The environmental industry requires different processing technologies and systems depending on the source of environmental pollution, type and characteristics of pollutants, and processing methods; hence most environmental service providers operate on the basis of customized orders.

  Recently, there have been a suite of changes concerning environmental management worldwide due to tougher regulations against pollution. These new standards are primarily aimed at environmental protection and defusing local disputes caused by the production of too much waste and the NIMBY (Not In My Back Yard) syndrome.

  In Korea, the question of how environmental problems are addressed has become a major political issue due to the excessive discharge of pollutants, inadequate incinerators, landfills and waste treatment plants as well as intense ¡°NIMBY reactions¡± from residents in those localities such facilities are (or are planned to be) located. In contrast to the drive under the World Trade Organization (WTO) for freer global trade, international trade regulations at the same time are becoming stricter in respect of environmental protection.

  In view of these domestic and international conditions, environmental protection is becoming progressively more important. Accompanied by the growth of other industries, the expansion of the environmental industry driven by technological developments could lead to the early realization of an environmentally friendly industrial structure. This will not only contribute to solving domestic environmental problems, but may enable Korea to more easily comply with international environmental regulations while providing opportunities for Korean environmental service providers to enter foreign markets. In short, the development of a domestic environmental industry will provide significant stimulus to the domestic economy.

  Through the sustainable use of natural resources and minimizing the disposal of pollutants, the environmental industry contributes to a more efficient distribution of governmental and private funds by reducing the social costs of environmental protection (such as imported materials, pollution cleanup and treatment). Furthermore, the development of environmentally friendly materials and technologies will promote knowledge integration and generate more added value, as environmental-effects assessment, environmental design, monitoring, plant engineering and other environmental services form an important part of the emerging industry and create more job opportunities than other industrial sectors.

  THE PRICE OF 'GROWTH AT ALL COSTS' In the course of paving the way for rapid economic development, Korea disregarded environmental concerns while promoting economic policies focused on national growth. It was only when environmental pollution became a serious problem that the government started to devise and enforce environmental regulations.

  Therefore, such enforcement has been slow, and the history of the environmental industry very short since its growth is largely driven by government regulations. It has always taken major pollution incidents to spur the development of the environmental industry. This is because the public and government tend to recognize the potentially disastrous effects of pollution (and the benefits of a clean environment) only after a crisis takes place.

  From this perspective, the Korean environmental industry can be said to have been created in the 1980s, while the phenol contamination of the Nakdong-gang River in the early 1990s marked a turning point after which the industry began to grow rapidly. However, in view of its short history, weak industrial base and lagging technolog y, the industry is characterized by technical shortcomings, a preponderance of small-scale businesses, poorly defined career opportunities and an adverse balance of trade in environmental products and systems.

  To fully address Korea¡¯s environmental problems, it is necessary to attract foreign investment through which to improve those domestic technologies currently at the developmental stage, and so strengthen the competitiveness of Korean environmental firms to equip them to compete in regional markets such as China and Southeast Asia.

  Since Korea can take advantage of its easy access to these regions plus other newly industrialized markets in its vicinity, the country is well-positioned to develop as a major base for the East Asian environmental industry. Consequently, it is imperative that Korea promote the introduction of advanced-country environmental technologies through the attraction of inbound foreign investment in order to bolster the industry¡¯s technological capabilities in weak areas and improve the trade balance in the environmental sector - a balance that has long been in deficit.

A HISTORICAL PATTERN OF GROWTH The South Korean environmental industry has demonstrated consistent growth. Revenues grew from 3.24 trillion won in 1990 to 7.47 trillion won in 1997, representing an average annual growth rate of 12.7 percent. However, the 1997 financial crisis intervened to put a brake on industry growth and investment. Turnover, in fact, dropped by 13.5 percent in 1998 . the gravest year of the crisis.

  Domestic consumption displayed a similar trend: purchasing recorded an average annual growth of 11.7 percent during the 1990/97 period, but fell off by 18.2 percent in 1998. Taking into account the convulsions wrought by the crisis, domestic production and consumption have posted historical patterns of continued growth since the early 1990s thanks to a constant increase in anti-pollution expenditures.

  Anti-pollution measures began to expand substantially at the beginning of the 1990s. Total expenditures in this area increased by 10.2 percent from 3.94 trillion won ($4.15 billion) in 1992, to 4.34 trillion won ($5.4 billion) the following year. Expenditures continued to accelerate rapidly until 1997; by 16.1 percent to 5.35 trillion won ($6.65 billion) in 1994 and by 17.8 percent to 6.30 trillion won ($8.11 billion) in 1995. The rate of growth slowed slightly in 1996 to 14.8 percent as the volume of purchases increased to 7.24 trillion won ($8.93 billion), but the following year, the market gained its former vigor by growing at a clip of 16.3 percent with expenditures totaling 8.42 trillion won ($7.20 billion, at prevailing exchange rates).

  Expenditure trends went into sharp decline in the crisis year of 1998, as businesses struggled for survival and environmental concerns went onto the back burner.
  A study of different economic actors shows that anti-pollution expenditures declined substantially during this time (by 18.1 percent in the corporate sector, 39.1 percent among households, and by 6.8 percent in the public sector). A study of the cutbacks in 1998 indicates that although expenditures on processing waste materials remained almost the same as in the previous year (increasing, in fact, by 0.3 percent), those dedicated to improving air and water quality fell substantially by 21.1 percent and 19.1 percent, respectively. A significant decline was observed across the board throughout industry. The heavy chemical industry and service industry, for example effected cuts of 19.9 percent and 21.4 percent, and even the utility industry, which had recorded major acquisitions the previous year, sliced spending by 12.1 percent.

A TENDENCY TOWARD DEFICIT Anti-pollution expenditures began to rebound as the economy started to recover and investment revived in 1999. Spending expanded by 10.75 percent to 8.23 trillion won ($6.86 billion) in 1999, slowed a little by growing 3.6 percent to 8.31 trillion in 2000, but bounced back the following year to record an 11.3-percent increase to 9.25 trillion won.

  A more detailed analysis of trends over the 1992/2001 period shows that government sector spending recorded the highest rate of average growth (by 10.9 percent per annum) while that by industry grew by 9.2 percent. A study by medium shows that expenditures on waste materials processing recorded the fastest rate of growth (12.7 percent per annum), while investments geared toward improving water and air quality grew by 9.5 percent and 7.2 percent per annum, respectively.

  South Korea has historically recorded a chronic deficit in the trade of environmental products. The Organization for Economic Cooperation and Development (OECD) reported that the country sustained a deficit of $3.4 billion in 1992 that subsequently swelled to $ 7.8 billion in 1995, before reaching its peak at $ 8.6 billion in 1996.

  Reflecting this trend to deficit, South Korea¡¯s trade specialization index (TSI) for the environmental industry continued to sink from -0.5820 in 1995 to -0.6261 in 1996, and to -0.6519 in 1997. (The TSI measures the degree to which a country ¡°specializes¡± in importing or exporting a particular product or whether its trade is in balance, see box). Such a trend implies a continued deterioration in the country¡¯s terms of trade in this sector. Immediately following the crisis of 1997, however, the trade deficit slumped to $2.5 billion in 1998 in the wake of cutbacks in environmental facilities investment and a subsequent decrease in the import of equipment and raw materials. Since then, the deficit enlarged to $5.1 billion in 2000 and then dropped to the $4-billion level in 2001 and 2002. A study also shows that the TSI for this sector has improved to -0.38 since 1998.

The Trade Specialization Index (TSI)   The index is derived by dividing the trade balance in the product or group of products by the volume of trade. In equation form it is expressed as follows: exports minus imports/exports plus imports. According to this equation, when Korean exports to a specific nation without importing anything, the value of the TSI achieves its maximum value of 1. When Korea imports from, without exporting to a specific country, the TSI sinks to its minimum value of -1.

  Compared to more developed countries, South Korea¡¯s TSI indicates an import-dominated structure of trade. In short, South Korea enjoys a comparative trade disadvantage in regard to more advanced countries and a comparative advantage against developing countries. It formerly displayed a high degree of import specialization against the United States, Japan and the European Union (-0.8 in 1995), but since then the index has gradually improved by falling to -0.5 against the United States and -0.7 against Japan and the EU in 2001.


  GETTING BEYOND FIRST-GENERATION TECHNOLOGY In the meantime, Korea¡¯s $500-million environmental trade surplus with China reveals an export-dominant trade structure. The TSI against China was a relatively high 0.57 in 1995, but it continually declined to 0.42 in 2001. The index against India at over 0.8 pointed to a high degree of export specialization until 2000, before dropping slightly to 0.6 in 2001.

  As demonstrated by the above, the structure of South Korea¡¯s environmental product and system trade with more advanced countries is characterized by chronic deficit, while displaying a tendency to improve gradually. Against developing countries, on the other hand, it reveals a tendency to slow deterioration despite the current surplus.

  This ¡°double structure¡± of the environmental sector trade clearly reflects the reality of domestic industry at the present. More specifically, South Korea has waste disposal technologies as advanced those of industrial countries, and holds a certain share of the market in developing countries. On the other hand, it is still substantially behind industrialized countries in the area of high-tech processes and thus must rely heavily on imports from these countries, resulting in a huge deficit in trade.

  The fact that Korea¡¯s TSI with industrialized countries (i.e., export capability) as the United States, Japan and EU is improving, while that with developing countries is worsening, shows that the country¡¯s environmental industry is in a ¡°nutcracker¡± situation.

  South Korea¡¯s major export markets are Southeast and Southwest Asia, and primarily focused on niche markets in these regions in which the country enjoys a competitive advantage. These products include electrical dust collectors, bag filters and water purification facilities such as waste disposal and sewage treatment plants. However, despite such an advantage, shipments of environmental products accounted for a mere 0.05 percent of total domestic exports, even though this sector accounts for as much as 0.3 percent of the country¡¯s manufacturing output.

  In general, South Korean environment technology has almost reached the level of an industrialized country in terms of waste disposal. Waste disposal is referred to as a ¡°first-generation technology¡± in the industry and involves the processing of discharged pollutants. However, in case of purification and restoration technologies, which are referred to as second- and third-generation technologies, respectively, South Korea is known to lag more advanced countries. Such countries have already reached the stage of exporting their first-generation technologies and are currently putting second-generation technologies to practical use. They have already completed the development of third-generation technologies that are just beginning to find applications.


  HISTORICAL DISADVANTAGE A more detailed comparison shows that South Korea¡¯s environmental technologies compare unfavorably with those of more advanced countries, ranking below the 50-percent level on average, except in a few areas. In particular, with the exception of desulfurization and denitrification technologies, South Korean purification technologies for most manufacturing processes rate only 20 percent of advanced-country level.
  While more advanced countries have expanded their investment in developing environmental technologies since the 1970s, South Korea has only a ten-year history in this area and consequently, accumulated investment has been low. As a result, its technologies are only at the 40-percent to 70-percent level of more advanced countries. Since the industry has concentrated the bulk of its investment in the waste disposal area, its sewage and toxic waste technologies are highly competitive while dust collection and desulfurization technologies have also been put to commercial use. On the other hand, such advanced technologies as clean manufacturing, earth environmental protection, and ecosystem restoration are still in a rudimentary state. Regardless, the projected investment in these areas is a mere 20 percent of the total domestic investment in environment technologies.

  This implies that South Korean environmental technology policy is mainly focused on development of basic facilities and related technologies. The advanced environmental technologies currently being developed in the industrialized world are expected to lead the technological field in the 21st century because of their potential to create high added value, tap large markets, and effectively address mounting pollution problems. Nonetheless, South Korea has only a rudimentary level of such technologies at present. Unless there is an epoch-making advancement, its technological dependence on advanced countries is expected to accelerate.

  Although the South Korean government environmental R&D budget has gradually increased since the mid-1990s, it accounted for only 0.027 percent of national GDP in 2001.


  THE KYOTO IMPACT Moreover, public R&D expenditures in this area were only 3.7 percent of the entire government research budget for 2001, much smaller than those in other technological areas.

  The health and size of the domestic environmental industry have changed over time in response to government policies developed in connection with industrial innovations both at home and abroad. The number of businesses operating in the environmental industry has thus tended to fluctuate with the seriousness of government policy toward the problems of pollution. The number increases when the government puts priority on a cleaner environment. Following the ratification of the Kyoto Protocol by South Korea in 2002, for example, the government began implementing tougher environment policies, generally considered a plus for the industry. On the other hand, when government policy is more growth- rather than environmentally oriented during times of economic contraction, the number of businesses decline.

  A careful study of such trends reveals that the number of businesses in the industry declined by 5.5 percent in 1993 and 2.3 percent in 1998. These two periods are politically and economically similar in that on both occasions newly elected political administrations adopted a ¡°growth-first¡± policy. In 1993, the new administration of President Kim Young-Sam, set aside environmental concerns from the outset in favor of a bold economic policy designed to promote growth. With the onset of the financial crisis in 1998, the new government of President Kim Dae-Jung adopted a suite of radical measures in a desperate effort to revive the economy with the upshot that environmental policy was once again left by the wayside. In short, the one clear lesson to be learned from these two cases is that when the government retreats on environmental policy, the number of businesses in the industry declines.
  According to the Ministry of Environment official registry, the number of domestic environmental businesses totalled 12,167 at the end of 2001. Among them, waste disposal plant contractors formed the largest portion with 22.7 percent of the total, followed by those in waste collection and transportation, 21.8 percent, and designers and builders of wastewater, night soil, and livestock waste disposal facilities, 14.5 percent. (See Table 7). One of the salient features of the South Korean environmental industry is that most businesses are small-scale; as many as 67 percent have an annual sales of less than 1 billion won.


  ENVIRONMENTALLY PROACTIVE With the reinforcement of regulations at home and abroad, and a greater awareness on the part consumers of the need to preserve the environment, the outlook for the environmental market in general is that it will expand rapidly.


  In response to the introduction of ISO 14000 environment management systems and standards and former U.S. president Bill Clinton¡¯s proposed ¡°Green Round¡± of trade negotiations, many businesses have started to adopt a pro-environmental managerial stance as their central business strategy. Moreover, with the concept of sustainable growth gaining currency, an increasing number of businesses are beginning to understand the importance of recycling, restoration and clean production technologies.
  The environmental industry is an area which requires knowledge-intensive technology at an advanced level. It has a great potential as an export industry and is expected to be an important creator of new jobs in the future. In particular, high value-added businesses such as environmental management, education and information services are forecast to thrive. Accordingly, the government is promoting the industry as a means of improving national competitiveness to enhance its growth potential.

  On acceding to the OECD in November 1995, South Korea agreed to abide by the organization¡¯s environmental strictures. Under such circumstances, advanced countries are attempting to link trade concessions to developing countries with efforts, on their part, to more closely protect their domestic environments. This, too, may prove important in promoting future industry demand.

  Total industry output was valued at 8.90 trillion won in 2001. It is expected to growth on average by 13 percent per annum until 2006, when it is projected to reach 14.97 trillion won ($12.48 billion at present rates). Output is predicted to maintain an annual average growth rate of 8 percent thereafter.

  NEW TECHNOLOGY CREATION By 2011, the environmental industry is expected to be worth 21.90 trillion won. The slowdown in the second half of the decade is based on the prediction that the South Korean environmental market will move into a mature stage thanks to a gradual improvement in environmental regulations, along with the advancement of public awareness about the need for a clean environment.

  Domestic consumption, based on existing pollutant-producing businesses is expected to contribute to expanding production during the first half of the decade. In the second half, however, the creation and expansion of demand for new environmental technologies (such as soil restoration and recycling) will contribute greatly to an increase in domestic consumption.
  In the meantime, domestic consumption is projected to grow faster than production, as it increases by an annual average rate of 15.1 percent from 7.67 trillion won in 2001 to 15.48 trillion won in 2006. Thereafter, it will slow to an average rate of 11 percent to reach 26.40 trillion won by 2011.

  In general, the environmental market can be divided into three areas: environmental services, resource utilization, and facilities. During the 2001-to-2005 period, the resource utilization segment is expected to grow fastest, at an annual average of 14.1 percent. Environmental services and facilities are estimated to grow at similar rates, namely 12.5 percent and 12.7 percent, respectively. Such general figures hide what are considered to be stellar performing areas. In the service area, for example, the environmental energy business is forecast to grow at a stunning 46.8 percent per year, while, in the facilities segment, clean production process and technology based businesses are expected to grow at 36.6 percent annually.

  The industry is thus primed for growth. The speed and value added component of that growth will depend on how successful the industry will be at attracting foreign investment partners.