Wednesday, February 01, 2006

Korean Mega-Trends

I found this report by the Korea Institute of Industrial Economics and Trade on mega-trends insightful.

By Lim Dongsoon / Ph. D., research fellow, KIET

What will lead the Korean economy and industrial sectors in 2020? Which sectors will be particularly promising? Which investments offer particular potential for the improvement of value chains? These are tough questions to answer. It is always a daunting task to ask tomorrow's questions and get answers today. The future is, by nature, uncertain.

One way to predict the future is to sort out probable trends that will fundamentally affect the future. We call the very influential trends "megatrends." The megatrend approach in industrial analysis has strong virtues as it helps us identify global drivers and estimate their impact on the world over the next few decades.

The Korea Institute for Industrial Economics and Trade has identified 15 key megatrends and grouped them into five clusters: i) changes in the world economic order, ii) labor, resources, and management, iii) acceleration in technology innovation, iv) evolution of new culture and consumption patterns, and v) Korea-specific situations including South-North economic relations.

Among the 15 megatrends, aging is a key megatrend that will shape the future of the economy and industry. It is generally expected that aging patterns will differ in various regions of the world. But aging will mostly have a negative influence on world economic growth.

In developed countries and many of the more advanced developing countries, the declining ratio of working people to retirees is straining labor supply as well as social services, pensions, and healthcare systems.

Therefore, measures need to be taken now to counterbalance aging. They include delaying retirement, encouraging greater participation of women in the work force, and relying on migrant workers.

Aging will also induce a new consumption pattern and boost elderly-care and elderly-friendly industries. For individuals, it will become necessary to prepare for 'double-cropping' in their life. For government, it will be necessary to provide support to them through active labor market policies.

The global economy is expected to enjoy a sustained period of dynamism through 2020. Dynamism will be strongest among so-called "emerging markets," especially in the two Asian giants - China and India.

The rising tide of the global economy will weaken a fully-operated multilateralism, but create more regional economic cooperation mechanisms such as free trade agreements.

China will emerge as a manufacturing superpower but at the same time will face competition from existing manufacturing superpowers such as Germany and Japan, which are expected to maintain a competitive edge in manufacturing through 2020.

The emergence of China inevitably requires neighboring countries to adapt to the shifts in the global paradigm of manufacturing and trade.

There will be moderate progress in South-North Korean economic cooperation. Economic cooperation across the border will be basically determined by inter-Korean relations.

KIET presents two possible scenarios: One scenario envisions fast progress in economic cooperation across the border. In another scenario where cooperation is promoted at a moderate level, South Korean firms will increase investment mainly in economic zones like the Gaeseong Industrial Complex.

One barrier that will impede continuous industrial development is a degradation of the environment and increasing scarcity of natural resources such as oil.

Demand for energy will grow through 2020. It will have a substantial impact on the world economy as well as geopolitical relations.

Fossil fuels will still be dominant, accounting for more than 90 percent of additional energy supply through 2020. Nuclear power will show very moderate increases in the future mainly due to environmental concerns.

However, 96 percent of the total projected increase in nuclear power capacity will be accounted for by emerging economies. Of the 55 GW of additional nuclear power to be installed in emerging Asia by 2025, 24 GW will go to China, 12 GW to India, and 12 GW to South Korea, according to EIA estimates.

Future energy prices will increase moderately, although with some high degree of uncertainty. Possible oil price volatility in the future will principally occur because of unforeseen political and economic circumstances - tensions in the Middle East for example. On the other hand, market forces will balance the oil market in the long term.

Technology innovations including the continuing diffusion of information technology and new applications of biotechnology and nanotechnology will be of particular national and global significance in 2020.

Most importantly, the integration of existing disciplines to form new ones, so-called fusion technology, will be essential in the future technology competition.

The integration of information technology, biotechnology, materials science and nanotechnology will generate a dramatic increase in innovation.

Another critical change in technology is that older established technologies will continue to leave center stage as new technology markets evolve.

The time between the discovery and the application of technological advances will continue to shorten. Developments in the laboratory will reach commercial production at ever faster rates, leading to increased investments as well as to higher risks.

These six megatrend clusters, coupled with the forecast of basic production factors such as capital and labor, will shape the business environment and influence the future of Korean industries both positively and negatively.

Globalization and the dynamics of comparative advantage have a positive impact on such industries as aircraft, automobiles, shipbuilding, iron and steel, and electronic equipment as they allow Korean companies to take advantage of the economies of scale.

But they will have a negative impact on textiles, consumer electronics, and office and computing machinery as they undermine the competitiveness of Korean firms vis-a-vis their rivals from emerging countries.

Aging will give a strong boost to elderly-care and healthcare, food and beverages, finance and insurance, and the real estate industries. These sectors offer goods for which demand rises more than proportionally with the growth of income.

However, aging will have a negative impact on automobiles and textiles as the growth rate of population decreases.

The three most important trends for the global economy in 2020 are population aging in the developed and some developing countries, increasing affluence in the developing world, especially China and India, and the fast pace of technological innovation.

Taken together, the megatrend forecast suggests the Korean manufacturing industries have good growth potential, but so do the manufacturing sectors of some countries like China and India.

So what is the best way to deal with future growth and risk faced by Korean industries? Innovate. As Deborah Wince-Smith, the chairperson of U.S. Council on Competitiveness, pointed out during the KIET International Conference on Korea Industry Vision 2020, our incredible pace of progress during the past few decades is not sufficient and we need to keep running.

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