Overview: The South Korean market economy underwent a profound transformation in the last half of the twentieth century, one perhaps unmatched by any nation during that time. It emerged from the Korean War devastated and remained a poor nation well into the 1960s, when an unprecedented period of growth, modernization, and industrialization transformed the economic and physical landscape of South Korea. In a mere four decades, per capita income in South Korea grew 100-fold. At the same time, the country’s cities, where economic opportunities abounded, grew at an unprecedented rate. Once an isolated nation of farmers, South Korea is now a nation with the highest rate of Internet access, a leader in semiconductor production, and a global innovator in consumer electronics.
This growth also has its downside. The Asian financial crisis of the late 1990s exposed a variety of structural weaknesses in the South Korean economy. Foreign reserves were insufficient, foreign borrowing was extensive (and by the end of 1996, 58 percent of external debt was short-term), and corporate debt/equity ratios were extremely high. The surge in debt, a result in part of government policies that failed to rein in a corporate culture that favored expansion over profits, became a significant vulnerability. Several major bankruptcies spurred banks to tighten their lending policies, and the subsequent capital shortage further aggravated an already weakened private sector. More bankruptcies followed. Add to these factors the perception that the Ministry of Finance and Economy was bungling matters, and a crisis of confidence led foreign investors to pull out of South Korea, exacerbating the foreign reserve shortage. By the end of 1997, South Korea was in the midst of a full-fledged foreign exchange crisis, and in order to prevent a total economic collapse, it was forced to secure an emergency loan from the International Monetary Fund (IMF).
South Korea’s recovery from the crisis, at least in terms of gross domestic product (GDP) growth, was remarkable and to an extent helped hide still present, difficult microeconomic conditions. GDP, which shrank by 6.7 percent in 1998, grew by 10.9 percent in 1999. In August 2000, the IMF “graduated” South Korea from its restructuring program. The years 2001 through 2004 saw gradually declining GDP growth figures.
Gross Domestic Product (GDP)/Gross National Income (GNI): The GDP growth rate in 2004 was 5.8 percent, and it is expected to slow to 4.9 percent in 2005. According to estimates, in 2003 the services sector contributed 62.2 percent of GDP, the industrial sector 34.6 percent, and the agriculture sector 3.2 percent. GDP in 2003 was US$605.3 billion. According to the South Korean government, gross national income (formerly called gross national product) per capita in 2003 was US$12,600, up from US$11,500 in 2002 and US$9,400 in 1999.
GOVERNMENT Budget: In 2003 the government had revenues of US$135.5 billion and expenditures of US$128.7 billion, including capital expenditures of US$23.5 billion. In 2004 a modest budget surplus of 0.3 percent of gross domestic product (GDP) was expected. This would make the fifth consecutive year of surplus and highlight the health of the South Korean government’s finances.
Inflation: Weak domestic demand and the appreciation of the w4n (South Korea’s currency) kept inflation in 2004 at 3.6 percent. This trend of moderate and stable inflationary pressure will likely continue in 2005, when inflation is expected to decline to 2.5 percent.
Agriculture: The agricultural sector’s share of gross domestic product (GDP) in South Korea continues to decline, accounting for only 3.2 percent of GDP in 2003. Agriculture employs 8–12 percent of the labor force. Price instability, particularly associated with cheap imports, is an increasing source of internal and external political friction. The primary crop in South Korea is rice; 80 percent of farms cultivate it, and domestic production sufficient to supply the nation remains a political priority. Other major crops include barley, wheat, soybeans, and potatoes, although production has declined steadily. South Korean demand for these products is satisfied through imports. Livestock production has increased with consumer demand and prosperity and is the second largest subsector of the agricultural economy behind rice. Fruit and vegetable production continues to supply domestic needs.
Forestry: South Korea’s once-rich forests were ravaged in the twentieth century by unmanaged logging for timber and fuel during the Japanese occupation (1910–45) and by the Korean War (1950–53). Reforestation policies put in place since the Korean War have had a salutary effect, but the process takes time. Today 70 percent of South Korea’s forests are less than 30 years old and are therefore largely unproductive. Timber imports far outnumber exports.
Fishing: The depletion of fishery resources along coastal areas spurred the passage of the Fishery Act of 1997, which established federal oversight of offshore and deep-sea fishing. It also established limits on catches for eight species. In 2000 there were 95,890 fishing vessels, and total fisheries production reached US$3.6 billion, a slight decline from the previous year. The number of workers in the industry has declined since 1982. In 2000 some 82,000 households were involved in marine fishing, a drop of nearly 17 percent from the preceding year. Fish processing employs some 140,000 workers, 45.5 percent of whom are women.
Mining and Minerals: South Korea possesses few mineral resources. There are small deposits of anthracite coal, uranium, tungsten, iron ore, limestone, kaolinite, and graphite.
Industry and Manufacturing: Industry contributes nearly 35 percent of gross domestic product (GDP) and employs 19–20 percent of the labor force. Important subsectors of South Korea’s industrial and manufacturing base include computers and computer peripherals, telecommunications equipment, consumer electronics, automobiles, shipbuilding, semiconductors, petrochemicals, and steel production. Whereas the industrial production growth rate in 2000 and 2003 hovered between 5 and 6 percent, it appears that in 2004 it moved upward significantly and now approaches 13 percent for the year.
Energy: Korea has modest internal energy resources: small deposits of anthracite coal and uranium and hydropower. Yet South Korea is ranked twenty-fifth in the world in electricity consumption per capita, and nineteenth in the world in the broader field of energy consumption per capita. Globally, South Korea is the seventh largest oil consumer in the world, and the fifth largest net oil importer. In 2001 South Korea consumed 2.1 million barrels of oil a day, and petroleum accounted for 55 percent of the nation’s primary energy consumption. Coal, most of it imported, accounts for 21 percent of South Korea’s total energy requirements. Domestic energy production in 2001 totaled only 5.2 million tons of oil equivalent (TOE), or 2.7 percent out of a total primary energy supply of 198.4 million TOE. Electricity demand, which is met through a combination of thermal, nuclear, and hydroelectric capacity, is expected to rise at an annual rate of 4 percent per year through 2015. South Korea is a signatory of the Kyoto Protocol of the United Nations Framework on Climate Change as a “non-Annex I state.” As part of the broader effort to reduce carbon emissions called for by the Kyoto Protocol, 12 new nuclear plants are planned to go online in South Korea before 2015.
Services: The services sector accounts for about 62 percent of South Korea’s gross domestic product (GDP) and employs 68–72 percent of the labor force. Major sources of growth are financial services, tourism, and retail sales.
Banking and Finance: In the wake of the 1997 financial crisis, and in concert with restructuring called for by the International Monetary Fund, South Korea embarked on a variety of banking and finance reforms. There is, however, some debate whether these have been implemented to the fullest extent. Foremost among the reforms was the acquisition of sufficient foreign reserves, the reform of the corporate and financial sectors, and a variety of structural adjustments. Monetary policy was tightened, with interest rates reaching a high of 20 percent; the public sector was trimmed, with the government budget held to a 3.8 percent rate of growth; minimum standards were established for banks, and those that failed to meet them were closed; investigations were launched into the management of non-bank financial institutions; the Nonperforming Asset Resolution Fund was established to purchase US$12.3 billion in bad loans; and the Financial Supervisory Commission was established. In the corporate sector, stricter auditing and bookkeeping guidelines were established, the rights of minority shareholders were bolstered, and corporate cross-payment guarantees were banned. Commercial banking is essentially nationalized, and privatization of state-owned banks only began in the late 1990s.
The implementation of these reforms under President Kim Dae-jung is widely credited for South Korea’s relatively quick recovery from the Asian financial crisis. Today the benchmark overnight rate in South Korea is 3.5 percent. South Korean banks are making an effort to implement the Basel II framework of the Bank for International Settlements. Foreign reserves, which at one point during the crisis fell to US$8.9 billion, now exceed liabilities at US$174.5 billion, making South Korea the fourth largest holder of foreign reserves in the world.
Tourism: Tourism has grown steadily since 1970, when approximately 170,000 people visited South Korea. In 2002, the most recent year for which figures are available, some 5.3 million visitors traveled to the country, without doubt drawn in part by the Fédération Internationale de Football Association (FIFA) World Cup that South Korea co-hosted with Japan. It was the first time the event was hosted in Asia, and an accumulated global television audience of 42 billion watched the games, providing major exposure for the nation. Short-term foreign visitors to South Korea are permitted to enter with no visa according to the principles of reciprocity or priority of national interest. In 2002 visitors from Japan accounted for 43 percent of all tourists to South Korea. In 2001 visitors from China were the second largest group, reflecting the growing closeness of relations between the two nations.
Labor: The labor force in South Korea in 2004 was 22.8 million individuals. Although there is some slight variation in statistics, the majority of South Koreans are employed in the services sector (68–72 percent), while a much smaller number work in industry (19–20 percent), and only 8–12 percent are employed in agriculture. Unemployment in 2003 was recorded at 3.4 percent. The minimum wage (which is reviewed annually) in 2003 was US$2.09 per hour, US$16.73 per day, or US$472.17 per month; companies with fewer than 10 employees are exempted from minimum wage regulations. The Ministry of Health and Welfare estimates that some 1.4 million persons (or 2.9 percent of the population) live below the poverty level, and another 3.2 million persons are classified as living in “potential extreme poverty.” Collective bargaining is practiced extensively, even among unions that are not recognized by the government. According to the Ministry of Labor, there were 6,506 unions in 2003, representing 1.6 million workers, or 11.6 percent of all employed workers. The government has come under criticism for failing to recognize new trade unions in the public sector, and for arresting and imprisoning trade unionists who engage in strikes under the charge of “obstruction of business.” In 2003 there were 319 strikes and 49 lockouts involving some 137,000 workers and resulting in the loss of some 1.3 million workdays. The majority of unions in South Korea are enterprise-based. Nonetheless, there are 44 industrial trade unions in two national federations: the Federation of Korean Trade Unions and the Korean Confederation of Trade Unions. About 50 percent of South Korean women are economically active, and the 1999 Equal Employment Act was amended to prohibit sexual discrimination in the private sector.
Foreign Economic Relations: South Korea joined the World Trade Organization in 1995 and the Organisation for Economic Co-operation and Development in 1996. Trade and by extension all foreign economic relations are key elements of South Korean politics and foreign relations in general. Merchandise exports in the early 1970s were valued at only 10 percent of gross domestic product (GDP); by 2001, they were equal to 37.7 percent of GDP. South Korea’s main economic partners are China, the European Union, Japan, Saudi Arabia, and the United States. Free-trade negotiations with Japan are expected to conclude with an agreement by the end of 2005.
Imports: Imports in 2003 were valued at US$178.8 billion. Major imports include crude oil, food, machinery and transport equipment, chemicals, and base metals and articles thereof. In 2003 goods from Japan accounted for 20.1 percent of all imports, followed by goods from the United States (13.9 percent), China (12.3 percent), the European Union (10.6 percent), and Saudi Arabia (5.1 percent).
Exports: Exports in 2003 were valued at US$193.8 billion. Major exports include semiconductors, wireless telecommunications equipment, motor vehicles, computers, steel, ships, petrochemicals, and textiles. The major market for South Korean exports is China (including Hong Kong), which accounted for 20.7 percent of all exports in 2003. The other important markets for South Korean goods were the United States (20.2 percent), European Union (12.8 percent), and Japan 9.3 percent.
Trade Balance: In 2002 South Korea had a trade surplus of US$14.2 billion, an increase of 5.9 percent over the previous year. In 2003 that surplus grew to US$15 billion.
Balance of Payments: In 2003 South Korea had a current account balance of US$12.3 billion. From 1998 to 2002, the current account balance as a percentage of gross domestic product (GDP) averaged 4.9 percent.
External Debt: In 2003 external debt was estimated at US$130.3 billion.
Foreign Investment: Foreign investment in 2001 accounted for 10 percent of gross domestic product (GDP); in 2002 it totaled US$84.6 billion. The United States is the largest foreign investor in South Korea, accounting for nearly 50 percent of the total in 2002. Japan, the Netherlands, Germany, Hong Kong, the United Kingdom, and France round out the top seven, respectively. American investments are heavily concentrated in services, while Japanese investors focus largely on manufacturing. Concerns about corruption, political stability, and unfavorable trade practices continue to limit the scope and extent of foreign investment.
Foreign Aid: South Korea, as a member of the Organisation for Economic Co-operation and Development, has an annual budget for Official Development Assistance. In 2002 that amount was US$278.8 million, up from US$265 million the previous year.
Currency and Exchange Rate: The unit of currency in South Korea is the w4n (KRW). As of May 1, 2005, the frequently fluctuating interbank exchange rate was US$1 = 997.36 w4n.