The Economic Success of South Korea - Essay Example

?The Economic Success of South Korea The Korean economy is often looked up to as a model for economic success in Asia, although studies show that there are certain aspects where Korea departed from the Pacific-Asian model, and in other aspects are consistent with it. Some of the salient economic issues concerning Korea’s development shall be discussed here from the works of Ajit Singh, Ha-Joon Chang and Alice Amsden, and a few other authors. Trade, exports and imports According to Ha-Joon Chang and Chul-Gyue Yoo (2000), from the 1960s to the mid 1980s, while Japan and Taiwan experienced consistent trade surplus, Korea lagged behind with a trade deficit resulting in foreign exchange shortage (p. 108). The oil crisis of the 1970s brought a steep rise in import bills, a major recession in export markets, and a hike in interest rates that compounded the foreign debt repayment burden (p. 111). Recovery in the 1980s reversed the situation and by 1986 large trade surplus was generated, allowing liquidity to build up and relaxation of foreign exchange restrictions by the central bank. After 1989, however, trade surplus had disappeared, nevertheless foreign currency control remained lenient and by 1995, foreign exchange control became largely insignificant (p. 113). By the 1997 Asian crisis, exports had again fallen, mainly due to restrictions on the export credits (p. 116). As a result of these dynamics, industrialists declined in power while financiers gained in strength, a development which would retard growth in Korea (Ha-Joon & Chul-Gyue, 2000, p. 105). Industry and Education The protection accorded emerging domestic industries until they have developed to the point where they can equitably compete is referred to by Lee (1997) as the process of maturation and growth of infant industries, or the infant industry theory (Metz & Turkson, 2000; Sunderasan, 2011). The infant industry policy has been material in the modern development of the Korean economy, which is characterized as a late-industrialized economy; this means that the country acquired its level of technology through direct technology transfer from more advanced countries instead of undertaking graduated degrees of innovations. Such a situation would have normally resulted in low wages because it takes place in an environment of unlimited labor reserves. On the contrary, Korea surprisingly experienced a continuous rise in average real wages since the sixties. This appears to defy the law of supply and demand for labor, that is, why wages would rise in a regime of abundant labor supply. Amsden (1990) attributes these to the following: First, high wages were in part due to the intense training and education in Korea to meet the demands of a technologically competent workforce. The increase in wages was the reward to individuals in the workplace who undertake additional training to complement the technology transfer. This contrasts with the traditional Asian model of the existence of ‘implicit contracts’ between workers and employers, where workers are rewarded for their loyalty and hard work in the performance of their duties. Second, the wage phenomenon in Korea has drawn attention to the segmentation of the labor market, on the basis of the qualifications required of the workers for the late industrialization. Workers who possessed the skill sets needed by a fast industrializing economy comprises a minority, at least at the time the industry is growing fastest, which the firms will seek to attract with higher wages. Finally, the increase in wages is partly justified by Korea’s fast growing GNP. Land reform and small-scale agriculture Amsden (1990) noted that one of the drivers of wages in modern Korean industries is the rapid increase in productivity in the agricultural sector. Prior to the seventies, the implicit wage received by male workers in agriculture surpassed the average wage of workers in manufacturing. There were few proletarians in Korean agriculture; the post-World War II agrarian reform made the tillers the owners of the land they tilled, thus a number of small scale family farms evolved which necessitated only a few hired workers to run on a regular basis, augmented only during harvest time when more hands were needed. With government support, the agricultural sector experienced a burst in productivity, a fact which also slowed the migration of people from the rural to the urban centers. According to Amsden, Korean agriculture was more egalitarian than those in the other Asian economies, therefore agricultural workers were less prone to resign and turnover was low, indicating a higher retention rate than what is predominantly experienced under the Asian model. Because of the agricultural sector’s high retention rate, and also the outflow of workers (about 27% of the male manufacturing work force) to the Middle East, real wages rose persistently within the period 1965 to 1984, a trend which departed from the Asian model that applied to other economies in the region (Amsden, 1990, pp. 82-83) Role of competition policy in East Asian development Amsden and Singh (1994) observed that Michael Porter believed that intense competition among firms is the driver in Japan’s development, which contrasted with the view of Caves and Uekusa that the presence of cartels and high entry barriers in the Japanese economy bred allocative inefficiency. Amsden and Singh believed that competition policy in Japan and Korea worked more towards attaining dynamic efficiency, characterized by the highest long-term productivity growth rate. Both countries adopted measures at both the levels of the industry and companies, which at times discouraged competition and at other times encouraged it (Amsden & Singh, 1994, p. 941). Role of women in the work force. Amsden (1990) noted that compared to women’s role as workers among other Asian economies, the Korean women played a more active role in the work force. Due to the high retention rate of workers in the agricultural sector and the increasing demand for skilled workers in industry, the participation of women became an important source of labor supply to fill the labor shortage from the seventies onwards. ‘The transfer of women’s work from the household to commercial employment is one of the most notable features of economic development’ (Lewis in Amsden, 1990, p. 85). That being said, in the eighties the male-female wage gap was greatest in Korea than in most other countries. Nearly 60% of the wage gap between the genders was attributable to the differences between males and females in terms of human capital – that is men had greater access to better education, and generally had more experience, than their female counterparts. With the passage of time, however, the wage gap had been decreasing and continues to do so, as the differences in human capital continued to recede. Women are increasingly gaining access to better education and experience in the workplace (Amsden, 1990). Crisis and post-crisis economy There are two sets of academic studies concerning Korea and economic crises. The first involves the Asian crisis of 1997-2000, and the second concerns the economic crisis of 2008-2010. Among the first is that of Jack Glen and Ajit Singh (2005), which points to poor corporate governance, corruption, and lack of competition that has led to over-investment among Asian corporations. The prevalence of the chaebol system in Korea was due to government policies that provided easy credit through direct lending that allowed corporations to pursue growth without giving due attention to profitability. The result was over-capacity and reduced rates of return, causing a fall in share prices and the resultant currency and banking crisis. The authors stress that it was not so much market failure as it was institutional failure that precipitated the Asian crisis. In this aspect, Korea exhibited similar systemic weaknesses as the other Asian economies, because had domestic markets been allowed to function without distortions, the intensely rivalrous chaebols (Amsden & Singh, 1994) would not have had unrestricted access to too much external debt; they would not have continued to grow and aim for market share without regard to profitability, and would not have resulted in too-big-to-fail companies for the government to bail out (Glen & Singh, 2005, p. 221). As a result of the Asian crisis, the IMF recommended economic reform which followed the US-UK model (Singh & Zammit, 2006). The equities market was opened to foreign investors, forcing the large publicly-listed companies to comply with international investors’ demand for short-term profits by minimizing investments. Additionally, deregulation of the banking industry allowed banks to allocate more financing for consumer loans which were more lucrative than loans to business (Ha-Joon Chang, 2012). Opening of Korea’s financial markets to foreigners could not have been done at a worst time, since it rendered the Korean economy more vulnerable to the subsequent financial crisis of 2008. Moreover, the domination of a developing economy by foreign enterprises hampers the accumulation of local technological capability (Ha-Joon Chang, 2004).  Korea’s economic growth thus fell from 6%-7% to below 4% per annum on per capita terms. Lower growth meant fewer jobs, lower wages, and poorer protection for the worker due to a relaxation of the labor laws. The welfare state and lifetime employment have been abandoned, causing great apprehension among Koreans about the future and their job security, since employers may more easily separate them from the company and replace them with younger, cheaper employees. Furthermore, Korean youth are opting more to become physicians and lawyers which are seen as more stable professions, rather than study science and technology which embody the skill sets industry needs (Ha-Joon Chang, 2012). Privatisation Ha-Joon Chang (2004) decried the privatization requirements wrote that private investments have an inherent disadvantage in a mixed economy such as Korea’s, in that private investors cannot take into account the degree to which additional production must be generated in the future due; or, it can do so only imperfectly, because their decisions are independent of each other. What Ha-Joon advocates in lieu of privatization of investments is that a comprehensive state investment plan for industrial development be drawn and implemented by the state, through the ‘administrative guidance’ of privately-owned domestic firms (p. 207)  Bibliography Amsden, A, & Singh, A 1994, 'The optimal degree of competition and dynamic efficiency in Japan and Korea', European Economic Review, 38, 3/4, pp. 941-951, Business Source Complete, EBSCOhost, viewed 10 May 2013. Amsden, AH 1990, 'South Korea's record wage rates: Labor in late industrialization', Industrial Relations, 29, 1, p. 77, Business Source Complete, EBSCOhost, viewed 10 May 2013. Amsden, AH 1991, 'Diffusion of development: The late-industrializing model and greater East Asia', American Economic Review, 81, 2, p. 282, Business Source Complete, EBSCOhost, viewed 10 May 2013. 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