Until recently a very poor country, South Korea has – almost overnight – achieved an economic miracle .Various measures have been put in place but largely it is the is economic revolution is thanks to new free-trade agreements.
The wonder of the South Korean economic revival appears even greater when considering that this country has almost no natural resources. It has also been struggling with an overcrowded population on its small territory for many years.
However, from its weaknesses, South Korea has built its largest opportunity – the export-oriented economic strategy of the country’s development – rapidly becoming the seventh largest exporter in the world.
We look at how South Korea has reinvented itself with the help of new trade agreements, and what we can learn from its experience.
The Source of South Korea’s Economic Revival
As a former state-controlled economy, South Korea first had to transform its socio-economic system and stabilise its political situation. It also had to increase the motivation of its population to work harder, whilst not expecting to witness initial results for at least the first few years.
At first, South Korean exports relied on low-cost products and services, until it realised that the only way to compete with China’s cheap labour and Japan’s high-tech and capital-intensive industries, was to focus on innovation and fast technological development in order to support its export-oriented strategy for the country’s development. This also required the reform of its education system, so as to develop a high-tech skilled workforce that can support this strategy.
In order to increase its export competitiveness but also attract investment, South Korea has continuously increased its research and development spending as a share of GDP and has, over time, even surpassed the US and Japan, who have traditionally been the global leaders in innovation. As presented in Figure 1., the intensity of South Korea’s research and development spending has grown by 88.5% since the 1990s, from 2.3% up to 4.3%, whilst the same period for the US saw just 14.4% growth, from 2.4% to 2.8%.
A large role in South Korea’s rapid economic development has been played by the Korean conglomerates, or ‘chaebols’, such as Samsung and Hyundai. They have become global technological leaders in a very short time by pooling their resources and entering the western markets through mergers and acquisitions, which has additionally increased their global high-tech leadership.
However, although there are many factors that have contributed to the rapid economic growth, the main engine behind South Korea’s economic miracle is the free trade agreements that South Korea has signed – first with its neighbours in Asia, and then with other countries around the world.
South Korean Free Trade Agreements
South Korea has signed or negotiated 38 free trade agreements with countries all over the world. Among the most important are the Asia-Pacific trade agreement, the ASEAN-Korea Comprehensive Economic Cooperation Agreement, and the free trade agreements with the US, EU and China – which is its main trading partner.
There are also very important free trade agreements in place with Canada, Australia, New Zealand, Colombia, Peru, Chile, India, Turkey, Vietnam, Singapore, Russia, the European Free Trade Association of Norway, Switzerland, Iceland and Liechtenstein, and others.
Furthermore, South Korea is a member of the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation (APEC) Forum, the Organization for Economic Cooperation and Development (OECD), and the Regional Comprehensive Economic Partnership initiated by China.
However, although free trade agreements have enabled South Korea to boost economic growth, expand business opportunities for its companies and reduce unemployment within the country, it still considers joining the Trans-Pacific trade pact (TPP), signed by the 11largest world countries with markets worth $500m. The main reason being the US’s withdrawal from it, and its bilateral trade deals with almost all TPP’s members.
On the other hand, if the US – with whom South Korea also has a free trade agreement – were to re-join the TPP, their trade would be in great trouble – particularly compared to Japan who would, in this case, gain a great trade advantage. Thus, South Korea should wisely consider its decision on this matter.
What Is Next?
Today, South Korea is the global leader of mobile broadband, smartphones, LCD TVs and consumer electronics, with annual exports of $483bn. It is one of the fastest growing economies in the world: the fourth largest Asian economy, and the eleventh largest world economy. South Korea is also ranked as the fourth country in the world for ease of doing business, compared to, for example, the US which is ranked as sixth, and the UK as seventh.
However, despite its economic miracle, South Korea currently faces a declining economic growth rate compared to its average rate over the past decade of 3.5%, to the current rate of 2.7%. Its exports rate has also dropped to 8.2%, largely because of the trade war between the US and China, but even more so due to the slowing of China’s economic growth, which has increased the fragility of South Korean producers and retailers due to high debt and dependence on exports to China.
South Korean responses to this are new economic measures that include providing $13bn in financial incentives to small companies, and reducing fuel taxes by 15% in order to encourage job creation and increase consumption. There are also other measures that should accelerate market deregulation and boost further investment in the country.
However, there are also other challenges for South Korea, such as its ageing population and, in particular, the unstable political situation in North Korea that still represents the main risk for investments in South Korea, and thus for its further economic growth. A shift in China to higher value-added manufacturing, and low-cost manufacturing in Vietnam and India can also pose further risks for its continued growth.
Thus, although a lot can be learned from its economic miracle, South Korea should wisely adapt to new circumstances, primarily by diversifying its economy – focusing more on high-value innovations that will increase its global competitiveness, reduce internal challenges, and further enhance its economic growth.