South Korea: Astounding Wealth With Precarious Security

What the people of South Korea have managed to create in the past generation is simply astonishing. Through targeted investment, the country has been transformed from a simple mostly agrarian based society, to an economic behemoth that has developed trade ties and business contact around the world.

Recognized as one of the Asian Tigers along with Hong Kong, Singapore and Taiwan, it is one of the most incredible success stories of the late 20^th and early 21^st centuries.

From humble beginnings, the country has developed an economy that has reached a Nominal GDP (Gross Domestic Product) of $1.393 trillion USD (United States Dollar). It became part of the trillion dollar club back in 2004. That translates into a PPP (Purchasing Power Parity) of $1.849 trillion USD. It ranks 11^th and 13^th respectively world-wide. Per capita nominally is at $27,513 USD and in PPP $36,528 USD.

It is quite impressive if you consider South Korea has a population of slightly less than 52 million and occupies a geographic area of just 38,691 square miles, the equivalent of 100,219 km2. It provides the country the 109^th ranking in territorial size. So obviously, South Korea economically punches way above its actual size.

South Korea is East Asia’s most developed nation in the Human Development Index. The country enjoys the continent’s highest median income and average wage as well as some of the lowest tax rates. It ranks near or at the top in world measures of education, health care, job security and government transparency.

The country makes up 9% of all the exports coming out of Asia. Only Japan at 11% and the colossus of China at 37%, provide a greater share. This makes South Korea the 6^th largest exporter in the world. These exports are valued at close to $600 billion USD.

By sector the economy of the country is dominated by services, which takes the largest share at 58.2% of the total. Industry comes in at 39.2% and agriculture at relatively small amount of just 2.6%.

What distinguishes South Korea from other industrial nations, is the existence of chaebols. These are enormous conglomerates that dominate the domestic economy.

For foreign investors it is important to note that South Korea ranks 4^th globally, in the ease of doing business. Unemployment remains at the exceptional low rate of 3.5% and inflation is just 1.3% annually.

However, it is true that growth has been slowing in the last few years, due to more sluggish domestic consumption and investment.

The country has amassed foreign reserves in excess of $368 billion USD. Yet, because of the recent economic slowdown in China and the ripple effect this has made in Korea, sovereign debt is expected to rise above 40% of GDP in 2016 from the 35% level last year. This will be the highest rate recorded since 1970.

Unfortunately, the present devaluation of the won against other major world currencies, is beginning to effect the rate of foreign investment in a negative way.

Following the end of the Second World War in 1945, the Japanese were forced to relinquish their control of the Korean peninsula which they had held since 1910.

The country became divided between the forces of the Soviet Union in the north and the American forces in the south. The growing antagonisms between the two superpowers prevented any real attempt at reunification.

Eventually the Communist North Korea would endeavor to reunify the country, with a full scale invasion of South Korea. The resulting Korean War (1950-53) would be the first real armed struggle in the Cold War. It would pit the forces of the capitalist and democratic West, against the communist forces of the East.

Despite the support of the Soviet Union and millions of Chinese troops, the North Koreans would fail to drive the United Nations forces out of South Korea. The determination of the United States to preserve an independent country in the southern part of the peninsula, first created a stalemate and would eventually lead to an armistice.

The border would be set roughly at the previous demarcation line (the 38^th parallel).

No peace treaty would ever be signed, so the two countries are technically still at war. Over a million Koreans had been killed and since both sides had been on the verge of victory at one point, nearly the entire country was devastated.

The difficult task of rebuilding a new country on both sides of the border began, with a demilitarized zone (DMZ) separating the two nations.

After the destruction of the war, South Korea remained one of the poorest countries in the world for over a decade. In the early 1960’s, the country would begin what would later be identified as an economic miracle.

Between 1962 and 1994, the economy grew at an average of 10%. This was a result of an growth in exports, that was expanding at a rate of some 20% a year.

The growth of the industrial sector was the principle stimulus to economic development. It would be accompanied by a rapid expansion of exports. Millions of people left the countryside, to take jobs in factories that practically sprang up over night.

Labor intensive industries permitted the country a competitive advantage, in manufactured exports during the early stages of rapid growth, because of the low domestic wages.

By 1986, manufacturing industries accounted for 30% of the GDP and 25% of the work force. Strong government assistance through various means and foreign aid allowed growth to expand further.

The leading industrialists were also adapting the newest technologies at an accelerated rate, in existing plant and with new facilities. Corporate profits continued to be plowed back into ever greater production.

The inflow of foreign capital was greatly encouraged during this period. It supplemented the shortage of domestic savings. The surge in exports brought the country ever higher returns in income. A virtuous cycle of growth had commenced.

In 1990, South Korean manufacturers planned a important shift in future production plans towards high technology industries.

This new rhythm would be interrupted twice. In 1989, with a downturn in the economy which brought a restructuring of the economy and again during the Asian Financial Crisis in 1997 and 1998. The latter event, forced the government to use a form of debt swaps, and adjustments to domestic labor compensation.

It enabled the country to ride out the huge deprecation of their currency and unsustainable debt in a number of industries.

Growth returned and by the end of 1999, the economy was surging forward again at an annual rate of over 10%. It would moderate to 9.2% in 2000. By this time the South Korean economic system was moving away from a centrally planned government directed model, to a more market oriented one.

The new national emphasis was now in the fields of aerospace, bio-engineering, fine chemistry, and microelectronics which provided an additional boon to growth.

A slowing world economy the following year, brought growth down to 3.3%. Exports plunged, but the South Koreans avoided a recession, unlike most other advanced nations at the time.

From 2003 onwards, the economy provided rates of expansion averaging between 4% and 5%.

The next shock to the South Korean economy would arrive during the global financial panic in 2008 and the Great Recession that followed. It would bring the first quarterly negative growth in 10 years. Annual growth slowed to 2.3% in 2008 and just escaped a recession at 0.2% in 2009.

The Koreans were able to avoid the worse by timely stimulus measures and strong domestic consumption of products, which partly compensated for the drop in exports. In 2010, the economy would rebound to the more normal rate of 6.1%.

The South Korean economy is expected to grow from 3.9% to 4.2% through 2030. By then it is expected to be the 7^th largest global economy, with the 3^rd highest GDP per capita among the G-20 countries.

It will remain largely dependent upon exports consisting of finished products in automobiles, electronics, ships, steel, telecommunications and some textiles.

However, the emphasis will continue to shift to higher technology industries for an ever greater share of the total. This is similar to what is happening with their closest competitor, the nation of Taiwan.

South Korea possesses some enormously influential companies in various sectors of the global economy. These are well know in many parts of the world and often command a major market share. An example of this, would be the giant electronic conglomerate Samsung. The country has also become the largest exporter of computer memory chips globally.

Exports today, account for 41% of all economic output for the nation. This is why the significant decline that occurred last year in this sector, was so alarming for leaders of industry and government officials alike.

Together, China and South Korea dominate the shipbuilding industry today. Although the Chinese lead in total tonnage built, the Koreans have taken the advantage in sales, as it concentrates efforts on ships that are of higher value. The nation boasts the largest shipyard run in the world, which is presently owned by Hyundai Heavy Industries.

South Korea also remains one of the largest automakers in the world. Hyundai Kia Automotive Group is the country’s largest company in this sector. It is not ironic that they export more gasoline, than any other country in Asia.

South Korean construction companies have become major international players. Samsung C&T Corporation alone, has built many of the highest buildings in the world. Among the most noteworthy is Burj Khalifa, located in the United Arab Emirates. It is presently listed as the tallest man-made building in the world. Also on the list are the Petronas Towers in Malaysia and Taipei 101 in Taiwan.

Partly the result of living in the most heavily militarized region on the globe, South Korea has become a major manufacturer of armaments. Major overseas customers include the nations of Australia, Bangladesh, Indonesia, New Zealand, Peru, Russia, Turkey, the United Arab Emirates and Venezuela.

South Korea faces some of the same challenges as other nations in the region are now experiencing. These are a rapidly aging population, low birth rate, an inflexible labor market and a heavy reliance on exports for growth.

The government to its credit is attempting to tackle some of these structural problems. There has been a renewed emphasis on deregulation and the promotion of entrepreneurship in those industries that take more creativity and ingenuity.

The system is at last providing greater recognition for the importance of a more competitive environment involving small and medium sized firms. Officials have made it a priority for example, that the entire country is now wired with the fastest internet speed globally.

South Koreans have built a society that has become the most developed democracy in Asia, with a well formulated system of laws which is rated the best in East Asia. It is known to be one of the safest and best regulated countries anywhere.

The country also has the highest percentage of graduates in the fields of engineering and natural sciences, on top of having the largest amount of students with higher degrees globally.

This has resulted in one of the most innovative countries in the world. Not surprisingly, South Korea ranks in the top levels for corporate research and development. It is number one in patents filed per GDP. The nation has truly become a global leader in next generation infrastructure and technology.

Seoul the nation’s capital where half the population lives, is one of the largest cities in the world, ranking one of the top ten. It is recognized as Asia’s most liveable city with the 2^nd highest quality of life globally. The latest technological advancements in communications and transportation have made this metropolitan area, one of the most modern cities in the world.

For all its strengths, South Korea unfortunately borders a country that is economically destitute, with a system that is unable to provide its citizenry with the basic necessities of life. All of the means of production are controlled by the state, through government run enterprises and collectivized farms. The nation continues to struggle with adequate food production for some 25 million people.

Over the years, North Korea has isolated itself from the world communist movement. The country has adopted an ideology of self reliance. It coincides with the national policy of putting the military first. The nation has the highest percentage of citizens, serving in the defense of the country in the world.

It has the 4^th biggest active army globally, at 1.21 million. Only the nations of China, India and the United States have larger force levels. Most disturbingly, the nation possesses nuclear weapons and is developing ever more advanced missile technology.

The country has been dominated by a single family since it became independent. The first ruler known as Kim Il-sung, ruled North Korea with an iron fist until he died in 1994. He was succeeded by his son Kim Jong-il, with his death arriving suddenly in 2011.

His youngest son Kim Jong-un was now elevated to the top position. He seems ill prepared, to deal with the myriad of economic problems facing his country. He also does not seem to fully grasp, the present international situation confronting North Korea.

This is the state of affairs that faces South Korea, just to the North. Things could easily become quite dangerous, practically overnight. Economically vital Seoul, lies just 35 miles (56.33 kilometers ) from the border.

In any armed confrontation, the city will immediately be part of a war zone. The presence of 28,500 American soldiers on the South Korean side of the border, has helped to maintain the peace.

In addition, China has been helpful in attempting to restrain the despotic, militaristic and many fear paranoid regime of North Korea. Any escalation of hostilities on the Korean peninsula, could easily lead to a full scale war. The prevention of this possibility, is always on the mind of South Koreans.

It is for good reason. A military conflict could easily destroy, much of what has been created in the past few decades and totally derail the economy. The great wealth of the country would matter little, if the nation came under a major attack from the north. It is therefore paramount to the South Korean government, to try to prevent this terrible reality from ever happening.