all, a continuous upgrading of skills (Merrill Lynch and Co., 1999). The concept of "lifelong learning for all", adopted by OECD Education Ministers in January 1996, provides a framework to guide education and training policy in the knowledge-based economy (Hasan, 1998). Successful implementation of this "cradle-to-grave" approach displays four characteristics: indi- viduals are motivated to learn on a continuing basis; they are equipped with cognitive and other skills to engage in self-directed learning; they have access to opportunities for learning throughout life; and they have financial and cultural incentives to participate in lifelong learning. The lifelong learning approach is centered on the learner - defined to include the individual as well as collective entities such as the enterprise, the economy and society at large. The objectives of education policy in this new environment need to be defined in the broader social and economic con- text and take into account individual objectives as they change over the lifecycle. The economic argu- ment is that the knowledge-based economy requires a skilled, flexible and adaptable labor force. New developments in the labor market include: rising skill thresholds; falling demand for low-skilled workers in relative terms; and rising growth rates for so-called knowledge workers. Micro-level studies indicate increasing use of flexible management practices (OECD, 1998c; OECD, 1999), stemming, in part, from more frequent and volatile changes in the demand for products and services. These developments con- tribute to reducing the shelf life of skills, and multiple careers through one's working life are becoming Human Resources for the more common. All these factors place a high premium on frequent updating of skills, increasing demand for problem solving, teamwork, communication and ICT skills. In general. based on the accumulated knowledge of international best practices as well as changes in production processes and relationships, the new paradigm in education proposes a new set of ele- ments (McGinn, 1999): · Primary attention is given to different methods of learning. · Teachers provide some direction to bodies of knowledge but place greater emphasis on applica- tions. · Teachers spend little time on instruction and devote the greater part of their effort to the facilita- tion of learning. · Students spend most time on experiential learning: learning while working, and working while learning. · Group learning is emphasized over individual learning. · Emphasis is on the diversity of perspectives that can be brought to solve problems, rather than on the identification of a single concept or best approach. · Non-cognitive methods of expression are encouraged to stimulate creativity in finding solutions to "messy" and complex problems, and in facilitating communication. · Changes in student assessment are required, with a shift away from measurement of knowledge toward evaluation of performance. · Attention to the application of knowledge increases interdisciplinary work and, over time, leads to a blurring of disciplinary lines and the creation of new disciplines. · Emphasis in both teaching and learning is on the construction of knowledge through action rather than the (re)discovery of existing facts. · Different expressions of human intelligence are valued in co-operative efforts at home, in the workplace, in society and in government. Whether or not everyone agrees with the above set of elements, the emerging evidence from recent education reforms around the world seems to indicate that they are indeed the key drivers of changes in the content, delivery and operation of education systems. D. Challenges to the Korean education system and possible responses The new paradigm for education described above, which is characterized by opportunity, creativity and quality of learning, provides a broad context in which to discuss some of the major challenges fac- ing the Korean education system in relation to the knowledge-based economy. Some features of the new paradigm can be identified in the PCER reform programs since 1995 and in subsequent revisions. However, interviews and site-visits in Korea suggest that the main problems identified in the PCER report still persist to a large extent, and that the implementation of the government's reform agenda has not gone as far as originally planned. More assertive reforms in deregulation and administration are needed to create the appropriate enabling environment for educational change. The central govern~ ment has a very important role to play in the continuous improvements that are needed in the country's education system. However, in the future its role will differ from that played in the past. In this section, the discussion focuses on four interlinked areas which present major challenges to the government and society in the reform of its education and training system: deregulation and decentralization; diversifi- cation; gender, relevance and quality; and the provision of lifelong learning. I. Deregulation and decentralization As mentioned above, Korea currently spends about 13.3% of its GOP on education, and parents spend an additional 3.2% on private tutoring for their children. Such heavy investment in education should, in theory, lead to a satisfactory national education system which provides quality education and Korea and the Knowledge-based Economy: Making the Transition meets the demands of the labor market. However, discussions with various stakeholders point to the opposite view: students are less and less content with what they are taught at school; parents are not satisfied with the education their children receive, as evidenced by the amounts spent on extra tutor- ing; companies complain about the lack of specialty and skills of their newly recruited workers and graduates. The country as a whole is not confident that its education system will enhance its competi- tiveness in a global economy increasingly driven by knowledge. Why then have the heavy investments in education not produced the results expected by Korean society? Why do Korean parents have to spend so much on private tutoring? In addition to strong pressures from Korean parents for their chil- dren to get into elite universities in Seoul, the over-regulated private provision, combined with lack of institutional autonomy and insufficient public funding in the Korean education system, have led to this situation. The time is therefore ripe for a shift in the government's as well as the public's focus away from increasing quantity to enhancing the flexibility of the Korean education system in order to pro- mote creativity and effectively use all the educational resources available to it. Deregulation. Over the years, the Korean education system, like the country's other economic sec- tors, has been heavily regulated. On the one hand, such intervention has played a major role in making basic education universal and providing skilled labor for the country's industrialization drive. 4 On the other hand, government intervention has generated a range of regulations regarding the provision of educational services. Although it provides only 4.4% of GDP public spending on education, with two- thirds of its education expenditure coming from private sources and with private education institutions constituting 35 and 90% of schools at the secondary and the tertiary levels respectively, government control over the entire operation of the education system has rendered the system highly centralized and inflexible to market needs. The central government regulates matters such as type of schools, stu- dent admission, curriculum, textbooks and teacher hiring; these regulations are also applied to all edu- cation institutions, with no distinction between private and public education institutions in the content or type of education services provided. In the absence of deregulation, it will be hard to carry out the educational reforms needed for Korea's transition to the advanced knowledge-based economy. The most illustrative example of over-regulation comes from the tertiary education sector. Both the private and public universities lack autonomy in their management and academic affairs, with govern- ment regulations constraining them in the recruitment and payment of staff, student enrolments and admissions, fee levels, and so on. Although the universities do not receive direct government instruc- tions on curriculum content, the curricula they provide are fairly uniform and many universities simply copy the programs of the top-ranking university. Consequently, the students coming out of this system tend to have the same knowledge structure and skills 5 Such a heavily regulated system does not have the flexibility to fulfil the country's growing demand for new types of knowledge workers. Until very recently, the university entrance examination system was open to the criticisms of being both inequitable and inefficient as a means of selecting students, and of causing the entire education system to become exam-driven. Examinations rank students according to a total score in a limited range of subjects, pointing to a lack of diversity; and the adoption of multiple choice questions does not encourage critical thinking or analysis. It is inequitable because it stimu lates a high level of spending on tutoring in order to prepare for the entrance examination, putting significant financial pressure on lower- income families. 6 In 1998, the government introduced performance-based evaluation (i.e. cumulative school performance in addition to the test scores), and reformed the college entrance system by allow- ing universities to develop their own admission criteria and select students based on performance rather than on pure test scores. However, this has not yet resulted in substantial changes in the system due to the lack of institutional capacity within the universities to implement such wide-ranging reforms. The Korean Government has recognized the problems which arise from its tight control over the education system and has embarked on a number of deregulation efforts. Deregulation should focus on: developing an education market with healthy competition; creating flexibility; and promoting syn- ergy in the system to maximize its outcome. Granting greater autonomy to education providers, espe- cially the private institutions, will certainly increase their responsiveness to the needs of the labor ~ market. However, deregulation alone is not sufficient to bring about the required improvements. Developing Human Resources for the Knowledge-based Economy Changing the traditional mind-set of the Korean public concerning the pursuit of education, especially at elite universities, is equally important, because such elitism not only dictates the secondary school curricula and the entrance examination system, but also increases the financial burden on parents from private tutoring. Chapter 7 sets out ways to induce such a change in mind-set. Decentralization. While deregulation may bring the needed flexibility to private institutions, it is not suf- ficient for public education, which has been subjected to a highly centralized administrative control by the central government. Increased productivity in the new knowledge-based economy will require that deci- sions be made at the local level, meaning that greater autonomy is devolved to knowledge workers, thus improving their overall performance (Drucker, 1999; McGinn, 1999). Although efforts in the area of decen- tralization have started, the expertise, knowledge base and supporting infrastructures for effective deci- sion making at the local levels are not yet strong enough to permit the needed decentralization. Elsewhere in the world, experience shows that the role of central governments in education is changing. This is reflected in the shift of managerial responsibilities and resources away from central government (i.e. the Ministry of Education) to lower levels of authority, and often directly to schools, with corresponding accountability. It is hoped that bringing decision-making power and accountability closer to those who teach and manage schools will make them more effective in helping students learn, more efficient in utilizing limited resources, and more directly accountable to students, parents and local communities, thus reducing the need for central control and supervision. Effective improvement cannot be brought about by schools alone, but it is important that the schools see themselves as a central part of the solution (FuHan, 1999). In Korea, the 1995 PCER reform introduced a new type of governing body in schools, although its roles were not clearly defined. A new autonomous school approach was proposed to improve the quality, competition and diversity of educa- tional services? Still. so far, insufficient administrative and financial decision-making power has been delegated from the provincial educational authorities to individual schools. 8 Further decentralization is therefore needed to enable school-based management and to make the Korean education system more responsive to local needs. Experiences of decentralization in countries like Australia, New Zealand, Spain and the United States can be useful references (see the example of New Zealand in Box 3.1). However, the autonomous school approach is likely to encounter serious oppOSition as it may be viewed as going against the ethos of Korean culture and as catering only to the higher-income fami- lies. The issue of equity that will arise through greater market orientation will also need to be addressed. Changing role for government. The required efforts in both deregulation and decentralization in the public sector will not entail reduced responsibility for central government in the nation's educational development. Rather, the role of central government will be strengthened, although not in the tradi- tional sense of maintaining control. The central government's new role in education is in macro-level strategic decision making, securing resources, ensuring overall co-ordination and evaluation, setting standards, assuring equity and quality, and providing support services. These new requirements and responsibilities have been recognized in Korea. 9 The role of government in ensuring equity is para- mount, particularly in light of the envisaged deregulation of the education system. As the government deregulates and the private sector expands, new demands are placed on government to ensure that poorer students are adequately taken care of through scholarships at the secondary and tertiary levels. The Korean Government has set up a number of programs to help children from poor families avoid the poverty trap: i) their school attendance is well protected through a subSidy program; and iii the school lunch program provides meals for those who cannot afford to pay for them. The Korean Government's share of education expenditure is considerably below the OECD aver- age, and only about 70% of the level in most western industrialized countries. However, as noted above, total educational expenditures in Korea as a share of GDP are probably the highest in the world. Greater deregulation will help the private sector to respond to parents' demand for improved quality and diversity in private education. However, this is likely to be accompanied by rising tuition fees. For children whose parents cannot afford the higher costs of private education, this raises the issue of equity. Therefore, a crucial role for government will be to find ways to reduce the financial burden on 3 Korea and the Knowledge-based Economy: Making the Transition Box 3.1. New Zealand's experience with decentralization From 1987 to 1997, New Zealand undertook a major restructuring of its public education system with the primary objective of decentralizing authority to the school level. With the social pressure (no eco- nomic growth, high unemployment yet a lack of skilled people, huge foreign debt and few international trading partners) and political pressure (against the backdrop of broader, sweeping changes in the public sector) in the country, this reform was created by building inter-ministerial co-operation, by employing personal commitment from the Prime Minister to enlist public support, and by providing a clear, "pre- negotiated" roadmap for reform implementation (the Picot Commission Report). The reform plan was to produce a publicly funded self-managing education system where authority and delivery was decentralized to the local level including: appropriate, well-defined accountability sys- tems; targeting those with specific needs; and, offering choice to all as to where and how to get education throughout their lives. Three key issues were central to this decentralization reform: school-level self-man- agement and decision making; central government setting of clear frameworks, guidelines, standards, and requirements; and parental choice by offering more options, greater diversity, enhanced access. The cen- tral government was also committed to targeting resources to needy areas and ensuring equity throughout the system. While there was a devolution of power to schools, the central government created several intermedi- ary agencies which were accountable to the government, e.g. the Education Review Agency, responsible for conducting school-level evaluations; the New Zealand Ouality Authority, responsible for quality promo- tion and assurance; the Implementation/Training Unit, responsible for advising and supporting adminis- trators to deal with the financial management and budget skills; and Education Service Centers for consulting with and supporting schools. Central offices at each level maintained the following roles: policy advisory, managing property, moving funds, and developing personnel, administrative and governance guidelines. In short, their main focus was on equity, support services and results. In 1989-90, almost overnight, most school-level tasks originally controlled by the central government went to 2 800 parent-elected and -controlled boards. This transition was preceded by the establishment at each school of a Board of Trustees with elected members. These boards signed charters with schools to set guidelines for school self-management and reflect local needs. Many observers feel that they have strengthened the role of the parents, but not necessarily of the teachers. Some lessons learned from this reform experience are: i) change is catalyzed by a general reform cli- mate, broad public support and requisite infrastructure; ii) consistent. strong and committed political leadership is essential; iii) legislating change demonstrates serious intent and reduces the temptation of reversal by fiat; iv) political leaders must have confidence in the commitment and ability of their public officials; v) allies in the planning and financial arenas of government are crucial, along with other option leaders; vi) use the communications media; vii) change quickly - more quickly than comfortable; viii) appoint a specialist change manager with authority to act; ix) take action to gain the co-operation of existing staff who must implement the transition; x) deliberately engage or isolate pressure groups - never ignore them; xi) be prepared to inject extra funding to "sweeten the pill" for reform losers; xii) allow for mistakes and create incentives for transparency and learning; and xiii) remember exit, transition and entry arrangements. This decentralization reform has provided more choices for parents and has improved the effectiveness and efficiency of the public education system in the country. Although there are some indi- cations of the increased learning outcome of students, thorough evaluations are currently under way. Source: Perris (19981. parents looking for quality education for their children, while maintaining equity in the system through the use of instruments such as scholarships, vouchers, tax deductions, low interest loans for private education and improvements in the quality of public education. It should closely examine the efficiency of the allocation of public and private resources to education. In addition, the government needs to provide substantial support to help individual institutions build their capacities. To promote quality and accountability, the central government should make the system more transparent and increase the availability of educational policy information and statistics to the public. Without this, deregulation and ~ decentralization efforts will not succeed. Human Resources for the Possible responses · Continued deregulation of the education system is needed to further educational reform in Korea. This includes deregulation not only of the tertiary. but also of the secondary education system. · Greater efforts should be made to introduce a market-oriented and stakeholder-driven governing system in education in Korea. with clearly defined autonomy and accountability at the institu- tional level. · Responsibilities should be decentralized. with corresponding resource allocations. and with each level being held accountable for results. especially to the local level. Institutional autonomy needs to be increased to enhance the decision making of schools lO and universities ll in areas such as staff administration Ihiring. firing. salaries and benefits). teaching loads. admissions poli- cies, enrolment quotas, and budgeting and financlng. 12 · The government should continue to increase public expenditure and investments in education, enabling the system to provide high-quality services and reduce the financial burden on parents of private tutoring. It must ensure equity in the system by investing in appropriate schemes, for example, providing scholarships to students from poorer families. · With the increasing diversity in the supply of education, it will be important to develop a trans- parent mechanism for the accreditation of different types of institutions and for undertaking benchmarking assessments to judge the quality of teachers and programs and to track and moni- tor quality over time. A national body with clearly defined criteria and standards could be estab- lished to undertake this task. The government has taken a number of steps in this area in recent years, such as the establishment of an educational credit bank system which allows individuals to accumulate course credits from accredited institutions toward certification throughout their life- time. Further efforts need to be made along this path to set up a national framework that encom- passes all educational and vocational qualifications, whether obtained formally or informally. · The newly conceived college entrance system, which allows each university or college to develop its own admission criteria, needs to be firmly implemented. This will improve equity of access to university education, and help to shift the learning culture in high schools away from learning by rote toward the development of critical-thinking and problem-solving capacities. The govern- ment needs to develop instruments such as scholarships and voucher schemes to guarantee equal learning opportunities to all Koreans. 2. Diversification As the knowledge-based economy evolves and the Korean education system is further deregu- lated, there will be increasing demand for diversified learning opportunities and increasing competi- tion among providers to provide a varied menu of offerings. 13 A diversified system would consist of centers of excellence, providing leadership for the nation's education and training system, and a variety of quality institutions which would form the needed critical mass to serve the needs of both the local economy and individual learning. This would involve not only universities and vocational institutions, but general secondary schools as well. Consequently, their programs would permit some diversification, while maintaining common core standards set by the Ministry of Education. In addition, increased pos- sibilities for self-paced and directed learning brought about by the utilization of ICTs and by a blurring of the distinction between formal and informal institutions in terms of services provided - require greater diversification in both the content and the providers of education and training. Diversification of the education system has already started in Korea, as for example, in the govern- ment's Seventh Curriculum Reform 14 and Brain Korea 21 initiatives which aim at establishing a few centers of excellence in higher education with substantial public investment. However, investing in centers of excellence alone will not satisfy the demand for human resources with the diverse skills that are needed for a knowledge-based economy: some structural adjustments are also needed. For instance, the scale of junior colleges is currently only about the half of the formal colleges and universities, even Korea and the the Transition though junior colleges produce the middle-level technicians that are increasingly in demand in the new economy. At both the college and school levels, very few programs are challenging enough for gifted students whose talents are important assets for the development of the knowledge-based economy in Korea. Thus, the kind of diversification in education and training needed in Korea is not limited to any particular level of education or institution; rather it calls for a systematic effort. Currently in Korea, the high-school vocational and academic streams are completely separate and opportunities for constructing individual pathways combining elements of academic and work-related experience are limited. This implies that the most important educational decision in a child's educa- tional history is made at age 15, at the end of the junior school, and is based mainly on examination scores. Such early streaming constrains individual learning opportunities. Recently, several academic high schools have begun to offer the vocational program to their senior students, although this has met with considerable resistance from students and parents, who worry that it might lower their score in the annual nation-wide Scholastic Achievement Test (SAT) administered by the government. 15 [n addition to the diversification in curriculum, other efforts should include, for instance, magnet schools in techni- cal areas or in the arts, as well as specialized training institutions outside the formal school system. Since tertiary education is the main provider of highly skilled personnel, Korea needs to strive to promote diversity in its tertiary education system. Although the nearly universal participation in tertiary education seemingly provides enough knowledge workers for the Korean economy, there is a growing need for a more diverse body of knowledge workers. Under the government's rigid regulations, the Korean universities operate in a "department store" style, offering similar disciplines rather than con- centrating on selected areas in which they have a competitive advantage. Recently, the government has started to expand the autonomy of the universities, particularly in creating their own curriculum. How- ever, take-up has been slow due to the lack of institutional capacity in many universities and the lack of competition among them. A stronger competitive environment needs to be cultivated, as this will encourage the universities to offer greater choice and become more responsive to student needs. The current higher education system in Korea is concentrated around Seoul and its vicinity, and there is a strong concentration of the "best" universities in Seoul. This has given rise to a strong sense of elitism centered on Seoul National University (SNU). [t also inspires a disproportional share of high- school graduates to apply for entry to SNU and other elite universities in Seoul at the expense of pro- vincial universities. Provincial universities, in turn, tend to follow the trends set by SNU, often without regard to their ability to afford them. The result is a tendency towards homogeneity in public universi- ties that reduces the flexibility and relevance of provincial universities in addressing local development needs. There is a need to further develop local universities outside Seoul. Graduate schools in different regions need to become specialized to meet local needs. It is important to note that diversification of the tertiary education system will involve complementary changes at the secondary level. The strong belief of the Korean people in education, and especially in elite education, and their reluctance to experiment in this area, means that diversifying the national educational system will present quite a challenge. Possible responses · Measures to increase institutional and curricular diversification should be combined to promote interdisciplinary studies and advance broader qualification profiles and flexibility, including overlap between academic and vocational streams. It is important to ensure students' individual choice and to provide for mobility within the system to fulfill the goals of lifelong learning, equity and efficiency. This could, for example, be done by institutionalizing the credit transfer system; accepting double majors; providing more information on other universities and colleges; provid- ing economic incentives for mobility; and facilitating exchange programs with national and for- eign universities. · Greater emphasis should be given to developing "double qualifying educational pathways" that can lead students to university or to tertiary-level vocational education or directly to the labor market. The axis of vocational education should move to the post-secondary level to meet the Developing Human Resources for the Knowledge-based Economy demands of the knowledge-based economy. Vocational colleges should be authorized to teach and award degrees and their degree programs should be given proper recognition in the tertiary education system. · Efforts should be made to develop a diverse tertiary education system with a few comprehensive universities that cover all disciplinary areas and others that provide more specialized programs. Each institution needs to develop its own programs in light of its institutional strengths and local industry needs. As virtual universities mushroom around the world, diversification could be achieved by using the new technologies. In addition to the emphasis on universities, efforts should be made to upgrade and expand junior colleges. Secondary-level education should be diversified through the deregulation of the education system. 3. Gender, relevance and quality Gender. Korea's successful transition to a knowledge-based economy needs to be underpinned by a positive attitude to reform and development, especially in the area of education. A key issue in this area is the gender bias against women which is deeply embedded in Korean culture and tradition. For example, although female students make up approximately 38% of total enrollment in tertiary educa- tion, they are mostly concentrated in the arts and social sciences. Only 4% of graduates in science and technology are women. Female university professors are rare, particularly in the science and technology fields. Lesser participation of women in S&T limits the pool of women available for recruitment in the technology industries. Gender biases in textbooks, prevailing social norms and a strongly gender- differentiated workforce make it difficult to change deeply entrenched attitudes to women's employment. The change in attitude toward the gender issue needs to start at an early stage. The curriculum at schools needs to be re-examined to remove gender bias and to take account of gender issues. In addi- tion, women should be encouraged and given the opportunities to assume leadership roles in the edu- cation system. This change of attitude toward women in society will be a long-term process, but it is crucial if each Korean citizen is to fully participate in and contribute his/her full potential to the nation's transition to a knowledge-based economy. Relevance. According to Robert Reich, the three jobs of the future include routine production ser- vices (performing repetitive tasks); in-person services (providing person-to-person services); and sym- bolic analytical services (problem-solving, problem-identifying and strategic brokering activities). 16 In Korea, the overarching need is to develop critical-thinking skills, communication skills, computer skills, quantitative reasoning and social interaction among students so that they can become successful knowledge workers for the future. 17 These new skills are very different from those traditionally taught at schools. Although the quality of Korean education at the primary and secondary levels has been praised around the world, how well can Korean schools perform and how good will be the quality of Korean education when measured against these new skill requirements? Until now, the main purpose of secondary education in Korea has been to prepare students to enter prestigious colleges and universi- ties. Even though a number of reforms have been instigated in this area, 18 the college entrance exami- nation system still tends to give priority to students who do better in all fields on average, rather than to those who possess creativity and problem-solving capabilities. The gap between what currently exists and what is required for the future needs to be bridged for Korea's successful transition to a knowledge-based economy. There are distortions in the labor market in Korea with respect to wage pre- miums for different types of education/degrees, partly fueled by the traditional sense of educational elitism. In its transformation to an advanced, knowledge-based economy, Korea must analyze its educa- tion system - not only from the supply side, but also from the demand side. Korea has been attempting to achieve the right balance between quantitative expansion and qual- ity promotion of its university education system. A shift in Korean education policy in 1980 increased the number of university entrants by 30%, and reduced the wages of young college graduates relative to the wages of young high-school graduates between 1982-88 (Choi, 19991. Firms complain that they now have to retrain newly recruited college graduates, although Korean firms spend much less on such train- ing than do enterprises in other OECD countries. Korean society needs to realize that the knowledge- ~ Korea and the Knowledge-based Economy: Making the Transition based economy calls for increased technical skills and that this does not necessarily require a univer- sity-level education. 19 This links back to the diversification issue. Korean universities do not maintain close linkages with industry and there are no mechanisms for systematic feedback from industry to indicate the kind of knowledge that should be taught and the skills that should be gained in universities. As a result, the university curriculum does not reflect the needs of industry, and graduates are not well prepared to perform their jobs without further training. A better mechanism for integrating the demands of the market into the education system is required if Korea is to transform itself into a knowledge-based economy. The KBE calls for university faculty to become "learning facilitators" and "knowledge utilization co-ordinators", training students and trans- forming research results into marketable products (Gibbons, 1998). Qualitlj. The quality of the basic education system in Korea has been acclaimed the world over and Korean students do remarkably well in international comparisons. The question is whether the system is of sufficiently high quality to ensure the development of the Korean knowledge-based economy, especially in terms of the new skills required (Murnane and Levy, 1997). Teachers play an essential role in ensuring the quality of education, but the lack of a sound incen- tive system for teachers is a major problem facing Korean schools. The salary rates of beginner teachers may not be sufficiently competitive with starting rates for graduates recruited to other occupations. In the area of teacher education, dated curricula and pedagogy are some of the other major problems and have contributed to the difficulties encountered in recruiting high-caliber people to the teaching pro- fession. This is a problem as teachers are increasingly seen as fundamental agents for change and qual- ity assurance in many countries which are undertaking major education reforms (Fullan, 1999; Darling- Hammond, 1997; Elmore, 1996). It is particularly true that while decentralization has brought decision making and resources closer to those who teach and manage schools, it simultaneously demands schools and teachers to be more accountable to their students, parents and local communities. The increased accountability and requirements for new teaching skills call for a strengthening of the teach- ing profession; but the teaching profession itself must also become more active about its professional- ism (Chase, 1998). Korea lags behind in this area: in 1995, 55% of all secondary teachers came from universities that did not specialize in teacher education. Teachers are recruited at the local level on the basis of selec- tion tests administered by district education authorities, and undergraduate students focus narrowly on preparing for these quite mechanistic tests, rather than securing a broad knowledge and pedagogical basis for teaching. Teaching practice (in all eight weeks for primary and four weeks for secondary) and pedagogical training playa remarkably minor and insufficient role in teacher education and training. The curricula for teachers' education gives far too much weight to subject content and too little to cross- subject themes such as those emphasized in the KBE - communication, problem-solving, critical think- ing, etc. The curricula is also dominated by university academics who do not promote teaching methods that focus on the acquisition of knowledge through practical experience. In addition, in-service educa- tion and training seems to be restricted to teachers at certain promotion points in their careers, instead of being related functionally to the changing requirements of the teaching profession as a whole. Insuffi- cient skills and training in technology have discouraged teachers from integrating ICT with curriculum and teaching. Experience and lessons can be learned from countries such as Singapore where, based on the national ICT strategy, a teacher training plan has been developed with different approaches (e.g. a formal support system, informal networks of teachers and self-directed independent training) focusing on IT integration at the academic subject level. In short, to improve the quality of its education system, Korea must establish appropriate incentives and mechanisms for the professional development of teachers. The government has an important role to play in this area, not only in terms of providing the needed supporting services, both financial and non-financial. but also in making the current system more transparent to enhance its quality. Quality is a more challenging issue in Korea's higher education system. Korean universities tend to focus on teaching students subject matter content (" know-what" knowledge) rather than teaching or ~ coaching them on how to apply or utilize knowledge ("know-how" knowledge) (Foray and Lundvall, Human Resources for the 1996). Lack of a sound incentive structure. including unsophisticated evaluation measures for tenured professors (i.e. which are seniority-based rather than performance- and outcome-based) and hiring own graduates. has been a major contributor to the low quality of faculty. This. in turn. makes it more difficult to address quality issues at the institutional level. Once hired. professors have lifetime tenure irrespec- tive of research/teaching performance. their pay is linked with the civil service scale and promotions are based on seniority and length of tenure. Universities typically also hire their own graduates rather than searching out the best performers irrespective of the candidates' alma mater. 20 Unless the incentive structure is reformed, no more than minimal gains may be expected. Thus, unlike its basic education system with its highly recognized quality, Korea has neglected to promote quality education in its uni- versity system, which is vital today in bUilding a strong knowledge-based economy. In addition. Korean universities have weak linkages with the international educational community. Students do go abroad for education but. due to government-mandated criteria for setting up cam- puses. foreign teaching institutions have not been given incentives to provide educational services in Korea as they have in. say. Malaysia and Singapore. These criteria include size of the campus lot. quan- tity and quality of various facilities, size of buildings, number of professors, etc. Foreign schools have difficulty in meeting these regulations due to the very high cost of space and facilities in Korea, particu- larly in Seoul. There are also informal pressures by students and the government to keep tuition fees low for all Korean universities. This is a missed opportunity in terms of raising the quality of Korea's higher education. The government could. for example. start by creating incentives to encourage joint offering of degrees by foreign and domestic universities. Under this format. foreign universities would maintain linkages to operations in their home countries. For example, students could study for part of the time in Korea and part of the time at their home campuses. One of the main barriers for foreign faculty teaching in Korean universities is the low English- language proficiency of the students. The current government has introduced several measures to improve the quality of university education in Korea. Under Brain Korea 21. the government plans to invest USD 1.2 billion over the next seven years in preparing the Korean workforce for the coming cen- tury. However, attaining standards in higher education which are comparable to those of leading coun- tries is not simply a matter of resources. Many fundamental changes will have to be made at the institutional level regarding organisational structure. curriculum and pedagogy to match the require- ments imposed by globalization and competition. Possible responses · Strategies to increase the number of women who can participate fully in the KBE should include the removal of socio-cultural obstacles to women who are skilled and have technical expertise. This should include the desegregation of academic fields by gender. and the provision of sup- port. networks and incentives to encourage women to enter, remain in and succeed in areas of study that will enable them to work in any field. At school level, teachers should be educated about gender biases and expectations; curricula and textbooks should be adapted to remove gender biases; and increased career guidance should be available for girls. At tertiary level. women should be encouraged to take up science and technology courses through: putting in place outreach measures such as grants and scholarships; providing support networks for women who are in large minorities on courses; setting quotas for women for lectureships. post-graduate courses, research pOSitions; and ensuring equal opportunities for overseas training. · There is a need to reform the existing curriculum and teaching pedagogy to make learning experi- ence gained at school more relevant to society's expectations. The integrated curriculum should include training in the new skills. e.g. communication skills, capability to utilize leTs. problem- solving capabilities, social skills to co-operate and share with others. etc. · Efforts should be made to revise the curricula to improve the balance between practical and theoretical subjects. and incorporate new technologies. New technologies will need to be an integrated part of teaching methods in most subjects in order to secure skilled and up-to-date ~ Korea and the Knowledge-based Economy: Making the Transition graduates. This will require general access to computers, the use of computer-based training, access to the use of electronic mailing, distance education, and so on. · Greater importance should be given to developing more extensive and varied forms of university- industry partnership.21 Such improvements would lead to a more effective, efficient university system - one which is more relevant to the needs of industry and which prepares students to be more productive on entry to employment. Measures which foster the establishment of exchange arrangements between universities and enterprises should also be encouraged. · To improve their educational services, universities could consider the adoption of new instru- ments including: i) accepting double majors; ii) adopting more open-ended evaluation and test- ing methods; iii) facilitating student and teacher mobility both nationally and internationally; iv) integrating field experience in the curricula, such as compulsory traineeships in private enter- prises; and v) formalizing credit transfers among institutions. · There is need to reform the incentive system for teachers, at both the school as well as the uni- versity leveL by deSigning pay schemes that are not based on seniority, but rather on perfor- mance and outcomes. · It is also important to adopt effective mechanisms to encourage healthy competition among pro- fessors and teachersY A knowledge management system could be introduced to develop com- munities of practice aimed at upgrading the skills of teachers to teach with new technologies and pedagogy, through sharing of experience and best practice . · Another important step to improving the quality of education in the country will be to encourage the expansion of exchange programs between Korean and foreign universities in OECD countries. Foreign professors could be appointed in Korean universities to help them keep up with the lat- est developments in their subject areas. To stimulate competition among Korean institutions, the government could consider gradually opening the education market to accredited foreign provid- ers in tertiary education. 4. Lifelong learning In the context of the rapid development and dissemination of new knowledge, it is particularly important to facilitate opportunities for lifelong learning. It should be emphaSized that lifelong learning is a "cradle-to-grave" concept and is not limited to adult learning only. In advanced countries, a prolifer- ation of institutions and mechanisms focus on lifelong learning at work and at home. New forms of learn- ing are becoming available, such as the Internet, increased use of TV. distance learning, virtual universities, and others. These trends can only intensify in the knowledge-based economy. The lifelong education system is not well developed in Korea. ICTs are not fully exploited in areas such as distance [earning and virtual universities, and Korea lags its OECD peers in the provision of learning opportunities for adults. While the training opportunities provided by the private sector are limited in comparison to other advanced countries, those that are available could lead to a risk of social polarization, as those who are better qualified may have the most opportunities for further training. However, there will be no incentive and motivation for lifelong learning if the improved or newly learned skills are not appreciated in the workplace. Such recognition and reward are important because in Korean culture, rewards are often based on seniority rather than on increased productivity derived from improvements in workers' skills. Since learning needs and motivations change over the lifetime, the knowledge-based economy needs to cater to the growing diversity of learning needs. both formal and informal. This is important for developing informed citizenship. strengthening the foundations of democracy and developing a con- sensus for the KBE. Thus, the issue of access to knowledge and information for all, and especially for the poor, needs to be stressed. The Korean Government has recognized the importance of this issue and has begun to expand the high-speed Internet network, offer free public access to computers, provide training in informatics and promote English proficiency. With regard to the digital divide for the children of poor families, the gov- Human Resources for the ernment has set up a special program to teach Internet and basic PC skills to nearly half a million stu- dents from poor families. It will also give free PCs and five years of free Internet access to some 50000 children from low-income families (see also Chapter 4 of this report) (Kim. 2000). These mea- sures are important. but not sufficient. For example. teaching children how to use the Internet is only the first step. The Korean Government should adopt some of the more efficient solutions that have been adopted by many countries, both developed and developing ones. The United Kingdom plans to set up 700 local Internet access centers around the country to increase access to knowledge and infor- mation. Canada has already connected all its libraries and schools. However. current programs to help poor students and other measures such as IT-related local government programs to build the informa- tion society in local areas. are not closely integrated in Korea as the main agencies dealing with these issues are different and effective co-ordination between them is lacking. Another important issue is the development of content for self-learning students. For example. Canada (SchooINET) has put in place incentive programs to encourage teachers. professors and stu- dents to develop content that can be shared. 23 Korea needs to develop suitable content for students at primary and secondary schools. and to make use of content developed by other countries. Possible responses · Korea needs to fully integrate its current adult. informal. vocational and distance education sys- tems with its formal education system. and to develop a lifelong learning system. The Education Credit Bank system is one initiative that can help to ensure such integration. · The government should invest more resources into helping schools build up their information infrastructures. 24 and faCilitating greater inter-university networking through ICTs to improve teaching and research. · The development and expansion of early childhood educational services should be given a higher priority in the government's educational agenda (including funding). A closer integration of early childhood educational services with the first year of primary education should be undertaken. · Women should be targeted in policies for enabling lifelong learning. Sites for early childhood education can help women to access second-chance educational opportunities. The government should provide guidance and information services about educational programs and training. introduce support groups (as in the case of Singapore). and provide access to open education programs and learning networks. · ICT-supported network learning should be utilized more in the education system to overcome the limits of distance and time. 25 Special attention needs to be given to the integration of lCTs with curriculum and pedagogy. The government's efforts toward equal access should gradually enable every citizen to learn whenever and wherever he/she wants in a convenient way and at low cost. E. Conclusions The planned transition to a knowledge-based economy requires that Korea undertake systemic reforms in education. These reforms will involve profound changes in all aspects of its current education system, i.e. not only in the inputs and their content and composition, but also in the institutional and governance infrastructures that deliver them. Deregulation and diversification of the existing education system is fundamental as, in its absence. the system will remain inflexible, lack competition and be less relevant to the needs of a changing society. At the same time, the education system must respond to the needs of the population and should emphasize lifelong learning. It should also be noted that the education reform process is complex and will take time there is no instant solution guaranteeing quick results. Global experience and research on education reform show that factors such as shared vision, clear goals. strong leadership. broad consensus building, the ability to make adjustment along the process. measurable indicators and the availability of a support infrastructure are critical to ensuring that the Korea and the the Transition reforms achieve the desired results. The government will playa central role in this process: overseeing the whole education system, particularly with a view to maintaining minimum standards. setting up a system of national qualifications. providing information on outcomes and quality. improving teacher training, encouraging industry-university partnerships, dealing with issues of equity and investing more in public education. In short. the systemic reform in education required in Korea will be a long-term process. 26 The chal- lenge is how to maintain the good practices achieved by the existing system. such as relatively high average quality and low dispersion of student performance. while creating a new system that will better serve the country's human resource needs in the global economy. It is suggested that Korea study how other countries, especially the OECD countries and neighbor- ing countries like Singapore and Hong Kong, are undertaking systemic reforms in education, with spe- cial attention to process-related issues. Above all, a change is needed in the mind-set of major players involved in decision making on the acquisition and value of education, training and skills. The required changes need the championship of the government and extensive participation of all stakeholders: par- ents, teachers, unions, private sector, professors, other members of civil society and the media. The Korean Government has demonstrated its strong commitment to education reform. Given the capacity and the political will to carry out such unprecedented reforms. Korea will benefit from a new generation of skilled citizens and will be in a strong position to make the transition to an advanced, knowledge- based economy. Chapter 7 elaborates on the implementation of the reform of the Korean education system. Human Resources for the Notes l. In 1995, in terms of public expenditure on education as a percentage of GDP, Korea was in the lowest group among the DECD countries, together with Turkey and Greece. Korea's expenditures were only about half of those of the Scandinavian countries (DECD, 1998a). 2. Although the PCER has since been dissolved, the proposals highlighted are in various stages of implementa- tion. 3. In 1998, the Korean Ministry of Education launched a new campaign to create a "Five Year Education Develop- ment Action Plan (draft)". The latest reform package, entitled "Vision for Education beyond 2002: Creation of a New School Culture", comprises five components: creating an autonomous school community; implementing a student-centered curriculum; cherishing the value of students' life experiences; diversifying the methods used for evaluating students; and emphasizing the professionalization of teachers. Detailed programs for each of these components are under development. 4. Although it has been argued that the educational policies pursued by the government have artificially stimu- lated the public's demand to seek higher education, one cannot ignore the positive role played by the Korean Government in the quantitative expansion of schooling in the country (Ki Su Kim, 1999). 5. Woo and Lee (1999). The PCER reform proposals include increasing institutional autonomy, and implementa- tion has already started, for example, in the regulation of student admissions to universities. However, the reforms do not go far enough. 6. Parents spend large amounts on private tutoring, some to make up for poor-quality schooling, and to provide greater diversity. More than 53% of Korean households with school-age children pay for private tutoring for their children (KEDI survey). More than 50% of students receive tutoring from the for-profit Private Learning Institutes (PLI) or Han-Won. Total expenditures on private tutoring amounted to 3.2% of GDP in 1998. There are two kinds of private tutoring (PT): one for improving talents and the other for academic achievement. Typically, pre-school children and elementary school students engage in private tutoring for the purpose of acquiring specific talents, such as drawing or music, and for improving the 3Rs (reading, writing, arithmeticl. This may be called PTI. This type of tuition is demanded because Kindergarten or primary schools do not meet parents' expectations of quality and variety in education. Secondary school students, on the other hand, focus on aca- demic achievement in such subjects as English, Korean and Math in order to improve their chances for college entrance. Expenditure on PT2, therefore, does not so much compensate for poor school quality but is geared largely towards the college-entrance exam, which is highly competitive because of the limited university entrance quota. 7. This approach advocates, for example, freedom to charge tuition fees at private schools and freedom to set curricula at all schools. 8. For example, an examination of the percentage of decisions taken at each level of government in public lower secondary education in Korea in 1998 shows that 37% of deCisions were taken at the central level; 31 % at the provincial/regional level; 7% at the sub-regional level; none at the local level; and 25% at the school level. In contrast. in some Scandinavian countries (Finland and Norway) and the United States, more than 50% of deci- sions were taken at the local level (DECD. 1998al. 9. The Korean Govemment provides the framework for the curriculum. qualifications, quality assurance proce- dures and standards for teacher training. Within this framework. schools have substantial responsibility for managing their own affairs, including budgets and staffing. This has been the trend in many countries around the world (e.g. Australia). informed by research from organisation theory and school effectiveness. It reflects developments in other sectors, including business, and is likely to be sustained. The school remains account- able to a central authority for the manner in which resources are allocated, usually judged to be effective (or not) by student outcomes. 10. As regards the autonomous school approach. one way may be to introduce such a scheme on a pilot basis, while addressing the equity issue by giving access to all students within an area (or through a lottery approach), their tuition being paid through some form of income-based subsidies, e.g. a combination of schol- arships and vouchers. The purpose of such a pilot would be to demonstrate that school-level initiatives can improve the quality of education. Korea and the Knowledge-based Economy: Making the Transition II. Management capacity at the schools and university level should be strengthened. Increasing autonomy might require changes in the basis of allocating public funds to universities, by for example, moving towards block grants to take account of the need for local decision making and management, and to increase effectiveness and efficiency. 12. The aim would be to permit institutions to attract quality staff in a competitive market, provide them with com- petitive employment conditions (academic as well as financial), adjust staffing and resources in line with changing demand for courses, allocate resources between teaching and research, etc. The corollary of most grants of autonomy is that institutions become more financially self-sufficient. 13. In addition to the need for people who are creative and sufficiently flexible to meet a variety of demands, there will be increasing demand for a very large number of knowledge workers ("technologists" in KBE jargon). These workers - who may constitute the fastest-growing group of all workers - do both knowledge work and manual work, and, for example, include health-care workers and automobile mechanics. In the transition to the knowledge-based economy, more and more manual workers will be technologists. In increasing knowledge- worker productivity, augmenting the productivity of technologists deserves to be given high priority (Drucker, 1999). The training of technologists is weak in the current Korean education system. For example, a recent firm- level survey for Korea indicated that the quality and supply of technicians and high-skilled personnel poses a problem in production and for technological improvement (World Bank, 1999b). However, educating technolo- gists is expensive and calls for partnerships with all sectors of the economy. Another issue is that in Korean cul- ture and social structure, educated people look down on people who work with their hands. 14. The Seventh Curriculum Reform offers a number of reforms, including a reduction in core subjects and a greater degree of choice. At present only limited changes in majors (20%) is permitted. Special admissions are allowed only up to a total of 10%. This type of diversity is linked to the freedom of universities to control the size and nature of their enrolment. 15. The number of students in vocational high schools was about 42% in 1995, with the remainder in academic high schools. This percentage is among the middle ranks of OECD countries. 16. Examples of routine production services include traditional blue-collar jobs and low- and mid-level managers (25% in the United States); examples of in-person services include waiters and flight attendants (30% in the United States); and examples of symbolic analytical services include scientists and lawyers (20% in the United States) (Reich, 1991). 17. For example, it has been said that the minimum skills now needed to obtain a middle-class job include the ability to: read at the 9th-grade level or higher; do math at the 9th-grade level or higher; solve semi-structured problems where hypotheses must be formed and tested; work in groups with persons of various backgrounds; communicate effectively, both orally and in writing; and use personal computers to carry out simple tasks like word processing (Murnane and Levy, 1997). 18. Some significant liberalization has taken place in the area of college admissions. Starting in 2002, universities will have complete freedom to use their own criteria in selecting students. 19. For example, in the State of Massachusetts, more than 70% of high-school graduates receive some form of ter- tiary education. There is constant pressure on schools to increase offerings in science and mathematics, and there is declining support for vocational education and training. This one-sided approach to education ignores the reality of how economies and labor markets function. According to the State's estimate, between 1996 and 2006, the economy will create through job replacement and growth about 1.1 million job openings. Only 3% of these openings will require schooling beyond university; 31 % will require at least a university education; more than 54% of the jobs will be in occupations that require high school or less; and 36% will be in occupations that require no more than one month oftraining (US Division of Employment and Training, 1998). 20. The Ministry of Education has recognized these problems and revised the rules of the Public Educational Per- sonnel and Staff Act. Under the new rules, contract-based faculty hiring is promoted, quotas are set to limit own-graduate recruitment by universities, and the universities will decide their own standards for evaluating their faculty. 21. Close links between university and enterprises can be very profitable for universities, since they can secure up-to-date and relevant teaching at the universities. On the other hand, industry will often also be able to profit from research results generated by universities. Empirically it seems that a close co-operation between universities and enterprises facilitates development and innovation. 22. In the past, the government emphasized equality in access to education; as a result, competition was not given much importance, and professors and teachers were treated equally regardless of the difference in their per- formance. This distorted attitude has had a negative influence on the adoption of a fair evaluation system for teaching staff. 23. For further information, see littp://www.scliooinet.ca. 24. The average number of students per computers was 16 in 1998. Vocational schools showed the highest PC dis- tribution (5.5), while academic high schools showed the lowest PC availability rate (19.6). Developing Human Resources for the Knowledge-based Economy 25. For example, the United Kingdom's National Grid for Learning scheme highlights the UK Government's com- mitment to lifelong learning and the creation of a learning society. The main aims of this scheme are to help create a "connected society", to improve the quality and availability of educational materials and to widen access to learning. 26. For a summary of lessons learnt from the Korean education reform effort, see Park (1999). The main points are: i) for the success of any reform, dose co-operation, together with a system of checks and balances between the Commission (deSigning body) and the Ministry of Education (implementing body), is important; iiJ sufficient budgets should be allocated for the reform; iii) in dealing with vested interest groups, more refined, sophisti- cated and flexible strategies should be developed, since merely appealing to the moral conscience, civic vir- tue or public-minded ness of the interest group will not work; iv) it is important to provide the appropriate incentive system to bureaucrats; v) a special pay system and promotion policy could be designed to motivate them to be more proactive for reform; vi) for effective deregulation, the establishment of a "Committee for Deregulation" composed only of non-bureaucrats is recommended; vii) dose co-operation with the media is indispensable for the success of the reform program; viii) for reform to succeed, a top-down (government-led) approach should be accompanied by a bottom-up movement; ix) participation of teachers and parents in the design and implementation of the reform process is of central importance in institutionalizing their permanent participation in educational policy making and in the implementation process; xl as educational reform usually takes a long time to consolidate, the reform group should prepare a series of smaller victories or reforms that can be celebrated along the road, thus enabling a high level of enthusiasm for reform to be maintained; and xi) the best way to successfully consolidate reform is to set up a reform body that outlives the current govern- ment or regime. This will ensure consistency and continuity in a politically and institutionally guaranteed reform management process, thus leading to successful consolidation of the reforms. Korea and the Knowledge-based Economy: Making the Transition References Chase, R. (1998), "NEA's Role: Cultivating Teacher Professionalism", Educational Leadership, Vol. 55, February. Choi, Kang-Shik ( 19991, "The Impact of Shifts in Supply of College Graduates: Repercussion of Educational Reform in Korea", Economics of Education Review, Vol. 15, No. I. Cole, George (1999). "Great Leap Forward", Times Educational Supplement, 15 October. Darling-Hammond, Linda (1997), "Reward and Reform: Creating Educational Incentives that Work", in S. Fuhrman and I. O'Day (eds.). Restructuring Schools for High Performance, San Francisco: Jossey-Bass. Drucker, Peter (1994), "The Age of Social Transformation", Atlantic Montlily, November. 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Washington, DC: World Bank. World Bank ( I 999b). "Corporate Survey of the Asian Financial Crisis", PREM, Washington, DC: World Bank. World Bank (1999c), World Development Indicators 1999, Washington, DC: World Bank. Chapter 4 Ensuring a Dynamic Information Infrastructure A. Background The Korean Government and people have been quick to recognize the importance of the global networking revolution and to formulate a strategy to ensure that the country moves ahead to gain all possible benefits from that revolution. Korea has performed impressively in the information infrastruc- ture sector in many areas especially Internet access and mobile telecommunications. It has a well- educated workforce, a strong ICT manufacturing sector and a number of other advantages. However, to preserve this strong record, the country needs to move toward a more efficient model of ICT provision and services. The 1999 White Paper Cyher Korea 21 notes that levels of information and the size of the knowledge gap greatly influence the productivity of individuals, businesses and economies. Cyher Korea 21 and related initiatives (including President Kim's New Year Policy Speech) layout an ambitious set of tar- gets to be met by 2002 to ensure that Korea becomes one of the top-ten nations in terms of information infrastructure and industry. Cyber Korea 21 highlights the importance attributed by the country's leaders to information infrastructure and sets out a number of policy goals. However, it suggests a role for the government that may be beyond what is appropriate in such a dynamic sector where technology and the speed and flexibility of the private sector may make strong government orchestration a hindrance rather than an asset. This chapter provides a picture of recent growth in the Korean ICT sector - in both infrastructure and manufacturing - before turning to some of the problems facing the sector. It discusses the legal. regulatory and investment environment in Korea, arguing for a change of focus in regulation and sup- port. It builds on the ideas laid out in Cyber Korea 2 I, but suggests a different focus in terms of regulatory and investment priorities. Broadly, it argues that Korea's high level of investment in information infra- structure has achieved impressive results. However, in common with the country's education sector, reform of the laws and regulations governing the IT sector could bring even higher returns to invest- ment. Moving away from micro-management of research and investment with direct control of regula- tion toward a more hands-off model could lead to a more rapid roll-out of ICTs and ensure higher growth of the sector in the future. B. Recent sector growth I. Recent growth in telecommunications and the Internet In 1980, telephone penetration in Korea was 7.3 lines per 100 people. By 1997, it was 44.4, almost reaching the OECD average of 48.9 telephones per 100 people (OECD, 2000). Between 1994 and 1998, the number of mobile phone subscribers grew from under 1 million to 14 million (see Figure 4.1). which, at 30.2 mobile phones per 100 people, was higher than the OECD average of 25. By the end of 1999, it is estimated that there were nearly 23 million mobile phones in Korea. Quality and cost of basic services is good, with the percentage of faults repaired within 24 hours the highest in the OECD area and rental charges well below the OECD average. l Today, one person in two owns a mobile phone. 79 Korea and the Knowledge-based Economy: Making the Transition Figure 4.1. Past and predicted growth in mobile phones - Hong Kong ······ Japan - - - Korea _ . - Malaysia _ ··. Singapore - - United States No. of telephones (1997 =100) No. of telephones (1997 =100) 700 700 600 600 500 500 400 400 .... .......... .. ..... 300 300 I ·· ..,.,.r. ~ -:-:: ······· 200 200 100 100 a o 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Pyramid Research. The number of Internet hosts is also increasing rapidly, with the country adding nearly 100000 host sites between January 1999 and January 2000 (an increase of over 50%).2 Estimates suggest there were already nearly 13 million Internet users in Korea in February 2000, up from just 3.1 million at the end of 1998 and only 1.6 million in 1997. At the end of 1999, 23.6% of Korea's population used the Internet - about the same proportion as in the United Kingdom and Chinese Taipei, and a significantly higher per- centage than in countries such as Japan and Germany (both at around 15%). In 1999 alone, an estimated 2 million Internet-capable PCs were sold. The number of women Internet users in Korea is also growing (although not fast enough). Women users made up 16% of all Internet users in 1998, reaching 20% in 1999. 3 Korean advanced services are mostly supplied at low cost and with good public access: · For consumers and small businesses using the Internet for less than 20 hours a month at off-peak times, a recent study by the OECD suggests that Korea's rates are the lowest among Member countries (OECD, 2000).4 · Public access is high. A recent survey of Web users worldwide found that Korea had one of the highest rates of access from school (at 29% of respondents) among the OECD countries (in Japan. the figure was 7%). Access from kiosks. libraries and cyber cafes accounted for over 20% of users - compared to less than 10% in Japan. This high rate of usage stems in part from the network of cyber cafes which offer service for less than USD I an hour. · An information superhighway has been installed in 94 major areas of the nation. with a capacity of 2.5 gigabytes per second. · In terms of use. a recent survey indicated that 56% of Korean users had purchased goods over the Internet from home (compared to a high of 72% in the United States. but only 37% in Spain). · There are 400 domestic online shopping malls, with monthly average sales of some ~ KRW 50 million to KRW 60 million (USD 41 700 to USD 50 000) as ofJanuary 1999. r"nsur.."" a Information Infrastructure According to Cyher Korea 21, employment in information and telecommunication companies climbed from 318000 to 507000 over the 1994-98 period, and public telecommunications revenue reached around USO 9.1 billion in 1997. Turnover in the ICT sector as a whole in 1999 is estimated to have increased by 20% to KRW 71 trillion. 2. A strong private telecommunications manufacturing sector Korea is currently one of the world leaders in code division multiple access (COMA) technology, with SK Telecom the world's largest COMA operator and with numerous local vendors exporting COMA equipment, especially handsets. In 1998, Korean companies exported USO 660 million of COMA-based phone sets, and the nation's three biggest mobile telecom firms - Samsung Electronics, LGIC and HEI - planned to ship USO 1.62 billion of COMA mobile phone eqUipment in 1999. Exports from the ICT sec- tor constituted 67% of the nation's trade surplus in the first quarter of 1999 (i.e. USO 4.77 billion). With nearly 40% of the global COMA market, Samsung is expected to remain the world's largest sup- plier for the third consecutive year. The company has established a firm footing in the us market and recently concluded a USO 100 million contract with AirTouch Communications to provide its COMA com- mercial system through 2003. In mid-July, Samsung won a three-year USo 160 million contract for its Internet phones from the Norwegian state-run telecommunications firm Telenor. Arguably, government intervention enabled the benefits of scale with COMA to be realized so qUickly. The Ministry of Information and Communications (MIC) has focused on the development of an information infrastructure through local technologies, rather than relying on foreign vendors. Recogniz- ing the potential of COMA technology, the government pushed the industry to adopt that technology as the standard for mobile communications and to develop a local technology base. The lack of worldwide development of COMA technology presented lower entry barriers for local companies to gain expertise with foreign companies through public and private research and development. The Korean Government's interventionist approach to guiding the development of the industry has a parallel in Europe where governments adopted the GSM standard (although this was not part of an industrial policy, and merely aimed to ensure service integration). In contrast, wireless information infrastructure development in the United States has been hampered by multiple standards, resulting in an inability to interoperate among different carriers in the country as well as with the rest of the world. Nonetheless, despite the fact that it paid off, the choice to enforce a CDMA standard was a risky gam- ble. And it has involved costs - including the need to make significant payments to US patent owners. In Section E, we further discuss the limited applicability of this experience to other efforts at central planning at the micro level. 3. Heav!l investments in leT infrastructure As Table 4.1 suggests, Korea invested heavily in its information infrastructure over the course of the 1990s. As a percentage of GOP, Korean investment was 0.8% in the first half of the decade and more than doubled to 1.85% of GOP in the second half. Compared with a number of other countries, this perfor- mance is very impressive. In percentage terms, in the second half of the 1990s, Korea's investment rate was nearly twice that of Hong Kong, and more than five times that of Japan. Another distinguishing feature of Korean investment is that a high percentage of funding came from government. In many OECO countries, the public share in investment was zero in the late 1990s, while for Malaysia, Singapore and the United Kingdom, the public share was 5% or less. In Korea, 25% of investment came from the public sector (although this was down from 48% in the early 1990s). As a per- centage of GOP, public investment in information infrastructure in Korea was higher than total invest- ment in information infrastructure in Japan and the United Kingdom, and about similar to US total investment. As a percentage of GOP, public investment in the sector actually rose over the course of the 1990s. Public investment in Korea has a fairly distinguished record compared to such investment else- where. Nonetheless, these figures raise the question of the returns to this investment. Does the perfor- Korea and the the Transition Table 4.1. Korean investment in information infrastructure, 1991-99 Hong Kong 0.58 0.98 0 0 Japan 0.14 0.34 0 0 Korea 0.80 1.85 48 25 Malaysia 1.12 1.04 6 '5 Singapore 0.35 0.57 38 4 United Kingdom 0.23 0.35 2 2 United States 0.58 0.'52 0 0 SiJurce: Pyramid Research. mance of the ICT sector suggest that this investment has collected the returns that might have been possible? While the country's performance has been notable, international comparisons suggest that the answer to this question is at best unclear. C. Remaining challenges While growth in service provision and the ICT sector has been striking in recent years, there is still some way to go. Perhaps most important in the future is the roll-out of more advanced equipment and services. The network digitalization rate in 1997 was 66.7% of fixed access lines, compared to an OECD average of 89.2%. In ISDN, as of May 1999, Korea Telecom had only 90000 customers (although there were a total of 829 000 high-speed Internet subscribers in February 2000, about half of whom accessed using ADSL).5 Continued advances in the quality of fixed service provision are central to further expan- sion of Internet use in the country, especially as consumers and businesses begin to demand an "always on" Internet environment (the ability to stay on line for extended periods). Indeed, while we have witnessed impressive performance in the growth of the Internet over the last two years, this performance is less astounding from the perspective of a global revolution in Inter- net provision. Figure 4.2 shows that future growth in Internet use is predicted to be reasonably strong- but this is from a low base, with 0.03 Internet subscribers per capita in 1997, compared to 0.11 in Hong Kong, for example. And, although we have seen that advanced Internet services are developing, once again this is from a very low base. In August 1999, only two Korean banks had started offering Inter- net banking and then only a limited range of services (although, again, there has been rapid progress over the last year)6 We have seen that Korea has 400 (rather smaIII cyber malls - compare this to Japan's 7000 and the United States' 450 000 (Ministry of Commerce, 1999). Further, in common with the rest of the world, Korea has seen the emergence of a "digital divide" between rich and poor, more and less educated, men and women, rural and urban. For example, the usage rate among those with incomes above KRW 4 million is more than double that among people earning less than KRW I million. For farmers and fishermen, a usage rate of 7.3% compares to a usage rate of 64% among office workers. Broadly, the picture is mixed for past returns to very significant levels of investment in the sector, and future estimates suggest that, in the absence of reform, returns to investment will remain lower than might have been the case. In mobile telephony. where competition prevails. returns appear to have been substantial. In other sectors with less competition, the evidence is less reassuring. How can better performance be ensured, especially in the provision of next-generation ICTs? Given the revolu- tionary nature of the sector, this report suggests that there is a vital role for government - especially in rolling out services to the disadvantaged - but that that role is different from that traditionally followed. ~ involving more open competition and investment policies. "'n .. "ri.,a a Information Infrastructure Figure 4.2. Total Internet subscribers, past and predicted - - Hong Kong ···· -. Japan - - - Korea - . - Malaysia -"'Singapore - Unilej:I~ Log of Internet subscribers (1997 = 100) Log of Internet subscribers (1997 = 100) 10 000 10000 1000 ... ~~~~~ __ ~~~~~~~~~ __ ~~ ____________ ~~~~ __=-.-__________ 1000 100 _________________________ ~ ___________ 100 10 ~~~~_~~~------~--------~----------~------------------ 10 o ____________ I~ ___ L __ _ _ _ _ _I~ __________ ~ __________ __________ ~I ~I ___________ 0 1985 1990 1995 2000 2005 2010 2015 Source: Pyramid Research. D. Cyher Korea 21: Targets and initiatives Responding to both the need to increase returns to investment and to keep Korea at the cutting edge of information and technology roll-out, in 1999 the Korean Government launched Cyber Korea 21, together with a range of linked initiatives. Targets were laid out, including: · Designating six strategic fields in which Korean firms will compete on the global stage: next- generation Internet, fiber-optic telecommunications, digital broadcasting, wireless communica- tions, software and computers. · Creating I million jobs and KRW 118 trillion of new production. · Providing universal service access speeds of 2 Mbps. · Nurturing more than 5 000 venture enterprises while doubling the proportion of Korean parts in IT equipment from today's 40%. · Increasing the number of Internet users to 10 million by 200 I. In order to meet these ambitious targets, a range of government initiatives have been put forward: · Reducing government ownership of Korea Telecom to 34% by the year 2000. · Providing KRW 500 billion for the development of info-tech core technologies in a bid to end dependence on foreign technologies. · Setting up a venture firm in information and communications and a venture co-operative to expand infrastructure for venture firms. · Investing KRW 10.4 trillion in advanced information infrastructure and information technology by 2002. ~ Korea and the Knowledge-based Economy: Making the Transition · Removing impediments to e-commerce, including the Door-to-door Sales Act, and ensuring the validity and security of digital signatures. · Connecting more than 10 000 schools to the Internet. providing computers free of charge to over 230000 teachers and 200000 classrooms. and providing free access to 50000 children from poor families. · Facilitating Internet PC purchases through a lump-sum payment at computer shops or through fixed installment savings accounts at the country's 2 800 post offices, with a target of 9 million new PCs. priced between USD 731 and USD 830. · Building Internet Plazas in public facilities, including libraries and post offices, and proViding kiosk access to certificate issuance services. · Teaching 900 000 civil servants. 10 million students and 600 000 military personnel to use computers. · Providing subsidized or free Internet training for groups including housewives. juvenile delin- quents and the disabled. · Providing e-mail accounts to all public servants and moving to a digital documentation and authorization system that will decrease work process times by up to 30% and digitize 80% of circu- lated documents . · Digitizing the public procurement operations of 26 000 institutions (up from 556 in 1998). The rest of this chapter explores the reform agenda in the light of Cyber Korea 21. and supports many of the recommendations of the report while suggesting a slightly different focus in terms of priori- ties and programs in specific areas. E. Next~generation policy and regulatory role for government Korea has been moving toward a more liberal ICT sector. Excluding Korea Telecom. the last few years have seen the launching of initiatives to remove limitations on resale services, individual owner- ship and mergers and acquisitions. increase aggregate foreign ownership restrictions to 49% and allow the largest shareholder to be foreign. The liberalization of the local loop market in 1998 means that all parts of telecommunications services are now legally open to competition. There is an important role for oversight of dominant operators to ensure fair competition. However. as we will see below. other restrictions remain. both on the incumbent operator and on the freedom to compete with it. Further. many domestic players are concerned that the government's continued interventionist approach, which appears to favor large players. will reduce the creativity and Vibrancy of the industry. ]. Opening up to domestic and foreign competition 7 Where more open and fair competition and less regulatory intervention has been allowed for signif- icant periods. the results have been noteworthy not least in the mobile sector and in third-party resellers for VolP services. In 1995-98, mobile revenues increased nearly six-fold. With the removal of the government-imposed compulsory subscription period of two years for mobile in April 1999. the number of mobile customers shot up by 3 million in just one month. Low prices for Internet access are in part the result of fierce and relatively unencumbered competition between some 24 commercial and five non-profit ISPs. some of which offer free pes in return for a three-year subscription. Conversely. competition has been slow to deliver in fixed services. There have been only three new entrants in the fixed telecommunications infrastructure market (compared to 29 operators in Ire- land). In the national long-distance market. Korea Telecom had a 91% market share in mid-1999. and held close to 100% of the local market. As a result. prices have remained high and service provision is weak. Between February 1996-99. the highest long-distance telephone charge in Korea dropped by 22%. compared to cuts of 50% in Japan or 46% in France. In addition, many advanced infrastructures (includ- ing ISDN) have been slow to roll out (although ADSL. for example. has grown more rapidly). Independent regulation (discussed below) will be part of the solution to overcome these problems (by offering better support for competition). Another will be to lower the barriers to entry posed by very Information Infrastructure high license, annual and research fees levied on operators. At present, the MIC has the authority to rec- ommend the level of investment required by each telecom provider to fund the research and develop- ment of telecommunications technology and other related projects. This is set by law at 3% of revenue (although the major operators did not meet this target in J 998 and it should be noted that the MIC plans to reduce these fees). A third method to overcome barriers to fixed competition would be to unbundle services. Presently, local loop network elements may not be unbundled, which means in effect that Korea Telecom's competitor in this market, Hanaro, must replicate all existing sunk plant at prohibitive cost. If unbundling remains prohibited, real competition will be unable to blossom in this market. A regulatory reform agenda to encourage stronger competition is laid out below. 2. Accessing international Investment Another important measure to ensure international competitiveness and improve domestic service provision is opening up access to international investment. As noted above, Korea has implemented WTO agreements on foreign ownership - and did so 18 months earlier than scheduled. However, remaining limits - including those on ownership of Korea Telecom itself are a wasted opportunity to attract investment to a sector where there is clearly foreign interest. For example, British Telecom is expected to invest USO 500 million in LG, while Bell Canada International Inc. recently announced that it has agreed to invest USO 159 million to acquire about 23.6% of Hansol PCS Co. Ltd, one of three new Korean COMA-based PCS operators. 8 Thus, while Korea Telecom is extending its overseas reach (it recently acquired a stake in a Vladi- vostok telephone company). overseas investment in domestic ICT markets should also be encouraged. If the government is concerned about international control of the incumbent, other OECD countries have found the "golden share" approach to be more efficient than maintaining majority ownership. Encouraging a greater role for private investment should allow for a reduction in government expenditure on service roll-out, which is also likely to increase efficiencies. Looking at the Internet backbone, government use of ICTs and universal access to advanced services, there remains a role for government support. However, this support should at the least be flexible and open to adjustment given changing circumstances. For example, capacity on the Korea Electric Power Corporation (KEPCO)'s dual-capacity fiber optic 2.5 gigabyte backbone was previously leased to 43 (out of 78) regional cable TV system operators purely for cable TV use. Recently, the backbone was spun off and new regulatory conditions will allow the cable companies to provide services including Internet over the network. Despite this "windfall" in backbone capacity, the MIC is yet to account for this change in its backbone investment plans,9 3. Reducing micro-regulation and control The advantages of open competition suggest the gains that could be made by rolling back a range of micro-regulations in the sector. While government intervention to impose the COMA standard sug- gests that early standardization is of benefit to consumers, counteracting this effect is the risk of "lock- ing in" the wrong standard. 10 Therefore, any technology standards ought to be widely canvassed with the private sector before introduction and should remain as flexible and limited as possible. Less defensible than standards from an economic standpoint are price regulations (with the excep- tion of those designed to control monopoly rentsl. For example, the government's decision to forcibly abolish company subsidies on cellular phones seems an unnecessary intrusion into business practices. Cljber Korea 21 also suggests a continued government role in the pricing policies of Internet Service Pro- viders, which appears unjustifiable in a very competitive market. 11 Finally, it should be noted that, despite the need for a more market-friendly approach to regulation and restrictions, many areas will continue to need oversight and (possibly) a greater level of regulation. For example, entry into the specialized telecom service provider (STSP) market has been simplified, and this sub-sector is now very competitive, Recently, an STSP company went bankrupt, raising con- cerns about compensation of consumers - here, there is clearly a need for regulation. Also, there is cur- Korea and the Knowledge-based Economy: Making the Transition rentlya degree of cross-ownership between competing telecommunications providers - for example, DACOM owns II % of Hanaro in the local telecommunications market. This should be discouraged, per- haps through regulation. 4. Independent regulation Perhaps the most important change that might be made to the regulatory environment is the cre- ation of an independent regulatory agency. Korea is one of only two countries in the OECD which does not have such a body. The Korean Communications Commission (KCCI is charged with ensuring fair competition in the sector through arbitration of disputes, fact finding on unfair practices, examination of competition-related rules and regulations, and proposing corrective measures against unfair practices. This body is nominally neutral and can, under limited circumstances, over-rule the MIC. For example, when it arbitrates between companies, its decisions cannot be overturned by the Minister. However, the KCC lacks independent legal status (coming under the supervision of the MICI and has but 20 employees who remain part of the MIC's management structure. Its powers are largely indirect and advisory; its role reactive rather than proactive. The problems created by this lack of independence are illustrated by the history of STSP competi- tion. Since the government liberalized the international call market, STSPs have mushroomed and their share of the market is now estimated at 15 to 20%. In the wake of broader competition, international calls now cost one-half or one-third of previous prices. However, the STSPs claim that KT is demanding that newcomers pay three to five times more for using KT equipment than do existing carriers such as Dacom and Onse Telecom, while the nation's public network operators, who once enjoyed an oligopoly in the international call market, complain in turn about the new competitors. They charge that the STSPs are getting a free ride, demanding to use facilities in which backbone network operators have made huge investments. Without an independent regulator, at the very least it will be hard to convince all parties that rules are being enforced in a fair way.12 Only with an independent regulator are all sides likely to feel equally treated a vital step toward encouraging investment and competition in the sector. An independent KCC, separate from the MIC and with its own staff and budget, would more effectively achieve market confidence and transparency. The KCC would need powers of licensing, price control and interconnection, overseeing policies on uni- versal service and the implementation of other regulatory safeguards. 5. A telecommunications regulatory reform agenda A recent OECD report (OECD, 2000) laid out a broad agenda for regulatory reform in the telecom- munications sector. Beyond independent regulation and fewer price controls in competitive markets, it suggests that priorities for improved independent regulation in this area should include: · Shifting to the long-run average incremental cost methodology (away from the fully distributed cost methodologYI in calculating interconnection costs. This would help avoid manipulation of distribution of common costs and penalize inefficiencies in the former monopoly carrier. Cur- rently, while KT interconnection charges are in the mid-range of OECD countries, they are high relative to retail prices and revenues . · Creating a universal service costing methodology and moving toward a technologically neutral universal service fund as the vehicle for supporting roll-out. · Simplifying the licensing regime by removing existing distinctions between fixed provision of local and long-distance services and perhaps moving toward a class-licensing system . · Simplifying the registration process for licenses by: moving to ex post examination of licensee standards and agreements rather than a priori examination wherever possible; allowing for rolling applications rather than offering a twice-yearly application window; reducing data ~ requirements for licensees; and removing R&D requirements on licensees. a Information Infrastructure · Rolling out IMTS-2000 mobile licenses (the MIC is considering an auction process as one of the options in selecting service providers!. Pre-qualification for this process might enhance competi- tive conditions in the market. · Adopting price caps for dominant local loop. leased line and long-distance provision (this is already being reviewed by the MIC), and removing price restrictions in the competitive mobile market. · Implementing arrangements for unbundling. · Introducing number portability to encourage competition by allowing users to change service providers without changing numbers (pledged by the MlC for this year). · Reducing government involvement in accounting rate negotiations with foreign operators based in a competitive market. Currently, the MIC approves a single accounting rate for all carriers oper- ating between Korea and a second country. This is one reason for very high accounting rates (leading to expensive international calls) in Korea. The US accounting rate with Korea is 71 cents, compared to the US-France rate of 20 cents or the US-Japan rate of 28 cents . · Minimizing overlap in the roles of the KCC and the Korea Free Trade Commission which enforces the Fair Trade Act on all sectors including telecommunications (for which there are no exemp- tions). · Increasing the transparency of the policy formulation process. Progress has already been made here. with the government holding public hearings on some regulatory proposals and providing notice of changes to the Telecommunications Business Act. Major telecommunications legislation is now reviewed by the Information and Communication Policy Deliberation Committee made up of outside experts. Nonetheless, user groups. including the Federation of Korean Industries, could be encouraged to playa more active role in the policy formulation process. · Moving toward joint independent operation with broadcasting regulators (the MIC has suggested that such an approach be implemented over the next year). 6. Legislation and support for research and the manufacturing sector We have seen that the government mandates research expenditures for telecommunications ser- vices suppliers. Cyber Korea 21 plans to step up government support for investment in technology and manpower to small venture firms in the information and telecommunications industry. There are particular concerns about the MIC having the joint roles of consumer protection and industry promotion - most regulatory bodies in the OECD are solely concerned with consumer inter- ests. This problem would be reduced with the granting of greater independence to the KCC. However, it should be noted that promoting the domestic telecommunications manufacturing industry does not necessarily have a positive effect on the service quality of domestic telecommunications. Indeed, if domestic promotion involves discriminating against superior imports. the opposite effect might be achieved. For example, Cisco Systems has already captured 80% of the domestic Internet equipment market. It might be a mistake to encourage a domestic competitor under these circumstances. Instead, the manufacturing sector ought to be opened up, creating a framework in which manufac- turing and services can develop in a competitive environment. This is especially true in the case of trade. Korean telecommunications manufacturers have greatly benefited from healthy export markets and the capability to exploit them. At the same time, however, European mobile telecommunications conglomerates have begun building COMA handsets. In response, Korea should liberalize its own tele- communications manufacturing industry, both to ensure that manufacturers remain internationally com- petitive at least on the easier home market and to put itself in a position to argue for the elimination of trade barriers in telecom fields elsewhere in Asia, Latin America and Africa. Where a role remains for support through targeted investment, the Scottish model of venture capi- tal support (rather than direct intervention in management decisions) might provide a good model of a relatively hands-off approach to industry promotion. Further, foreign investors are showing great inter- 3 Korea and the Knowledge-based Economy: Making the Transition est in Korean manufacturing operations. The recent investment by Philips in LG-LCD, one of the world's largest liquid crystal display manufacturers, came about partly because of the high level of manufactur- ing technology of the Korean counterpart. Korean companies have abundant skilled labor, and devel- opment costs could be much cheaper in Korea because the wages of Korean engineers are lower than those of other OECD countries. Where it is available, tapping foreign investment and expertise is likely to be a more efficient mechanism for promoting a strong ICT service sector than widespread govern- ment investment and closing off the manufacturing sector from foreign competition. 7. Legislation and regulation for electronic commerce There is also the need for wider reform to prepare businesses for the digital age. Venture capital has an important role to play in supporting the entrepreneurs who typify Web development - small and relatively inexperienced in business and financial management. Governments in other countries (such as Scotland!. as mentioned earlier, have supported venture capital funds to develop the ICT industry, similar in some respects to the funds to be set up in Korea. More important to further development of ICT industries, however, is the broader legislative and regulatory environment. Full competition in tele- communications and Internet service provision is perhaps the first step. Beyond that, the Ministry of Finance and Economy's decision to streamline laws that negatively impact upon SME operations is a significant move, as is the government's overhaul of 106 laws and regulations that will affect the growth of the knowledge-based economy. More narrowly, a number of considerations relating particularly to e-commerce are already being addressed through Korea's Basic Act on Electronic Commerce, the Elec- tronic Signature Act and the Act on Telecommunication Infrastructure Protection. A number of steps remain to be taken, however. As we have noted, Korea's electronic commerce is expected to grow from KRW 150 billion (USD 125 million) in 2000 to KRW 3.7 trillion (USD 3 billion) in 2002, so the government needs to pre- pare for rapidly expanding Internet transactions. Tax incentives for online transactions are not neces- sary, but a different approach to taxation might well be required for example, modifying the VAT system. It is also important to study ways of protecting consumers and ensuring the privacy of informa- tion, with a need for electronic signatures and certification systems - especially at public terminals. National initiatives from around the world suggest a range of activities for government in this sector (UK Government, 1999; Computer Systems Policy Project, 1999; Ireland Advisory Committee on Tele- communications, 1998; GECD, 1998): · Encouraging the foundation of a digital economy, including: the mapping of emerging clusters of e-com- merce and examining whether their development can be facilitated; encouraging training, sup- porting industry mentoring and partnering - especially for and with SMEs, as with Korea's Electronic Commerce Resource Centers; ensuring the equivalence between digital and written documents; supporting electronic signatures, payment systems and certification systems (a mea- sure supported in Cyher Korea 21); and ensuring widespread broadband access. · Enhancing trust, including: the provision of a secure public key infrastructure (an adaptable and secure form of encryption). especially for government-private sector and government-citizen relations; allowing users free choice of cryptographic methods (and using them to protect critical infrastructure); guaranteeing the rapid and widespread prosecution of electronic fraud and other electronic crimes; supporting "parents' Web sites" and content-filtering software; and ensuring that government itself adopts "best practice" information and privacy policies. · Ensuring sustainability, including: adapting tax laws to the new commercial environment; promoting widespread access both within and outside government (a key part of the Cyher Korea 21 initia- tive); and preserving the value of intellectual property through enforcement of the 1996 World Intellectual Property Organization treaties. While the passage of the Electronic Signature Law in July 1999 was a step in the right direction, a number of barriers to e-commerce remain. For example, under current laws, only the Korean Fund ~ Transfer Center and the Korean Fund Transfer Company are allowed to execute foreign exchange busi- UVlI'dIllJL Information Infrastructure ness, inhibiting a number of key Internet financial services. Similarly Internet brokerage operations are not allowed outside the insurance business. The Door~to~door Sales Act (DDSA), which requires all firms conducting business over the Internet to have a business presence in Korea and to comply with Korean law, also acts as a bottleneck. [t is a commendable part of the plans laid out in Cyber Korea 21 to repeal this law. In general. a broad survey of laws governing commerce should be conducted, and those laws that would unintentionally or unnecessarily restrict e~commerce should be amended so that [nter~ net firms can do business freely. Foreign standards on e~commerce transactions should be mutually rec~ ognized, while ensuring the protection of the Korean consumer. The issue of taxation of e-commerce is a particularly complex one which is still being worked out worldwide. Now is the time, however, to move toward novel taxation systems that account for the growth of e-commerce expected to equal 7.2% of GDP in the United States by 2001. for example. A second consideration is international harmonization of rules regarding the taxation of e-commerce, although this issue is slightly less urgent as the WTO predicted in 1998 that only USD 60 million in international trade would be conducted over the Internet in 2001 (Boyle et al., 1999). Korean tax administrators face a number of challenges in an environment where it is difficult to establish the place of residence of both the seller and buyer (or consumer) of a product: · Preventing tax avoidance (for example, with mail-order goodsl and double taxation (on some services). · Discouraging new forms of tax fraud and evasion - both intentional and accidental. This would involve enhanced capabilities in tax and police departments as well as information campaigns for (in particular) SMEs. · Ensuring consistent treatment of cross-border transactions. · Ensuring privacy. · Limiting transaction costs this could be achieved in part through the use of advanced software and database technologies. Some solutions being examined worldwide include licensing suppliers to support (supplier) resi~ dence~based taxation. This, in tum, might be streamlined through automated transaction reporting sys- tems embedded in software - perhaps browsers - and tax forms redesigned to obtain data on electronic trading. These solutions raise a number of privacy and economic efficiency concerns, how- ever. The OECD has convened a number of discussions on e-commerce issues and has concluded that VAT should be taxed according to the point of consumption. These discussions are ongoing. One further important element will be to move toward a common global standard of classification of services similar to that for goods maintained by the World Customs Organization (the Harmonized Commodity Description and Coding System). The United Nations Central Products Classification Scheme might be a system on which to build (the United States Census Bureau appears ready to use a classification system based on UNCPC, for example) (US National Tax Association, 1999). It will also be important over the medium term for Korea to take a significant role in international discussions on the direct tax treatment of international e-commerce transactions, especially relating to VAT and customs duties on small consignments of imports. F. Ensuring access and overcoming the digital divide While much of this chapter has discussed the need for a lighter government hand - less regulation, greater distance between bureaucrat and entrepreneur there are a number of vital roles that the gov- ernment retains in the information economy. Some of these roles will require an even greater level of activism. Perhaps most importantly, in order to ensure that the digital revolution benefits all rather than being reserved for an elite, it is crucial to ensure access to the new information technologies - both for the individual and for small companies wishing to bid for government contracts on line, for example. A first step toward universal access to information infrastructure is the universal service obligation for basic telephone services although Korea, with telephone penetration rates above the OECD aver- age, should find this challenge easy to address. At least in the short term, it is likely that the incumbent 89 I Korea and the Knowledge-based Economy: Making the Transition could shoulder the responsibility at limited cost. In the longer term, as mentioned above, its universal service compensation fund should be competitively and technologically neutral. However, beyond basic services, universal access to more advanced equipment is likely to be better funded directly through general government revenues rather than by imposing requirements on telecommunications operators. Improving equity of access to the Internet will involve the widespread training and access policies outlined in the Cljber Korea 21 White Paper - initiatives such as connecting 10 400 schools; teaching civil servants, housewives, students and military personnel to use computers; building Internet Plazas; and facilitating Internet PC purchases. There are a number of models around the world of training programs designed to ensure ICT tech- nologicalliteracy. In Singapore, there are computerized community clubs, staffed by volunteer trainers, in the proximity of every public housing complex (where more than 80% of the population lives). The city-state has also encouraged private companies to sponsor mass-training exercises. It is important that such exercises reach out and are flexible to the needs of the disadvantaged - the poor, the elderly and the disabled. Technological literacy is only the first step, however, and there is a large role for government to support more advanced training. Ireland has introduced training programs for future Net entrepreneurs in the business skills that they will need to run their own Internet start-up. Finally, although English is losing its position as the monopoly language of the Internet, it is likely to remain dominant. While there might be a role for government to support Korean-language content in some sectors (for example, pub- lic health), the networked economy also increases the importance of foreign-language skills. Training is clearly only useful if people have access to networked computers. A model for the provi- sion of access, used in this case for the provision of public telephones but adaptable to public Internet provision, is the Chilean subsidy auction system. In 1994, Chile set up a limited-life fund to support the provision of the first payphones to remote and rural areas. Companies were asked to bid for the lowest subsidy that they would accept to provide service. Within two years, the fund had achieved 90% of its roll-out objectives, using only about half of its USD 4.3 million budget -largely because it received bids to provide service with no subsidy to about half of the chosen locations. Just over USD 2 million in pub- lic funds had leveraged USD 40 million in private investment to install telephones in 1 000 localities at about 10% of the costs of direct public provision (Wellenius, 1997). Such methods, by supporting public provision through tapping private entrepreneurialism, are likely to achieve more than the direct gov- ernment provision suggested in the Cljber Korea 21 report - and at lesser cost. G. Using leTs to improve the performance of government Another unique role for government in the information economy is to introduce ICTs into the 21 % of CDP that it is directly responsible for. Cljber Korea 21 lays out some impressive targets for using ICTs to improve the performance of government - for example, providing e-mail accounts to all public servants and digitizing public procurement operations and document circulation. The range of ICT applications in government suggested by international experience is huge: · In Ireland, the Department of Social Welfare supported decentralization efforts through more than a dozen computer applications that improved information transfer and co-ordination. · In the United States, "collusion detection software" is being used to root out impropriety in pub- lic bids. · In Spain, smart cards are used to collect unemployment benefits at kiosks and to check on job vacancies and job opportunities. · In MalaYSia, government departments have collaborated on a networked system to facilitate land-resource management (Heeks, 1998) . · Thirty million people a month access New York City's Web site where they will soon be able to L..2Q.. pay local taxes, municipal bills and parking tickets, as well as secure permits, look for govern- a Information Infrastructure ment jobs. bid on government auctions and obtain government and community information and news.13 · The Estonian Association of Telecottages is preparing to exploit IT to increase governance. plan- ning a pilot project of virtual municipalities based on Kuusamo in Finland. There. villagers are able to access information about local government budgets. contacts, laws. transport. health and counseling services. They will also be able to access forms and documents. International experience also suggests some important lessons. however. First. ICTs can only playa part in reform of government processes. While they allow for greatly increased information processing and flow. only with broader institutional reform will the full benefits of ICT introduction be felt. Second. it is important to walk before running. Bringing ICTs into any workplace is a complex. time- and resource-intensive activity. Moving from no computerization to full government on line in a single stage is a difficult proposition. Third. and perhaps most significant. it is important not to leave clients behind. Online government can only be equitable if all citizens are on line. If ICT access does not reach the vul- nerable - groups such as the old, the poor or the disabled the very people who need government ser- vices the most are likely to be denied them. This only emphasizes the importance of overcoming the digital divide. Seattle might provide a model here. The city is bolstering its public access network with remote wireless Internet connections at eight storefront "little city halls" and installing Internet gateways for 85 PCs at five community centers throughout the city. Officials have also hired a consultant to draw a technology map that will tell residents where they can find public Web connections from locations as diverse as senior centers and neighborhood convenience stores. Finally, there is need for greater co-ordination within government. The proliferation of government initiatives on the knowledge economy and society within individual government departments in Korea will further slow implementation of Cyber Korea 21 unless increased co-ordination can be ensured (see Chapter 7). In the United States, co-ordination between the White House. the Department of State. the Department of Commerce and the FCC. among others. has been a vital element in fostering the benefits of the Internet and electronic commerce for businesses and consumers. H. Conclusions Korea has made impressive strides in rolling out and updating its information infrastructure. This has involved not only the infrastructure itself. but also the manufacturing sector that creates it. However. in such a fast-moving field, strides are not enough - worldwide, the sector is changing and expanding by leaps and bounds. A number of Cyher Korea 21's goals - creating new jobs and production. increasing the bandwidth of universal service, nurturing venture enterprises. increasing the number of Internet users are admirable. However, the sector's progress is constrained by an unwieldy and outdated regulatory and legal structure which will have to be streamlined. Without reform, the goals of Cgher Korea 21 will be unachievable or will only be achieved at great cost. Moving toward independently regulated competi- tion will allow for the more efficient upgrading of technology and provision of services. At the same time, to ensure that all parts of Korean society move forward together. the country's plans for inclusion and use of ICTs in governance must be given the highest priority. Revisiting C",ber Korea 21 and related targets. what does this mean for the country? · Reducing government ownership of Korea Telecom is an important step - but one that could be taken further. It is only the first of many needed steps to reduce the role of government in this sector. There is a need to revisit regulations on foreign ownership and licenSing. to reduce direc- tion of research and pricing. to push forward on unbundling and a range of other issues. · Government has a role to play in investing in advanced information infrastructure - although major support should be limited to the backing of private provision of services to government agencies and departments. These plans should be highly flexible. taking into account. for exam- ple. the "windfall" of the KEPCO network. 3 Korea and the the Transition · Providing support to end dependence on foreign technologies. setting up a venture firm in infor- mation and communications and a co-operative to expand infrastructure for venture firms are all complex undertakings. In particular. the goal of "ending dependence on foreign technologies" is likely to be overly ambitious. It is unlikely that Korea will have a strategic comparative advantage across the entirety of the ICT sector. While there might be a small government role in encouraging the growth of SMEs in the Internet sector. a hands-off approach is likely to produce better results than detailed targeting of firms and technologies. The government's primary role in creating a dynamic information infrastructure is to ensure that the market conditions and incentives are in place to allow for private sector competition and investment. · Removing impediments to e-commerce and ensuring the validity and security of digital signa- tures are important first steps. The Korean Government will need to examine a range of other issues - such as taxation of e-commerce and the provision of public key infrastructure - in order to enhance its ability to move transactions on line. · Connecting schools. providing computers free of charge to teachers, facilitating Internet PC pur- chases and building Internet plazas in public facilities are valuable steps toward the goal of expanding access. For the roll-out of ICT infrastructure. a market-conforming measure such as the Chilean auction scheme might provide a model mechanism for efficient provision. and might be a more responsive and targeted mechanism than blanket subsidies . · Teaching civil servants. housewives, students and military personnel to use computers are also laudable goals. Use of the Singapore model might further expand access to training. · Providing e-mail accounts to all public servants and moving toward a digital documentation and authorization system, along with digitizing public procurement operations, should greatly increase the efficiency of government. However, it becomes all the more important to ensure that the disadvantaged are not excluded from services or SMEs from bidding for contracts - again, this emphasizes the need to ensure equality of access and training. With the help of such reforms, Korea can put itself in a leading-edge position in terms of public and government access and use of ICTs. En,mriin.!! a Information Infrastructure Notes I. Korea did not do as well in increasing the number of personal computers per I 000 persons between 1994 and 1998. By 1998, the number was 157 PCs per 1000 persons, compared to 458 in Singapore and an OECD average of 256. 2. In 1998, Korea had 38 Internet hosts per 10000 people, compared to 188 in Singapore and an OECD average of 254. 3. This figure is clearly too low and points to one of the costs arising from discrimination mentioned elsewhere in the report. The recently announced initiative on subsidizing training for home-makers should help to solve this problem. 4. Although in the case of a "basket" encompassing PSTN connection and usage fees plus ISP charges for users staying on line for 40 hours or more a month, Canada and the United States are still the cheapest markets at peak times. 5. OECD (2000); and Ministry of Information and Communication, Paris. 6. HSBC (1999). Local banks are adopting the Internet banking system, however, turning it into one of their main business objectives this year, by offering diverse services including loan applications. Kookmin Bank has seen the number of its Web-banking customers top 100000 and I 000 new clients are registering every day. Shinhan Bank receives I 000 online loan applications daily, as opposed to just 400 at bank counters. 7. This and the folloWing four sections draw heavily on OECD (2000). 8. The global rush to invest in Korean Internet companies has increased since last spring, when Web giants began to forge strategic ties with Korean companies. Amazon.com, one of the largest US online music and book retail- ers, formed a partnership with Samsung Corp., which recently announced that it would transform itself into an Internet-oriented firm through a strategic alliance with America Online. In March, Microsoft launched a Korean version of msn.com, its Web search and content aggregation service, while Lycos Inc. will open a Korean-lan- guage portal in July through a joint venture with Mirae Corp., investing USD 3 million for Net services. A US online brokerage, E*Trade, plans to team up with LG Securities to offer a joint stock trading service in Korea. These foreign investors will bring needed talent and expertise to Korea's nascent advanced Internet services. 9. Although it should be noted that in the wake of the Asian crisis, the MIC has already scaled back its planned investment from KRW 63 trillion to KRW 10.4 trillion by 2002. 10. A commonly cited example of sub-optimal "locking in" is the VHS standard of video systems, visually inferior to the Betamax system but which more quickly achieved a critical mass of users. Although this example was a pri- vate sector failure. government enforcement of standards can increase the risk, especially in a rapidly develop- ing sector such as telecommunications. II. Increased competition is likely to produce losers as well as winners and might even increase the rate of bank- ruptcies in the sector. If these are the result of fair competition. however, they are an important part of the mar- ket process. 12. Other problems include the fact that Korea Telecom frequently competes against private operators such as SK Telecom or Samsung Electronics for research funds, licenses or services and there are complaints of unfair treatment. Another example is the selection process of the broadband wireless local loop spectrum. Newly selected corporations were charged a fee for the right to bid, while Korea Telecom and Hanaro Telecom were selected with no charge six months earlier. Korea Telecom and Hanaro were thus given preferential access to a valuable spectrum resource at no cost. 13. See the Web site at ftttp:llwww.ci.nyc.ny.uslfttmlldoVfltmIl555s1flOme.fttml. Korea and the Knowledge-based Economy: Making the Transition References Boyle, Michael, P. Peterson, John M. Sample, William J. Schottenstein, Tamara L. Sprague (1999), "The Emerging International Tax Environment for Electronic Commerce", Tax Management International Journal, Vol. 28, pp. 357-382, II June. Computer Systems Policy Project ( 1999), Advancing Global Electronic Commerce: Technology Solutions to Public Policy Challenges, Washington, DC. Heeks, Richard (1998), "Information Age Reform of the Public Sector: The Potential and the Problems of IT for India Information Sys- tems for Public Sector Management", Working Paper Series No.6, IDPM, University of Manchester. HSBC (1999), Securities Sector Report: Korean Internet Plays, London: HSBC, August. Ireland Advisory Committee on Telecommunications (1998), Report to the Minister for Public Enterprise, Dublin: Government of Ireland. Ministry of Commerce (Korea) (1999), "Maximizing the Benefits of Electronic Commerce: Korea's Initiatives", Seoul. OECD (1998), "The Role of Telecommunications and Information Infrastructure in Advancing Electronic Commerce", internal working paper, Paris: OECD. OECD (2000), Regulatory Reform: Korea, Paris: OECD. Pyramid Research Inc. (1999), Information Infrastructure Indicators, 1990-20 I 0, prepared for infoDev, Washington, DC: World Bank, available online at http://www.infodev.org/pro;ects/375/ffn375.Mm. UK Government (1999)' e-commerce@its.best.uk: A Performance and Innovation Unit Report, London: HMG. US National Tax Association (1997), Communications and Electronic Commerce Tax Pro;ect. Final Report, Washington, DC. Wellenius, Bjorn (1997), "Extending Telecommunications Service to Rural Areas - The Chilean Experience", World Bank Viewpoint Note No. 105, Washington, DC: World Bank. Chapter 5 Improving the Korean Innovation System A. Introduction Korea's innovation system (KIS) remains largely based on the catch-up model. In the past. this model was quite effective in achieving Korea's development goals in a short period of time and enabled the country to rapidly master a wide range of industrial and technological activities. However, this model has its limitations. Private sector R&D, the lion's share of gross R&D spending, remains mainly oriented toward short-term technological development, while the majority of public sector R&D programs are highly mission-oriented but weak in terms of diffusion. Overall, Korea's development strategy in the S&T area has strongly favored the rapid exploitation of mature and advanced technolo- gies for market expansion in selected sectors, over a broader strengthening of its knowledge base. The KIS has had relatively weak global linkages, except through arm's length ways of acquiring foreign knowledge such as technology embedded in equipment goods and components and formal technology licensing contracts. Until recently, Korea has made little effective use of technology acquisition through foreign direct investment (FOIl. strategic alliances or joint research programs. Today, Korea has come up against the limits of this strategy. In a world where trade. investment and production are increasingly globalized. the capacity to develop. acquire, diffuse and commercialize knowledge is becoming the major source of competitiveness and growth. In the knowledge-based econ- omy. production and innovation increasingly require complementarity between "partners" at national and international levels. The holistic concept of the national innovation system (NIS) highlights this requirement. I In many respects. Korea's potential research capability compares well with that of other OECD countries. High R&D spending and relatively well educated human resources are among its assets. However. the KIS is weak in terms of systemic linkages and interfaces among innovation actors. Korea's transition to the knowledge-based economy will therefore require a reorientation of its innovation sys- tem. A number of questions need to be examined. Is the current research orientation appropriate for supplying the KBE with the necessary knowledge base? [s its current configuration adequate for making efficient use of available resources? Is its current incentive structure suitable to effectively respond to changes in technology, market and social conditions? In the wake of the recent financial turbulence. the country has recognized the importance and urgency of this issue, and has introduced several important policy measures, While some are very positive. others need to be more carefully designed from a sys- temic perspective, B. Profile of science, technology and innovation activities I. R&D expenditure and output Korea ranks very high among OECD countries in terms of R&D intensity (R&D as a share of GDP)' along with Finland, Japan, Sweden. Switzerland and the United States. It has the lowest government share of R&D financing, followed by Japan, pointing to the prominent role of the private sector in R&D financing and performance. R&D intensity in the business sector is very high, with only Finland and Sweden showing higher intensities. In contrast. the share of R&D performed by the Korean higher edu- Korea and the Knowledge-based Economy: Making the Transition cation sector is very low and, in terms of researchers per 10 000 labor force, the country ranks close to the EU average. Korean R&D spending is high and in 1998, its total R&D budget in current PPP USD ranked seventh in the OECD, roughly equivalent to that of the Nordic countries (Denmark, Finland, Norway and Swe- den) taken together. However, Korea's R&D activities can be characterized as "high input" with a "biased composition of output"; the generation of codified knowledge (e.g. in the form of patents and publications) is relatively low compared to that of knowledge embodied in traded goods (Table 5.1). The number of scientific and technical articles per unit of GDP is quite low. Other patent-related "out- put" indicators shown in Table 5.1, such as technological strength and technological intensity, confirm that Korean R&D efforts contribute less to the generation of codified knowledge. This can be seen from the pattern of Korean patenting in the United States. Patenting has risen, indicating the increased innovative capability of Korea, and Korean patents represented 2% of all utility patents granted. However, of all patents of foreign origin, Korea ranked fifth, with 5% of the total. Patent- ing is mainly concentrated in the chaebol, with Samsung playing the dominant role. Samsung Electronics Table 5.1. Income and technological performance, 1998 1 Indicators of scientific and technological activities Income level, _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ 1996 Researchers Government- G~vem'."'ent Busin~ss Gross Scientifi.c Technological GDP per capita domestic per 10 000 fmance d R&D of fInancmg % on R&D as a % and technical R&D as a expenditure articles t s reng th T hi' I e.c no ~gl::a as % of OECD expenditure labor force, on R&Das a % as a % of GDp, f t t l R&D of business per unit per USD mtenslty 1997' 1998' 0 0 a , fR&D) average of GDP. 1998' 1998' GDP,1998' ofGDp2 0 United States 140 2.8 74 0.8 30.6 2.3 20 410 10.4 Norway 128 1.7 76 0.7 42.9 I.3 21 Switzerland 126 2.7 55 0.7 26.9 2.3 37 Japan 121 2.9 92 0.5 18.1 2.3 15 354 10.6 Iceland 118 2.0 91 1.1 55.9 1.2 23 Denmark 117 1.9 61 0.7 35.7 1.9 31 87 1.6 Canada 114 1.6 54 0.5 31.9 I.3 25 203 3.3 Belgium 112 1.6 53 0.4 26.4 1.4 20 III 1.8 Austria III 1.6 34 0.7 44.6 1.I 18 125 1.9 Australia 107 1.7 67 0.8 46.0 0.8 24 Germany 107 2.3 59 0.8 35.6 2.0 21 215 5 Netherlands 106 2.1 50 0.8 39.1 1.4 31 170 3.5 France 103 2.2 60 0.9 40.2 1.8 20 115 2.7 Italy 102 1.0 32 0.5 51.l 0.7 13 101 I Sweden 100 3.9 86 1.0 25.2 4.4 41 147 5.3 United Kingdom 98 1.9 51 0.6 30.8 1.6 29 160 3.2 Finland 96 2.9 83 0.9 30.9 2.9 35 114 2.7 Ireland 92 1.4 51 0.3 22.2 I.3 16 69 New Zealand 88 1.1 45 0.6 52.3 0.4 29 Spain 77 0.9 33 0.4 43.6 0.5 16 21 0.2 Korea 72 2.9 48 0.7 22.9 2.5 5 25 0.7 Portugal 70 0.7 27 0.4 68.2 0.2 7 8 o Greece 67 0.5 20 0.2 46.9 0.2 16 Czech Republic 64 1.3 24 0.5 36.8 1.0 15 Hungary 47 0.7 28 0.4 56.2 0.3 20 115 0.7 Mexico 36 0.3 6 0.2 71.l 0.1 2 15 o Poland 35 0.8 32 0.5 59.0 0.4 17 Turkey 30 0.5 8 0.3 53.7 0.2 4 I. Or latest available year. 2. Scientific and technological articles per billion USD of GDP. See National Science Foundation (1998). 3. Technological strength is determined by multiplying the number of patents by an index of their impact. This index measures how frequently a country's recent patents are cited by all of a current year's patents. The patents refer to those granted at the us Patent and Trademark Office. Data are from CHI Research. 4. Technology intensity compares the technological strength of a country with its GDP expressed in PPP USD. See OECD (1998a) for details. Source: OECD calculations, based on the Main Science and Technology Indicators database; CHI Research; National Science Foundation (1998); and OECD (1998a). Table 5.2. Flows of R&D funds in Korea, J997 KRW 100 million Performed by: Financed by INational and public GRls Other non-profit Nation~1 an~.public Private universities Government- invested Private enterprises Total research institutes orlls. umverSlles organisations Government 99.67 82.87 19.85 64.47 30.86 1.21 4,67 25897,88 (21.25) Government-funded institutes 0.08 4.47 0.90 6.58 5.24 0.12 0.47 I 808.43 ([,48) Other non-profit organisations 0.01 0.13 40.87 257 [,57 0.63 0.36 I 326.81 (1.09) National and public universities 0.00 0,01 0.07 8.42 0.13 0.00 0,02 393.73 (0.32) Private universities 0,00 0,01 0.03 0.18 47.99 0.00 0.00 4021.29 (3.30) Government-invested organisations 0,05 8.38 3137 3.25 1.31 97.90 0,11 10355.34 (8.50) Private enterprises 0,17 4,13 6,90 14.45 12,14 0.09 94.31 77936.62 (63.96) Foreign sources 0.01 0.01 0.01 009 0,76 0,05 0,06 117.96 (0,10) Total 3805.4 15106.2 1777.3 4361.5 8354.4 8363.4 80089.5 121858.1 (3.12) (12.40) (1.46) (3.58) (6,86) (6.86) (65,72) (100,00) Note: Numbers (except total) are percentage shares for each column. Numbers in parenthesis under totals are percentage shares in total. Source: MOST (1998). ;. tI) ~ ii II> ::s ;' = ~ o = Korea and the Knowledge-based Economy: Making the Transition Co. Ltd. patented the most (40%). followed by Daewoo electronics (9.7%). LG Semiconductor Co. Ltd (7.2%), LG Electronics Inc. (6.6%), and Hyundai Electronics Industries Co. Ltd. (6.5%). Patenting by Samsung almost exclusively concerns electronics, with little breadth to the patenting, either by company or by sector (US Patent and Trademark Office, 1998). 2. Flows of R&D funds Flows of R&D funds in Korea show some peculiarities. First, shares of self-financing are very high in both the public and private sectors. Government is the main financier of government research institutes (GRls). at more than 80%. Industry also shows a very high share of self-financing, at more than 90%. The higher education sector shows the most diversified sources of funding, although this is mainly the result of weak public support for university research. Table 5.2 shows that private enterprises account for the lion's share of both R&D investment and spending; the government sector's share is moderate and that of the university sector is very small. Roughly two-thirds of total R&D funds are spent by private enterprises. The shares of GRls and universi- ties are 15 and 10%, respectively. National/public universities rely mostly on government funds, while the private universities tend to be self-financing. 3. R&D activities and international competitiveness R&D resources tend to be concentrated in a small number of industries, especially the ICT (e.g. communications equipment, semiconductors, computers, and electrical and electronic products) and automobile sectors, while the sources of international competitiveness are spread over a diverse set of industries, including some with low research intensities. Some R&D-intensive industries (e.g. precision instruments and pharmaceuticals) have been lagging in improving their international competitiveness, in contrast with some scale-intensive sectors (e.g. plastic and rubber, shipbuilding, and iron and steel) and labor-intensive sectors (e.g. textiles and leather). This implies that Korean industry has not yet fully harnessed the potential of R&D to add greater value to their products. While Korea is a major exporter of high-technology products, the value content of its exports, including high-technology products, remains low. For instance, its up-market share in exports to EU-15 countries is below the OECD average, while its down-market share ranks fourth, after Turkey, the Czech Republic and Poland 2 C. Main features and weaknesses of the Korean innovation system I. Weakness of the basic knowledge effort In terms of basic research, Korea shows two contrasting features: it ranks in sixth place among the OECD countries in overall spending on basic research as a percentage of GDP; but it has one of the low- est shares of basic research in all R&D activities (Figure 5.1). The favorable position in terms of spend- ing on basic research reflects the fact that Korean business enterprises perform more basic research as a share of GDP than do firms in any other OECD country (with the exception of Switzerland). However, the low overall basic research share indicates that public research sectors, including the GRls and the universities, spend relatively less on basic research than in most other OECD countries. 3 Korea's universities are characterized as being weak in research and are mainly oriented toward general education. Their share in total R&D expenditures is one of the lowest in the OECD area (Figure 5.2). To a large extent, this is due to high student-teacher ratios and heavy teaching loads, inad- equate research infrastructure (e.g. a lack of experimental facilities). and a lack of qualified research manpower and support staff. However, the shortage of human resources is not sufficient to explain Korea's poor performance as measured in terms of scientific publications and patents. The ratio of R&D expenditures to researchers, a proxy for research infrastructure, is almost equivalent to that of most ~ OECD countries. This points to the existence of institutional problems and a lack of incentives for the Korean Innovation Figure 5.1. Basic research as a percentage of GOP by sector of performance, 1997 Ell Higher education Ell Government o Business enterprises _ No breakdown Basic research as a percentage of all R&D activities 27.9 22.0 -c==;====;=---..---..---ilB---iijiiiiiii---iijiiiiiii--- Switzerland (1996) France (1996) 21.2 Germany (1993) 16.0 Australia (1996) (1996) United States 13.3 Korea 12.0 Japan (adjusted) 21.3 Austria (1993) 16.1 Norway (1995) ~1 ~~ 18.0 Czech Republic 35.5 Poland 9.6 Netherlands (1995) 27.6 Hungary 22.8 Spain 24.9 Portugal (1995) 12.0 Ireland (1993) 35.8 16iWiliiil@ii·!tiii%WI Mexico (1995) 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 % Source: OECD (1999b). research in the higher education sector. Until very recently, research had not been a primary concern in most Korean universities and quality of research is not given much weight in recruitment and promotion. In addition, Korean universities do not specialize in basic research. Their participation in wider R&D activities may suggest better relationships with other innovation actors. However, this creates a serious bias in the orientation of university research and weakens the domestic knowledge base. The problem is closely related to flows of R&D funds. Compared with the GRls, public funding for university research in general is [ow, and there is a sharp contrast between funding for the national and public uni- versities and funding for private universities. Public research funding for the latter stands at half the level of that for national and public universities. Consequently, universities tend to seek other sources of funding, notably from private enterprises, which may also serve to bias university research away from enhancing the knowledge base. 2. Private sector R&D The limitations of internalization in large companies Private enterprises have endeavored to upgrade their technological capabilities by establishing in- house research labs; they have rapidly increased their R&D expenditures since the early 19805, with large companies, notably the chaebol, taking the lead. This process called for intensive assimilation and adaptation, and led to the successful development of production capacities for standardized products using mature technologies. Until recently, most R&D laboratories were organized and managed in the same way as other areas of business, i.e. in the framework of centralized and hierarchical structures that facilitate the mobilization of existing financial and human resources into new business lines while utiliz- ~ Korea and the the Transition Figure 5.2. Higher education expenditure on R&D per researcher 1 000 current PPP USD 1 000 current PPP USD 250 250 HERD per researcher 200 _______________________________________________________ 200 150 150 100 100 50 50 0 0 0'1> ~IQ ~~4, ~~ IQ'I> riP &>~ c~ ",IQ"> 0° ·c~ :;.'" ~ v.,'lf :,~ *,0<: 0~ ~q; ~ q.'lf 0«; -0~ (J'lf IQ