How South Korea Get So Rich
How South Korea went from extreme poverty to one of the richest economies in the world
Before the second world war, Korea was a colony of Japan from 1910 to 1945.
But after the second world war, japan surrendered to the allied forces and had to give up control of its occupied colonies.
In 1945, when Korea was in the hands of allied forces, they broke them into two parts. One would be North Korea controlled by the soviet union, and western nations held south Korea.
The problem for South Korea was that all the heavy industries and natural resources were in the north.
South Korea doesn’t have a heavy industry that could help them recover from economic crises.
In the 1950s, South Korea was in extreme poverty. But in one generation, South Korea had transformed itself from an underdeveloped nation to one of the most prosperous countries in the world.
Today, South Korean companies are well-recognized names around the world. So how did South Korea transform itself from an extreme poverty nation dependent on foreign aid to the 10th largest economy in the world?
Let’s learn the reason behind the South Korean economic miracle.
South Korea’s GDP per capita in the early 1960s was below 100, lower than Ethiopia or Yemen.
In the 1960s, General Park Chung hee organized a coup and took control of South Korea. Although it caused political instability in the short term, Park Chung-hee would play a key role in changing the destiny of South Korea’s economy.
Until the 1960s, South Korea’s economy was dependent on foreign aid. Park Chung-hee recognized if South Korea wanted to become a prosperous nation, it had to decrease its dependence on foreign aid.
Park’s government wanted South Korea to be an export-based economy, Which helped improve the country’s economic condition. At the time, South Korea didn’t have any natural resources to export.
But South Korea had a large population, so the government decided to specialize in manufacturing goods that require a large population and will create economies of scale.
The Role of Education
When the Park government came into power, the mandatory primary and secondary education policy had already begun in South Korea, Which would also help fuel its economic growth.
The park government quickly realized that economic growth dont happen by luck, and the country can’t rely on foreign aid for the long term. So it started investing the money that came from foreign aid to build infrastructure and education.
South Korea’s education system played a big part in its economic growth. To create high-tech quality products and services, companies need highly educated workforces.
So the government started to invest in education with a higher emphasis on engineering, science, and mathematics because this field would help the nation become a technologically advanced rich country.
The Park government started creating a five-year plan starting in 1962.
In the beginning, it focused on industrializing the country. At the time, South Korea was poor.
It didn’t have the resources to develop heavy industry because it required a lot of investment and infrastructure, which south Korea didnt have.
So the park government started focusing on developing light industries like textile, which require smaller investments and infrastructure.
The first five-year plan from 1962 to 1966 called for a 7 percent growth rate. Many western nations believe this growth to be impossible to achieve.
But surprisingly, South Korea had a growth rate of 9 percent, Far exceeding expectations.
The Transition From Light To Heavy Industries
In the early days of industrialization, South Korea’s economic growth started with light industries.
But the park government realized that if they wanted South Korea to become a prosperous nation. It had to transition from light to heavy industries like steel or car manufacturing, which could boost its economic growth.
By 1972, the park government started to focus on heavy industries like steel, shipbuilding, and car manufacturing to increase economic growth.
To improve infrastructure, The park government focused on getting foreign investment into the country.
South Korea started to normalize relations with Japan in 1965. As relations improved, South Korea received 800 million dollars from Japan and access to advanced technology, which will further help its economic growth.
South Korea deployed its troops in the Vietnam war, and in return, the US helps South Korea with foreign aid.
At that time, the US economy had low tariff barriers. So South Korea’s economy increased its exports to the United States, Which further help the Korean economy to grow in the global market.
The Chaebols (Conglomerates)
In most western countries, companies choose what to produce and who will build it.
In South Korea, the government would decide what to produce and who will make it.
South Korea’s government grants special treatment to those conglomerates (Samsung, LG, Hyundai) known as chaebols.
The government would provide tax cuts, free financing, and other incentives so the conglomerates would increase their production and employ more people to improve the overall economic growth.
Although, the government provides conglomerates with special treatment to boost their economic growth.
One thing that encourages these conglomerates to keep innovating is that the government would encourage foreign competition. So they know they have to keep innovating and compete in the global market to survive.
As the economy grew and became complex, the government started to rely more on free market forces, which coincided with the Democratization of South Korea.
Conglomerates have a monopoly in their industry, which allows them to take risks outside of their core industry to diversify their business operation and experiment with new technology.
South Korea also opened trade with Japan and learned how to modernize its economy as Japan was the first eastern Asia country to become a fast-growing economy.
South Korea in the 1997 Asian Financial Crisis
In the 1990s, many chaebols became a monopoly in their respective field and became too big to fail. Also, The level of corruption in the government and private sector was massive.
During the Asian financial crisis, South Korea was a country that was severely affected by the crisis. Its currency won was attacked by speculators, and it went down significantly.
The cause of the crises was the chaebol over leveraged debt and the government giving loans on political relations rather than economic grounds, which resulted in bankruptcies.
Interdependence among Asian economies also plays a big part. For example, Korean banks provided loans to many Thailand companies, and Thailand was going into crisis.
Many Thailand companies were shut down and declared bankruptcies. The Korean banks that provided them massive loans were worth nothing. That affected the South Korean economy and Asian economies overall.
South Korea was left with no option and forced to take loans from the IMF to rescue its economy from falling.
Many conglomerates went bankrupt, and one of them was Daewoo.
Big conglomerates realized that the government won’t bail them out.
It gives conglomerates an incentive to won’t get over-leveraged and remain competitive in the global market.
The government demanded chaebols (Big conglomerates) reduce their debt-to-equity ratios to prevent this type of crisis from happening again.
South Korea quickly recovered from the Asian financial crisis in 1999, and its economy began to grow after a few years.
In the 2000s, its economy became more liberalized and a market economy which helped fuel its economic growth through the 2000s to the present.
Today, the South Korean economy has become a hub for technological innovation. Its education and health system is one of the best in the world.
South Korea has displayed that good economic management is far more crucial than natural resources for fueling economic growth.
South Korea is the largest shipbuilder in the world. The third largest car manufacturer and a technology hub rival Silicon Valley and Tokyo.
These industries helped South Korea to become one of the richest economies in the world.
South Korea GDP per capita went from 79 dollars in the 1960s to 34,758 dollars.
Its GDP had gone from 25.7 billion dollars in 1960 to 1.7 trillion dollars.
South Korea has shown that good policies and hard work of people can raise a nation from extreme poverty to one of the fastest growing economies in the world.
Originally Published On Medium
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