Korea’s Economy: The Next Decade
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Little more than thirty years ago, in the early 1960s, Korea, with a per capita income of less than U.S. $100, was one of the poorest countries in the world. Today, Korea has one of the most dynamic industrial economies in the world, and its per capita income has reached more than $8,000. By way of indication of this dramatic change, Korea will become a member of the Organisation for Economic Cooperation and Development by 1996. The country’s rapid economic progress, what some call the Korean economic miracle, raises several questions: What factors have contributed to such a rapid change? Will Korea continue to grow as fast in the coming decade? What are the new challenges and national priorities for Korea, now that it is at the threshold of joining the world’s advanced economies?
According to Korea’s new Five-Year Plan (1993-1997), and based on studies by the Korean Development Institute, the economy will grow at an average annual real growth rate of seven percent for the decade, and at the rate of six percent for the next five years. In addition, the Korean currency will steadily appreciate vis-a-vis the U.S. dollar. By 2002, it is projected that Korea’s per capita income will be over $20,000, quite comparable to many European countries today.
Success solves old problems, but it brings new challenges as well. Korea’s economic success has solved many old economic problems, including the problems of absolute poverty, unemployment, chronic inflation, and a persistent balance-of-trade deficit. But Korea faces many new challenges, such as strong external pressures to completely open all sectors of the economy, internal pressures to be more equitable, high expectations for economic welfare, and challenges from the new age of globalization.
Despite Korea’s economic success, most of its agriculture and many small-sized firms in the service sector are still backward and internationally uncompetitive. In these domains, accordingly, there is strong opposition to further opening of the domestic market in these sectors. The government, however, advised by technical experts and supported by most businesses, has launched rigorous programs for opening the economy, including a planned reduction of tariffs on manufactured goods to the level of the advanced economies by 1998, and a complete elimination of import restrictions in manufacturing. In agriculture, there are ambitious restructuring programs underway, including large-scale investment in promising agricultural sectors, so that they may compete internationally; a program of vocational training, education, information and placement services, so that marginal sectors will transfer their resources into the growing sectors of manufacturing and services; and, finally, increased subsidies for the older generation in agriculture. In the service sector, rigorous financial reforms and liberalization of interest-rate policies, foreign exchanges, and capital markets will be carried out. In a few years, Korean businesses and individual entrepreneurs will have complete freedom to invest abroad, and foreigners will have the same freedom to invest in Korea.
The government played an important role in Korea’s economic take-off in the 1960s and 1970s. Some eminent economists describe Korea’s success as government-led growth. Since the early 1980s, however, the government has gradually liberalized the economy. In the next decade, accelerated liberalization will become inevitable as a means of coping with the coming age of globalization. The recent reorganization of Korea’s government (December 1994) and its five-year plan made it clear that Korea’s economic growth will, in the future, mainly rest on private initiatives.
Continued economic success and rising optimism about the economic future seemed to elevate people’s expectations for greater economic welfare and for political and social gains, as has been revealed in recent labor disputes. I would simply suggest here that Korea will quickly learn the importance of cooperation through information-sharing. In contrast to the Anglo-Saxon cultural emphasis on the economic interests of individuals, the importance of communal welfare and cooperation is deeply rooted in Korea’s cultural heritage. A communal democracy and a more equitable society, therefore, will develop in the spirit of Korea’s traditional cultures.
Until recently, Korea has been at the receiving end of international economic cooperation. Foreign capital inducement policies were actively promoted in order to supplement domestically available resources. Beginning in the late 1980s, the government established the Official Development Assistance program, which consists of both bilateral and multilateral assistance, including grants-in-aid, technical cooperation and economic development cooperation funds. In addition, Korea’s outgoing foreign direct investment has been growing rapidly since 1987, because of a large increase in wages and appreciation of the currency.
Korea is one of the countries that has benefited most from a liberal world trade system. It will, therefore, actively participate in the responsibility for maintaining free world trade bilaterally, regionally, and multilaterally. This responsibility for greater economic cooperation with developing countries and for maintaining a free world-trade system, is currently under discussion at the macro level, on the level of inter-governmental relationships. Globalization is not so much a matter of macro-relationships, as of increasing interaction among micro-economic units, and increasing strategic alliances and cooperative network-building between domestic and foreign firms, banks and institutions, in order to increase their competitive position and/or to increase their profits. Thanks to world-wide trends of deregulation and economic liberalization on the part of most governments in recent years, and also due to technological innovation, especially in computers and information science, the world is getting smaller and the economic distance between nations is becoming shorter. The national border, in economic terms, will become less and less meaningful. In this age of globalization, we can say the success of individuals and nations is largely dependent on how they cope with new challenges of globalization.
In this sense, the energetic support of the Korean community for the Korean Studies Program at the University of Michigan has special meaning for both Korea and Michigan, not only for better cultural understanding, but also for strengthening our respective competitive positions in what is becoming a borderless economy. The borderless economy, however, does not imply a lack of identity. Effective globalization depends on correctly recognizing one’s identity. In this sense, Korean-Americans have a special mission: they should play the important role of bridging two cultures and increasing cultural and economic interaction between the two countries.
Bon Ho Koo was a Distinguished Visiting Scholar at the International Institute in Winter 1995. Professor Koo is the former President of the Korea Development Institute, the principal economic think-tank for the Korean government, and is currently Professor of Economics at Hanyang University. At the University of Michigan, he conducted a seminar offered through the International Institute, in conjunction with the Business School and the Political Science Department. This article is an excerpt from Professor Koo’s talk to the local Korean community, sponsored by the Korean Studies Program.