South Korea's trans­for­ma­tion from 'Her­mit King­dom' to eco­nomic power

Financial Nigeria Magazine - - Contents - South Korean Pres­i­dent Moon Jae-in

Eco­nomic Back­ground

For most of its post­war his­tory, South Korea has re­lied on eco­nomic lib­er­al­iza­tion world­wide to drive its econ­omy. The coun­try, squeezed be­tween larger na­tions and strapped for nat­u­ral re­sources, has used a close re­la­tion­ship be­tween govern­ment and in­dus­try, as well as a proac­tive trade pol­icy, to build a re­silient econ­omy. Along the way, it shed its rep­u­ta­tion as a her­mit king­dom to be­come a global eco­nomic power.

The Korean Penin­sula has a long tra­di­tion of in­no­va­tion and de­vel­op­ment. Its peo­ple built the world's first astro­nom­i­cal ob­ser­va­tory, de­vel­oped metal print­ing presses hun­dreds of years be­fore Western coun­tries did and launched iron­clad ships at the end of the 16th cen­tury. But in­va­sion and oc­cu­pa­tion at the hands of larger, more pow­er­ful na­tions – namely China and Ja­pan – punc­tu­ated each era of wealth and de­vel­op­ment. Given the re­gion's his­tory, it is hardly sur­pris­ing that South Korea's mod­ern econ­omy emerged rather rapidly af­ter the Korean War, which it­self fol­lowed World War II and Ja­pan's 35year oc­cu­pa­tion of Korea. The tu­mult of the pre­ced­ing decades left the penin­sula dev­as­tated and di­vided by the mid-1950s. But South Korea man­aged to turn its econ­omy around. Most of its pop­u­la­tion still de­pended on the agri­cul­tural sec­tor at the end of the war. By the late 1960s, agri­cul­ture sup­ported just one-third of the pop­u­la­tion, and to­day, only 1 in 50 Kore­ans is di­rectly in­volved with the sec­tor. Within a mat­ter of decades, a poor agrar­ian na­tion that de­pended on for­eign aid had be­come one of the world's largest economies.

Dubbed the Mir­a­cle on the Han River, an Asian tiger and a lit­tle dragon, Korea's econ­omy thrived. Ex­ports fu­eled the coun­try's pre­cip­i­tous eco­nomic rise, sup­ported by the col­lab­o­ra­tive re­la­tion­ship be­tween the govern­ment and fam­ily-led con­glom­er­ates known as chae­bols. Un­der au­thor­i­tar­ian lead­er­ship and a cul­ture grounded in Con­fu­cian ideals that dic­tated fa­mil­ial loy­alty, obe­di­ence and hard work, the South Korean work­force quickly de­vel­oped a rep­u­ta­tion as one of the world's most dili­gent and ef­fi­cient la­bor pools. In this re­spect, South Korea re­sem­bles Ja­pan, its geopo­lit­i­cal ri­val and a ma­jor eco­nomic com­peti­tor. The coun­tries' economies, in fact, share many strik­ing sim­i­lar­i­ties. The chae­bols, for ex­am­ple, are not un­like Ja­pan's keiretsu. And be­cause arable land is scarce in both coun­tries, each state turned to ex­ports of man­u­fac­tured goods to drive growth.

Seoul em­pha­sized man­u­fac­tur­ing ini­tially as part of an im­port sub­sti­tu­tion strat­egy, in­stat­ing tar­iffs and non-tar­iff bar­ri­ers to dis­cour­age com­peti­tors from flood­ing the South Korean mar­ket with their goods and ser­vices. Once the coun­try's do­mes­tic man­u­fac­tur­ing sec­tor had de­vel­oped, the govern­ment then fa­cil­i­tated favourable con­di­tions for its own ex­ports. The com­po­si­tion of South Korea's ex­ports has evolved in phases, start­ing with gar­ments and tex­tiles in the early post­war days be­fore grad­u­at­ing to con­struc­tion, heavy in­dus­try and chem­i­cals in the late 1960s through the 1970s.

Around that time, South Korea's au­to­mo­bile sec­tor also be­gan to take off. The govern­ment first be­gan in­creas­ing the as­sem­bly of for­eign ve­hi­cles in the coun­try through tax in­cen­tives and tar­iff ad­just­ments, but by 1976, Hyundai Mo­tor Co. was rolling its own mod­els off its as­sem­bly lines. Other South Korean car com­pa­nies such as Kia Mo­tors later es­tab­lished them­selves as house­hold names as well. In an ef­fort to con­trol ev­ery as­pect of the ex­port process, Hyundai en­tered the ship­build­ing sec­tor in the 1970s. Fel­low chae­bols in­clud­ing Dae­woo and Sam­sung Elec­tron­ics fol­lowed suit, help­ing to make South Korea one of the world's lead­ing ship­builders.

The govern­ment changed course af­ter the global oil cri­sis of the 1970s, and in the next decade, South Korea delved into the elec­tron­ics sec­tor. As they had pre­vi­ously with heavy in­dus­try, lo­cal com­pa­nies at first part­nered with for­eign firms to learn the ropes of elec­tron­ics man­u­fac­tur­ing. From there, the chae­bols took ad­van­tage of their close ties to Seoul, ac­cess to govern­ment cap­i­tal and ef­fi­cient work­force to ex­cel in the in­dus­try. South Korea was one of the world's largest pro­duc­ers of dy­namic ran­dom-ac­cess me­mory, or DRAM, by the mid-1990s. To­day, Sam­sung and LG Elec­tron­ics Inc., two of the coun­try's largest chae­bols, are lead­ers in high-tech con­sumer prod­ucts. But the strength of its con­glom­er­ates be­lied the weak­nesses lurk­ing in South Korea's econ­omy. In 1997, the Asian fi­nan­cial cri­sis brought the cracks in the Korean sys­tem to light. The govern­ment tar­geted the chae­bols that had driven its eco­nomic rise for re­form. Even so, the com­pa­nies' wellestab­lished man­u­fac­tur­ing, au­to­mo­tive and ship­ping in­ter­ests en­abled South Korea's quick re­cov­ery from the cri­sis. Chae­bols, more­over, are still the most com­pet­i­tive em­ploy­ers in the coun­try to­day; on av­er­age, em­ploy­ees of small and medium-sized en­ter­prises re­ceive just 63 per­cent of what work­ers em­ployed by the large con­glom­er­ates earn.

As South Korea's econ­omy has evolved over the decades, Seoul has stead­fastly pro­tected the agri­cul­tural sec­tor that once drove it. Farm­ers and fish­ers re­ceive just un­der half of their in­come on av­er­age from govern­ment sup­port. (Rel­a­tive to other coun­tries in the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment, South Korea pro­vides one of the high­est lev­els of aid to its agri­cul­tural pro­duc­ers.) Seoul main­tains high prices on agri­cul­tural goods in part to sus­tain the pay­ments, de­signed to keep agri­cul­tural work­ers' in­comes com­pa­ra­ble to the con­stantly im­prov­ing wages of ur­ban­ites. And be­cause of its dearth of arable land, South Korea still strug­gles with a sup­ply de­fi­ciency nearly as large as its to­tal trade sur­plus. The coun­try de­pends on agri­cul­tural im­ports to fill the siz­able gaps in its do­mes­tic pro­duc­tion.

Trade Implications

Trade Strat­egy

For most of its post­war his­tory, South Korea re­lied on mul­ti­lat­eral sys­tems to gov­ern its in­ter­na­tional trade. Over the past decade, how­ever, the coun­try has turned in­creas­ingly to free trade agree­ments, putting it at the van­guard of the global tran­si­tion away from broad mul­ti­lat­eral deals. (Its geopo­lit­i­cal po­si­tion as a small coun­try wedged be­tween larger pow­ers has al­ways pushed South Korea to the fore­front of eco­nomic shifts to de­fend its own tiny mar­ket.) To­day, free trade agree­ments have be­come a key part of its na­tional eco­nomic strat­egy. Ex­pand­ing its net­work of trade deals is nec­es­sary to ad­vance South Korea's eco­nomic well-be­ing while coun­ter­ing com­pet­i­tive pres­sure from Ja­panese and Chi­nese firms and adapt­ing to the de­mo­graphic changes in the South Korean work­force.

South Korea has ag­gres­sively pur­sued free trade deals with coun­tries large and small to sus­tain its boom­ing ex­ports mar­ket and to keep up with re­gional com­peti­tors. Its ne­go­ti­a­tions with smaller trade part­ners typ­i­cally fo­cus on di­ver­si­fy­ing its mar­ket ac­cess with­out jeop­ar­diz­ing its in­ter­ests. South Korea's free trade agree­ment with Sin­ga­pore, for in­stance, left out agri­cul­tural ex­ports. Its trade pacts with larger na­tions, mean­while, in part re­flect its na­tional se­cu­rity pri­or­i­ties, in­clud­ing for­ti­fy­ing its strate­gic re­la­tions with ma­jor pow­ers such as China and the United States. And its ef­forts have paid off. Roughly 70 per­cent of South Korea's ex­ports en­joy un­ob­structed ac­cess to over­seas mar­kets.

But the coun­try's econ­omy is ap­proach­ing an­other cross­roads as so­cial inequal­ity grows, pri­vate con­sump­tion de­clines and ex­ports slow in key in­dus­tries such as au­to­mo­biles and ship­build­ing. These changes could cause Seoul to shift its trade strat­egy, for ex­am­ple by pro­mot­ing more small and medium-sized do­mes­tic en­ter­prises to make up for the de­clin­ing ef­fi­cacy of the chae­bol struc­ture. Nev­er­the­less, the same core group of sec­tors that spurred South Korea's mirac­u­lous growth over the past 50 years will con­tinue to guide the free trade agree­ments it ne­go­ti­ates down the line.

Of­fen­sive in­ter­ests

A sta­ple of South Korea's econ­omy, the ship­build­ing in­dus­try is one of the coun­try's main of­fen­sive in­ter­ests. Low

wages and the dis­tinc­tion as a strate­gic in­dus­try helped the sec­tor thrive ini­tially. The South Korean ship­build­ing in­dus­try ben­e­fited fur­ther from a de­cline in Ja­pan's com­pet­i­tive­ness in the years be­tween the 1997 and 2008 fi­nan­cial crises and from glob­al­iza­tion when Seoul gained par­tial own­er­ship of some ship­yards in Europe. But to­day, ship­builders in South Korea and around the world are still strug­gling to re­cover from the 2008-09 slump, which caused a pro­longed dip in de­mand for global ship­ping and led to an over­sup­ply of ships. Low oil prices, too, are hurt­ing chae­bols such as Dae­woo that build off­shore oil rigs in ad­di­tion to their other ac­tiv­i­ties. The sec­tor has en­dured heavy lay­offs and sub­stan­tial losses re­cently, though the South Korean govern­ment has propped up the in­dus­try, giv­ing Dae­woo, for ex­am­ple, a $2.6 bil­lion bailout in April. As the global ship­ping sec­tor slowly re­bal­ances and regains its strength, South Korea will con­tinue work­ing to lower bar­ri­ers to its ship­build­ing in­dus­try in trade ne­go­ti­a­tions.

Its fu­ture, how­ever, lies in elec­tron­ics and high-tech man­u­fac­tur­ing. South Korea will main­tain an of­fen­sive stance in this sec­tor, seek­ing out new mar­kets for its tech prod­ucts to com­pete with long-stand­ing ri­vals such as Ja­pan and emerg­ing chal­lengers such as China. Seoul, like Bei­jing, is in the throes of an eco­nomic tran­si­tion, the ef­fects of which are likely to be most pro­nounced in the tech­nol­ogy sec­tor. Af­ter re­ly­ing on part­ner­ships and fi­nan­cial ad­van­tages to ad­vance its econ­omy, South Korea is start­ing to em­pha­size in­no­va­tion and cre­ativ­ity. To that end, the coun­try may turn to­ward small and medium-sized en­ter­prises in­stead of chae­bols. Do­ing so will prob­a­bly re­quire re­forms, as will ad­dress­ing South Korea's high lev­els of youth un­em­ploy­ment. And in the wake of these prospec­tive re­forms, Seoul may pur­sue measures in fu­ture trade deals to pro­tect its smaller com­pa­nies in their quest for in­no­va­tion.

Com­pared with its other of­fen­sive in­ter­ests, South Korea's au­to­mo­tive sec­tor is more com­pli­cated, con­sid­er­ing it is also a de­fen­sive in­ter­est. The govern­ment has im­ple­mented de­fen­sive safety and en­vi­ron­men­tal stan­dards to keep for­eign com­peti­tors out of its tiny do­mes­tic mar­ket. But be­cause South Korea's mar­ket is too small to sus­tain its au­tomak­ers, Seoul has also worked to in­crease its mar­ket share over­seas by re­duc­ing bar­ri­ers to its ve­hi­cles through trade ne­go­ti­a­tions. The coun­try's pas­sen­ger ve­hi­cle ex­ports soared af­ter the Asian fi­nan­cial cri­sis, nearly qua­dru­pling from 2001 to sur­pass $44 bil­lion in 2014 (though they have since fallen, dip­ping be­low $38 bil­lion in 2016). In the process, South Korean au­to­mo­tive man­u­fac­tur­ers found them­selves in more di­rect com­pe­ti­tion with com­pa­nies in the United States, Europe and Ja­pan. Some of South Korea's trade part­ners may ob­ject to its non­tar­iff bar­ri­ers, es­pe­cially if they turn trade flows in Seoul's favour. Al­ready, U.S. Pres­i­dent Don­ald Trump's ad­min­is­tra­tion has high­lighted the au­to­mo­tive sec­tor as one of the short­com­ings of the free trade deal the United States signed with South Korea in 2012. (Wash­ing­ton in­tends to rene­go­ti­ate the pact, as U.S. Trade Rep­re­sen­ta­tive Robert Lighthizer an­nounced July 12.) The chal­lenges the sec­tor's of­fen­sive and de­fen­sive in­ter­ests pose have en­cour­aged Seoul to largely ex­clude the au­to­mo­tive in­dus­try from cer­tain trade agree­ments, such as the one it re­cently closed with Bei­jing.

De­fen­sive in­ter­ests

As for its more straight­for­ward de­fen­sive in­ter­ests, agri­cul­ture is still the most sen­si­tive sec­tor for South Korea, de­spite its small con­tri­bu­tion to the coun­try's econ­omy. Seoul re­lies on high tar­iffs – nearly 60 per­cent – along with tight quo­tas and re­stric­tive reg­u­la­tions on agri­cul­tural im­ports to in­su­late its do­mes­tic sec­tor, es­pe­cially rice, meat and dairy. In pre­vi­ous free trade deals, South Korea has ne­go­ti­ated to grad­u­ally open its mar­ket, for in­stance through sched­ules to phase out tar­iffs and non-tar­iff bar­ri­ers on se­lect fruits and veg­eta­bles. Rice, on the other hand, is a peren­nial ex­cep­tion be­cause of its cen­tral role in the govern­ment's ef­forts to main­tain self­suf­fi­ciency in grain. Now that the coun­try's farm­ing com­mu­nity is rapidly shrink­ing, South Korea will have to turn to tech­no­log­i­cal ad­vances such as au­to­ma­tion to keep up its do­mes­tic agri­cul­tural pro­duc­tion, how­ever small it may be. It may even have to lib­er­al­ize the sec­tor. Down the line, these con­sid­er­a­tions are likely to fac­tor into dis­cus­sions on free trade agree­ments.

South Korea's ser­vice sec­tor, too, is closely pro­tected since it has largely un­der­per­formed rel­a­tive to other do­mes­tic in­dus­tries and to the ser­vice sec­tors of other de­vel­oped economies. (La­bor pro­duc­tiv­ity in the South Korean ser­vice sec­tor is about half that of the U.S. in­dus­try and 70 per­cent of that of Ja­pan.) As the coun­try's man­u­fac­tur­ing ex­ports ma­ture, though, a more ro­bust ser­vice sec­tor could help com­pen­sate for its flag­ging au­to­mo­tive and ship­build­ing in­dus­tries while also ac­com­mo­dat­ing its ag­ing pop­u­la­tion and ris­ing in­come inequal­ity. With that in mind, Seoul has at­tempted to re­form the in­dus­try to try to stim­u­late pro­duc­tiv­ity, sup­port small and medium-sized en­ter­prises, and en­cour­age the de­vel­op­ment of mod­ern in­dus­tries such as health care, telecom­mu­ni­ca­tions and le­gal and fi­nan­cial ser­vices. South Korea's govern­ment has also used free trade ne­go­ti­a­tions to slowly open up its ser­vice sec­tor to over­seas providers in hopes of fa­cil­i­tat­ing struc­tural changes at home. Its re­cent trade deals with the Euro­pean Union and United States ex­em­plify its strat­egy to pro­mote ser­vices trade across a range of ar­eas, in­clud­ing ex­press de­liv­ery, telecom­mu­ni­ca­tions and broad­cast.

“South Korea's Trans­for­ma­tion From ‘Her­mit King­dom' to Eco­nomic Power” is re­pub­lished un­der con­tent con­fed­er­a­tion be­tween Fi­nan­cial Nige­ria and Strat­for.

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