By Matija Šerić
The Miracle on the Han River is a term used for the fantastic economic development of South Korea in the second half of the 20th century and can be extended to the period of the beginning of the 21st century. It is a phenomenon that deserves the recognition that economic experts rightly give it.
The development of the South Korean economy, and at the same time the progress of the political and social order, is undoubtedly impressive. In the middle of the 20th century, South Korea was a war-torn, poor and backward, mostly agrarian country, which belonged to the group of countries that formed the “Third World” and depended on foreign aid. In the following decades, rapid transformation followed. Economic and social development transformed the country from a poor one to one of the richest countries in the world.
Despite the lack of natural resources, the country developed rapidly, and based its development on international trade while using all the advantages of globalization, integrating into the world economy through export-oriented industrialization. In a few decades, South Korea has become a leader in manufacturing and technological innovation, with globally recognizable brands such as Samsung, LG, Hyundai, KIA.
The brilliant development has ushered South Korea into the elite group of Asian tigers and enabled it to join prestigious multilateral organizations such as the OECD, the G-20, the Paris Club and the Indo-Pacific Economic Prosperity Framework (IPEF). Also, the country is included in the group of N-11 countries (Next 11) – these are the countries that Goldman Sachs listed as 11 potential countries that, together with the BRICS members, will be the world’s largest economies by the middle of the 21st century. Currently, South Korean economy is 11th in the world in terms of nominal GDP, and the country is the world’s seventh largest exporter. It has one of the largest foreign exchange reserves in the world.
After the end of authoritarian rule in 1987, the Republic of Korea is considered a nation with a highly developed democracy that enjoys the highest level of media freedom in Asia. According to the Human Development Index, it’s ranked 19th in the world and 5th in the Asia-Oceania region. According to the life expectancy of its inhabitants, it ranks enviably 3rd in the world (80.5 years for men and 86.5 years for women). Korea’s progress was internationally recognized by holding the 1988 Summer Olympics in Seoul, the 2002 FIFA World Cup in South Korea (and Japan) and the 2018 Winter Olympics in Pyeongchang.
However, the path to a developed country with a stable democracy was thorny and arduous. From the very establishment of the Republic of Korea on August 15, 1948, exciting and not at all pleasant political processes followed. The Korean War between 1950 and 1953 was a fratricidal war between two Koreas with two different political and social arrangements with about three million dead Korean civilians. It was one of the bloodiest wars of the 20th century. In the war, China intervened on the side of North Korea, while the UN coalition led by the USA intervened on the side of South Korea. Seoul changed hands several times, and eventually the communist forces were pushed to positions around the 38th parallel, close to the initial positions. After that, the front stabilized, and the last two years of the war were a war of attrition without significant changes. In July 1953, an armistice agreement was signed. In the following decades, the two Koreas took different paths.
Since the establishment of the modern Republic of Korea in 1948, a total of six republics have changed. From 1948 to 1960, the country was ruled by the authoritarian leader Syngman Rhee. At that time, the economy was dominated by agriculture. In 1950, land reform began to be implemented, whereby the American military authorities distributed lands previously owned by the Japanese to ordinary peasants. During the Second Republic, which lasted from 1960-1961 Prime Minister Chang Myon also implemented the policy of state capitalism but also cooperated with Japan, which was very significant because of Japan’s economic power.
In 1961, a military junta headed by General Park Chung-hee came to power. In those moments, the foundation was laid for the miracle on the Han River. The first national 5-year plan was implemented. It was based on the improvement of agriculture, mining, electricity production, development of chemical fertilizers, oil industry, ironworks, steelworks, construction of roads and ports. The South Korean authorities realized that something needed to change because their country was overcrowded, so the solution was to export products and services. Park’s motto was to treat workers like family members, which proved to be a hit as South Korean workers were 2.5 times more productive than American workers. Although Park led a military dictatorship that stifled civil liberties and other rights of citizens, economic progress was taking place. During the Third Republic between 1963 and 1972, the country received millions of dollars from Japan due to property rights claims and from the US, which, due to involvement in the Vietnam War, sought to support democratic South Korea as a counterweight to communist North Korea. The government used foreign revenues to achieve a self-sustaining economy and launched the saemaeul initiative to develop rural areas. Strongman rule and cheap labor were catalysts for the growth of the South Korean economy.
During the Fourth Republic between 1972 and 1981, South Koreans invested in the chemical industry relying on the strategy of replacing imported products with domestic products. The authorities have improved workers’ rights and wages. The government invested in heavy industry which resulted in the growth of the electronics and steel industries. Heavy industries were located in the south of the country. Factories in Seoul accounted for 25% of factory output in 1978. During the 1970s, income inequality between the industrial and agricultural sectors was a problem. President Park was assassinated in 1979. The Fourth Republic entered a period of political instability under Park’s successor, Choi Kyu-ha. There was a tense situation in the country. Choi was unofficially deposed by Park’s associate Chun Doo-hwan in a December 1979 coup.
The Fifth Republic (1981-1987) will be led by Chun who staged a coup in 1980, established a military dictatorship and adopted a new constitution. During the 1980s, the government adopted a conservative monetary policy and tight fiscal measures to control inflation. The money supply was cut in half. Seoul even froze the budget for a short time. Government interventions in the economy have decreased, as have restrictions on imports and foreign investments. It was a real hit as the economy became more competitive. To reduce disparities between the rural and urban sectors, Seoul has expanded investment in public projects such as roads and other thoroughfares while improving farm mechanization. These measures were enacted in the early 1980s and, together with improvements in the world economy, contributed to the South Korean economy thriving again in the late 1980s. The country achieved economic growth of 9.2% between 1982 and 1987 and 12.5% between 1986 and 1988. GDP growth was around 10% between 1963 and 1990.
During the years of rapid catch-up with the developed world, South Korea used at least 19 of the most important forms of intervention aimed at promoting an export-oriented economy: currency devaluation, preferential access to imported semi-finished products needed to produce export goods with strict controls that prevented abuses, targeted protection of industries, price incentives, tax exemptions for domestic producers, internal exemptions from indirect taxes for successful exporters, lower direct tax on income generated from exports, accelerated depreciation for exporters, certificates of right to import, direct subsidies for exports of selected industries, monopoly rights granted to companies that first achieve exports in target industries, subsidized interest, export credit insurance and guarantee system, creation of free trade zones, establishment of public enterprises to serve as leaders in establishing new industries, promotion of South Korean exports worldwide, un improvement of the technological level, coordination of foreign technology licensing agreements by the government, setting export goals for companies.
Chaebols or large business (often family) conglomerates played an important role in the country’s industrialization. Chaebols were carefully selected from among successful exporters, and granted subsidies and privileges to stimulate economic development. Every conglomerate was started by a family. 10 family chaebols were responsible for 60% of the growth of the South Korean economy during the period of rapid growth in the second half of the 20th century. The most important chaebols are Samsung, Hyundai and LG.
Thanks to democratization and the establishment of the Sixth Republic in 1987, in the first half of the nineties, the South Korean economy continued to grow steadily and develop in the private and state sectors. However, in 1997, the Asian financial crisis broke out. After several Asian currencies suffered a major decline, the South Korean won experienced a sharp drop in value. By the end of the year, the IMF has approved USD 21 billion that will be part of a USD 58.4 billion aid package. The moves of the government and foreign creditors curbed the financial problems. Adaptation to the labor market and alternative sources of financing helped significantly. At the end of 1999, GDP grew by 10.5%, prompting President Kim Dae-jung to declare an end to the won crisis.
The economic reforms introduced by Kim were based on the reorientation from state capitalism to the market model and enabled economic growth that was 9.2% in 2000 and 3.3% in 2001 due to the slowdown of the world economy. Growth continued in the following years until the outbreak of the World Financial Crisis in 2008. Factory production, consumption, exports of cars and semiconductors fell. But still a bigger crisis was avoided. The government’s stimulus measures and the consumption of goods that were more consumed due to the drop in exports helped. Already in 2010, GDP growth amounted to a superb 6.1%.
In 1960, North and South Korea were similar in their poverty, ranking among the poorest countries in Asia and Africa. It is assumed that today, after more than half a century, South Korea has a per capita income about 20 times higher than that of North Korea. South Korea’s GDP at purchasing power parity (PPP) is about US$53,000 per year, which is higher than Italy’s or Spain’s. South Koreans have moved from 10% of Americans’ income in 1970 to about 70% today.
The most important sectors of the South Korean economy are the electronic and telecommunications industry, shipbuilding, the automotive industry, construction, the production of weapons and military equipment, tourism, and mining. GDP consists of service activities with a share of 58%, industry 39% and agriculture 2%. According to this year’s estimates, the nominal GDP is 1.8 trillion USD, which places the Republic of Korea 10th in the world and 4th in Asia. South Korean GDP PKM is 2.765 trillion dollars which is the 14th place in the world and the 6th place in Asia.
In 2021, nominal GDP grew by 4.02%. Inflation this fall is 5.67%, and unemployment is around 3%, which are impressive results in times of the corona crisis. About 14% of the population lives below the poverty line, and public debt amounts to about 47% of GDP. In 2021, exports amounted to 644.5 billion USD and imports to 615.1 billion USD. The main export partners are: China (25.8%), ASEAN countries (17.3%), USA (14.4%), EU (9.3%) and Hong Kong (5.9%). On the other hand, the main import partners are: China (23.2%), USA (12.2%), EU (11.8%), ASEAN countries (11.7%) and Japan (9.8%). ).
South Korean society underwent as rapid a transformation after the Korean War as the economy. The population more than doubled between 1955 (21 million inhabitants) and the beginning of the 21st century. It currently has more than 51 million inhabitants. At the same time, modern education was developing rapidly, with considerable government involvement, due to the revival of the Korean people’s traditional commitment to education after decades of repression during the Japanese occupation period. The growth of educational institutions and commercial and industrial enterprises in and around large cities attracted an increasing number of rural people to urban areas. In particular, Seoul grew about 10 times to about 10 million people between 1945 and the beginning of the 21st century.
The capital Seoul is today the city with the fourth largest nominal GDP (926 billion USD) in the world after Tokyo, New York and Los Angeles. Seoul is a very old city with a history of more than two thousand years, but it is also a new city. During the Korean War, the city changed hands several times and was largely devastated. Today, Seoul is dominated by business districts and tall skyscrapers with glass facades, hotels, restaurants, cultural landmarks, and the city with its metropolitan area is home to more than 25 million people. The quality of life is among the highest in the world.
Communication media also recorded a significant rise in the last century, especially the publication of newspapers and magazines, while in recent times digital media dominate. The status of the most media-free country in Asia shows the extent of media freedom. An ambitious program of expanding and modernizing the country’s transport infrastructure was also undertaken. However, the most noticeable social change in South Korea has been the emergence of a middle class. The previously mentioned land reform carried out in the 1950s, together with the expansion of modern education and the expansion of the economy, caused the disappearance of the once privileged yangban (land-owning) class, and a new elite emerged from the ranks of the former commoners.
Another significant social change was the reduction of the family. Rural-to-urban migration disrupted the traditional family structure as urban dwellers tended to live in apartments as nuclear families and have fewer children. In addition, women fiercely fought for complete equality before the law and fought for greater rights. They were given the right to register as family heads in the new family household registration system that came into effect in 2008. In the old system, only men could register as family heads. The new system increased women’s rights in cases of divorce and custody of children and equated the rights of adopted children with those of biological children.
The armed forces of the Republic of Korea are among the strongest armed forces in the world, more precisely, according to the Global Firepower portal, they rank 6th in the world. The army has 555,000 active military personnel and 2.7 million reservists, making it one of the largest standing armies in the world. It is equipped with the most modern Western weapons as a faithful American partner in the Far East. Few people know that South Korea possessed a nuclear program that fell victim to the détente between the US and the USSR during the 1970s when Seoul gave up possession of the most destructive weapons. Still, with a nuclear-armed northern neighbor, there are growing calls for Washington to arm Seoul with nuclear weapons to contain the threat posed by Pyongyang. It is interesting that South Korea is the country where Christianity is the most represented religion with 29% of believers (dominated by Protestants) and exceeds the number of Buddhists with 23%.
Lately, starting from the 1990s, the cultural influence of South Korea in the world is becoming more and more present. In other words, it is a demonstration of soft power. It is enough to highlight the mega-popular Netflix TV series Squid Game, the Oscar-winning film Parasite, the colorful singer PSY and his Gangnam Style, the female K-pop band Blackpink that conquers the music charts. Korean popular culture is breaking through and conquering international audiences. K-pop, K-dramas and cinematic productions have become a phenomenon called the Korean wave. Korean cultural influence has spread to India, a nation of 1.4 billion people where Korean is the fastest-growing foreign language and is taught in high schools. In most of the world, the mention of South Korea evokes positive comments.
Despite the successes, the aforementioned film and musical works show protests against social inequalities and injustices in South Korean society are expressed. Research from 2015 to 2022 has shown that many young people want to emigrate; they compare the present to the feudal class system of the Joseon period. An entire generation in the 20s and 30s was ironically labeled as the sampo generation of the “three abandoned” because they gave up on courtship, marriage and children they could not afford. Now they are called the N-po generation, which despairs because of numerous difficulties in life, from the impossibility of finding permanent employment to not owning their own home.
South Korea currently has the lowest fertility rate in the world and an aging population. The total population is also expected to decrease in the future. The government is concerned that fewer children and an aging society will slow down economic growth and destabilize the social and pension system. The annual number of newborns has reached a record low of 272,000 in 2021, compared to one million a year in the 1970s. In contrast to the optimism and hopes of previous generations, research shows that since 1990, the number of Koreans who believe they have “freedom of choice and control over their lives” has been declining.
It is not yet clear how the authorities will respond to this social crisis, although the dissatisfaction of young people requires a fairly quick response. Perhaps the authorities will try to preserve the status quo and avoid social change until the situation becomes pre-revolutionary as it was in the world in 1968. It would be desirable if the government decided on some proactive solution. The future of the nation depends on how it responds to this existential challenge, whether it finds a path to shared prosperity for the next generation or tragically fails to overcome social divisions. Current president Yoon Suk-yeol has yet to initiate concrete changes.
After a series of decades with a spectacular GDP growth rate of 6 to 9 percent, South Korea’s GDP has been growing at 2-3 percent per year since 2012. While slower growth is common in developed economies, South Korea also has structural weaknesses: it is overly based on its main export product (semiconductors), produced by one or two large companies (e.g. Samsung), depends on one large market (China) and relies on the raw materials of the country with which it is currently waging a trade war (Japan). Low growth rates also reflect demographic problems, for which there are few good solutions without major demographic changes. The way to overcome the crisis lies in new dynamic areas of the economy and the ideas of young Koreans. Particularly promising is the liveliness of Seongsu-dong, the so-called “Seoul’s Brooklyn” and Pangjo Valley, home of Korean high-tech start-ups and modern entrepreneurs. These locations radiate innovation and creativity and show that they are part of the most advanced Korea. They break stereotypes that Koreans, due to Confucian social norms, are most successful in hierarchical corporate structures such as chaebol.
Based on innovation, the start-up economy could be a source of growth that will stimulate wider social development. South Korea needs more creative companies like Naver, Korea’s Google, which made it into the country’s top 10 companies for the first time in 2020. The government should stop with policies that bring poor results, such as issuing state subsidies to large companies that create negative conditions for the growth of smaller companies. Ultimately, common practices of large companies, such as extracting short-term profits from smaller suppliers at the expense of long-term investments in supply chains, create significant barriers to SME development. There are currently some important initiatives to address this challenge, such as promoting reciprocity in Korean and Asian supply chains, but more needs to be done, especially by large Korean entrepreneurs. If the obstacles are removed, South Korea could become a premier start-up and investment destination, attracting a new generation of entrepreneurial talent while building on its growing image as a global cultural powerhouse.