SEOUL – In the last half-century, South Korea has become a model for developing countries, with remarkable economic growth enabling it to become the world’s eighth largest trading country and achieve per capita income of $26,000. But lately its economy has been faltering, with GDP growth averaging 3.6% for the last ten years – a significant drop from the 8.1% annual growth rate that prevailed in 1965-2005. And the OECD projects a further decline – to around 2.5% – in the coming decade.
But a forecast is not fate. With a new economic strategy that nurtures more diversified sources of growth, while reducing the country’s excessive reliance on exports and large enterprises, South Korea can reinvigorate and sustain strong growth.
South Korea’s economic performance over the last 50 years was attributed largely to good fundamentals, including a high savings rate, strong human capital, sound institutions, and prudent fiscal and monetary management. Trade openness provided access to inexpensive imported intermediate goods, larger markets, and advanced technologies, thereby contributing to rapid productivity growth in the country’s manufacturing industries. Performance-based incentives facilitated the continuous upgrading of South Korea’s comparative advantage in global markets.
The problem is that such policies have led South Korea to become excessively dependent on exports for growth. Exports accounted for about 56% of South Korea’s gross national income in 2013, compared to 34% in 2002 and just 15% in 1970. As a result, South Korea’s economy has become highly vulnerable to changes in external demand – a fact that became starkly apparent during the 2008 global economic crisis.