South dated back to 1950’s. In its earlier days

                                            South
Koreas economy development can be termed as the one of the most rapid
developments in the history of the modern world. The roots for the growth of
South Korea economy can be dated back to 1950’s. In its earlier days after
independence the government of south korea laid down plans for the development
and upliftment of farmers as they are the highest population share. The wealthy
landlords had sold their farms at a lower rate to other farmers because of the
government initiatives, which led to the distribution of wealth among different
classes of the society.

The present economic
development and achievement of south korea has been laid down because of the
different policies and measures since 1960’s, which not only developed the
economy but also stood out as a self-sufficient nation in the modern arena. The
following timeline of events will describe the growth of South Korean economy
over the past 2 decades

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5
Year Economic Development Plans

1st
5 Year Plan (1962-1966)

In 1962, President Park
has introduced Economic Planning Board (EPB), which laid down 5 Year Economic
Development Plans (1962-1966), for overall development of the country &
especially identifying the best performing industries and develop them. During
this 1st 5year period many initiatives like export promotion, low
interest rates on loans, devaluation of “Korean Won”, lifted certain exemptions
on imports, soft loans were taken from Japan & America were being taken and
initiated to increase capital flow and development of the country.

2nd
5 Year Plan (1967-1971)

It mainly concentrated on
Heavy & Chemical Industries. It also began to increase its defense
capabilities by spending a major chunk of its budget on military activities.

From 1971-1980, the
country main focused on overall internal development like construction of
projects, dams, highways R & D programs, industrial parks etc. which lead
to creation of jobs and increase cash flow in the economy.

 

South
Korean 1979 Economic Crisis

This crisis was
inevitable because of the following reasons

Ø  High
Inflation

Ø  Rising
Wages

Ø  Oil
Prices downturn worldwide

Ø  Assassination
of President Park

Ø  High
amount of Foreign debt ($20.3 billion in 1979)

South
Korean Economy From 1980 – 1988

The year 1980 was
changing phase in the history of South Korean economy, as government initiated
its 1st “growth” strategy for the betterment of the economy.

The main events which
took place during this time are as follows

1.     
National Stabilization program was launched,
which ordered not to increase any wages for employees, cutting down employees,
repressing labor unions were main priorities of government to tackle the
“economic crisis”

2.     
During this period, the south Korean
economy faced many challenges. The main events during this period are as
follows

3.     
4 National Banks were Privatized (1981
-1983)

4.     
Imposed restriction of individual
ownership on banks with a maximum level of 8%

5.     
Tariff reduction programs were introduced
to eliminate trade barriers

6.     
Government Regulated market entry &
investments in rationalized industries.

7.     
Tax benefits for existing companies

8.     
Increase the usage of Information &
Communication Technology

9.     
Increased export activities

10. 
Labor unions became rampant in the
country, which fought for the rights of the fellow labors.

South
Korean Economy from 1993 – 1997

Kim Young Sam became the
1st civilian president. He developed the policy of “globalization”,
to make the economy stronger. He has introduced 5 Year Financial Liberalization
plan in 1993 to attain the required criteria for OECD. The key policies are as
follows

Ø  Interest
rates “deregulation” was done

Ø  Abolishment
of “policy loans”

Ø  Promoting
foreign investments in to the country

Ø  Liberalization
of capital accounts

Ø  Short
term borrowing was encouraged rather than long term borrowings as it would
increase the cashflow in the market.

Ø  Entering
OECD in 1996, helped in increase of foreign portfolio investment at an account
of $12.4 billion.

Ø  The
corporate growth sector has also slummed to -14% which deteriorated the health
of the economy.

Ø  The
bankruptcy of Hanbo Steel, Jinro & Sammi from the top 30 chaebols further
weakened the growing economy, which could not withstand the upcoming financial
crisis in the Asian region.

 

 

 

Financial
Crisis 1997

In the year 1996, Korea
has become the 11th largest economy in the world. Later in the same year it
joined the Organization for Economic Cooperation and Development (OECD). But,
the happiness and achievement didn’t last long as the economy is effected by
the “Asian financial crisis”, which opened the basic weaknesses in the system,
starting from

Ø  Bad
loans in the banking sector

Ø  Overcapacity
of the manufacturing sector

Ø  Careless
growth policies followed by large conglomerates

Most of the Asian
countries were affected by this crisis at the initial stage. Thailand was the 1st
country to collapse by this crisis. The south korean economy did not expect
this crisis to hit its economy in the starting stages. The government and its
officials were of confidence that it can be tackled by taking few necessary
preventive steps. But their calculations and expectations went wrong when South
Korean Won has depreciated more than 20% in November 1998.

Later in December 1998,
as there was only 1 option left out, South Korea has taken financial help from the
International Monetary Fund (IMF) for an amount of $58 billion, which was the
highest amount of loan, ever taken by any country worldwide.

But these steps did not
stop the economy from collapsing as in by mid December there was “national
default”. The currency has gone down by 40% & $9 billion of IMF were used
by this time. The U.S Federal Reserve & other Central Banks around the world
were asked not to give loans, if so they give they would face a defaulter at
the end of the day.

But, IMF came to South
Korea rescue and immediately gave $10 billion to the government.

South
Korean Economy Causes for the Financial Crisis

1.     
More emphasis on exports has been done and
the domestic market segment was neglected.

2.     
Firms heavily relied on state guaranteed
borrowing systems & monetary stabilization bonds which were maintained
below the actual market prices.

3.     
Domestic banks were restricted in credit
decisions by government regulations

4.     
Large amount of subsidized loans was given
to large conglomerates

5.     
Stringent industrial policies were not put
into place

6.     
No alternative business groups were
developed and over dependence on chaebol group was done.

7.     
Economies in scale of production were
exploited by the large corporation’s and the medium and small enterprises were
left out behind. They were not supported by any kind of industrial supportive
programs.

8.     
Policy loans were given high importance
and were allocated to their favorable corporates, which also led to
vulnerability of capital markets, to tackle external undesirable events. 

9.     
High amount of external debt nearly $42
Billion was taken by the banks, foreign capital was imported at a very high
rate.

10. 
Korea’s developmental state also rewarded
successful exporters by basing support on the quantitative results of their
exports. Which decreased the confidence of local producers and created
structural imbalances in the economy.

11. 
The capital markets of the south Korean
economy are underdeveloped, so companies preferred “debt” as main investment
source in their operations. The chaebols were given loans on low interest rates
received foreign capital in high amounts, investment licenses were given to
favored ones.

12. 
Illicit Wealth Accumulation Act was passed
in which many famous business men were arrested and later on released those who
agreed with conditions of the government, where the business people should do
business even if there is no profit involved.

 

South
Korea’s Reform Measures

Ø  Fiscal
Austerity Program: It was implemented, in which government sending was reduced
and increased taxes on products and materials

Ø  People
voluntarily donated gold rings and bracelets i.e., worth of $2 Billion

Banking
Sector Reforms

Ø  Non-performing
or viable banks have been shut down by the government

Ø  Some
banks have been merged & some other are required to shut down

Ø  Korean
Asset Management Corporation: It was set up to dispose bad debts through
national & international auctions.

Foreign
Investments Reform

Ø  Lifted
Legal Restrictions on foreign investment

Ø  Local
banks were taken over or merged by foreign banks

Ø  Capital
market was also opened to foreign investments

Ø  Free-Trade
agreement with U.S(3rd biggest trade partner)

Chaebol
Reform

Ø  Transparent
management practices should be followed by the companies

Ø  Companies
were asked to give more importance to core businesses rather than side
businesses

Ø  Making
managers & shareholders of the respective businesses accountable in case of
default.

Ø  No
debt payments were allowed within business groups or entities

Ø  The
top 5 conglomerates swapped businesses with each other to eliminate
overcapacity in certain sectors.

Ø  Reporting
of the financial statements to the shareholders

After
Crisis Effect

Ø  Recession

Ø  Low
investments

Ø  Rise
in Unemployment

Ø  Domestic
Private Consumption was encouraged

Ø  Corporate
bankruptcies

Ø  Fall
Out of Exports

By the year 2001 Korean
economy grew by 3 %, which was a phenomenal growth. The usage of credit cards
also got increased heavily as people stated to spend at a very high rate. In
2003, due to heavy usage of credit cards the largest credit card company LG
Creditt Card Co., has gone bankruptcy, but the then President Roh have
announced rescue packages and public fund to avoid another crisis. 

Way
Forward

By 2007, South Korea is
one of the fastest growing economy amongst the ASIAN nations. President Lee had
promoted “747” vision which implies
to 7 % annual growth rate, $40,000 per capita income & to become 7th
largest economy in the world.

Solutions

Ø  Implement
Central bank’s autonomy

Ø  Secure
foreign investment

Ø  Foreign
reserves should not deplete

Ø  Chaebol
domination should be brought under control

Ø  Banking
sector should be regulated