South Korea has experienced one of the largest economic transformations of the past 60 years. It started as an agriculture-based economy in the 1960s,1 and it became the 11th largest economy in the world in terms of gross domestic product (GDP) in 2016.2 How did the industrialization miracle take place? Show
Factors in South Korea’s Economic SuccessMany studies attribute South Korea’s structural transformation to policy reforms aimed at opening the country to foreign markets. Indeed, the export-oriented policies of South Korea are one of the most important factors of its success: South Korea is now one of the top 10 exporters in the world, and its exports as a percentage of GDP increased from 25.9 percent in 1995 to 56.3 percent in 2012.3 Two additional factors have contributed to the increase in international trade and industrialization in South Korea:
Environment and InnovationFirst, a strong business environment fosters growth in the domestic market and attracts foreign investors. According to the World Bank, South Korea is ranked No. 4 in terms of the overall Ease of Doing Business (DB) index in 2018, while the U.S. is ranked No. 6, as seen in the table below.4 2018 World Bank Doing Business Rankings
Among the list of criteria, South Korea dominates in the ease to start a business and enforcing contracts. All of them play a significant role in encouraging investment, production, communication and, eventually, economic growth. Second, South Korea has devoted extra attention to technology development and innovation to promote growth. Innovation and technology are the key factors that have underpinned South Korean export competitiveness and fueled the country's remarkable economic rise over the past decades.5 In fact, South Korea is now spending the largest share of its GDP on research and development (R&D), even larger than the U.S. and Japan, two of the global leaders in innovation based on R&D intensity. 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).  Challenges for South KoreaEven though South Korea has been successful at promoting exports, its business environment and innovation, challenges still remain, including many from China. Chinese competition is one challenge. Policymakers in China have also been emphasizing the importance of high-skill manufacturing and exports. This could have a negative impact on South Korea as China has traditionally been a large importer of South Korean goods. China is also catching up fast in innovation. Its R&D intensity has been approaching the levels of the U.S. and Japan.6 Furthermore, given South Korea’s relatively limited geographical size, natural resources and population size, an aging population aggravates the threat that South Korea’s economy might fall behind its fellow developed countries.7 To maintain sustainable economic growth, South Korea needs to continue its support in innovation and a favorable business environment. Notes and References:1 Kim, Kwan S. “The Korean Miracle (1962-1980) Revisited: Myths and Realities in Strategy and Development (PDF).” Kellogg Institute Working Paper #166, November 1991. 2 World Bank GDP ranking (PDF). 3 Iwulska, Aleksandra. Golden Growth: Restoring the lustre of the European economic model: Country Benchmarks (PDF), World Bank, 2012. 4 “Doing Business 2018: Reforming to Create Jobs (PDF).” World Bank Group, 2018. 5 Domínguez, Gabriel; and Mazumdaru, Srinivas. “Why innovation is king in South Korea.” Deutsche Welle, Feb. 10, 2016. 6 Santacreu, Ana Maria; and Zhu, Heting. “Has China Overtaken the U.S. in Terms of Innovation?” St. Louis Fed On the Economy, March 12, 2018. 7 Domínguez and Mazumdaru. Additional Resources
About the Authors Ana Maria Santacreu Ana Maria Santacreu is an economist and research officer at the Federal Reserve Bank of St. Louis. She joined the St. Louis Fed in 2013. Read more about the author's work. Ana Maria Santacreu Ana Maria Santacreu is an economist and research officer at the Federal Reserve Bank of St. Louis. She joined the St. Louis Fed in 2013. Read more about the author's work. Heting Zhu Heting Zhu is a senior research associate at the Federal Reserve Bank of St. Louis. Heting Zhu Heting Zhu is a senior research associate at the Federal Reserve Bank of St. Louis. Which of the following best explains an effect on the United States economy by the patterns depicted in the maps?Which of the following best explains an effect on the United States economy by the patterns depicted in the maps? Federal programs were created to reduce levels of unemployment.
Which of the following historical developments between World War I and World War II would the author of the passage most likely support?Public debates over the proper balance between liberty and order. Which of the following historical developments between World War I and World War II would the author of the passage most likely support? d. the efficacy of using federal power to achieve social goals.
Which of the following best explains a long term result of the development depicted in the excerpt?Which of the following best explains a long-term result of the development depicted in the excerpt? New forms of mass media contributed to the spread of national culture.
Which of the following was a key difference between the Korean War and the Vietnam War quizlet?Which of the following was a key difference between the Korean War and the Vietnam War? The chances of a direct military clash between the United States and the Soviet Union was greater in the Vietnam War. United States leaders could more easily argue that communist aggression led to the Vietnam War.
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Which of the following explains the context for United States economic development between 1950 in the early 1970s?
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