Background

South Korea started as a country under dictatorship after the second World War and

slowly transitioned to a democratic republic we see today. South Korea is one of the

most advanced economies in the world, but back in the 1960s it was one of the

poorest. The achievement South Korea has today can be traced back to post-World-

War era when South Korea finally gained independence from former Japanese rulers

and established their own government. During the critical decades from 1945 to 1990,

one can observed how South Korea acquired its distinctive and highly successful

characteristics through strong and effective government planning, kinship-based

business organization (the chaebol), and the Confucianist cultural values (Sanidas), all

of which are still prominent in today’s South Korea.

After the Korean War up until 1961, South Korea remained largely a poor developing

country which relied primarily on subsistence economy and American aid and capital.

South Korea at that time had important roles in the American eyes--- an anti-

communist buffer and a potential market for a reconstructed Japan, so America was

providing South Korea support in various form, including aid and investments in

infrastructure and education. One thing noteworthy is that American investments and

influence at that time helped greatly expand educational facilities at all levels, and the

results can be observed in the increase in literacy rate from 22% in 1945 to about 72%

in 1960 (Chaudhuri). The expansion of education has laid the foundation for future

development of human capital which is one of the crucial elements in economic

growth. Before 1961, South Korea was largely dependent on consumer-goods and labor

-intensive sectors, such as food and textiles, and the whole economy was relied on
import substitution, foreign aid, and over-valued exchange rates (Sanidas). The pivotal

point came in 1961 when Park Chung Hee led a military coup to overthrow the

government and became the new president whose dictatorship needed economic

growth to provide legitimacy. President Park saw economic growth as a top priority

and introduced the right economic policies and five-year economic plans, dedicating

to industrialization and to transform the country’s economy. Under Park’s

dictatorship, allocation of resources was not left to the market mechanism, instead the

government picked up the job to direct flow of resources to the crucial economic

activities. The growth of exports was a main factor behind South Korea’s success

today. Steps were taken by the government to create a better environment for export

industry and eliminate obstacles against exports, such as devaluation, free trade

scheme for exports, and suspended indirect taxes on domestic factors used for exports.

Government also attempted to make production of exports more profit-making by

offering various forms of incentives, such as reduced costs for infrastructure,

electricity, and transportation services and cuts in incomes taxes. The government also

adopted a quite interventionist approach to deal with the risks and uncertainties

facing the exporters by providing prices incentives, subsidies, and non-market

instruments. The most considerable change in the course of development might come

at the development of steel industry in the late 1960s during the Second Five Year Plan

(1967-1971), following by the development of heavy and chemical industries which

then became the government’s priority. Finally, towards the 1980s, the structure of

manufacturing industries shifted from labor-intensive to capital- and skill-intensive

which is the result of the industrial policy of the 1970s (Chaudhuri).

The close relationship between government and the business is one of the distinct

characteristics of South Korea economy, and such relationship can trace back its roots

to Park’s economic development plan. Private enterprises were the main agent who

carried out the economic policies and plans designed by the government. The

government knew that alongside developing key industries, it was also important to

identify target firms and to help them grow. Such mentality led to the growth of the

“chaebols,” large family-own business conglomerates who engage in various activities

and form a network of huge corporates and smaller specialist companies. The

government needed the chaebols to realized its economic plans, hence, there were

numerous special arrangements from the government to help them grow, such as

channeling foreign funds to the chaebols for them to undertake government assigned

project, or guaranteeing repayment when a company is unable to repay its foreign

creditor. The development of the chaebols also led to a highly monopolistic and

oligopolistic concentration of capital and profitable economic activities in the hands of

a few families, but the government was not concerned about it, given that the

government believed the chaebols were necessary for the country to compete with its

Western counterparts (Chaudhuri).

The Confucianist cultural values have their deep roots in Korean society and have

formulated a strong basis of ethic for the Koreans. Self-discipline, strong family ties,

desire for education, loyalty to the country and organization, adaptive to changes and

committed to work are the characteristics of the Confucian ethic. Such Confucian

tradition can also be found in the business world. Business organization, such as the

chaebols, are extremely family-oriented with hierarchical internal structure. The

Confucian values that penetrated both society and business world have assisted the

entire process of South Korea’s economic development (Sanidas).

Data

Metric (year: 2017) South Korea United States Source

GDP (purchasing $2.035 trillion $ 19.49 trillionCIA World
power parity) Factbook
GDP (official $1.54 trillion $ 19.49 trillion CIA World
exchange rate) Factbook
GDP Real Growth 3.1% 2.2% CIA World
Rate Factbook
Per Capita GDP $39,500 59,800 CIA World
Factbook
GDP Composition  Household  Household CIA World
by Sector (end use) consumption: consumption: Factbook
48.1% 68.4%
 Government  Government
consumption: consumption:
15.3% 17.3%
 Investment  Investment
in fixed in fixed
capital: 31.1% capital: 17.2%
 Investment  Investment
in in
inventories: inventories:
0% 0.1%
 Exports of  Exports of
goods and goods and
services: services:
43.1% 12.1%
 Imports of  Imports of
goods and goods and
services: - services: -15%
37.7%

GDP Composition  Agriculture:  Agriculture: CIA World

by Sector (origin) 2.2% 0.9% Factbook
 Industry:  Industry:
39.3% 19.1%
 Services:  Services: 80%
58.3%

Labor Force Size 27.75 million 160.4 million CIA World

Factbook
Participation Rate 69.2% 73.3% OECD
Unemployment 3.7% 4.4% CIA World
Rate Factbook
Gini Index 0.355 0.390 OECD
Inflation Rate 1.9% 2.1% CIA World
Factbook
Export ($) $577.4 billion $1.553 trillion CIA World
Factbook
Imports ($) $457.5 billion $2.208 trillion CIA World
Factbook
Trade Surplus (% 7.79% Nil CIA World
of GDP) Factbook
Trade Deficit (% of Nil 3.36% CIA World
GDP) Factbook
National Debt (% 39.5% 78.8% CIA World
of GDP) Factbook
Population 54.1 million 329.3 million CIA World
Factbook
Population Growth 0.44% 0.8% CIA World
Rate Factbook
Life Expectancy at Total population: Total Population: CIA World
Birth (years) 82.6 years 80.3 years Factbook
Male: 79.4 years Male: 78 years
Female: 85.9 years Female: 82.5 years
Infant Mortality Total: 3 Total: 5.3 deaths/ CIA World
Rate deaths/1,000 live 1,000 live births Factbook
births Male: 5.7
Male: 3.2 deaths/1,000 live
deaths/1,000 live births
births Female: 4.9
Female: 2.8 deaths/1,000 live
deaths/1,000 lives births
Homicide Rate 1 5 The World Bank
(per 100,000
people)
Central Bank 1.44% 1.15% OECD
Interest Rate
Stock Market 87.3% 148.1% The World Bank
Capitalization ($;
% of economy)
Property Rights

South Korea, as a capitalist economy, primarily relies on private ownership of factors

of production, but also has some parts that are owned by the government. There are

three main classifications of ownership that are --- widely held company, family-

owned company, and state-owned company. In South Korea, more than 50% of the

large publicly traded companies, which have numerous shareholders but few of them

have controlling power, are widely held companies; around 24% are owned by

families, which are called the chaebols, and almost 20% held by the state. Medium-

sized companies are largely owned by families, and some are widely held (Stuart, and

Gregory). The state-owned enterprises are largely concentrated in transportation,

communication, electricity, gas, and water sector which are mostly for providing

public goods to the citizens. Family ownership is one of the distinct features in the

Asian model, and especially in South Korea the chaebols, such as Daiwoo, Hyundai,

and Samsung, have considerable influence on the economy through massive family-

owned conglomerate dominating the key exporting industries, such as autos,

electronics, telecommunication, and steels. chaebols’ dominance over the economy

can be seen from the fact that sales revenue generated by the top ten chaebols takes

up 67.8% of South Korea’s GDP (Premack). For the chaebols, they mostly relied on the

funds that channeled through families and company crossholdings. Due to the lack of

outside capital inflow, the chaebols are more relied on debt than equity funding,

increasing the role of the banks in South Korea’s economy. Before privatization in

1982, banks were largely owned by the government, but government’s strong
intervention continued after financial liberalization and deregulation. By government

having strong influence over the banks, it created a support system for the chaebols;

government provides a line of credits to the major banks, and these banks will then

channel funds to the chaebols. As mentioned above, the chaebols only acquire funds

through families, so small investors do no invest in corporations; instead, the funds for

investments go to bank deposit and thus resulting in a high domestic saving rates in

South Korea.

Decision-making

Government revenue and government spending as a percentage of GDP is relatively

lower in South Korea than those under the European model, but in the case of South

Korea, it does not indicate a smaller role of government or less interventionist role for

the state. South Korean government is in charge of the country’s economic planning

and often make use of industrial policy to provide the chaebols conditions they need

to achieve the government’s plan. Thus, the government, banks, and the chaebols have

a very intertwined relationships in the economy. Since the 1960s, the chaebols are the

main institutions to carry out economic plans devised by the government and the

government would support the chaebols through government contracts, legislative

support and favorable policies such as subsidies, cut tax rate. Such relationship

between the government and the chaebols continues to today, while the government

decide the macro plan for the economy, the chaebols continue to be the main engine

for South Korea’s economy. Between firms in Korea, they largely rely on relational

contracting rather than market-based contracting which in commonly seen in the

Anglo-Saxon and European model. Chaebols operate on the foundation of personal

agreements and existing trust relationships, and within the network such relational

contracting are used to support other smaller firms in the network. Through propping,

when a firm is less profitable, financial support will be given to them by other

companies in the network, creating a certain stability for the business. Within the

chaebol network, there is a wide range of companies creating a phenomenon of

horizontal and vertical integration of the industry; through tunneling, contracts are

usually given to companies in the network rather than outside firms. Unlike in the

Anglo-Saxon model or European model, corporate management is not separated from

ownership in the case of the chaebols. Corporates are usually owned and run by a big

family with extensive crossholding with numerous affiliated firms that make up the

big conglomerate network. Such unification of ownership and management in hands

of a few families greatly reduces the principal-agent problem often seen in hierarchical

organizations, but at the same time, it reduced the incentives for minority

shareholders to invest and their rights in the company.

Incentive Mechanism

Like other capitalist economy, material incentives are the major source for labor

productivity. But in South Korea, where the society is deeply influenced by the

Confucian values, moral incentives come into play as well. Confucian values advocate

the concept of family, loyalty, diligence, and perseverance create a strong basis in the

Korean society towards work ethics, education, and loyalty to the country and

institutions. The set of Confucian values not only assisted the economic development

from the 1960s till 1990s, but also continue to provide the people with moral incentives

to participate and perform well in the corporates and the economy. South Korea’s
labor market has elements from the Anglo-Saxon model and the European model; it

adopts the fire-and-hire system but also granted basic rights to the workers given

family concept of corporates and South Korea’s membership in the International

Labor Organization (ILO) which imposes certain regulatory obligation regarding

protecting labor’s rights. South Korea corporates functions a share economy with their

employees who share the risks of the company by having bonuses, based on profit, as a

great component of their compensation (Stuart, and Gregory). Share economy

provides flexibility for the companies in terms of labor cost, especially during

economic downturn; business can easily cut down labor cost by providing less bonuses

to the workers instead of firing them. Workers also have greater incentives to commit

to their jobs given that their bonuses are largely dependent on company’s

performance, and even during economic downturn they get to keep their job,

although receiving less salaries. A two-tiered system is also used in South Korea’s

economy, where full-time senior workers enjoy full protection from the corporates and

part-time younger workers having less protection and normally move from one job to

the other. Two-tiered system encourages workers to commit to the corporate and

climbing the corporate ladder. Once they achieved enough time in the company, they

will be guaranteed full protection and better pay, being taken care by the firm.

Public Choice System

Despite the fact that South Korea is a capitalist democracy, where there is a great deal

of private freedom and deregulation, government still plays a heavy role in the

economy by devising centralized economic plans and government regulations. The

element of centralized economic planning traces its root back to the dictatorship of
Park and continues to today’s democratic South Korea. Through centralized economy

planning and industrial policy, South Korea’s economy rapidly grew from the 1960s to

1990s; government’s use of industrial policy to promote exports continues to today.

The chaebols are the main contributors to South Korea’s export-oriented economy

which accounts for more than 40% of the country GDP (CIA World Factbook). The

government supports the chaebols through policies such as providing subsidies,

allocating lines of credit to major banks which then channeling funds to the chaebols,

and preferential access to government contracts. There are some downsides that come

along with the government’s industrial policy favoring the chaebols. With preferential

treatments from the government, the chaebols continue to dominate South Korea’s

economy and its exports industry. Industrial policy favoring the chaebols has greatly

compromised the emergence of new innovative firms and has given rise to the

corruption and such intertwined relationships between the government and the

chaebols have given rise to the corruption in the country (Premack).

Standards of Living

The most direct way of evaluating living standards is by looking at a country’s income

and consumption. Judging by the economic data, South Korea enjoys a high level of

living standards. In 2018, its GDP per capita by purchasing power parity is $39,500

which is well beyond the world average of $17,30o, and household consumption takes

up 43% of the country GDP. Apart from material aspects, there are also other

indicators to decide living standards in a country, in terms of life expectancy, safety,

infant mortality rate, and the World Happiness report. South Korea has an average life

expectancy of 82.6 years (male: 79.4 years and female: 85.9 years) and an average
infant mortality rate of 3 deaths per 1,000 live births (male: 3.3 deaths and female: 2.8

deaths) (CIA World Factbook); both numbers point to the fact that South Korea

provides people with access to quality healthcare and an environment of high level of

hygiene, better lifestyle with diet and nutrition, and low crime rates. With South

Korea’s homicide rate low as 1 death per 100,000 people, crimes involving violence are

relatively uncommon in the country. Lastly, according to the 2018 World Happiness

Report, South Korea is ranked #57 with a score of 5.915 among 156 countries that are

included (#1 Finland- 7.632; #156 Burundi- 2.905), overall level happiness in South

Korea is high and mostly explained by the country’s GDP per capita (PPP) and social

support, less by freedom to make life choices and perceptions of corruptions (World

Happiness Report). South Korea remains under heavy influence of patriarchy and

Confucian values, people face more pressure from the family in terms of life decisions

such as education and career, especially female faces more social pressures than male.

Economic Growth

South Korea has gone through different phases of economic growth since the 1960s

when President Park decided to reform the economy and promote growth. Before

President Park, South Korea’s economy was largely relied on import substitution with

no significant growth. Starting in the 1960s, under Park’s dictatorship, South Korea

embarked its export-oriented industrialization and started to see significant extensive

growth marked by an average annual GDP growth rate of 9% from 1960s till 1990s (the

World Bank). December 1996, South Korea officially joined the Organization of

Economic Cooperation and Development (OECD) which includes top industrial

democratic economies to create a forum for economic and social policy discussion.
Since then, South Korea officially evolved into a developed country which

characterized by intensive growth rather than extensive growth. South Korea’s GDP

per capita has grew from $8,273 in 1990 to $39,500 in 2018, ranking as one of the top-

income countries (the World Bank). The industrial sector has continued to be one of

the major contributors to the country’s economic growth and GDP, especially during

the 1980s (Chaudhuri). Share of industry to the country’s GDP are mostly from

manufacturing; the share of manufacturing grew from 13.6% of GDP in 1960 to 30.6%

of GDP in 1980. Largest industries include electronics, automobiles,

telecommunications, shipbuilding, chemicals and steel. South Korea is also the world’s

largest manufacturers of electronic goods and semiconductors which are essential

components of smart phones. In 2016, South Korea dominates the global

semiconductor market by taking up 57% of the global share, and domestic wise,

semiconductor industry accounts for around 16% of the country’s total exports (Suk-

yee). Service sector has gradually grown in terms of its share of the country’s GDP

from around 35% of the GDP in 1960s and to 50% of the GDP by the late 1990s, and

finally reaching almost 60% of the GDP in 2018 (CIA World Factbook).

Efficiency

During the time period since 1960s leading up to the 1990s, government had been

mainly focusing on developing its export-oriented industrialization. A considerable

amount of resources was allocated to the chaebols who the government believed to

have the capacity boost the country’s export industry. And indeed, the Chaebols,

supported by government’s industrial policy and preferential access to bank credits,

did bring industrialization, investment and export growth to the economy and have
lifted the country out of its poverty in the 1960s to one of the world’s most advanced

economies we see today. The dominance of chaebols has brought rapid economic

growth for the country, but not a sustainable one due to resources are inefficiently

allocated by the government to the chaebols to create investment-based growth

model; and chaebols’ excessive market power and expansion have greatly restrained

the entry of new small- and medium-sized startups which could bring innovation and

competition to the economy. The chaebols have grown extremely powerful under the

government-business collusion and corruption, and they can easily exploit the

economy by conducting excessive and illegal debt financing, unlimited expansion of

capacity, dominating market prices, suppressing technological advancements,

lobbying government to restrict market entry or open market policies, and force rival

or small firms out of the business (Lee). All above make the economy functions less

efficiently and overly dependent on a small number of chaebols, and with their

dominance, the economy has lost a great degree of market competitiveness and

innovation. When the 1997-98 Asian financial crisis hit South Korea’s economy hard, it

became evident that the rigid internal structure of the economy--- dominance of

conglomerates and crony capitalism--- is hindering economic growth and the

transformation to an innovation-based model which requires investment in advanced

research and development and dynamic competitive market where decentralized firms

can easily enter and exit (Aghion, Guriev, and Jo).

Equity

South Korea, like other East Asian countries, has achieved rapid economic growth

since the 1960s with relatively low income inequality which is quite unusual for high
growth economy. This is the result of government policy that accompanied the

country’s economic development. Polices were adopted by the government to ensure

that individuals in the economy can benefit more equally from the economic growth;

policies included universal education, public-housing programs, land reform, and

control of fertilizer and agricultural prices to bring up rural incomes (Stuart, and

Gregory). On top of it, after the Korean war, South Korea went through land reform

and eliminated elites’ property ownership which created a more levelled starting point

for everyone. South Korea, with a score of 0.355 in GINI coefficient, still exhibits a

certain extent of inequality problems but than some European and Western countries,

such as the U.K, France, and the U.S. (World Bank). South Korea’s top 1% income

group owns 12.2% share of income and the average income of top 20% is 5.3 times

higher than the bottom 20%; the U.S.’s top 1% income group owns 20% share of

income, and the average income of top 20% is 9.4 times higher than the bottom 20%

(UNDP). For the working-age population, inequality is not that striking, instead it is

more evident in specific demographic groups, such as the young (age from 15-29), old

(age above 65), and female. Income inequality especially among the vulnerable

demographic groups reflects the poor redistributive effects of tax and social welfare

system. Only 13% of the working-age population live in poverty, but for the

demographic group ages above 66, the number surges to 44% which three times

higher than OECD average (OECD). Young people are facing lower employment rates

and considerable high housing prices. Average youth employment rate in South Korea

is slightly above 40% which is lower than the OECD average around 50%. (OECD).

Housing prices are one major problem in the economy. Acquiring property in the

capital, Seoul, is extremely unaffordable for the young that they have given up on
affording their own house. An individual needs 13.4 years of income to buy property in

Seoul, the capital of South Korea; compared to other megacities such as New York,

which takes 5.7 times annual salary, and Tokyo, which takes 4.8 times annual income

(The Dong-A Ilbo). Last but not least, the women also suffer more inequality than

other demographic groups, partly contributed by South Korea’s strong patriarchic

society. In fact, South Korea has the worst gender inequality among developed affluent

countries. South Korean women earn 33.59% less than men, ranking as the highest

gender wage gap among OECD countries (Fickling). Women are also concentrated in

non-regular jobs, taking up almost 40% of total employment, while male labor in non-

regular jobs only accounts for around 20% of total employment (OECD).

Stability

During the good times, South Korea’s economy could be considered stable with steady

GDP growth, low unemployment rate, and an inflation rate around 2% which is

aligned with the central bank’s suggested rate. But the structure of the economy has

made it vulnerable to international fluctuations and global economic crisis. Although

South Korea has a steady GDP growth of 2-3% per year from 2017-2019, its growth has

slowed towards the OECD average. The slowing down of economic growth is largely

caused by the oligarchic export-oriented element of the economy which has hindered

the country to pursue further innovation-based growth and advanced technology

sector, lowered the labor productivity while increasing labor inputs, and also made the

country vulnerable to international fluctuations. The internal economic structure of

South Korea could be explained by the idea of crony capitalism where government and

conglomerates collude. Small- and medium-sized enterprises, who are capable of

bringing innovation and competition to the economy, have been greatly compromised

and the conglomerates has continued to grow. South Korea’s rapid economic growth is

characterized by expansive external growth led by the chaebols but largely lack of

technological advancements which can truly establish a high value-added economic

system where resources and investments are allocated efficiently and eventually

achieve sustainable growth. The core problem of chaebols’ overinvestment became

evident during the 1997-98 Asian financial crisis, which hit the country’s industry and

financial sector hard. Highly leveraged investment was considered necessary to fully

promote growth potential, but there was too much funds directed to areas with poor

returns to the investment and with speculative activities. The problems of heavy

reliance on debt-funding and inefficient investments was amplified during the period

of the crisis. By the end of 1998, the country’s GDP had contracted almost 6%,

unemployment rate rose to 8.6%, and foreign reserves shrunk almost 10% compared to

the previous year (Lee). Another recent incident again explains the economy’s

vulnerability to external factor can be found in South Korea’s trade war with Japan,

which took place in the summer of 2019, compounded by the global slowdown and

uncertainty, has led to lower export volume and significant decrease in business

investment (OECD).

Comparison between South Korea and the United States

Compared to South Korea (48.1%), the United States has higher household

consumption by GDP (68.4%) which means that the economy is largely driven by

domestic consumption, which makes the economy less vulnerable to external

economic shocks or fluctuations, rather than relying on exports or other components

in the GDP. South Korea, on the other hand, heavily relies on exports industry, which

accounts for 43.1% of its GDP, and has a relatively lower household consumption.

Manufacturing, heavy industry, and electronics are the main industries for South

Korea’s export economy which largely explains that industry accounts for 39.3% of the

GDP, while service sector takes up 58.3%. The United States economy is dominated by

service sector which takes up 80% of its GDP, while industry only accounts for 19.1%.

Although South Korea and the United States are both developed capitalist economy,

GDP per capita in the United States is considerably higher than South Korea’s number

by around $20,000. Such drastic difference can be explained by several reasons: first,

the U.S. has an entrepreneurial culture where people have the desire to start their own

business and development, and a numerous former startups and now successful

multinational enterprise, such as the Facebook, has also inspire peopled in the

country, creating a self-reinforcing entrepreneurial culture. A highly competitive

market and a well-developed system of equity finance in the United States also

contribute to this entrepreneurial culture. It is very easy for firms to enter or exit the

market where a lot of companies are competing in. There are also angle investors who

are willing to invest in new startups, and a strong venture capital market that help

facilitates the growth of those companies which could generate innovation and

technological advancements for the economy. Last but not least, the United States has

a more favorable regulatory environment where less restrictions and burdens are

placed on the businesses. But in South Korea, there is an absence of such culture,

largely due to its oligarchic internal structure where the chaebols dominate the

economy and have government providing them preferential treatments, such as

subsidies and easier access to bank loans. The strong market power and government
regulation has greatly restrained small-and medium-sized firm from entering the

market. South Korea’s stock market capitalization (87.3%) is lower than the stock

market capitalization in the U.S. (148.1%) which explains the family ownership in

South Korea, companies prefer to get funds through bank loans or crossholdings

rather than outside investors; thus, South Korea does not have a strong venture capital

market that can help finance small- and medium-sized companies’ growth. South

Korea’s service sector, which is mainly composed of small- and medium-sized

enterprises, is also less developed than the one in the United States, and it has low

labor productivity caused by several reasons: first, there are more regulation burden

placed by the government on those firms; second, there is no enough R&D in those

firms, and the share of the firms that participates in global innovation networks is the

second lowest in the OECD; third, the lack of entrepreneurship and entrepreneurship

opportunities; fourth, there is no market-based financing for them to promote growth

(OECD). The lack of technology-intensive and innovation-intensive industries and the

dominance of the chaebols, which creates strong market power, less competitive

market, and inefficient investment and resources allocation, continue to be the

problem that hinder economic growth.

WSJ Articles Review

Since last summer, Korea and Japan started their own trade war over historical

disputes concerning wartime reparation for South Korea’s forced labor. South Korea’s

Supreme Court ruled that some Japanese firms have to compensate the forced labor

during World War II but rejected by the Japanese. In return, Japan imposed export

restrictions on three key materials--- fluorinated polyimide, photoresist and

hydrogen--- which are crucial for South Korea’s semiconductor industry. Soon after

both countries removed each other from their lists of preferential trading partners.

Some trade groups were worried about the disruption in the supply of Japanese

material to South Korean industry could affect the global supply chain of electronics

and delay delivery of tech products such as Apple’s iPhone and data server used by

Amazon’s cloud-computing service. South Korea responded by it would take

retaliatory measures targeting Japan’s tourism and food sectors. Widespread boycotts

of Japanese goods took place in South Korea. South Korea also announced its plan to

pull out from an agreement between the two countries to share military intelligence

which could seriously undermine the joint effort to promote the region’s stability and

security, especially when having a hostile and nuclearized neighbor, North Korea,

although South Korea later backed out from its decision. Upon Japan announced the

export restrictions, South Korea said it would invest $6.5 billion in R&D to try to

develop their own industrial materials and equipment. Chaebols such as Samsung and

Hynix also announced that they started to seek for more suppliers to minimize impact

and ensure the stability of production. By the end of 2019, leaders from two countries

met with Chinese Premier Li Keqiang in China for a summit on cooperation regarding

North Korea’s threats, but relations between Japan and South Korea failed to warm up.

Despite ongoing tension between the two, some analysts pointed out the immediate

impact would be limited, and trade between the two are unlikely to drop significantly,

but it still more time to observe whether later it would have a larger impact for both

countries and the global supply chain. By the end of 2019, South Korea has found itself

on a potential path to a difficult economic period of diminishing growth and inflation.

Korean consumer prices rose by only 0.6% in 12 months to September which is the
lowest in 20 years and the country’s GDP growth has slowed down as well. While

nonfinancial corporates have kept their debt rate relatively stable over the years, about

100% of GDP, households’ debt levels have increased greatly, reaching 92% of GDP

which is 20% higher since the 2008 global financial crisis. Conditions South Korea is

facing right now is stagnating growth and inflation caused by the slowdown of global

trade, compounded by China’s slowdown. In early 2019, South Korea and the United

States signed a one-year deal on shared defense cost which resulted in South Korea

contributed about $925 million, an 8.2% increase from the previous year. Early this

year in January, the United States again asked the South Korea to contribute more to

the table, leading to ongoing tough negotiations on a new special measures

agreement. Leading to 2020, South Korea was hit hard by the global pandemic. In the

early stages of the outbreak, it was the most affected country outside of China with

around 900 new daily cases. The government has adopted aggressive measures to

counter the spread of the virus: first, by performing large-scale testing. South Korea

now is capable of carrying out test up to 20,000 people a day at 633 testing sites across

the nation; second, by implementing tracking system which grants investigator access

to credit-card transactions, smartphone data and security-camera footage. The system

provides the government with information on the whereabouts of infected people and

also potential patients; third, the government enforced large-scale social distancing,

requesting the suspension of churches, gyms, and entertained venues. Through active

government approach, South Korea has successfully flattened the curve, and even held

the world’s first national election during the pandemic. President Moon Jae-in, prior

to the election, who has gained high popularity due to his successful measures to take

control of the pandemic, had more political incentive to hold the 300-seat National
Assembly election. Procedures of casting votes are carefully arranged to prevent any

possibility for the catch-on of the virus. After successfully taken the virus under

control, economic impacts continue to persist in the country, and may even get worse.

Small businesses are closing down and the conglomerates, such as Samsung, Hyundai

and LG, who rely heavily on exports have to suspend overseas factories, cut pay, and

even lay off workers. One pleasant incident amid the global pandemic and economic

downturn would be the recent National-Assembly election, where President Moon

Jae-in’s Democratic Party won the majority of the seats for the first time in its history,

opened up possibilities to reform the chaebols. One of Moon’s campaign promises was

to reform the chaebols and curb corruption under government-business collusion, but

before the election, due to the lack of majority seats, the president has faced numerous

legislative gridlocks, and now the door has been opened.

Recommendations

South Korea has witnessed a decline in growth since 2011, and this is largely due to the

continued dominance of the chaebols, corporate governance, heavy dependence on

export industry, lack of innovation. The first thing, South Korea should do is to reform

the chaebols to promote productivity and inclusion. Corporate governance,

characterized by family ownership and unification of owner and management, is

considered weak in South Korea, lagging behind most of the OECD countries. The

government can start by breaking up the firm family ownership structure by including

outside directors to the management to ensure independence, and request that

outside directors should comprise more than 50% of the boards. This could potentially

undermine the intra-network trading, and prevent the chaebols network from growing
and direct more opportunities to the outside firms. Second, the government should

establish institutions to oversee and regulate the public listed companies’ activities to

ensure more transparency of their transaction to counter corruption and

overinvestment. Third, the government is encouraged to reduce preferential

treatments and industrial policy to the chaebols and reduce market entry barriers for

the small- and medium-sized enterprises to create a more competitive market with

less market power. Forth, product market competition should be improved by

lowering barriers for imports, allowing more foreign direct investment into the

economy, and loosening product market regulation which is the most stringent in its

service sector. Fifth, innovation and key digital technologies are weak in the economy,

in order to promote innovation, the government should create a more friendly

environment for new technologies and innovative industries starting by exempting

them from a few existing legal requirements to make testing products and business

model easier for them. Then, the government can encourage entrepreneurship by

requiring banks to grant startups preferential interest rates to reduce personal costs

when the startup fails, which can make exiting the market easier for entrepreneurs

also reallocate resources to innovative enterprises. Without a strong venture capital

market like the United States has, South Korea can also increase lending to technology

firms to help them finance company growth; Finally, South Korea has a relatively weak

service sector which is mainly consists of small- and medium-sized enterprises. These

enterprises generally have low labor productivity which also create a low productivity

in the service sector. The government should ensure there are enough support provide

to these firms to increase their productivity and improve the overall productivity of

the service sector.

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