In this paper, I will discuss the measures that the Republic of Korea’s (addressed as South Korea from here on out) government took in trying accomplishing economic development despite its several economic and political upheavals. I will, specifically, review the economic growth and institutions established in South Korea beginning in the 1950s, the process of democratization in South Korea, and the effects that the Asian Financial Crisis of 1997 had on South Korea. With the background information of these factors, I will then delve into the importance of South Korea becoming an economic power and the impact it has had on the United States of America. II. Miracle on the Han River:
South Korea has experienced a turbulence of economic downfalls and political uprisings since the 1950s. At the end of the Korean War, which lasted from 1950 to 1953, South Korea was in a major economic slump. The Gross Domestic Product (GDP) of South Korea in 1954 was $1.5 billion and its per capita GDP was a mere $70. It was toward the end of 1953 that South Korea and the United States of America signed the U.S.-South Korean Mutual Security Treaty that established America’s responsibility to protect South Korea from external aggression in Washington’s anti-communist wave. It was the United States’ duty to provide South Korea with military and economic aid in order for South Korea to begin its transformation from being one of the poorest nations in the world to being the 15th largest economy in the world in a span of about seventy years. From 1946 to 1976, the United States, alone, provided South Korea with $12.6 billion to assist in its economic growth.
Several other nations, such as Japan, also provided South Korea with aid. Under the government of Park Chung-Hee in 1962, an authoritarian government was established because it was Park’s belief that a strong authoritarian government was essential in promoting rapid economic growth. Beginning in 1962, South Korea developed a series of five-year economic development plans to industrialize its economy. Several policy changes and politico-economic institutions that were established had emphasized export and labor-intensive heavy industries, including steel and shipbuilding industries. Park wanted to ensure the government had control over established institutions, which were overseen by three government bodies: the Ministry of Commerce and Industry, the Ministry of Finance, and the Economic Planning Board (EPB).
The Ministry of Commerce and Industry guided corporate activities with the approval of the government. The Ministry of Finance was in charge of fiscal and monetary policies, so if the government did not believe that a company could contribute to the economic development of the nation, then it would never obtain a bank loan. The Economic Planning Board was essential in coordinating programs of economic planning, central budgeting, and foreign capital management and statistics. These three government bodies determined the path of the economy through economic planning and by controlling company actions and spending.
The Park administration was most interested in having an export-oriented economic policy; therefore it favored export-oriented companies. When managing its limited financial resources, the government distributed them to very few diverse conglomerates that they thought would last in a competitive, international market, which are known as chaebol. In order to stay in the government’s good-graces to receive financial resources, the chaebol were forced to conform to the government’s guidelines. The chaebol was the largest influence when it came to the South Korean economic transformation. The South Korean economy went from an agricultural society to a technologically advanced, export-oriented industrial economy in a span of only twenty years. III. Democratization of the South Korean Nation:
The people of South Korea wanted to live in a democratic nation, but according to Park Chung-Hee, it was in the economies best interest to have an authoritarian government. After the assassination of Park Chung-Hee, Chun Doo Hwan took power against the peoples’ wishes. This caused uproar in the South Korean society and several citizens went on strike to protest the new administration. Despite these protests, Chun continued to rule with an antidemocratic government and would merely suppress any protests that were attempted, using military force. After Chun’s seven year rule, the government announced that they would make the transition to becoming a democracy on June 29, 1987. With great support from the people of South Korea, they were finally given a direct election of the president, guarantees of human rights and freedom of speech, local autonomy, and the freedom to form political parties. On October 29, 1987, the constitutional amendment to change the presidential election was put forth.
Roh Tae-Woo was a democratically-elected president in South Korea, but due to challenges and rejection that the Roh administration faced, Roh merged his administration with that of his presidential opponents, Kim Young-Sam and Kim Jong-Pil. Kim Young-Sam won the next president election in South Korea in December 1992. The Kim administration adopted local autonomy in following the democratic-style government. Kim believed that reducing the government’s involvement in policy making would make for a better democratic nation, but the lack of intervention and the greater freedom that the government gave to corporations only led to serious economic issues that were caused by the corruption, which I will further explain when I discuss the issues that South Korea faced during the Asian Financial Crisis of 1997.
During the transition of forming a democratic nation, South Korea was not immediately successful in creating economic growth. In order to achieve positive changes in the economy, democratization must be institutionalized. It was difficult for the economy to stabilize since mature institutions that could guarantee growth were not created. Rather, the government tried to characterize the economy through fast changes and rapid economic growth, when the government should have taken the time to institutionalize political and economic systems. It is the building of mature institutions that have proven to be crucial in policy making and implementing a strong government that can maintain a consistent economic growth rate. IV. The effects of the Asian Financial Crisis of 1997 on South Korea:
The era of economic growth in South Korea came to a halt in 1997 due to the Asian Financial Crisis that started in Thailand. By 1997, South Korean banks reached 24 percent of the gross national product (GNP) in foreign debt; 58.1 percent of the total debt was short-term debt. A number of the chaebol conglomerates were not only bankrupt, but also collected an average debt-equity ratio of almost 400 percent. There were several reasons to why the financial crisis hit South Korea so hard causing its worst economic fall since the Korean War. Different administrations caused institutional confusion in the economy. Under the Chun Doo Hwan administration, antigovernment labor movements were violently repressed, which gave firms in South Korea a competitive advantage because low labor costs meant higher profits for the corporation and economy. Chun weakened other factors in the economy, such as the protection of domestic markets and the overall government, in order to continue with the nation’s economic boom. It was from issues that arose when Chun seized power, that the government once again implemented democratic elections.
President Roh Tae Woo had a far different approach to handling economic policies. In Dual Sources of the South Korean Economic Crisis, Dongyouh Shin expresses that the “Roh era is best characterized by the uncontrolled deregulation of economic activities and the unprepared opening of financial and product markets.” The issue with the Roh administration was that needed interventions were never done. For example, several labor strikes for higher wages were never intervened upon, so corporations had no choice but to raise the wages of labor workers. The average income of workers continued to rise rapidly by 10 percent in 1987, 15.5 percent in 1988, and 21.1 percent in 1989, eventually exceeding productivity costs. This, in turn, caused higher rates of inflation, a loss of competitive advantage in the global market, and a decrease in the economic growth rate. The Kim Young-Sam administration furthered Roh’s deregulation and nonintervention policies to liberalize the South Korean economy.
The lack of economic control and government involvement made during the Kim Young-Sam administration made it impossible for the government to make the necessary adjustments in preventing this crisis from happening. Therefore, corruption between politicians, government officials, and businessmen were never investigated. The economy suffered from a cyclical issue that the chaebol and banks for could not escape. The chaebol was expansion-oriented and never regulated, so it ended up expanding uncontrollably. Banks felt pressure from the government that forced them to continue to loan large amounts of money to the chaebol. It was to the point that the chaebol ended up accumulating so much in back debt that if the chaebol were to go bankrupt, then the bank would also go bankrupt, so in order to avoid this situation, the banks had to continue to loan money to the chaebol. This institutional confusion that was caused during the Roh and Kim administrations due to deregulation and lack of intervention was the main reason for inconsistencies in economic policies and the eventual crisis of 1997.
In November 1997, the South Korean government applied for a $57 billion emergency loan from the International Monetary Fund (IMF) and in return agreed that the government would adopt a series of tight macroeconomic policies, go through economic reforms to stabilize the economy, and regulate financial institutions. It was the Kim Dae Jung administration that began to work on restructuring the South Korean economy. With this economic reconstruction, the South Korean economy soon recovered and stabilized from the economic crisis that lasted from 1997 to 1998. By 1999, the state managed to go from a net debtor country to a net creditor country. And by 2002, South Korea had wiped away its debts to the International Monetary Fund. Once again, the economy of South Korea began to flourish.
V. The South Korean Influence on the United States
The present-day relationship between the United States and South Korea is extremely important for several reasons. At the end of the 1940s and in the beginning of the 1950s, the United States was a major influence in the South Korean economy. The United States established capitalism in South Korea, which began the changes in the South Korean economic structure. I would say that the United States is, definitely, responsible for such rapid growth in the South Korean economy. Without the economic and military aid the South Korea received from the United States after the Korean War, South Korea may not be as successful as it currently is today. In return, South Korea has become the seventh largest trader with the United States for goods and the second largest market for agricultural goods. It has provided the United States with quality goods, such as steel and electronics, for a cheaper price, which keeps the United States in good economic-standing with South Korea. Even though the United States and South Korea did go through periods of friction due to political differences and issues with trade, the two nations have kept their politico-economic relations strong and remain close allies. VI. Conclusion:
The rapid economic development of South Korea is, indeed, a miracle. Within a span of about seventy years, South Korea managed to go from one of the poorest nations in the world to an important economic entity in the international market. I discussed how the economic development in South Korea beginning in the 1950s, the democratization of a nation, and the effects of the financial crisis of 1997, contributed to the factors that stabilized the South Korean economy and made the Republic of Korea an important international trading partner with the United States and several other countries. South Korea went through a rollercoaster of economic improvements to unfortunate downfalls. Through these experiences, South Korea has created a fairly stable politic-economic government. The reasoning for South Korea’s rapid economic development since the 1950s is due in large to the aid of nations, including the United States and Japan. Even though South Korea was on the path to becoming a democratic nation, the rule of Park Chung-Hee made an influential growth in the economy because of his authoritarian rule, which continued through the Chun Doo-Hwan rule.
Chun’s administration did continue a fast paced growth rate for the economy, but under unfortunate circumstances. The changes that impacted the economy were under the rule of Roh Tae-Woo and Kim Young-Sam. Their attempt to further liberalization through deregulation and lack of intervention worsened the condition of institutions. The chaebol managed to expand without regulations, which harmed not only the stability of the chaebol, but also the stability of the banks in South Korea. As issues in the political and economic system continued to build up, the economy fell flat. It was at fault of the South Korea government for not regulating quick changes that occurred in the economy, such as democratizing its government, deregulation, and the expansion of the chaebol were factors that the government did not take under consideration when attempting to grow its economy.
When environmental changes occur, it is important for a nation to adjust its workings around that in order to maintain a strong infrastructure, but because the government did not, it eventually led to its financial crisis in 1997. After the financial crisis occurred, it was important for the economy to recognize its issues and come up with solutions, which is when new policies and regulations were set in place. It was not until actions were taken to make changes according to shifts in the political and economic system, that infrastructure and stabilization in the South Korean economy occurred.
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