Brief History of the Economic Development of South Korea

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       While the success of South Korea’s rapid economic development purely belongs to the hard-working Koreans, the evolvement of the development process has been extremely intervened by foreign powers by virtue of its beautiful as well as essential geopolitical position in Asia. As a result of this geopolitical fate, Korea had to face with two of the world’s most aggressive and extensive powers of the twentieth century which were Japan and United States. This argument corrects the economics of a country is shaped by political factors since Korea’s relations with these countries of the international capitalist system played a crucial role in the economic development of the country in terms of capital accumulation and technology transfer.

       In 1800s, East met with the imperialist West after the end of Japan’s seclusion policy (sakoku), and thus West’s capitalist industrial base. As a result, East has been pulled into the West’s new global economic order. At that time, Japan had an early success of military and economy such as institutionalisation. Therefore, this situation gave Japan an advantage in the Asia separately from Korea and China. Subsequently, it struggled to expand its territories and sphere of influence (because of the threat of Western powers) by the great Asianism cause under the rising sun of the Japanese Empire. Unfortunately, at that time, Korea could not manage to finalise its institutions within the country to act in a harmonised way. Therefore, Japan took advantage of South Korea by annexation of the country.

       Notwithstanding, this atrocious event provided Korea an utterly new technological infrastructure for its economy. In other words, colonisation had opened the way for a great economic power whose economy grows ten per cent every year has emerged in Asian continent.

How did it happen? 

       First of all, despite Japan’s sorrowful impact, he opened a new world to Korea in terms of economic and technological infrastructure. During the colonisation time, in Republic of Korea, an elite group formed who were bureaucrats, businessmen, technicians, white-collar workers, doctors had educated in Japanese language. Even when Korea’s relationship with Japan   lost ground during Syngman Rhee’s government, those elites continued to follow Japanese newspapers, magazines, books, economic trends and industrial technologies. A striking example to that is President Park Chung Hee, who came from this elite group. As a result, Japan became a model of national economic development for Korea.

       If we look at the chronological order of the economic development of South Korea, as told above, during the annexation of South Korea, the country was reliant to Japan in terms of its capital, technology and management. After the annexation has ended in 1945, Korea was contaminated by the U.S. At that time, Korea’s economy was in a dreadful situation. Furthermore, the partition of the country from the 38th parallel left the South without any fertile resources since the 90 per cent of metal and 83 per cent of chemical were producing in the North. Until 60s, most of the Korean imports were supported by foreign aids such as United Nations Korea Reconstruction Agency (UNKRA) and United States and Korean economy has started to recover. In May 1961, a military coup overthrow the existing administration. The military government’s economic reforms which contains tax and budget improvements helped Korean economy to cultivate.

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Photo: http://www.wikiwand.com

       Close government and business system with credit and import restrictions provided success to Korea at the beginning. Import of the raw materials and technology, especially from Japan were promoted. In addition, savings and investment were promoted more than consumption. During the Park Chung Hee administration with the emphasis on science and technology policies, South Korea’s economy grew rapidly. The impetuous industrialisation and growth based on exports was the main target. In addition, Park’s policies encouraged private entrepreneurs. Tax benefits, import privileges, incentives for doing exports, low-interest bank loans and convenience to borrow from foreign sources were provided. These businesses later constructed the chaebol class of South Korea.

       When it comes to 60s, in 1961, the Economic Planning Board was established. One year later, the first five-year plan was conducted in order to expand energy industry, agricultural productivity, exports, technology and an infrastructure for a good production system. Currency was dropped, interest rates were increased so that the private saving could increase, and taxes of the imported goods were reduced. Furthermore, foreign investors were attracted to Korea. In this period, Korean economy observed a 7.8 per cent growth and its GNP per capita grew from 83 to 125 US dollars.

       In 1967, the second five-year plan was conducted in order to shift the South Korea into heavy industry which later helped Korea to find place in the competitive world market. In this period, highways were built and the industry was based on steel and petrochemical. Because of the price stabilisation program, price of the grain decreased and agriculture took back seat until 1971. Later, government conducted a policy of high grain prices. As a result, the Saemaul Undong Movement took place in 1970. Its aim was increasing agricultural production and income in the country sides.

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Photo: http://www.koreatimes.co.kr

       In this 10 year period, manufacturing sector has grown 15 to 21 percent respectively. Furthermore, as planned, domestic savings rates increased and exports from different countries increased. Diversification in production and trade brought success in 70s to Korea. In 1972, Park implemented the third five-year plan. The names of the plans were Heavy Chemical Industrialisation Plan (HCIP) and the “Big Push”. To fund the HCIP, government borrowed money from foreign countries. The government’s plan was to expand South Korea’s heavy and chemical industries. Thus, investment to steel, machinery, shipbuilding, electronics and chemicals has done. Modern shipbuilding facilities and zinc and cooper refineries were constructed. In the same period, cars which produced in Korea have exported to some markets. In fact, one of the main targets of Korea was to facilitate domestic production of weaponry because of the security threats.

       In 1973, increasing oil prices affected Korea who depends heavily on imported oil for energy production so construction contracts with Middle East were done. In 1977, the fourth five-year plan was announced. By this time, GNP per capita became 1000 US dollars. However in 1979, high inflation rates continued and the second oil shock appeared. Thus, Korean economy went through hardships. In order to reduce the inflation rates, monetary policy were adopted. Therefore, in 1989 the economy started to recover. Eventually, South Korea has achieved 9.2 growth an average between 1982 and 1987 and 12.5 percent between 1986 and 1988. But the predicaments did not end there. Although, South Korea’s economic development was stable in the early 1990s, it changed during the Asian financial crisis in 1997-98. This crisis exposed the weaknesses in South Korea’s economy model which are high debt/equity ratios and vast shot-term foreign borrowing. Dynamic and productive labor market with flexible wage rates, openness to imports and foreign investments helped Korea to survive from the Asian Financial Crisis. In 1998, GDP became 6.9 per cent, in 1999 it increased to 10.8 and, in 2000 it was 9 per cent.

       In 2000s, South Korea’s economy became more market-oriented model rather than the government-directed investment model. However, 9/11 affected South Korea as it affected many countries in terms of economy. The global economy slowed and the exports fell down thus, Korea’s GDP was 3.8 per cent in 2001. By the creation of a more liberalised economy, South Korea’s economy was more stable between 2003 and 2007. In 2008 economic crisis, export focused economy of South Korea went through hardships again but recovered quickly and achieved 6.3 per cent GDP in 2010. Despite to the Miracle of the Han River, in the long-term, South Korean economy would have some challenges due to the ageing population, major reliance on exports which form half of Korea’s GDP, monopolise of chaebols and rigid labor market. Even though there are problems in the current political economy of South Korea, its remarkable achievement can not be underestimated.

       This admirable development of South Korea’s economy has caused intricate debates within the Korean society. Park Chung Hee might brought the economic wellness to Korean society however, he was a dictator. Even today, the paradoxical question of whether the democracy or economic development should be achieved first within a country have been debating by Korean people. Furthermore, the effects of this brutal but productive years on the Korean society and youth should be investigated deeply.

References:

Korea Old and New A History

contrystudies.us

http://www.nber.org

http://www.forbes.com

http://www.wikipedia.org

2 Comments Add yours

  1. Useful overview.

    Like

    1. iremcihan says:

      Thank you! 🙂

      Like

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