The
economy of
South Korea is the third largest in
Asia and the twelfth largest in the world in terms of market exchange
nominal GDP as of 2006. In the aftermath of the
Korean War, South Korea grew from being one of the world's poorest countries to one of its richest. From the mid to late twentieth century, it has enjoyed one of the fastest rates of prolonged
economic growth in history. The nation’s per capita
gross national product has grown from only $100 in 1963 to $24,500 in 2007.
[1] This phenomenon has been referred to as the "
Miracle on the Han River."
The South Korean economy has been radically transformed over the past six decades, particularly during the period after the
Park Chung Hee government launched its First Five-Year Economic Development Plan in 1962. When South Korea was established in 1945, the economy was predominantly agricultural.
[2] In the decades immediately following, the economy shifted to
light industry and
consumer products, and then again to
heavy industry during the 1970s and 1980s. The economy began to reach maturity in the 1990s as
exponential growth slowed to a robust rate averaging 6.5 percent. The rapid economic growth of the late 1980s was further boosted by hosting the
1988 Summer Olympics in Seoul, as well as the
2002 World Cup with
Japan. Furthermore, the
service sector has grown to comprise about two-thirds of GDP.
[3] During this period, Korean workers' wages increased considerably, leading labour-intensive industries to move elsewhere, such as
China,
Vietnam, and
Indonesia. In 1996, South Korea became a member of the
OECD, a milestone in its development history.
At the start of the 21st century, predicting that the Internet would become an important factor in the
global economy, the government sought to make South Korea the world's leading
IT nation in just 5 years. With
public funds, the government began to actively support South Korea's native IT industry, led by flagships
Samsung Electronics and
LG Electronics. Success was seen at home in following years with the development of
DMB and
WiBro technology and abroad with Korean IT products and services capturing market share in key sectors such as
semiconductors. With this technological background, South Korea has been termed one of the '
Next Eleven' economies and at its current rate, is expected to be equal in size to the economies of the
United Kingdom and
France by 2025.
In addition to its advanced IT infrastructure, the government is now beginning to invest in the
robotics industry. With the aim of becoming the "World's Number 1 Robotics Nation" by 2025, there are plans to put one robot in every household by 2020.
[4][5] There are other ambitious plans to expand or create other sectors of the economy, including the
financial,
biotechnology,
aerospace and
entertainment industries.
Historical overview
Following the
Japanese rule and the
Korean War, the
Syngman Rhee administration of the newly formed South Korean state used
foreign aid from the
United States during the 1950s to build an infrastructure that included a nationwide network of primary and secondary schools, modern roads, and a modern communications network. The result was that by 1961, South Korea had a well-educated young work force and a modern infrastructure that provided a solid foundation for economic growth.
Beginning in the 1960s
South Korea's real
gross national product expanded by an average of more than 8 percent per year, from US$3.3 billion in 1962 to US$204 billion in 1989. Per capita annual income grew from US$87 in 1962 to US$4,830 in 1989. The manufacturing sector grew from 14.3 percent of the GNP in 1962 to 30.3 percent in 1987. Commodity trade volume rose from US$480 million in 1962 to a projected US$127.9 billion in 1990. The ratio of
domestic savings to GNP grew from 3.3 percent in 1962 to 35.8 percent in 1989.
The most significant factor in rapid industrialization was the adoption of an outward-looking strategy in the early 1960s. This strategy was particularly well suited to that time because of South Korea's poor natural resource endowment, low savings rate, and tiny domestic market. The strategy promoted economic growth through labor-intensive manufactured exports, in which South Korea could develop a competitive advantage. Government initiatives played an important role in this process. The inflow of foreign capital was greatly encouraged to supplement the shortage of domestic savings. These efforts enabled South Korea to achieve rapid growth in exports and subsequent increases in income.
By emphasizing the industrial sector, Seoul's export-oriented development strategy left the rural sector relatively underdeveloped. Increasing income disparity between the industrial and agricultural sectors became a serious problem by the 1970s and remained a problem, despite government efforts to raise farm income and improve living standards in rural areas.
Stability
A
Hyundai vehicle, which has become a worldwide symbol for Korea's industry.
In the early 1980s, Seoul instituted wide-ranging structural reforms. In order to control inflation, a conservative
monetary policy and tight fiscal measures were adopted. Growth of the
money supply was reduced from the 30 percent level of the 1970s to 15 percent. Seoul even froze its budget for a short while. Government intervention in the economy was greatly reduced and policies on imports and foreign investment were liberalized to promote competition. To reduce the imbalance between rural and urban sectors, Seoul expanded investments in public projects, such as roads and communications facilities, while further promoting farm
mechanization.
These measures, coupled with significant improvements in the world economy, helped the South Korean economy regain its lost momentum in the late 1980s. South Korea achieved an average of 9.2 percent real growth between 1982 and 1987 and 12.5 percent between 1986 and 1988. The double digit
inflation of the 1970s was brought under control.
Wholesale price inflation averaged 2.1 percent per year from 1980 through 1988; consumer prices increased by an average of 4.7 percent annually. Seoul achieved its first significant surplus in its balance of payments in 1986 and recorded a US$7.7 billion and a US$11.4 billion surplus in 1987 and 1988 respectively. This development permitted South Korea to begin reducing its level of
foreign debt. The trade surplus for 1989, however, was only US$4.6 billion dollars, and a small negative balance was projected for 1990.
Current status
In recent years South Korea's economy moved away from the centrally planned, government-directed investment model toward a more market-oriented one. South Korea bounced back from the
1997 East Asian financial crisis and carried out extensive financial reforms that restored stability to markets. These economic reforms, pushed by President
Kim Dae-jung, helped Korea maintain one of Asia's few expanding economies, with growth rates of 10% in 1999 and 9% in 2000. The slowing global economy and falling exports account for the drop in growth rates in 2001 to 3.3%, but in 2002 Korea pulled out a very respectable 6.0% growth rate. Restructuring of Korean conglomerates (''
chaebols''), bank privatization, and creating a more liberalized economy with a mechanism for bankrupt firms to exit the market remain Korea's most important unfinished reform tasks. Although the growth slowed down in 2004, a promising 5% growth was achieved in 2006, due to popular demand for key export products such as
HDTVs and
mobile phones. Increasing trade with the
People's Republic of China is expected to boost Korea to a leading position among Asia's developed economies. It is also expected to lead the world in penetrating Japan's trade barriers.
South Korea relies largely upon exports to fuel the impressive growth of its economy, with finished products such as electronics, textiles, ships, automobiles, and steel being some of its most important exports. Although the import market has liberalized in recent years, the agricultural market has remained largely
protectionist due to serious disparities in the price of domestic agricultural products such as rice with the international market. As of 2005, the price of rice in South Korea is about four times that of the average price of rice on the international market, and it was generally feared that opening the agricultural market would have disastrous effects upon the South Korean agricultural sector. In late 2004, however, an agreement was reached with the
WTO in which South Korean rice imports will gradually increase from 4% to 8% of consumption by 2014. In addition, up to 30% of imported rice will be made available directly to consumers by 2010, where previously imported rice was only used for processed foods. Following 2014, the South Korean rice market will be fully opened.
Government role
Under Park Chung Hee
In 1961 General
Park Chung Hee overthrew the popularly elected regime of Prime Minister
Chang Myon. A nationalist, Park wanted to transform South Korea from a backward agricultural nation into a modern industrial nation that would provide a decent way of life for its citizens while at the same time defending itself from outside aggression. Lacking the anti-Japanese nationalist credentials of
Syngman Rhee, for example, Park sought both legitimacy for his regime and greater independence for South Korea in a vigorous program of economic development that would transform the country from an agricultural backwater into a modern industrial nation.
The Park administration decided that the central government must play the key role in economic development because no other South Korean institution had the capacity or resources to direct such drastic change in a short time. The resulting economic system incorporated elements of both
state capitalism and
free enterprise. The economy was dominated by a group of large private conglomerates, known as
chaebol, and also was supported by a significant number of public corporations in such areas as iron and steel, utilities, communications, fertilizers, chemicals, and other heavy industries. The government guided private industry through a series of export and production targets utilizing the control of credit, informal means of pressure and persuasion, and traditional monetary and fiscal policies.
The government hoped to take advantage of existing technology to become competitive in areas where other advanced industrial nations had already achieved success. Seoul presumed that the well-educated and highly motivated work force would produce low-cost, high-quality goods that would find ready markets in the United States and the rest of the industrial world. Profits generated from the sale of exports would be used to further expand capital, provide new jobs, and eventually pay off loans.
In 1961 Park extended government control over business by nationalizing the banks and merging the agricultural cooperative movement with the agricultural bank. The government's direct control over all institutional credit further extended Park's command over the business community. The Economic Planning Board was created in 1961 and became the nerve center of Park's plan to promote economic development. It was headed by a deputy prime minister and staffed by bureaucrats known for their high intellectual capability and educational background in business and economics. Beginning in the 1960s, the board allocated resources, directed the flow of credit, and formulated all of South Korea's economic plans. In the late 1980s, the power to allocate resources and credit was restored to the functional ministries. In 1990, the Economic Planning Board was given primary charge of economic planning; it also coordinated and often directed the economic functions of other government ministries, including the Ministry of Finance. The board was complemented by the Korea Development Institute, an independent economic research organization funded by the government. Other government bodies directing the economy included the Office of the President, which included a senior secretary for economic affairs; the Ministry of Finance; the Ministry of Trade and Industry; the Ministry of Labor; and the Bank of Korea, which was controlled by the Ministry of Finance.
Park's first major goal, which was immediately successful, was to establish a self-reliant industrial economy independent of the massive waves of United States aid that had kept South Korea afloat during the Rhee years. Modernizing the economy and maintaining overall sustained growth were additional goals in the 1970s. Significant economic policies included strengthening key industries, increasing employment, and developing more effective management systems. Because South Korea was dependent on imports of raw materials, such as oil, a major government objective was to significantly increase the level of exports, which meant stressing greater international competitiveness and higher productivity. The early economic plans emphasized agriculture and infrastructure, the latter were closely tied to construction. Later, the emphasis shifted consecutively to light industry, electronics, and heavy and chemical industries. Using these strategies, an export-driven economy developed.
The government combined a policy of import substitution with the export-led approach. Policy planners selected a group of strategic industries to back, including electronics, shipbuilding, and automobiles. New industries were nurtured by making the importation of such goods difficult. When the new industry was on its feet, the government worked to create good conditions for its export. Incentives for exports included a reduction of corporate and private income taxes for exporters, tariff exemptions for raw materials imported for export production, business tax exemptions, and accelerated depreciation allowances.
The export-led program took off in the 1960s; during the 1970s, some estimates indicate, Seoul had the world's most productive economy. The annual industrial production growth rate was about 25 percent; there was a fivefold increase in the GNP from 1965 to 1978. In the mid-1970s, exports increased by an average of 45 percent a year.
Industrial policies
The major issue facing the Park regime in the early 1960s was the grinding poverty of the nation and the need for economic policies to overcome this poverty. A critical problem was raising funds to foster needed industrial development. Domestic savings were very low, and there was little available domestic capital. This obstacle was overcome by introducing foreign loans and inaugurating attractive domestic interest rates that enticed local capital into production. Of South Korea, Taiwan, Hong Kong, and Singapore, only South Korea financed its economic development with a dramatic build-up of foreign debt, debt that totaled US$46.8 billion in 1985, making it the fourth largest
Third World debtor.
As noted by consultant David I. Steinberg, Seoul administered a series of economic development plans. The government mobilized domestic capital by encouraging savings, determined what kinds of plants could be constructed with these funds, and reviewed the potential of the products for export. In this sense, the will of the government to undertake economic development played a crucial role; the role of the government, however, was not limited to such measures as mobilizing capital and allocating investments.
Steinberg also pointed out that Park's government restructured industries, such as defense and construction, sometimes to stimulate competition and other times to reduce or eliminate it. The Economic Planning Board established export targets that, if met, yielded additional government-subsidized credit and further access to the growing domestic market. Failure to meet such targets led to Seoul's withdrawal of credit.
Revenues and Expenditures
The central government budget has generally expanded, both in real terms and as a proportion of real GNP, since the end of the Korean War, stabilizing at between 20 and 21 percent of GNP during most of the 1980s.
Government spending in South Korea has been less than that for most countries in the world (excepting the other rapidly growing Asian economies of Japan, Taiwan, and Singapore). The share of government spending devoted to investment and other capital formation activities increased steadily through the periods of the first and second five-year plans (1962-1971), peaking at more than 41 percent of the budget in 1969. Since 1971 investment expenditures have remained at less than 30 percent of the budget, while the share of the budget occupied by direct government consumption and transfer payments has continued to increase, averaging more than 70 percent during the 1980s.
During the 1980s, the largest areas of government expenditure were economic services (including infrastructural projects and research and development), national defense, and education. Economic expenditures averaged several percentage points higher than defense expenditures, which remained stable at about 22 to 23 percent of the budget (about 6 percent of GNP) during the decade. In 1990, the government was studying plans to lower defense expenditures to 5 percent of GNP. Some observers noted a trend toward a slight increase in the portion of the budget devoted to social spending during the 1980s. In 1987 expenditures for social services--including health, housing, and welfare--were 16.4 percent of the budget, up from 13.9 percent in 1980, and slightly higher than 1987 government outlays for education (see table 3, Appendix).
The government revenue structure was virtually totally dependent on taxes (see table 4, Appendix). By the early 1980s, nearly two-thirds of tax money was collected in the form of indirect taxes. Revenues collected by the central government in 1987 rose to 19,270.3 billion won (for value of the won--see Glossary), up from 13.197.5 billion won in 1984.
Public enterprise
During the 1960s, public enterprises were concentrated in such areas as
electrification, banking, communications, and manufacturing. In 1990 these enterprises were, in many cases, efficient revenue-producing concerns that produced essential goods and services at low costs, but which also produced profits that were used for new capital investments or to produce funds for public use elsewhere. In the 1980s, Seoul was slowly privatizing a number of these firms by selling stocks, but the government remained the principal stockholder in each company. In the 1980s, an important function of public enterprises was the introduction of new and expensive technology ventures.
In 1985 the public enterprise sector consisted of about 90 enterprises employing 305,000 workers, or 2.7 percent of total employment in the nonagricultural sector. There were four categories of public enterprises: government enterprises (staffed and run by government officials), government-invested enterprises (with at least 50 percent government ownership), subsidiaries of government-invested enterprises (usually having indirect government funding), and other government-backed enterprises. Government-invested public enterprises, such as the Korea Electric Power Corporation (KEPCO) and the Pohang Iron and Steel Company (POSCO), represented the core of the new enterprises established during Park's regime. In the late 1980s, roughly 30 percent of the revenues produced by public enterprises came from the manufacturing sector and the other 70 percent from such service sectors as the electrical, communications, and financial industries.
Financing
Financing South Korea's economic development in the 1990s was expected to differ from previous decades in two main respects: greater reliance on domestic sources and more emphasis on equity relative to debt. Beginning in the 1960s, foreign credit was used to finance development, but the amount of foreign debt had decreased since the mid-1980s. According to the Sixth Five-Year Economic and Social Development Plan (1987-91), an average annual growth rate of 8 percent was expected, together with account surpluses of about US$5 billion a year through 1991.
To realize these growth targets, South Koreans needed the gross domestic savings rate to exceed the domestic investment rate; additionally, they needed the financing of future economic growth to come entirely from domestic sources. Such a situation would involve reducing foreign debt by US$2 billion a year; and South Korea would become a net creditor nation in the mid-1990s. Through the promotion and reform of the securities markets, especially the stock market, and increased foreign investment, the sixth plan encouraged the diversification of sources and types of corporate finance, especially equity finance.
Domestic savings were very low before the mid-1960s, equivalent to less than 2 percent of GNP in the 1960 to 1962 period. The savings rate jumped to l0 percent between 1970 and 1972 when banks began offering depositors rates of 20 percent or more on savings accounts. This situation allowed banks to compete effectively for deposits with unorganized money markets that had previously offered higher rates than the banks. The savings rate increased to 16.8 percent of GNP in 1975 and 28 percent in 1979, but temporarily plunged to 20.8 percent in 1980 because of the oil price rise. After 1980, as incomes rose, so did the savings rate. The surge of the savings rate to 36.3 percent in 1987 and 35.8 percent in 1989 reflected the sharp growth of GNP in the 1980s. The prospects for continued high rates of saving were associated with continued high GNP growth, which nevertheless declined to 6.5 percent in 1989.
According to Donald S. Macdonald, through the early 1980s funds for investment came primarily from bilateral government loans (mainly from the United States and Japan), international lending organizations, and commercial banks. In the late 1980s, however, domestic savings accounted for two-thirds or more of total investment.
Throughout the 1980s, the financial sector underwent significant expansion, diversification of products and services, and structural changes brought about by economic liberalization policies. As noted by Park Yung-chul, financial liberalization eased interest ceilings. Deregulation increased competition in financial markets, which in turn accelerated product diversification. In the early 1980s, securities companies were permitted to sell securities through a repurchase agreement. By 1985 banks also were allowed to engage in the repurchase agreements of government and public bonds. In 1981 finance and investment corporations started dealing in large-denomination commercial paper. The new form of commercial paper was issued in minimum denominations of 10 million won, compared to the previous minimum value for commercial paper of 1 million won.
In order to extend their ability to raise cash, investment and finance companies introduced a new cash-management account with a 4 million won minimum deposit in 1983. Investment and finance corporations managed client funds by investing them in commercial paper corporate bonds and certificates of deposit. Money-deposit banks in the mid-1980s began offering similar accounts, known as household money-in-trust. Trust business formerly had been the exclusive domain of the Bank of Seoul and Trust Company; however, after 1983 all money-deposit banks were authorized to offer trust services.
The financial system underwent two major structural changes in the late 1970s and 1980s. First, money-deposit banks saw a sustained erosion of their once-dominant market position (from 80 percent in the 1970 to 1974 period to 55 percent by 1984). One reason for this decline was that in the 1970s nonbank financial intermediaries, such as investment trust corporations, finance companies, and merchant banking corporations, were given preferential treatment. Further, because the costs of intermediation at these nonbank financial institutions were lower than at banks (with their many branches nationwide and their multitudes of small savers and borrowers), their cost advantages and higher lending rates allowed them a larger market share.
The second structural change was the rapid increase of commercial paper and corporate debenture markets. Another development was the steady growth of investment trust corporations in the 1980s.
Because of the introduction of tax and financing incentives by the government that encouraged companies to list their shares on the stock market, the Korean Stock Exchange grew rapidly in the late 1980s. In 1987 more than 350 companies were listed on the exchange. There was an average daily trading volume of 10 million shares, with a turnover ratio of 80 percent. In 1989 the stock market was tarnished by accusations of insider trading among the five major South Korean securities firms. The Securities and Exchange Commission launched an investigation in late 1989. The popular index of the market soared to a high of 1,007.77 points on April 1, 1989, but plunged back to the 800s in late 1989 and early 1990.
Business financing was obtained primarily through bank loans or borrowing on the informal and high-interest "curb market" of private lenders. The curb market served individuals who needed cash urgently, less reputable businesspeople who engaged in speculation, and the multitudes of smaller companies that needed operating funds but could not procure bank financing. The loans they received, often in exchange for weak collateral, had very high interest rates. The curb market played a critical role in the 1960s and 1970s in pumping money into the economy and in assisting the growth of smaller corporations. The curb market continued to exist, along with the formal banking system, through the 1980s.
Industry
The growth of the industrial sector was the principal stimulus to economic development. In 1987 manufacturing industries accounted for approximately 30 percent of the gross domestic product and 25 percent of the work force. Benefiting from strong domestic encouragement and foreign aid, Seoul's industrialists introduced modern technologies into outmoded or newly built facilities at a rapid pace, increased the production of commodities--especially those for sale in foreign markets--and plowed the proceeds back into further industrial expansion. As a result, industry altered the country's landscape, drawing millions of laborers to urban manufacturing centers.
A downturn in the South Korean economy in 1989 spurred by a sharp decrease in exports and foreign orders caused deep concern in the industrial sector. Ministry of Trade and
Industry analysts stated that poor export performance resulted from structural problems embedded in the nation's economy, including an overly strong won, increased wages and high labor costs, frequent strikes, and high interest rates. The result was an increase in inventories and severe cutbacks in production at a number of electronics, automobile, and textile manufacturers, as well as at the smaller firms that supplied the parts. Factory
automation systems were introduced to reduce dependence on labor, to boost productivity with a much smaller work force, and to improve competitiveness. It was estimated that over two-thirds of South Korea's manufacturers spent over half of the funds available for facility investments on automation.
In 1990 South Korean manufacturers planned a significant shift in future production plans toward high-technology industries. In June 1989, panels of government officials, scholars, and business leaders held planning sessions on the production of such goods as new materials, mechatronics-- including industrial robotics-- bioengineering, microelectronics, fine chemistry, and aerospace. This shift in emphasis, however, did not mean an immediate decline in heavy industries such as automobile and ship production, which had dominated the economy in the 1980s.
Except for mining, most industries were located in the urban areas of the northwest and southeast. Heavy industries generally were located in the south of the country. Factories in Seoul contributed over 25 percent of all manufacturing value-added in 1978; taken together with factories in surrounding Kyonggi Province, factories in the Seoul area produced 46 percent of all manufacturing that year. Factories in Seoul and Kyonggi Province employed 48 percent of the nation's 2.1 million factory workers.
Energy
The Korean Peninsula is only modestly endowed with natural resources, and North Korea has far more natural resources than South Korea. During the Japanese colonial period (1910-45), the North served as the center for mining and industry whereas the South, with somewhat greater rainfall, a warmer climate, and slightly greater arable terrain, served as the center for rice production.
South Korea's mineral production is not adequate to supply its manufacturing output. Energy needs are also met by importing bituminous and anthracite coal and crude petroleum. In 1987 approximately 23.4 million tons of anthracite coal, approximately 4,000 tons of tungsten, 565,000 tons of iron ore, and 47,000 tons of zinc ore were mined. Lesser amounts of copper, lead, molybdenum, gold, silver, kaolin, and fluorite also were mined (see fig. 9).
Energy producers were dominated by government enterprises, although privately operated coal mines and oil refineries also existed. In 1990 South Korea still had no proven oil reserves. Offshore oil possibilities in the Yellow Sea and on the continental shelf between Korea and Japan yielded nothing through the 1980s, but exploration continued. South Korea's coal supply was both insufficient and of low quality. The potential for hydroelectric power was very limited because of tremendous seasonal variations in the weather and the concentration of most of the rainfall in the summer months. Accordingly, Seoul placed an increasingly heavy emphasis on developing
nuclear power generation.
Electric power in South Korea was provided by the Korea Electric Power Corporation (KEPCO). When KEPCO's predecessor, KECO, was founded in 1961, annual power production was 1,770 million kilowatt-hours (kwhr); production reached 73,992 million kwhr in 1987. The ratio of usage during 1987 was 17.9 percent for residential customers, 16.2 percent for public and service businesses, and 65.9 percent for the industrial sector. Energy used in electric power generation consisted primarily of nuclear, coal, oil, and liquefied natural gas (LNG). Of the 54,885 million kwhr of electricity generated in 1985, 22 percent came from nuclear plants then in operation, 74 percent from thermal plants (oil and coal), and 4 percent from hydroelectric sites. It was predicted in 1988 that the generation structure by the year 2000 would be 10.2 percent hydroelectric, 12.2 percent oil, 22.9 percent coal, 10.2 percent LNG, and 44.5 percent nuclear.
Nuclear Power
Main articles: Nuclear power in South Korea
South Korea placed a heavy emphasis on
nuclear power generation. The country's first nuclear power plant, the
Kori Number One located near Pusan, opened in 1977. Eight plants were operational in 1987 when atomic power generation was an estimated 71,158 million kilowatts, or 53.1 percent of total electric power.
Agriculture
A major land reform in the late 1940s and early 1950s spread ownership of land to the rural peasantry. Individual holdings, however, were too small (averaging one
hectare, which made cultivation inefficient and discouraged mechanization) or too spread out to provide families with much chance to produce a significant quantity of food. Additionally, South Korea is a mountainous country with only 22 percent
arable land and less rainfall than most other neighboring rice-growing countries.
At the start of the economic boom in 1963, the majority of South Koreans were farmers. Sixty-three percent of the population lived in rural areas. In the next twenty-five years, South Korea grew from a predominantly rural, agricultural nation into an urban,
newly industrialized country and the agricultural workforce shrunk to only 21 percent in 1989. Government officials expected that urbanization and industrialization would further reduce the number of agricultural workers to well under 20 percent by 2000.
The enormous growth of urban areas led to a rapid decrease of available farmland, while at the same time population increases and bigger incomes meant that the demand for food greatly outstripped supply. The result of these developments was that by the late 1980s roughly half of South Korea's needs, mainly
wheat and
animal feed corn, was imported.
Compared with the industrial and service sectors, agriculture remained the most sluggish sector of the economy. In 1988 the contribution of agriculture to overall
GDP was only about 10.8 percent, down from approximately 12.3 percent the previous year. Most economists agreed that the country's rural areas had gained more than they had contributed in the course of industrialization. Still, the growth of agricultural output, which averaged 3.4 percent per year between 1945 and 1974, 6.8 percent annually during the 1974-79 period, and 5.6 percent between 1980 and 1986, was credible. The gains were even more impressive because they added to a traditionally high level of productivity. On the other hand, the overall growth of the agriculture,
forestry, and
fishing sector was only 0.6 percent in 1987 as compared with the manufacturing sector, which grew 16 percent during 1986 and 1987.
Service industries
Service industries included
insurance,
restaurants,
hotels,
laundries,
public bath houses, health-related services, and entertainment establishments. There were thousands of small shops marketing specialized items, large traditional marketplaces, and streamlined buildings housing corporate and professional offices. Game rooms featuring Ping-Pong tables, or billiards, and tearooms serving a variety of beverages were located on almost every downtown city corner.
In the mid-1980s, the largest employer of South Korea's service sector was retail trade. A growing number of workers were employed by the department stores (most of which were owned by
chaebol) that were opening rapidly in the downtown areas of major urban centers. The vast majority of retailers were small merchants in cities, towns, and villages, each with a modest storefront, or stand, limited stock, and poor access to capital, but the great majority of South Koreans made their purchases from these small retailers. In 1986 there were approximately 26,054 wholesale and 542,548 retail establishments and 233,834 hotels and restaurants that employed about 1.7 million people (these figures probably do not include family members working in small stores).
The distribution system was far from perfect, and managers recognized the need for better organization and management. Most of the nation's wholesalers were located in Seoul and accounted for most of the turnover of goods. Most of the sales outlets were located in the heart of urban centers. Cargo truck terminals and warehouse facilities were spread irregularly through city neighborhoods.
An improved transportation and communications infrastructure, increasing incomes, enhanced consumer sophistication, and government tax incentives encouraged the development of a modern distribution network of chain stores, supermarkets, and department stores.
Tourism
Main articles: Tourism in South Korea
South Korea's hosting the
1988 Seoul Olympics made 1988 a boom year for tourism. More than 2 million tourists spent US$3.3 billion, an increase in the number of tourists and the dollars spent, respectively, of 24.9 percent and 42.2 percent over 1987. Japanese visitors accounted for 48 percent of the total; tourists from the United States made up 14.9 percent. This trend continued in subsequent years, with 2.95 million foreign visitors arriving in 1990 and 3.8 million in 1995.
[6]
Labour force
Labour movement in the 1980s
Despite significant increases in wages in the 1980s,
labour unions in the late 1980s continued their wave of strikes demanding better working conditions and wages. The ferocity and sheer size of the labour movement caught management and the government by surprise. During his first year or so in office, President
Roh Tae Woo was confronted with considerable labour unrest; there were more than 300 strikes in the first three months of 1989. Emboldened by the political reforms of 1987 and by reports that the rate of South Korea's economic growth was greater than the improvements in their own incomes and life-styles, many workers agitated for a greater share of the nation's prosperity and sought more freedom and responsibility at the workplace and an end to the traditional paternalism of management. Lost production was estimated to have climbed to US$6 billion in 1989 from US$4.4 billion in 1988.
Workers were caught in a revolution of rising expectations, as a wave of rising urban land values and housing costs outpaced average real wage increases of more than 70 percent during the 1980s. Moreover, wages for manual workers, who were responsible for much of the production and export that fueled the economy, were much lower than the national average. In the late 1980s, working families still found themselves struggling to meet minimum standards of living. Employees also were expected to work long and often erratic hours in exchange for steady employment and were frustrated over a lack of benefits and individual say.
Worker complaints were focused on three areas: low wages, long working hours, and a high number of industrial accidents. In 1986 the average wage of a South Korean worker was US$381 a month (339,474 won), including overtime and all allowances. The basic wage was US$287, or 255,408 won, but, according to the government, the basic wage necessary to sustain a "decent" way of life was US$588 (524,113 won). Thus, the average worker only earned two-thirds of what the government thought necessary to sustain a family of four. In 1987 semiskilled workers typically received US$1.50 to US$2.00 per hour and worked fifty-five to sixty hours a week; unskilled workers worked twelve-hour days seven days a week, earning US$125 a month.
Recent trends
South Korea was known for having the world's longest working hours. In 1986 the Korean worker averaged about 54.7 hours a week. This situation was the natural consequence of the low wage system that necessitated extended hours and extra work to earn minimum living expenses.
There were, however, dramatic increases in wages in 1988 and 1989.
Labour stoppages in the manufacturing sector, coupled with a scarcity of labour, led to 20-percent salary increases for workers in the manufacturing sector in 1988 and 25-percent salary increases in that sector in 1989. These raises later spread, increasing wages across the entire economy 18.7 percent in 1989. By 1989 some South Korean economists were worrying about the effect that skyrocketing wages would have on the cost of domestic-made goods and the consequent impact on export prices. The situation was especially worrisome because the wages paid to workers in South Korea's major competitors were growing far more slowly.
Average annual household income is 39,013,596 won (USD 42,108) as of 1Q 2007 retrieved from Korea National Statistical office.
Science and technology
The most important sources of productive growth for South Korean manufacturers had traditionally been directly or indirectly related to the ability of South Korean companies to acquire new technology from abroad and to adapt it to domestic conditions, rather than paying the cost of research and development. However, as Seoul's industry and exports continued to evolve toward higher levels of technology, domestic research and development efforts needed to be increased. Fortunately for South Korea, its high level of well-educated workers, who constitute a formidable brain trust for future research and development, are its major asset.
Historical development
The Seoul government began investing in technology research institutes soon after the republic was established. The
Korean Atomic Energy Commission founded in 1959 was responsible for research and development, production, dissemination, and management of technology for peaceful applications of atomic energy. In the mid-1960s, the government established the
Ministry of Science and Technology to oversee all government research and development activities and the
Korea Institute of Science and Technology to function as an industrial research laboratory.
In the 1970s, in order to better coordinate research and development, two scientific communities were established--one in Seoul, the other near
Taejon. The Seoul complex included the Korea Institute of Science and Technology, the
Korea Development Institute (affiliated with the
Economic Planning Board), the
Korea Advanced Institute of Science, and the
Korea Atomic Energy Research Institute. Plans for the
Daeduk Science Town near Taejon were far more ambitious. Modeled after the
Tsukuba Science City in
Japan, by the late 1980s the Daeduk Science Town accommodated laboratories specializing in shipbuilding, nuclear fuel processing, metrology, chemistry, and energy research. The government founded the
Korea Advanced Institute of Science to develop and offer graduate science programs, and it also encouraged universities to develop their own undergraduate programs in science.
High technology
The tremendous growth of
Samsung since the mid-1980s was strong evidence of the high productivity in such modern industries as electronics. The group's total sales nearly doubled (8.4 billion won to 14.6 billion won) between 1984 and 1986, while the number of employees only increased from 122,000 to 147,000. The reason for this high degree of productivity was South Korea's move away from labor-intensive industries to those that were highly automated.
South Korean planners realized that the country needed to advance quickly in such areas as high technology if the economy were to grow while matching foreign competition.
POSCO's decisions to build the
Pohang Institute of Science and Technology and the
Research Institute of Industrial Science and Technology were examples of this trend. POSCO also used a great deal of money to lure back more than 100 top South Korean scientists and researchers who had emigrated abroad.
POSCO's efforts represented a great change from the past. As of the late 1980s, many of South Korea's younger scientists, technocrats, and economic planners in had received their graduate education in the United States. Throughout the 1970s and 1980s, the government sponsored the scientific and technical education of many graduate students at prestigious institutions, such as
Harvard University and the
Massachusetts Institute of Technology. The success of the Pohang Institute of Science and Technology meant that many of South Korea's future scientific and technical leaders would be educated at home.
In 1987 the
Korea Development Institute issued a report,
Korea Year 2000, that profiled South Korean economic development in 2000. The Korea Development Institute noted that the industrial structure would be highly developed and would resemble that of advanced countries inasmuch as high value-added industries, high-technology industries, and soft industries grew relatively rapidly. Further, changes in industrial structure were expected rapidly to reduce the demand for unskilled workers while simultaneously increasing the demand for professional and technical manpower, resulting in further change of the employment structure.
The Korea Development Institute also noted that the Ministry of Science and Technology had prepared a long-range plan of science and technology for the twenty-first century that took into account limited available resources. Accordingly, Seoul selected its comparative advantage areas, including
informatics-- particularly information storage and retrieval and electronic data processing,
fine chemicals, and
precision machinery in the short term;
biotechnology and
new materials in the mid-term; public benefit areas, such as the environment, health, and welfare, as another group; and
oceanography and
aeronautics for the medium and long term.
In 1990 Seoul announced an ambitious plan to promote science and technology so that high-technology activities would dominate the economy by the year 2000. The Ministry of Science and Technology intended to coordinate technology-related projects between government and industry in a variety of fields including semiconductors, computers, chemistry, and new materials.
North-South trade
Since 1988, two-way trade between the two Korean countries has increased from $18.8 million in 1989 to $647.1 million in 2002. In 2002, South Korea imported $271.57 million worth of goods from
North Korea, mostly agro-fisheries and metal products, while shipping $371.55 million worth of goods, mostly
humanitarian aid commodities including fertilizer and textiles as inputs for North Korean garment manufacturers. South Korea is now North Korea's third-largest trading partner, after China and Japan. Numerous ventures by the
Hyundai Group have contributed to North Korea's economy, including the
KÅmgang-san (Diamond Mountain) tourist site. Last year alone, 84,347 visitors travelled by Hyundai-operated passenger ships, and most recently via land routes, as part of this tourism initiative, raising the total number of South Korean visitors to over half a million (see
KÅmgang-san Tourist Region). A mere 1,141 North Koreans travelled to South Korea, mainly for joint sporting events.
Hyundai Asan is also lined up to be the South Korean party that will help develop an 800 acre (3.2 km²) industrial complex in
KaesÅng, located near the
Demilitarized Zone (DMZ), subject to final agreements, including between
Seoul and
P'yÅngyang. The year 2002 witnessed significant progress on the Seoul-
ShinÅiju railroad, on both reconstructing road and rail links across the DMZ (as of early 2004 this process was stalled). However, the constructiveness of these efforts is still on question, as North Korea still declines to abandon its radical
neo-Stalinist style of government and is hardly showing any reliable economic growth.
Macro-economic trend
This is a chart of trend of gross domestic product of South Korea at market prices
estimated by the International Monetary Fund with figures in millions of South Korean Won.
| Year | Gross Domestic Product | US Dollar Exchange | Inflation Index (2000=100) |
|---|
| 1980 | 38,774,900 | 605.85 Won | 33 |
| 1985 | 84,061,000 | 869.51 Won | 46 |
| 1990 | 186,690,900 | 707.59 Won | 60 |
| 1995 | 398,837,700 | 771.27 Won | 82 |
| 2000 | 578,664,500 | 1,130.95 Won | 100 |
| 2005 | 812,196,561 | 1,024.11 Won | 117 |
For purchasing power parity comparisons, the US Dollar is exchanged at 841.39 Won only. This implies that for 2006, with exchange rates of 945 per dollar, and nominal GDP over 850 trillion won, the GDP will reach over $900 Billion (US dollars).
Other economic indicators
'Industrial production growth rate:'
10.1% (2004 est.)
'Electricity:'
★ ''production:'' 322.5
TWh (2003)
★ ''consumption:'' 293.6 TWh (2003)
★ ''exports:'' 0 kWh (2003)
★ ''imports:'' 0 kWh (2003)
'Electricity - production by source:'
★ ''fossil fuel:'' 62.4%
★ ''hydro:'' 0.8%
★ ''other:'' 0.2% (2001)
★ ''nuclear:'' 36.6%
'Oil:'
★ ''production:'' 0 barrel/day (2004 est.)
★ ''consumption:'' 2.07 million barrel/day (2004 est.)
★ ''exports: 0.63 million barrel/day (2003)
★ ''imports: 2.263 million barrel/day (2003)
'Natural gas:'
★ ''production:'' 0 cu m (2003 est.)
★ ''consumption:'' 20.92 billion cu m (2003 est.)
★ ''exports:'' 0 cu m (2003 est.)
★ ''imports:'' 21.11 billion cu m (2003 est.)
'Agriculture - products:'
rice, root crops, barley, vegetables, fruit; cattle, pigs, chickens, milk, eggs; fish
'Exports - commodities:'
electronics (5000 of Export - 2004 statistics) - semiconductors, LCD panel, mobile phone, computers related, television, and others], motor vehicle, steel, ships, petrochemicals
'Imports - commodities:'
machinery, electronics and electronic equipment, oil, steel, transport equipment, organic chemicals, plastics
'
Exchange rates:'
South Korean Won (W) per US$1 - 945.3 (May 2006), 1,143.7 (2004), 1,191.61 (2003), 1,251.09 (2002), 1,290.99 (2001), 1,130.32 (January 2000), 1,188.82 (1999), 1,401.44 (1998), 951.29 (1997), 804.45 (1996), 771.27 (1995)
History
Growth plunged by 6.6% in 1998, then strongly recovered to 10.8% in 1999 and 9.2% in 2000. Growth fell back to 3.3% in 2001 because of the slowing global economy, falling exports, and the perception that much-needed corporate and financial reforms have stalled. Led by industry and construction, growth in 2002 was 5.8%, despite anemic global growth. South Korea's economy is the 3rd
[7] or 4th
[8] largest in Asia on a currency basis.
See also
★
Four Asian Tigers
★
Economy of North Korea
★
List of Banks in South Korea
★
List of Korea-related topics
★
List of North Korean companies
★
List of South Korean companies
★
Heavy-Chemical Industry Drive
References/Notes
1. GDP - Per Capita (PPP)
2. Yang (1999), p. 593.
3. Country Studies: South Korea
4. In a Wired South Korea, Robots Will Feel Right at Home
5. A Robot in Every Home by 2020, South Korea Says
6. ì—°ë„별 ìž…ì¶œêµ í†µê³„(1975~1998) Korea Tourist Organization
7. International Monetary Fund, World Economic Outlook Database, &pr1.x=31&pr1.y=13 April 2007. Data for the year 2006.
8. World Bank - July 1, 2006 . Data for the year 2005.
External links
★
kosis.nso.go.kr -
Korea Statistical Information System
★
Korea and the Knowledge Economy – (
World Bank Institute)
★
BOK.or.kr –
Bank of Korea, the
central bank of
South Korea
★
KSE.or.kr–
Korea Stock Exchange
★
Samsung Economic Research Institute
★
OECD's Korea country Web site and
OECD Economic Survey of Korea
★
Development at Home and Abroad: My Lessons from Korea - University of Iowa Center for International Finance and Development
★
Investing in South Korean Stocks - An October, 2006 article with global investor perspecitve discussing general South Korean Market activity and projections.
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