The bad news is really good news: with South Korea flexing its considerable economic muscle on the world stage, the U.S. suddenly has a new competitor--and partner--in the ever-evolving global marketplace.

• Author: Weidenbaum, Murray L.
• Position: Economics

THE ECONOMIC, POLITICAL, and social transformations that have occurred in South Korea in recent decades have been remarkable. That nation now is one of the most vibrant and thriving democracies in Asia. At the same time, it has become a regional as well as global economic powerhouse. The implications for U.S.-Korean relationships are profound.

Korea is in the midst of perhaps its most fundamental economic adjustment in modern times. It is taking on the key characteristics of the most advanced industrial economies. Its extraordinary economic development, especially over the past half century, has been based heavily on the growth of manufacturing centered on the chaebol, which is a conglomerate of many companies clustered around one parent firm. However, Korea currently is witnessing much of its traditional manufacturing activity moving to lower cost areas, notably China. That should be viewed as neither surprising nor undesirable.

The concerns expressed in some business quarters of Korea about the "hollowing out" of its manufacturing base ring a clear bell with Americans. That has been a much discussed topic in numerous U.S. industries for some decades now. A great many nations have seen their manufacturing workforces shrink in recent years (including China). In the typical case, the main agent of change has not been from overseas, but rather the rise in the productivity of domestic business operations due, in large measure, to technological advances. For example, American industry literally is producing more goods (the current Index of Industrial Production is 13% above 1997) with fewer people (14,000,000 as compared to 17,000,000 in 1997). Economic trends rarely move in the same direction for long periods of time. New factories in some high-tech industries tend to be so capital intensive that there is little advantage to locating them in areas of low-cost labor.

Understandably, employees who are displaced have been hearing bad news--at least until they get new jobs. Yet, as a practical matter, were it not for rapid technological progress and resultant rising productivity, most Americans still would be doing harsh physical labor working on farms in order to raise enough food to feed the population. Living standards, as a result, would be much lower than they are today. The same is true for advanced industrial nations generally.

In the 21st century, there is a different, but fundamental, justification for the expansion of productivity, it is the basis for successful competition in world markets. Were the productivity of our workers stagnant over the years, there would be no economic basis for raising compensation or even maintaining employment. The business would have gone to more competitive firms in other countries.

In highly developed economies such as in the U.S., outsourcing often is part of a broader effort of private companies to focus on their core competence. In the process, major business farms subcontract out many of their activities to other firms, mainly domestic. Despite the vehement criticism by various interest groups, overseas sourcing can best be seen as a part of that more basic trend to more efficient and effective business management. For instance, as companies upgrade their software systems, there is less need for locally based programmers and--simultaneously--more domestic demand for higher paid systems integrators. Corporate information technology departments are changing their mix of in-house talent. They are emphasizing such relatively high-paid skills as managerial experience, business process knowledge, and understanding the domestic customer.

Many advanced economies have seen their domestic industries do much of their current expansion in China and elsewhere in East Asia. In fact, over the course of global economic history, taking on production for wealthier regions is a way in which poorer countries accelerate their economic development cycles.

The U.S. perhaps is the most conspicuous example of this phenomenon. American companies have moved a substantial portion of their new production facilities offshore. For the generation of domestic income and employment, they...