I’m currently managing director of Content and Business Planning at The Korea Times. Before I took the current position in early 2024, I served as managing editor in charge of both paper and online for over three and a half years. In 2015-2018, I worked as Singapore correspondent covering ASEAN nations.
KoreaToday From war-torn nation to economic powerhouse
By Kim Jae-kyoung
Korea set to leverage G-20 summit to become global trendsetter
By Kim Jae-kyoung
Staff reporter
Since the end of the Korean war in 1953, South Korea has played the starring role in one of the world's greatest stories of rebirth by transforming a war-ravaged agrarian economy into a manufacturing powerhouse.
The outstanding transformation was the outcome of government policies aimed at mobilizing personal savings and directing bank lending to aid the construction of industries and businesses.
Over the past 60 years until 2009, the nation's real GDP rose at the annual rate of nearly 7 percent. The growth of exports was even more impressive. In dollar terms, exports rose from a meager $28 million in 1952 to more than $400 billion in 2009.
According to the Bank of Korea (BOK), following an average of 3.9 percent growth in 1950s, Korea enjoyed consistent high growth for nearly 40 years. The average GDP growth rate averaged 8.4 percent in 1960s, 7.4 percent in the 1970s, 8.6 percent in the 1980s and 6.2 percent in the 1990s.
Entering the 21st century, the GDP growth slowed to a moderate pace of around 4 to 5 percent but it has sought to sustain economic growth by adjusting the policy focus from a manufacturing industry to the service sector. In 2010, 60 years after the Korean War, the Korean economy is undergoing a paradigm shift from a developing economy to a developed one in the wake of the global financial crisis.
The Korean War (1950-1961)
With the political and social unrest ensuing after liberation from Japanese colonial rule on August 15, 1945, the Korean economy was at the brink of collapse with stagnating production and high consumer inflation.
The government made all-out efforts to stabilize the war-torn economy but the Korean War (1950-1953) again pushed the economy to near collapse. After the 1953 cease-fire, with the introduction of international aid to support economic resurrection, the government was determined to revive the economy from the devastation of the war.
According to the BOK, by 1956, with the production of electric power, mines and manufacturing all surpassing pre-war levels, post-war reconstruction efforts were nearly complete. But inflation was still high with the Seoul area wholesale price rising 48 percent a year on average from 1954 to 1956.
Against this backdrop, in 1957, the government developed a financial stabilization plan for the value of money and to maintain a single official exchange rate. In 1958, it geared toward maintaining a balanced budget by containing the expansion of fiscal investment and lending and by trying to increase tax income through tax reform.
However, the political and social turmoil provoked by the April 19 Revolution in 1960 and the May 16 Military Coup in 1961 removed the consistency of economic policies and the Korean economy again plunged into a serious slump. The military government realigned economic policy from stability to growth.
Industrialization (1962-1971)
In the 1960s, the prime goal of the economic policy became growth that would lead to an increase in employment. In the early 1960s, the military government led by the late President Park Chung-hee drew up the Economic Development Plan aimed at speeding up industrialization and improving national income through an export-led growth strategy.
In 1961, with the goal of increasing the effectiveness of industrialization efforts, the government took direct control of commercial banks. In 1962, the initial year of the First Economic Development Plan, the government carried out the currency reform to steer gray funds toward industrialization efforts and to absorb excess liquidity.
During the period of the Second Economic Development Plan from 1967 to 1971, Korea's exports grew exponentially at an average annual rate of 9.5 percent, thanks to the advance of industrialization efforts and favorable external conditions, such as the strong growth of leading economies and the Vietnam War.
The central bank said that the economic policy during the 1960s focused on bolstering the financial system and supplying money to expand external trade and support high economic growth, while absorbing excess liquidity generated by the rapid economic growth in order to sustain economic stability.
Fostering heavy industries (1972-1979)
In the 1970s, with Korea graduating from the infancy of industrialization, heavy and chemical industries like steel, petrochemicals and ship-building became the prime candidates for financial support to promote the advance of Korea's industrial structure. During this time, Korea's large conglomerates, better known as chaebol, such as Samsung, POSCO and Hyundai, emerged as the main locomotives for economic growth.
Buffeted by the First Oil Shock in the early 1970s, the economy was confronted by slower growth, rapidly rising inflation, and a swelling current account deficit. In order to resolve the crisis, the government introduced two special economic measures in January and December 1974.
Based on the recognition that the light industry-driven economy had limitations in its ability to deliver sustained economic growth and export expansion, the government began to push ahead with a master plan for heavy and chemical industry development from 1973. Under the plan, the government instructed banks to channel policy loans to national infrastructure projects, such as the development of the Seoul-Busan Expressway.
Thanks to the government-led growth-oriented policy, Korea was able to achieve high annual economic growth of over 8 percent in the 1960s and 1970s to emerge as one of the newly-industrialized counties, according to the BOK. But rapid growth also had side effects such as chronic inflation and distorted fund allocation.
Strengthening of economic growth (1980-1989)
In the 1980s, to resolve the chronic and accumulating problems arising from fast economic growth and to create a solid foundation for continuing stable economic advancement, the government adopted a drastic restructuring policy. The prime goal of the economic policy was redefined as price stability and the government started to implement strong economic stabilization policies.
With this price stabilization stance and supported by the so-called three lows ― low oil prices, the lower value of the U.S. dollar against the Japanese yen and low international interest rates, the economy showed a strong performance, recording an annual growth rate of over 10 percent for three years after 1986.
The current account also shifted to a substantial surplus, which encouraged deregulation and internationalization of the financial sector. As a result, many new financial institutions from banks, investment trusts and insurance to leasing companies were established. Foreign exchange and capital transactions were also substantially deregulated.
Globalization and deregulation (1990-1996)
After the robust performance of the late 1980s, the Korean economy still made progress in the early 1990s thanks to strong domestic sales. But the basic framework for ensuring economic stability began to show signs of weakness with the current account balance retreating to a deficit and rising prices.
Therefore, the government has carried out a series of reform measures in the areas of finance and administration such as the mandatory use of real names in all financial transactions. It also implemented measures aimed at improving Korea's industrial competitiveness, such as promoting technology and human resource development and inducing fair competition.
The central bank said that the 1990s were also a time when financial, foreign exchange and capital account deregulation was actively pursued in keeping with the global trend of financial liberalization and globalization as economic inter-dependency deepened among countries.
During this period, the government carried out a three stage liberalization plan to deregulate all interest rates. It also expanded foreign exchange deregulation with the introduction of a market average exchange rate system. Restrictions on foreign investment in Korea and overseas investments by Korean residents were also steadily eliminated. Due to such efforts, Korea was admitted to the OECD in 1996.
Currency crisis (1997-2007)
From the beginning of 1997, the Korean economy began to show signs of instability with a string of large corporate insolvencies, a widening current account deficit and difficulty in attracting foreign capital.
In the latter half of the same year, the delay in resolving Kia Motor's insolvency, the sharp increase in non-performing loans of financial institutions and the impact of the Southeast Asian currency crisis further undermined foreign investors' confidence in the Korean economy.
In November, Korea was forced to the brink of defaulting on its debts due to the rapid drop of foreign exchange reserves triggered by the freefall of the Korean won. As a result, the country was forced to resort to a bailout fund from the International Monetary Fund (IMF) and received a $57 billion aid package
The currency crisis was the outcome of the government's ambitious growth-oriented economic policy. The country experienced a hard time due to the economic turmoil but the crisis offered an opportunity to strengthen the nation's economic fundamentals by exposing the structural weaknesses of the economy.
After successfully weathering the crisis with bold restructuring, Korea went on to solidify its position as one of the world's manufacturing powerhouses in the 2000s, with many Korean conglomerates, including Samsung and Hyundai, enjoying recognition in the global business community.
G-20 Summit and looking ahead (2008-present)
Over the past six decades, the Korean economy has made remarkable progress. However, there are still lots of challenges the country should tackle to truly become a leader in the global community.
First of all, the country should speed up deregulation in the service sector to increase its significance in the economy. At the same time, the country needs to improve its labor market flexibility and the quality of its capital markets.
Reforming the outdated education system, revamping the role of the government in the economy, and globalizing the public mindset are also recommended as key tasks.
The Korean economy has demonstrated its capability and potential by capitalizing on the global financial crisis triggered by the U.S. subprime mortgage meltdown. It was hit hard by the global financial crisis but recovered at the fastest pace among major economies.
The G-20 Seoul Summit in November will be another chance for the country to prove its capabilities. Amid the global crisis, the country was named in September 2009 to host the Group of 20 Summit, becoming the first Asian country to hold a meeting of the world's 20 major economies.
Experts stressed that the country should leverage this opportunity by uniting nationwide capacities and maximizing potential.
"Korea should take advantage of its position as the chair country for the G-20 process in 2010 in order to launch and strengthen East Asian economic diplomacy and promote East Asian economic integration and economic policy coordination for the region's contribution to the balanced and sustainable growth of the world economy," National Strategy Institute President Young Soo-gil said.