As the Republic of Korea industrialized beginning in the 1960s, the Korean government introduced policies to ensure a qualified, skilled workforce to its rapidly growing economy. By the 1990s, however, structural changes were reshaping the economy. Then the 1997–98 Asian financial crisis caused a severe economic downturn in Korea. Gross domestic product growth fell from 5.8 percent in 1997 to –6.7 percent in 1998, the unemployment rate rose from 2 percent in 1996 to 8.6 percent in 1999, and the demand for skilled workers decreased. Along with the increasing unemployment rate, Korean small and medium enterprises (SMEs) faced another challenge at this juncture. While in 1993 these businesses employed 70.7 percent of workers and contributed 49 percent of total industrial production (Korea Federation of Small Business Administration 2002), “SMEs … were less competitive in terms of productivity, scale, and finance in comparison to large enterprise counterparts” (Lee and Sahu 2017). The productivity per worker of SMEs was 34 percent of that of large enterprises, while the average wage for SME workers was only 55 percent of the average for large enterprises (Lee 2006). Furthermore, SMEs did not participate actively in training their workers under the auspices of the government-led skills development policy.
The development challenge for Korea was to reform its skills development policy in order to increase employment rates, while also tackling the low productivity of SMEs, the group of businesses most severely affected by the Asian financial crisis.
This case study (prepared by Kye Woo Lee and Dipan Kumar Sahu) and delivery note (adapted by Yongjin Lee from the original case study) examines how the Korean government did this, with a focus on the provision of training to SMEs using a consortium approach.