[경제시평] Topics raised by the ‘Draghi Report’

The ‘Future of European Competitiveness’ report (Draghi Report) led by Mario Draghi, former Italian Prime Minister and President of the European Central Bank (ECB), who successfully overcame the European financial crisis, is attracting attention in Washington think tanks.

Under the neoliberal global economic system, the European Union (EU) has grown into an economic model that imports cheap Russian gas, creates high value-added manufacturing industries, and exports it to the world. However, due to the war in Ukraine, energy prices are soaring, China’s manufacturing competitiveness and export oversupply are being hit, and EU companies are losing investment across the Atlantic due to the US industrial policy and massive subsidies, facing a total crisis.

‘Differences in innovation’ diverge the economic fortunes of the U.S. and Europe

The New York Times ignored the new technologies of Chinese electric car makers such as BYD over the past 10 years, when German cars were sold in the millions in China, and was too complacent with past success, and the German government also did not invest for the future in a situation where it had room to spare due to a budget surplus. Rather, it is diagnosed that the waste of the golden age by passing a law mandating a balanced budget has led to today’s crisis.

The message of the Draghi report is serious. It is said that the ‘difference in innovation’ decided their fate. While six tech companies with a market value exceeding 1 trillion euros have emerged in the United States over the past 50 years, there has been no tech company with a market value exceeding 100 billion euros in the EU. While discussing the Draghi report with US and EU experts, I could not help but feel the overlap between the EU and Korea situations. Although it differs only in scale from the single market, there is no significant difference in that it faces the challenge of urgently changing from an export-centered, legacy manufacturing-centered industrial structure to a new paradigm in the rapidly changing global economic environment and U.S.-China geopolitical situation.

Looking at the Draghi Report, we raise the question of where Korea’s industrial competitiveness will be in 5 or 10 years, regardless of the fluctuating export performance depending on the global market situation. It is difficult to achieve economies of scale with only domestic demand for a population of 50 million, but the total fertility rate (0.72) is the lowest in the world and the population is shrinking and aging. The Korean economy’s nominal GDP fell to 14th last year after ranking 10th in the world in 2020. Developing countries with large and young populations will continue to gain ground. Considering the size of the economy alone, even the G7 is a difficult goal. Semiconductor automobiles, which support the Korean economy, are in the midst of geopolitical tensions between the United States and China as the industrial paradigm is rapidly changing.

While the memory-centered Korean semiconductor industry is still struggling in non-memory technology, TSMC’s Arizona plant is known to have secured a yield comparable to that of Taiwan. The TSMC semiconductor plant in Kumamoto, Japan is also operating successfully and is seeking expansion. Electric vehicles are a game of software, and in Gartner’s 2024 Digital Automobile Index, the top 10 was almost entirely filled with Chinese cars, and Korean companies ranked 15th.

When we need a Korean version of the ‘Draghi Report’

Despite the pressure of U.S. export controls and China’s macroeconomic difficulties, the technological advancement of China’s version of ‘Sobujang’ continues to make progress and accumulation. Self-driving taxis that have actually been ridden in Beijing, China are already operating in more than 16 cities, and Baidu’s self-driving taxis have recorded 7 million rides. In China, 2.2 million science and engineering graduates are produced every year, and we account for only 1/10th of that number. Fortunately, the bright students who went to medical school instead of engineering school are out on the streets and not coming back.

Korean companies I met in China said that the pace of innovation and technological development in China was so fast that they had to stay in China to learn new technologies. China, where people flocked to in the past for low-cost production and entry into large markets, has become the place to go to learn technology. It has been a long time since we heard about ‘competitiveness’ as a topic for national survival in this desperate global competition. It is time for a Korean version of the ‘Draghi Report’ to see whether we are being buried in the past and neglecting investment in the future.

Yeo Han-gu, senior member of the Peterson Institute for International Economics and former head of the Trade Negotiation Headquarters