South Korea Economic Development

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Table of Contents

Introduction
Economic growth
Capital inflow
The exchange rate regime
Domestic credit supply
Asset price boom and bust
Policy lessons
References

Introduction

Like all the other Asian countries, South Korea was adversely affected by the 1997 economic crisis. However, going back in history, the country was able to navigate through the crisis in the 1980s, which had hit the emerging markets (Collins & Park, 1989).

Nonetheless, the 1997 crisis as economist say hit the country with severe economic shock compared to the most recent 2007 economic meltdown and the 1980s crisis (Collins & Park, 1989). Nevertheless, with all these challenges, South Korea has emerged as one of the world greatest economies ranking at the 11^th position globally.

All this was achieved in a thirty-year period of hard work and proper governance. The rapid growth experienced by the South Korean government was built on strategic planning and careful use and exploitation of resources. Today South Korea is one of the most influential exporters.

Economic growth

The growth of the Korean economy began immediately after independence from their colony Japan in 1945 (Collins & Park, 1989). The survival of the country was not guaranteed since it had very limited resources to establish a strong economy. Nonetheless, the South Koreans were determined to change their situation into a success story (Collins & Park, 1989).

The road to economic growth was one filled with challenges and setbacks with events such as the 1950-1953 war prolonging the economic instability and stagnation (Alexander, 2003). After the war, Korea’s population began to rise at 2.2% and the per capita Gross National Income, GNP also grew at a rate of 5.6% (Alexander, 2003).

From 1953 to 1996, the Gross National Product, GNP increased from 2.3 to 480.2 billion US dollars (Alexander, 2003). The per capita GNP also rose from 67% to an amazing US$ 10, 543 (Collins & Park, 1989).

Capital inflow

South Korean rapid growth into an industrial economy was greatly influenced by government involvement in the contest cash flow (Collins & Park, 1989). The government initiated high levels of national savings, well distributed investments as well as education. Capital control was a principle strategy that the country used to get to achieve the economic power they have today (Collins & Park, 1989).

South Korea used capital controls to shield its financial market from the international market (Alexander, 2003). For instance, investment in the stock market was not allowed for foreigners until 1992 (Alexander, 2003).

There were no foreign financial activities or firearms allowed in the country and locals were not allowed to operate foreign accounts. Nonresidents were also prohibited from investing in bonds until 1996 (Alexander, 2003). To limit foreign investments, the Korean won was inconvertible and the government worked hard to discourage offshore trade (Alexander, 2003).

The exchange rate regime

The Korean Won was initially pegged to the US dollar and the ministry of finance was responsible for controlling the exchange (Paul, 2003). In 1964, South Korea established the single currency peg system, which was the tool, used to peg the Korean Won to the US dollar (Paul, 2003). It was around the same time that a certificate system was initiated.

The South Korean government therefore gave a very low limit of exchange of the Korean Won. In addition, it restricted commercial banks from trading foreign exchange certificates that were below the limit set by the government (Paul, 2003). In 1980, the fixed link between the Korean Won and the US dollar was dropped and a new system was introduced (Paul, 2003).

They introduced a new system called the Multiple Currency Basket Peg, MCBP (Alexander, 2003). The basket currencies included currencies of the closest trading collaborates among them Japan, Germany, Canada, and the United States of America.

Domestic credit supply

The economy of South Korea has experienced some economic challenges including the political repercussions that befell the country after the assassination of President Park who was killed in 1979 (Alexander, 2003). The country’s export business boom was experienced during the late 1980s, although a major slowdown developed in the early 1990s, which lead to the 1997 economic collapse.

The economy of South Korea greatly depended on the export of IT related products and in that period the demand for these products was fairly reducing. Some aspects such as the credit card bubble further reduced the local demand for the same products further hurting the market at large (Alexander, 2003).

Asset price boom and bust

South Korea was one of the poorest nations of the world and this was mostly because of the war in the early 1950s (Alexander, 2003). The country took a while before it fully recovered from the slow-paced economic revival hence depending greatly on trading partners such as the United States of America and Japan (Paul, 2003).

South Korea’s economic development mainly focused on education and import substitution policy (Paul, 2003). The country was transformed into a new industrialized country in the early 1970s through the deliberate strategic efforts by the government to revive the crumbling economy.

The economy was brought back on its feet by reviving the light industries and emphasizing on labor-intensive manufacturing industries (Alexander, 2003).

Policy lessons

The business of exporting and choosing a target market was a joint agreement between the industry players and the government (Alexander, 2003). Financial markets were entirely controlled by the government, which included banks and this facilitated the development of firms by expanding their export capacities.

The development strategy used by South Korea is considered today as one of the Asian magical events since the country has developed into one of the greatest nations of the world. The country changed its industrial structures and consequently its GDP rose from 12% to 20 % in 1962-1971 (Collins & Park, 1989).

Nonetheless, the strategy also had some defects in terms of balancing between the light and the heavy industry sectors (Collins & Park, 1989).

There were also critical disparities between those engaged in the export business and the local businesses (Collins & Park, 1989). The country suffered from the great national foreign debt due to the government banking system that was the sole financier and the preferred source of access to credit.

The government gave incentives such as subsidies, tax reduction, as well as exceptions, which was the reason why most companies agreed to invest in such risky and extensive industries. Without the government intervention these companies would not have risked to venture into the industries hence, the development as seen today would not have been realized.

However, in order to be able to that, the government depended on foreign borrowing to be able to fund and offer such incentives, these led to the ultimate foreign debt and hence threatened the stability of the economy.

References

Alexander, A. (2003). Korea’s Capital Investment: Returns at the Level of the Economy, Industry, and Firm. Special Studies Series 2. Washington, DC: Korea Economic Institute.

Collins, S., & Park, W. (1989). External Debt and Macroeconomic Performance in South Korea. In Developing Country Debt and Economic Performance. Chicago, U.S.A: University of Chicago Press.

Paul. (2003). The Chastening.New York, NY: Public Affairs.

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