RIYADH, 3 October 2007 — Over the past three decades, South 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 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 poor countries to one of its richest with more capital and resources.
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. This phenomenon has been referred to as the “Miracle on the Han River.” 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. During this period, Korean workers’ wages increased considerably, leading labor-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, Seoul began to actively support its 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. There are other ambitious plans to expand or create other sectors of the economy, including the financial, biotechnology, aerospace and entertainment industries.
Not only this, in less than two generations, the nation has established itself as one of the world’s leading industrial nations, especially excelling in the fields of shipbuilding and manufacturing of electronics, semiconductors and automobiles. International financial markets positively regarded Korea’s economic achievements, including sustained high growth, moderate inflation, high national savings, nominal external deficits and significant government budget surpluses.
Korea has been rapidly integrating itself into the world economy since the onset of the 1997 crisis. The government has advanced a new paradigm that involves upgrading business practices to international standards, promoting human resources and technology development and enhancing institutional efficiency. The timing and strength of the economic recovery will depend largely on the pace of corporate sector restructuring, household adjustment to reduced job security and investor confidence in Korea.
The government remains strongly committed to reform and will continue to implement financial and corporate restructuring while pursuing flexible macroeconomic policies conducive to growth. In fact, Korea’s goal is to solve the problems rooted in its past and create an economic structure suitable for an advanced economy meeting the challenges of the 21st century. Following the change of government in 1998, Korea renewed its resolve to work with the IMF to fully implement comprehensive reform measures.
As such, Korea was determined to adopt stringent adjustment measures to overcome economic crisis. The new leadership took steps to promote reform in the financial, corporate, public and labor sectors with a view to restoring and strengthening foreign investors’ confidence as well as maintaining a commitment to a free-market economy, restructuring of the chaebol-based system, and increasing flexibility in the labor market.
Korea’s foreign currency reserves that totaled a mere $8.9 billion as of the end of 1997 rose to $215.9 billion as of February 2006 and the nation has been able to repay all the $13.5 billion rescue loan from the International Monetary Fund (IMF).
To this end, it is important to mention that the macroeconomic policy pursued by Korea aimed and still seeks to achieve stabilization by requiring acquisition of sufficient foreign reserves, reforming the corporate and the financial sectors, and laying a foundation for enhancing the country’s long-term growth potential.
The Bank of Korea maintained a tight monetary policy stance since 1997, reflected in the market interest rate hike that at one point reached as high as 20 percent. In the public sector, a stringent government budget was implemented with a 3.8 percent growth rate, which is lower than the nominal GDP growth. The organization and staff of government agencies were reorganized and paired down while local government budgets were reduced.
As a result of structural reforms in the economy following the 1997-98 upheavals, Korea was able to build a strong industrial foundation, especially in the areas of semiconductors, automobiles, shipbuilding, and petrochemicals. For example, Korea’s shipbuilding industry holds 32. 3 percent of the world market share, competing neck and neck with Japan, followed by the People’s Republic of China with 6.8 percent in 2001. Since Nov. 1997, however, the currency crisis and financial meltdown have threatened the remarkable economic growth Korea has achieved over the past three decades. According to a recently published survey, the top 10 export products were: semiconductors, automobiles, computers, wireless telecommunication equipment, ships, oil products, synthetic fibers, visual display devices, steel plates and clothing. Those items accounted for 55.4 percent of the nation’s total export revenue recently. Compared with the top 10 item list made in 1982, only five items — clothing, ships, steel plates, semiconductors and visual display devices remained on top.
Semiconductors, automobiles, and communication equipment grew so vigorously in terms of export that it topped the list and replaced other items such as shoes, synthetic filaments, audio equipment, textiles and steel structures. And side by side came the reform process. The corporate sector reforms aimed to achieve two objectives; to reduce the size of corporate debt, and to institute a new corporate governance structure that induced better and more transparent management.
Unlike in the past, the government did not intervene directly in the restructuring of the corporate sector. Instead, the government focused on improving legal and institutional environment to facilitate and monitor the process and supported the financial sector to expedite its restructuring efforts by providing funds for recapitalization and liquidate all nonperforming bonds. Big corporations led by Hyundai, Samsung, Daewoo, LG and SK groups agreed to realign their businesses in seven areas — semiconductors, petrochemicals, automobiles, aircraft, rolling-stock, power generating facilities, ship engines and petroleum refining.
Their efforts to merge companies in the same line of business to cut the number of companies in each field reduced the number of subsidiaries from 804 in April 1998 to 544 in 2000. This exercise is still continuing during 2007.