With per capita income swelling better than fivefold from 1970 to 1995, Korea was on the leading edge of the East Asian miracle. But 1997’s financial crises brought the miracle to an abrupt end, raising questions about Korea’s economic prospects and the underlying reality of the East Asian boom.

To help answer these questions, we studied Korea’s current economic performance and used this knowledge to gauge what its medium- and long-term growth potential might be.¹ We examined how the regulatory environment has affected Korean companies in four manufacturing industries (automobiles, steel, food processing, and semiconductors) and four service industries (retail banking, general merchandise retailing, housing construction, and telecommunications). Our main conclusions are:

• Overall, the old regulatory environment led to high inputs (especially in manufacturing), and low productivity (Exhibits 1 and 2).


• Despite massive investment in the best available manufacturing technology, protectionism and poor corporate governance prevented Korean companies from adopting the best management practices. As a result, labor and capital productivity in most manufacturing sectors stands at less than half of US levels.
• Service sector industries were systematically starved of capital. As a result, companies are well below scale and highly inefficient. Their performance is further hindered by...