The economy of South Korea is a developed, largely free-market economy that is the fourth largest in Asia and 15th largest in the world. South Korea's transformation into a developed country between 1960 and 1980 was called the Miracle on the Han River by Koreans. The nation was considered to be one of the "Asian Tigers".
Today, South Korea is classified as a high income economy by the World Bank and an advanced economy by the IMF and CIA. South Korea's capital, Seoul, is a major global city and a leading international financial centre in Asia. South Korea has the smallest gaps between the rich and the poor in high income Asian economies.
An extremely competitive education system and a highly skilled and motivated workforce are two key factors driving this knowledge economy that has the world's highest scientific literacy and second highest mathematical literacy.
It boasts the world's highest broadband internet access per capita. In 2007, the Economist Intelligence Unit ranked South Korea's IT Industry Competitiveness among the top three in the world.
South Korea's economy relies heavily on exports and is the eleventh largest exporter. It is home to many well known global conglomerates such as Samsung, Hyundai-Kia, LG and SK.
In the second quarter of 2009, South Korea’s economy expanded 2.6 percent from the previous three months, The economy has achieved the highest growth rates among OECD countries as support from the government and the central bank bore fruit.
History
Following 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. South Korea signed in 1965 to Treaty on Basic Relations between Japan and the Republic of Korea. Hereby, South Korea received $800 million in grants and soft loans from Japan. The South Korea government spent most of its money establishing social infrastructures and corporation, founding POSCO, building Gyeongbu Expressway and the Soyang River Dam.
Rapid growth from 1960s to 1980s
South Korea's real gross domestic product expanded by an average of more than 8.7% per year, from US$30.3 billion in 1960 to US$340.7 billion in 1989. GDP per capita grew from US$1,226 in 1960 to US$8,027 in 1989. Thanks to industrialization GDP per hour worked (labor output) more than tripled from US$2.80 in 1963 to US$10.00 in 1989. 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, high 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, Korea'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 rural living standards.
Stability
In the early 1980s, 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. Korea 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.
1990s and the Asian Financial Crisis
For the first half of the 90's, the South Korean economy continued a stable and strong growth in both private consumption and GDP. Things changed quickly in 1997 with the Asian Financial crisis that started in Thailand. After several other Asian currencies were attacked by speculators, the Korean Won started to heavily depreciate in October 1997. The problem was exacerbated by the problem of non-performing loans at many of Korea's merchant banks. By December 1997, the IMF had approved a USD$21 billion loan, that would be part of a USD$58.4 billion bailout plan. By January 1998, the government had shut down a third of Korea's merchant banks. Throughout 1998, Korea's economy would continue to shrink quarterly at an average rate of -6.65%. Korean chaebol Daewoo became a casualty of the crisis as it was dismantled by the government in 1999 due to debt problems. American company General Motors managed to purchase the motors division.Indian congolmerate Tata Group, purchased the trucks and heavy vehicles division of Daewoo.
Thanks to action by the Korean government and debt swaps by international lenders the financial problems were able to be contained. Much of South Korea's recovery from the Asian Financial Crisis can be attributed to labor adjustments (ie. a dynamic and productive labor market) and alternative funding sources. By the first quarter of 1999, GDP growth had risen to 5.4%, and strong growth thereafter combined with deflationary pressure on the currency lead to a yearly growth of 10.5%. In December 1999, president Kim Dae-jung declared the currency crisis over.
2000s
After the bounce back from the crisis of the late nineties, the economy continued strong growth in 2000 with a GDP growth of 9.08%. Growth fell back to 3.8% in the early 2000s because of the slowing global economy, falling exports, and the perception that corporate and financial reforms had stalled. More recently the economy stabilized and maintain a growth rate between 4-5% from 2003 onwards. Restructuring of Korean 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.
South Korea relies largely upon exports to fuel the 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.
Korea was heavily affected by the economic crisis of 2008. Following the bankruptcy of a major Korean institution, the Korean Won lost up to 30% of its value, and the Government of Korea was forced to introduce a major stimulus package to stimulate the economy.
Government role
See also: Five-year plans of South KoreaUnder 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 an agricultural nation into a modern industrial nation that would provide a high quality 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
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