Magazine article Foreign Affairs

South Korea: The Backwater That Boomed

Magazine article Foreign Affairs

South Korea: The Backwater That Boomed

Article excerpt

South Korea's development over the last half century has been nothing short of spectacular. Fifty years ago, the country was poorer than Bolivia and Mozambique; today, it is richer than New Zealand and Spain, with a per capita income of almost $23,000. For 50 years, South Korea's economy has grown by an average of seven percent annually, contracting in only two of those years. In 1996, South Korea joined the Organization for Economic Cooperation and Develop- ment, the club of rich industrialized countries, and in 2010, it became the first Asian country and the first non- G-7 member to host a G-20 summit.

To call South Korea an emerging market, therefore, is a bit of an anachro- nism. The country is a rich, technologi- cally advanced, mature democracy with an impressive record of innovation, economic reform, and sound leadership. Yet South Korea is not exactly a developed market, either. The value of its exports plus imports (at $1.25 trillion a year) exceeds its national income (at $1.1 trillion). That openness, along with the lack of protection provided by a bloc such as the eu, subjects South Korea to greater market volatility than other major industrialized countries and presents some serious challenges. So, too, does its highly concentrated corporate sector, aging population, and politically dangerous neighborhood. South Korea may well be more dynamic than some developed economies, making it attractive to investors, but it is also much riskier.

SO LONG, KOREA DISCOUNT

Given South Korea's extraordinary accomplishments, it is tempting to try to distill the secrets of its success, so that they can be bottled and used elsewhere. But South Korea's remarkable leap from poverty to riches owes to a unique set of historical circumstances.

Soon after the division of the Korean Peninsula, in 1945, South Korea already had in place the building blocks for growth: an educated population, property rights, land reform that boosted pro- ductivity, and the institutions of modern capitalism. But then came the Korean War, which devastated the country. Investment did not take off until the country began to rebuild in the 1960s, when the authoritarian president Park Chung-hee (father of the current presi- dent, Park Geun-hye) embarked on a set of policy reforms that encouraged domestic saving and opened the economy up to international trade.

South Korea's initial rapid growth was characterized by both political author- itarianism and extensive state intervention in the economy. In the 1970s and 1980s, Seoul channeled massive amounts of capital through subsidies and low-interest- rate loans into trusted family-led chaebol, or conglomerates. These favored firms also enjoyed trade preferences and mo- nopoly rights, among other indulgences extended by the government. Such preferential treatment enabled the chaebol, which today include Hyundai and Samsung, to grow into massive business empires whose brands are now recognized and envied around the world. But the story has a dark side: today, the chaebol's ongoing dominance poses challenges to regulators seeking to make South Korea's markets more competi- tive. And the conglomerates' historical ties to the country's early dictators feed resentment among many South Koreans, who regard the businesses as having achieved their dominance unfairly.

In recent decades, South Korea's politics have gone through an evolution just as stunning as that of its economy. After 40 years of rule by a succession of strongmen, in 1987, South Koreans freely elected Roh Tae-woo as president. Roh, a former general who had been handpicked by his military predecessors, was still linked to the old regime. But his next two successors-Kim Young-sam (a centrist civilian politician) and Kim Dae-jung (a former dissident)-most certainly were not. Their elections were a testament to South Korea's rapid liberal- ization. As Park's recent election shows, however, the echoes of the country's authoritarian past linger, and divisions over that past form one of the main fault lines in modern South Korea. …

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