SEOUL, South Korea — South Korea looks prosperous: Department stores stock a wide variety of upscale, international brand products; well-dressed business people fill the streets of Seoul; and the skyline is one of gleaming, high-rise office and apartment buildings.

But economic challenges there persist and require a new economic development model. Following the East Asian economic model, with its emphasis on cheap labor to fuel export-led economic growth, South Korea became a wealthy country. However, labor is no longer cheap — and South Korean labor unions are far from docile. Thus, manufacturing has had to move abroad to areas offering cheap unorganized labor, contributing to growing unemployment at home.

South Korea has to find a new model for continued economic growth and increased employment. Given the high cost of living and a growing number of Koreans living paycheck to paycheck, stimulating domestic demand doesn't seem like it could make up for lost exports and jobs.

What's more, according to the Korea Herald, "South Korea has experienced the fastest income polarization among the rich Organization for Economic Cooperation and Development nations over the past decade." Since the 1998 Asian financial crisis, the number of low-income people has increased due to a scarcity of jobs. At the same time, those with more financial assets saw rising stock and real estate prices added onto their regular salaries.

To help address the economic malaise, President Lee Myung-bak has lobbied for passage of the Korea-U.S. Free Trade Agreement. Studies have concluded that this would result in a 6 percent rate of growth in the South Korean GDP over a 10-year period. Although the U.S. economy would grow by $10 billion to $11 billion annually, U.S. resistance has come from the cattle industry, which has encountered barriers in exporting beef to South Korea. And those in the automobile industry fear that a free trade agreement would only add to the imbalance in the automobile trade between the two countries.

A compromise is clearly in the economic interests of both countries. ROK ambassador to Washington Han Duck-soo predicts that the U.S. will ultimately pass the agreement early next year, after the health care reform issue is settled.

To keep a manufacturing base and expand job opportunities, South Korea has to develop higher-value-added high-tech products. With greater innovation and added creativity, South Korean manufacturing might be able to move away from the highly disciplined "traditional" manufacturing it has been known for and further into bio-engineering, environmentally oriented "green" industries, or the aerospace industry.

Another way to invigorate the economy is to improve the foreign investment environment. According to a Korea Chamber of Commerce and Industry survey conducted among 500 foreign firms, the South Korean investment environment was rated behind that of Singapore, Hong Kong and Taiwan in terms of incentive programs, deregulation efforts and legal consistency. Lee clearly understands the situation and is trying to improve the investment environment, but is running into bureaucratic resistance.

As beneficial as the free trade agreement would be to South Korea's economic woes, the solution to its economic challenges is multifaceted.