Economy of South Korea

Template:Economy of South Korea table The economy of South Korea is the 14th largest in the world according to GDP measured in PPP, and the tenth when measured nominally, as of 2006. Per capita gross national product, only $100 in 1963, exceeded $20,000 USD in 2005.

The core of the South Korean economy has changed substantially over the country's six-decade existence. In the 1940s, the country was predominantly agricultural, with little industry. The emphasis shifted to light industry and consumer products in the following decades, and then to heavy industry in the 1970s and 1980s. In the first three decades after the Park Chung Hee government launched the First Five-Year Economic Development Plan in 1962, the South Korean economy grew enormously and the economic structure was radically transformed.

The rapid economic growth of the late 1980s, however, slowed considerably in 1989. The growth rate was cut almost in half from the previous year (to a still-robust approximate 6.5 percent), the inflation rate increased as wages soared even higher. These developments all pointed to a gradual slowing of the expansion of the rapidly maturing economy.

As in other developed countries, the service sector has become increasingly dominant since the 1990s; it now comprises about two-thirds of the GDP.

Historical overview

Following the Japanese occupation 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.

Beginning in the 1960's

South Korea's real gross national product expanded by an average of more than 8 percent per year, from US$2.3 billion in 1962 to US$204 billion in 1989. Per capita annual income grew from US$87 in 1962 to US$4,830 in 1989. The manufacturing sector grew from 14.3 percent of the GNP in 1962 to 30.3 percent in 1987. Commodity trade volume rose from US$480 million in 1962 to a projected US$127.9 billion in 1990. 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, low 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, Seoul'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 living standards in rural areas.

Shift to capital-intensive industries

By the early 1970s, however, the industrial sector had begun to face problems of its own. Up to that time, the industrial structure had been based on low value-added and labor-intensive products, which faced increasing competition and protectionism from other developing countries. The government responded to this problem in the mid-1970s by emphasising the development of heavy and chemical industries and by promoting investment in high value-added, capital-intensive industries.

The structural transition to high value-added, capital intensive industries was difficult. Moreover, it occurred at the end of the 1970s, a time when the industrial world was experiencing a prolonged recession following the second oil price shock of the decade and protectionism was resulting in a reduction of South Korean exports. By 1980 the South Korean economy had entered a period of temporary decline: negative growth was recorded for the first time since 1962, inflation had soared, and the balance-of-payments position had deteriorated significantly.

Stability

In the early 1980s, Seoul instituted wide-ranging structural reforms. 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. Seoul 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.

Domestic market

In the late 1980s, the domestic market became an increasing source of economic growth. Domestic demand for automobiles and other indigenously manufactured goods soared because South Korean consumers, whose savings had been buoyed by double-digit wage increases each year since 1987 and whose average wages in 1990 were about 50 percent above what they had been at the end of 1986, had the wherewithal to purchase luxury items for the first time. The result was a gradual reorientation of the economy from a heavy reliance on exports toward greater emphasis on meeting the needs of the country's nearly 43 million people. The shifts in demand and supply indicated that economic restructuring was underway, that is, domestic consumption was rising as net foreign demand was falling. On the supply side, the greater growth in services mirrored what the people wanted--more goods, especially imports, and many more services.

By 1990 there was evidence that the high growth rates of the late 1980s would slow during the early 1990s. In 1989 real growth was only 6.5 percent. One reason for this development was the economic restructuring that began in the late 1980s--including the slower growth of major export industries that were no longer competitive on the world market (for example, footwear) and the expansion of those industries that were competitive, such as electronics.

Current status

In recent years South Korea's economy moved away from the centrally planned, government-directed investment model toward a more market-oriented one. South Korea bounced back from the 1997-98 crisis with International Monetary Fund assistance, and carried out extensive financial reforms that restored stability to markets. These economic reforms pushed by President Kim Dae-jung, helped Korea maintain one of Asia's few expanding economies, with growth rates of 10% in 1999 and 9% in 2000. The slowing global economy and falling exports account for the drop in growth rates in 2001 to 3.3%, but in 2002 Korea pulled out a very respectable 6.0% growth rate. Restructuring of Korean conglomerates (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. As of 2004 the economic situation looks less promising than in the years before. Increasing trade with the People's Republic of China, however, is expected to boost Korea to a leading position among Asia's developed economies. It is also expected to lead the world in penetrating Japan's trade barriers.

South Korea relies largely upon exports to fuel the impressive 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 through the WTO by which South Korean rice imports will gradually increase from 4% of consumption 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.

Government role

Under 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 a backward agricultural nation into a modern industrial nation that would provide a decent way 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 both legitimacy for his regime and greater independence for South Korea in a vigorous program of economic development that would transform the country from an agricultural backwater into a modern industrial nation.

The Park administration decided that the central government must play the key role in economic development because no other South Korean institution had the capacity or resources to direct such drastic change in a short time. The resulting economic system incorporated elements of both state capitalism and free enterprise. The economy was dominated by a group of chaebol, large private conglomerates, and also was supported by a significant number of public corporations in such areas as iron and steel, utilities, communications, fertilizers, chemicals, and other heavy industries. The government guided private industry through a series of export and production targets utilizing the control of credit, informal means of pressure and persuasion, and traditional monetary and fiscal policies.

The government hoped to take advantage of existing technology to become competitive in areas where other advanced industrial nations had already achieved success. Seoul presumed that the well-educated and highly motivated work force would produce low-cost, high-quality goods that would find ready markets in the United States and the rest of the industrial world. Profits generated from the sale of exports would be used to further expand capital, provide new jobs, and eventually pay off loans.

In 1961 Park extended government control over business by nationalizing the banks and merging the agricultural cooperative movement with the agricultural bank. The government's direct control over all institutional credit further extended Park's command over the business community. The Economic Planning Board was created in 1961 and became the nerve center of Park's plan to promote economic development. It was headed by a deputy prime minister and staffed by bureaucrats known for their high intellectual capability and educational background in business and economics. Beginning in the 1960s, the board allocated resources, directed the flow of credit, and formulated all of South Korea's economic plans. In the late 1980s, the power to allocate resources and credit was restored to the functional ministries. In 1990 the Economic Planning Board primarily was charged with economic planning; it also coordinated and often directed the economic functions of other government ministries, including the Ministry of Finance. The board was complemented by the Korea Development Institute, an independent economic research organization funded by the government. Other government bodies directing the economy included the Office of the President, which included a senior secretary for economic affairs; the Ministry of Finance; the Ministry of Trade and Industry; the Ministry of Labor; and the Bank of Korea, which was controlled by the Ministry of Finance.

Park's first major goal, which was immediately successful, was to establish a self-reliant industrial economy independent of the massive waves of United States aid that had kept South Korea afloat during the Rhee years. Modernizing the economy and maintaining overall sustained growth were additional goals in the 1970s. Significant economic policies included strengthening key industries, increasing employment, and developing more effective management systems. Because South Korea was dependent on imports of raw materials, such as oil, a major government objective was to significantly increase the level of exports, which meant stressing greater international competitiveness and higher productivity. The early economic plans emphasized agriculture and infrastructure, the latter were closely tied to construction. Later, the emphasis shifted consecutively to light industry, electronics, and heavy and chemical industries. Using these strategies, an export-driven economy developed.

The government combined a policy of import substitution with the export-led approach. Policy planners selected a group of strategic industries to back, including electronics, shipbuilding, and automobiles. New industries were nurtured by making the importation of such goods difficult. When the new industry was on its feet, the government worked to create good conditions for its export. Incentives for exports included a reduction of corporate and private income taxes for exporters, tariff exemptions for raw materials imported for export production, business tax exemptions, and accelerated depreciation allowances.

The export-led program took off in the 1960s; during the 1970s, some estimates indicate, Seoul had the world's most productive economy. The annual industrial production growth rate was about 25 percent; there was a fivefold increase in the GNP from 1965 to 1978. In the mid-1970s, exports increased by an average of 45 percent a year.

Industrial policies

The major issue facing the Park regime in the early 1960s was the grinding poverty of the nation and the need for economic policies to overcome this poverty. A critical problem was raising funds to foster needed industrial development. Domestic savings were very low, and there was little available domestic capital. This obstacle was overcome by introducing foreign loans and inaugurating attractive domestic interest rates that enticed local capital into production. Of South Korea, Taiwan, Hong Kong, and Singapore, only South Korea financed its economic development with a dramatic build-up of foreign debt, debt that totaled US$46.8 billion in 1985, making it the fourth largest Third World debtor. Foreign corporate investments were primarily of Japanese origin.

As noted by consultant David I. Steinberg, Seoul administered a series of economic development plans. The government mobilized domestic capital by encouraging savings, determined what kinds of plants could be constructed with these funds, and reviewed the potential of the products for export. In this sense, the will of the government to undertake economic development played a crucial role; the role of the government, however, was not limited to such measures as mobilizing capital and allocating investments.

Steinberg also pointed out that Park's government restructured industries, such as defense and construction, sometimes to stimulate competition and other times to reduce or eliminate it. The Economic Planning Board established export targets that, if met, yielded additional government-subsidized credit and further access to the growing domestic market. Failure to meet such targets led to Seoul's withdrawal of credit.

Economic plans

Economic programs were based on a series of five-year plans that began in 1962. The First Five-Year Economic Development Plan (1962-66) consisted of initial steps toward the building of a self-sufficient industrial structure that was neither consumption oriented nor overdependent on oil. Such areas as electrification, fertilizers, oil refining, synthetic fibers, and cement were emphasized. The Second Five-Year Economic Development Plan (1967- 71) stressed modernizing the industrial structure and rapidly building import-substitution industries, including steel, machinery, and chemical industries. The Third Five-Year Economic Development Plan (1972-76) achieved rapid progress in building an export-oriented structure by promoting heavy and chemical industries. Industries receiving particular attention included iron and steel, transport machinery, household electronics, shipbuilding, and petrochemicals. The developers of heavy and chemical industries sought to supply new industries with raw materials and capital goods and to reduce or even eliminate dependence on foreign capital. New (and critical) industries were to be constructed in the southern part of the peninsula, far from the border with North Korea, thus encouraging economic development and industrialization outside the Seoul area and providing new employment opportunities for residents of the less developed areas.

The Fourth Five-Year Economic Development Plan (1977-81) fostered the development of industries designed to compete effectively in the world's industrial export markets. These major strategic industries consisted of technology-intensive and skilled labor-intensive industries such as machinery, electronics, and shipbuilding. The plan stressed large heavy and chemical industries, such as iron and steel, petrochemicals, and nonferrous metal. As a result, heavy and chemical industries grew by an impressive 51.8 percent in 1981; their exports increased to 45.3 percent of total output. These developments can be ascribed to a favorable turn in the export performance of iron, steel, and shipbuilding, which occurred because high-quality, low-cost products could be produced in South Korea. By contrast, the heavy and chemical industries of advanced countries slumped during the late 1970s. In the machinery industries, investments were doubled in electric power generation, integrated machinery, diesel engines, and heavy construction equipment; the increase clearly showed that the industries benefited from the government's generous financial assistance program.

The late 1970s, however, witnessed worldwide recession, rising fuel costs, and growing inflation. South Korea's industrial structure became somewhat imbalanced, and the economy suffered from acute inflation because of an overemphasis on investment in heavy industry at a time when many potential customers were not in a position to buy heavy industrial goods.

The Fifth Five-Year Economic and Social Development Plan (1982-86) sought to shift the emphasis away from heavy and chemical industries, to technology-intensive industries, such as precision machinery, electronics (televisions, videocassette recorders, and semiconductor-related products), and information. More attention was to be devoted to building high-technology products in greater demand on the world market.

The Sixth Five-Year Economic and Social Development Plan (1987-91) to a large extent continued to emphasize the goals of the previous plan. The government intended to accelerate import liberalization and to remove various types of restrictions and nontariff barriers on imports. These moves were designed to mitigate adverse effects, such as monetary expansion and delays in industrial structural adjustment, which can arise because of a large surplus of funds. Seoul pledged to continue phasing out direct assistance to specific industries and instead to expand manpower training and research and development in all industries, especially the small and medium-sized firms that had not received much government attention previously. Seoul hoped to accelerate the development of science and technology by raising the ratio of research and development investment from 2.4 percent of the GNP to over 3 percent by 1991.

The goal of the Seventh Five-Year Economic and Social Development Plan (1992-96), formulated in 1989, was to develop high-technology fields, such as microelectronics, new materials, fine chemicals, bioengineering, optics, and aerospace. Government and industry would work together to build high-technology facilities in seven provincial cities to better balance the geographic distribution of industry throughout South Korea.

Revenues and Expenditures

The central government budget has generally expanded, both in real terms and as a proportion of real GNP, since the end of the Korean War, stabilizing at between 20 and 21 percent of GNP during most of the 1980s. Government spending in South Korea has been less than that for most countries in the world (excepting the other rapidly growing Asian economies of Japan, Taiwan, and Singapore). The share of government spending devoted to investment and other capital formation activities increased steadily through the periods of the first and second five-year plans (1962-1971), peaking at more than 41 percent of the budget in 1969. Since 1971 investment expenditures have remained at less than 30 percent of the budget, while the share of the budget occupied by direct government consumption and transfer payments has continued to increase, averaging more than 70 percent during the 1980s.

During the 1980s, the largest areas of government expenditure were economic services (including infrastructural projects and research and development), national defense, and education. Economic expenditures averaged several percentage points higher than defense expenditures, which remained stable at about 22 to 23 percent of the budget (about 6 percent of GNP) during the decade. In 1990 the government was studying plans to lower defense expenditures to 5 percent of GNP. Some observers noted a trend toward a slight increase in the portion of the budget devoted to social spending during the 1980s. In 1987 expenditures for social services--including health, housing, and welfare--were 16.4 percent of the budget, up from 13.9 percent in 1980, and slightly higher than 1987 government outlays for education (see table 3, Appendix).

The government revenue structure was virtually totally dependent on taxes (see table 4, Appendix). By the early 1980s, nearly two-thirds of tax money was collected in the form of indirect taxes. Revenues collected by the central government in 1987 rose to 19,270.3 billion won (for value of the won--see Glossary), up from 13.197.5 billion won in 1984.

Public and private companies

Following the Korean War, foreign aid became the most important source of funds for the reconstruction and rehabilitation of the economy. What was left of the Japanesebuilt industrial plant, most of which by the 1950s either was obsolete or had been destroyed by warfare), generally was turned over to private owners, who were chosen more often for their political loyalty than for their economic acumen. Moreover, Rhee favored certain businessmen and companies with government contracts in exchange for financial support of his political endeavors. It was during this period that a group of entrepreneurs began companies that later became the chaebol, or business conglomerates. The chaebol were groups of specialized companies with interrelated management. These groupings of affiliated companies dominated South Korea's economy in the late 1980s and often included businesses involved in heavy and consumer industries and electric and electronic goods, as well as trading companies and real estate and insurance concerns.

The chaebol were responsible for the successful expansion of South Korea's export capacity. According to Steinberg, in 1987 the revenues of the four largest chaebol were US$80.7 billion, a figure equivalent to twothirds of Seoul's total GNP. In that year, the Samsung Group had revenues of US$24 billion; Hyundai, US$22.7 billion; Daewoo, US$16 billion; and Lucky-Goldstar, US$18 billion. The revenues of the next largest chaebol, Sunkyong, totaled US$7.3 billion in 1987. The top ten chaebol represented 40 percent of all bank credit in South Korea, 30 percent of value added in manufacturing, and approximately 66 percent of the value of all South Korean exports in 1987. The five largest chaebol employed 8.5 percent of the manufacturing work force and produced 22.3 percent of all manufacturing shipments. Despite a rash of strikes against the chaebol beginning in 1987, the chaebol generally had higher compensation and better working conditions than their lesser South Korean competitors.

Public enterprise

During the 1960s, public enterprises were concentrated in such areas as electrification, banking, communications, and manufacturing. In 1990 these enterprises were, in many cases, efficient revenue-producing concerns that produced essential goods and services at low costs, but which also produced profits that were used for new capital investments or to produce funds for public use elsewhere. In the 1980s, Seoul was slowly privatizing a number of these firms by selling stocks, but the government remained the principal stockholder in each company. In the 1980s, an important function of public enterprises was the introduction of new and expensive technology ventures.

In 1985 the public enterprise sector consisted of about 90 enterprises employing 305,000 workers, or 2.7 percent of total employment in the nonagricultural sector. There were four categories of public enterprises: government enterprises (staffed and run by government officials), government-invested enterprises (with at least 50 percent government ownership), subsidiaries of government-invested enterprises (usually having indirect government funding), and other government-backed enterprises. Government-invested public enterprises, such as the Korea Electric Power Corporation (KEPCO) and the Pohang Iron and Steel Company (POSCO), represented the core of the new enterprises established during Park's regime. In the late 1980s, roughly 30 percent of the revenues produced by public enterprises came from the manufacturing sector and the other 70 percent from such service sectors as the electrical, communications, and financial industries.

Financing

FINANCING DEVELOPMENT

Financing South Korea's economic development in the 1990s was expected to differ from previous decades in two main respects: greater reliance on domestic sources and more emphasis on equity relative to debt. Beginning in the 1960s, foreign credit was used to finance development, but the amount of foreign debt had decreased since the mid-1980s. According to the Sixth Five-Year Economic and Social Development Plan (1987-91), an average annual growth rate of 8 percent was expected, together with account surpluses of about US$5 billion a year through 1991.

To realize these growth targets, South Koreans needed the gross domestic savings rate to exceed the domestic investment rate; additionally, they needed the financing of future economic growth to come entirely from domestic sources. Such a situation would involve reducing foreign debt by US$2 billion a year; and South Korea would become a net creditor nation in the mid-1990s. Through the promotion and reform of the securities markets, especially the stock market, and increased foreign investment, the sixth plan encouraged the diversification of sources and types of corporate finance, especially equity finance.

Domestic savings were very low before the mid-1960s, equivalent to less than 2 percent of GNP in the 1960 to 1962 period. The savings rate jumped to l0 percent between 1970 and 1972 when banks began offering depositors rates of 20 percent or more on savings accounts. This situation allowed banks to compete effectively for deposits with unorganized money markets that had previously offered higher rates than the banks. The savings rate increased to 16.8 percent of GNP in 1975 and 28 percent in 1979, but temporarily plunged to 20.8 percent in 1980 because of the oil price rise. After 1980, as incomes rose, so did the savings rate. The surge of the savings rate to 36.3 percent in 1987 and 35.8 percent in 1989 reflected the sharp growth of GNP in the 1980s. The prospects for continued high rates of saving were associated with continued high GNP growth, which nevertheless declined to 6.5 percent in 1989.

According to Donald S. Macdonald, through the early 1980s funds for investment came primarily from bilateral government loans (mainly from the United States and Japan), international lending organizations, and commercial banks. In the late 1980s, however, domestic savings accounted for two-thirds or more of total investment.

Throughout the 1980s, the financial sector underwent significant expansion, diversification of products and services, and structural changes brought about by economic liberalization policies. As noted by Park Yung-chul, financial liberalization eased interest ceilings. Deregulation increased competition in financial markets, which in turn accelerated product diversification. In the early 1980s, securities companies were permitted to sell securities through a repurchase agreement. By 1985 banks also were allowed to engage in the repurchase agreements of government and public bonds. In 1981 finance and investment corporations started dealing in large-denomination commercial paper. The new form of commercial paper was issued in minimum denominations of 10 million won, compared to the previous minimum value for commercial paper of 1 million won.

In order to extend their ability to raise cash, investment and finance companies introduced a new cash-management account with a 4 million won minimum deposit in 1983. Investment and finance corporations managed client funds by investing them in commercial paper corporate bonds and certificates of deposit. Money-deposit banks in the mid-1980s began offering similar accounts, known as household money-in-trust. Trust business formerly had been the exclusive domain of the Bank of Seoul and Trust Company; however, after 1983 all money-deposit banks were authorized to offer trust services.

The financial system underwent two major structural changes in the late 1970s and 1980s. First, money-deposit banks saw a sustained erosion of their once-dominant market position (from 80 percent in the 1970 to 1974 period to 55 percent by 1984). One reason for this decline was that in the 1970s nonbank financial intermediaries, such as investment trust corporations, finance companies, and merchant banking corporations, were given preferential treatment. Further, because the costs of intermediation at these nonbank financial institutions were lower than at banks (with their many branches nationwide and their multitudes of small savers and borrowers), their cost advantages and higher lending rates allowed them a larger market share.

The second structural change was the rapid increase of commercial paper and corporate debenture markets. Another development was the steady growth of investment trust corporations in the 1980s.

Because of the introduction of tax and financing incentives by the government that encouraged companies to list their shares on the stock market, the Korean Stock Exchange grew rapidly in the late 1980s. In 1987 more than 350 companies were listed on the exchange. There was an average daily trading volume of 10 million shares, with a turnover ratio of 80 percent. In 1989 the stock market was tarnished by accusations of insider trading among the five major South Korean securities firms. The Securities and Exchange Commission launched an investigation in late 1989. The popular index of the market soared to a high of 1,007.77 points on April 1, 1989, but plunged back to the 800s in late 1989 and early 1990.

Business financing was obtained primarily through bank loans or borrowing on the informal and high-interest "curb market" of private lenders. The curb market served individuals who needed cash urgently, less reputable businesspeople who engaged in speculation, and the multitudes of smaller companies that needed operating funds but could not procure bank financing. The loans they received, often in exchange for weak collateral, had very high interest rates. The curb market played a critical role in the 1960s and 1970s in pumping money into the economy and in assisting the growth of smaller corporations. The curb market continued to exist, along with the formal banking system, through the 1980s.

Industry

The growth of the industrial sector was the principal stimulus to economic development. In 1987 manufacturing industries accounted for approximately 30 percent of the gross domestic product (GDP--see Glossary) and 25 percent of the work force. Benefiting from strong domestic encouragement and foreign aid, Seoul's industrialists introduced modern technologies into outmoded or newly built facilities at a rapid pace, increased the production of commodities--especially those for sale in foreign markets--and plowed the proceeds back into further industrial expansion. As a result, industry altered the country's landscape, drawing millions of laborers to urban manufacturing centers.

A downturn in the South Korean economy in 1989 spurred by a sharp decrease in exports and foreign orders caused deep concern in the industrial sector. Ministry of Trade and Industry analysts stated that poor export performance resulted from structural problems embedded in the nation's economy, including an overly strong won, increased wages and high labor costs, frequent strikes, and high interest rates. The result was an increase in inventories and severe cutbacks in production at a number of electronics, automobile, and textile manufacturers, as well as at the smaller firms that supplied the parts. Factory automation systems were introduced to reduce dependence on labor, to boost productivity with a much smaller work force, and to improve competitiveness. It was estimated that over two-thirds of South Korea's manufacturers spent over half of the funds available for facility investments on automation.

In 1990 South Korean manufacturers planned a significant shift in future production plans toward high-technology industries. In June 1989, panels of government officials, scholars, and business leaders held planning sessions on the production of such goods as new materials, mechatronics-- including industrial robotics-- bioengineering, microelectronics, fine chemistry, and aerospace. This shift in emphasis, however, did not mean an immediate decline in heavy industries such as automobile and ship production, which had dominated the economy in the 1980s.

Except for mining, most industries were located in the urban areas of the northwest and southeast. Heavy industries generally were located in the south of the country. Factories in Seoul contributed over 25 percent of all manufacturing value-added in 1978; taken together with factories in surrounding Kyonggi Province, factories in the Seoul area produced 46 percent of all manufacturing that year. Factories in Seoul and Kyonggi Province employed 48 percent of the nation's 2.1 million factory workers.

Energy

The Korean Peninsula is only modestly endowed with natural resources, and North Korea has far more natural resources than South Korea. During the Japanese colonial period (1910-45), the north served as the center for mining and industry whereas the south, with somewhat greater rainfall, a warmer climate, and slightly greater arable terrain, served as the center for rice production. (see Physical Environment , ch. 2).

South Korea's mineral production is not adequate to supply its manufacturing output. Energy needs are also met by importing bituminous and anthracite coal and crude petroleum. In 1987 approximately 23.4 million tons of anthracite coal, approximately 4,000 tons of tungsten, 565,000 tons of iron ore, and 47,000 tons of zinc ore were mined. Lesser amounts of copper, lead, molybdenum, gold, silver, kaolin, and fluorite also were mined (see fig. 9).

Energy producers were dominated by government enterprises, although privately operated coal mines and oil refineries also existed. In 1990 South Korea still had no proven oil reserves. Offshore oil possibilities in the Yellow Sea and on the continental shelf between Korea and Japan yielded nothing through the 1980s, but exploration continued. South Korea's coal supply was both insufficient and of low quality. The potential for hydroelectric power was very limited because of tremendous seasonal variations in the weather and the concentration of most of the rainfall in the summer months. Accordingly, Seoul placed an increasingly heavy emphasis on developing nuclear power generation.

Electric power in South Korea was provided by the Korea Electric Power Corporation (KEPCO). When KEPCO's predecessor, KECO, was founded in 1961, annual power production was 1,770 million kilowatt-hours (kwhr); production reached 73,992 million kwhr in 1987. The ratio of usage during 1987 was 17.9 percent for residential customers, 16.2 percent for public and service businesses, and 65.9 percent for the industrial sector. Energy used in electric power generation consisted primarily of nuclear, coal, oil, and liquified natural gas (LNG). Of the 54,885 million kwhr of electricity generated in 1985, 22 percent came from nuclear plants then in operation, 74 percent from thermal plants (oil and coal), and 4 percent from hydroelectric sites. It was predicted in 1988 that the generation structure by the year 2000 would be 10.2 percent hydroelectric, 12.2 percent oil, 22.9 percent coal, 10.2 percent LNG, and 44.5 percent nuclear.

South Korea placed a heavy emphasis on nuclear power generation. The country's first nuclear power plant, the Kori Number One located near Pusan, opened in 1977. Eight plants were operational in 1987 when atomic power generation was an estimated 71,158 million kilowatts, or 53.1 percent of total electric power.

South Korea's first antinuclear protests occurred in December 1988 when residents near the Kori complex demonstrated against low-level waste that had been secretly buried just outside the plant. In 1989 residents near other nuclear reactors protested the environmental damage they said was caused by the units. Sixteen antinuclear groups joined together to form the Movement for the Eradication of Nuclear Power Plants. The government, however, asserted that the South Korean nuclear program was well run and that none of the 193 antinuclear protests reported since 1977 was serious.

Agriculture

At the start of the economic boom in 1963, the majority of South Koreans were farmers. Sixty-three percent of the population lived in rural areas. In the next twenty-five years, South Korea grew from a predominantly rural, agricultural nation into an urban, newly industrialized country and the agricultural workforce shrunk to only 21 percent in 1989 (see fig. 10). Government officials expected that urbanization and industrialization would further reduce the number of agricultural workers to well under 20 percent by 2000.

South Korea's agriculture had many inherent problems. South Korea is a mountainous country with only 22 percent arable land and less rainfall than most other neighboring rice-growing countries (see Land Area and Borders; Climate , ch. 2). A major land reform in the late 1940s and early 1950s spread ownership of land to the rural peasantry. Individual holdings, however, were too small (averaging one hectare, which made cultivation inefficient and discouraged mechanization) or too spread out to provide families with much chance to produce a significant quantity of food. The enormous growth of urban areas led to a rapid decrease of available farmland, while at the same time population increases and bigger incomes meant that the demand for food greatly outstripped supply. The result of these developments was that by the late 1980s roughly half of South Korea's needs, mainly wheat and animal feed corn, was imported.

Compared with the industrial and service sectors, agriculture remained the most sluggish sector of the economy. In 1988 the contribution of agriculture to overall GDP was only about 10.8 percent, down from approximately 12.3 percent the previous year. Most economists agreed that the country's rural areas had gained more than they had contributed in the course of industrialization. Still, the growth of agricultural output, which averaged 3.4 percent per year between 1945 and 1974, 6.8 percent annually during the 1974-79 period, and 5.6 percent between 1980 and 1986, was credible. The gains were even more impressive because they added to a traditionally high level of productivity. On the other hand, the overall growth of the agriculture, forestry, and fishing sector was only 0.6 percent in 1987 as compared with the manufacturing sector, which grew 16 percent during 1986 and 1987. During the first half of 1989, the agriculture, forestry, and fisheries sector grew 5.9 percent, as opposed to manufacturing's 2.9 percent.

Service industries

Service industries included insurance, restaurants, hotels, laundries, public bath houses, health-related services, and entertainment establishments. There were thousands of small shops marketing specialized items, large traditional marketplaces, and streamlined buildings housing corporate and professional offices. Game rooms featuring Ping-Pong tables, or billiards, and tearooms serving a variety of beverages were located on almost every downtown city corner.

South Korea's Hosting the 1988 Seoul Olympics from September 18 to October 2, 1988, made 1988 a boom year for tourism. More than 2 million tourists spent US$3.3 billion, an increase in the number of tourists and the dollars spent, respectively, of 24.9 percent and 42.2 percent over 1987. Japanese visitors accounted for 48 percent of the total; tourists from the United States made up 14.9 percent. The Korean National Tourist Corporation predicted that in 1990 almost 3 million tourists would visit the country.

An improved transportation and communications infrastructure, increasing incomes, enhanced consumer sophistication, and government tax incentives encouraged the development of a modern distribution network of chain stores, supermarkets, and department stores (see Transportation and Telecommunications , this ch.).

In the mid-1980s, the largest employer of South Korea's service sector was retail trade. A growing number of workers were employed by the mostly department stores (most of which were owned by chaebol) that were opening rapidly in the downtown areas of major urban centers. The vast majority of retailers were small merchants in cities, towns, and villages, each with a modest storefront, or stand, limited stock, and poor access to capital, but the great majority of South Koreans made their purchases from these small retailers. In 1986 there were approximately 26,054 wholesale and 542,548 retail establishments and 233,834 hotels and restaurants that employed about 1.7 million people (these figures probably do not include family members working in small stores).

The distribution system was far from perfect, and managers recognized the need for better organization and management. Most of the nation's wholesalers were located in Seoul and accounted for most of the turnover of goods. Most of the sales outlets were located in the heart of urban centers. Cargo truck terminals and warehouse facilities were spread irregularly through city neighborhoods.

Labor force

Labor movement in the 1980s

Despite significant increases in wages in the 1980s, labor unions in the late 1980s continued their wave of strikes demanding better working conditions and wages. The ferocity and sheer size of the labor movement caught management and the government by surprise. During his first year or so in office, President Roh Tae Woo was confronted with considerable labor unrest; there were more than 300 strikes in the first three months of 1989. Emboldened by the political reforms of 1987 and by reports that the rate of South Korea's economic growth was greater than the improvements in their own incomes and life-styles, many workers agitated for a greater share of the nation's prosperity and sought more freedom and responsibility at the workplace and an end to the traditional paternalism of management. Lost production was estimated to have climbed to US$6 billion in 1989 from US$4.4 billion in 1988.

Workers were caught in a revolution of rising expectations, as a wave of rising urban land values and housing costs outpaced average real wage increases of more than 70 percent during the 1980s. Moreover, wages for manual workers, who were responsible for much of the production and export that fueled the economy, were much lower than the national average. In the late 1980s, working families still found themselves struggling to meet minimum standards of living. Employees also were expected to work long and often erratic hours in exchange for steady employment and were frustrated over a lack of benefits and individual say.

Worker complaints were focused on three areas: low wages, long working hours, and a high number of industrial accidents. In 1986 the average wage of a South Korean worker was US$381 a month (339,474 won), including overtime and all allowances. The basic wage was US$287, or 255,408 won, but, according to the government, the basic wage necessary to sustain a "decent" way of life was US$588 (524,113 won). Thus, the average worker only earned two-thirds of what the government thought necessary to sustain a family of four. In 1987 semiskilled workers typically received US$1.50 to US$2.00 per hour and worked fifty-five to sixty hours a week; unskilled workers worked twelve-hour days seven days a week, earning US$125 a month.

Recent trends

South Korea was known for having the world's longest working hours. In 1986 the Korean worker averaged about 54.7 hours a week. This situation was the natural consequence of the low wage system that necessitated extended hours and extra work to earn minimum living expenses.

There were, however, dramatic increases in wages in 1988 and 1989. Labor stoppages in the manufacturing sector, coupled with a scarcity of labor, led to 20-percent salary increases for workers in the manufacturing sector in 1988 and 25-percent salary increases in that sector in 1989. These raises later spread, increasing wages across the entire economy 18.7 percent in 1989. By 1989 some South Korean economists were worrying about the effect that skyrocketing wages would have on the cost of domestic-made goods and the consequent impact on export prices. The situation was was especially worrisome because the wages paid to workers in South Korea's major competitors were growing far more slowly.

Science and technology

The most important sources of productive growth for South Korean manufacturers had traditionally been directly or indirectly related to the ability of South Korean companies to acquire new technology from abroad and to adapt it to domestic conditions, rather than paying the cost of research and development. However, as Seoul's industry and exports continued to evolve toward higher levels of technology, domestic research and development efforts needed to be increased. Fortunately for South Korea, its high level of well-educated workers, who constitute a formidable brain trust for future research and development, are its major asset.

Historical development

The Seoul government began investing in technology research institutes soon after the republic was established. The Korean Atomic Energy Commission founded in 1959 was responsible for research and development, production, dissemination, and management of technology for peaceful applications of atomic energy. In the mid-1960s, the government established the Ministry of Science and Technology to oversee all government research and development activities and the Korea Institute of Science and Technology to function as an industrial research laboratory.

In the 1970s, in order to better coordinate research and development, two scientific communities were established--one in Seoul, the other near Taejon. The Seoul complex included the Korea Institute of Science and Technology, the Korea Development Institute (affiliated with the Economic Planning Board), the Korea Advanced Institute of Science, and the Korea Atomic Energy Research Institute. Plans for the Daeduk Science Town near Taejon were far more ambitious. Modeled after the Tsukuba Science City in Japan, by the late 1980s the Daeduk Science Town accommodated laboratories specializing in shipbuilding, nuclear fuel processing, metrology, chemistry, and energy research. The government founded the Korea Advanced Institute of Science to develop and offer graduate science programs, and it also encouraged universities to develop their own undergraduate programs in science.

High technology

The tremendous growth of Samsung since the mid-1980s was strong evidence of the high productivity in such modern industries as electronics. The group's total sales nearly doubled (8.4 billion won to 14.6 billion won) between 1984 and 1986, while the number of employees only increased from 122,000 to 147,000. The reason for this high degree of productivity was South Korea's move away from labor-intensive industries to those that were highly automated.

South Korean planners realized that the country needed to advance quickly in such areas as high technology if the economy were to grow while matching foreign competition. POSCO's decisions to build the Pohang Institute of Science and Technology and the Research Institute of Industrial Science and Technology were examples of this trend. POSCO also used a great deal of money to lure back more than 100 top South Korean scientists and researchers who had emigrated abroad.

POSCO's efforts represented a great change from the past. As of the late 1980s, many of South Korea's younger scientists, technocrats, and economic planners in had received their graduate education in the United States. Throughout the 1970s and 1980s, the government sponsored the scientific and technical education of many graduate students at prestigious institutions, such as Harvard University and the Massachusetts Institute of Technology. The success of the Pohang Institute of Science and Technology meant that many of South Korea's future scientific and technical leaders would be educated at home.

In 1987 the Korea Development Institute issued a report, Korea Year 2000, that profiled South Korean economic development in 2000. The Korea Development Institute noted that the industrial structure would be highly developed and would resemble that of advanced countries inasmuch as high value-added industries, high-technology industries, and soft industries grew relatively rapidly. Further, changes in industrial structure were expected rapidly to reduce the demand for unskilled workers while simultaneously increasing the demand for professional and technical manpower, resulting in further change of the employment structure.

The Korea Development Institute also noted that the Ministry of Science and Technology had prepared a long-range plan of science and technology for the twenty-first century that took into account limited available resources. Accordingly, Seoul selected its comparative advantage areas, including informatics-- particularly information storage and retrieval and electronic data processing, fine chemicals, and precision machinery in the short term; biotechnology and new materials in the mid-term; public benefit areas, such as the environment, health, and welfare, as another group; and oceanography and aeronautics for the medium and long term.

In 1990 Seoul announced an ambitious plan to promote science and technology so that high-technology activities would dominate the economy by the year 2000. The Ministry of Science and Technology intended to coordinate technology-related projects between government and industry in a variety of fields including semiconductors, computers, chemistry, and new materials.

North-South trade

Since 1988, two-way trade between the two Korean countries has increased from $18.8 million in 1989 to $647.1 million in 2002. In 2002, South Korea imported $271.57 million worth of goods from North Korea, mostly agro-fisheries and metal products, while shipping $371.55 million worth of goods, mostly humanitarian aid commodities including fertilizer and textiles as inputs for North Korean garment manufacturers. South Korea is now North Korea's third-largest trading partner, after China and Japan. Numerous ventures by the Hyundai Group have contributed to North Korea's economy, including the Kŭmgang-san (Diamond Mountain) tourist site. Last year alone, 84,347 visitors travelled by Hyundai-operated passenger ships, and most recently via land routes, as part of this tourism initiative, raising the total number of South Korean visitors to over half a million (see Kŭmgang-san Tourist Region). A mere 1,141 North Koreans travelled to South Korea, mainly for joint sporting events. Hyundai Asan is also lined up to be the South Korean party that will help develop an 800 acre (3.2 km²) industrial complex in Kaesŏng, located near the Demilitarized Zone (DMZ), subject to final agreements, including between Seoul and P'yŏngyang. The year 2002 witnessed significant progress on the Seoul-Shinŭiju railroad, on both reconstructing road and rail links across the DMZ (as of early 2004 this process was stalled). However, the constructiveness of these efforts is still on question, as North Korea still declines to abandon its radical Neo-Stalinist style of government and is hardly showing any reliable economic growth.

Macro-economic trend

This is a chart of trend of gross domestic product of South Korea at market prices estimated by the International Monetary Fund with figures in millions of South Korean Won.

Year	Gross Domestic Product	US Dollar Exchange	Inflation Index (2000=100)
1980	38,774,900	605.85 Won	33
1985	84,061,000	869.51 Won	46
1990	186,690,900	707.59 Won	60
1995	398,837,700	771.27 Won	82
2000	578,664,500	1,130.95 Won	100
2005	812,196,561	1,024.11 Won	117

For purchasing power parity comparisons, the US Dollar is exchanged at 841.39 Won only. This implies that for 2006, with exchange rates of 945 per dollar, and nominal GDP over 850 trillion won, the GDP will reach over $900 Billion (US dollars).

Other economic indicators

Industrial production growth rate: 10.1% (2004 est.)

Electricity:

• production: 322.5 TWh (2003)
• consumption: 293.6 TWh (2003)
• exports: 0 kWh (2003)
• imports: 0 kWh (2003)

Electricity - production by source:

• fossil fuel: 62.4%
• hydro: 0.8%
• other: 0.2% (2001)
• nuclear: 36.6%

Oil:

• production: 0 barrel/day (2004 est.)
• consumption: 2.07 million barrel/day (2004 est.)
• exports: 0.63 million barrel/day (2003)
• imports: 2.263 million barrel/day (2003)

Natural gas:

• production: 0 cu m (2003 est.)
• consumption: 20.92 billion cu m (2003 est.)
• exports: 0 cu m (2003 est.)
• imports: 21.11 billion cu m (2003 est.)

Agriculture - products: rice, root crops, barley, vegetables, fruit; cattle, pigs, chickens, milk, eggs; fish

Exports - commodities: electronics (5000 of Export - 2004 estatitics) - semiconductors, lcd panel, mobile phone, computers related, television, and others], motor vehicle, steel, ships, petrochemicals

Imports - commodities: machinery, electronics and electronic equipment, oil, steel, transport equipment, organic chemicals, plastics

Exchange rates:
South Korean Won (W) per US$1 - 945.3 (May 2006), 1,143.7 (2004), 1,191.61 (2003), 1,251.09 (2002), 1,290.99 (2001), 1,130.32 (January 2000), 1,188.82 (1999), 1,401.44 (1998), 951.29 (1997), 804.45 (1996), 771.27 (1995)

History

Growth plunged by 6.6% in 1998, then strongly recovered to 10.8% in 1999 and 9.2% in 2000. Growth fell back to 3.3% in 2001 because of the slowing global economy, falling exports, and the perception that much-needed corporate and financial reforms have stalled. Led by industry and construction, growth in 2002 was 5.8%, despite anemic global growth. South Korea's economy is the 3rd largest in Asia on a currency basis.

References

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See also

• OECD's Korea country Web site and OECD Economic Survey of Korea
• Economy of Asia
• East Asian Tigers
• Economy of North Korea
• List of Banks in South Korea
• List of Korea-related topics
• List of North Korean companies
• List of South Korean companies
• Heavy-Chemical Industry Drive
• Information about Korea, China and Japan economy- Samsung Economic Research Institute

External links

• Korea and the Knowledge Economy - World Bank Institute
• http://www.bok.or.kr/ Bank of Korea, the central bank of South Korea
• http://www.kse.or.kr/ Korea Stock Exchange
• Information about Korea, China and Japan economy- Samsung Economic Research Institute