Economic Development in South Korea

Topics: Investment, South Korea, Foreign exchange market Pages: 12 (4354 words) Published: November 8, 2008
At the end of World War II, Korea was a poor former agricultural colony of Japan. But the rapid growth of Korea’s industrial economy has been remarkable. The economy of South Korea is now the third-largest in Asia and the 13th largest in the world by GDP as of 2007. To trace back the economic development of South Korea, the former president Park Chung-Hee played a pivotal role, and was credited for shifting its focus to export-oriented favoring a few large conglomerates. Unlike his predecessors, Park showed a strong commitment to economic development, believing good economic performance as a primary means for enhancing his political legitimacy. Under the President Park Chung-Hee’s era, the government played a dominating role in a country’s economy. It was able to do so by allocating resources, fixing prices, and owning and controlling enterprises directly. The government of Republic of Korea’s role in the economic development plan was “either direclty participate or indirectly render guidance to the basic industries and other important fields.” The government actively intervened in economic development, providing financial incentives, offering industry-specific information, regulating labor force as well as entry and exit of the market, and initiating almost every major investment by the private sector. South Korean economy in 1961-1979 could be defined as the capitalist world’s most tightly supervised economy, often characterized as a state-led industrialization. The essay dealt with how the President Park Chung Hee’s government played an exact role in finance, investment, regulation, and administration to carry out the economic development plan during 1961 to 1979.

I. Financial Incentives by the Government
The Korean government had been a pervasive force in every sector of the economy, pursuing the state “shall encourage the foreign trade, and shall regulate and co-ordinate it.” In South Korea, a policy moved toward primary-export substitution. In order to encourage export of goods, the government accomplished through a reform of the structure of financial incentives. It involved lowering of tariff barriers that had protected native industries, tax holidays, exemptions, and reductions across the board for firms willing to export. In addition, the state allowed discounts and subsidies for transportation costs and devalued the Korean won to cheapen export goods. From 1963 a trade link system was introduced and encouraged the exporters by giving them the right to use all the profits generated by exports to import more goods. As a result, there was rapid increase in exports in 1963 which triggered by this link system. When the domestic currency was overvalued, the companies imported raw materials and sold the finished products in the domestic market, rather than in overseas markets to generate profits.

The government of Korea’s exchange rate policy took an important role in sustaining growth in exports. Especially after an amendment of the Bank of Korea Act in 1962, monetary policy authority was transferred to the Ministry of Finance. Under the amended act, the Ministry of Finance gained control of foreign exchange from the central bank, and this added crucial factor to the government’s financing strategy for development project. In 1964, Korea officially moved away from a fixed exchange rate to floating exchange rate system. Despite the changes in exchange rate system, the actual system was not much different from the fixed rate system based on the U.S. dollar with discontinuous devaluations. According to Bank of Korea’s Monthly Economic statistics, there were devaluations of the nominal exchange rate of 64% in 1964, 12% in 1971 and 1972, 19% in 1975, and 25% in 1979. The discontinuous devaluations of Korean won to U.S. dollar had helped to remain the real exchange rate unchanged. It was important to maintain the constancy of the real exchange rate, because the real exchange rate indicated the prices of...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Economic Security of South Korea Essay
  • Essay on Financial Crisis in South Korea
  • south korea country analysis Essay
  • China’s Economic Growth and Development Essay
  • economic development Essay
  • economic development Essay
  • Essay on Economic growth and economic development
  • Essay about South Korea's Economic Success

Become a StudyMode Member

Sign Up - It's Free