Economy and Trade
Over the past 50 years, South Korea (often referred to in financial markets as Korea) has been transformed from a largely rural and poverty-stricken country into one of the world’s major economies, and a leading exporter of cars and electronic goods. South Korea’s success is often called the “miracle on the Han,” after the river that runs through the 23-million-strong capital, Seoul. This economic success has occurred even though South Korea remains technically at war with North Korea; the three-year civil war between the Communist North and the Western-backed South ended in 1953 without a peace agreement. The South has since lived with the threat that its unpredictable and still Communist northern neighbor, which, in 2006, successfully tested a nuclear weapon, could reignite hostilities.
The South Korean economy is now the third largest in Asia and the 13th largest in the world. However, the government must confront serious challenges if the economy is to remain prosperous. These include a rapidly ageing population, and structural problems such as a rigid labor market, and a general lack of regulatory transparency.
Economic Policy over 12 Months
The government of President Lee Myung-bak, who was elected in December 2007, came to power promising to roll back the influence of the state. Lee argued that “the Korean economy is too large and too complex to be managed by the government,” and promised to cut corporate and personal taxation, reduce the number of government ministries, deregulate the economy, reform the labor market, privatize state-owned entities, and liberalize foreign trade. The popularity of this policy offering may have reflected widespread unease among South Koreans about the growing economic threat from China and other low-cost Asian producers. While the Lee administration has delivered on some of these pledges, the global financial crisis that broke in September 2008 has derailed others, including the government’s flagship privatization program.
By the start of 2009, and following a dramatic weakening of the economy, President Lee said he was committed to finding policies that would make the recession a shallow one. The president declared a national emergency, and said he would preside over a weekly emergency economic committee consisting of senior policy-makers to ensure that a four-year investment plan, worth US$38 billion and designed to boost the economy, was implemented. The plan is focused on environmental projects and the infrastructure, and aims to create one million jobs. However, the government may have trouble steering its plans through parliament. The opposition is opposed to a number of bills designed to liberalize the economy and improve South Korea’s international competitive position, and it physically disrupted parliament for nearly two weeks during December 2008 and January 2009.
The central bank pursues an inflation-targeting monetary regime, aiming to keep inflation within a range of 2.5–3.5%. After a one-year pause, monetary policy was tightened in August 2008. Inflation had, by then, exceeded the inflation target for 10 consecutive months, and the central bank cited concerns about liquidity growth and the need to anchor inflation expectations behind the decision to raise the benchmark rate to an eight-year high of 5.25%.
Following the escalation of the global credit crunch in September 2008, the central bank embarked upon a program of cutting interest rates aggressively. By the end of February 2009, the key interest rate stood at just 2%, with further loosening anticipated by markets. However, despite these cuts, credit conditions in the country remained difficult. Risk-averse financial institutions have been conservative with new lending, and companies with low credit ratings have experienced great difficulty in raising capital.
Economic Performance over 12 Months
With assistance from the International Monetary Fund (IMF), South Korea recovered from the 1997–1998 Asian financial crisis to record strong growth rates for much of the current decade. In 2006 and 2007, for example, the economy expanded by 5.1% and 5%, respectively. However, the global financial crisis that developed in September 2008 hit South Korea particularly hard as a result of its open economy. According to preliminary data, the economy contracted by 5.6% in the last quarter of 2008, compared with the previous quarter. Exports declined sharply, and this fed through to weaker consumption and investment. The economy grew by 3.5% overall in 2008.
Korean financial markets were affected even more than most by external shocks during 2008. Writing for the South Korean news agency, Yonhap, in February 2009, Anoop Singh, director of the Asia and Pacific Department at the IMF, explained that “both domestic and foreign-exchange liquidity tightened for banks with large wholesale financing requirements, while foreign investors retrenched from very liquid markets such as Korea.”
However, Singh argued that the economy should begin to recover during the second half of 2009, because the banking system is “well capitalized, non-performing loans are still low, and balance sheets of large corporates are generally healthy.” Furthermore, Singh declared that policy-makers had taken a “comprehensive and forward-looking approach” to the global turmoil to maintain the country’s fundamentals. In particular, Singh praised the loosening of monetary policy, and proactive measures taken by the authorities to ensure “that liquidity in the banking system remains ample, despite the tightening of external financing conditions.” He also commended “numerous initiatives to bolster the financial and corporate sectors, and to avoid the sharp deleveraging process seen elsewhere, such as through bilateral currency-swap arrangements with the United States, Japan, and China.”
In March 2009, the government said that it expected the economy to shrink by around 2% in 2009, marking the first contraction since the 1997–1998 Asian financial crisis. The finance ministry said that around 200,000 jobs would be lost during the course of the year as exports collapsed—they fell by 26% in the first two months of 2009. However, the government believed that exports would pick up later in the year, aided by a sharp fall in the currency; by March 2009, the won had lost 35% of its value against the dollar over the preceding year.
Support for Inward Investment and Imports
The South Korean government has a generally positive attitude towards foreign investment, and the administration of President Lee has been particularly keen to improve the investment environment. Certainly, there are various barriers that need to be addressed. The regulatory environment remains opaque in certain areas, while labor laws are overly rigid. Labor relations are also problematic, with large numbers of days lost through strikes relative to other Organization for Economic Cooperation and Development (OECD) countries. Invest Korea can provide assistance to investors.
South Korea is a member of the World Trade Organization, and is striving to liberalize its trade regime. For information on tariffs on specific goods or for other assistance on importing goods into the country, see the website of South Korea’s customs service.
Tax Exemptions
South Korea offers various tax exemptions and other incentives to companies that invest in South Korea. A guide detailing all of these incentives is published on Invest Korea’s website.
Statistics
GDP growth: 3.5% (2008, official statistics)
GDP per capita: US$26,000 (2008, est.)
CPI: 4.1% (February 2008, official statistics)
Key interest rate: 2% (end-February 2009, official statistics)
Exchange rate versus dollar: South Korean won per US dollar—1,101.7 (2008, est.)
Unemployment: 3.6% (January 2009, official statistics)
FDI: US$103.7 billion (June 30, 2008)
Current-account deficit/surplus −US$6.41 billion (2008)
Population: 48,379,392 (July 2008, est.)
Source: CIA World Factbook except where stated
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