South Korea's Economy on the Upswing [ voanews ]

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South Korea's Economy on the Upswing

Washington, D.C.
02 February 2006




Since the early-1960s, the "Asian Tiger" has achieved record economic growth and become one of the world's leaders in high technology, but some analysts say the Asian financial crisis of the late-1990s exposed the limitations of South Korea's economic model.

When the Korean War ended in 1953, South Korea was one of the poorest countries in the world. Its per capita gross domestic product -- the total yearly output of goods and services - was below one percent, comparable to that of poor countries in Africa and Asia. In 2004, South Korea joined the trillion-dollar club of world economies.

Three and a Half Decades of Extraordinary Economic Growth



South Korea's unprecedented growth started soon after a 1961 military coup installed General Park Chung-hee as president.

“South Korea had an extraordinary period of economic growth from roughly 1963 till it hit a financial crisis in 1997,” says Marcus Noland, a senior fellow at the Institute for International Economics in Washington.

“During that period, growth averaged eight percent a year and there was only one year, 1980, after the second oil shock [in 1973] and the assassination of the leader, President Park Chung Hee [in 1979], in which they had negative growth. So this is really an unparalleled historical experience. And really, South Korea is the first country to go from developing country to developed country status,” says Noland.



Today, South Korea's Samsung Electronics Company is the world's largest maker of plasma display panels [i.e., flat screen plasma TVs]. Its LG Electronics firm is Asia's second-largest mobile phone maker and Korea's Hyundai cars are gaining worldwide popularity for their affordable prices and good performance.

Clyde Prestowitz, President of the Economic Strategy Institute in Washington, says few countries today can compete with South Korea's computer industry and Internet technology. “[South] Korea is clearly the leader in Internet technology and in the use of cell-phone technology, biotechnology and telecommunications technology, and semi-conductor technology. It's just light years ahead of the United States in these areas,” says Prestowitz.

The Strategy of Developmental Dictatorship

After the Korean War, South Korea began to transform itself from an agrarian to an industrial economy. It achieved rapid economic growth through a unique state-led strategy, which included tight governmental control of capital and the country's financial system, state sponsorship of selected industries, import restrictions and emphasis on science education.

Peter Beck is an expert on Korea at the International Crisis Group's office in Seoul, the South Korean capital. He says the strategy of developmental dictatorship, started under President Park, has helped fuel South Korea's rapid economic growth since the early-1960s.

“It is primarily the president who does the dictating, but he was listening to the business community and not just making decisions in the vacuum. But the fact that he was a dictator insulated him from a lot of the public pressures that a democratic leader would have faced. And so he could make tough decisions. He could keep wages low, for example, because he could resist social pressure to raise wages,” says Peter Beck.



South Korea's economy flourished until the onslaught of Asia's financial crisis in the late-1990s, when growth plunged to a negative 6.9 percent. Long-time dissident and opposition leader Kim Dae-jung, who became president at the time, was able to obtain an international loan package to save the country from bankruptcy. In exchange, he pledged economic reforms, including closing bankrupt banks and opening up capital markets to allow foreign investment in South Korea. Such free-market reforms helped pull the economy out of its slump by 1999.

But some analysts, including Marcus Noland, say the crisis has exposed some of the limitations of South Korea's government-controlled economic model.

“First of all, it tends to bureaucratize the financial system. Bankers begin acting like bureaucrats instead of acting like bankers. They don't exercise much judgment in how they allocate capital. Secondly, it encourages corruption because if the government is encouraging the banks to loan to some favored groups, firms or activities capital at preferential interest rates, then, obviously, there's an incentive to bribe government officials, bankers and others in order to be able to get that preferential access for yourself,” explains Marcus Noland.


Rigid Labor Markets Stifle Growth


But Marcus Noland says South Korea increasingly needs effective corporate and financial management. Many analysts say the country's most pressing problem is its highly unionized labor force, known for its massive strikes against the closing down of unproductive companies.

But analyst Clyde Prestowitz argues that South Korea's economic model is not rigid: “In the late-1990s and the early years of this century, [South] Korea went through pretty dramatic reform and restructuring of its industry and of its economic model. And it began to focus a bit more on consumer welfare and on promoting consumer credit and things like that. And I think it is today one of the world's strongest economies”.

South Korea's economic growth averaged a healthy four percent for the past two years and most economists say the outlook for future growth is good.

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