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The 60 Year Long March of the Korean Economy; Tough but Triumphant

The 60 Year Long March of the Korean Economy; Tough but Triumphant

JEON Young-Jae

Aug. 22, 2008

Transcript

Welcome to our Video Program. I’m Young-Jae Jeon from the Macroeconomics Department.

2008 marks the 60th anniversary of the foundation of the Republic of Korea. Within the comparatively short period of 60 years, Korea has grown into a full-fledged industrialized democracy after experiencing the tragedy of the Korean War and many years of poverty and famine. This dramatic transformation of a formerly desperate economy into one of the world’s economic powerhouses is nearly unprecedented in history. Today we’ll take a closer look at the past 60 years of the Korean economy.

Korea has grown into a notable economy with its per-capita income rising to $20,045 in 2007 from $67 in 1953. Its nominal GDP jumped 746-fold to $969.8 billion from $1.3 billion during this period. The main drivers behind Korea’s robust economic growth can be seen from three different perspectives.

First, Korea was not in a good position for economic development. Korea lacked and still lacks natural resources and suffers from a politically difficult location. Worse, the Korean War occurred only 2 years after the country was founded, destroying roughly 40-50% of the nation’s industrial facilities. Even after the war ended, the Korean peninsula was engulfed by constant tension arising from the conflicts between North and South.

Korea however, took up the challenge and moved rapidly ahead. With its existence constantly threatened by many factors, particularly aggression from the North, South Koreans developed a strong sense of urgency and devoted themselves wholeheartedly to economic development.

Korea also made active use of the security, capital and market opportunities from US aid in its economic growth. During this time, South Korea engaged in a vigorous ideological competition with the North, tried to close the gap with Japan in technology, and dealt with a new competitor and partner as the Chinese economy rose in strength. Escalating competition in neighboring countries served as a stimulus for the country to enhance its internal cohesion and integrity.

Second, another factor behind Korea’s spectacular economic growth is that it has pursued a largely free market economic system from its foundation. Out of the ruins of war, Korea revised its constitution and set up a free market economic system in 1954. The North, which adopted a closed communist economic system, started out ahead, but now lags many decades behind the South, showing just how prudent South Korea's choice ultimately was.

Even during the 1960s when the government took the initiative in the development of economic development strategies, Korea maintained the basic framework of a market economy. Unlike India and Brazil, where the government engaged directly in production via state-run companies, the Korean government served mostly as a partner for private businesses, and played only a guiding and supporting role. This strategy paid off and turned out to be successful.

Finally, Korea selected appropriate policies according to the change in circumstances. Korea’s economic take-off was initiated by government-led export-oriented industrialization under five-year economic development plans. To overcome the limits of the small domestic market and the lack of natural resources, this strategy focused on exports as a way to boost the economy. Korea intensively cultivated the heavy and chemical industry in the 1970s and the IT industry in the 1980’s and succeeded in advancing the nation’s industrial structure.

From the late 1980s, Korea made a number of efforts to better meet the requirements of the times, and to take a new step forward from its developmental economy. Korea joined the global open market system in a more active manner by opening its door wider through a string of measures to liberalize the movement of imports and capital.

As democracy progressed, however, Korea came under increased demand to redistribute its wealth more evenly, which led to reforms in its welfare system. The nation would eventually face a financial crisis due to its failure to find a new growth strategy to replace the government-driven export strategy, as well as a lack of preparation for market opening, and failures in financial supervision and foreign exchange policies. During the process of overcoming the crisis, Korea carried out market-centered financial reforms.

The history of the Korean economy is a dramatic epic. Who could even imagine that a country which consisted of little more than ashes after the Japanese occupation and the Korean War, would turn itself into the world’s thirteenth largest economy? The Korean economy today is not at the end, but the beginning of a new trajectory. Instead of sticking to the “imitation and learning” paradigm of using US and Japanese technology and techniques, Korea needs to come up with its own growth strategy to make the next step forward. To this end, the country needs to accelerate its transition towards an innovation-driven economy by increasing the efficiency of its R&D investment, while exploring and cultivating new growth engines in finance, biotechnology and energy. In addition, the country needs to lay a solid foundation to pursue the rule of law, and to expand social capital through the establishment of rational conflict-resolving systems. Finally, Korea's social safety net needs improvement to ensure that fewer people slip through the cracks of society as technology changes and as markets open. This will create a virtuous circle where economic growth leads to improvement in distribution of wealth.

Thank you for watching. I’m Young-Jae Jeon.

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