The Economics Of Globalization In South Korea

Introduction

Globalization is a phenomenon that has had a variety of effects on different countries in the world and to which all countries have reacted to just as differently. South Korea is one of the countries that has greatly benefitted from free trade and open markets. Within the span of three decades, South Korea transformed itself from a developing country suffering the after-effects of war to a country that can compete with the developed nations of the West.

At the end of the Second World War, there was great turbulence in Korea which was as yet officially undivided. Korea gained independence from Japan who had ceded to the United States in 1945. There was a struggle between the North and the South; it was a pit against communist Russia against anti-communist America and the end result was a torn Korea with the South going to the Americans and the North in the hands of the Russians. This would greatly influence the two states’ economic growth because of their responses to international trade.

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South Korea between 1980 and 1990

Business cycles

General Park had an ambitious plan for South Korea, to transform it from a mediocre third world country into a competitive economy on the international platform. His vision was achieved through sheer grit and careful planning that was implemented in three and five year phases. This saw the country survive the post Korean war crisis into a stabilizing economy at the beginning of the eighties decade.

At the beginning of the eighties decade, Park implemented another phase of his plans; the focus was moved from labor intensive industries toward the heavy and chemical industries (HCI). President Park used the ‘Chaebols’ to achieve his industrialization aspirations.

The Chaebol system constituted the building up of export oriented industries focusing on six major sectors namely steel, petrochemicals, shipbuilding industry, electronics, machinery and non-ferrous metals. This was coupled with discouraging labor unions that fought for the workers’ rights. It demonstrated how heavy handed and authoritative Chung Park was as a ruler. His approach to tackling dissent was quelling it instead of trying to work out the underlying issues (Kim, pg 455).

In the earlier part of the eighties, South Korea’s growth hit a snag due to a confluence of factors. The most pressing of this was the international oil shock that resulted in oil prices rising to six times their original value. Because of the high cost of production, there was a corresponding decrease in demand for South Korea’s exports.

The factors that contributed to the economic downturn of the late eighties could be pinned down primarily to the decline of the Chaebols which had grown extensively and had become too big to run and manage effectively. There was also stiff competition from other industries that were unrelated to the HCIs such as agriculture. With South Korea’s wealth came higher costs of living which resulted in the rise cost of human labor. Chaebols also faced competition from other Asian countries on the international market that had cheaper labor with their major competition being China who still had access to cheap human labor (Guillen, pg 213).

At the same time, there was the rapid growth of the building industry in the Middle East which saw South Korea’s casual laborer’s flocking to these countries and creating a deficit in the former. The wages paid to laborers became higher, crippling the industry further. There were more than three hundred thousand casual laborers who left the country in search of greener pastures abroad.

Trade

For the Chaebols, their growth was promoted by giving tax subsidies, being granted to subsidized public services as well as being given priority when it came to financing their projects. This approach was detrimental to small to medium sized industries which did not flourish as much as the Chaebols did. It resulted in a skewered distribution of assets, as compared to the earlier years since the wealthy Chaebols owners ended up with higher incomes.

The Chaebols with widest sphere of influence were: Hyundai, a force in automobiles, engineering, construction, shipbuilding and industrial activity as well as the finance sector. Samsung specialized in electronics, petrochemicals, and construction. LG’s focus was on home appliances, electronics, petrochemicals and chemicals (Lewis & Amadu, pg 58).

Another step that Mr. Park took was protecting the domestic market from the invasion of cheap foreign goods so as to foster growth. This was done by levying heavy import taxes on goods that were being produced market so that homemade products could be more affordable to the consumer (Lewis & Amadu, pg 62).

The negative impact of the Chaebols was that they increased the discrepancies between the already existing social classes and exacerbated an already tense situation. Though the GNP went up to almost six times what it had been in the seventies, literacy was on the rise with university enrollments three times what they had been in the previous decade, the gap between those in the lower income brackets and the rich had widened considerably. The angst that authoritarian Park had managed to quench in past came to the fore. There were further demonstrations from students and those in lower income brackets (Lewis & Amadu, pg 215).

Exchange rates and monetary policy

The result of all these things happening at the same time was an occurrence of high inflation rates which in turn led to the South Korean currency, the won, being re-evaluated. Because of the easy credit availability, the country borrowed heavily worsening the inflation trends and for a while, it appeared as though the country would sink into a very deep financial hole (Adelman & Robinson, pg 97).

Because of the upheavals in the economy towards the end of the seventies, Korea embarked the eighties with heavy foreign debt as well as high inflation. To counter this, she embarked on a stabilization program. This involved cutting down on the incentives that had initially been offered to the Chaebols while at the same time introducing an incomes policy. This was the right step to take because it laid down the foundations for South Korea’s lasting economic prowess (Ihm, pg 168).

With the liberalization of financial markets, there was a corresponding rise in interest rates which in turn led to greater domestic savings (Ihm, pg 168).

All along South Korea had been an authoritarian state with resounding economic success but limited democracy. The slow economic growth experienced in the mid eighties resulted in political unrest because there was no democratic foundation. The political atmosphere was heavily dependent on economic performance. Change came in 1987 when rebellions and revolutions led to the tearing down of authoritarian rule that had oppressed the country for so long (Guillen, pg 88).

The problem that had started emerging in the seventies concerning the distribution of wealth became more apparent. While on the whole things looked rosy, with a GNP that could be compared to Western developed nations, extremely low mortality rates and life expectancy that matched that of New Zealand, there was the underlying problem of an emergent super-wealthy class and a dissatisfaction of those in the lower income brackets (Lewis & Amadu, pg 174).

South Korea: 2005 to 2009

Business cycles

South Korea has had her fair share of ups and downs in the economic sector and in her quest for economic superiority on the international platform. In this quest, there have been mistakes made that have cost the country greatly. The most recent and most severe economic crisis that the country has had to face so far has been the collapse of the Asian economy in 1997.

This revealed the fault lines resulting from poor financial practices such as having a high debt to equity ratio, borrowing heavily from other countries and lack of control over the financial institutions- the banks- which backed poor unserviceable loans. The result was a 6.9% plunge in GDP by 1998. Other than the Asian financial crisis, this was also blamed on South Korea’s autocracy (James & Amadu, pg 188).

But South Korea is still a force to reckon with on the international scene. A member of the Organization of Economic and Cooperative Development (OECD), it is the country with the eighth highest volume of export in the World surpassing Canada, Russia and the United Kingdo, as well as being the fourth largest economy in Asia (Heritage Foundation, n.p).

Trade and labor markets

The Chaebols that were instituted by General Park and which contribute towards South Korea’s rapid economic growth in the seventies and eighties are still growing strong, contributing to the bulk of the country’s industry oriented export business. The ten largest Chaebols by 2009 were Samsung Electronics, Hyundai Motor, Korea Electric Power, POSCO, Samsung Life Insurance, KB financial Group, Hyundai Mobis, LG electronics and LG chemicals (Heritage Foundation, n.p).

The country, as of 2009, was the number one shipbuilder globally and had the largest volume of oil exports in all of Asia. Her major trading partners are the United States, European Union, China and Japan. This has been aided by the fact that in recent years, the country has been more open to the idea of free trade and lowered restrictions that had previously guarded her domestic market. The tariffs that were placed on imports have been revised to create a more amicable trading atmosphere with her trade partners (CIA, n.p).

South Korea has readily embraced the digital age, being ranked at number one as having the highest Digital Opportunity Index (DOI). An indication of the country’s heavy digital leaning is the fact that globally, it is the country with the highest internet access per capita (CIA, n.p).

In the transportation and energy sector, the country has an advanced and comprehensive infrastructure made up of air routes, road, railway and waterways. The country is linked by the high speed railway that runs between major cities and and an underground railway system that links other cities in the country (CIA, n.p).

Exchange rates and monetary policy

In the more recent years, reforms in both the banking and industrial sectors have seen to safer and better financial practices. By 2006, the country had a labor force of 23.77 million, with a low unemployment rate of only 3.3%. The country had had a Gross Domestic Product (GDP) of $US 24, 200 (CIA, n.p).

Economic freedom in South Korea according to the World Bank, is relatively high. The country is ranked at position 31 globally, with a percentage score of 69.9. this has been manage through constant revision of tax laws and tariffs to make them more competitive as well as transacting businesses in an open manner to alleviate distrust and suspicion.

The country’s President, Lee Myung-bak, who came into office in 2008 promised to work towards freeing the economy even further to allow the country to be more competitive. The challenges that the country faces towards its strive for economic freedom are corruption as well as inflexibility in the labor market (Heritage Foundation, n.p).

Long term economic growth

One of the issues that South Korea is still grappling with is the equitable distribution of resources because though the country has a high GDP, 15% of the total population live in poverty. There are the superrich who while making up only 10% of the population, carry 25% of the national wealth and at the other extreme end, are those in the lowest income brackets making up 10% but only carrying 3% of the national wealth (Global Education, n.p).

South Korea still works with the tariff system with an average weighted tariff that stood at 7.1% by 2007. Hindrance to trade results in extra expenses that are brought about by unreasonable tariffs, restrictions put on imports and exports, barriers to accessing the service market and regulations that are not very transparent (Heritage Foundation, n.p).

The economic downturn that has seen most world economies in a shamble has not greatly affected the country. The inflation rate of the won has been kept under control, staying at an average of 3.9% for the period 2006 to 2008. This has been partly because there was quick response on the part of South Korea to the changes in the international market and inflation pressures (Heritage Foundation, n.p).

The literacy levels in the country are very high, standing at 97.9%. education is greatly valued in the country and is provided free until one attains the age of fourteen or fifteen. South Korea is the country with the highest percentage of teenagers who go through with their secondary school education. As a result of this, there is greater gender equity as more and more women get opportunities in the job market. The percentage of women who make up the workforce stands at forty one (Global Education, n.p).

Recommendations

Though South Korea’s economic growth has been commendable, there are factors that work against this. These are such as the country’s very rigid labor regulations, the necessity of a buffing up their financial institutions and financial markets as well as greater straightforwardness in transactions. What should be done is to go lax on the confounding labor regulations, open up the country to Foreign Direct Investment by moving away from protecting the domestic market-an action that served its part in the past, as well as reforming the taxation system. All these actions would go a long way in keeping up with the growth that has been witnessed by Korea in all these years (Lipsky, n.p).

Conclusion

South Korea has witnessed its share of ups and downs in the economic sector but remains a stellar example of how positively globalization can affect a nation; there are high standards of living with the per capita income standing at US $20,000, high levels of literacy and high life expectancy.

South Korea can further increase her economic productiveness on the international scene by reforming its taxation and labor regulations as well as participating more actively in free market trade and encouraging foreign direct investment.

Works cited

Adelman, Irma and Susan, Robinson. Income Distribution Policies in Developing Countries: The Case of Korea. Stanford University Press, 1978. Print.

Central Intelligence Agency (CIA). “South Korea.” The World Factbook Undated . Web. 9 Apr. 2010.

Guillen, Mauro. The limits of Convergence: Globalization and Organizational Change in Argentina, South Korea, and Spain. Princeton: Princeton University Press, 2001. Print.

Global Education. “South Korea.” Global Education Undated . Web. 9 Apr. 2010

Ihm, Chon-Sun. “South Korea’s Economic Development.” Social Studies 79.4 (1988): 165-169. Print.

James, Lewis, and Sesay Amadu. Korea and Globalization: Politics, Economics and Culture. New York: Routledge, 2002. Print.

Kim, Jung. “The Political Logic of Economics Crisis in South Korea.” Asian Survey (2005): 453-474. Print.

Lipsky John. “Reconstructing the World Economy.” International Monetary Fund 25 Feb. 2010. Web. 5 Apr. 2010.

The Heritage Foundation. “South Korea: information on economic freedom.” heritage.org undated . Web. 10 Apr. 2010.

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