Case Study Paper South Korea

Alexandra Huang

Feb 18, 2019

International Political Economy

In 40 years, Korea successfully transformed itself from one of the world’s poorest regions to

a lively, active, and developed economy. Viewed from a global stance, Korea’s development is

viewed as a growth miracle, since many other countries that adopted similar growth strategies

ended up remaining poor and undeveloped. In this paper, I will outline why Korea was able to

succeed while others were not, evaluate whether this model should be adopted by other

countries, and show that how implementation of the same model can lead to drastic different

results since each country has a different historic, social, and political environment.

The essence of the Korea growth model lies it ins adoption of an active industrial policy that

includes providing subsidized credit, trade protection, tax breaks, and other benefits to

companies in order to achieve rapid industrialization. However, simply having these industrial

strategies was not enough for Korea to transform from a developing economy to a developed

one. I argue that there are three other important factors that allowed for the “Miracle on the Han

River” besides the basic industrialization strategies. They are: (1) a strong and capable education

system and government’s heavy investment in all levels of education; (2) an extreme amount of

money poured into Research & Development, which allows Korea to maintain its growth rate

even after industrialization; (3) a healthy political environment that encourages discipline and

integrity rather than fosters corruption. First of all, Korea invested heavily in its primary and

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secondary education and reached almost universal enrollment rate for both by the 1980s. This

made sure that skilled labor was able to keep up with the rate at which the country was

developing, as well as mitigated income inequality. Second, South Korea understood the

important of R&D since technology triggers growth in the long run. According to federal bank of

St. louis, between 1996 and 2015, South Korea’s R&D intensity grew 88.5 percent (from 2.24

percent in 1996 to 4.23 percent in 2015), while the U.S.’s only grew 14.4 percent (from 2.44

percent in 1996 to 2.79 percent in 2015). Third of all, South Korea has a rather healthy

government free of corruption and cronyism, which allowed the country to develop without

being disrupted by political disasters. If the country was in a messy political state, then funds

would be misallocated and the country would be plagued with political drama that distracts the

country from developing.

I argue that while it is indispensable for countries to adopt active industrial policies including

tariffs and support for the domestic industries, it is also important for countries to achieve the

three conditions described above in order to avoid staggering growth and being stuck in a

poverty trap. However, it is worth noting that these three factors are much more difficult to

implement, given the historical and social reality of many nations. But since all these factors are

tied closely to another, any major defect in any of these components can result in a country’s

failure to transition from a developing to developed nations. If we examine why countries like

Brazil failed to turn itself into a developed country, it is not necessarily because it did not adopt

the proper industrial growth strategies, but rather because it failed to achieve these three long-

term factors that Korea was able to establish. For example, with Brazil’s rampant corruption and

unsound political regime, it is difficult for Brazil to achieve sustainable growth even if it

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continues to adopt an active industrial policy. From Brazil’s previous president Michel Temer to

dozens of government officials and senators to corporate leaders, corruption has plagued Brazil

on its way to achieving development. Political chaos and extractive government policies defeats

the purpose of implementing growth strategies in the first place.

While certain conditions that allowed this model to work were unique to Korea, such as the

small size of the country and its historical background, but not all the conditions are unique to

Korea. With a successful implementation of active industrial strategies and the three key factors

outlined previously, other nations also have the potential to transform successfully the way

Korea did. To further elaborate, there are two major conditions that are relatively unique to

Korea, and those are (1) the development of chaebols, which are large oligarchies that formed

extremely tight connections with the government; (2) its relatively small size and population

compared to many other countries. First of all, chaebols are large conglomerates that are owned

by the most powerful families in Korea and backed up heavily by the government. According to

George Ogle, the author of “South Korea: Dissent Within the Economic Miracle”, ten chaebol

families were responsible for 60% of South Korea’s growth from 1960 to 2000. This is a

condition advantageous to a small country like Korea. Huge sized conglomerates can allow many

people to be employed, and can stimulate economy in a systematic and rapid fashion. However,

this is not strictly unique to Korea, either. Countries like Japan is also known for its successful

oligarchies, the Zaibatsu. The advantages of these family businesses lie in the effectiveness of its

top management branch, since it is run by a family member, the level of quality of these

conglomerates is usually guaranteed. Second, the small size of the country also made success

much more likely than many larger countries in the Africa continent or bigger countries in Asia,

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such as China. Smaller countries such as Singapore, Japan, Hong Kong, and Finland also

witnessed rapid economic growth in a short amount of time. Perhaps smaller countries do it

better because it is easier for a smaller state to be sustainable, but also simply because there are

fewer ways for things to go wrong in the process of development.

However, not all of the conditions that set the ground for success were unique to Korea. The

Four Asian Tigers of Singapore, Hong Kong, Taiwan, and Korea have all turned from poor rural

regions into high-income economies in an extremely short amount of time. If we compare the

Asian Tigers to countries that failed in its transformation, we will see that all these countries

have developed advanced education systems and curriculums as well as have a somewhat

healthy political environment that fosters good governmental practices, despite its extent of

democratization.

Indeed, a sustainable education system and a healthy political regime is difficult to obtain.

For example, China has struggled in both of these factors which explains why China is starting to

stagger in its growth. By adopting active industrial strategies, China has also witnessed a

tremendous amount of growth in the past three decades. However, its poor education system fails

to produce a high quantity of educated citizens; its political regime is highly un-transparent and

corrupt; income inequality is vast because the number of skilled workers is in scarcity due to the

poor education system. Examining the Chinese model, it is fair to assume that while a set of

active agricultural policies might stimulate rapid short-term growth, the long term sustainable

growth that allows countries to actually take a leap and jump over the threshold lies in its sound

institutional systems from education to government. However, it is important to acknowledge

that these institutions take a long time and tremendous strenuous effort to develop. Countries like

Korea and Singapore were blessed with a higher starting point than many African nations

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because by the time their colonizers left, their nations were not broken into pieces and it would

take them less time to recover and begin industrialization. Historically, certain nations find it

difficult to open its political environment due to the long suppression of a dictator or the imperial

system that had always been in place. It is crucial to recognize that system and organization

drives growth, and without a government that is sincerely open to reforms and growth, the short-

term industrial strategies will not be transformative. In conclusion, it is fair to draw the

conclusion that not all of the conditions that allowed the industrial growth model to work was

completely unique to Korea. However, Korea did happen to be successful in many hidden factors

of growth, and that was one of the biggest reasons why Korea succeeded. Overall, countries who

strive to industrialize at a rapid pace should implement both short term and long term growth

strategies. In the short run, government can heavily subsidize loans to particular sectors that need

help developing and growing. Countries can even adopt Korea’s strategy of deciding when,

where, and how much to invest in a certain sector, as long as the government remains transparent

and uncorrupt. Firms can also borrow from abroad, with the government protecting domestic

firms from currency depreciation. Moreover, governments can adopt high tariffs allowed

domestic industries to mature and develop. According to Chang, United Kingdom and the U.S.

both would not have achieved its level of growth without implementing high tariffs, ranging

from 40 to 60 percent. In addition to protectionist measures that stimulates rapid

industrialization, the three hidden factors are equally important as well. While these strategies do

not pay off immediately, spending money on developing a strong education system, pouring

investment into R&D from both national and private sector, as well as doing what one can to

cultivate a healthy and open and political system are all crucial in helping a country develop

sustainably.