The Rapid Growth and Development of South Korea

The rapid growth and ontogenesis in the newly industrialising economies (NIEs) in recent decades has been nothing short of spectacular. Now among the beingnesss most dynamic industrialised economies, the NIEs of Singapore, Taiwan Hong Kong, and sec Korea which provide be the focus, stand as perhaps the best causes of successful scotch development. The scotch development of southwest Korea, which has been among the most rapid in the world is typical of the miracle that is the NIEs.Korea has come far since the days it was a terra firma of hungry sieve farmers, by pursuing an industrialisation-led development commitment since 1961, which has since produced annual GDP growth of 8.4% per annum, second only to China. The success of south Korea, has been identified by a mo of situationors including the shift away from significance substitution strategies towards export orientated industrialisation, and the effective managing of the economy and authoritarian rule adopted by th e establishment in determine to reanimate the pace of capital accumulation, technical progress and structural change to produce economic growth beyond what could possibly occur in a free mart economy.NIEs, South Korea, be immediately recognised as export machines boasting some of the highest trade/GDP ratios in the world. International economic relations began in 1964 with the recognition of these limitation of the domesticated foodstuff and the ineffectiveness of pursuing substitution industrialisation strategies. As part of its new strategy for export expansion the South Korean presidency body introduced new measures which included the devaluation of the won, which improved the competitiveness of its exports and introduced incentives designed to channel resources into export-orientated industries.Exporters were likewise supported by direct immediate payment payments, permission to retain immaterial exchange earnings for the purchase of imports, and the exemption from v irtually all import controls and tariffs. The government in consultation with firms, set up export targets for industries as well as individual firms. These targets appeared to choose influenced firm behaviour and supporting this cl m different was from between 1961 and 1973 the volume of exports increased at an annual rate of 35% and today continues to consistently rank in the top twenty trading nations.Over the expire 30 years the share of manufactures in total exports has increased from 12% to 95%. Furthermore the manufactures exported have themselves changed with more advanced products, led by electronics dominating the list of major exports and hence the enormousness of the Samsung and Lucky G middle-agedstar to the Korean economy. The direction of trade has also changed somewhat, where South Korean exports went largely to the USA and imports came from Japan, Asian countries excluding Japan are now South Koreas major trading partners. The importance of China is also becoming of increasing significance.South Koreas economic success as noted can also be contributed to the high levels of savings and investment. South Koreans save about 35% of GNP and thus sustainable economic growth has been driven by capital stock accumulation and expanded productive capacity. and then some figures show up to 60% of economic expansion in South Korea is a result of capital accumulation and increase infrastructure.Undoubtedly one of the most important rationalisations for economic success is effective government intervention. Selective government intervention has make headwayd the development of new industries, umpteen of which have become internationally competitive and also supported and advanced the growth of the private sector. The main aim of the government in South Korea has been to ensure that the behaviour of individual credit line accorded with the long term interest of the business class as a whole, and succession applying authoritarian rule recognising whe n it was time to allow the market to operate on its own. Apart from the macroeconomic management, government in the NIEs have also sought to accelerate the pace of capital accumulation, technical progress and structural change beyond what would have resulted from laissez-faire.All NIEs pursued trade policies, supporting industrial deepening and the development of national firms with selective incentives to promote exports. In South Korea for example, the government gave Chaebols preferential access to bank loans, relying on them to develop heavy and chemical industries capable of competing internationally. Indeed four decades of industrial development in South Korea have been marked by what have been marked as incestuous ties between cock-a-hoop business and government. In recent times government has been hostile to the conglomerates but the appointment of Mr Kim Suk Won to the ruling party has reopened an old wound over the role of big business and politics in South Korea.The role of the Chaebols in the Korean economy was a substantial reason for Koreas success over the last 40 years. The Chaebols are the large multi-company family owned business entities which are both horizontally and vertically integrated. Examples include Samsung, Hyundai, Lucky Goldstar and Daewoo, which together account for over one-half the total output. The Chaebols have played a major role in the economic development of Korea. They were given preferential access to bank loans and were relied upon to develop the HCIs (as they had the resources and top executive to compete in foreign markets). Indeed, the period of the HCIs drive marked the most rapid expansion of the Chaebols.The Chaebols engaged in fierce and even ruthless disputation with one another on the many fronts of industry, with at least 4 or 5 competitors in each industry, which all contributed to the economic expansion of the economy.The government in South Korea, as well as other NIEs has supported a technology policy. By providing a favourable tax environment, government has indirectly encouraged business research and development expenditure. The Korean government for example grants a tax credit equal to 10% of capital expenditures. Current policies are aimed at achieving a 5% share of research and development expenditure in total GNP by 2001. The government has also aided vestigial technological development in advanced materials, advanced vehicle technology, bio materials and nuclear reactors.The role of the government in South Korea was also to provide these financial incentives to promote the development of particular industries. Interest Rates for example were kept generally low and stable in order to reduce the cost of investment. Designated industries received precedency in allocation of bank credit, state investment funds and foreign exchange, The government in South Korea deliberately distorted prices and incentives as to improve the market outcome and accelerate economic growth.The go vernment in South Korea also actively pursued competition policies. This intervention works both ways. In other words competition policy restricted the competition or promoted competition policy in the areas depending on the circumstances. In South Korea the government granted exemptions to conglomerates from laws governing monopolistic practices. Competition policy has been married with industry policy. In this the role of government has been limited with government policy interacting with the competitive strategies of private firms.Governments in the NIEs have been remarkably stable. This has had obvious benefits on the economy. There is no standard formula for government in the NIEs and there are differences between them across nations. Singapore for example has a paternalistic government whilst Hong Kong is essentially laissez-faire Stability is the only real link between governments of the NIEs.As the South Korean economy reached a more mature stage of economic growth problems regarding the structural change in the economy began to surface. The agricultural sector in South Korea for example is now only a third of its original size. Most notably there has been a marked shift to the tertiary sector. There has been obvious problems and challenges resulting from this. Most notably rapid growth has brought about prod shortages in key sectors such as electronics, heavy machinery and shipbuilding. Such shortage of labour in which employers have noone to get vacancies made by expanded productive capacity allow for threaten South Koreas booming exports, which is seen as the vehicle for growth in South Korea. The problem is further compounded by an increasing reluctance among school leavers to dirty their hands in industry and the inability and unwillingness to attract foreign labour.After growth and development in South Korea for so long was driven by government intervention one of the most important challenges veneering the matured economy was for the governm ent to relinquish much of its influence over the economy and to allow market forces to operate effectively. If South Korea is to continue to growing as a truly advanced industrialised nation then obviously the market mechanism will have to be let to operate freely. This will take time and cause and also cause relative social unrest.As the South Korean economy has reached a mature stage, it has recognised the old regulatory environment that led to high levels of inputs especially in manufacturing sectors but low levels of productivity must change. In manufacturing, Korea has massively invested in the best visible(prenominal) technology but because of protectionism and poor corporate governance in banks and companies, it was not forced to adopt the best managerial practices. As a result labour and capital productivity are in most manufacturing sectors less that 50% of US levels and thus must be one of the challenges for in store(predicate) success of the Korean economy.Other challen ges that Korea has had to face, continues to face, and must overcome are the consistent current account deficits (CADs) and foreign debt which may put a constraint on South Koreas future economic performance. South Koreas economy relies heavily on high exports and thus is susceptible to global fluctuations. Secondly there is a insistency need in South Korea to use imports more efficiently.Furthermore, the greatest of the challenges Korea has had to face to date was the Asian Financial Crisis of 1997. Up to this point in time many economists looked favorably upon the economic fundamentals of Korea. However, due to excess short term debt over the long term debts, excess debt over equity and the generating of wealth through and through with(predicate) asset price bubbles, which was clearly unsustainable, these vulnerabilities only required a small shock which was initiated by the devaluation of the Thai baht in July 1997.As an advanced economy, South Korea now needs far more than sim ply hard work and determination to succeed in this new century, Companies in South Korea need to prevent ahead of the profound social, economic and political transition. It is the inherent need for human capital that drives much of South Koreas business and government spending. Many would defend that a well educated workforce is paramount to future success.In the future, South Korea will need to reform its financial sector, remove the burden of excessive business regulation, provide a more favourable environment for foreign investment and restructure its economy away from declining manufacturing and agricultural industries towards services and sophisticated manufacturing.The prospects for go along economic growth hinge on the success of the aforementioned drivers for economic growth. Deregulating services in addition to lowering barriers to imports, allowing FDI (which can reduce the risks of future financial crisis in the medium and long term) and improving corporate governance would be the key to restoring strong growth in Korea.This reduction would come generally because fair competition with best practice together with more careful bankers and demanding shareholders would force Korean manufacturers to improve their return their return on investments. In an increasingly globalised economy higher productivity in manufacturing and low import barriers would allow domestic competition to increase due to lower prices. Opening the domestic market would not lead to an increase in the trade deficit or external debt as higher capital productivity would reduce the need to import capital.In overall terms, prospects for South Koreas economy are favourable, but the high rate of success from the growth performance in the 1980s will be difficult to replicate. The next phase of the Asian miracle that will involve China emerging as the worlds largest economy within 10 years and the re-emerging Japanese economy will provide substantial benefits for the Korean economy. So me important strengths of the economy include a well educated and actuate workforce, a growing level of R&D, continued rates of high savings, greater regional trade links and potential for domestic growth through increased infrastructure investment, housing and personal consumption.In summation, South Korea is an economy which initially through selective government intervention and now through domestic and international reforms, sped to economic might. Although there are many challenges in the longer term making South Koreas future uncertain, (including the reunification with the ailing, unstable North) the fact South Korea has come so far argues well for the future. If South Korea can make the necessary changes to its economy to become a sustained industrialised nation then it will certainly take its place as an economic leader in the near future.