South Korea's Economic Success

South Korea’s Economic Success
A Rise from the Ashes of War

ECON 211:

South Korea’s Economic Success
A Rise from the Ashes of War After signing an armistice agreement between North Korea, the US and China on July 27, 1953, the next 5 decades South Korea has been pulling itself out of the ashes of a war that divided the country. South Korea has risen to great economic success becoming one of the 15 greatest economies of the world in 2010. This great success did come at a great price and sacrifice to the people of South Korea. Through all the hard work and sacrifices of the people, to the taking back of governments from dictatorial type regimes, the economy has come about and has lifted the people out of those ashes and into the times of great economic success. As South Korea was finishing its chapter with the brutal Korean War, the “annual per capita income at the time was $100US,” according to Durkop and Ratzer (2010). They also go on to say that “the annual per capita has grown significantly and that Korea has changed from being a recipient nation to that of a donor nation” (2010). The change from a recipient nation means that they are now not receiving any aid, but as a donor nation, they are giving out aid to help those nations in need. With this incredible amount of change we have to wonder what exactly it is that made the progress of the South Korean economy so successful. With this question in mind, I intend to scratch the surface as to what large events played out in across the decades, in the government and the industries to create such a jump from the bottom of the barrel to almost the cream at the top. After the war, South Korea sustained itself on the aid provided from the United States. South Korea’s government influenced and promoted the growth in manufacturing to quickly boost its GDP and continue its momentum. At the beginning the “main exports were shoes and textiles but eventually got South Korea got into the development of other items such as cars, technologies, metals and fabrics” (Comeback Kid, UNK). Still though, at the very beginning, there was little to no economic progress due to corruption of top political personnel until the coup and rule of the leader Park Chung-hee. Until then the economy wasn’t able to bring itself out of economic hard times (Heo, U and Roehrig, T. 2010). Park Chung-hee had both a civilian and military education and rose to Brigadier General in the South Korean Army. After the Korean War, he saw the corruption that was rampant in the civilian leadership and staged a military coup in May of 1961. With this coup “he took the power and restructured the South Korean economy to try and revitalize it.” After he set in to motion his plans, he decided to stay in power which led to his assassination in 1979 (Heo, U and Roehrig, T. 2010). During his 18 years of dictatorial like leadership in the Presidential Office, he did implement an economic plan of action and through this helped kick start the economy by designing the economy based on that of exports. President Park “nationalized banks and set export targets, rewarding those business people that exceeded their targets. Imports were tightly controlled, exports were subsidized, and South Korea’s exports were free to be imported to other countries. With this, the economic growth was about 10% per year”, and impressive increase over those 18 years (Holcombe, UNK). With the subsidizing of certain companies this helped in the progress of the technology and automobile industries. Also with tightly controlling the imports there was less outside products creating more need for in country industry of certain items therefore keeping the money and the jobs in country. With the exports being free of tax to other countries, then South Korea could be able to send their products overseas, look more enticing to buyers and this did increase the GDP of South Korea. This seems to me like they were basically taking other countries money and creating a merchandise trade surplus. With this surplus, it would be able to tip the balance of payments on the credit side so as to be in the positive therefore increasing GDP over time. As the nation of South Korea continued to progress into the 1990’s, the economy continued to increase at an impressive rate. The increase in the 90’s was helped out by the increase in the education system that was improved and developed in the late 70’s and 80’s. After the war, the education system was still very inadequate and “the actual emphasis in education up until the 1970s was citizenship education-inculcating loyalty, patriotism, self- reliance, and anticommunism. Even the ideology of modernization introduced in the early 1960’s focused on the spirit rather than technology.” “Seriously and sustained special attention to scientific and technical education came only in 1973 with the establishment of vocational schools associated with the “movement to scientificize the whole people” that was developed in conjunction with the government’s heavy and chemical industrialization plan begun the same year” (Sorensen, 1994). With this you can see how human capital can help an economy as the economy did increase through to 1997. As the 90’s progressed, the living standards of South Korean’s had drastically improved, the economy had grown impressively, the education system had been renovated and amped to meet the needs of the growing economy. Even with this rapid growth, the Asian economic crisis of 1997, the economy of South Korea nearly collapsed. “The Bank of Korea severely depleted the foreign currency reserves by backing the country’s currency, the won” (Durkop, C and Ratzer, S., 2010). “Foreign borrowing was extensive and corporate debt/equity ratios were extremely high. Many of the country’s conglomerates went bankrupt (these same conglomerates were encouraged by both government and banks to borrow heavily to help finance high risk foreign investments. To prevent total collapse of the economy, the government obtained one of the biggest loans from the International Monetary Fund (IMF) in 1997. With this an extensive restructuring of the corporate banking sectors took place after the crisis and by mid-2001, the government re-paid all the emergency IMF loans. President Kim’s (President of South Korea at the time of the Asian economic crisis) reforms helped the country maintain a growth rate of 10% for 1999 and 9% for 2000” (Comeback Kid, UNK). After the hard lessons learned and the restructuring of the financial institutions, South Korea would find that all this will help out in another decade when another financial crisis was to almost render the world in chaos.
As the global recession in 2007 began with the collapse of Lehmann Brothers, this set back the Korean Auto industry as many buyers in both the American and European markets cut back on spending. Due to the reduction of spending “the government’s response was immediate and announced a massive $120 billion bailout package in November 2008 and followed with another $11 billion infusion in the form of tax cuts, and in January of 2009 a $38 billion economic stimulus package (with over 80% for the green investments). Over the last few years, lower interest rates and tax cuts aided the recovery of this financial crisis” (Comeback Kid, UNK). With these discretionary fiscal policies immediately taken, what would have happened if there was not a response from the government and they believed in a lassiez faire approach? I would beg to believe that if the response were not so timely, there may have been a deepening recession in South Korea and the country may have been in more trouble than if they did. South Korea is still making its way out of the recession but after the fear that its economy might slip back into one, it has remained steady and slowly increasing every year. Its economy has improved at a greater pace than many other world economic powers. “Recent Goldman Sachs report predicted that South Korea has the potential to become the world’s 3rd richest country by 2025, and 25 years later the 2nd right behind the US. The government continues to remain committed to reform and may continue to implement financial and corporate restructuring while advocating flexible macroeconomic policies conducive to growth. The GDP per capita has been steadily rising and is now $25,000US” (Comeback Kid, UNK). After seeing the corruption, changes of government, economic plans, changes in education, and the stimulation in the economy, the growth of the South Korean economy is one that is a learned one and one that has had only a few short years to learn. In these few short years it is still amazing to see that such a small country in physical size can stand out and be a country with such economic power. “According to a statement by the IMF, “Since the second half of 2008, thanks to the government’s expansionary macroeconomic financial policy and normalization of trade. The growth rate will remain high at 6.1% for this year as well, due to increases in fixed investments and expanding stock” (Kim, 2010).

References
Durkop, C and Ratzer, S. (2010). South Korea and the G20 Asia’s Poorhouse Emerges as Economic Miracle Nation.
Heo, U and Roehrig, T. (2010). South Korea Since 1980. Cambridge University Press, NY, NY.
Holcombe, R. (UNK). South Korea’s Economic Future: Industrial Policy, or Economic Democracy?
Kim, J. (Sept 02, 2010). S. Korea’s Growth Rate Climbs to 6.1% This Year. Retrieved 22 Sept 2010 from http://news.mk.co.kr/v3/view.php?sc=30800003&cm=Economy&year=2010&no=474993&relatedcode=&sID=308
Sorensen, C. (February, 1994). Success and Education in South Korea. Comparative Education Review, vol 38, no 1. Comparative and International Education Society.
South Korea: The Comeback Kid of Asia (UNK). Retrieved 22 Sept 2010 from http://thomaswhite.com/explore-the-world/south-korea.aspx

References: Durkop, C and Ratzer, S. (2010). South Korea and the G20 Asia’s Poorhouse Emerges as Economic Miracle Nation. Heo, U and Roehrig, T. (2010). South Korea Since 1980. Cambridge University Press, NY, NY. Holcombe, R. (UNK). South Korea’s Economic Future: Industrial Policy, or Economic Democracy? Kim, J. (Sept 02, 2010). S. Korea’s Growth Rate Climbs to 6.1% This Year. Retrieved 22 Sept 2010 from http://news.mk.co.kr/v3/view.php?sc=30800003&cm=Economy&year=2010&no=474993&relatedcode=&sID=308 Sorensen, C. (February, 1994). Success and Education in South Korea. Comparative Education Review, vol 38, no 1. Comparative and International Education Society. South Korea: The Comeback Kid of Asia (UNK). Retrieved 22 Sept 2010 from http://thomaswhite.com/explore-the-world/south-korea.aspx