During the Covid-19 crisis, South Korea has stood out as a nation that has responded strongly in spite of initially high infection rates. However, even before Covid-19, the peninsular economy had initiated a global expansion, riding the K-pop boom and creating brand value through Samsung and LG. Its high exports and steady growth led it to be called the “Germany of Asia” and hailed an “economic miracle”. These flattering monikers, however, often mystify the process by which the nation achieved tremendous growth, and misconceptions range from “nothing special” to “completely dependent on US trade deals”. In order to get a better grasp of the present, it is important to look at its history and see how its economy developed to its current state.
After the Second World War, the nation of Korea was granted independence from Japan, but celebrations were short as the Soviets and the Americans quickly split the land in two at the 38th Parallel. The Korean War ensued, lasting from 1950 to 1953 and claiming around 3 million South Korean lives. Around 2 million of these were civilians, marking over 10% of the pre-war population. The economy was almost non-existent, with large parts of the country ravaged by war. Unemployment skyrocketed, poverty was widespread, and many people suffered from famine and a lack of resources. Moreover, South Korea’s potential to grow seemed incredibly low, as the vast majority of the share of natural resources were located in the Northern part of the peninsula, and a militaristic dictatorship with strong communist ideals lay waiting on the border. Over the next decade, however, several corporations were set up and the economy slowly recovered through a free market-based economy.
In 1961, General Park Chung-hee, a Korean War general who was responsible for postwar reconstruction, overthrew the incumbent government, starting an authoritarian regime that sparked the rapid rise of living standards in Korea. The Park government committed to a policy of isolationism, imposing harsh export quotas and blocking foreign imports and investment. Moreover, the next decades saw the rise of the chaebols, family-owned conglomerates which were able to expand due to favourable government contracts, tax breaks, a lack of regulation, and lax labour legislation, which meant that these corporations could exploit workers and produce high-quality goods at low cost. In fact, many of these chaebols still exist, with Samsung, Hyundai, and LG being famous examples. Additionally, the government seized Japanese-owned land, giving it to their beneficiaries, and implemented five-year plans to increase economic output. In addition to domestic measures, the South Korean government received $3 billion from the US as compensation for playing a role on the frontlines of the Cold War, which was efficiently allocated to various industries for growth.
However, it seems that there is a disconnect between the agrarian culture with little comparative advantage in many sectors, and the booming industry that we see today. The disconnect between the two can be explained by the dynamic theory of comparative advantage. The traditional theory sees comparative advantage as fixed, in which a nation should specialise in producing goods it can produce comparatively more efficiently than other countries. However, this fails to take into account the fact that industries can grow, which is problematic when discussing future development and economic planning. An example in which this was particularly effective was the Pohang Iron and Steel Company, which was discouraged by the international community due to the lack of the required natural resources and small domestic market. It is now the eleventh-largest steel company in the world and is one of the lowest-cost producers of steel in the world. Importantly, state planning and intervention were required for it to succeed.
During the Asian Financial Crisis in 1997, the South Korean economy was hit hard, after regional turmoil led to the depreciation of the won from 800 won per US dollar to 1700. Due to this currency shock, the existing system of preferential treatment from the state began to collapse as the government found it harder to borrow money and interest began to pile up. An iconic failure was the Hanbo scandal, in which a steel corporation was indicted for embezzling $6 billion from government loans, received through corruption and bribery. The bankruptcy of Hanbo Steel led to widespread distrust of the financial and industrial complex, worsening the crisis as other chaebols also went under.
Eventually, the IMF provided a $58.4 billion dollar bailout, underwriting corporate defaults in exchange for governmental and financial reform. The main changes included mergers within the banking sectors and a reduced cap for foreign investment, which culminated in the bailouts of companies such as Daewoo by General Motors. The economy eventually recovered from the crisis, but the collapse of the system served as a reckoning for the unsustainable practices of corruption and monopoly which had led to growth.
In the early 2000s, the landscape of the South Korean industry saw the rise in international consumption goods, with its tech exports booming due to an increase in demand for smartphones, screens, and semiconductors. The auto industry maintained its position as a pillar of the economy, but South Korea’s increased diversification helped the nation continue its economic reforms and encouraged a strong shift towards a market-oriented economy. These provided a bulwark against the troubles of the 2000s such as the September 11 attacks and the Financial Crisis of 2008. While the South Korean economy was, of course, negatively affected by both, strong domestic consumption and stimulus measures helped prevent a recession.
Today, South Korea is still cementing its role as a developed nation. In the current crisis, Korea is one of the countries faring on the better side, as the decrease in GDP has only been 3% quarter on quarter for the first half of 2020, compared with an OECD average of over 10%. A large factor in this is seen in the country’s history of government intervention as well as preparations and drills since MERS. For instance, the Korean Disease Control and Prevention Agency hosted “war games”, dealing with the hypothetical emergence of a novel coronavirus from China. This preparedness can be attributed to efficient civil servants, a forward-looking philosophy maintained from the 1960s, and extensive investment into infrastructure and technology, highlighted by the 5G networks built all over the country. Though many take the development of the nation for granted, the present-day success is a mirror of the historic diligence and methods employed to enable it.