South Korea - Economic Growth and Development

This study note covers aspects of growth and development in South Korea

South Korea is one of the most highly regarded countries in the world when it comes to sustained growth and development. In each of the last five decades, the average annual rate of growth has exceeded 5% and the economy is now an innovation-driven, high-income country of just under 49 million people with a total GDP in excess of $1 trillion and a per capita income of over $20,000 (PPP adjusted).

The South Korean economy accounts for 2% of world GDP and the economy is making progress in converging towards Japanese income levels. Some commentators have christened South Korea the “Germany of Asia". Jim O'Neill, the creator of the BRICs acronym regards South Korea as a top nation in terms of sustained growth potential.

• South Korea has an enviable record of macroeconomic stability – the economy was hit hard by the Asian Financial Markets Crisis of the late 1990s but this led to wide-ranging economic reforms and the aim of making the country more resilient to regional and global economic shocks
• The economy avoided recession in 2009 (one of only a small handful of advanced nations to do so)
• Recovery was strong in 2010 although it has slowed down since – averaging just over 3%. Keep in mind that the natural rate of growth for high-income countries tends to slow down – it becomes harder to sustain rapid percentage growth rates
• The economy continues to be driven forward to strong export performance and the share of national output taken up by manufacturing industry has risen – thus far South Korea has avoided the process of de-industrialisation, indeed her service sector is relatively weak by global standards
• Exports have held up well partly because the South Korea currency (the Won) has depreciated
• Both consumer price inflation and unemployment remain low
• The economy runs a current account surplus and the budget (fiscal) balance is strong – South Korean national debt is very low (less than 40% of GDP) – this provides a buffer if and when South Korea has to fund the costs of integrating a failing North Korean economy after re-unification
• One area of weakness is consumer debt - Korea's household debt to GDP ratio stands at about 80%, the highest in Asia and more than most OECD countries
• Is South Korea too export-dependent?

Competitiveness Indicators

One of the strengths of South Korea is her scores on a range of competitiveness indicators. The percentage of national income given over to research and development (R&D) has grown and a rising percentage of exports come from hi-technology products. South Korea has outpaced countries such as Taiwan in moving towards high value-added manufacturing products. The economy boasts some world class businesses including Samsung, Hyundai, LG and Kia Motors. Exports account for over 50% of GDP and two thirds of South Korean exports go to developing nations. Trade with China has grown rapidly.

The economy is relatively open for foreign trade and investment, but the South Korean economic model has not been built on free market principles. Much of the early growth was supported by import tariffs as part of an import substitution policy.

• Global competitiveness ranking for 2012: 24/142
• Infrastructure: 9/142
• Macroeconomic environment: 6/142
• Health and primary education: 15/142, Higher education and training: 17/142
• Technological readiness: 18/142, Market size: 11/142

In nearly every year since 1996 the annual increase in exports of goods and services has easily outpaced the growth of GDP – leading to a sustained rise in the share of exports in South Korean national income.

Human Development Progress for South Korea

• South Korea is ranked 15^th in the latest Human Development Index
• Life expectancy is high (80.6) and public expenditure on education and training high (>4% of GDP)
• The country is highly urbanised (83% of the population)
• Income and wealth inequality is low but it has been increasing in recent years.

Export Transition

A key development challenge for middle-income countries is to achieve a process of export transition away from lower value-added products towards goods and services that command higher premium prices in advanced nation markets. South Korea appears to have made this transition well – Samsung is a major competitor to Apple Inc for example – and exports to emerging countries are growing strongly

Unlike many middle income and newly established higher income countries, South Korea's manufacturing industry has seen a rising share of national income

South Korea and Regional Trade Agreements

Korea's integration in the world economy is still low in terms of import penetration, the share of foreign workers and the stock of inward FDI. Korea has taken steps to enhance its openness through free trade agreements (FTAs), including those with the EU and the United States. FTAs may also help boost the stock of inward FDI from its 2010 level of 13% of GDP, the third lowest in the OECD area. Moreover, FDI in services is only 6% of GDP in Korea compared with an OECD average of 37%.

South Korea and US Living Standards – An Example of Income Convergence

• Income convergence happens when a nation's per capita income (PPP adjusted) moves closer to that of another i.e. the gap in relative income per head decreases.
• The chart above presents GDP data for Taiwan, South Korea, China and India. The data is expressed as a percentage of the USA level – US per capita GDP usually increases each year so that for income coverage to take place, it is vital for country's to outpace the USA in terms of growth.
• South Korea and Taiwan have both escaped the middle-income trap – by the end of 2010 their per capita GDP levels were under two-thirds of the US level. China is making big strides – India too although to a less extent. Despite this, their income per capita remains a relatively small fraction of the US level.

Key Development Indicators for South Korea