Internal Factors of the Korean Economic Development

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    As well as the external factors, internal factors played a key role in the economic success of South Korea. Right industrial policies and solid institutions of the government and the dedicated people of Korea brought inevitable success to South Korea. In this post, the internal factors of the Korean economic development will be analysed in two aspects.

Chaebol

  Chaebol was one of the most important internal factors of Korea’s economic development. Word chaebol comes from chae “wealth or property” and bol “clan” means business conglomerate in South Korea. They are international businesses controlled by a chairman who has power in all of the operations within the business. Every chaebol is owned and managed by a family. Samsung, Hyundai, Hanhwa and LG Group are one of the biggest chaebols in South Korea. The chaebol in Korea was the key determinant of creating new industries, markets and export production during the development years and turned South Korea into one of the most powerful countries in Asia. After the Japanese retreat in 1945, some of the Korean businessmen purchased the assets of some Japanese firms. Moreover, during the Rhee administration, these companies received incentives and privileges from the government. In other words, cooperation between the government and chaebol was paramount in the economic growth in early 60s. By this collaboration, government relied on chaebols for the improvement of heavy industries. To that end, government gave foreign loans and incentives to the chaebol companies. In addition, government selected some companies to do projects and funded those projects. These incentives helped chaebols to grow. Further, the expansion of exports played vital role in chaebols’ growth. Consequently, their growth resulted in variation of production in South Korea. In the 80s, chaebols became financially independent, which meant that they did not need government support anymore. With those developments, Chaebols turned South Korea into one of the largest newly industrialised countries. In 2014, the largest chaebol Samsung composed the 17 per cent of the South Korean economy which held US$ 17 billion.

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     Today, Samsung is used all around the world and it is the main competitor of American Apple. Despite of their contributions to South Korean economy, many problems come along with them. Corruption, bribery, fraud accounting are some of the problems of Chaebols. According to the news of ‘The Globe and Mail’, Eon Ha Yong, who works in a small manufacturing firm which sells its products to chaebols, says that the Chaebols do not give back their earnings to the society. Although the Chaebols deserve much of the credit for the development of South Korean economy, they became too powerful today. Many economists agree that, South Korea now struggles because of the overdevelopment of chaebols. South Korea’s small and medium sized businesses cannot be productive and grow bigger as much as chaebols, therefore high-valued service sector is falling behind of the other countries. Therefore, export based economy transformed by chaebol companies strangles according to the Organization for Economic Co-operation and Development’s report. Chaebols were becoming rich because of the failure in the economy, they were focusing redundantly on overseas factories, accumulating all the profits, restricting domestic suppliers and preventing the growth of small and medium-sized businesses which 90 percent of South Korean workers work in. Today, Chaebols enter any business that will bring them money. In addition, since these companies are so powerful and their failure would ruin many things, government do not implement much of its policies including country’s justice system to chaebols. Government afraid to hurt conglomerates which would affect South Korea’s economy deeply. Despite their highly contribution to South Korea’s economy, current situation must be taken into account. Nevertheless, Chaebols are paramount for the Korean economic development.

 

Institutions

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In the ‘Economics of the 38th Parallel’ chapter of the book “Why Nations Fail” written by Daron Acemoglu and James A. Robinson, Acemoglu and Robinson mention about the North Korea’s and South Korea’s economics and the facts that shape their economy differently. As known, close to the end of the World War II, Japanese colony in Korea retreated on August 15 and in one month Korea was divided into two parts at the 38th parallel. While the South was in control of the United States, the North was in control of Russia. In June 1950, the cold war was started by North Korean army’s invasion of the South. In autumn, North Korea retreated. The two authors give an example in order to explain the economic difference between North Korea and South Korea. During the war, Hwang Pyong Won was a pharmacist, hided from the North Korean army and stayed in the South. His brother was a doctor, taken from the North. They were separated in 1950 and met again in 2000 with the two governments’ agreement for family reunification. Hwang Pyong Won’s brother became a doctor in the air force, which regarded as a good job in a military dictatorship. But comparing with the South Korea, his situation was not that well. He had not owed a phone and car. When Hwang Pyong Won offered his brother some money, his brother rejected because the government would ask about that money to give them. Similarly, when he asked to buy him a new coat, he rejected it again because he said that he borrowed the coat from the government to come to South Korea. According to Hwang Pyong Won, although his brother said that he lived well, he looked very thin.

Even though North Korea started with a better economy back then, today the economic gap between the North Korea and the South Korea is tremendous. After 1945, separated governments took on different actions to organise their economies. South Korea’s political and economic institutions were formed by Syngman Rhee who studied in Harvard and Princeton. He was an anticommunist and took support from United States. He was authoritarian as his successor Park Chung Hee. They both carried out a market economy where private property was admitted. But in the North, communist Kim Il Sung declared himself as dictator of the country and introduced an inflexible form of centrally planned economy which is called Juche system with the help of the Soviet Union. Markets were banned and private property was forbidden and North Koreans were not free in every field of their lives except the elites around Kim Il Sung. But the system of North Korea is an exact failure. Its industrial production and agricultural productivity failed and because of the lack of private property, people did not want to invest and increase their businesses’ productivity. Differently in South Korea, economic institutions encouraged investment and trade. Investment in education was done by South Korean politicians. Policies about industrialisation increase of investment, exports and transfer of technology was made. Therefore, South Korea has grown rapidly relatively to the other East Asian nations.

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From the story told by Acemoglu and Robinson, we understand that the answer of the huge economic gap between the North and the South Korea lies in institutions. Institutions are the rules which decide how will the economy run and the incentives which make people happy. In South Korea, people can take a good education and the state supports economic activity. Thus, the entrepreneurs can borrow money from banks and financial markets. People can borrow money as companies to enter into partnerships with foreign companies, as individuals to buy houses with mortgage credit. People in South Korea are free to open business and sell whatever they want but in North Korea they are not free. As in South Korea, inclusive economic institutions which mean equitable benefits for economic participants allow and inspire participation of many people in economic activities where they can use their skills and talents and make their own choices. Economic institutions must encourage private property, a system of law based on equity, a public service which people can exchange things, permission to enter s new business and right to people to choose their careers in order to be an inclusive economic institution since the inclusive economic institutions bloom the economic activity, productivity growth and give importance to private property rights. Further, to function properly, a society needs other kind of public services which are roads and transportation so that economic activity can be done. Inclusive economic institutions as in South Korea form inclusive market, which gives people freedom to do whatever they want in terms of job in life. By this creative environment, people would have courage to start business, employee activities would be held when the productivity is high and better working firms can be replaced. Clever industrial policies and solid institutionalisation are one of the most important internal factors of the Korea’s rapid economic development. Of course, one should not underestimate the power of dedicated and hard working Korean people.

 

References:

Acemoglu, Daron, and James A Robinson. 2012. Why Nations Fail: The Origins of Power, Prosperity and Poverty. 1st ed. New York: Crown, 529.

theglobeandmail.com

 

 

 

 

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