The Republic of Korea, commonly known as South Korea, is one of the most successful newly emerging countries. Korea’s development experience over the past half-century has been a source of inspiration for other developing countries. Indeed, Korea may be the face of hope for all those countries who want to radically transform the social and economic conditions of their people in the course of a single generation. Even among successful countries characterized by sustained high growth, Korea stands out with its impressive industrial upgrading and ability to recover quickly from shocks. It has transformed itself from a poverty-stricken country to one of the developed nations with highly positive social and economic parameters, within a single generation. Understanding the Korean development model and policies is of utmost importance for other developing nations as there are important lessons to gain.
After the Korean War, South Korea remained one of the poorest countries in the world for over a decade. In 1960, its gross domestic product per capita was $79, lower than that of some sub-Saharan countries. The hwan (South Korean currency) lost half of its value against the dollar between fall 1960 and spring 1961. The Korean economy was heavily characterised by agriculture and mining, while manufacturing consisted of less than 3% of the GNP.
The Korean Institute for International Trade (KITA) states that policies of globalisation and liberalisation are the most critical elements in booming the Korean economy. The government started by announcing its five-year economic development plan based on an export-oriented industrialization policy. Top priority was placed on the growth of a self-reliant economy and modernization. The economy grew rapidly with vast improvements in industrial structure, especially in the basic and heavy chemical industries. Persistent development required large capital investments so the government used the influx of foreign aid from Japan and the United States to provide loans to export businesses, with preferential treatment in obtaining low-interest bank loans and tax benefits. The United States offered about $60bn in grants and loans to South Korea between 1946 and 1978. The government focused on building up large economic champions, or chaebols (business conglomerates), against American advice to focus on small- and medium-sized companies. That policy laid the foundation for successful South Korean brands in the world market, such as Samsung and LG, although it came at a price in terms of political corruption in the close ties between business and political elites. Economic and technological growth during this period improved the standard of living, which expanded opportunities for education. Workers with higher education were absorbed by the rapidly growing industrial and commercial sectors, and urban population surged.
Despite the immense economic growth, however, the standard of living for city labourers and farmers was still low. Laborers were working for low wages to increase the price competitiveness for the export-oriented economy plan and farmers were in near poverty as the government-controlled prices. As the rural economy steadily lost ground and caused dissent among the farmers, however, the government decided to implement measures to increase farm productivity and income. Despite the social and political unrest, the economy continued to flourish under the authoritarian rule with the export-based industrialization policy. Development plans focussed on expanding the heavy and chemical industries, raising the capability for steel production and oil refining. As most of the development had come from foreign capital, most of the profit went back to repaying the loans and interests. In the 1980s, tight monetary laws and low-interest rates contributed to price stability and helped the economy boom with notable growth in the electronics, semiconductor, and automobile industries. The country opened up to foreign investments and GDP rose as Korean exports increased.
In the first half of the 1990s, in already democratic South Korea, the economy continued a stable and strong growth. However, things changed quickly in 1997 with the Asian Financial Crisis. Much of South Korea's recovery from the Asian Financial Crisis can be attributed to labour adjustments (i.e. a dynamic and productive labour market with flexible wage rates) and alternative funding sources like the IMF.
The Korean transformation from a poor low per capita GDP country to a rich manufacturing economy hasn’t been a smooth one. It was marred by protests and unrests yet, the country managed to turn things around for itself in about 3 decades. It was only possible due to the persistent focus on trade and export-oriented manufacturing. If one looks upon the Korean economy from 1960-1990, one will find the consistent introduction of new and innovative policies to facilitate trade and promote industrialisation and manufacturing in the economy. There is another important part of the development process that is often missed out by researchers and academicians. The Korean government has given immense importance to human capital and has invested in health and education of its people. The Korean government did not encourage abroad education, rather it tried to create an enabling environment by inviting intellectuals into Korea. Another important lesson that developing nations like India must learn from Korea is its persistence on economic growth and development without being hampered by protests and social unrest. Thus, the South Korean development model acts as an inspiration for other developing nations which shows that appropriate policies along with good governance can turn around the fortunes of a country even with a span of few decades.
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