RIYADH, 3 October 2006 —The Republic of Korea will be the world’s ninth largest economy by 2025 with its GDP expanding to $2.63 trillion, according to a study by Goldman Sachs, a global investment bank. Not only this, Korea will be ranked the third after the US and Japan by 2025 among 22 countries in terms of the ranking of income per capita. Its income per capita is expected to soar to $81,000 by 2050 and hence Korea stands as a coveted destination for trade and investment for the Middle East countries in general and for Saudi Arabia in particular. Korea, once known to be one of the world’s poorest agrarian societies, has undertaken economic development in earnest since 1962. In less than four decades, it achieved what has become known as the “economic miracle on the Hangang River” a reference to the river that runs through Seoul — an incredible process that dramatically transformed the Korean economy while marking a turning point in Korea’s history.
An outward-oriented economic development strategy, which used exports as the engine of growth, contributed greatly to the radical economic transformation of Korea. Based on such a strategy, many successful development programs were implemented. As a result, from 1962 to 2003, Korea’s Gross National Income (GNI) increased from $2.3 billion to $576 billion, with its per capita GNI soaring from $87 to about $12,646. These impressive figures clearly indicate the magnitude of success that these economic programs have brought about.
GNI and per capita GNI drastically dropped to $312 billion and $6,744 in 1998 due to the fluctuation in foreign exchange rates but these figures returned to the pre-economic crisis level in 2002. The Korean government is taking major initiatives to improve the nation’s economic competitiveness by adopting a floating exchange rate system making available short-term export financing, simplifying customs procedures, and encouraging foreign investment. Korea’s First Five-Year Economic Development Plan (1962-1966) focused on laying a foundation for industrialization. The plan successfully initiated, and then accelerated, a structural adjustment of the nation’s industrial structure from subsistence agriculture to modern manufacturing and export trade.
In the process of its economic growth, Korea has carried out comprehensive industrialization. The share of primary industries in the overall industrial structure decreased steadily from 31.5 percent in 1970, to 15.7 percent in 1980, and further to 4.1 percent in 2003.
Korea produces a wide range of industrial machinery and equipment. The nation’s shipbuilding and auto manufacturing industries have reached their peak, while its electronics industry is the leading growth sector and an increasingly important generator of foreign exchange. Korea is ranked the sixth-largest auto manufacturer in the world, with a production of over 3 million vehicles annually. To meet ever-increasing fuel demand, large petrochemical complexes, supported by several large refineries, have been developed along the coasts of the country.
Other principal industrial products include cement, processed foods, plywood, chemical fertilizers, footwear, clothing, ceramics, glass, nonferrous metals, and farm implements. To reinvigorate the development of advanced science and technology, the government established the Korea Institute of Science and Technology (KIST) and the Ministry of Science and Technology (MOST) in 1966 and 1967, respectively.
Since the early 1990s the government has been concentrating on three areas: the fostering of research in the basic sciences, securing an efficient distribution and use of R&D resources, and expanding international cooperation. These efforts are intended to increase Korea’s technological competitiveness. Under a “Long-term Plan for National Science and Technology Development,” formulated in 1999, Korea envisions to become one of the top seven technologically advanced nations in the world during the first quarter of the 21st century.
As of the end of 2003, Korea’s total R&D investment reached $16 billion, which accounted for 2.64 percent of GDP. In addition, Korea will continue to strengthen its involvement in global issues such as the preservation of the environment, and a stable supply of food, energy, and health care for the betterment of mankind. Over the past three decades, Korea has enjoyed an annual average economic growth rate of 8.6 percent and has emerged as the world’s 12th largest trading nation.
The nation’s foreign currency reserves that totaled a mere $3.8 billion as of the end of 1997 rose to $199.7 billion as of January 2005 and the nation has been able to repay all the $13.5 billion rescue loan from the International Monetary Fund (IMF). In the process of financial sector reform, the government has closed a number of non-viable financial institutions. Other viable banks are following through on the strong remedial actions imposed by the FSC to further improve their soundness.
Korea’s government has mobilized fiscal resources totaling 159.0 trillion won (approximately $134 billion) to support viable financial institutions in regard to their re-capitalization and the disposal of non-performing loans and resolve non-viable financial institutions. The financial institutions have also intensified their own rehabilitation efforts, including downsizing and the inducement of foreign capital investment. In the corporate sector, overall results of restructuring have been quite positive.
As for the public sector, public institutions and associations have been streamlined and their organizational structures changed. Also, state-owned enterprises are being privatized or have undergone drastic management reform, depending on their business orientation. To form a consensus on labor-related issues, on Feb. 6, 1998, a Tripartite Committee was formed between representatives from labor, business, and the government. The committee established a framework for an equitable sharing of both economic and non-economic costs, and attained public consensus for the restructuring efforts.
In the early 1960s, Korea strictly screened FDI, confining to selected industries and also restricted the repatriation of capital. Under the new law, Foreign Direct Investment (FDI) flow into Korea increased steadily from 1984. In 1993, to make the nation more attractive to foreign investment, the government devised a five-year plan for opening up the domestic market. Entrance to OECD in 1996 stimulated a sharp rise in FDI a year later in 1997, as 57 industries, by far the largest number ever, were fully opened to foreign investors.
The Act on Foreign Investment and Foreign Capital Promotion, revised in the first quarter of 1998, created an almost fully liberalized manufacturing sector. Korea’s strategy for capital market development centers on two interrelated policy initiatives, namely market liberalization and market augmentation. Capital market liberalization will directly increase Korea’s access to foreign capital and technology, while market augmentation will improve the operational efficiency of the capital market.
Significant progress has already been realized in the implementation of measures to further open the Korean capital market and reduce barriers to portfolio and direct investment. Foreign investment will be fully liberalized for all industries, except for those involving national security concerns and cultural considerations such as the mass media. Certain sectors subject to international negotiations over foreign investment such as the communications and shipping industries will also remain controlled.
Foreigners are treated equally with Korean nationals when purchasing land for business purposes as well as non-business purposes. All limits on foreign investment in the local bond and money market have already been eliminated, as has the ceiling on foreign investment in the stock market. Foreign banks and securities companies are also allowed to establish local subsidiaries. As of May 25, 1998, foreign investors have been able to buy shares of any Korean firm without consent of the board of directors or governmental approval, except for defense industry companies and public corporations.