Korea's economy: Finding a new momentum

OECD Economics Department

©Michael Dean/OECD Observer

Korea’s transition from one of the poorest countries on earth in the early 1960s to the world’s 11th-largest economy and sixth-largest exporter by 2015 is unprecedented. 

The high-growth era that began in the early 1960s was supported by: first, an outward-oriented development policy based on the expansion of exports; second, macroeconomic stability; and third, investment in physical and human capital.

I was privileged to watch the early days of the “Miracle on the Han River” while living in Korea from 1974 to 1976; then, per capita income was less than 15% of the US level (adjusted for purchasing power parity). Life expectancy was short: my friends who saw through their 50s were honoured with “a feast at age 60” (환갑잔치). Poverty was accompanied by political repression and martial law.

Returning to Seoul in 1993 to begin preparing the first OECD Economic Survey of Korea, I saw a very different country. Rapid industrialisation had made it a major exporter, with per capita income at 37% of the US level, similar to Greece and Portugal at that time. Development was underpinned by education: enrolment rates reached 90% for primary school in 1964, for middle school in 1979 and high school in 1993. In addition to the economic benefits, universal access to primary and secondary education promoted social mobility and income equality. The focus on tertiary education in the 1990s laid the foundation for Korea’s success in information technology and the growth of a knowledge-based economy.

Well-being on the Han River ©Ed Jones/AFP

Economic development was accompanied by democratisation: the election of President Roh Tae-woo in 1987 was the first democratic transition of power in Korean history. His successor, President Kim Young-sam, Korea’s first president without a military background, achieved his goal of leading Korea into the OECD in 1996, a feat that represented the culmination of 35 years of extraordinary growth.

However, less than a year later, Korea was hit by the Asian financial crisis. In November 1997, Korea requested emergency assistance from the IMF to avoid a default on its foreign debt. In early December, the IMF announced a record US$57 billion agreement with Korea. Nevertheless, the situation continued to deteriorate due to large-scale capital flight, and the Korean won lost nearly half of its value relative to the dollar during the month of December 1997. The survival of Korea’s economic miracle appeared to be in jeopardy.

The financial crisis led to a sharp economic downturn. Output fell more than 5% in 1998 and around half of the country’s chaebols disappeared, including Daewoo, the second largest conglomerate, whose 275 companies manufactured everything from ships to semiconductor chips. The unemployment rate jumped from 2% to 7%, leading to severe hardship in a country with only a rudimentary social safety net. During my visits in 1998, Seoul was covered with signs advertising “IMF” sales, also referred to as “I aM Fired” sales. I was touched by the resilience and patriotism of Koreans. Ordinary citizens lined up to turn in their personal holdings of gold–even wedding bands–to help the country overcome the financial crisis.

Click to enlargeThe 1997 crisis was a result of a number of structural weaknesses that had developed during the high-growth era. As noted in the OECD Economic Survey of Korea in 2000, Korea had been “deficient in developing the rules and principles of a market economy, failing to implement structural reform policies consistent with the changes in the international environment”. Two such weaknesses appear to have been fundamental: the low levels of profitability and high levels of debt in the corporate sector, reflecting the tendency of the business conglomerates to diversify across a wide range of industries; and a poorly-functioning financial system that followed government, rather than market, direction in allocating capital, as well as having poor credit analysis and internal risk control mechanisms.

Following the old saying “never waste a crisis”, the Korean authorities set out to address these weaknesses, with the OECD providing support. For instance, our annual OECD Economic Surveys of Korea over 1998-2001 helped by focusing on reforms to improve the corporate sector and the financial system, as well as the labour market. These policies laid the foundation for renewed growth, which averaged some 4.3% per year during 2001-11.

oecd,economy,korea,chaebols,randall jones,crisis,growth

Star export: K-pop icon Psy enthrals a lively crowd. The billion-dollar Korean pop music industry has been dubbed “Korea’s greatest export” by Time magazine. Lee Jae Won/REUTERS

Since 2011, however, the annual output growth has slowed, in part reflecting a more morose global picture, to 2.8%, leaving per capita income at around 64% of the US level. Domestic problems shared the blame. The current president, Park Geun-hye, stated in 2014 that there would be “no future for us, unless we break the protracted cycle of low growth by changing the fundamentals of our economy”. Sustained output growth is necessary to further raise living standards, deal with the cost of possible rapprochement with North Korea and cope with population ageing, which is projected to be the fastest in the OECD.

Slowing growth suggests that Korea’s traditional growth model, based on exports produced primarily by chaebols, has become less effective. The OECD is supporting the government’s objective of fostering a “creative economy” by shifting Korea’s economic paradigm to one based on innovation in which new start-ups and the service sector play a more central role.

As stressed in the 2016 OECD Economic Survey of Korea, converging to productivity levels in the most advanced countries requires narrowing productivity gaps between manufacturing and services, and between large and small firms. This, in turn, depends on improving framework conditions through regulatory reform, greater integration in the world economy, and enhanced labour flexibility. Changing the government’s role from that of coach to referee is necessary to promote a creative economy.

An essential goal is to ensure that growth is inclusive. One of the hallmarks of Korea’s high-growth era was a relatively low level of inequality, but its performance in this regard has weakened. Indeed, inequality has risen significantly and Korea’s relative poverty rate is the eighth highest in the OECD area, reflecting wide wage gaps between regular and non-regular workers, who account for a third of employment and earn only 64% as much per hour as regular workers. Breaking down labour market dualism and addressing the large productivity gaps between services and manufacturing, and between large and small firms, would be sure steps to promote more social cohesion.

Quite simply, after rapid economic development, Korea now needs to focus more on well-being. Its work-life balance is undermined by working hours that are the longest in the OECD area. In particular, Korea must reverse the environmental degradation that accompanied rapid industrialisation in order to improve the quality of life.

My 40-year experience of Korea leaves me optimistic that the country will overcome these challenges. Korea’s most important resource is its people, which are outstanding in so many ways. I look forward to continued collaboration with Korea and to celebrating further progress over the next 20 years.

OECD (2016), OECD Economic Survey of Korea, OECD Publishing, see www.oecd.org/korea

©OECD Observer October 2016

Economic data


Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive print editions delivered to you directly

Online edition
Previous editions

Don't miss

  • Africa's cities at the forefront of progress: Africa is urbanising at a historically rapid pace coupled with an unprecedented demographic boom. By 2050, about 56% of Africans are expected to live in cities. This poses major policy challenges, but make no mistake: Africa’s cities and towns are engines of progress that, if harnessed correctly, can fuel the entire continent’s sustainable development.
  • “Nizip” refugee camp visit
    July 2016: OECD Secretary-General Angel Gurría visits the “Nizip” refugee camp, situated between Gaziantep and the Turkish-Syrian border, accompanied by Turkey’s Deputy Prime Minister Mehmet Şimşek. The camp accommodates a small number of the 2.75 million Syrians currently registered in Turkey, mostly outside the camps. In his tour of the camp, Mr Gurría visits a school, speaks with refugees and gives a short interview.
  • OECD Observer i-Sheet Series: OECD Observer i-Sheets are smart contents pages on major issues and events. Use them to find current or recent articles, video, books and working papers. To browse on paper and read on line, or simply download.
  • Queen Maxima of the Netherlands gives a speech next to Mexico's President Enrique Pena Nieto (not pictured) during the International Forum of Financial Inclusion at the National Palace in Mexico City, Mexico June 21, 2016.
  • How sustainable is the ocean as a source of economic development? The Ocean Economy in 2030 examines the risks and uncertainties surrounding the future development of ocean industries, the innovations required in science and technology to support their progress, their potential contribution to green growth and some of the implications for ocean management.
  • OECD Environment Director Simon Upton presented a talk at Imperial College London on 21 April 2016. With the world awash in surplus oil and prices languishing around US$40 per barrel, how can governments step up efforts to transform the world’s energy systems in line with the Paris Agreement?
  • Happy 10th birthday to Twitter. This 2008 OECD Observer interview with Henry Copeland said you’d do well.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Once migrants reach Europe, countries face integration challenge: OECD's Thomas Liebig speaks to NPR's Audie Cornish.

  • Message from the International Space Station to COP21

  • The carbon clock is ticking: OECD’s Gurría on CNBC

  • If we want to reach zero net emissions by the end of the century, we must align our policies for a low-carbon economy, put a price on carbon everywhere, spend less subsidising fossil fuels and invest more in clean energy. OECD at #COP21 – OECD statement for #COP21
  • They are green and local --It’s a new generation of entrepreneurs in Kenya with big dreams of sustainable energy and the drive to see their innovative technologies throughout Africa. blogs.worldbank.org
  • Pole to Paris Project
  • In order to face global warming, Asia needs at least $40 billion per year, derived from both the public and private sector. Read how to bridge the climate financing gap on the Asian Bank of Development's website.
  • How can cities fight climate change?
    Discover projects in Denmark, Canada, Australia, Japan and Mexico.
  • Climate: What's changed, what hasn't, what we can do about it.
    Lecture by OECD Secretary-General Angel Gurría, hosted by the London School of Economics and Aviva Investors in association with ClimateWise, London, UK, 3 July 2015.
  • Is technological progress slowing down? Is it speeding up? At the OECD, we believe the research from our Future of ‪Productivity‬ project helps to resolve this paradox.
  • Is inequality bad for growth? That redistribution boosts economies is not established by the evidence says FT economics editor Chris Giles. Read more on www.ft.com.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .

Most Popular Articles


What issue are you most concerned about in 2016?

Euro crisis
International conflict
Global warming

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2016