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Newly Industrialised Countries

Case Study: South Korea


NICs: Definition:
- Countries that have undergone rapid and successful industrialisation since the 1960s.
- Economic growth initially achieved through the development of manufacturing
industry and exportation of cheap consumer goods. The Asian Tigers benefitted from
a large, flexible and very cheap labour supply and each country developed low skilled
and labour-intensive industries.
- The emergence of NICs has been a key element in the process of globalisation.

Asian NICs 3 generations

Filter down concept of industrial location


- In Asia 3 generations of NIC can be recognised in terms of the timing of industrial
development and their current economic characteristics.
- Nowhere else in the world is the filter-down concept of industrial location better illustrated

Positive Consequences of economic growth

• TNCs have brought in valuable foreign currency which has been used to increase
domestic production, reduce imports and fund infrastructure and social development
• Old and new technologies have been introduced and this has allowed the
development of Asian TNCs in these fields
• With increased prosperity Asian NICs rapidly improved their essential
infrastructure such as roads and airports and then set about improving the quality of basic
life.

Case study: South Korea

South Korea has grown rich in a short time:

- After the Korean War of 1950-3 the South had a GDP per head the same as much of
Sub Saharan Africa. It is now the 14th richest country in the world.
- From the early 1960s the economy took off achieving amazing rates of growth for 40
years.
- Wages rose steadily and all aspects of the quality of life improved.
e.g. life expectancy increased from 47 years in 1955 to 75 in 2002.

Reasons for South Korea’s success

- Government influence

• State-directed bank loans at negative real rates of interest


• Held the growth of wages well below that of productivity by banning most trade unions
• Held down the price of grain in the rural areas
• Initiated a program of export-led economic growth
• Invested heavily in education

Reasons for South Korea’s success continued.

- Copying of the developed world’s technology. At first SK remained dependent on the


technology of the US and Japan but by the 1990s SK had emerged as one of the world’s most
technologically advanced countries.

- Development of huge TNC’s known as chaebol. These progressed from the


manufacturing and exporting of inexpensive consumer goods through the manufacturing of heavy
industrial products to the manufacture of high-tec equipment.

- Location. To the west of SK lies China and to the southeast lies Japan

- Attracting FDI. SK extremely successful in attracting foreign investment. Much of this has
come from the Transnational companies.

• From the 1960s to 1990s SK transformed itself from an exporter of mostly textiles and
shoes into a major global producer of cars, shipbuilding and steel and later, high technology
fields such as mobile phones and semi-conductors.

Industrialisation Process – Korea

1960s
Government - 5 year Economic Development Plan. Shift of policy away from inward looking
strategy of import substitution to outward looking strategy of export of light manufactured goods,
Korea has comparative advantage due to cheap labour

1970s
Government policy – restructuring of type of exports in favour of - more sophisticated products
- higher value added products
- increase in agricultural products

Korea develops Heavy Industries and Chemical Industry (HCI).


- Therefore a growing demand for skilled workers pushes up wages.
- Increases urbanisation – workers migrate to industrial centres where jobs available.
- HCI policy produces good results, GNP increases
- Problem: Over investment in HCI, under investment in light industries

1980s
Government policy:
- Rationalisation of industries with the example of ship building. Concentration of
economic power increases because many of the troubled companies are taken over by the
growing TNCs, CHAEBOLS
- government restrictions on FDI relaxed, recognition of FDIs role in promoting
competition and transferring advanced foreign technologies
- industrial restructuring aimed at promoting small and medium companies

1990s Globalisation

Government Policy – Needs to change economic strategy. Previous one, which promoted
exports using cheap labour, not working. Lost comparative advantage, 1990s wage increase
averages 18% a year. Also liberalisation occurs. Keeping domestic markets protected from
foreign competition has shown its limits.

Economic crisis of 1997

1990S structure of Korean economy had become increasingly vulnerable

- external debt and insufficient foreign exchange reserves


- 30 years of government led growth which had created a close relationship between the
government and the Chaebol. Main concern of Chaebol became expansion in size rather than
making profits. Debt financed growth. Foreign exchange crisis 1997. IMF called in by Korea to
manage the crisis
- Reforms of Chaebol had 2 aims
• to reduce the size of corporate debt
• new structure for TNCs with better and more transparent management

The Asian 1997-8 Financial Crisis

• The SK economy was particularly badly hit. Why?

- Downturn in the semiconductor, metals and petro-chemical businesses and the value of the
yen fell, increasing the price of SK’s products compared with Japan. Profits slumped and compan
borrowing rose. SK’s foreign debt doubled between 1995 and 1997

- Emergence of low-cost competitors in the region

- High manufacturing wages


2000
Government policy – Innovation
- Very high rate of borrowing by chaebols
3 areas of future growth:-
-Job creation
- Increased foreign competition
-Innovation in industries
-Balanced development in rural and urban
- Banking system collapsed because of bad debt
areas and in
large and small companies
- Chaebols had crowded out small firms leaving the
country with few innovative start up companies