South Korea is often mentioned as among the ‘Four Asian Tigers,’ joining Hong Kong, Singapore, and Taiwan. These so-called ‘tigers’ are labeled such because their highly developed economies experienced growth rates of 7 percent or greater per annum from the 1960s until the 1990s. In 1997, the Asian financial crisis was hard on Hong Kong’s financial markets while Singapore and Taiwan were relatively unharmed. The story was different, however, in South Korea where the stock market collapsed and unemployment increased. South Korea’s economy has since tripled its per capita GDP and has become an archetype of success to outsiders.
The transformation of the Republic of Korea into an economic and political powerhouse should come as a surprise to those who are familiar with the peninsula’s history. Torn apart by the Korean War, North and South Korea pursued completely different trajectories to development yet each path is overshadowed by the legacies of the past because each half of the peninsula expends large sums of money maintaining standing military forces that are ready at a moment’s notice to reignite the Korean War all over again.
While the Democratic People’s Republic of Korea pursued a Stalinist-model of development, South Korea experienced a series of military dictatorships and state-led development under the dictatorship of Park Chung-hee.
The Korean War had devastated North and South Korea and ripped apart regions that were a united entity for many generations. The North was rich in mineral resources while the South held most of the country’s arable land.
Prior to the Korean War, Korea was under the colonial rule of the Japanese, who renamed members of the population as well as entire cities trying to make ethnic Koreans into ethnic Japanese. The trauma of generations of war, oppression, and then division would lead many to rightly conclude that South Korea’s rise is an economic miracle.
Seoul, the capital of South Korea, is among the most modern cities in the world: bustling with people, commerce, and technology, it is both a showcase and a model for the future.
After the Korean War, the South was among the poorest countries in the world with income levels on par with African nations recently liberated from colonialism; yet, by the end of 2011 it was richer on average than the member states of the European Union. This gives South Korea the distinction of being one of the few states that has risen from aid-based to wealth within a relatively short time.
It is touted by economists as a model for others because South Korea successfully transitioned from a brutal military dictatorship to a parliamentary democracy and ranks, along with Japan, as among the most liberal East Asian states.
Under the administration of former Hyundai Chief Executive Officer now President of South Korea, Lee Myung-bak, South Korea has expanded progressive social policies as well as the social welfare system.
All of this growth is part of Korea’s ‘catching-up’ phase of development: it is how the nation handles the future that will decide whether Korea’s economy continues to rise. For example, after besting its rivals, Korea will need to rely more on innovation to continue its successful trajectory. This introduces an element of trial-and-error heretofore foreign to an economy that has modeled itself on the successes of others.
The Korean workforce is highly trained and educated. Both to its advantage and its disadvantage, its economy is dominated by large, all-powerful chaebol that squeeze out smaller firms from competition. Mirroring this, its civil society is marked by strong family ties. As time marches forward, this model will come increasingly under strain as social mobility both geographically and economically places strains on traditional social models.
While employing only 25% of the workforce, South Korea’s chaebol form 50% of the nation’s economic output. Conglomerates like the chaebol exist in other nations, but few have the resilience nor use the same methodical, relentless success of the South Korean conglomerates. One worrying problem with the all-powerful chaebol is that many executives within the leadership at these firms are dependent upon the founding families for their positions through patronage networks. The tradition of keeping these companies within the family puts major portions of South Korea’s economy at risk depending upon the successor’s business acumen.
Additionally, as argued earlier, one challenge in continuing growth is innovation and there is evidence that the chaebol system stifles innovation and does not promote it because it is a system inherently designed to limit risk. Limiting risks limits opportunities for growth and increases the likelihood that poor business models, products, or leadership will become calcified, contributing to the firm’s long-term stagnation.