South Korea

INTRODUCTION

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In 1953, South Korea was a beleagured and corrupt democratic state in economic ruins following the devestation of World War II. Beginning in 1953 and lasting until 1961, the United States invested an estimated 4.3 billion dollars into the South Korean economy. It was a symbolic investment aimed at curbing communism and preserving the fragile Korean democracy; South Korea’s weak President Chang, however, was unable to use the financing to preserve his reign or the Korean democracy. The overthrow of President Chang in a coup in 1961 marked a hiatus in South Korea’s short lived democracy. The following period, under the authoritarian rule of former Major General Park Chung Hee, was one of incredible economic growth; despite its divergence from democracy and liberal economic polices.

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The growth of the South Korean domestic economy, under the efficiency of Park’s authoritarianism, led to dramatic changes in Korea’s economic performance and infrastructure. Natural resources were scarce on the Korean peninsula and South Korea required the importation of almost all of its raw materials and commodity inputs. In order for South Korea to purchase the materials it needed, Park implemented a process that promoted a large volume of manufactured exports inorder to pay for the inputs it needed. As South Korea subsidized its light industries to fuel industrial growth, the system began to take advantage of its cheap labor to make its products globally competitive. During the first decade of Park’s reign, Korea’s GNP doubled from 3,071 billion in 1962 to 6,962 billion in 1971. Park’s obsession with economic growth and the end of corruption drove him to develop South Korea’s infrastructure in a way, drastically different, than the development of other third world authoritarian states (most notably no nationalization, a feature of most developmental states).

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Park saw the value of the entrepreneurial spirit and its correlative value to economic success. His strict demand for the individual entrepreneur to achieve remains an intricate value in Korean society. South Korea industrialized with the guidance and financial assistance of the government, but it was under the control of Korea's corporate structure "chaebols" that the system would prosper. As South Korea developed an educated, middleclass, and entrepreneurial citizenry, its economic growth rate and GDP began to soar. South Korea sacrificed many of its cheap labor components in favor of increased wages to support a middle-class that could drive its domestic economy. Accordingly, South Korea’s income distribution in 1981 was more reasonable than that of most other developing nations; with the top 20 percent controlling 42.2 percent of the money and the bottom 20 percent controlling 19.7 percent. By 1986, South Korea had the highest economic growth rate in the world and was able to save significant portions of its GNP.

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As South Korea developed its middleclass, its increasingly educated population became more equipped to handle technological developments. The technological development of Korea’s industries helped fuel its second period of rapid economic growth in the 1990s. Today, South Korea is a first world country, ranking 11th in the world in GDP and 30th in GDP per capita. The following sections of this report will detail the economic history of South Korea through the modern era. Scott Levin

PARK'S KOREA

Before the end of World War II, Japan ruled over Korea. Japan’s economic policies were primarily made to benefit Japan. As a result, Japan did not pay attention to the well being of Korea’s economy. This led to an uneven distribution of industry between northern and southern Korea. Japan focused industry in northern Korea because the north had more natural resources and they were in a better physical location to benefit Japan. [1]

In 1948, Korea was split into North and South Korea. North Korea was significantly better off as a result of Japanese rule. South Korea on the other hand was one of the worst off countries in Asia. The country relied heavily on aid from the United States and Japan.

This aid was far from sufficient for the country to live above poverty and the conditions were not conducive for economic growth. Since South Korea had a lack of natural resources, it relied heavily on imports of raw goods for production.

[2]

In 1961, Park Chung Hee took over as leader of South Korea. He took many political liberties to give himself power. He inserted a democratic voting system with the condition that he wouldn’t run for office next term. He was elected president in 1963. He then went on to run for office multiple times. At the time, the president was limited to two terms of four years in office. He had the constitution changed to allow him to serve more terms. He also declared a state of emergency to give him more authority over people. His rule is recognized as being authoritarian. [3][4]

Park’s political liberties were driven by his desire to not be reliant on foreign aid. His economic policies were targeting his goal of increasing exports and production. He had three main policies.

1. To export and produce more, the businesses needed to import the raw materials. To give businesses an incentive to import, Park got rid of tariffs on raw materials business say will be used to produce goods for exports.
2. Production quotas were set in place for businesses. If a business met the quota it received a tax break. This tax break gave businesses two options. They could take the money and invest it in their company. This increase in capital goods increases spending in the economy and starts a multiplier effect. Another option is for a business to use the tax break and decrease the price of the goods being produced. This could make their goods more competitive in the global market.
3. The third policy was a simple decrease in taxes for businesses. The tariffs and production tax breaks were on top of this tax break.

After two failed assassination attempts, Park was shot by the director of the South Korean equivalent of the CIA, KCIA. He died in 1979.

Parks rule is best summed up by Britannica:

“The military leadership that emerged in the early 1960s and led the country for a quarter century may have been autocratic and, at times, repressive, but its pragmatic and flexible commitment to economic development resulted in what became known as the ‘miracle on the Han River.’” 12/13/07

Charlie Umberger

1980's to Crisis

1980's

By the late 1970’s to the early 1980’s the economy was changing for the worse. Korea initiated a comprehensive stabilization program designed to “control excess liquidity, realign credit priorities, eliminate price distortions, and promote competition.” However, unforeseen circumstances like the second oil shock and the assassination of President Park Chung Hee in 1979 pushed the Korean economy into turmoil. “Korea's economic performance in 1980 was the worst in more than 20 years as the economy contracted by 5.2 %, with the wholesale price soaring more than 38 %, and the current account deficit reaching US$5.3 billion.” [5]

To address the excess liquidity problem Korea decided to undergo rationalization within their industry. Companies were ordered to consolidate and merge in order to make larger companies. The power-generation equipment industry and automobile industry merged together to form the Korea Heavy Industrial Company in August 1980.

"Between 1984-1987, further rationalization of industries took place in shipping and overseas construction. The rationalization program entailed reducing the number of firms through mergers, reducing their shipping capacity or calling off deficit-ridden overseas construction projects, and lowering tax and financial burdens in the process." [6]

This led to the establishment of several heavy industrial companies known as chaebols, such as automobile manufacturing, metal refining, machine fabrication and petrochemical production. (1)Korea had monopolized and effectively got rid of small business.

"Such large scale restructuring of industrial firms required continuous government intervention in the credit markets. Due to the world recession following the second oil shock, many debt-ridden firms became financially insolvent. The government's concern over unemployment and financial instability led it to bail out these firms for the sake of social stability. At the same time, the government attempted to reduce the scope of intervention in the allocation of financial resources. From 1981 to 1983, commercial banks underwent privatization. The interest rate gap between policy loans and ordinary bank loans was almost completely eliminated in 1982. Furthermore, entry barriers into the financial industry were lowered and financial services provided by different intermediaries were diversified and streamlined. The government restrictions on foreign direct investment (FDI) were relaxed substantially in recognition of the FDI's role in promoting competition and transferring advanced foreign technologies. The revision of the Foreign Capital Inducement Act in 1984 precipitated a shift to a negative system, abolishing restrictions on the foreign ownership ratio and the repatriation of capital."[7]

Quick Facts

1. Real GNP growth from 1982 to 1988 averaged 10.5 % annually
2. inflation,both wholesale and consumer sectors, below 5 % annually after 1982
3. trade surplus began in 1986
4. surplus reached $14.2 billion in 1988

Throughout the decade, the economy generated about 2.8 million new jobs, and the unemployment rate sank to the unprecedented level of 2.5 % in 1988. [8]

Ryan Daniel

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1900s: High Wages and Inflation

In the 1990's tremendous wage hikes far exceeded the rise in productivity. They reached 19% increase annually at it's peak. "In addition to such excessive wage hikes, high financial costs, excessive administrative regulations on business activities, and low social overhead capital investment have afflicted industrial competitiveness and entrepreneurship." [9]

This with the help of extremely high disposable income, which promoted private spending, led to high inflation. The current account balance, which was in surplus since 1986, went back into a deficit in 1990. Inflation reached 10% in 1990.

Globalization of the 1990s

Korea recognized that their economic strategy was out of date. They felt the need to change and throw out many of the ideas they practiced. At this time every country was undergoing massive globalization. Korea followed and joined many international economic organizations:

1. Uruguay Round of trade talks[10]

• The World Trade Organization's method of conducting negotiations is called rounds. The Uruguay Round included objectives:

• to reduce agricultural subsidies
• to put restrictions on foreign investment
• to begin the process of opening trade in services like banking and insurance

2. World Trade Organization

• the World Trade Organization (WTO) deals with the rules of trade between nations at a global or near-global level. But there is more to it than that.[11]

3. Asia-Pacific Economic Cooperation(APEC)

• is the premier forum for facilitating economic growth, cooperation, trade and investment in the Asia-Pacific region[12]

4. OECD

-organization that brings together the governments of countries committed to democracy and the market economy from around the world to:[13]

• Support sustainable economic growth
• Boost employment
• Raise living standards
• Maintain financial stability
• Assist other countries' economic development
• Contribute to growth in world trade

Reform of the Financial Sector

The Korean Government acknowledged that their financial sector was corrupt. The 'Real Name System' was the Government's effort to correct this. The 'Real Name System' made it impossible to conduct financial business using a false name. This dealt away with institutionalized corruption and illegal financial dealings.[14]

Quick Facts

1. Increased investment and export
2. Economic growth rate increased from 3% (1992) to 8.6% (1994) to 8.9% (1995)
3. GNP per capita surpassed the 10,000 (U.S.) mark in 1995
4. Unemployment rate sank to 2% in 1996
5. Inflation remained at or around 4% [15]

Ryan Daniel

PRESENT DAY

[16]

1 South Korean Response to Crisis • In the six months since the Korean government and the IMF created the provisions of the IMF standby loans, the Korean government enacted a plethora of reforms to help the situation. The government created the Tripartite Committee, which consisted of labor leaders, business leaders, and public officials. The committees agreement had 90 detailed measures that constitute the basic principles of the restructuring process. On April 1998, $21.8 billion worth of domestic banks' short-term external debt was converted to long-term government-guaranteed debt.

• The government has responded by offering a wide spectrum of economic structural reforms, in finance, corporate governance, labor, liberalization, and the public sector.

2.Financial Sector Report • The goal of themacroeconomic policy is to achieve stabilization by gaining sufficient foreign reserves, reshaping the corporate and the financial sectors, and laying a foundation for enhancing the country's long-term growth potential. The Bank of Korea had followed a tight monetary policy stance since 1997, which can be seen in the market interest rate hike that at one point reached as high as 20%. In the public sector, a strict government budget is being implemented with a 3.8% growth rate, which is lower than the nominal GDP growth. To help fix the financial sector and to regain confidence, resolution of unstable financial institutions is being pursued as a top reform goal. • The Non-performing Asset Resolution Fund, created in November 1997 to eliminate bad loans, has already bought bad loans with a book-value of 16 trillion Won. Also, financial supervision has been enhanced through an improved supervisory system and raised standards regulation.

3 Corporate Sector Reform • The ongoing corporate sector reforms aim to achieve two objectives. First, it aims to reduce the size of corporate debt, and second, it aims create a more transparent system. • Financial restructuring will help the corporate sector reform by easing liquidity constraints and enhancing the monitoring mechanism. • The government intends to no longer favor large businesses in providing various forms of assistance. Instead, small and medium-sized firms will be protected from unfair competition practices from the large sized competitors. • Legal protection for the rights of minority shareholders has also been strengthened

4. Corporate Restructuring • As a result, corporate restructuring became necessary because the overlapping lines of businesses among chaebol have become an obstacle to South Korea's economic recovery • The agreement calls for efforts to merge companies in the same line of business, to reduce the number of companies in each field. At the same time, they plan to push for investment by foreigners in their business. They hope to reduce unnecessary investment, raise competitiveness and promote foreign investment.

5. Modern South Korea and Growth Opportunities

• "The economy of South Korea is developed and the 3rd largest in Asia and the 11th largest in the world, in terms of nominal GDP as of 2006 • The foreign exchange rate has stabilized at near pre-crisis level and the stock price index has recovered from its lows due to the resumption of foreign capital influx. • Today, the country is home to world-class technology companies (Samsung Electronics, LG Electronics), automakers (Kia Motors, Hyundai Motor), steelmakers (POSCO) and shipbuilders (Hyundai Heavy Industries). • Reliance on manufacturing and exports has also left Korea vulnerable to foreign competitors following the same blueprint—particularly China • They are determined instead to create an advanced economy powered by their own inventions and talents. • Korea's has a huge amount of brainpower: 97% of its youth make it to grade 10 of high school, the highest percentage in the world. Korean students' math skills are second only to those of the Finns. • Today, the United Nation rates South Korea as a Prosperous Economy and the country became both part of the CIA and IMF list of advanced economies. • Upon entering the 21st century, South Korea produced a National IT Project to become the world's leading IT nation in just 5 years. International success was seen in the following years, with South Korea surpassing the United States and Japan in becoming the world's leader in the semiconductor (eg. RAM & Flash Memory) and digital display (eg. LCD & Plasma Panels) industries, as well as consumer electronics such as TVs, Mobile Phones or MP3 Players. • In addition to its highly advanced IT industry, the government is now beginning to invest in the robotics industry. With the aim of becoming the "World's Number 1 Robotics Nation" by 2025. there are plans to put one robot in every household by 2020 • Restructuring of Korean conglomerates (chaebols), bank privatization, and creating a more liberalized economy with a mechanism for bankrupt firms to exit the market remain Korea's most important unfinished reform tasks." [17]

Ben Leighton