A report for the fulfillment of course of Understanding Emerging Markets

SOUTH KOREA:
Inspiration to peer
countries for growth
Political-economic approach
Shivam Rastogi DM15151| Vishal Gupta DM15166
8-25-2014

Introduction
In our study we have emphasized on the governance of the South Korea, which in turn is the major
factor of its growth from where it was to the state of becoming the Asian Tiger. The Lessons from the
governing style of South Korean leaders and the various strategies and reforms to overcome the crisis
that become the hindrances to the path of becoming the Asian Tiger is a lesson to the rest of the South
Asian Countries.
South Koreas Economic development since 1960s has been phenomenal. Devastated by the Koreans
war (1950-53), South Korea was the poorest countries in the world in 1950s Its GDP was mere
$1.5billion and per capita GDP was $70 in 1954. Starting in 1962 with a 5 year economic plan, however,
South Korea initiated industrialization to develop the economy. Through the implementation of several
more % year economic plans, South Korea now is the 13th largest economy in the World. It had the GDP
of $949.7 billion in 2007 and GDP per capita reached $19.64.
South Korea enjoyed miraculous economic development in the past seven decades. After the
assassination, a military dictator in 1979 who orchestrated South Koreas rapid economic development,
the Korean people were expecting a democratic govt. However, that expectation was completely
destroyed by another military dictatorship. To make matters worse, the Korean economy faced its first
potential crisis in 1980 second global oil shock.
Decentralization has had many positive effects on Korean Politics and Society, such as Human Rights
improvement, a better reflection of public opinion in policy making, fair elections and as well as freedom
of speech.
Some of the negatives were decreased exports due to wage hikes of labor which was due effect of the
legalization of the labor unions. The chaebol reforms and many others.
So ahead we will take a closer look at the major phases of South Korean Development and will make a
brief comparison with other fast growing South East Asian Economies.

Objective:
Objective of this study is to look upon the governance of the country and how it plays an important role
in determining the growth of the country.
Methodology:
We have chosen the secondary data to carry our study. We have divided the time line into two broader
phases of South Koreas development as Authoritarian Government and Democratic rule. Further the
analysis is done on the year wise basis.



Analysis and Discussion:
We have analyzed the government policies and the different style of leadership in the country over the years. The
different reforms and their impact have been studied and how they impacted the growth.

ECONOMIC DEVELOPMENT UNDER AUTHORITARIAN GOVERNMENT
PARK CHUNG-HEE ADMINISTRATION
EXPORT ORIENTED INDUSTRIALIZATION
Although the South Korean Government actively intervened in the economy to protect domestic
industries, their intervention was also designed to lead the economy to be competitive in international
markets.
In 1962, Korean Government launched the first five year economic plan. As US aid was declining, the
plan focused on transforming the economy from being foreign and dependent to becoming
independent. To this end, the government provided assistance to basic industries and invested in the
improvement of the social and economic infrastructure. Thus in first five year plan government aimed to
improve the foundation of economy before the initiation of export led industrialization policy.
In 1967, increasing exports became the keynote of the second five year plan. The government planned
on fostering industries for the both export promotion and import-substitution. Due to the lack of capital
and advanced technologies, the govt. gradually moved its focus from light industries to heavy chemical
industries.
Export oriented industrialization policy had two meaningful effects, 1. Import substitution of light
industrial goods was almost completed by the end of 1960s and quality of goods had matched
international standards. 2. Export oriented industrialization had a significant impact on industrial
structure.
In early 1970s government Stated pushing for Heavy chemical Industrialization (HCI), and with the third
five year economic development plan, government focused mainly on nonferrous metals,
petrochemicals, general type machinery, ship building and electronics as five strategic fields.
As the HCI was more risky and needed a greater investment, the dependence of business on the
government for credit allocation increased. As a result, the government business ties deepened.

CONTROL OF THE FINANCIAL SECTOR AND THE GOVERNMENT BUSINESS TIES
To implement the export oriented growth policy, South Korean Government made two major policies
1. Control the financial sector to provide preferential treatment of export oriented industries and
to increase domestic savings
2. Manage the exchange rate to stabilize the exports.
To this end, the Korean Government purchased bank stocks and publicly owned the main bank, which
provided two benefits, a) it strengthened the Government Autonomy and b) gave a power over credit
allocation. For strengthening its power of credit allocation, in September 1965, government announced
a law that limited interest rates. This was one of the locomotives that contributed to South Koreas
economic growth. With this policy, the Korean govt. aimed to move a significant amount of capital from
the private money market to banks by controlling the unrealistic interest rates of savings account. This
showed a gradual increase of growth as in 1960s the average personal savings share of GDP was only 1-2
percent.
Korean Government aggressively managed the exchange rate to maintain the value of Korean currency
without much fluctuation.
In 1979 the Era of PARK CHUNG-HEE administration was came to end and thus the policies of this
current administration gave its impact in terms of growth.



CHUN DOO-WHAN ADMINISTRATION
On October 26, 1979, President Park Chung lee was assassinated by Korean Central Intelligence Agency
(KCIA). The death of President Park brought about confusion and instability. Hope of Democratic
government was thrashed by General CHUN DOO-WHAN, as he came into power. And in 1980 a massive
demonstration against him was held by college students and private citizens.
As soon as He took over the office, he faced many economic problems.
OIL shock in 1979, inflation was high and was threatening the economy. Intense investment in HCI made
it more serious issue as it was not getting curbed. The big Business conglomerates popularly known as
chaebols were the center of the economic structure and were creating problems in overall economic
structure and distribution of wealth. And with that international economic environment was not friendly
to Korean exports either. The recession was on in the world due to 79 oil shock. For this to continue with
the Development Strategy Chun doo-whan administration adopted aggressive policy measures to
continue to develop the economy.

INFLATION CONTROL
In 1970s, the government placed emphasis on reducing inflation to acquire socio-economic stability. In
addition government realized that the continued inflation might reduce Koreas international
competitiveness, which will slow down exports and eventually growth. For that tight fiscal policies were
adopted, government expenditure freeze in 1984, raised interest rates and reduced credits. Thus budget
deficit was reduced by 39% by 1985. The period of Chun Administration was termed as a period of
stability of prices.



ECONOMIC RESTRUCTURING
Chun Admin also tried to reduce the dependence of the economy on big business conglomerates
(chaebol) and HCI with policies for restraining economic centralization in 1980. This policy was
important and meaningful as its purpose was to restructure the existing Korean Economy. With this
policies more of the resources were aimed to distribute among the medium and small scale industries.
Another policy was rear ranging businesses to improve overall effectiveness of the national economy.
Due to government led development approach, some industries were totally dependent on the
government in 70s, but apart from that these industries failed to overcome with the hurdles to meet
international standards. The external forces like recession and pressure of devaluating the currency led
some major unprofitable businesses to liquidate through merger and acquisition. 70 such businesses
were reorganized till 1988.
Chun government also changes the credit allocation policies by introducing a cap on credit that can be
assigned to one chaebol. And a prior government approval is needed by chaebols before investing in any
new business, thus correcting unfair relationship between big firms and small businesses.
EFFECT OF NEW ECONOMIC POLICIES
Average growth rate during this period (1981-87) was 8.7 % and national GDP reached $100 billion. The
new policies to deal with economic problems worked effectively and its only because of the lows in the
period- low oil prices, low interest rates, and low exchange rates, which provided a friendly environment
for economic recovery and growth.

TRANSITION TO DEMOCRACY
Due to the increased protests against the administration human rights abuse and authoritarian rule. The
movement peaked with a death of college student by police beating. It led thousands of people to come
out on streets to request for a democracy. In individual war of kim dae-jung and kim Young-sam, ROH
Tae-woo got the benefit and got highest no of votes. However he was also from the military
background.
THE BEGINNING OF DEMOCRATIZATION
ROH TAE-WOO ADMINISTRATION
Roh Tae-wo laid emphasis on equity and balance enhanced the social welfare system through housing
policies and a national health care plan. The government constructed two million homes and they
decided to include people in the lower income bracket in their national health plan. Government also
adopted minimum wage law to assist in redistribution of wealth.
The public investment made for social welfare aggravated the balance of payments, in addition the
trade deficit caused by a surge in imports led to an economic decline. In 1987 the labor union disputes
increased significantly, the ROH Tae-woo administration decided not to intervene which led to lost
worker productivity in early period of Roh government.
Frequent strikes led to wage increment for labour workers. In addition the rapid income growth resulted
in high inflation rate, a loss of international competitiveness, and slower economic growth. This led to
take some action so Roh Government vetoed a labor reform bill in 1989 and due to pressure from labor
unions South Korea joined the United Nations and International Labor Organization in 1991.
KIM YOUNG-SAM ADMINISTRATION
Kim began liberalizing the economy through deregulation and a decrease in government intervention.
They decided not to investigate corruption coming from financial institutions lending practice.
Traditionally there was a close tie between politicians, government officials, and businessman.
Politicians/Government Officials pressured banks to give loans to export oriented businesses, especially
chaebol, and a chaebol made illegal contributions to politicians in return.
To cut the politics-business ties and make financial transactions transparent, the Kim government
adopted the real name financial transaction policy. They also adopted real name property ownership
policy. They joined OECD, the Kim administration pushed economic policies, which included the
liberalization of the foreign exchange rate, foreign direct investment, and insurance. It led to rise in
foreign capital inflow, followed by the increase of mercantile banks or quasi-financial companies to
handle the foreign capital.

Source : the economist



THE 1997 FINANCIAL CRISIS
South Korea showed the sign of economic trouble in early 90s. By June 1997, foreign debt by Korean
banks had reached 24 percent of the GDP. The short term debt was approximately 350 percent of their
foreign exchange reserves. Moreover the average debt-equity ratio of the thirty largest chaebols was
almost 400 percent.
Financial liberalization and tight monetary policy, which kept domestic interest rates above world
interest rates, encouraged commercial and merchant banks to rely heavily on cheaper foreign credit-
perceived to be cheaper because of pegged exchange rate. The high rates of short term loans and
international debt along with the low level of political involvement and economic control did not allow
Kim government to make proper adjustment before the financial problems became uncontrollable,
which eventually led to a serious foreign exchange problem. Exchange rates skyrocketed in the second
half of the year. Apart from these the immature institutionalization and international competitiveness
declined as the price of export goods rose significantly.
The crisis humbled Korea into economic trusteeship under global capitalism, in return for bailout loans
from the International Monetary Fund.
Directly after the presentation of money related emergency, essentially all financial markets fell into a
hopeless state inside a day. For example, the unemployment rate multiplied inside the initial couple of
months of the emergency, and the for every capita GNP dove from over $10,000 in 1996 to pretty nearly
$6,000 in 1998, tumbling to the level accomplished in 1991. Negative development rates, corporate
liquidations, loss of motion of the keeping money and fiscal segment, soak stake emptying, and
pervasive unemployment and homelessness, all of which were truly outside to the people of Korea, got
to be boundless.
The most striking part of the post-budgetary emergency is that change is definitely not constrained to
the monetary circle. Essentially every segment of Korean culture, counting corporate, managing an
account, worker's parties, government, state-run ventures, governmental issues, training, and even
social propensities and qualities have experienced what's more are experiencing critical progressions.

POST CRISIS REFORM POLICIES
The KIM Dae-jung administration was in a better position to implement labor and financial reform than
the KIM Young. They followed the IMF recommended policy to restructure Chaebols and ill performing
financial institutions. So Kim Dae-Jung government privatized most publicly owned banks and in addition
government attracted foreign capital to save struggling companies.
IMF recommended high rates of interest and tax increases along with cut backs on government
expenditures. Kim Jung raised interest rates, which made credit allocation extremely difficult for small
and medium size enterprises. As a result companies went bankrupt and unemployment rose
significantly. Thus the IMF policy was criticized.
Kim jung government created two financial supervisory authorities: the financial supervisory
commission and the financial supervisory service. Kim government abolished the cap of aggregate
foreign direct investment of Korean equities to attract more FDI. Kim jae-dung adopted the big deal
where Chaebol swapped weak businesses to merge into strong companies and new companies also
created through combining weak businesses from Chaebol.
IMPACT OF FALSE SHORT TERM POLICIES
Despite the quick recovery from financial crisis, the economy also revealed potential problems due to
the policies adopted. The main problem was the credit card debt, to enhance private consumption Dae-
jung government encouraged credit card usage. This policy helped the economy grow in short term but
consequences of it was most of the growth was based on debt. ROH Moo-hyun faced this issue when he
became president. Another issue they faced was the reduced corporate investment.
Roh-hyun administration increased social welfare expenditures by increasing taxes to improve social
wealth redistribution. As a result, corporate capital moved to foreign countries looking for better
business environment, which in turn slowed the economy.



KOREA IN 2000S
Korea's economy moved far from the midway arranged, government-controlled financing model to a
more market-turned one. These monetary changes, pushed by President Kim Dae-jung, helped Korea
keep up one of Asia's few extending economies, with development rates of 10.8% in 1999 and 9.2% in
2000. Development fell once again to 3.3% in 2001 in light of the abating worldwide economy, falling
fares, and the recognition that highly required corporate and monetary changes have stalled.
South Korean economy was influenced by the September 11 Attacks, bringing on development to fall
over to 3.8% in 2001 likewise due to the moderating worldwide economy, falling fares, and the
recognition that corporate and fiscal changes had stalled. Because of industrialization GDP for every
hour met expectations multiplied from us$2.80 in 1963 to us$10.00 in 1989. As of late the economy
balanced out and keep up a development rate between 4-5% from 2003 onwards.
Headed by industries, development in 2002 was 5.8%, in spite of weak worldwide development. The
rebuilding of Korean aggregates (chaebols), bank privatization, and the formation of a more changed
economywith a system for bankrupt firms to passageway the business sector remain Korea's most
critical unfinished change undertakings. Development hinder again in 2004, however creation stretched
5% in 2006, because of famous interest for key fare items, for example, Hdtvs and cellular telephones.
Korea endured noteworthy setbacks amid the late-2000s subsidence that started in 2007. Development
fell by 3.4% in the final quarter of 2008 from the past quarter, the first negative quarterly development
in 10 years, with year on year quarterly development keeping on being negative into 2009. Most areas
of the economy reported decreases, with assembling dropping 25.6% as of January 2009, and shopper
merchandise deals dropping 3.1%. Sends out in automobiles and semiconductors, two discriminating
mainstays of the economy, shrank 55.9% and 46.9% separately, while trades general fell by a record
33.8% in January, and 18.3% in February 2009 year on year. As in the 1997 emergency, Korea's money
likewise accomplished gigantic vacillations, declining by 34% against the dollar. Yearly development in
the economy abated to 2.3% in 2008, and however South Korea could constrain the downturn to a close
stop at 0.2% in 2009.
In 2010, South Korea made a solid financial bounce back with a development rate of 6.1%, indicating a
return of the economy to precise levels. South Korea's fare has recorded $424 billion in the initial eleven
months of the year 2010, officially higher than its fare in the entire year of 2008. The South Korean
economy of the 21st century, as a Next level economy, is required to develop from 3.9% to 4.2% every
year somewhere till around 2030, like development rates of creating nations, for example, Brazil or
Russia.

CONCLUSION
It has been contended that it will be hard, if not incomprehensible, throughout today's creating nations
to take after the South Korean advancement way and to turn into "the next tiger" on the grounds that a
specific synthesis of formal and casual organizations and recorded circumstances upheld the South
Korean get up to speed improvement. South Korea had the playing point of having a high social union,
and an ethnical homogenous profoundly energetic and decently instructed populace. Thusly the make
up for lost time improvement with quick financial changes under dictator tenet was effective in any
event from a monetary perspective. The same strategies in an alternate nation needing South Korea's
casual establishments would have led to other comes about. Hence, South Korea's improvement model
can't be exchanged blindfold to today's emerging nations.
Emerging nations can gain from South Korea that instruction, an equivalent wage dissemination, a fare
introduction and free market changes are huge elements for financial advancement, while popular
government does not need to be presented thoughtlessly, at any cost, particularly when the populace is
failing to offer the important training and law based political society.







REFERENCES
http://uskoreainstitute.org/wp-content/uploads/2011/05/Chekan_YB2010
http://online.wsj.com
http://www.bbc.com/news/world-asia-pacific
http://technode.com
http://www.economist.com
www.worldbank.org