The Middle-Income Trap: South Korea's Unique Economic Journey

Korea's exceptional leap to developed status highlights the critical middle-income trap faced by many nations.

### The Middle-Income Trap: Challenges and Opportunities for Developing Countries
* 🌍 The recent World Bank report, summarized by Martin Wolf, focuses on the concept of the "**Middle Income Trap**," particularly highlighting South Korea's unique position as the **only country to transition successfully from developing to developed status**.
* 📊 This report emphasizes the rarity of such transitions, noting that while countries like Saudi Arabia, Bulgaria, Chile, and Poland have made progress, none have achieved the same recognition as **developed nations like Korea**.
* 🌀 The middle-income trap is described as an **economic stagnation phase** where countries fail to advance beyond middle-income status, akin to a person **stuck in puberty without maturing**.
* 📉 The report warns that if current trends continue, countries like China, Indonesia, and India may take **decades to achieve only a fraction of the U.S. per capita income**, indicating a potential **stagnation in the global economy**.
* 🌱 To escape this trap, developing countries must undertake a three-step leap, which includes **acquiring capital**, **injecting foreign know-how**, and **fostering self-destructive innovation**, a process that South Korea successfully navigated in its economic history.
* 🚗 Historical examples from Korea's automotive industry illustrate how **government pressure and competition can drive innovation**, contrasting with Brazil's stagnation in the same sector despite its earlier start.
* 🔍 Martin Wolf concludes that for developing countries to thrive, they must **embrace openness and meritocracy** while overcoming challenges such as **protectionism and a divided global economy**, which hinder their ability to **leap forward**.
* 🔮 As South Korea faces declining industries and a critical juncture for future growth, the report raises questions about **maintaining export competitiveness** and the potential for **new industries to emerge** in a rapidly changing economic landscape.

Understanding all the knowledge of the world. This time, we've got international news. Don't do that, don't do that. I would like to introduce our guest, who is affectionately called Auntie by the staff. Please welcome her. Hello! Oh, it's already quite late. What should we do today? We need to get started right away. Let's first look at the screen. Today, I brought Martin Wolf's column after a long time. I was curious about what he had to say. Recently, the World Bank released a report that is just under 300 pages long. It’s such a massive amount of information that it feels like my fingers are going to get arthritis scrolling through it. Martin Wolf kindly summarized the key points in his column, and importantly, the main subject of the report is almost entirely about Korea. Oh, really? Yes, so we should be aware of it.

I would like to introduce the content. First of all, what is this report? This is an example of a report written by a bank, called the Middle Income Trap. It discusses what is needed for a developing country to transition through the middle-income stage and become a developed country. What exactly is necessary for these developing countries to become successful? It seems like there are hardly any countries that have successfully made this transition. In the past, those that became developed countries were already advanced long ago. 

So, what exactly is the middle-income trap? It seems that South Korea is the only country that has transitioned from being a developing country to a developed one. However, even South Korea's status as a developed country is somewhat ambiguous. This report expresses dissatisfaction with the current government, indicating that there are issues that need to be addressed.

The report raises the question of why, apart from Korea, there seems to be no other country that has managed to escape the challenges faced by developing nations. This concern stems from the fact that there are cases where countries have transitioned from being developing to high-income nations, such as Saudi Arabia, Bulgaria, Chile, and Poland. However, Korea is the only country that has been recognized as a developed nation among them. This situation indicates that Korea is truly exceptional. It seems there is a fateful trap that prevents developing countries from progressing beyond the middle-income stage. This concept is known as the middle-income trap. The report explores whether there is a way to overcome this trap. This concern is the motivation behind the discussion. The title of the report, which is also displayed on the screen, refers to this middle-income trap, which we commonly call the trap of middle-income countries. Let me explain the concept in simpler terms.

So, it's not just that middle-income countries fall into a trap when they make mistakes; rather, it's a trap that all of them fall into without exception. Therefore, there isn't a middle-income country that escapes this kind of snare. I want to explain this as a sort of economic puberty that emerges when the economy has grown to a certain extent. When you think about puberty in terms of a person, as a child grows, there comes a time when they hit puberty, right? Once puberty hits, that's it; it can't be explained. But if during puberty, the body grows but the person doesn't mature into an adult and just stops there, what happens? It becomes the worst-case scenario. Imagine being stuck in puberty as an adult, unable to study or progress, just growing physically. That state is truly the worst. For example, if a country starts producing goods...

The country was quite large in terms of production, and because of that, the cost of labor has gone up, which has increased the overall cost. However, when it comes to quality, we still cannot match the advanced countries; we are stuck at that level. As a result, the attractiveness of the product inevitably decreases. It's not appealing to buy just because it's cheap, and there isn’t a sense of loyalty that makes people willing to pay a high price either. So, in terms of cost-performance ratio, it becomes the worst product. If we understand this situation as the middle-income trap, it might resonate better since everyone experiences it and often gets stuck there. However, there is a sentence in the report that illustrates the current situation, and I highlighted it, so let me read it all.

The director said that since it's a summary, I must read it. However, if we continue on this trend, what that means is that China will take 10 years, Indonesia will take 70 years, and India will take 75 years to reach a per capita income that barely reaches 25% of that of the United States. Even in 10 years, the income in the U.S. will only be 255% of that. The fact that the rest will take 70 years means it's not feasible. This suggests that the U.S. can just stay still. I wonder what will happen next. That was the point of discussion. Additionally, I'll show you another picture. There are simply too many countries that I just mentioned. This picture shows the countries classified by the World Bank based on income levels as of this year. Currently, 108 countries are classified as middle-income countries. The greener the color, the wealthier the country.

The countries that are colored red tend to be poorer, while those that are darker shades are generally wealthier. The light green color represents upper-middle-income countries, and the countries trapped in the middle-income bracket are also light green. The upper-middle-income countries include China, Thailand, Indonesia, Mexico, and Turkey. On the other hand, the lower-middle-income countries consist of India, Vietnam, the Philippines, Egypt, and Pakistan. There are indeed many countries classified as middle-income in light green and pink. However, around 6 billion people live in these middle-income countries, which accounts for 75% of the world's population. Among them, two out of three people live in extreme poverty. These countries generate about 40% of the world's GDP, and when it comes to carbon emissions, they are responsible for 60% of the total emissions coming from middle-income countries.

If we don't find a new breakthrough, the world economy will likely stagnate, so it's really important for these countries to find a way to leap forward. The World Bank conducted research and concluded that in order for developing countries to become developed, they need to make a leap, but that leap cannot be done in one go; it requires a three-step jump. So, Korea has made this three-step jump, and even though it went through these three stages, the second step is about injecting the know-how of developed countries, and the third step involves self-destructive innovation. The conclusion is that the first condition, which is capital, is something that developing countries lack. Therefore, ultimately, they need to either borrow capital from developed countries or receive it as aid; in any case, they need to bring it in. Otherwise, they won't be able to establish factories or anything like that.

If we look into our country's history, in 1965, we received 500 million dollars from Japan under the claims agreement. With that 500 million dollars, we built Pohang Steel and also constructed the Soyanggang Dam. Another significant event was our participation in the Vietnam War. The United States paid us for our involvement, and thankfully, our fathers and grandfathers did not spend that money locally but sent it all back to our homeland in dollars. Over nine years, this accumulated to about 5 billion dollars in foreign currency. Because of those sacrifices and pains, we were able to go to Saudi Arabia and receive what we did. Anyway, what I'm talking about now is related to what I just mentioned.

Such historical facts should never happen again, but because of the sacrifices and pain that occurred, it became a catalyst for the creation of capital, allowing for the first significant leap forward. The initial capital emerged from various sources, including the Vietnam War. Now, let’s take a look at this. This image compares South Korea and Brazil. In terms of per capita income, South Korea, which was at 20% of the United States in the past, surpassed 60% in 2019, while Brazil actually regressed. The blue line represents South Korea, and the red line represents Brazil. Since 1990, about 34 countries have transitioned to high-income status, with South Korea being the most populous among them. Countries like Brazil and Chile have either stagnated or experienced only brief moments of progress before faltering. This can be symbolized by...

The second and third stages of the jump involved the second stage injecting the know-how of advanced countries, while the third stage represented self-destructive innovation. A case that symbolizes the third stage is actually simply outlined in the World Bank report. It mentions that exports were encouraged while exposing domestic companies to competition from foreign firms. When I thought about what such cases might be, I considered the automotive industry in the 1970s. During the 70s, our country's automotive industry partnered with companies like Toyota and Ford, assembling cars by bringing in parts and putting together foreign car models. There was also Samsung Motors during that time. It was a good period, but the government allowed this for a while and then said, You guys need to...

I have assembled foreign cars, so I have a rough idea now. So, let's try making domestic cars. If we do that, we can export and earn money, right? How long are we going to just assemble and receive commissions? Therefore, if we can't increase the localization rate of parts to over 76%, I will take away the license for assembling those parts. We will apply pressure as the government. In short, we were trying to create a unique model. However, under that pressure from the government, Hyundai managed to create the Pony in just a year and a half. At that time, they asked a designer from Italy for help and learned about engines and car design in the UK and Japan, upgrading it to our own unique model. Initially, they made money from this jump, but afterward, they just continued assembling.

If we continue to stay in our current position, whether we create unique models or anything else, we need to take a leap forward so that we can do what other countries are doing. Brazil, for instance, started assembling automotive parts and the automobile industry much earlier than we did. However, if you look at Brazil now, there aren't any notable unique models; instead, most global companies have entered and dominated the market. The World Bank emphasizes that during the innovation process, existing powers tend to resist and push back. Nonetheless, there are countries that continue to innovate despite this resistance, while others hesitate and are unable to overcome the pushback from established interests. This struggle ultimately determines their fate. In this context, our country...

From the perspective of not having many century-old companies, it’s not necessarily a good thing. I've organized my thoughts on this, so if you could show the screen, for example, in Germany, companies established before 1950 account for 70% of listed companies, while in the United States, that ratio is only 50%. This suggests that Germany isn't producing many new companies. On the other hand, in the U.S., every year, 88% of all companies are newly established, whereas in Germany, that rate is only 3%. This means that in the U.S., companies are born, fail, and grow, while in Germany, companies tend not to fail and last a long time. Therefore, it’s not just about having strong century-old companies; it also indicates that there isn’t intense competition among companies in the country. In other words, it means there is a lack of innovation and change. Conversely, in our country, there aren’t many century-old companies.

That means our country is dynamic, and competition is fierce. Even if a company is doing well for a while, it can still fail. We also have a relatively short history, so we don't have any companies that have lasted a hundred years. Well, we do have some companies that are a hundred years old, but when a new economic system emerges and innovation occurs, most of the smaller companies that have been around for a hundred years tend to disappear. They should actually disappear. For example, even if we don't go back a hundred years, we remember the time when we used feature phones. Companies like Samsung, LG, Pantech, and Sky were around back then. However, when Apple, which wasn't even a phone manufacturer, suddenly introduced the smartphone, all of those companies disappeared. And a country or industry where Pantech becomes a hundred-year-old company...

It's a somewhat strange industry, isn't it? In fact, Motorola is nearing its 100th anniversary in just a little while. However, right now, it seems to be lacking some strength. This is actually indicative of a developing country. If Motorola were still number one and approaching 100 years, that would be unusual. There are not many companies in the U.S. that have lasted 100 years. A true century-old company grows and innovates through competition, continually adapting and expanding. 

Anyway, Martin Wolf organizes these ideas well in his column, and towards the end, he mentions that society and the economy need to be more open and meritocratic for advancement to be possible. However, this is quite challenging for developing countries. He also discusses protectionism and the potential for a divided global economy, highlighting the difficulties that developing nations face.

Developing countries and underdeveloped countries are weakening the possibility of making a leap. So, people say, Our country is also in the OECD, so we are a developed country based on that. However, many people are worried these days. This is because the existing industries that have been doing well until now are all weakening, right? The sectors that have sustained us, such as automobiles, steel, and semiconductors, don't seem to be as strong as before. But what about new industries? There seems to be nothing. So, in fact, one important point in this report is that other countries are also in the same situation; they emphasize the importance of exports a lot. Our country has a very high dependency on exports. So, can our country maintain its status and continue to establish itself as a developed country?

The question is whether our export competitiveness can continue to be maintained. If not, other countries may rise up. For example, India might surpass China. If alternatives emerge, we will need to quickly shift our focus from industries like semiconductors and shipbuilding to new sectors. However, I believe our export competitiveness will be maintained for some time, and we are likely to continue to excel in these areas. If the answer to the question about whether we can maintain our position as a leading country is yes, then our status as a developed nation will likely be sustained for a while.

To become a developed country, a three-step leap is necessary. Korea has managed to make this leap somehow, but it seems that other countries have not been able to do so. The question is whether other countries really cannot make that two or three-step leap.

It is highly unlikely that it will happen. We are now discussing this possibility. In very difficult times, it is also hard to gather capital, and suddenly, the Vietnam War and the Middle Eastern situation arose, which was quite fortunate, right? In the past, the opportunities we had to jump forward were a kind of luck that is unlikely to happen again in the 21st century. So why did they suddenly write this report? What could have prompted it? The term middle-income country has always been around, and the World Bank report seems to indicate that they don't have much to say. What are the OECD and the World Bank doing together? They must be writing things like this. So why did they suddenly write this? We need to understand why we invited Attorney Ahn Hee-cheol today to hear such discussions. If we consider the current issues, it seems that the entire world is now...

Middle-income countries have been struggling for 70 years. That's the case with Korean volleyball as well. But why is it that we need to come up with something now? There are no items to present. Anyway, among those in the economic sector who are doing a lot of research and giving lectures, there has been some discussion. A report came out about a month or two ago, and it was very hot. So everyone has read it at least once, and it’s available in Korea as well. The Financial Times wrote about it. The discussion seems to be about this. For example, as mentioned earlier, the car assembly production has just started and is now in its third year. They are starting to make some money now, but usually at this point, one wouldn't say, You need to create a reader model, or else you won’t be able to assemble. By the third year, one would typically start saying, How about some political funds? But then why?

Did they make it so difficult for the companies? Bring one more, bring one more. So, export it. What, did the Park Chung-hee government do this for the nation? In my view, it was because there was a threatening force called North Korea, so we had to hurry. It was a sense of urgency. If we continue like this for ten years, we cannot become a slightly better-off country. Look at how it's growing with support from that shellfish. Until the late 1970s, we were not living well. That's right. We thought we were doing well, but how anxious were we? So, if you're assembling for the second year, you must create a final product in the third year. They must have pushed for it like this. So, in our country, during that economic adolescence, when there was backlash from vested interests, they tried to postpone that adolescence as much as possible.

In a way, it can be seen as oppression. While trying to postpone things as much as possible, it also hinders growth during that delay. This is how I interpret the method used. When vested interests are created, and at that moment, external factors cause everything to collapse, it seems that the timing aligns somewhat. However, the three-stage jump mentioned here is supposed to lead to creative destruction, which is essential for reaching the ranks of developed countries. I still wonder if we have truly achieved this three-stage jump. 

So far, it is true that we have gathered capital and made internal technological advancements, but I question whether disruptive innovation has actually occurred within us. I still have doubts about this. Today, we are indeed at a critical point for the three-stage jump.

This is how it is. For example, what broadcasting stations did our country have in the 1960s? There was nothing, right? Nowadays, every morning, I go to MBC. If you go to MBC, you will see on the wall that MBC first started broadcasting in 1960 or 1970. At that time, it was a small broadcasting station located in a four-story building in Jongno, which they rented. That was how it began. Now, in the process of becoming a large broadcasting station, it wasn't just that company but also that it jumped to the next level. They gathered capital and created a broadcasting station comparable to those in developed countries. However, since they couldn't transform, places like Understanding emerged. Naturally, our viewers expect the existing broadcasting stations to produce certain content, and they want more and more of it. Please bring Professor Sung Il-gwang quickly. Where is he? Hurry up and bring him here for more details.

Let's talk about this. When we come here and discuss things, we don't ask those kinds of questions. Even on holidays, this is about disruptive innovation. Typically, established powers like broadcasting companies try to avoid these changes or want to eliminate them. So, some things do disappear, like Tada, which is no longer around. However, on the other hand, companies like Underdog are still making progress and thriving. This is what we call disruptive innovation. It makes you think, Wow, the future of the Korean economy is bright! It's really tough, though. Is it really that hard to keep just one item alive? That's how it is. I understand. So, considering that our country is facing an aging population and a rapidly declining birthrate, which is the steepest in the world, I personally think that this might be better. It’s a sudden drop in birthrates compared to other countries.

If we experience rapid aging, we feel a sense of crisis and anxiety, thinking, Hey, our country can't just let this happen; we have to take drastic measures. There are discussions about things like requiring military service for those over 60. However, if we approach aging and low birth rates half-heartedly, it will be like a frog in boiling water, and we could end up in a really foolish situation. Our country will face a sharp decline, and we might have to bring in 2 million people from India. It’s unavoidable; do we want our country to collapse? Back in the 1970s, we thought we had no choice but to face such dire situations, and we managed to overcome that crisis. I think it might be better to tackle low birth rates boldly. There are aspects to consider, and I'm not sure if this is something I should say, but I welcome the 6% low birth rate. It's truly surprising; as aging becomes more severe, it might actually be a good thing.

I understand, Chief. That's not what I meant. No, no. Ah, it's a healthy conversation, a healthy conversation indeed. It's just 2% speculation, but there are aspects to it that make us feel desperate. That's what I'm talking about. 2% could lead to the country’s downfall. This is really... Ah, I see. All men should re-enlist. When did I ever say that? Yes, Chief, I appreciate it. Thank you. I will take my leave now.

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The Middle Income Trap and South Korea's Unique Journey

The World Bank's recent report, summarized by Martin Wolf, focuses on the middle-income trap and its impact on developing countries, with South Korea being the only nation to successfully transition to a developed status.

The report expresses dissatisfaction with the current government's efforts and questions why other countries have struggled to escape the challenges of development.

The middle-income trap is likened to a universal struggle that all countries in this stage face, making it difficult for them to progress and mature economically.

The Economic Disparity and Development Challenges

China, Indonesia, and India will take decades to reach a per capita income that is only 25% of the U.

Middle-income countries, accounting for 75% of the world's population, are struggling with extreme poverty and are responsible for 40% of the world's GDP and 60% of carbon emissions.

The World Bank recommends a three-step jump for developing countries to transition to developed status, with capital injection and self-destructive innovation being crucial for success.

The Stages of Innovation in the Automotive Industry

The second stage of innovation involved advanced countries' know-how, while the third stage led to self-destructive innovation, exemplified by the automotive industry's struggle with foreign competition.

The government's pressure on local companies to increase the localization of parts led to Hyundai's rapid creation of the Pony model.

in company establishment and failure rates highlights the impact of competition and innovation on a country's economic growth.

The Dynamics of Competition and Development

The country's dynamic nature and fierce competition lead to the frequent failure of companies, even those that have been around for a century.

The emergence of new economic systems and innovations often results in the disappearance of older companies.

The report emphasizes the importance of export competitiveness for maintaining the country's status as a developed nation, while also highlighting the challenges faced by other developing countries in making a similar leap.

The Uncertain Path of Middle-Income Countries

The report on middle-income countries' struggles has prompted discussions, with the World Bank and OECD collaborating on it.

The speaker reflects on the past opportunities for growth, driven by external factors like the Vietnam War and North Korea's threat.

They question whether disruptive innovation has truly occurred and emphasize the critical point for a three-stage jump towards becoming a developed country.

The Evolution of Broadcasting and Demographic Challenges in Korea

Korea's broadcasting industry began in the 1960s with a small MBC station, which has since grown significantly.

Disruptive innovation has played a key role in the industry's evolution, with new companies like Underdog thriving despite the challenges faced by established powers.

The country's rapid aging population and declining birthrate pose significant challenges, leading to discussions about drastic measures to address the crisis.