Moreover, the establishment of political economies provided a structure that encouraged an environment of an efficient flow of investment and production for businesses. South Korea is merited for its level of efficiency achieved through incentives, despite its high levels of corruption. The drive for efficiency is another factor which aides economic growth.
Additionally, the provision of an educational and technical infrastructure implies the emphasis of growth. The importance of education is that it equips the labour force with skills to adapt to their economy. According to the definition of growth aiding the increase in living standards is implicit. Conversely South Korea exploited the workforce through military discipline, a 54-hour working week, unequal wage due to gender and an uneven income distribution. It is argued that a compliant workforce is needed to foster growth. However this was not true for South Korea as it had the most dominant trade unions.
It is argued that the assistance from foreign investment particularly America, solely provided the rapid growth of South Korea. However, it is clear that there is a combination of factors at play, such as state planning. Although there is no doubt that the $6 million aid assisted South Korea immensely with its capital accumulation. Moreover the $ 8 billion food shipment allowed a decrease in wages and a reduction in the price of exported commodities provided South Korea with the potential to develop. It is also reported that the level of assistance provided by America accounted for 15% of South Korea’s Gross Domestic Product (GDP) and paid for 80% of its imports. Hence the high level of investment allowed the South Korean economy to flourish by the state allocating capital and investment into productive areas, which would lead to further development.
In addition to the intervention of the state, the industries were initially managed and modelled by six centralised Japanese Zaibatsu companies and consequently gave rise to the creation of the Chaebol. South Korea also relied on Japan for 40% of its imports. This. Despite the heavy influx of funding, there were restrictions on foreign involvement, such as technology transfer was a condition demanded by the government. Thus loans were favoured more, as the government and America subsequently guaranteed them.
In addition, it is reported that the successful rapid growth of the Korean Economy was in fact aided by its flexibility in adapting to the demands of the world economy. This is evident in the movement of the sectoral path from textiles to automobiles and computers.
However, these inter-institutional forms of economic co ordination and risk sharing came to a halt when the Chaebols were dismantled in 1993. It is acknowledged that the general causes of the financial crisis of Korea are the financial system, overvaluation of the won, and the behaviour of the conglomerates and unproductiveness of credit.
Krugman and the International Monetary Fund (IMF) (1998 &1997) identified that the weak banking policy left South Korea vulnerable, as the banks lent excessively and invested in low productivity projects. This was viewed as a moral hazard as it demonstrated that they had soft budget constraints. The concept was that the individual businesses were meant cross subsidise, however in practice this failed to be the case as no regulation was enforced to encourage businesses to do so.
It is argued that the won was overvalued before the onset of the crisis. Rhee and Jwa (1998) state that the overvaluation failed to trigger the capital outflow. Therefore it was irresponsible for the authorities to intervene in the foreign exchange markets, as the Korean reserves could not defend the won.
The strategic behaviour of the conglomerates was subject to decline over the last 10 years, due to low rate of return on investments and overcapacity. Huang and Xu (1999) report that the problems of the loss making projects were hidden effectively through borrowing, therefore the problem was not identified earlier. However, this eventually led to the bankruptcy of the eighth largest conglomerate, Hanbo in 1997. This consecutively led to a lack of confidence and the abandonment of the economic planning policy (which previously bailed out businesses) and the privatisation of the financial sector triggered the bankruptcy of thirty other conglomerates. Hence the debt to equity ratios of conglomerates increased rapidly to unsustainable levels e.g. Hanbo reached 60:1, as their line of credit was deleted. This lack of confidence led to lower Foreign Direct Investment (FDI), as Goldstein (1998) suggests that the series of bankruptcies acted as a ‘wake up call’, for investors to withdraw their investments. This resulted in a foreign debt bill of $150 billion at the end of 1997. Coupled with the slowdown of exports the current account deficit also grew.
Unproductive credit occurs when credit is not employed effectively to finance new and productive activities. Some individuals believe that unproductive credit occurs as a side effect of rapid capital accumulation. However, Choi and Nam (1993-4) argue that the root of the problem arose from the fact that bad debts were dealt ineffectively. For example, the Bank of Korea subsidised credit by printing domestic money, which led to an increase of inflation, another economic bad.
Despite the general explanations for the Korean crisis, there are two main views of how the financial crisis occurred. The ‘fundamentalist’ point of view states that the crisis was inevitable as the blame lies with the government, for the lack of cooperate transparency and for the moral hazard behaviour. Whereas the ‘financial panic’ standpoint believe the IMF is to blame, as the restructuring of the economy and liberalisation of the financial sector led to the withdrawal of funds and political instability.
In conclusion, the main sources of economic growth have been a combination of state guidance of exports orientated industries and financial assistance from America, which created the foundation of the economy. However without the smaller inputs towards growth, such as the land reforms of the 1950’s it is probable that the speed of South Koreas development would have been slower. It is clear that in fact the economic development has been state led, despite the arguments by some economists such as Wade (1990), believe that the government have allowed the development of South Korea to be free, as on an aggregate level the market inefficiencies created through intervention, offset each other.
Similarly, the causes of the crisis are due to a combination of factors such as the structural problems such as the low technical advancements since the mid 1980’s, for example Taiwan has 3225 more patents for technological accumulation than South Korea and the abandonment of long term strategic policy measures. However the weight of the discussion suggests that an element of uncertainty also contributed greatly to the financial crisis as each supposedly ‘Asian Tiger’ employed slightly different measures to achieve growth. Therefore the economic growth had also resulted in the change of ideology therefore giving rise to conflicts in policy measures employed. As it was unexpected how South Korea would respond to such conditions.
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Dani Rodrick, ‘Getting interventions right: how South Korea and Taiwan got rich’, Economic Policy, 20, 1995
Appelbaum R and Henderson J, States and Development in the Asian Pacific Rim, page 9
Appelbaum R and Henderson J, States and Development in the Asian Pacific Rim, page 39
Henderson J, ‘Uneven crises: institutional foundations of East Asian economic turmoil’, Economy and Society, 28 (3), 1999 Table 5- page 352