In 1953, South Korea emerged from the devastation of the Korean War as one of the poorest countries on earth, with a per capita income of less than $100.1 Today, it is a prosperous, developed democracy with the world’s 11th largest economy and a per capita income close to $28,000.2 This transition has come to be known as “the miracle on the Han River.”
Korea’s modern alliance with the United States, which took shape after the Korean War, helped make this possible. For more than a half-century, the U.S. has maintained a large military presence in Korea. That has allowed the Korean government to focus more of its resources on economic development and less on defense against possible North Korean aggression. The U.S. government has also provided a huge amount of investment and economic aid.
However, U.S. assistance is only part of the reason that Korea has been able to go from poverty to prosperity in a relatively short time period.
As poor as Korea was in the 1950s, it had a head start on its quest for development. It had a well-educated population, legal protection of property rights, and the benefits of a pre-war land reform program that reduced economic inequality and helped build a middle class. The government also made a major investment in education in the post-war years and all but eliminated illiteracy by the 1960s.3
A series of authoritarian and corrupt dictators ruled Korea until 1987. With financial assistance from the United States, United Nations, Japan and Germany, they rebuilt their country’s infrastructure and industrial base and made manufacturing and exports the engines of Korea’s economy.
Korean manufacturers made labor-intensive products that could be produced more cheaply than in the United States or Western Europe and therefore exportable to those places at a profit. They started with textiles and gradually moved up the economic food chain to consumer electronic products and telecommunications devices, heavy-industry equipment and ships.
The country’s export-based economy paid handsome dividends. Exports accounted for a whopping 45 percent of GDP in 1999.4
Korean leaders also facilitated the growth of big corporations such as Samsung LG, and Hyundai – known collectively as the chaebol – through subsidies, low-interest loans and other special favors. This helped them grow into the global conglomerates they are today. It also fueled resentment among Koreans about the outsized power of the chaebol and the government favoritism that led to it.
After a several years of massive and peaceful anti-government protests led by students and labor unions, some of which met with retaliatory violence by the government, Koreans were able freely to elect their president in 1987.
Democratization had many positive effects, including freedom of speech, improvement in human rights, and government policies based more on public opinion. It also led to increased labor rights, which in turn led to higher wages. Labor-management disputes lowered productivity and that made exports more expensive.
In the early 1990s, Korea’s current account balance went into a deficit, owing to rising inflation, appreciation of the Korean won and a global recession.5 The government responded by encouraging capital inflows. Total public and private sector external debt rose from (US)$89.9 billion in 1994 to $174.2 billion in 1997.6
These factors, along with a poorly-regulated financial system, led to Korea’s financial crisis of 1997. It forced the government to request a bail-out by the International Monetary Fund and other international financial institutions. They lent Korea $58.4 billion.7
Soon afterward, Korea’s precarious financial position led foreign investors to withdraw their money from Korea. That put the country on the brink of default on its IMF loans.
An illustration of the role that Korean national pride has played in the country’s growth is that the danger of default led tens of thousands of Korean people to line up outside banks to give away their gold jewelry and mementos.8
At the insistence of the United States, the IMF and Korea agreed on a loan restructuring. Korea was able to repay the loans entirely in 2001, almost three years ahead of schedule.
President Kim Dae-jung, a former anti-government activist who had been imprisoned and sentenced to death, spearheaded a series of financial sector reforms, including the closing of bad banks and a strengthening of the government’s regulatory regime. He also moved the economy away from a centrally-planned model to a more market-oriented one.
In the 21st Century, Korea has enjoyed modest to high GDP growth. It has continued to rely on exports as the engine of its economy and has become the world’s largest ship-builder. Rising domestic affluence and a strong preference for Korean-made cars, appliances and consumer goods helped the country weather the 2007-08 financial crisis and recession better than most. By 2010, Korea’s economy was back in the fast lane with a growth rate of 6.1%.9
Trade is still the mainstay of Korea’s economy. During the 2000s, it negotiated free trade agreements with the United States, the EU, Australia, Canada and other countries and enjoys trade surpluses with all of them. China is now its largest trading partner, accounting for 25% of its exports and 17% of its imports.10
Today, South Korea’s $1.5 trillion economy is the world’s 11th largest. Its economy grew by 3.3% in 201411 and its unemployment rate was 3%.12
Thanks to its long-term support by the United States, its transition to democracy and a free-market economy and the extraordinary drive and work ethic of the Korean people, Korea is now widely-recognized as a developed country with a bright future.
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