Korea - Economy
Over the past several decades, the Republic of Korea has achieved a remarkably high level of economic growth, which has allowed the country to rise from the rubble of the Korean War into the ranks of the Organization for Cooperation and Development (OECD). Today, South Korea is the United States' seventh-largest trading partner and is the 15th-largest economy in the world.
In the early 1960s, the government of Park Chung Hee instituted sweeping economic policy changes emphasizing exports and labor-intensive light industries, leading to rapid debt-financed industrial expansion. The government carried out a currency reform, strengthened financial institutions, and introduced flexible economic planning. In the 1970s Korea began directing fiscal and financial policies toward promoting heavy and chemical industries, consumer electronics, and automobiles. Manufacturing continued to grow rapidly in the 1980s and early 1990s.
In recent years, Korea's economy moved away from the centrally planned, government-directed investment model toward a more market-oriented one. South Korea bounced back from the 1997-98 Asian financial crisis with assistance from the International Monetary Fund (IMF), but its recovery was based largely on extensive financial reforms that restored stability to markets. These economic reforms, pushed by President Kim Dae-jung, helped Korea return to growth, with growth rates of 10% in 1999 and 9% in 2000. The slowing global economy and falling exports slowed growth to 3.3% in 2001, prompting consumer stimulus measures that led to 7.0% growth in 2002. Consumer overspending and rising household debt, along with external factors, slowed growth to near 3% again in 2003. Economic performance in 2004 improved to 4.6% due to an increase in exports, and remained at or above 4% in 2005, 2006, and 2007. With the onset of the global financial and economic crisis in the third quarter of 2008, annual GDP growth slowed to 2.3% in 2008 and just 0.2% in 2009.
Economists are concerned that South Korea's economic growth potential has fallen because of a rapidly aging population and structural problems that are becoming increasingly apparent. Foremost among these structural concerns are the rigidity of South Korea's labor regulations, the need for more constructive relations between management and workers, the country's underdeveloped financial markets, and a general lack of regulatory transparency. Korean policy makers are increasingly worried about diversion of corporate investment to China and other lower wage countries, and by Korea's falling foreign direct investment (FDI). President Lee Myung-bak was elected in December 2007 on a platform that promised to boost Korea's economic growth rate through deregulation, tax reform, increased FDI, labor reform, and free trade agreements (FTAs) with major markets. President Lee’s economic agenda necessarily shifted in the final months of 2008 to dealing with the global economic crisis. In 2009, the economy responded well to a robust fiscal stimulus package and low interest rates.
Two-way trade between North and South Korea, which was first legalized in 1988, rose to almost $1.82 billion in 2008 before declining sharply thereafter. Until recently, South Korea was North Korea's second-largest trading partner after China. Much of this trade was related to out-processing or assembly work undertaken by South Korean firms in the Kaesong Industrial Complex (KIC). Much of the work done in North Korea has been funded by South Korea, but this assistance was halted in 2008 except for energy aid (heavy fuel oil) authorized under the Six-Party Talks. Many of these economic ties became important symbols of hope for the eventual reunification of the peninsula. For example, after the June 2000 North-South summit, the two Koreas reconnected their east and west coast railroads and roads where they cross the DMZ and improved these transportation routes.
South Korean tour groups used the east coast road to travel from South Korea to Mt. Geumgang in North Korea beginning in 2003, although the R.O.K. suspended tours to Mt. Geumgang in July 2008 following the shooting death of a South Korean tourist by a D.P.R.K. soldier. Unfortunately, North-South economic ties were seriously damaged by escalating tensions following North Korea’s torpedoing of the South Korean warship Cheonan in March 2010. In September 2010, South Korea suspended all inter-Korean trade with the exception of the Kaesong Industrial Complex. As of mid-November 2010, economic ties had not seen signs of revival.
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