An Overview of the South Korean Economy Since the '50s

The economy of South Korea has seen many changes in the last 50 years. Many economists have been amazed by its rapid development and have called it "The Miracle on the Han River". What made it grow to such a successful economy and how was it maintained? These are questions that many have brood over and the answer is not as easy as many think. There are several factors to the impressive success of the country and many of its answers lay with its people and culture.

History

After WWII, Korea was governed by the American military government who ruled from 1945 to 1949. After the fall of the U.S. controlled regime, the Korean republic was established under President Rhee Syngman. During his reign, the Korean War broke out in 1950 and lasted for three years. The war brought devastating effects for the country with the economy suffering the largest blow. Rhee, after facing several allegations of corruption, was overthrown by students in 1960, and Chang Myon was elected President a year later. After the student revolution, it did not take long until Park Chung Hee, a highly respected army general, led a military coup to overthrow Chang's government in 1961. Park was elected president in 1963 and oversaw an economic revolution in South Korea. After all the political turmoil, Park and the new Korean junta regime found national and political strength in economical development (Thayer Watkins).

Under Park, the Korean government established five-year economic development plans to address the economical issues. The country's many economists and planners helped establish the first Economical Planning Board in 1961. From that year on, Korea started focusing more on exporting and industrialization. The government repeated the successful five year economic development plans in four consequent periods that lasted from 1962 to 1981. Korea was becoming a more westernized country and a shift from the orient was taking roots.

The famous Chaebols, the family owned conglomerate firms were starting to emerge as business incentives were increasing. Large firms like Samsung, Hyundai and LG were on top of the Chaebol list at that time. There were many reasons behind the increasing industrialization of the country. The Park administration gave businesses many privileges including more private entrepreneurship, exporting, low-interest bank loans, tax breaks and foreign based funding. The interest rates were also increased to encourage people to save more money.

After the financial support from America started to decline, the government sought financial diplomacy with other countries like Japan and Germany. Despite the brutal history of the Japanese colonization, relations between the two countries stabilized in 1965 and Japan started to increase its funding through loans and compensations for the colonial era. During a visit to the Federal Republic of Germany, Park made financial ties with the German government and was able to receive both commercial credit and financial aid. Seoul began to see an improvement in credit ratings due to its easy access to funds, high increases in export levels, international funding and a highly educated work force. Many foreign companies saw a tremendous economical opportunity in Korea and foreign investment started becoming a major economical force as the demand for manufacturing increased.

During the first two five-year plans, statistics were showing that the Korean economy was seeing substantial growth. The most important sectors during the two periods were manufacturing (which increased by 36 percent), domestic savings and exporting. This was also a time during which a new economical strategy started to arise in the government. Many companies started to diversify their trade and production and saw new opportunities in industries like steel, chemicals, shipbuilding, machinery, electronics, oil refinery and metals. This diversification took place as part of the third five-year plan during most of the 1970's. The refineries and the shipbuilding industries saw the greatest growth as Korea was preparing its economy for improving global competition and an advance in domestic artillery production.

Despite the inevitable success under the five-year economical development plans, the economy took many severe blows with the biggest blow happening in 1978. Because of the country's intense focus on export goods, increasing wages and improved living standards, a decrease in domestic consumer goods was taking place as many companies were discouraged to produce consumer goods because of the imposed price controls. The endless influx of the dollar was increasing the money supply and the country was entering an inflation period. In 1979, the inflation had taken its full toll on the economy. The cost of living had increased with almost 26 percent as the rapid growing wages were slowing down.

Park, who had the power to address these issues, replaced the Economic Planning Board in 1979 and started implementing new tactics to calm down the economic turmoil. Park's regime was able to change many economical policies to get a better grip of the situation. For example, both the growth rate and the money supply were lowered and heavy industry was replaced with light industry as well as lowered price control to increase the production of consumer goods. Despite the good intentions of these tactics, recession, bankruptcy and unemployment rates became major issues for the economy under the Park regime (South Korea Economical Development).

During the same year of the proposed stabilization measures by the government, Park was assassinated and a new government under Choi Kyu-hah was established in 1979. The new government under Choi continued to impose the new tactics that were started under the Park regime (Thayer Watkins).

Information and Communication Technology (ICT)

Korea has been praised for its economical development since the end of the Korean War with the titles like "The miracle on the Han River" and the "Asian Tiger". The country has seen an average GNP increase of 8 percent per year since 1962 and has become one of the wealthiest countries in the world in less than half a century. Since the late 1980's, the Korean market has seen an expansion in trading goods like consumer electronics, automobiles, semiconductors, ships and chemicals (Lee, 8).

The rise of the Korean Chaebol, which literally translates into Business Association, was one of the major factors in Korea's economical success. Their ability to raise money was based mostly on secure funding from foreign financial institutions initiated by the Korean government. Many Chaebol's faced increased tension due to their increased debt levels and a financial disaster was inevitable. The disaster would hit Korea during the Asian financial crisis in 1997. Their only savior at this time was the International Monetary Fund (IMF) who helped bring in 57 billion dollars in order to save the economy (Lee, 8).

In the years following the 1997 crisis, the government started implementing new policies to lessen the financial impacts. New priorities for high-tech industries were established to achieve competitive advantage over other Asian countries like China. The government also required banks to wipe out all bad loans including the ones given to the Chaebols. The majority of Korean banks were sold to financial organizations abroad and half of the Chaebols went bankrupt. This new hard-edged approach led to the intense and competitive industries of today's Korea. But the main contributor pertaining to the nation's economical recovery after the crisis has been the ICT sector (Lee, 9).

The first factor that made Korea such an important part of the ICT revolution was the government's determination to not commit the same mistake with ICT as they did with the Industrial Revolution in the late 1800's. The mindset of the Korean people was that their inability to introduce industrialization to the country was the main reason for the isolation, backwardness and vulnerability of the Korean nation (Lee, 9).

From 1997 to 2000, Korea's alteration of its economical plans paved the way for its financial future. The actions taken against the Chaebols and the banks were made to prevent more crises to happen and also to get a better understanding of the economic future of the country. During the 70's and 80's, Korea's economy was heavily based on light and heavy industries like the export of automobiles and apparel goods. As the global competition was getting more intense, and with the Chinese becoming a more powerful export country, Korea had to look for other options (Lee, 9).

The shift began slowly in 1996 when Korea started focusing more on knowledge based business. ICT became the primary industry of the nation and the basis for future economical strategies. Many new products like communication tools, precision goods and semiconductors were dominating Korea's exporting trade. The government started investing huge amounts of funds in the ICT sector, about 5 billion dollars between 1996 and 2001.According to Sang M. Lee, the ICT industry "grew from $32.6 billion in 1997 to $58.7 billion in 2001 (10). The ICT industry also contributes to the nations annual GDP, with figures exceeding all other industrial sectors of the country. From 1997 to 2001, the GDP share of the ICT industry grew from 8.6 percent to 12.7 percent (Lee, 10).

During the years of the crisis, unemployment was becoming a serious issue in Korea. A lot of people were out of jobs, especially college graduates who had just finished college. The turning point came when these young graduates started investing in ICT-projects, which led to an increase in ICT funding by nearly 30 percent from 1998 to 2001. The government also stepped in to finance a great ICT export plan called the "e-Silk Road", which improved the export rate by roughly 20 million dollars and contributed to the country's total exports by almost 30 percent (Lee, 10).

Today, the Korean ICT infrastructure is the most advanced in the world. It owes a lot of its success to the constant inflow of foreign funds and its highly skilled and motivated workforce.

The Automobile Industry

The Korean economy has seen a rise in many of its industrial sectors during the past 50 years. One of the most successful sectors is the automobile industry that, just like the ICT industry, has risen to great heights in the past 20 years. Today, Korea's car industry is the 5^th largest producer in the world and the 6^th largest exporter. At first, Korea was manufacturing auto parts for the Japanese and the American car industry. Nowadays, Korea is a major competitor in the automotive global market.

The whole story started with a mechanic called Choi Mu-seong who introduced the first Korean car called Sibal in 1955. The car was actually an U.S. army jeep that Choi and his brothers had slightly modified to introduce to the Korean market.

Five years later, in 1960, the Korean automobile company Sinjin signed a license agreement with Toyota to initiate the car Sinjun Publica. During this time, the Korean government took crucial steps towards protecting the newly established industry. Many foreign companies were prohibited from entering the Korean market under the "Automobile Industry Protection Act". Despite these preventive measures, foreign companies were able to enter the market on the basis that they joined local Korean businesses. This gave rise to several important business entities like the Asian Motor Company and Hyundai Motor Company, who had technical assistance from Ford Motor Company.

During the 1970's, Toyota withdrew from the Korean market and Sinjin Automobiles turned to the American automobile giant General Motors. This joining of ventures between the two companies paved the way for the creation of General Motors Korea. Another Korean company that collaborated with foreign companies was Hyundai Motors. In 1975, Hyundai joined British Leyland Motor Corporation to construct the first fully developed Korean automobile of its time; the Hyundai Pony. Other companies like Italdesign, Mitsubishi and Barclays Bank were also involved in the development and funding of the Pony.

The 1980's was a very important decade for the auto industry in Korea. Companies like Kia, General Motors, Hyundai and Asia Motors were engaged in full scale competition with each other. The 1980's brought a major change to the auto industry in Korea. Unlike the 70's, where auto part manufacturing comprised the majority of the industry, the 80's was a decade of automobile exporting. The Hyundai Pony was exported to the U.S. in 1986 and set a sales record during the first year of its introduction, with nearly 126,000 cars sold. What made the Pony so attractive to the U.S. consumer was mainly its low price.

During the 1990's and beyond, the export of Hyundai Motors to North America was increasing with tremendous success. Several of its brands won exclusive honors during the beginning and mid 1990's, but despite these successes the company was looking at a troublesome future. The Pony started showing off bad effect which was mostly due to its low cost. The quality and reliability of the vehicle was not prioritized and Hyundai received a very bad reputation in the United States. To counter this horrible downfall, Hyundai started investing in extensive research of its vehicles. In 2004 Hyundai joined Honda and became a more secure and respected auto brand (Automobile Industry in South Korea).

Despite the turmoil, Korea has been a great competitor in both the ICT and automobile markets of the world. With the economy being in the state that it is today, ICT companies like Samsung, LG and Auto makers like Hyundai are still making incredible progress and acting as saviors for the Korean economy. For the next two or three years, one is only left to speculate what might happen to the world economy and what is in store for Korea as well.