NEW DELHI -- Despite resentment against Japan for its colonial domination of the Korean Peninsula (1910-1945), South Korea followed Japan in its model of postwar economic development. In both countries, the central government established close links between commercial banks and companies while ensuring that an obedient central bank provided adequate liquidity. Behind all this were neomercantilist policies dressed up under the modern guise of export-led development.
Two seminal events have discredited the Japanese model and its variations. On the one hand, the bursting of Japan's bubble economy brought on a relentless era of slow economic growth. On the other hand, the turmoil that swept through East Asia in 1997-98 challenged the notion that governments could use bank-dominated financial systems to boost growth by relying upon exports.
Although Japan served as a detached mentor over the past decades, Asia's biggest economy is being edged off the radar screen of its neighbors. This reflects the fact that Japan's homegrown economic malaise attracts little favorable attention while China's high growth offers considerable allure. The new reality is that China is becoming South Korea's biggest Asian trading partner.