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Korea Has Surpassed Japan in Per Capita GDP
And Its Lead Is Growing
It was headline news when the Japan Center for Economic Research predicted that Korea would surpass Japan in nominal GDP per capita in 2027 and Taiwan would do so in 2027. However, according to the World Bank, in real terms, Korea already surpassed Japan in 2018 and, with its better performance in the COVID era, its lead is growing. The IMF projects that, in 2023, Japan’s GDP (total, not per capita) will be only 0.2% above its pre-Covid level in 2019 whereas Korea’s will be up 6%.
(The real measure—called Purchasing Power Parity with a 2017 base year—provides a better portrait of living standards than the nominal measure. That’s because the gyrations of a country’s currency can abruptly send a dollar-based comparison of nominal GDP up or down by several percent of GDP. The PPP measure avoids this statistical illusion.)
The main reason Korea has passed Japan in per capita GDP is that its productivity—i.e., GDP per work-hour—has been growing much faster than Japan’s during the latter’s “lost decades.” Until the mid-1990s, Japan was rapidly catching up to the US in productivity, rising to a peak of 71% of the US level in 1997. Since then, it has fallen back to just 63%. Japan has also fallen back relative to Europe. By contrast, Korea’s catchup has continued and it now just a percentage points below Japan. If current trends continue, its only a matter of several years before Korea surpasses Japan by this measure as well.
Moreover, unlike Japan, Korea has passed on the fruits of its productivity growth to its workers. For the three decades from 1990 through 2020, annual real wages (not including benefits) barely increased in Japan, whereas they almost doubled in Korea. Korean workers now enjoy higher wages than their Japanese counterparts. (This is not a statistical distortion caused by the growth of low-paid part-time workers in Japan since Korea has the same pattern.)
None of this means Korea is without problems. In fact, it shares some of the same structural defects that eventually hobbled Japan’s growth. As noted above, a third of its labor force consists of low-paid non-regular workers. It, too, suffers from extreme “dualism” in the economy: i.e., a combination of super-efficient and innovative high-tech sectors and far less productive sectors in parts of manufacturing and assorted services. In fact, Korean growth is slowing down. As economies mature, growth does slow. How much of Korea’s deceleration is simply due to that maturation and how much due to structural defects needs more examination. Still, its average per capita growth in the five years prior to COVID was 2.4%, a good number for a rich country.
I’ll be taking a further look at Korea-Japan comparisons as part of a forthcoming piece in Toyo Keizai on the pros and cons of Tokyo’s weak yen strategy. Part of the piece will examine why Japan has trouble growing despite lowest “real yen” rate in a half-century and why Korea sails along even with a strong currency. It will be posted in the blog.