Political events in South Korea accelerated after Korean President Yeon Suk-yeol imposed martial law in the country, claiming to “defend South Korea against North Korea and protect the free constitutional order”, an action that was quickly thwarted by the National Assembly (parliament), prompting military forces to leave the streets. It led to mass resignations.
Lawmakers in South Korea called for the president’s impeachment after he declared martial law before retracting it hours later, sparking the biggest political crisis in decades in Asia’s fourth-largest economy.
These events pushed South Korea to the forefront, which witnessed one of the largest economic transformations in the past sixty years. It began as an agricultural economy in the 1960s, becoming one of the 14 largest economies in the world in terms of gross domestic product, which reached 1.71 trillion. Dollars in 2023, an increase of 2.32% from 2022.
Major transformations
South Korea’s economy has undergone a remarkable transformation since the end of the Korean War in 1953. Initially the country focused on textiles and light manufacturing, then shifted toward heavy industries such as steel and chemicals in the 1970s.
By the 1980s, South Korea had embraced high-tech sectors including automobiles and electronics, and today South Korea is the 14th largest economy in the world after the government’s economic strategy allowed real GDP to grow at a rate of 7.3% annually between 1960 and 2019, according to the Asian Fund Managers Foundation. (Asia Fund Managers).
In 2020, South Korea’s GDP contracted 0.7%, recording its first economic decline since 1998 under the impact of the COVID-19 pandemic.
The economy returned to recovery in 2021 with a growth rate of 4.6%, the highest in 11 years, driven by strong semiconductor and automobile exports. Then growth slowed to 2.7% in 2022, then to 1.4% in 2023.
In its World Economic Outlook report issued in October 2024, the International Monetary Fund expects that South Korea’s economy will grow by 2.5% in 2024 and 2.2% in 2025.
Perhaps the question that arises is how did this miracle happen and transform the war-torn country from an agricultural state into one of the strongest economies in the world?
Transformation and success factors
South Korea has achieved remarkable success in recent decades in combining rapid economic growth with significant poverty reduction, as real GDP grew at an average rate of 5.7% annually between 1980 and 2023, according to World Bank data.
Korea’s per capita gross national income rose rapidly from $67 in the early 1950s to $33,745 in 2023, and Korea was the first country to receive aid before becoming a member of the Development Assistance Committee (DAC) of the Organization for International Cooperation. Economic and Development Organization (OECD) in 2010, according to the World Bank.
Many studies attribute the structural transformation in South Korea to the political and economic reforms that the country has pursued, and according to the Federal Reserve Bank (the central bank of the United States of America) in St. Louis (which is one of 12 regional reserve banks in the US Federal Reserve System), the factors for economic success can be summarized. Korean in the following points:
1- Export-oriented policiesThis policy constitutes one of the most important factors for South Korea’s success, as it became one of the top 10 exporting countries in the world within a short period, and its exports as a percentage of GDP rose from 25.9% in 1995 to 56.3% in 2012.
2- Environment and innovation: A strong business environment promotes growth in the local market and attracts foreign investors. According to the World Bank, South Korea ranked fourth in terms of the overall ease of doing business index in 2018, while the United States ranked sixth.
3- Ease of starting a business and enforcing contractsSouth Korea dominates the index of ease of starting a business and enforcing contracts, all of which play a large role in encouraging investment, production, and communications, and ultimately promote economic growth.
4- A strong interest in technologySouth Korea has paid special attention to the development of technology and innovation with the aim of promoting growth. Innovation and technology are among the main factors that have supported the competitiveness of South Korean exports and fueled the remarkable economic rise that the country has witnessed over the past decades.
5- Research and developmentDuring the years from 1996 to 2015, South Korea spent the largest share of its gross domestic product on research and development, a larger share even than the United States and Japan, which are world leaders in the field of innovation based on research and development intensity.
From 1996 to 2015, South Korea’s scientific R&D intensity grew by 88.5% (from 2.24% in 1996 to 4.23% in 2015), while in the United States it only grew by 14.4% (from 2.44% in 1996 to 2.79% in 2015).
The most important challenges facing the Korean economy
According to the East Asia Forum, the most important challenges facing the South Korean economy in the future are the following:
1- Decrease in exports and imports
Relying heavily on trade for economic growth, South Korea saw a decline in both exports and imports in 2023, with exports ending with a 7.4% decline, while only automobile and ship exports saw growth among major export goods.
What is crucial is that memory chip exports decreased by 30.6% during the current year 2024, although they began to recover last October.
2- Energy costs continue to rise
While energy imports fell by 22% in 2023, import costs for crude oil, liquefied natural gas, coal and other petroleum products remained above levels seen before the Russian-Ukrainian war, and geopolitical concerns kept costs high, including a price increase at the beginning of the Israeli aggression against Gaza.
3- Switching away from Russian fuel
In 2023, South Korea eliminated its imports of Russian crude oil, and saw its overall imports of mineral fuels from Russia decline by 50.7%.
South Korea has largely replaced Russian crude oil with increased imports from Saudi Arabia, Qatar, and the UAE. To enhance overall energy security, South Korea has reached an agreement with Saudi Arabia to store 5.3 million barrels of Saudi crude oil in Ulsan as strategic reserves for South Korea.
4- Decrease in exports to China
Exports to China, South Korea’s largest trading partner and an important source of its trade surplus, fell by 20% in 2023 to $124.8 billion.
Imports from China also fell by 8% during the year, leading to South Korea’s first trade deficit with China in 31 years.
5- The American-Chinese confrontation
Geopolitics also plays an important role in South Korean trade. In recent years, South Korea has found itself caught in the middle of the technology war between the United States and China over the critical role it plays in the supply chains for semiconductors and electric vehicle batteries.
