South Korean Economic Development and Its Factors

Introduction

South Korea has had an impressive reputation in economic success based on sustained economic growth and industrialization, despite being among the poorest countries in the 1960’s. Generally, South Korea’s industrial transformation was aided greatly by the U.S government, which had high hopes that South Korea would become a model of capitalist development and would be successful both socially and economically (Baier and Bergstrand 24). In 1960’s, South Korea was a largely rural and agricultural-based country where the agricultural sector accounted for almost 40% of the Gross Domestic Product (GDP) and employed approximately 70% of the total population in the country.

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The World Bank designated South Korea as a low-income country during that time, since its per capita income was 82 dollars, which placed it behind some current third world countries such as Senegal, Ghana, Liberia, Zambia Honduras and Peru (Hart-Landsberg 26). This economic weakness was mainly attributed to the country’s internal trade position and Korea’s limited industrial base (Gupta 748). This paper will discuss South Korea’s emergence as a developing economy following impressive economic reforms.

Early Development of South Korea

The favorable economic progress of South Korea started to be witnessed between 1953 and 1962. During this time, the United States government-funded approximately 70 percent of South Korea’s total imports, curbing the large trade deficit that existed in its balance of payment and leading it to a path of recovery. However, it was in 1961 that the actual economic conditions of South Korea began to take shape when Park Chung Hee led a military coup and the government took control of the financial system (Hart-Landsberg 57). The result of this was a significant rise in the economic growth of South Korea to the extent of being ranked third among all middle-income countries within 20 years in terms of economic growth and development. In 1980, it’s per capita income had grown to three times the normal growth rate of three African Countries and twice that of two Latin American countries combined. However, most analysts and leaders are convinced that South Korea’s success is due to the government’s initiatives of applying free markets and free trade policies. Nevertheless, the current debate about how South Korea has achieved rapid economic success and industrialization amid tough global economic, social, and political challenges is beyond conventional wisdom explanation.

The Conventional Wisdom: Market Power

Economists explain South Korea’s achievements by comparing economic policies and success of Asian countries such as Hong Kong and Taiwan with the common policies of Brazil, Argentina, Mexico, and India. These Asian countries have grown rapidly as a result of free markets and free trade policies (Amsden 4). Indeed, they are commonly referred to as the emerging markets of contemporary world. On the other hand, most non- East Asia countries have failed to develop due to practises on import- strategy policies that are based on government regulation of domestic and international economic activities. The following policies were seen to have a major impact on accounting for the differences in performances among East Asian countries and the Latin American countries.

Asian governments did not encourage or discriminate against export within their countries (Gupta 738). This is in comparison with Latin American countries and East Asian countries that provided incentives for sales in domestic and local markets. In addition, Asian markets had absolutely no role in the import and export process in those countries. They also created a stable economic environment for exporters who could make adequate plans to transport their goods to various international neighbouring countries in East Asia. Primarily, the government initiated a credit policy that favoured large firms, and as a result, such firms were able to generate a lot of revenue for the country (Hart-Landsberg 62). Moreover, Asian governments also did not interfere with economic activities within their countries; they respected and promoted free-trade within and outside their countries. This is unlike Latin American countries where there is passive control on prices, exports and other regulations that provide opportunities for corruption and uncertainty in business environment.

Another aspect worth noting is that, Asian governments did not take part in market labour regulation or allow for creation of trade unions. However, in Latin American countries, trade unions were powerful and markets were much regulated by government, thus resulting to fewer investment opportunities in the countries than witnessed in Asia. Importantly, Asian governments also did not over-regulate capital markets unlike in Latin America and India where the markets were highly regulated by the state. Finally, Asian governments encouraged anti-inflationary policies that contributed to moderate interest rates and curb inflation tax unlike the Latin American countries where fears of increased interest rates and taxes still make many investors to shy away from investments.

Among various policies that have been used for economic growth in South Korea, the main policy that stands out is the role of government in achieving development. Despite conventional wisdom identifying economic success and failure as a result of free market and free trade policies in different countries, it also comes with challenges associated with it.

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Challenges of Conventional Wisdom in South Korean Economy

In both South Korea and Taiwan, the state has played a major role in shaping economic growth and industrialization; this is through controlling the financial sector of the economy, which is crucial in achieving development (Hart-Landsberg 57). When South Korean government decided that export was the priority for the entire economy, it did not however signify that it was committed towards making the process a success for the foreseeable future. The government’s export promotion strategy was viewed by many as a government plan to promote national development in its underdeveloped parts of the country. In addition, the government also targeted new areas for development in order to replace imports from other countries. Moreover, government acted aggressively in encouraging private firms to take part in the production process of heavy chemical programs that it saw as likely to boost the economy. However, Reimer notes that a globalization of production requires proper knowledge of the dynamics of comparative advantage and their implication in commercial policy formulation and implementation (384).

South Korea government also supported a rapid growth of exports through a strict labour intensive policy that created low labour costs; however, workers faced poor working conditions, especially considering that the number of educated or skilled workforce was insufficient to undertake large volume of work (Gupta 748). The challenge to conventional wisdom in South Korea’s case is that, its rapid economic growth is not as a result of free market and free trade policies, but government’s intervention in all aspects of the economy such as international trade and investments decisions, market entry and exit decisions, and allocation of labour market conditions (Amsden 17).

The Challenges of Conventional Wisdom in Taiwanese Economy

The economic development part of Taiwan is similar to that of South Korea where the state played a crucial role towards achieving economic growth, the difference being that Taiwanese government was dominated by the Chinese rather than the local Taiwanese living in the country at the time. This resulted to the state accounting for 57 percent of production in the 1950’s. In addition, the government also owned majority of the banks in the sector, thus playing a key role in influencing development in the region.

The support on exports did not mean that the Taiwanese government relied on free trade policy to handle its operations. Only exporters enjoyed the free trade regime, whereas the government used various control tactics for imports into the country. Due to the vast economic powers in its possession, Taiwanese government has transformed both the industrial sector and the agricultural sector. The government also intervenes in the labour market to curb unfair prices and regulate interest rates in the sector.

The Taiwanese government used extensive methods to control imports such as luxury goods, goods considered important to the national security of the country and goods subject to monopoly by the government. Like South Korea, it is difficult to suggest that free labour market and capital markets have contributed to economic growth and industrialization in Taiwan. It is also worth noting that, the government promoted trade through distancing itself from direct production processes, except in key sectors that were of national and international interest such as mining, and infrastructure (Hart-Landsberg 74).

Lessons from Both Countries

Both South Korea and Taiwan have market economies where private investors organize most of the production processes in order to earn profits, while the governments take charge of various sectors such as market entry, credit control and trade to effect policies to govern the markets. When compared to Latin American countries, it is worth noting that the two Asian countries rely on state policies and production system to shape their economies while Latin American countries have different state policies such as control on imports that enable them control local markets. Moreover, Latin American governments also do not control investment decisions and capital markets unlike South Korea and Taiwan where every investment decision must be regulated by the government.

Generally, Latin American states have less concern over the production and industrial activities as compared to Taiwan and South Korea, which saw industrial growth over a period of 20 years within the government being the key player in achieving success.

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Conclusion

In conclusion, economic growth and development result from strong regulation of activities and dynamics of different countries by the state. There must be an in-depth understanding of the market forces and various regulations that bring about development, both locally and internationally in a given country. Good social relationship among different countries is another crucial factor towards achieving growth and development. One important lesson learnt from the rapid growth of South Korea is that it is important to allow capitalism play its role in economic activities of a country; however, government should always come in to regulate essential areas of economic environment through policy formulation and implementation. From the foregoing discussion, it can be deduced that, although conventional wisdom view success in South Korea and Taiwan as being as a result of free markets and free trade, it is important to note that governments’ sound and effective export strategies played a key role in such success. This therefore illustrates why the much regulated economies of Latin America were left behind in development, albeit catching up in recent years.

Works Cited

Amsden, Alice. Next Giant: South Korea and Late Industrialization. NY: Oxford University Press, 1992. Print.

Baier, Scott and Jeffrey Bergstrand, “The Growth of World Trade: Tariffs, Transport Costs, and Income Similarity.” Journal of International Economics 53.1 (2001): 1-27. Print.

Gupta, Kulwant. Economics of Development and Planning. New Delhi: Atlantic Publishers & Distributors, 2009. Print.

Hart-Landsberg, Martin. The Rush to Development: Economic Change and Political Struggle in South Korea. NY: Monthly Review Press, 1993. Print.

Reimer, Jeffrey J. Global production sharing and trade in the services of factors. Journal of International Economics 68.1 (2006): 384–408. Print.

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