Few noticed, but a major geoeconomic event occurred in 2018 when Korea surpassed Japan in real per capita GDP. By 2026, Korea will be 12% ahead of Japan, according to the International Monetary Fund (IMF), What makes this event all the more important and illuminating is that Korea shares so many of Japan's structural flaws. Korea's ability to surmount, or at least ameliorate, those flaws provides lessons for Japan as well as others.

The measured used by the IMF to calculate "real" GDP is called Purchasing Power Parity. It provides the best comparison of living standards because it eliminates distortions caused by varying price levels and gyrations in exchange rates.

Korea outstripped Japan primarily because its productivity--i.e., real GDP per work-hour--has been growing much faster than Japan's. Until the early 1990s, Japan was rapidly catching up to the US. Its productivity rose to a peak of 71% of the US level in 1997. Since then, it has fallen back to just 63%. By contrast, Korea's catchup has continued and is now just a few percentage points behind Japan. It will outperform Japan by this measure as well.

How did Korea do so well despite its Japan-like flaws? Korea resembles Japan so much that experts like the Washington-based Korea Economic Institute in 2016, have warned that, without enough reform, "We only need to look to Japan to see Korea's likely future." Like Japan, Korea is a "dual economy," that is, a hybrid of extremely efficient exporting sectors and woefully inefficient sectors in parts of domestic manufacturing and most services. The productivity gap between Korea's corporate giants and its small and medium enterprises (SMEs) is the third worst in the OECD. So lopsided is the economy that Samsung Electronics alone accounted for an astonishing 20% of all Korean exports in 2019. Meanwhile, more than a third of its labor force consists of low-paid non regular workers. So, while Korea is doing well compared to others, the OECD says its defects lower its growth rate by 1-2 percentage points below what it could be.

What has saved Korea from Japan's fate is that it has gotten right more of the "basics," while also making more serious efforts to address its defects.

For details, in English and Japanese, see these two posts. https://richardkatz.substack.com/p/korea-has-surpassed-japan-in-per?s=w<https://richardkatz.substack.com/p/korea-has-surpassed-japan-in-per?s=w>and https://richardkatz.substack.com/p/how-korea-outstripped-japan-in-per?s=w<https://richardkatz.substack.com/p/how-korea-outstripped-japan-in-per?s=w>

Richard Katz

Carnegie Council of Ethics In International Affairs