Did you know that the South Korean economy experienced the biggest growth in the shortest period in history? In the 1960s, South Korea was one of the poorest countries in the world. However, in the past 60 years, it has become one of the largest economies worldwide. The main reasons for South Korea’s successful economic growth are innovation and technology. Let’s study it further.
Overview of the South Korean economy
As of 2021, South Korea’s economy ranks as the tenth-largest economy in the world and the fourth in Asia with a GDP of US $1,823.85 billion. However, it was not always like that. Before the 1960s, Korea was among the poorest countries in the world with a GDP per capita of just US $79. This was primarily due to wars and Japan’s occupation of the country from 1910 until 1945.¹
In the years that followed, South Korea took a turn and the economy has grown rapidly. Between 1962 and 1989 the economy grew by an average of 8% in GDP each year, from $2.7 billion to $230 billion. South Korea was no longer considered a poor economy.²
This was possible thanks to the US donating $3.1 billion dollars and the government’s support with tax concessions to companies that had potential, such as Hyundai, Samsung, and LG. This helped boost the economy and create more jobs. The rigid education system has also largely contributed to the growth of the economy as it pushed and motivated youngsters to create innovations and technological developments. Due to these efforts, the South Korean economy even continued growing during the global financial crisis of 2007–08.³
However, due to the pandemic and the trade wars between China and the US, the South Korean economy saw a decline in its growth by 0.9% in 2020. However, the economy did not continue to decline and bounced back to continue its growth at 4.3% in 2021.⁴ This continued growth in 2021 was impacted by the government’s fiscal and expansionary spending to improve employment and increase the number of jobs available in the labour market.
Economic growth
Economic growth is the increase of the real output over a particular period of time. Economic growth is measured by the increase in a country’s Gross domestic product (GDP).
Which type of growth has South Korea’s economy experienced? There are two main types of economic growth: short-run economic growth and long-run economic growth.
Short-run economic growth is the growth of an economy that uses its previously underutilised resources (such as unemployed labour) to stop performing below its capacity. This type of economic growth is also referred to as an economic recovery.
Long-run economic growth is an increase in aggregate supply over time. An increase in productive capacity in the economy leads to more goods and services being produced.
To learn more about this topic, take a look at our explanations on Economic growth.
Characteristics of the South Korean economy
Let’s explore some of the most important characteristics of South Korea’s economy.
South Korea’s economy utilises its resources rapidly
Before the 1960s, the South Korean economy was deprived due to wars and Japan’s occupation. That year, 40% of the population was unemployed and suffered extreme poverty. In the 1960s the economy was declining at -40.71%.
However, from the 1960s onwards South Korea started to put its focus on exports and utilising labour productivity by increasing employment in the short term period. This caused the GDP to grow rapidly. Between 1963 and 1969 it grew 35.3%.⁵ We can refer to this spur in economic growth as short-run economic growth or economic recovery, as unutilised resources such as unemployed labour were put to work.
Be aware that over time not only did South Korea start to utilise unused resources but also increase its productivity, which affected the country’s long-run economic growth.
South Korea has a mixed economic system
South Korea has a mixed economic system.
Private economic freedom (people have a lot of freedom to start their own businesses and have quite a few foreign trade options)⁶ is accompanied by the government’s regulations, such as restricted foreign investment, mandatory 52-hour working weeks, income taxes, etc.
South Korea is ranked as the twenty-fourth most free economy in the world.
South Korea’s economic growth is highly influenced by exports
South Korea’s economic growth is highly influenced by exports such as electronics, vehicles, and plastics. The country’s exports have grown from US $495,426 in 2018 to US $604,860; they had a slight decline in 2019 and 2020, but increased again in 2021. Moreover, exports are forecasted to continue to increase in the upcoming years. This characteristic of the Korean economy tells us that its economic growth wasn’t only a short term thing: it was a long-run economic growth as both productivity and exports have increased.
South Korea’s economy heavily relies on foreign trade
South Korea is not only an export-driven country, but it also imports goods from China, the USA, and Japan. In fact, 70% of South Korea’s GDP is based on world trade, which includes exports and imports, which are forecasted to increase in the upcoming years. That leaves South Korea as the seventh-largest exporter and ninth-largest importer globally.⁷ The growing foreign trade regarding imports and exports tell us that productivity and demand are increasing simultaneously therefore in this sense this shows us that Korea has a long-run economic growth.
South Korea’s economy continuously improves labour productivity
The Korean labour force is becoming more productive as the output per hour continues to increase over time. For instance, in 2010 the average labour productivity per hour was US $32.1 and as of 2020, the average labour productivity per hour increased to US $41.7.⁸ This labour productivity improvement is influenced by innovations and technological enhancements which helps labour to perform more effectively. This is an example of the long-run economic growth: there is an increase in labour productivity which increases the nation’s real output.
South Korean economy’s ranking
Despite being one of the poorest economies worldwide, South Korea has become the tenth largest economy in the world and fourth in Asia through innovation, technology, education, and their export strategy.
In table 1, you can see South Korea’s economy compared to the nine other strongest economies worldwide.
| Country | GDP in 2020 (Billions in US $) | GDP in 2021 (Billions in US $) | Growth between 2020 and 2021 in % |
| United States | 20,893.75 | 22,939.58 | 5.97 |
| China | 14,866.74 | 16,862.98 | 8.02 |
| Japan | 5,045.10 | 5,103.11 | 2.36 |
| Germany | 3,843.34 | 4,230.17 | 3.05 |
| United Kingdom | 2,709.68 | 3,108.42 | 6.76 |
| India | 2,660.24 | 2,946.06 | 9.50 |
| France | 2,624.42 | 2,940.43 | 6.29 |
| Italy | 1,884.94 | 2,120.23 | 5.77 |
| Canada | 1,644.04 | 2,015.98 | 5.69 |
| South Korea | 1,638.26 | 1,823.85 | 4.28 |
Table 1. World economy ranking 2020-2021.
⁹The South Korean economy grew by more than 4% between 2020 and 2021, but compared with other economies, South Korea did not show much growth. Among the nine strongest economies, South Korea comes eighth in economic growth just above Japan and Germany.
Thus, we can conclude that South Korea’s economy continues to grow, but not as fast as in the 1990s. Part of the reason could be the Coronavirus pandemic, which may have a long-lasting effect on the nation’s economic growth.
The GDP per capita shows the average living standards and economic well-being of a country. It is calculated by
diving the country’s total GDP by the total number of residents in the country.
As of 2021, South Korea’s GDP per capita was US $27,490.00, which is well above the world’s average.¹⁰
The future of South Korea’s economy
Let’s explore the predictions and estimations of the International Monetary Funds (IMF) regarding the future of the South Korean economy.
The IMF predicts that South Korea’s economy will continue its steady growth throughout the upcoming years. Economists foresee that South Korea will continue to rank as the tenth largest economy in 2022. To be more specific, they predict that South Korea’s economy will grow by 3.3% in the year 2022 and reach a GDP of US $1.91 trillion.
In 2022, this growth is predicted to result from an increase in domestic demand and private consumption of services since the government plans to ease restrictions due to the high vaccination rates.¹¹ This growth in private consumption would be an economic recovery or short-run economic growth, as unused resources, such as services, are back on demand as Covid 19 restrictions are lifted.
In terms of foreign trade, South Korea’s exports between 2022–25 are predicted to grow annually ranging from 4.7% to 3.4%. On the other hand, imports throughout the same period are forecasted to grow ranging from 5.0% to 3.7% annually.¹² This predicts that South Korea will have a long-run growth as demand and supply of goods and services will continue to increase steadily.
The difference between North and South Korea’s economies
The North and South Korean economies are extremely different. Korea was divided in 1948 into the Democratic People’s Republic of Korea in the North and the Republic of Korea in the South. After the end of the Korean War in 1953, the two countries took completely different social, economic, and political paths.
Let”s see a brief comparison of these two economies.
| North Korea | South Korea |
| North Korea is isolated from the rest of the world and tightly controlled by the government. Therefore, the economic growth statistics are unpublished or unreliable. However, the forecasts are that the economy will remain poor and grow at a very slow rate or even decline. | South Korea has seen one of the biggest growths in history. It went from being one of the poorest countries in the 1960s to be in the top 10 of the world’s biggest economies. |
| The North Korean economy struggles to meet people’s basic needs such as food and safety. According to the World Bank, in 2017 half of North Koreans lacked electricity. | The South Korean economy ranks above the world average in terms of living standards, education, earnings, security, etc. |
| North Korea’s economy heavily relies on help from the United Nations as well as a few countries like China. | South Korea‘s economy’s growth is influenced by world trade. In fact, 40% of the country’s GDP comes from that. South Korea is one of the biggest and most important exporters in the world. |
Table 2. Comparison between South Korea and North Korea’s economy.¹³
South Korea Economy - Key takeaways
- In 2021 South Korea’s economy ranked as the tenth-largest economy in the world and the fourth in Asia with a GDP of US $1,823.85 billion.
- Before the 1960s, South Korea’s economy was one of the poorest globally.
- Between 1962 and 1989 South Korea’s economy grew by an average of 8% annually.
- South Korea’s economic growth in the 1960s was a short-run economic growth since previously unused resources like unemployed labour were utilised.
- Following the economic recovery in the 1960s, South Korea’s economy has been increasing its GDP and productive efficiency which is referred to as long-run economic growth.
- The key characteristics of South Korea’s economy are the rapid use of its resources, a mixed economic system, exports, reliance on foreign trade, and constant improvement of labour productivity.
- The IMF forecasts that South Korea’s economy will continue to grow steadily along with its foreign trade regarding exports and imports.
- The key differences between South Korea’s and North Korea’s economies are that South Korea’s economy developed very quickly and people have above average living standards. In North Korea, although the statistics are unpublished or unreliable, the predictions are that country has very slow or no economic growth, and people are still lacking basic needs.
Sources
1. World Bank, The East Asian miracle, Economic Growth and Public Policy, 1993.
2. World Bank, The East Asian miracle, Economic Growth and Public Policy, 1993.
3. World Bank, The East Asian miracle, Economic Growth and Public Policy, 1993.
4. Santandertrade, South Korean Foreign Trade in figures, 2022.
5. Seung-Hun Chun PHD, Strategy for Industrial Development and Growth of Major Industries in Korea, 2010.
6. World Bank, The East Asian miracle, Economic Growth and Public Policy, 1993.
7. Santandertrade, South Korean Foreign Trade in figures, 2022.
8. Yoon, L. Labor productivity per hour in South Korea from 2010 to 2020, 2021.
9. Daniel Collinge, Why North Korea still falls short in providing for the basic needs of its people, 2019.
10. Trading Economics, South Korea GDP per capita, 2021.
11. Joori Roh, S.Korea sees steady recovery, slightly increases 2022 growth forecast, 2021.
12. Santandertrade, South Korean Foreign Trade in figures, 2022.
13. GlobalEDGE, South Korea: Introduction, 2021.
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