South Korea The Economy
Southwest Hidden Gate, Suwon Castle, largest of the five
hidden gates, where a hidden road for transporting military
provisions begins
IN THE FIRST THREE decades after the Park Chung Hee government
launched the First Five-Year Economic Development Plan in 1962,
the South Korean economy grew enormously and the economic
structure was radically transformed. South Korea's real gross
national product
(GNP--see Glossary)
expanded by an average of
more than 8 percent per year, from US$2.3 billion in 1962 to
US$204 billion in 1989. Per capita annual income grew from US$87
in 1962 to US$4,830 in 1989. The manufacturing sector grew from
14.3 percent of the GNP in 1962 to 30.3 percent in 1987.
Commodity trade volume rose from US$480 million in 1962 to a
projected US$127.9 billion in 1990. The ratio of domestic savings
to GNP grew from 3.3 percent in 1962 to 35.8 percent in 1989.
The rapid economic growth of the late 1980s, however, slowed
considerably in 1989. The growth rate was cut almost in half from
the previous year (to a still-robust approximate 6.5 percent),
the inflation rate increased as wages soared even higher, and
there was speculation concerning a small trade deficit in the
early 1990s. These developments all pointed to a gradual slowing
of the expansion of the rapidly maturing economy. Nevertheless,
it also was clear that rapidly rising domestic demand would keep
the economy healthy (even with a slight drop-off of exports),
unless a major political crisis were to shock the country.
The most significant factor in rapid industrialization was
the adoption of an outward-looking strategy in the early 1960s.
This strategy was particularly well suited to that time because
of South Korea's poor natural resource endowment, low savings
rate, and tiny domestic market. The strategy promoted economic
growth through labor-intensive manufactured exports, in which
South Korea could develop a competitive advantage. Government
initiatives played an important role in this process. The inflow
of foreign capital was greatly encouraged to supplement the
shortage of domestic savings. These efforts enabled South Korea
to achieve rapid growth in exports and subsequent increases in
income.
By emphasizing the industrial sector, Seoul's export-oriented
development strategy left the rural sector relatively
underdeveloped. Increasing income disparity between the
industrial and agricultural sectors became a serious problem by
the 1970s and remained a problem, despite government efforts to
raise farm income and improve living standards in rural areas.
By the early 1970s, however, the industrial sector had begun
to face problems of its own. Up to that time, the industrial
structure had been based on low value-added and labor-intensive
products, which faced increasing competition and protectionism
from other developing countries. The government responded to this
problem in the mid-1970s by emphasising the development of heavy
and chemical industries and by promoting investment in high
value-added, capital-intensive industries.
The structural transition to high value-added, capitalintensive industries was difficult. Moreover, it occurred at the
end of the 1970s, a time when the industrial world was
experiencing a prolonged recession following the second oil price
shock of the decade and protectionism was resulting in a
reduction of South Korean exports. By 1980 the South Korean
economy had entered a period of temporary decline: negative
growth was recorded for the first time since 1962, inflation had
soared, and the balance-of-payments position had deteriorated
significantly.
In the early 1980s, Seoul instituted wide-ranging structural
reforms. In order to control inflation, a conservative monetary
policy and tight fiscal measures were adopted. Growth of the
money supply was reduced from the 30 percent level of the 1970s
to 15 percent. Seoul even froze its budget for a short while.
Government intervention in the economy was greatly reduced and
policies on imports and foreign investment were liberalized to
promote competition. To reduce the imbalance between rural and
urban sectors, Seoul expanded investments in public projects,
such as roads and communications facilities, while further
promoting farm mechanization.
These measures, coupled with significant improvements in the
world economy, helped the South Korean economy regain its lost
momentum in the late 1980s. South Korea achieved an average of
9.2 percent real growth between 1982 and 1987 and 12.5 percent
between 1986 and 1988. The double digit inflation of the 1970s
was brought under control. Wholesale price inflation averaged 2.1
percent per year from 1980 through 1988; consumer prices
increased by an average of 4.7 percent annually. Seoul achieved
its first significant surplus in its balance of payments in 1986
and recorded a US$7.7 billion and a US$11.4 billion surplus in
1987 and 1988 respectively. This development permitted South
Korea to begin reducing its level of foreign debt. The trade
surplus for 1989, however, was only US$4.6 billion dollars, and a
small negative balance was projected for 1990 (see
table 2,
Appendix).
In the late 1980s, the domestic market became an increasing
source of economic growth. Domestic demand for automobiles and
other indigenously manufactured goods soared because South Korean
consumers, whose savings had been buoyed by double-digit wage
increases each year since 1987 and whose average wages in 1990
were about 50 percent above what they had been at the end of
1986, had the wherewithal to purchase luxury items for the first
time. The result was a gradual reorientation of the economy from
a heavy reliance on exports toward greater emphasis on meeting
the needs of the country's nearly 43 million people. The shifts
in demand and supply indicated that economic restructuring was
underway, that is, domestic consumption was rising as net foreign
demand was falling. On the supply side, the greater growth in
services mirrored what the people wanted--more goods, especially
imports, and many more services.
By 1990 there was evidence that the high growth rates of the
late 1980s would slow during the early 1990s. In 1989 real growth
was only 6.5 percent. One reason for this development was the
economic restructuring that began in the late 1980s--including
the slower growth of major export industries that were no longer
competitive on the world market (for example, footwear) and the
expansion of those industries that were competitive, such as
electronics.
Data as of June 1990
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