Development of South Korea - Case Study Example

Development of South Korea Table of Contents Introduction 3 Strategies of South Korea4 Industrialization 4 Rapid Capital Accumulation 5 Mobilization of Unemployed Labor 6 Planning 7 Conclusion 7 Work Cited 8 Name of the Student: Name of the Professor: Course Number: Date: Introduction The economic triumph of South Korea between 1962 and 1995 is well recognized, and also stands as evidence that a state can raise itself from deficiency in only one generation. The development model of South Korea has attracted the global attention. It was considered among the deprived countries of the world but during such decades of the economic expansion, it has changed itself from the poorest countries towards one of richest countries, in spite of the shortage of natural assets, heavy defense expenses, a high density of population, and severe wartime destruction. The economic growth was averaged at 8.7% per annum during 1962 to 1995. In 1962 the per capita Gross Development Product (GDP) was US$87 which had increased to $10548 in 1996. The nominal GDP has also increased from $2.3 billion in the year 1962 to $480.4 in 1996, thereby establishing the economy of South Korea as the 11th largest economy on the earth. Moreover, in the year 1996, it was the 29th member of the OECD (Chowdhury and Islam 42). During the early stage of 1960, reconstruction began in the financial well-being area, mainly after flourishing military coup of Park Chung Hee – the leader of South Korea; in the year 1961. The main force of monetary injection in South Korea is the United States (US). At the starting of 1961, Park agreed to assist the US in Vietnam War for the exchange of financial rewards. From 1965 to 1971, South Korea sent above three lakh soldiers in Vietnam War to provide support to the US. As a result, United States infused more than three billion dollars in their economy which gave South Korean government the confidence to fetch more money through different kinds of business. Large construction deals throughout Middle East and also the growth of international conglomerates such as Samsung and Hyundai continued towards fuelling the economy of South Korea after Vietnam War. An efficient economic growth strategy was designed as well as launched by the Park Chung regime, based on the broad state intervention and export-oriented development model (Azimi, Fuller and Nakayama 90). Strategies of South Korea South Korea along with Singapore, Hong Kong, and Taiwan “a group of four”; whose speedy economic development and unusually fair income distribution, differentiates them from rest of the world. Since South Korea is largest among them and the growth started from an extraordinarily low base, so, its success is mainly noteworthy. There are various factors which lead to the success of Korea which includes: restructuring or the implementation of economic strategy after 1960, industrialization, recruitment of unemployed labor, efficient planning and speedy capital accumulation (Kuznets 44). Besides all these, the success factors also include prior slackening of constraints towards development such as land-tenure exploitations, illiteracy, and inadequate infrastructure. The Korean country has experienced a lot in relation to the trade and growth challenges. The traditional argument is based on the theory of comparative gain, emphasizes the advantages from the free trade through engaging in the activities especially for which Korea is best fitted in regards of source endowment: in general, dissimilarities in the factor endowment must determine the models of comparative benefits; a labor profuse country will then have a relative benefit in labor concentrated goods in relation to a resources-rich country. Park Jung Hee saw the requirement to construct an industrial base which was later considered as the keystone of the future development of Korea. The long term strategy includes diversification into the manufactured exports. The main strategy to expand industry includes targeting only some sectors that were estimated to perform better in the international markets. The Neomercantalist Model of South Korea shows the relation between domestic output and world demand for an open and small economy (Kim 11-14). The world requirement/demand determines the national output level. The unit price of the industrial production is influenced by the output level, given the occurrence of the scale economies within manufacture sector; i.e. the better the output level, the lesser the unit production cost. Therefore, the initial stage of exports resolves the international competitiveness of the country, which influences the growth rate in world requirement. Defensive trade policies could be crucial to guard the balance of payment situation of the country. The Neomercantalist Model fitted moderately to the development strategy of South Korea which explains that the world demand leads to domestic output which leads to additional productivity which in turn leads to global competitiveness. After adopting the development strategy, the industrialization of South Korea is observed as a success case in relation of changing proportional advantage achieved by “accurate” pricing and “rational” exchange rate guidelines. Definite policies for the development of industry in South Korea throughout the export expansion period can be divided into two wide categories: set of the macroeconomic policies intended for influencing the common environment for the industrial activities; and the group of policies are aimed on the growth of industries or specific sectors. This explains the success of South Korea (Kim 11-14). Industrialization Industrialization is considered among those aspects which led towards the success of Korea. The conversion to fast export-oriented development in Taiwan in 1960 has been repeatedly compared with South Korea. The practice of both the economies became a significant model for several developing countries, in the 1980s, even though there were some differences in their policies. During 1950s, Korea pursued “one-sided import substitution policy” with the export development playing a minimum part in total economic growth. However, during the 1960s, the policies of trade and exchange rate were reformed, leading to the rapid switch towards export-oriented development and ultimately towards industrialization. After 1960, South Korea was particularly successful in mounting exports in those sectors that has not been developed during the immediate postcolonial and colonial years (Booth 176). During 1970s, the Country has switched its industrial policy in the direction of technology and capital intensive heavy & chemical industries. To attain the development of heavy & chemical industries, the policy mission was to assemble capital, skilled workers, industrial sites, entrepreneurs, and technology into the heavy & chemical industries. Towards this end, Government Park executed four considerable initiatives: a liberal incentive scheme, growth of education for the skilled workers, a massive industrial site, and the founding of the new research organization (Chowdhury 47). South Korea chose the strategy of fast industrial growth through heavy & chemical industries. Chaebols like Samsung, Hyundai, Daewoo, and LG have become the domestic words in most of the countries. These as well as other chaebols played an important part in the rapid industrial growth of Korea. Chaebols were formed by entrepreneur who perceived a profitable chance in economic reformation of the country. The chaebols decided to make huge investments in long development industries such as shipbuilding, automobile, chemicals and oil refineries, and the President Park decided to provide them favored treatment in payment of loans of bank at low rate of interest, tax benefits, monopolistic industrial authorization, and favorable rates of foreign exchange. Moreover, they were open to diversify as well as set up fresh companies. The top 10 chaebols were responsible for 25% of Gross National Product of the country i.e. South Korea in 1981. By 1996, a total of twelve chaebols were registered amongst the Fortune International 500. Not only the economies of South Korea grow at 8% per annum throughout 1960-1980, its exports also grow from $17 bn in the year 1980 to almost $72 bn in 1990, along with trade excess of $9 billion. South Korea appeared among the strongest economies of the world (Khandwalla 163). Rapid Capital Accumulation The adoption of capital accumulation strategy is the next factor towards the success of South Korea. It adds towards rapid technological improvement as well as an amazing transformation of output. During 1963, the nonfuel primary produce accounted for over half of the country’s exports, and the wigs of human hair were the 3rd leading item. After some time the exports of South Korea were mainly dominated by the manufactures like electrical products, textiles, and steel and iron; only one main product group, i.e. fish is at the top 10. Capital accretion was financed mainly by mounting domestic saving, amplified by a considerable inflow of the savings from overseas, thereby reaching almost 10% of GDP during 1971. These inflows took the shape of loans of long term as well as trade credits especially from public institutions and private lenders (Edwards 486). In South Korea, the labor unions were not powerful and government has also not imposed regulations or any least wage that extensively affected the purpose of remuneration and working conditions during the time of export-oriented policy. Real wages mount dramatically due to the rising requirement for labor and also due to the result of the market forces by means of capital accumulation (Krueger 139). During the stage of external development, chaebols grew quickly through rapid capital accumulation whereas the medium and small firms were monetarily excluded from the state support. The chaebol groups mainly extended their interest from customer nondurables (such as textiles and foods) to customer durables (such as automobiles and electronics), and afterward to the manufacturer goods (such as machinery, information, and shipbuilding industries). This extension recommends a quantitative augmentation in both sales and capital, and qualitative conversion of assets in the development of the private power that governs the overall circulation of national economy (Suh 64). The gross investment rate increased tremendously from 17% to 38.1% from 1963-1996, thus fuelling notable economic growth. The high rate of investment was accredited to a soaring rate of return on the capital as well as low industry risk. A soaring return on the capital was accredited to low wages, low interest rates on loan, and the domestic industries protection from the foreign investment (Chowdhury 47). Mobilization of Unemployed Labor A significant feature of the economic growth has been accredited to the ability of South Korea to efficiently utilize the state’s profuse human resources. The demand for labor increased significantly during 1960 because of labor-intensive strategy of industrialization. As an outcome, the country was changed from labor surplus during 1960 to a labor-deficiency economy in 1977. Real wages augmented more than the productivity increments, thus raising the real unit manual labor costs. However, with this augmentation in wages, the rate of real interest on loans continued to be low during the early stage of 1980. The increase in wage-rental percentage led the companies to replace capital for labor. Supply of the human resources improved rapidly by the demographic expansion in labor force, mobilization of the underemployed workers, and by advancing education. Between 1964 and 1995 the workforce augmented by 2.9% per year and the labor participation has also improved. The flexible and efficient labor market of South Korea was a main element towards the tremendous growth of economy as well as employment. Under the authoritarian regimes, highlighting the high growth plans and the anti-competitive agreements such as laws of labor protection, union monopolies, and minimum wages did not subsist. Market forces mainly determined employment and wages (Chowdhury 48-49). Initially the labor marketplace was under strict control of government. Taking the initiative of government, management practiced an authoritarian strategy towards labor relations. Often the state intervened to solve disputes, thus leading to shortage of the labor-management talent among businesses. This situation altered dramatically with the weakening of the government control and political democratization. The education level has also improved remarkably. They perceive education as directly related to material success and social status (Chowdhury 48-49). The unemployment falls from 8% in 1961 to beneath 4% in 1971. There was significant increase in the public funds allotted to skill development, education, and scientific and professional training. Significant public assistance was offered for in-plant and government job training, equally in provincial areas and large cities. After 1981, all these attempts were synchronized by the Training Corporation. Above all, noteworthy are the guidance behavior of the productivity centre of South Korea, where more than 20,000 industrial employees get instruction of modern technologies every year (Deyo 28). Planning Today South Korea is not just the eleventh largest economy of the world but is also having a promising cultural force and an energetic democracy. The country is planning for the reunification of the North Korea and South Korea; where these two countries have decided to work in the direction of a nonviolent reunification in the near future. Though, this practice has constantly been achieved with several difficulties because of usual tension between these two countries. Korean reunification however if accomplished might upshot from the lack of adjustment by both or either of the Korean states, particularly if the North Korea fall short to make the smooth and orderly transition into post-cold conflict world. It is considered that there are total of three probable pathways towards Korean reunification: mutual consent, default, and war. Mutual consent will be the authorized reunification policy of both South and North Korea. Their plans of official reunification vary only in approach and method, not in terms of aim. South Korea supports a gradualist method but the approach of North Korea is more immediate and direct. The approach of North Korea was “one state, one nation, and two local governments” in which every political system would be held intact within single united nation-state. North Korea was undergoing the consolidation and transition stress and also the financial stagnation. The complexity is compounded through the shortage of food carried by the distressing floods in 1995. Under such conditions, reunification by means of default is considered as the most practical scenario. For example, administering the overflow of the refugees from North should be considered in advance (McCann 65). The hope of their relationship requires both the states towards taking the conciliator step in the way of peaceful coexistence before the final unification. However, for some reasons, neither of them is ready to acknowledge the other’s reunification plans, formula and policy. The war for supremacy reflects ethnic nationalism of Korea. However, if there is desire for reunification and peace among the people of Korea, the prospect or vision will be attained. Reunification is regarded as lodestar of the Korean nationalism; therefore accomplishing it is mainly the objective of both the nation (McCann 67). Conclusion The report explains that the South Korea has played an important role towards macroeconomic intervention as well as in assembling the whole people to accomplish the developmental objectives. However, it’s just not the state itself, but exogenous issues such as culture, geopolitics, and history too has given shape to the nature of Korean state as well as its financial performance. The democratic growth is considered as an evolutionary occurrence resulting from the economic development. The economic expansion brings the transformation in the socio-economic formation of the people and therefore the forces rising from this changes support democratic governance. However, the other similar countries such as Singapore, Hong Kong, and Taiwan have also attained economic development and unusually fair income distribution system. But among them, the growth of South Korea started from an extraordinarily low base; so, its success is mainly noteworthy. These three countries should learn from South Korea how to attain success by switching its industrial policy in the direction of technology and capital intensive chemical industries. They can also adopt capital accretion strategy which results in rapid technological up-gradation as well as an astonishing transformation of output. By adopting these approaches, those three countries can attain more economic development. Work Cited Azimi, Nassrine, Matt Fuller, and Hiroko Nakayama. Post-Conflict Reconstruction in Japan, Republic of Korea, Vietnam, Cambodia, East Timor and Afghanistan. United Nations: United Nations Publication, 2003. Print. Booth, Anne. Colonial Legacies: Economic and Social Development in East and Southeast Asia. United States of America: University of Hawai Press, 2007. Print. Chowdhury, Anis. and Iyanatul Islam. Handbook on the Northeast and Southeast Asian Economies. United Kingdom: Edward Elgar Publishing Limited, 2007. Print. Deyo, Frederic C. Beneath the Miracle: Labor Subordination in the New Asian Industrialism. London: University of California Press, 1989. Print. Edwards, Sebastian. Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences. United States of America: The University of Chicago Press, 2009. Print. Khandwalla, Pradip N. Management of Corporate Greatness: Blending Goodness with Greed. New Delhi: Pearson Education India, 2009. Print. Kim, Kwan S. “The Korean Miracle (1962-1980) Revisited: Myths and Realities in Strategy and Development”. Kelloggpublications. Kellogg Institute Publications. 1991. Web. 18 Nov. 2014. Krueger, Anne O. Trade and Employment in Developing Countries: Synthesis and Conclusions. United States of America: The University of Chicago Press, 2007. Print. Kuznets, Paul W. “Governmant and Economic Strategy in Contemporary South Korea”. Pacific Affairs, University of British Columbia, 58(1), 1985. McCann, David R. Korea Briefing: Toward Reunification. New York: M.E. Sharpe, 1997. Print. Suh, Moon-Gi. Developmental Transformation in South Korea: From State-sponsored Growth to the quest for Quality of Life. United States of America: Greenwood Publishing Group, 1998. Print. Read More