Korea’s economy

Korea is the world’s 13th largest economy with a GDP of US$1.435 trillion in 2015. Advanced manufacturing and services dominate the economy, employing the majority of the population. Among its main manufactures are mobile phones, consumer electronics, household whitegoods, cars, ships and steel, all of which are exported around the globe. As an advanced manufacturing economy, Korea imports large quantities of natural resources such as coal, iron ore and oil. It is also a net importer of agricultural products.

Korea’s phenomenal economic progress in the last half- century has in many ways mirrored the Japanese “economic miracle” that preceded it. When the Japanese occupation
of Korea ended in 1945, Korea was impoverished and its economy was mostly agricultural. Much of its infrastructure was subsequently destroyed during the Korean War, which also had an enormous human cost. By 1960, Korea’s per capita GDP was comparable with some of the poorer countries of Asia and Africa. Since then, however, the economy has been transformed, becoming a global industrial powerhouse on the back of what is often referred to as “the miracle on the Han”, a reference to the Han River that flows through Seoul.

Korea’s initial rapid growth was achieved by extensive state intervention in the economy with a focus on heavy industry to produce manufactured products for export. In the 1970s and 1980s, the Government channeled capital into family- controlled chaebols, or otherwise known as conglomerates. These huge firms also enjoyed trade preferences and monopoly rights, among other advantages extended by the Government. This enabled the chaebols, which today include the Hyundai and Samsung groups of companies, to grow into massive business empires with brands that are world leaders in their fields and global household names.

Korea was, however, hit hard by the Asian financial crisis
in the late 1990s, resulting in a significant curtailing of economic growth. After receiving an emergency loan from the International Monetary Fund (IMF), Korea was forced to instigate a series of reforms, including reducing the role of Government in the economy and an overhaul of the financial sector. By the early 2000s, Korea had rebounded from the crisis, averaging a healthy growth rate of 4.4 per cent in the first decade of the century.

In the more recent global financial crisis of 2008-09, Korea was one of the few OECD countries to avoid recession. Nonetheless, the Government adopted numerous economic reforms in its wake, including greater openness to foreign investment and imports. Trade remains an important part of the Korean economy, with exports worth 45.9 per cent of GDP in 2015. Imports were worth 38.9 per cent of GDP in the same year.

With high-tech industry and a sophisticated consumer market, Korea offers an attractive market for businesses worldwide to begin or expand their Asian presence. Along with average annual GDP growth of four per cent from 2005-2014 (World Bank), strong purchasing power is another factor that makes Korea an attractive market.

Manufacturing has driven Korea’s rapid economic development, transforming it into a global industrial giant.
It is once again the world’s largest shipbuilder, recently regaining this title from China, fifth largest car maker, and sixth largest steel maker. In the past, most opportunities for foreigners have involved establishing labour-intensive manufacturing or processing operations geared towards the export market. These days, investors obtain better returns by utilising the skilled workforce in higher value and high technology fields.

Korea’s services sector has long lagged behind its dynamic world-class manufacturing sector in efficiency and effectiveness. Unlike the export-oriented chaebols, the services sector is dominated by small and medium-sized enterprises (SMEs), which account for 80 per cent of the output and 90 per cent of the employment in the services sector. Manufacturing-led development has siphoned capital, talent and other resources away from services. By 2012, services sector productivity was only 45 per cent of that in manufacturing, far below the OECD average
of 86 per cent. The SME population is dominated by very small enterprises, and many business owners have limited entrepreneurial aspirations; only 0.07 per cent of SMEs grow to become large companies. This reflects both a lack of entrepreneurial culture and the significant challenges that small companies face in Korea. In particular, the high degree of trading between companies within the same chaebol limits the available market for many SMEs. Low productivity in the services sector also reflects its small (nine per cent in 2011) and declining share in business R&D, putting it well below the OECD average of 38 per cent. 

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