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The South Korean economic development experience: smart cities, green growth, public toilets, land and capital markets

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Table of contents

1. Challenges and Prospects of the Korean Economy

2. Secrets of Korean Economic Development

3. Korea’s Export-Oriented Industrialization: Trade and Industrial Policy

4. Korea Smart Cities Development

5. The Case of Korean Cheonggy-cheon Stream Restoration

6. Solid Waste Recycling Policies in Korea

7. Public Toilet Development in Korea

8. Korea’s Capital Market

9. Korea Governance Reform

10. Korea’s Green Growth

11. Korean Land Market

Challenges and Prospects of the Korean Economy

The International Monetary Fund (IMF) classifies South Korea as an Advanced Economy and the Bank for International Settlements (BIS) classifies South Korea in the emerging market group. The Financial Times Stock Exchange (FTSE) classifies South Korea as a Developed Market since 2009 and MSCI classifies South Korea as a part of Emerging Market Indices. The World Bank made a comprehensive study for 101 countries and suggested that Korea in the list of countries, which overcame middle income growth traps successfully. South Korea soon to expect become a member of so-called 50—30 club: country with population over 50 million and per capita income higher than 30,000 USD. Korea became the first aid recipient-turned-donor country of the world. Korea joined OECD Development Assistance Committee (DAC) in 2010, in the middle of an economic crisis and Korean government increased the budget to support foreign aid activities. Korea was the only economy with sovereign rating upgraded by all three credit rating agencies (CRA) during crisis: S&P upgraded from A+ to AA- on September 15, 2015. Korea is the first Asian country that signed Free Trade Agreements (FTA) with both US and the EU. Korea also signed FTA with China in 2015. It means that Korea have FTAs with all “Big Three” economies of the world. Korean economy rapidly has transformed from the least developed country to one of the most advanced economies.

There are three key sources for the past economic growth in Korea: outward-looking development strategy, flexible adaptation of economic policies and adherence to market principles. In 1950s Korea focused on import substitution industries and then switched to export promotion. From 1960s Korean government supported export promotion policies and activities. It was one of factors to maintain global competitiveness of Korean economy. By opening-up the market and encouraging competition the government failure was minimized and corruption prevented by market discipline. Korean government successfully adopted policies correspondent to economic development challenges. Entrepreneurship enabled firms to take risks for returns and lead technology development in Korea.

The potential growth in Korea is projected to decline to 2% after 2030 mainly due to shrinking working-age population, lower female and youth labor force participation rate and under-utilization of elderly population. Korea SME’s have a low productivity growth related to service sector slowdown. Major reforms are needed in following areas: dual labor market to be more flexible, financial safety net to strengthen the governance structure.

Korean economic miracle characterized differently from other countries, because in Korea economic growth was achieved with equity. Economic growth and equity came together until late 1990s in Korea. This is fundamental difference between Korean economic achievement and economic performance of other countries. Korea stands to join the club of major advanced economies. In a globalized world, the future of Korea will depend upon the competitiveness of non-tradable sectors.

Secrets of Korean Economic Development

Following the Korean War, Korea was rather poor country. Even in those years Korean government undertook a few very important initiatives, which amounted to efforts to build pillars as foundation for subsequent economic miracle. There were 4 such important pillars. And then in 1962 — 1971 was a period when an Outward-oriented Development Strategy Geared to Global Markets was successfully launched in Korea. In 1970s Korean government thought of the need of upgrading industrial structure in order to catch-up with advanced industrial countries. It was a background of promotion of heavy and Chemical industries. This promotion campaign was associated with intervention by the government in the market mechanism and that has provided Korean economy with resilience. When Korean economy resilience was undermined as a result of government intervention, there were few multiple external and internal crises for Korean economy. Those multiple crises forced the Korean government to undertake economic reforms and that reforms amounted to an effort to promote transition from a heavily government managed economy to a market-led economy in 1980s. It was a story of a first half of 1980s. In 1987 — 1996 Korea experienced a historic shift to democracy and for the subsequent 10 years Korea took measures to democratize various institutions as well as to internationalize the Korean economy. And those efforts were organized during terms of two successive Presidents: President Roh Tae-woo (1988 — 1993) and President Kim Young-sam (1993 — 1998). This internalization of economy was promoted amid prosperity and democratization. Despite all of these economics reforms, internalization process, there was one serious weakness of Korean economy, which was built during the 1970s and 1980s. This is a problem of a model of Chaebol’s, big business groups. This problem model was built in Korean system with intervention by the government in the market system in order to support failing industries and for which purpose government had directly managed the banking system itself. Korea had a government-led banking industry, which itself was not competitive industry. And within this banking system the banks played the role of support for Chaebols. The political could not afford Chaebol’s to fail, because Chaebols were too big. That was sort of guaranteed access by the big businesses to a bank lending. And also because of the shortage of domestic funds, the Chaebol’s wanted to borrow from the markets abroad. But in those days long-term funds transactions were tightly regulated by government. Chaebol’s and big business groups wanted to mobilize the funding from domestic system as well as from foreign capital markets. And that made Korean businesses vulnerable to the financial crisis in 1997 — 1998 and sudden movement of financial funds. And this is a nature of so-called Too-Big-To-Fail problem of Korean businesses. Despite the early effort to shift to the market-led economy in the early 1980s Korea failed to address these to Too-Big-To-Fail Moral Hazard Problem and quite contrary as result of heavy involvement in the market in the 1980s as well, in order to rationalize industrial investments and in order to address the problem of overlapping and excessive investments in heavy and chemical industries made in the 1970s, government promoted consolidation of investments and businesses. And that means enlarging the size of big businesses at the expense of smaller businesses and also that meant that government had to intervent in the banking operations heavily in order to direct the flow of funds in support industrialization. And that intervention created Too-Big-Too-Fail Hazard Problem as well as the size of Chaebol’s even much larger and that was the core of the financial crisis, which Korea experienced in the years 1997 — 1998. Advise by the IMF, Korea undertook a broad package of economic reforms, especially including the financial sector restructure and Chaebol’s sector restructure. Making banking operations basically independent by the government and political influence. In that way, the financial crisis in the late 1990s forced as well as helped Korea address Too-Big-Too-Fail Problem and basically to solve that problem. On the one hand this financial crisis was a price Korea paid for the government too much intervention in the market in the previous years, and the same time this financial crisis provided solution for that Moral Hazard Problem involving the Chaebol’s.

Social Development has been promoted by government along side economic growth. It was an agenda to support the economic growth process. Korean economic miracle was engineered by authotorian leadership by President Park Chung-Hee. In those years citizen and political rights were much constrained. However, there were elements of democracy. Because in the early days, people in Korea didn’t mind to lose some freedom in exchange for material prosperity, which economic development would provide. Even the President Park Chung-Hee was an authoritan leader, he did have some support from the citizens in general for what he was doing to promote economic growth. He was opposed and criticized by democracy fighters, opposition politicians as well as students at universities. However, President Park Chung-Hee has some public support for his approach the Korea development. But as economic prosperity increased as well as income level increased, the need for prosperity in relevant importance declined, while the peoples demand for freedoms and democracy intensified. The balance between prosperity and democracy was gradually changing in favor of democracy. And when by the 1980s Korean income level surpassed 5000 USD and economy has a high growth rate, and Korean society enjoyed a new prosperity, people begun to demand freedoms. The public opinions gradually shifted in order of more democracy. University students began to show a strong demand to allow free university bulletins at the Presidential elections to be held in the late 1987. And as result of this elections, Korea made a shift to a new democracy. Even before this Korea had a democratic forces and President Park Chung-Hee could not ignore the need to secure public understanding and support for what he was doing. This is Politics of Development as Competition for National Cause between Prosperity and Democracy.

Labor Rights were repressed, but that did mean that was no active labor market movement for labor rights. There was underground world of supporters of labor rights. Once the new democracy has come in, those labor activists became very powerful political force in Korea and they began to confront the employees of big businesses. That confrontation has become structurally impended in Korean economy society and it continues to these days. Korea has this Adversarial Labor Relations, which was consequence of the suppression of labor rights during authorian years.

Those many problems and structure weaknesses have emerged Korea to continue development in 20th century and accelerated transition to the knowledge economy. Korea had many problems and in order to ensure the sustainability of development, Korea have to address all those problematic elements in integrated way. Because all of them are functionally interdependent with others. Generally, Korean government had a selective and focus thinking. Every government as it comes in identify a few priorities and focuses on that. The focus itself may be necessary, but it should not happen at the expense of other objectives and problems. All the problems and goals for progress should be considered together and approached in interdependent way. Although, the focus on emphasis of political efforts could be on some of them. So, in that way sustainable development requirements balancing various elements.

Korean government until the mid 1990s didn’t consider an environmental consequence of economic growth very seriously. If the government make anything to protect the environment, the representatives did it rather reluctantly. Korean people began aware of these 2 faces of economic miracle. First face is prosperity and another face is environmental degradation. In 1962 Park, Chung-hee went down to the Ulsan and there he launched very first one industrial compound of Korea. Nowadays Korea has more than 1000 industrial compounds. Park, Chung-hee in his speech mentioned that Korea should eradicate the poverty and when Ulsan will become an industrial city with a black sky, it will mean that Korean dreams about successful economic development have been fulfilled. In the mid 1980s Ulsan had a black smoke filling the sky and some fish in the river near the city was dead. In Ulsan city at this time there were environmental refugees moving out of the city and the government provided subsidies in order to finance them. Ulsan city citizens began to understand that environment quality is as important as high income. And similar things happened across the country, because there were many factories in Korea. However, nowadays the river in Ulsan city is clean and many people participate in swimming competitions. The Green Ulsan city was reconstituted as a result of efforts of mid 1990s, which is coincided with local autonomy’s system. This environmental policy was supported by locally elected mayors and those efforts for environmental for a green growth. The Green Growth was formally launched as a national strategy in 2009. However, in substance green growth started much earlier, especially with introduction of local autonomy in 1995. Ulsan city was the leader in this regard.

Many other crises threaten economic development of Korea since early 2000s. Polarization of Economy and Society: Persistent youth unemployment, social inequalities rising, unhappiness and suicidal rates highest in OECD. Serious LT threats to economic prosperity: fast ageing, weak social welfare foundation, the 7th largest emitter of GHG, the contingency of inter-Korean unification as a threat. Environmental threats: air pollution, ecosystems degradation and climate disaster vulnerability. Governance failure worsening: corruption and increasing complacency among officials.

There are few important lessons from Korean Experience. First of all, Economic Development promoted with heavy-handed intervention in the market cannot be sustained. Economic Development cannot be sustained without parallel social development. The economic development strategy itself should be a socially inclusive strategy. Environmental Development should accompany economic and social development. The green growth strategy can help harmonize all three dimensions of development — environmental, economic and social. Economic Development can be enabled or expedited by authoritarian government, depending on what kind of the leader is in charge. However, development based on authoritarian leadership is unlikely to last, however good that the leadership may be.

Korea was one of the most miserable countries in the world after Second World War. Only two countries in Asia had lower GDP than South Korea during 1950s. Korea’s GDP per capita was near Ghana (75) and Mozambique (85). But after 30 years there was huge difference and the steps Korea made became larger and larger. The purpose of this chapter is to explain: What make that difference? How did Korea made such a jump while other countries stayed stagnant? What are the secrets behind that? Economic growth is determined by labor, capital and productivity. And Economic System fundamentally determined by market efficiency, property rights, corruption level, openness, economic and other policies. What was the role of economic system in Korea? Economic system is composed of four criteria: ownership (land, companies), decision-making mechanism (market or economic plan), objectives (individual freedom, growth versus equality), motivation scheme (monetary, moral, coercive).

In the past Korea had big landlords with many tenants (63% of household). In 1949 South Korean authorities carried out a very extensive land reform. 76% of farmers and 65% of farm land was covered under this land reform. Farmers paid 30% of crops during 5 years, then they were able to get the ownership. It was rather good condition for each household in Korea. And each household was able to have only 3 hectares. It’s a reason why Korean farmland households are very small and segmented. Because of this land reform process there were no big households. If country have an equally distributed land ownership such as in Korea, China or Japan, there is a tendancy of a faster economic growth. But unfortunately, many Latin American and Carribean countries are very unequal in land distribution and that is one of the reasons of the region slower economic growth. In order to compete with North Korea, a communist counterpart which was not necessarily friendly to South Korea, Seoul had a strong political pressure to enable this land reform

Another type of ownership is a company type. Whether a company is runned by Ministry, Separate Agency, SOE (State-owned Enterprise) or private one. In the past in Korea were different type of companies, but many of them are privatized nowadays.

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