South Korea business growth essay
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After the World War II, a South Korea was created as a republic while the North Korea became communist. During the Korean War (1950-1953), US and other UN forces intervened to defend South Korea from North Korean attacks supported by the Chinese and the Soviet Union. An ceasefire agreement was signed in 1953, splitting the Peninsula along a demilitarized zone at about the 38th parallel. Thereafter, South Korea grew economically at a tremendous pace gaining recognition around the world for the quality products and democratization processes. In the following essay I am going to critically assess the factors I find responsible for the post-war business and economic upheaval in South Korea, as well as comment on whether or not the given model is replicated anywhere in the pacific rim area. Various educated findings together with my personal opinion will be presented on the given topic.
From 1965 till about 1992 the South Korea economic growth was most spectacular in the world with the GNP growth rate surpassing any country in the world. Yet one must understand that such economy was not always the case for this little Asian country (Park, 120).
One of the factors influencing the economic growth in Korea in the years to come was the US military and consultant presence in South Korea from 1945 till 1949. In the late 1949, the US forces left the country and Mr. Syngman Rhee was appointed president who from the first day in office stressed the South Korea's desire to follow the democratic model of development as opposed to the communist model of the North Korea (neighbor of South Korea). His inspirations could not be implemented because after the US forces left the country, the Korea War started and had extremely negative impact on the country's economy and business development. During the period from the end of the Korean War to the early 1960's South Korea pursued a policy of import substitution for economic development, which was on par with the democratic traditions ("give people what they need and now") yet was against the patriotic mood of the South Koreans ("let's build products at home"). As a result of such policy Mr. Rhee was overthrown by a student revolution of 1960. Another pro US and pro Europe hero, Chang Myon, was elected president but overthrown a year later, in 1961 by a military coup led by a concervative and patriotic Park Chung-hee. There had been virtual stagnation in South Korea from 1959 to 1962 (Clarke, 87). Mr. Park was elected president in 1963 and economic development was seen as the major economic issue. After the war, korea did not have any production, so it basically had not choice but to start building factories to at least have something to trade with other countries, because after the war, there was hardly anything left besides farms that produced only agricultural products. South Korea understood that unless the Koreans are educated and exposed to factory work, the whole country would be totally agrarian and unattractive to foreigners.
Another factor that contributed to the business development of South Korea was the reduction of U.S. aid in the late 1960's which contributed to the import substitution strategy (because there was hardly anything other countries needed from South Korea, and South Korea had no resources to trade with other countries, and as a result started to create its own production facilities) which the former president Mr. Rhee proposed during his short term. The need was to provide the internal market with the needed goods in virtually any sector of economy. Korea then shifted to an export-oriented strategy for development relying on its extremely cheap labor that was supposed to produce very competitive goods for exports for the decades to come. The government tried to direct this development but made major mistakes in direction. The Mr. Park Regime initially emphasized heavy industry and the chemicals industry which was against the will of many private businessmen. After Park's assassination in the mid-1970s and the second oil shock in 1979 the Chun Regime stopped the projects devoted to the heavy and chemicals industries and shifted credit to light industries and agriculture with the high return on investment and with the export potential (Park, 123).
The third important factor that in my opinion, contributed to the economic success of South Korea was the presence of private property. Even though as we read through this essay, we understand that the South Korean presidents during their terms were trying to direct the economic growth of South Korea by focusing on either heavy/chemical industry, on import substitution, or export-oriented economy, or light industries, it were private businesses that did the job. The South Korean government decided to help private individuals with various tax incentives for exporters instead instead of owning businesses, and therefore, the public sector of South Korea was very small. Other countries like Philippines, Thailand, Vietnam and Laos in an attempt to follow the South Korean economic model also try to reduce the government ownership and encourage private investment and exports (Chang, 23).
It should be noted that the government initiatives were oftentimes successful and the creation of such famous companies like Pohang Iron and Steel Company, Korea Telecommunications Authority, Korea Electric Power Corporation, the Office of the Railroad, and Korea Monopoly Corporation (for tobacco and ginseng products) indeed proved to be rather stimulating for the economic development in the country. I should also note that the public sector provided 80-90 percent of the financial services, two thirds of the gas, electricity and water supplies, 30 percent of transportation and communications, 30 percent of mining, and 15 percent of manufacturing. At the same time some of the public enterprises were originally Japanese firms which were taken over by the government in 1945 (Clarke, 90). (In the 1980's the government began a program of privatization of some of these public enterprises.)
Another important step initiated by the South Korean government was the drastic budget cuts, limited government spending and the frozen (and tied to the general economic growth in the country) salaries of the government employees, who in that manner were forced to think of ways to improve the economy. As result of such drastic governmental measures, the South Koran GNP grew by some 9.5% annually during the years 1964-1969. The governmental decision to devaluate the South Korean currency unit won by over 50% in 1964 in order to stimulate the South Korean exporters is believed one of the primary reasons why the economy of the country skyrocketed. With the economic development the money became scarce which contributed to the drastic growth of interest rates for the savers and various tax incentives on the interest and the proceeds to encourage the investment which indeed occurred in the mid-1960s. As a result deposits jumped from 9 billion won in September 1965 to 50 billion won by the end of 1966. The savings ratio began to increase and by 1990 reached about 30 percent.
Another factor that contributed to the drastic economic growth in South Korea were large conglomerate corporations, called "chaebol", which proved to be the most revenue-generating companies for the South Korean industry. These diversified companies under single family ownership arose in the late 1950's as corporations with political influence for obtaining scarce credit and resources, yet nowadays did transform into the public / private corporations. The Japanese corporate culture also encourages the presence of the large companies similar to "chaebol" of Korea, yet because the Japanese economy is much older than South Korean, it can be said that Japanese corporate culture encouraged South Korea to follow the example. Currently there are other countries like Philippines, Thailand, Vietnam and Laos that try to follow the South Korean model by encouraging large companies and exports, yet they seem to be less successful than South Korea.
I should also note that the tremendous economic growth in South Korea gave the country a name "Asian tiger (or "dragon" according to some sources)". South Korea did a right bet on the high-tech industries that were expected to generate high revenues in the future. Three decades ago, when the country still did not decide to enter the high-tech industries, the South Korean GDP per capita was comparable with levels in the poorer and most underdeveloped countries of Africa and Asia. Today South Korean GDP per capita is roughly 20 times North Korea's and equal to the lesser economies of the European Union. Yet I should also mentioned that such success in adopting the high-tech industries in South Korea was achieved by a system of close government/business ties, including directed credit, import restrictions, sponsorship of specific industries, and a strong labor effort. The South Korean model was somewhat re-adjusted and applied to countries like Thailand, Laos and the Philippines yet the results did vary with Thailand being the country that mostly benefited from government-directed export-oriented economy, as well as high savings and low consumption (Clarke, 93).
The South Korean government promoted the import of raw materials and technology at the expense of consumer goods and encouraged personal savings and investment over consumption by providing great tax rebates, or tax-incentives for saving and imposing high sales taxes that are aimed at discouraging consumption. Such methods are pretty difficult to properly assess, because a great number of countries of Europe, or North America grew well because of great spending with the US still being the richest and greatest thoughtless spender. But it might seem that in that particular case when consumption was discouraged, while investment and exports were encouraged South Korea enjoyed the highest economic growth.
South Korea achieve spectacular economic growth, development and a title "Asian Tiger" by means of the export-promotion under the government's guidance. This so-called "Asian model" contains the some peculiarities. Firstly, the industrial sector, which is predominantly private, finances its investments mainly through the government bank loans rather than through issuing bonds and shares. In other words, the Asian model is different from the capital-based system and does not encourage people to buy shares but rather to invest in a bank and then, it would be the bank's role to invest in other industries. Secondly, the South Korean government intervenes in the selection of the strategic industrial sectors and provides 'policy loans' to the targeted sectors (currently high-tech industries, yet there used to be hard manufacturing/ chemical, etc.)
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