Korea’s rapid economic rise and lessons for developing economies

  • 2014-03-05
  • By Kim Chung-Hwan is the Cultural attache at the Embassy of the Republic of Korea

The Baltic Times has cooperated with the Cultural attache at the Embassy of the Republic of Korea in bringing this series of articles which describe Korea’s experience in developing its economy, and its rapid rise to becoming a global economic powerhouse that it is today. These articles can be seen as ‘lessons for developing economies,’ for the independent Baltic States to offer ideas in their own pursuit of building strong and successful economies.

Where Korea stands now
The per capita GDP of the Republic of Korea is estimated at around $24,000 at the end of 2013, and the country is also the 7th largest exporter in the world, with its goods and services sold overseas worth more than $1 trillion last year. In addition, the country boasts of a large holding of foreign exchange reserves nearing $350 billion, when the global economic outlook looks so uncertain with the U.S. tapering in effect. Korea’s stellar economic achievement over the last six decades, rising from the ashes of the Korean War ending in 1953, is emulated by developing countries in Southeast Asia and in other continents.

Over the past 60 years Korea has gone through a brutal civil war, a civilian-led political revolution, a military coup and a few confrontations with the neighbor in the north, pushing the peninsula almost onto the brink of another war. I would like to emphasize that Koreans are proud to have pulled the feat off, against all these odds, not to mention the relative lack of natural resources and its total dependence on imported oil. Koreans also take pride in the fact that the country is currently an active member of G-20 economies, serving as one of economic powers leading the global economic council promoting senior-level discussions of policy issues pertaining to the international financial stability.

Secrets behind the success story
What are the main factors that account for Korea’s rapid ascent as a major economic power and an influential actor on the international scene? First and foremost, its high population density and general public enthusiasm for education might give a clue.

Korea has one of the highest population densities in the world and its people want to ensure that their offspring climb the social ladder by making substantial, if not excessive, investments in their education. This tendency has served as a double-edged sword. The pervasive desire has translated into outstanding academic performance, as demonstrated by the recent results of the OECD-led tests worldwide. But you should not let its dark side go unnoticed. Koreans blame themselves on placing the burden of too intense competition on children from an early age on. Stories about how competitive it is to obtain an admission to one of the elite kindergartens in the posh area of Seoul may serve to illustrate my point.

Secondly, the successive Korean presidents since the end of the Korean War in 1953, whether he was a democratically elected one or an iron-fisted ruler, have shared a strong desire to drag the country out of poverty. They have pushed government-designed economic planning and implemented export-oriented policies in a rather coherent manner. While pursuing these policies, the country had to pay a heavy price in the form of over-concentration of wealth and influence in the hands of a few family-controlled business groups and a perceived level of transparency not in line with the country’s economic stature. However, it should be pointed out that the government’s heavy intervention in the early stage of the country’s economic development should be excused and understood as a time-efficient and cost-effective way to allocate scarce resources.

Finally, the geopolitical situation surrounding the Korean peninsula has always been somewhat precarious and such perception, combined with high population density, has instilled hard-working ethics and a high savings rate in the Korean people. In Korea, it is not unusual to see employees of big companies spend more than 12 hours in the office everyday, and a lot of students toil away at school and after-school private institutes until after 10:00 in the evening. Working long hours does not necessarily mean that their productivity is high. Sometimes it is just the contrary, but no one can deny the fact that Koreans’ willingness to work long hours reflects their dedication to work.

Challenges ahead
Even with its relatively favorable macro-economic indicators, Korea faces a lot of challenges like any other country and is trying to negotiate its way out of these problems. Let me explain some of these issues and the proposed solutions.
Korea’s overall development path must change in order to wean itself gradually from over-dependence on big family-owned business groups. From now on, its development should be given impetus more by its small and medium-sized companies than before. The government is making efforts to help these small and medium-sized companies to stand on their own feet and is producing schemes to spur investment into ventures run by tech-savvy and ambitious engineers.

Beyond any shadow of doubt, a high literacy rate and general enthusiasm, bordering on obsession, for education have been responsible for Korea’s rapid economic development. Its education system, however, has been blamed for laying too much emphasis on rote learning rather than nurturing sorely-needed creativity. Korea has excelled so far by putting a lot of well-educated and disciplined workers and long hours into the workplace. Now it seems that raising productivity further should come from nurturing more creativity in the way people think and work, rather than from encouraging people to work long hours. Korea has been successful in following in the footsteps of advanced economies so far. But staying on top is quite a different ball game compared to chasing the advanced economies and requires a radically different strategy.

While having pursued relentless economic development, some Koreans have found themselves not content with their relative economic status. As a result, the perception gap between left and right-leaning people have widened regarding, for example, what role the government should play to introduce a welfare state and how the fruits of economic success should be allocated. This is an ongoing ideological struggle found in Western Europe and the U.S. as well. In Korea, the problem is a bit more acute due to the fact that the country has made an unparalleled development within a short space of time. We should reach a compromise with folks having different political orientations and be braced for a tantalizing prospect of reunification with North Korea. The process will entail enormous costs, but also represents another opportunity for the Korean economy to make a quantum leap ahead.

Lessons for other developing economies
It is time to wrap up the series on ‘Korea’s rapid economic development and its lessons for developing economies’ and I would like to share my ideas as to some of the lessons to be gleaned from Korea’s experience.
First of all, you need patriotic leaders with long-term vision and people who share his or her vision. Each country has its own strengths and weaknesses. In the long term, it is not the physical conditions and the country’s geo-political location that determines its competitiveness. It ultimately boils down to whether you can find people knowing how to extract maximum benefits from their advantage and turn seeming disadvantages around.

Just look around and you should be able to find plenty of examples of blessings in disguise (crisis and calamities turning out to be blessings in the long-run, depending on your response) and the resource curse (countries with an abundance of natural resources tend to have less economic development and a worse development outcome than those with few resources).

Secondly, do not hesitate to make investments for your future generations at the expense of your own sacrifice. If your students in academia or vocational training are not outperforming their peers in the neighborhood, your future is not very bright. Just make sure that you instill into students a sense of competition and nurture creativity within them. Any former socialist country might find it rather difficult to make that transition. But remind yourself that fair competition, risk-taking and proper rewards are what make the market economy tick, and the same principles apply to education as well as to business.

Follow the course of export-oriented policies if your domestic market is too small. Find a niche market where you have relative advantage compared to other nations in the region. When Korea started exporting goods, the major items were iron ore and hair pieces. It took more than four decades for Korea to became a major exporter of semiconductors, automobiles and electronic devices.

Make sure to open your domestic market to foreign competition gradually to boost the competitiveness of your own domestic firms. In order to attract foreign direct investment, do not delude yourself that you may attract foreign investment by granting generous offers not available to domestic firms. Those big foreign firms are basically interested in two things only. Does the target market have enough growth potential that justifies their overseas investment? Does your government implement transparent and reliable administrative practices (not any favorable tax deals or other incentives) to ensure them that they could take the profits back home, when they occur? Provide government officials sticks and carrots (incentives and monitoring) to lead them to the most open and transparent administration. In the early stage of economic development, it is the civil servants who hold the key to success.

Final words
The Latvian government decided early on to become a member of NATO and the EU, and its currency has been replaced by the euro from January this year. These conditions imply that the Baltic country is ready to engage in active trade with the most stable and rich countries in Europe, without too much defense burden to shield itself from any potential foreign aggression. I believe that these are the measures taken in the right direction and many countries in the neighborhood will keep a close eye on your country’s development from now on. Korea is one of those countries with heartfelt wishes that Latvia would put itself on a successful development path and serve as a model for many countries in Eastern Europe.

The Korean Embassy would like to thank Mr. Dorian Ziedonis, the editor in chief of The Baltic Times, for allowing the series on Korea’s rapid economic rise and its lessons for developing economies to be part of the newspaper.