Overview of Economic Growth and Development in South Korea - Term Paper Example

Overview of Economic Growth and Development in South Korea Introduction Economic development can be considered as the process of economic transformation relating to structural changes of an economy by means of industrialization, increment of Gross Domestic Product (GDP) as well as income per capita. Many scholars have put forward different definitions of economic development. Lewis (2007) viewed economic development as a rise in output per person. KindleBerger (2013) viewed economic development as an increase in production of goods and services in an economy. Todaro & Smith (2014) views economic development as a multifaceted process comprising significant transformations in social structures, people’s attitudes and state institutions thereby speeding up economic growth and lessening inequality. Todaro & Smith (2014) further state that economic growth is the increase in the production of goods and services quantified in terms of Gross National Product (GNP) or GDP. It is a steady course through which the productive capability of an economy rises actively to generate increased levels of national productivity and returns. This paper provides an overview of economic growth and development in South Korea, which is among the developed economies of East Asia. It discusses strategies applied to measure economic growth and development with reference to South Korea, highlighting how the country compares to Japan, which is one of its developed neighbours. The paper also evaluates economic planning in South Korea, which has been significant in the accomplishment of the country’s development goals. It illuminates how population growth influences economic development while comparing South Korea to various developing economies. Overview of Economic Growth and Development in South Korea Todaro & Smith (2014) highlight the traditional tools for measuring development in economic terms such as accomplishing constant growth rate of income per capita to support a country to increase its output at a higher rate than its population growth rate. Gross National Income (GNI), inflation and Purchasing Power Parity (PPP) are some of the aspects used to measure the economic health of a country’s population. Gross National Product (GDP) is widely used as an indicator of economic development and depicts increased production. It is used as a measure of economic development in South Korea, which reached a high of $1.6 trillion with a GDP growth rate of 2% and $32,272 per capita income in the 2014 fiscal year (Lawn & Clarke, 2014). While applying GDP as a measure of economic development, it is assumed that increased production creates the need for labour thereby creating employment opportunities hence raising individual incomes, which results in enhanced well-being. It does not necessarily mean that the concerns of poverty, inequity, joblessness and income distribution have been addressed. Instead of only focusing on the market value of economic activity, it is important to measure the levels at which social goals are accomplished, for example whether the society is able to sustainably access basic human needs. GDP encompasses all goods and services irrespective of their contribution if any, to sincere developments in a country’s population, or whether such outlays were focused on moderating the loss resulting from a growing economy. Some important aspects of the economy are ignored while using GDP as a measure of development. These include the non-market oriented production, social and environmental costs that come alongside progress in GDP (Jackson & McIver, 2011). Genuine Progress Indicator (GPI) is a better measure compared to GDP as it focuses on the quality of economic development. It is an important instrument that determines the promoters of prosperity and economic growth thereby playing an important role in developing better government policies. It includes all the components of GDP that promote genuine progress whereby the value of individual consumption spending is used as the base. The GPI quantifies the well-being of households thereby considering public investment and expenditure as self-justifying (Talberth et al. 2011). According to Todaro & Smith (2014), while national governments of East Asian countries play a significant role in facilitating positive economic development in the region, governments in the less developed countries of Africa, Latin America and the Caribbean among others are known to practice negative approaches that impede development whereby they supress the market’s position as a stepping stone towards economic realization. In an ideal situation, governments are expected to act as the key agents and supporters of development. They are expected to generate equilibrium between private entities and public policy, which has been a major challenge among developing countries. This is mainly as a result of corruption that is entrenched in government systems, poor governance and erosion of the role of state through vested interests. Hindrance of the market to play its role in economic development has contributed to poverty and civil unrest in developing countries (Jackson & McIver, 2011). The civil society is seen as the public’s watchdog, creating a negative view of the government by constantly criticizing state policies for socio-economic development. Nevertheless, the productive role of government as evidenced in many successful interventions mainly in East Asia is often overlooked. This realization by civil society in developed countries has led to assessment of governments in a multifaceted approach that objectively evaluates the strengths and weaknesses of the public and private sector. Such evaluation is a better strategy that sets the stage for resolving the imperfections, integrating and appreciating the role of government, private sector and civil society in economic development (Todaro & Smith, 2014). There is a strong relationship between political reform and economic growth and development in South Korea. The country’s early speedy growth was characterized by political totalitarianism and widespread state involvement in the economy. In the 1970s and 1980s, the government directed huge amounts of capital by means of subsidizations and low-interest-rate credits into specific reliable family-led companies referred to as ‘chaebols’. These favoured companies also took advantage of trade preferences and rights to establish monopolies among other benefits drawn-out by the state. Such privileged actions facilitated the ‘chaebols’ to develop into considerable commercial realms whose products are now familiar and coveted globally. Hyundai and Samsung are among the early ‘chaebols’, which currently are large companies with a significant global market share. Nevertheless, the contemporary business environment in Seoul does not favour continuous dominance of ‘chaebols’ at the expense of a perfect market system. Moreover, the ‘chaebols’ past links with South Korea’s founding dictators generate resentment among many citizens who consider the companies to have achieved their current market dominance in a prejudicial manner (Chul-Kyoo, 2013). Warfare has had significant influence on South Korea’s economic development. The Korean Peninsula was partitioned in 1945 creating North and South Korea. The South by this time had well developed foundations for economic development including an educated public, already established property rights that are necessary for a functional market system, strategic land reforms that facilitated productivity as well as banks, trade unions and private enterprises among other institutions of contemporary capitalism. Ideological differences between the North and South resulted in the Korean War between 1950 and 1953 that shattered the newly established economy after liberation from the Japanese colonial rule in 1950. There was no investment in the economy until 1961 when the totalitarian ruler, General Park Chung-hee took power and launched a set of economic policies that promoted internal savings and embarked on promoting international trade. Constant threats from the North also threaten the thriving economy although the US has been supportive of the economy military wise (Rogers, 2013). According to Todaro & Smith (2014), economic planning is a thoughtful and sensible attempt by the state to express resolutions regarding the allocation of factors of production among different sectors of the economy hence influencing the level of production of goods and services in a particular time frame. Planning was widely accepted as a tool for the state to guide and accelerate economic growth in South Korea under General Park Chung-hee. He launched five year plans that were focused on increasing wealth within the country and also enhance political stability. There was consistent shift in policy from import substitution development to export-focused growth, which was gradually entrenched in the five year plans that began in 1962 through the Economic Planning Board, which is a state agency. The first plan was implemented between 1962 and 1966 seeking to promote the textile sector and increase the country’s self-sufficiency hence minimize dependency on US financing (Chun, 2013). With successful implementation of the first five year plan, the country launched its second plan spanning between 1967 and 1971, focused on transforming the emphasis of industrial production from local to the global market. Subsequent five year plans were concentrated on the global market, which expanded significantly in 1972 when the US re-opened diplomatic relations with China. These five year plans were financed through foreign borrowing with minimal foreign direct investment (Rogers, 2013). This type of planning is considered among primary elements of development planning in mixed economies by Todaro & Smith (2014) whereby governments undertake public investment projects through foreign borrowing. The state finances projects that are considered to contribute greatly towards the accomplishment of lasting economic objectives such as infrastructure and import substituting production that forms a foundation for future export segments. Despite government’s important role in policy development and involvement to activate development in particular sectors that hold significant potential for economic development, there are myriad problems resulting from such interventions. It is common for market players to have different opinions regarding the necessary interventions to promote production. Moreover, government planning orientates all market players in one direction thereby creating the risk of market failure. Private decision making has greater flexibility than government planning that involves bureaucratic structures and may not be useful in managing comprehensive plans where personal initiative may be of great significance. Innovation and efficiency may not be accomplished in the implementation of government controlled decisions due to lack of motivation plans such as incentives that are applied in the private sector to enhance productivity and control wasteful usage of resources (Todaro & Smith, 2014). From 1960, the state engaged in radical transformation of the economy and control of development in the major public and private initiatives. The government strived to create a favourable organized structure through setting priorities for industrial development to enhance growth in the private sector. Social and economic development was guided by the state. However, by late 1980s, the state’s intervention in the economy was significantly reduced while foreign investment and import policies were relaxed to enhance competition. The government mainly embarked on rural development whose growth had been eclipsed by significant industrial growth in urban centres. This policy was aimed at reducing the inequity between the rural and urban economies through investing in public infrastructure and agricultural mechanisation (Lawn & Clarke, 2014). The current hands-off approach by South Korea’s government and the development success accomplished indicates the need for minimal government intervention in the economies of developing countries. Effective competition enhances the accomplishment of the roles that markets play in economic development. According to Todaro & Smith (2014), markets play a significant role, of generating product utility for consumers and ensuring that consumers access what they need, where they need it and in good time. They also motivate producers to innovate and hence greater product utility. Most developing countries have limited or lack distinctive civic, institutional, official, and social settings that are necessary to support a well-designed market system. Fraudulent deals, corruption, market cartels that establish monopolies and other market imperfections must be dealt with for a market system to promote economic development. South Korea is among the developed countries that have accomplished a lot as a result of a functional market in contrast to many African, Latin American and Caribbean countries (Rogers, 2013). South Korea’s economy is likely to be at per with that of Japan in the next decade. The main commodities produced by South Korea include electronic goods, machinery and equipment, automotive products, steel and ship construction. The country also has a well-developed textile industry. It is ranked at position 15 globally in terms of Human Development Index (HDI), which is the top most among its East Asian neighbours. The standards of living among citizens are relatively high with the highest average income per person in Asia and the 10th highest globally. The country ranks among the highest in terms of education globally, healthcare excellence, job security and best environment of business. Student skills in the economy are the best compared to other OECD economies (Chun, 2013). Japan which is a developed country and former colonial master to South Korea mainly exports semi-conductors, electronics, automobiles, office machinery and chemicals. The economies trade between each other and also compete for the same foreign markets including China, Taiwan, India and the US, which is the single largest market for both economies (Chu & Hill, 2012). Income distribution in South Korea has changed for better in the last decade with greater equality between the rich and the poor compared to how it was a decade earlier. However, the older people between 66 and 75 years of age are likely to be poor compared to other East Asian countries such as China, Taiwan, Hong Kong and Singapore. Moreover, the current taxation policy is undoing the income equality that had been achieved in 2009. The Total tax revenue is the country’s economic model that is increasing inequality at 26% of GDP. To promote foreign investment, the government lowered taxation on labour leading to a reduction in social spending. The tax benefit plan lowers poverty by a mere 18% which is much lower compared to other OECD countries such as Sweden where a similar model lowers poverty rate by 80% (Cheong, 2011). Population growth and structure plays a significant role in economic development. Todaro & Smith (2014) observe that the current developed economies were characterised by progressive industrialization with a relatively low population growth rate of less than 2% per annum. Increases in population were attributed to low birth rates and decreased death rates in the European and North American nations. On the contrary, developing nations experience relatively high annual population growth rates of over 2.5%. Moreover, the populations are concentrated in few areas leading to a high person to land ratio. This type of population distribution is associated with mushrooming of informal settlements in urban centres as a result of rural-urban migration. Another aspect of population is age structure whereby majority of people in the less developed countries are young and dependants below the age of 18 years. Population growth rate in many developing East Asian countries reached a peak in the late 1960s when the United Nations and other agencies offering foreign aid were concerned about the impact of population growth on the environment and economic development. They began family planning campaigns through donor funded population programs (Chu & Hill, 2012). South Korea is one of the most populous East Asian economies that adopted population stabilisation at the expense of the indigenous ‘pro-natalist’ approach that associated high population with great national strength. By 1990, South Korea was among the five East Asian economies that had reduced their birth rates to less than 3 children per woman. By the end of 1990s, South Korea’s population growth had reduced by 1% per annum, far above Japan whose population growth had declined by 0.2%. By 2009, South Korea had the lowest population growth rate globally. The high population is associated with reduced death rates. 47.3% of the country’s population is aged between 25 and 54 years that comprise new entrants and experienced people in the labour pool. While 27.6% are below 24 years old, the aging population above 54 years comprise 25.1%. In other words, most of the population is within the productive age (Mason, 2010). Conclusion GPI is superior to GDP as a measure of economic development as it takes in to account various aspects such as the quality of life, environmental integrity and social well-being rather than only focusing on output. South Korea’s development progress has been consistent over a considerable period and the economy is likely to be at per with that of Japan in the next decade. Economic planning by the state has significantly helped economic progress in the country. Warfare and constant threats from the North have had a negative influence on the economy of South Korea. Political reforms have been significant in promoting international trade in the economy. Population growth influences economic development and South Korea is among the East Asian economies that have achieved relatively low population growth rate. References Cheong, K S (2011), ‘Economic Crisis and Income Inequality in Korea’, Asian Economic Journal, 15(1), 39-60. Chu, Y & Hill, H. (2012), The East Asian High-Tech Drive, United Kingdom: Edward Elgar Publishing Limited. Chul-Kyoo, K. (2013), ‘Impact of Korea’s Economic Development on Social Conditions’, Korea Focus, 12(3), 114-131. Chun, B. C. (2013), ‘Effects of Financial Liberalization on Consumption in Korea’, The Bank of Korea Economic Papers, 6(1), 24-41 Jackson, J & McIver, R (2011), Macroeconomics, New South Wales: McGraw Hill. KindleBerger, C. (2013), The World in Depression, 1929-1939, 40th edition, Oakland, CA: University of California Press. 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