Analysis: Asia's economic history foretells Chinese slowdown

(Reuters) - The past is not an infallible guide to the future, but a reading of how East Asia's economies developed suggests China needs to get ready for an appreciable slowdown in growth in the years ahead.

And that same history lesson must have Beijing praying that it can follow in the footsteps of vibrant South Korea, not stagnant Japan.

Last weekend's gathering of the Group of 20 major economies was aimed at securing short-term growth and currency stability.

But the opulence of the lake resort where G20 finance ministers met was a vivid illustration of how South Korea has avoided the so-called middle-income trap and continued to push living standards closer to those of advanced countries.

For decades, many countries in Latin America and the Middle East have failed in this task. In Asia, the Philippines is a prominent example.

"Many countries make it from low-income to middle-income, but very few actually make that second leap to high-income. They seem to get stuck in a trap where your costs are escalating and you lose competitiveness," said Ardo Hansson, a World Bank economist in Beijing.

Not so South Korea. When war on the divided peninsula ended in 1953, the south was poorer than the north.

By 1997, though, South Korean per capita GDP (at purchasing power parity exchange rates) had reached 57 percent of the average of the Organization for Economic Co-operation and Development, a forum of industrial democracies that Seoul joined a year earlier.

The 1997/98 Asian financial meltdown set back many middle-income countries across the region. Investment, vital to sustain medium-term growth, has still not recovered to pre-crisis levels in Thailand, Malaysia and the Philippines.

South Korea, though, after nearly defaulting on its debts at the end of 1997, pulled itself together and resumed its march up the value chain.

DON'T STOP REFORMING

The key reason is that Seoul embarked on far-reaching market reforms. In particular, the government reduced the power of the chaebol, sprawling debt-heavy conglomerates whose links to the state created the impression that they were too big to fail.

But many did fail as South Korea injected more competition into the economy, liberalized imports and deregulated the financial sector that was a captive source of funding for the chaebol.

"They really changed the rules of the game for the large corporations. It became clear that being big and being close to government was not enough to keep you alive," said Randall Jones, who heads the OECD's South Korea desk.

Since the crisis, the country has grown more than twice as fast as the OECD norm, propelling per capita GDP to 83 percent of the group average by 2008.