Korea Information - Economy
The Korean Economy
The Miracle On the Hangang River
The Miracle On the Hangang River
The Constitution of South Korea stipulates that “the right of property shall be guaranteed for every citizen.” In short, the country has adopted the market economy system, respects individuals’ and businesses’ right to conduct free economic activities, and guarantees the profits and properties made and accumulated by them.
However, the Constitution does not guarantee the limitless, unfettered pursuit of capitalistic free economy. The Constitution stipulates that an unjust situation should be rectified if the abuse of capital is found to cause damage to people as an apparatus set to improve things relating to the free market economy. South Korea has achieved economic growth at an unprecedented speed. Observers called what the country has accomplished the “Miracle of the Hangang River”, as most of the country’s industrial facilities were destroyed during the three-year-long Korean War, and the country was devoid of capital and natural resources.
In the early 1960s, the country pushed ahead with export-oriented economic development plans. At first, the country’s major export items were mainly light industrial products manufactured in small factories, or raw materials. In the 1970s, the country invested in heavy chemical facilities and laid the basis for the export of heavy industrial products. At present, the country has a number of industries that boast solid international competitiveness, such as the shipbuilding, iron/steel, and chemical industries.
The foundation of such strong competitiveness was built around that time. The country is now leading the semiconductor and display sectors. The country hosted the 1988 Seoul Olympic Games, which provided the country with the momentum to join the ranks of semi-advanced countries. The international mass media called the country one of the four Asian tigers, along with Taiwan, Singapore, and Hong Kong. In December 1996, the country became the 29th country to join the OECD, which is largely composed of advanced countries.
South Korea’s exports, which amounted to only USD 32.82 million in 1960, surpassed the USD 10 billion mark in 1977 and reached USD 495.4 billion in 2016. The country’s GNI per capita was a paltry USD 67 in 1953 around when the government was established, yet reached USD 29,745 in 2017.
South Korea gradually established an export-oriented economic structure centered on large businesses in the process of pursuing growth as a country with insufficient capital and resources. Conglomerates came to dominate industry, while the country’s economic structure became heavily reliant on exports and imports, leaving it susceptible to external conditions.
In November 1997, a foreign exchange crisis hit the country, forcing it to turn to the IMF for a bailout. It was the first ordeal the country had had to face after years of rapid economic growth. The country took the drastic step of driving poorly performing businesses out of the market and then pushed ahead with industrial restructuring. In only two years, the country regained its previous growth rate and price levels as well as a current account balance surplus. In the process, some 3.5 million people joined in the campaign to collect gold to help the government repay the fund borrowed from the IMF. A total of 227t of gold were collected. The world marveled at the Korean people’s voluntary participation in the determined effort to repay its national debts.
While making concerted efforts to extricate itself from the foreign exchange crisis, the country benefitted from certain ancillary effects, such as the adoption of the globalized economic and financial system. However, the restructuring process also had its dark sides. The government’s fiscal expenditure increased and the income imbalance deepened.
After overcoming the economic crisis, the South Korean economy continued to record solid growth. The country’s GDP more than tripled from USD 504.6 billion in 2001 to USD 1,616.4 billion in 2017, the 11th largest total in the world. In fact, during the period 2008-10, when most of the world was experiencing a devastating financial crisis, the country recorded an amazing 6.3% economic growth rate. The world’s major mass media organs referred to the country’s accomplishment as a “textbook recovery”.
By 2010, South Korea had emerged as the world’s 7th largest exporting country. From 2011 to 2014, the total volume of the country’s exports and imports stood at over USD 1 trillion for four consecutive years. Trade volume retreated in 2015 and 2016 but rebounded to the USD 1 trillion level in 2017. South Korea’s foreign currency reserves amounted to USD 389.3 billion in 2017, and the country’s short-term foreign debt ratio stood at 30.8% as of the end of June in 2017, which sits around the middle range among G20 countries. The country’s sovereign credit rating has been at a stable level.
South Korea has adopted the open market economy, and is thus negotiating with other countries to sign more FTAs, as well as allowing foreigners to invest in the country freely while encouraging domestic businesses to invest in foreign countries equally freely. The country offers advantages to foreign investors under the long-term objective of establishing itself as a major financial hub and logistics base of Northeast Asia.
The country has opened its market in most sectors, including agriculture. Koreans have traditionally attached great importance to agriculture, viewing it as the basis of the universe. In 2015, the country also opened its rice market, the final area of the agricultural sector not subject to full international competition.
The country is pushing ahead with the complete opening of the market through FTAs. The country plans to sign FTAs with numerous countries with the aim of expanding its economic territory worldwide. As of 2017, South Korea has signed FTAs with 52 countries, including Chile, EFTA, ASEAN, India, the European Union, Peru, the United States, Turkey, Australia, Canada, China, New Zealand, Vietnam, and Colombia. In 2017, the country initialed an FTA with five Central American countries - Costa Rica, El Salvador, Nicaragua, Honduras, and Panama.
South Korea encourages FDI under the Foreign Investment Promotion Act. In South Korea, “FDI” refers to “a foreigner’s acquisition of 10% or more of the equity share of a domestic business through an investment of not less than 100 million won, or a foreign-based business’s borrowing of a long-term (5 years or longer) loan from its parent business in a foreign country and the like.”
Under the Foreign Investment Promotion Act, the government guarantees the profits earned by foreign investors and offers them a variety of benefits, such as tax incentives, cash support, and mitigation of land-related regulations. The country also protects foreigners’ intellectual property rights and foreign exchange transactions. Foreign investors are allowed to take the profits they earn in South Korea out of the country, on the basis of creative and efficient operation.
Foreign investors are eligible for support from the South Korean government concerning the land required for the establishment of a factory or research facilities, the purchase or lease or construction of a building, or the installation of electric or communication facilities. They may ask for partial payment of the amount for up to 20 years in cases involving the purchase of land owned by either the central or a local government. The government also provides cash support in consideration of the FDI amount and the number of locals to be employed. The government is ready and willing to provide land and capital if a foreign business displays excellent technological prowess and maintains the employment of a given number of locals.
FDIs in the country surged right after the foreign exchange crisis in 1998, with the increasing trend continuing. The accumulated reported amount of FDI as of 2017 came to USD 22.9 billion, the third year in a row the USD 20 billion milestone was reached. The FDI amount suggests balanced growth trend in terms of business types, regions, and investment types.
The government continues to improve the system for the provision of support to foreign investors. In October 2010, the government mitigated the criteria for cash support for foreign investors and expanded the scope of state/ municipality-owned land eligible for private contracts in a bid to mitigate the FDI conditions. Korea improved the conditions for FDI.
In 2016, the country revised the Foreign Investment Promotion Act to unify the procedures for registering foreign investments, which had previously differed by investment type. The government plans to shift its policies in support of foreign investors and ‘U-turn’ companies (Korean firms that refocus their investment on Korea as opposed to investing more abroad) to promote job creation.
The country also invites newly emerging countries with surplus funds, including China and the Middle Eastern countries, to invest in the service sector of the country with high added value.
As part of efforts to create a favorable environment for FDI, the government hosts Foreign Investment Week (FIW) and provides a Red Carpet Service for foreign investors. The government also operates projects to promote FDI in local authorities including sending delegations to study investment feasibility and supporting investment projects.
The country also plans to attract FDIs by providing cash support for such headquarters and R&D facilities and incentives such as tax reduction/ exemption, including holding IR sessions, etc. The country also designates locals in the Unites States, the United Kingdom, China, and Japan as PR ambassadors for FDI in the country.
South Korea is making preparations for a period when its combined export/ import volume is expected to reach US$2 trillion. The country is also striving to become a major logistics hub of Northeast Asia.
The country is investing heavily in automation and the sophistication of export/import cargo stevedoring facilities, with the aim of greatly enhancing its logistics competitiveness.
The country is striving to invigorate its air cargo network and expand industrial complexes situated close to airports. In 2016, Incheon International Airport marked an all-time record in cargo volume. Growth continued, reaching 2.92 million T in 2017. According to Airports Council International (ACI), since 2013, Dubai International Airport (UAE) has ranked 2nd in terms of international freight volumes, beating Incheon International Airport. However, Incheon International Airport is striving to take its spot back having recorded 3 million T of high-value shipments in 2018.
Air cargo has high added value. It accounts for about one quarter of the total transportation charge, although it accounts for only 0.2~0.3% of all forms of transportation cargoes in terms of weight. The South Korean government has expanded the cargo terminal of Incheon Airport and trains talented young people to take charge of airfreight logistics at the relevant educational institutions.
With the opening of Terminal 2 in January 2018, the annual cargo capacity of Incheon International Airport has increased from the previous 4.5 million T to 5.8 million T.
It is noteworthy that Incheon International Airport has ranked first in the world for 12 consecutive years in the annual evaluation of airport services conducted by the ACI, a consultative council for more than 1,700 airports around the world. This testifies to the sheer quality of operation of Incheon International Airport. Furthermore, the airport became the first airport in the world to be registered with the Airports Council International Hall of Fame.
Located on the peninsula, South Korea has many international trade ports including Busan, Incheon, Pyeongtaek, Gwangyang, Ulsan, Pohang, and Donghae. In 2016, the volume of cargo handled at the country’s ports stood at 1,509.47 million T, showing a 3.2% increase year-on-year.
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The government is committed to diversifying export items and enhancing their quality through the annual selection of first-rate quality goods. Among the range of first-rate products selected by the Ministry of Trade, Industry and Energy in 2016, the number of products in which Korea enjoyed top rank in market share came to 161, up from 154 a decade before. Among these are memory semiconductors, AMOLED displays, thin-film transistor liquid crystal displays (TFT LCDs), liquefied natural gas (LNG) carriers, and car carriers. Korea’s polyester microfiber in the textile chemical industry also took up the largest share in the global market.
Information technology is the strongest element of the country’s economy, a sector that encompasses all the skills required for management innovation and administrative reform as well as skills relating to computer software, the Internet, multimedia, and communication devices.
The country’s well-established communication infrastructure was further enhanced with a 4G nationwide network; 5G, fifth-generation wireless technology, is slated to be commercialized in 2019. South Korea’s ICT-related exports amounted to USD 197.6 billion in 2017.
The country displays solid international competitiveness in cellphones, semiconductors, computers, and peripheral devices, and continues striving to maintain its leading position in these sectors amid the rapidly changing information technology environment.
South Korea is also one of the world’s largest car manufacturing countries. In 2017, the country ranked 6th in the world in terms of the number of cars produced, with 41.15 million vehicles.
Currently only five countries: the US, Japan, Russia, France, and now South Korea are equipped with nuclear power plant technology. The country became the world’s 6th nuclear power plant exporting country by supplying a Korean-developed plant to the UAE. The first nuclear reactor made solely with Korean technology — from design, construction, to commissioning — began its operations in Jordan in December 2016. With this, the country became the eighth country in the world to export a nuclear reactor. The country also boasts solid international competitiveness in the iron/steel and chemistry sectors.
A relatively new export sector for South Korea, the export amount of cultural contents rose significantly, from USD 2.3 billion in 2008 to USD 6 billion in 2016, and one which is growing strongly, is cultural products, including publishing, music, video games, characters, and TV, films and webtoons production.
In 2016, the country’s game industry generated approximately KRW 11 trillion in domestic sales and exported goods worth a combined total of USD 3.3 billion. Korea’s PC and mobile games are gaining popularity not only in Asia, including China and Japan, but also in North America.
The government proposed a blueprint for becoming a leading country in the Fourth Industrial Revolution by supporting innovative start-ups and proactively responding to technological change.
As part of such efforts, a special committee on the Fourth Industrial Revolution will focus on creating an ecosystem for the Fourth Industrial Revolution, in which new ICT technologies and services can create new pathways. The committee will also serve as a strategic platform that prepares for the nation’s future through regulatory reform, basic research, human resources development, and strategic investment in future industries.
South Korea topped the 2017 Bloomberg Innovation Index, securing the No. 1 spot for four consecutive years. The Bloomberg Innovation Index evaluates countries based on seven criteria.
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At present, South Korea is striving to transform itself into a global economic system. Although the country accomplished rapid growth within a short period of time, this led to the problem of an imbalance in the development of large businesses and SMEs due to the implementation of an economic policy that was heavily dependent on the export of large enterprises. As such, the need for shared growth was singled out as a potential solution to the problem. The issue emerged as a problem that would have to be resolved at the international level amid the global economic crisis in 2008.
In 2010, the Presidential Commission for Shared Growth for Large and Small Companies was launched with a view to settling conflicts between large-sized businesses and SMEs. The commission is assigned with the duties of fostering an atmosphere conducive to shared growth in industries, monitoring and announcing large businesses’ shared growth indices, designating sectors and items suitable for SMEs, and settling conflicts between large businesses and SMEs based on a social consensus.
The G20 Summit in Seoul in 2010 was held under a similar theme. The G20 Summit came into being following the global economic crisis in 2008, based on the view that it was necessary to have major emerging countries take part in international economic discussions, as the G7 Summit inevitably had certain limitations in this respect. It was pointed out that the international financial system had failed to reflect the fact that the share and role of emerging countries had expanded to a considerable extent over the previous three decades.
At the G20 Summit held in Seoul in 2010, South Korea assumed the position of the Chair, indicating that the country had assumed a positive role in the international economic order.
The G20 Summit Seoul adopted the 20-item Seoul Summit Leaders’ Declaration and came up with an agreement containing 74 items. Other results of the summit included the announcement of the Seoul Development Consensus for Shared Growth, the Multiyear Action Plan, and the Anti-Corruption Action Plan.
The Seoul Summit Leaders’ Declaration stressed the role of developing and emerging countries in a move to put an end to the foreign exchange war between major countries and to reform the IMF, which used to be centered on industrialized countries. Its contents were focused on the pressing need to stabilize global financial markets and provide support for impoverished countries striving for economic development. The declaration went a long way towards enhancing the status of South Korea in global economic and financial markets.