Korean Economy
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Executive Summary
In this assignment I am going to discuss the main reasons for the rapid growth South Korea has experienced over the past forty years In addition to this, I will discuss the problems facing the country and suggest strategies to promote future economic prosperity. To do this, I will consider South Koreas:
Evolving comparative advantage
Technology policies and research and development expenditure
Educational system and policies
Technology import policies
I will also consider global developments including the South East Asian financial crisis of 1997 along with mega-trends caused by globalisation and technological developments.
Introduction
Known as one of the four tigers of Asia, South Korea is located in Far East Asia with China and North Korea located across its borders. South Korea is ruled by Roh Moo-hyun who was elected president in December 2002 after narrowly beating rival candidate Kim Dae-Jung and has a population of around 48.3million. Some people regard the growth South Korea has experienced over the past forty years as a miracle as GNP per capita in 1963 was only $100 compared to $9800 in 2002 (eighteen times larger than North Koreas) and is now the 12th largest economy in the world (www.nationmaster.com/encyclopedia/economy-of-south-korea).
Reasons for South Koreas economic growth
The significant growth of South Koreas economy since it became independent in 1945 began in the late 1960s with state policies providing the basis for successful late industrialisation. Park Chung Lee became president in 1961 and it was he that provided the economic strategy that started to lift South Korea out of poverty and transformed the economy into one of the fastest growing economies in the world. The strategy Park Chung Lee developed was based on that of South Koreas nearest rivals Japan rather than Western policy advisers. This would give South Korea a comparative advantage in modern technology and a large market near-by for Korean products. The emphasis on boosting exports was accompanies by the motivation of generating more income and employment and loosening the foreign exchange constraint on investment and economic growth. The help of raw materials and manufacturing such as plywood and textiles booming in industry was the catalyst to the process. Low labour costs meant that companies became more and more competitive resulting in the Korean Won being massively devalued. The technology for making such products was acquired through suppliers, foreign buyers or from trade literature.
South Koreas late industrialisation was characterised by three factors:
Diversification
Macro-economic policies
Growth momentum
Diversification relates to the penetration of new industries that South Korea began to explore rapidly, meaning industries began to expand just as quick as a result (www.oxfordscholarship.com/oso/content/economiesfinance). The 1970s saw clothing and footwear along with steel and chemical industries grow with the assistance of Korean involvement with continuous investment projects. The Pohang Iron Steel Company (POSCO) will be discussed in more detail later in the assignment. The South Korean government implemented policies that helped companies allocate their resources enhancing their technological capabilities. The Chaebol, South Koreas huge conglomerates were encouraged to diversify into heavy industries targeted by the governments five year plans (Journal reference World Development Vol 15 No. 6 p.762, Dahlman, Ross Larson and Westphal Managing Technological Development Lessons from the newly industrialised countries).
For the Korean government to maintain a level of economic activity used macro-economic policies. These included, the reduction in short-term interest rates in order to keep inflation consistently low with the exception of the 1997 crisis. To develop its industries, South Korea used deficit spending throughout the last thirty years and it is still a common method today. Korea ignored the advice of the U.S during the 1950s that was to go back to being a supplier of rice and seaweed to Japan and instead Syngman Rhee who was president at the time decided to build up Korean industry through a policy of import substitution. The benefits of that decision can be seen today with South Koreas economy being the 12th largest in the world. The manufacturing industry grew rapidly as demand for Korean products over time continued to grow and this rose with employment. More and more women were being employed by businesses and the educational system of South Korea played a significant role in helping the economic growth of the country. Wages of South Korean workers multiplied seven times from the late 1960s to 1997. There was an emphasis on educating the workforce in the most efficient way possible via public programmes and appropriate private incentives. The educational system is structured in a way that pupils at school compete with each other for top grades as the ones who do the best are given special treatment. The school week is six days long in South Korea and because of Asian culture; the rules in schools are very strict. This has gone on for decades and because Koreans are so well educated, the knowledge they gain compared to other countries is a significant advantage (
During the 1960s, the Chaebol were encouraged by the government to promote industry and penetrate export markets. After president Park got assassinated in the late 1970s, the chaebols began to influence government policy in their own interest. South Korean firms were characterized by high debt-equity ratios, which meant that companies were investing more money than they actually had. By focusing on one global market and restructuring, the top chaebols recovered from the 1997 crisis and continued to play a significant role in South Koreas economic growth as explained on the following page.
Geert Hofstedes Model
Geert Hofstede defines culture as software of the mind. He came up with five differences in mental programming:
Power distance