Contemporary South Korean Economy: Challenges and Prospects

The following sections are included:

• Contents
• About the Author
• Abbreviations
• Preface

South Korea’s phenomenal economic success post-World War II (WWII) has been widely hailed as another economic miracle after Japan’s. In less than two decades after the war, South Korea had transformed from an agricultural nation to a major manufacturer in the world. The successful industrialisation from light to heavy industries had sustained the country’s high economic growth rates for nearly four decades since the 1960s; the exceptions were the oil crisis and Asian financial crisis that dragged down its economic growth to negative rates in 1980 (−1.9%) and 1998 (−5.7%). The quicker gross domestic product (GDP) expansion than population growth rapidly augmented South Korea’s GDP per capita from merely US$91.5 in 1961 to US$7,523 in 1991 and US$27,195 in 2015. The successful industrialisation also allowed manufacturing sectors to provide job opportunities for the mass labour released from the agricultural sectors, pulling tens of millions of people out of poverty. Despite the gradual relocation of manufacturing production to overseas countries since the 1990s, the unemployment rate continued to remain relatively low from 1990 to 2015 (between 2% and 4%) except for in 1998 and 1999…

With the government’s strong support, chaebols’ importance in South Korea’s economy has grown quickly since the 1960s. The country has also become a key manufacturer in both heavy industry and high technology sectors in the world thanks to chaebols’ business success. However, South Korea’s economic turmoil after the Asian financial crisis exposed the weakness of its growth model based on government-backed chaebols. Some chaebol affiliates either went bankrupt or were sold to foreign investors after the post-crisis reforms, while some have continued to develop with steady net profit growth. After the 2008–2009 global financial crisis, wealth has noticeably gone to a few surviving chaebols, which, despite their immense business success, employ only a small percentage of the local working population. Notably, the pro-chaebols economic policies after the crisis benefited only this small group of people at the expense of a large number of workers in the small and medium-sized enterprises (SMEs)…

The implementation of the KORUS since 2012 has been a significant event in South Korea’s history of foreign trade policy. Not only does it pave the way for greater access of South Korean firms to the most important consumption market in the world, it also further strengthens the country’s security alliance with the United States. For the United States, the bilateral FTA is the second largest FTA that it has signed, after NAFTA (North American Free Trade Agreement) in terms of total goods traded. The FTA opens up new opportunities for the United States to expand its market share in South Korea, in particular, agricultural products and services. It also serves as a model for other Asian countries to set up similar institutionalised economic relations with the United States in the future. KORUS FTA would thus help deepen US engagement in Asia-Pacific economic regionalism. The only setback is the increased competition between Korean and American firms. Without appropriate remedial measures and adjustments, the less competitive workers and sectors in both countries would likely suffer from the effects of the FTA…

On 20 December 2015, a FTA between the People’s Republic of China (PRC) and the ROK took effect, a milestone in bilateral economic relations after the two countries established diplomatic relations in 1992. According to the FTA, 92% of South Korea’s export items and 93% of China’s will enjoy zero tariffs in bilateral trade in 20 years. Nonetheless, several items are excluded, including automobile, petrochemical products and rice. The slow pace of full implementation and the limited width of tariff cut suggest that bilateral trade in goods is not key to this bilateral FTA. Indeed, the two countries have sought to expand economic cooperation beyond traditional processing trade through this FTA. A follow-up negotiation on investment and services in 2017 or 2018 may promote greater economic opening up between the two countries…

Income inequality was not an issue for South Korea before the 1970s; the dramatic economic growth rates had kept the economy buoyant and the people employed. The turning point came after the country has begun to experience relatively higher inflationary rates and worsening income distribution since the 1970s. The oft-cited causes include the low interest policy, rapid development of urbanisation and large companies’ dominance in business. In recent years, South Korea’s Gini index had clearly improved, dipping from 35.8 in 2000 to 30.2 in 2013 according to The World Factbook. Although Korea’s income inequality, measured by Gini index, is not particularly serious when compared to that of other countries, many Koreans felt the strains of an unfair distribution of economic gains…

South Korea is expected to become a “super-aged society” with over 20% of its population aged 65 years and older in 2026, just 10 years from 2016. Falling total fertility rate (TFR) and rising longevity are the two fundamental contributors to the country’s growing ageing population. The impact of an ageing demography on the country’s labour force structure could be felt especially in recent years. The economic growth prospect may take a beating as saving, consumption and investment are expected to decline subsequent to the ageing demography. More importantly, an ageing population means a smaller workforce and therefore less tax revenue for the government to support the unemployed elderly. Indeed, since its post-war economic take-off, the Korean government has done relatively little in fostering a secure social safety for its senior citizens. As a dramatic change in demography is expected in the coming decade, how to minimise the potential impact from an ageing society will unavoidably take top policy priority…

The following sections are included:

• Conclusion
• Index