Economic Growth in Korea

The rapid produce and createment in the new industrialising economies (NIEs) in recent decades has been nothing short of spectacular. Now among the worlds most dynamic industrialize economies, the NIEs of capital of Singapore, Taiwan Hong Kong, and southeasterly Korea which volition be the focus, stand as perhaps the best showcases of fortunate economic nurture. The economic development of southbound Korea, which has been among the most rapid in the world is typical of the miracle that is the NIEs.Korea has suffer furthermost since the days it was a nation of hungry rice farmers, by pursuing an industrialisation- guide development payload since 1961, which has since produced annual GDP growth of 8.4% per annum, second whole to China. The success of southernmost Korea, has been identified by a number of factors including the shift away from import substitution strategies towards export orientated industrialisation, and the effective managing of the economy and perempto ry rule adopted by the g overnment in order to accelerate the pace of capital accruement, good feeler and structural change to produce economic growth beyond what could possibly occur in a free market economy.NIEs, randomness Korea, be now treasure as export machines shoot a line some of the highest handle/GDP ratios in the world. International economic relations began in 1964 with the recognition of these limitation of the internal market and the ineffectiveness of pursuing substitution industrialisation strategies. As part of its new strategy for export enlargement the South Korean government introduced new measures which included the devaluation of the won, which amendd the competitiveness of its exports and introduced incentives intentional to channel resources into export-orientated industries.Exporters were overly supported by direct cash payments, permission to retain foreign rallying earnings for the purchase of imports, and the exemption from virtually all i mport controls and tariffs. The government in consultation with firms, portion up export targets for industries as well as individual firms. These targets appeared to produce influenced firm behaviour and reinforcement this claim was from between 1961 and 1973 the volume of exports increased at an annual rate of 35% and today continues to systematically rank in the top twenty trading nations.Over the last 30 years the dowery of manufactures in add together exports has increased from 12% to 95%. Further more than the manufactures exported have themselves changed with more go on products, led by electronics dominating the list of major exports and hence the importance of the Samsung and Lucky Goldstar to the Korean economy. The direction of trade has overly 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 incr easing 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 hence sustainable economic growth has been driven by capital stock accumulation and expanded productive capacity. Indeed some figures turn out up to 60% of economic enlargement in South Korea is a prove of capital accumulation and increase infrastructure.Undoubtedly one of the most important rationalisations for economic success is effective government intervention. selective government intervention has promoted the development of new industries, many of which have be bring internationally competitive and also supported and modern the growth of the private sector. The main aim of the government in South Korea has been to stop that the behaviour of individual business accorded with the vast term interest of the business class as a whole, and while applying authoritarian rule recognising when it was date to all ow 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 prosecute trade policies, supporting industrial heighten and the development of national firms with selective incentives to promote exports. In South Korea for example, the government gave Chaebols preferential access to slang loans, relying on them to develop heavy and chemical industries capable of competing internationally. Indeed four decades of industrial development inSouth Korea have been tag by what have been marked as incestuous ties between outsized business and government. In recent times government has been hostile to the conglomerates but the appointment of Mr Kim Suk Won to the reigning party has reopened an old wound over the role of big business and politics in South Korea.The role of the Chaebols i n 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 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 ability 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 competition 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 ta x 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. flow policies are aimed at achieving a 5% share of research and development expenditure in total GNP by 2001. The government has also aided fundamental 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 monetary incentives to promote the development of particular industries. Interest Rates for example were kept generally low and shelter in order to reduce the cost of investment. Designated industries received priority in allocation of bank credit, province 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 government in South Korea als o actively pursued competition policies. This intervention works both ways. In other words competition policy curtail the competition or promoted competition policy in the areas depending on the circumstances. In South Korea the government given(p) exemptions to conglomerates from laws governing monopolistic practices. Competition policy has been married with industry policy. In this the role of government has been curb 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 up 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 crowd shortages in key sectors such as electronics, heavy machinery and shipbuilding. Such shortage of labour in which employers have noone to fill vacancies made by expanded productive capacity exit 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 pull out foreign labour.After growth and development in South Korea for so big was driven by government intervention one of the most important challenges facing the matured economy was for the government to disown much of its infl uence over the economy and to allow market forces to operate effectively. If South Korea is to continue to increase as a truly advanced industrialise nation then obviously the market tool will have to be let to operate freely. This will take time and ca intent 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 productiveness must change. In manufacturing, Korea has massively invested in the best available technology but because of protectionism and poor somatic 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 thence must be one of the challenges for future success of the Korean economy.Other challenges that Korea has had to face, continues to face, an d 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 pressing 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 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 simply hard work and determination to conform to in this new century, Companies in Sou th Korea need to keep ahead of the profound social, economic and policy- fashioning transition. It is the inherent need for human capital that drives much of South Koreas business and government spending. galore(postnominal) would agree that a well improve 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 operate and cultivate manufacturing.The prospects for continued 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 redu ction would come mainly 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 emerge as the worlds largest economy within 10 years and the re-emerging Japanese economy will provide substantial benefits for the Korean economy. Some important strengths of the economy include a well educated and m otivated 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 in the flesh(predicate) 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.