G eo Factsheet

www.curriculum-press.co.uk Number 229

Economic development in South

Korea - an original tiger
Introduction
Korea is located in east Asia (Fig. 1) and is one of the original NICs (newly industrialising countries). Korea, once one of the world’s
poorest agrarian societies, has undertaken economic development in earnest since 1962. In under fifty years, it achieved the ‘Miracle
on the Hangang River’ – a process that dramatically transformed the Korean economy. Today, it is one of the most successful economies
in eastern Asia. NB: South Korea’s official name is the Republic of Korea. In this Factsheet the name Korea will be used.
Fig. 1 The Asia-Pacific region.
Korean imports have steadily increased thanks to the country’s
JAPAN
liberalisation policy and increasing per capita income levels. As one of
NORTH
MONGOLIA KOREA East the largest import markets in the world, the volume of Korea’s imports
Sea Tokyo
Pyongyang exceeded those of China in 1995, and were comparable to the imports of
Beijing Malaysia, Indonesia, and the Philippines combined. Major import items
Seoul
included industrial raw materials such as crude oil and natural minerals,
SOUTH general consumer products, foodstuffs and goods such as machinery,
KOREA electronic equipment and transportation equipment.
(Republic
of Korea)
PA C I F I C
OCEAN The start of growth in the 1960s
CHINA The industrialisation process began in the early 1960s with the
Taipei
introduction of First Five-Year Economic Development Plan. The
TAIWAN government made a conscious policy shift from the inward-looking
growth strategy of import substitution to the outward-looking growth
Hong Kong
strategy of export promotion. The essence of growth strategy was to
promote exports of light manufactured goods in which Korea possessed
BURMA PHILIPPINES comparative advantage given its cheap labour cost.
LAOS South
China
THAILAND Sea The government’s export promotion strategy did not receive warm
VIETNAM acceptance at first. During the 1950s, Korea had depended on grant-in-aid
Bangkok
CAMBODIA and concessionary public loans, mainly from the United States, which
financed imports and domestic projects.
Ho Chi
Min City
Heavy and chemical industry promotion in the 1970s
In the early 1970s, the changing international economic environment had
Kuala
Lumpur MALAYSIA a significant impact on Korea. In 1971, the US government reduced the
number of U.S. armed forces stationed in Korea by about one- third. The
worldwide commodity shortage of 1972-73 and the oil shock of 1973-74
merely compounded the problem. The measures undertaken by the
INDONESIA government were to restructure the composition of commodity exports in
Jakarta favour of a more sophisticated, higher value-added products, to diversify
AUSTRALIA
its trade partners, and to increase domestic agricultural output.

Korea turned to the Heavy and Chemical Industry (HCI). Already an

Over the past 30 years, Korea has enjoyed an annual average economic growth important priority in the Third Five-Year Development Plan (1972-1976), HCI
rate of 8.6% and has emerged as the world’s 12th largest trading nation. In less received greater emphasis because of the changes in the external environment.
than two generations, the nation has established itself as one of the world’s As the HCI drive spread, the growing demand for skilled workers pushed up
leading shipbuilders and manufacturers of electronics, semiconductors and domestic wages. HCI accelerated the urbanisation of Korea, as workers
automobiles. Korea’s accession to the OECD in 1996, signalled Korea’s entry flocked to industrial centres where there were jobs available.
into the rank of advanced countries. There are only four OECD member
countries in the Asia-Pacific region: Japan, Korea, Australia and New Zealand. The HCI drive policy produced impressive results. Between 1972 and
1978 the GNP growth averaged 10.8% annually, and the annual growth
An outward-oriented economic development strategy, which used exports rate from 1976 and 1978 reached 11.2%. The share of HCI products in
as the engine of growth, contributed greatly to the radical economic total exports rose from 21.3% in 1972 to 34.7% in 1978. However,
transformation of Korea. As a result, from 1962 to 2005, Korea’s Gross Korea’s industrial structure was distorted by over-investment in HCI and
National Income (GNI) increased from US$2.3 billion to US$786.8 under-investment in light industries. At the same time, real wages were
billion, with its per capita GNI soared from $87 to about $16,291. increasing faster than productivity, weakening export competitiveness.
1
Economic development in Korea - an original Tiger Geo Factsheet

Rationalisation and liberalisation in the 1980s

The government forced firms suffering from excess capacity, namely Unfavourable terms of trade shocks in 1996 severely damaged profits of
those involved in power-generation equipment industry and automobile Korean corporations in 1997. Insolvent corporations and financial
industry, to merge. Between 1984-1987, further rationalisation of institutions damaged Korea’s credibility abroad, leading to foreign capital
industries took place in shipping and overseas construction. The flight. The vicious cycle of foreign exchange shortage and deterioration of
concentration of economic power increased, since many of the troubled Korea's credibility developed into a full-fledged foreign exchange crisis at
firms were taken over by the growing Korean conglomerates or chaebol. the end of 1997. In October 1997, the Korean Stock Exchange began to
plunge followed by a sharp fall of the Korean won against the U.S. dollar.
Due to the world recession following the second oil shock, many debt-
ridden firms became financially insolvent. The government’s concern over Financial sector reform
unemployment and financial instability led it to bail out these firms for the To manage the crisis, Korea called in the IMF, and produced economic
sake of social stability. In addition, the government restrictions on foreign reform programme focused on macroeconomic stability. The
direct investment (FDI) were relaxed substantially in recognition of the macroeconomic policy aimed to achieve stabilisation by requiring
FDI’s role in promoting competition and transferring advanced foreign acquisition of sufficient foreign reserves, reforming the corporate and the
technologies. Industrial restructuring in the 1980s aimed at promoting financial sectors, and laying a foundation for enhancing the country's
small and medium-sized enterprises (SMEs). Employment in primary long-term growth potential.
industries decreased (Fig. 2) but there were increases in secondary and
tertiary industries. Therefore employment in primary industries decreased Corporate sector reform
(Fig. 2) but increased in secondary and tertiary industries. The corporate sector reforms aimed to achieve two objectives; to reduce
the size of corporate debt, and to institute a new corporate governance
Fig. 2 Employment by industry in Korea, 2007. structure that induced better and more transparent management. Big
corporations led by Hyundai, Samsung, Daewoo and LG groups agreed
1970 50.4% 14.3% 35.3% to realign their businesses in seven areas: semiconductors,
(9,617)
petrochemicals, automobiles, aircraft, rolling-stock, power generating
facilities, ship engines and petroleum refining.
1980 34.0% 22.5% 43.5%
(13,683)
Labour sector reform
1990 In particular, unions in chaebol became stronger and more militant, and
17.9% 27.6% 54.5%
(18,085) dismissals became virtually impossible. Unemployment rates increased from
2.6% in November 1997 to 6.8% in 1998, but it has decreased to 2.7% in 2007.
2000
(21,061) 10.9% 20.2% 68.9%
Changes after the crisis
(thousands A change of government in 1998 led to reform in the financial, corporate,
persons) Primary Secondary Tertiary public and labour sectors with a view to restoring and strengthening
industries industries industries foreign investors' confidence. The Korean economy once again proved its
durability after undergoing its sharpest contraction in the wake of the
financial crisis. The rebound was the result of the rigorous restructuring
efforts, the elimination of bad loans from the banking sector and
Globalisation in the 1990s
favourable macro conditions during 1999-2000.
Market liberalisation and political democratisation resulted in labour disputes
and wage increases which far exceeded the rise in productivity. Entering the
Looking back into the 1960s, large corporations in Korea played the key
1990s, wage hikes averaged 18% annually. In addition high financial costs
role of spearheading the economy toward rapid growth. However, the
and regulations on business activities reduced industrial competitiveness and
concentration of economic resources brought some unique features that
entrepreneurship. Furthermore, the sudden increase in disposable income
needed to be discarded if the firms are to remain globally competitive.
among Koreans led to excessive private spending and speculation.
Over-borrowing and reckless expansion, close links with political interest
groups and dominance of major shareholders, lack of transparency,
Internationally, the 1990s witnessed growing regionalisation as economic trade
outdated governance structures all added to the negative image of chaebol.
blocs were formed among countries of Europe and America. The government
increasingly felt the need to change its economic strategy, as the previous strategy
Industrial innovation
that promoted exports using cheap labour as comparative advantage while
Sustaining Korea’s economic growth are key industries that have
keeping domestic markets protected from foreign competition showed its limit.
garnered recognition in the global arena. Korea is the world’s largest
shipbuilding nation; the third largest for semiconductors, and the fourth
Economic Crisis of 1997
largest for digital electronics (Fig. 3). As a major auto manufacturer,
Throughout the 1990s, the structure of the Korean economy had become
Korea produces over three million vehicles annually. Korea first started
increasingly vulnerable. The vulnerability came from two sources. First was the
exporting cars in 1976.
short-term external debt and insufficient foreign exchange reserves. By the end
of 1996, the share of short-term debt out of the total external debt peaked at 58%.
Fig. 3 World rankings
The second factor behind Korea’s economic vulnerability was the • World’s largest shipbuilding nation
corporate financial structure. The 30 years of government-led growth • World’s largest supplier of DRAM semiconductors, TFT-
process created a close relationship between the government and chaebol. LCD and CDMA mobile phones
Chaebol were often engaged in projects at the government’s bidding and • 3rd largest supplier of semiconductors
the government, in turn, implicitly provided insurance against project • 4th largest supplier of digital electronics
failures. Business firms’ main concern became expansion in size rather • 5th largest producer of textile, steel and petrochemicals
than to earn profits. To finance the expansion of businesses, firms chose • 6th largest supplier of automobiles
the option of debt-financed growth.

2
Economic development in Korea - an original Tiger Geo Factsheet

With almost 11% of the global market share, Korea’s semiconductor Technology in agriculture
sector is at the forefront of the industry, particularly in terms of flash Agricultural development efforts have been concentrated mainly on maximising
memory and sac (System on a Chip). As of 2004, Korea’s DRAM yields from the country’s limited arable land, which comprises only about 19%
(Dynamic Random Access Memory) ranked first in the world, with a of total land area. New high-yield varieties of rice and other crops have been
47.1% market share. introduced. Also, a large-scale fertiliser and pesticide industry has been
developed to keep farmers adequately supplied with these essential products.
Since 2000, innovation has topped the national agenda. Having
undergone spectacular growth in a relatively short period of time, the There has also been rapid growth in the production of fruits, vegetables
Korean government is now focusing on the “quality of growth”. Korea and other high quality crops, as well as livestock products. The spread of
envisions three pillars for future growth: growth that fosters job creation, vinyl greenhouses greatly contributed to the increased volume of the
growth that fuels innovation in industries, and growth that brings nation’s vegetable harvest.
balanced development among the provinces as well as metropolitan areas
and among companies large and small. Employment in manufacturing The process of industrialisation resulted in a steady decrease in Korea’s
has declined (Fig. 4) but it has increased in services. Nevertheless, the farm population. The ratio of rural residents to the overall population
size and composition of manufactured products has increased and plunged from 57% in 1962 to below 9% in the late 2000. This trend has
changed between 1970 and 2000, as shown in Fig. 5. also affected the employment structure of the nation's industry. To solve
the problem of rapidly dwindling rural labour, major efforts have been
Fig. 4 Employment composition in Korea. undertaken to promote farm mechanisation.
80
Science and technology
Manufacturing
To reinvigorate the development of advanced science and technology, the
Employment composition (%)

70
Service government established the Korea Institute of Science and Technology
60 (KIST) and the Ministry of Science and Technology (MOST) in 1966 and
50 1967, respectively. Initially, Korea’s national science and technology
policies focused mainly on the introduction, absorption, and application
40 of foreign technologies. In the 1980s, however, the emphasis shifted to
30 the planning and conducting of national R & D projects to raise the level
of scientific and technological skills.
20
Since the early 1990s, the government has been concentrating on three areas:
10
the fostering of research in the basic sciences, securing an efficient distribution
0 and use of R & D resources and expanding international cooperation. In 2004,
1990 2000 the government announced a plan to restructure the National Innovation
System (NIS). The plan emphasises shifting from a catch-up model to a more
creative approach, increasing networking among players. At the end of 2004,
Korea’s total R & D investment was around 2.85% of GDP.
Fig. 5 Manufacturing products.
Conclusion
8.2% 7.4% 4.5%
12.9% International financial markets positively regard Korea’s economic
achievements, including sustained high growth, moderate inflation, and
high national savings. However, these impressive accomplishments were
14.3% 19.2% overshadowed by the difficulties of several major conglomerates and
38.1% 47.4% financial institutions. Nevertheless, Korea is intent on moving forward.
5.8% 9.3%
Korea is working to become the focal point of a powerful Asian economic
21.3% bloc during the 21st century. The Northeast Asian region commands a
large pool of essential resources that are the necessary ingredients for
27.8% 8.8%
economic development. These include a population of 1.5 billion people,
4.9% 7.9% abundant natural resources, and large-scale consumer markets.
3.9% 19.4%
18.7% 20.8% Korea is attempting to develop as North-east Asia’s new business centre
and logistics hub. Taking advantage of its geographical location between
4.2%
17.9% such large economies as China and Japan, it hopes to emerge as a major
12.3% 4.7% economic and IT power early in this century.
22.1% 7.3%
13.7% 9.8% To go forward, the government intends to upgrade business practices to
7.3%
international standards, promote human resources and technology
1970 1980 1990 2000 development, and enhance institutional efficiency. Korea’s goal is to solve
(1,335) (36,279) (177,309) (564,834)
(billions won) the problems rooted in the past, and create an economic structure suitable
for an advanced economy to meet the challenges of the 21st century.
Others Chemicals Food
Acknowledgements
Machinery Printing/ This Factsheet was researched by Garrett Nagle who visited Korea in 2007, as a guest of the
publisng government. Curriculum Press, Bank House, 105 King Street, Wellington, TF1 1NU. Tel.
01952 271318. Geopress Factsheets may be copied free of charge by teaching staff or students,
Metal Textiles
provided that their school is a registered subscriber. No part of these Factsheets may be
reproduced, stored in a retrieval system, or transmitted, in any other form or by any other
means, without the prior permission of the publisher. ISSN 1351-5136