KIME: Middle East Studies
중동경제연구소 Korea Institute of the Mideast Economies
Over the past three decades, Republic of Korea underwent a remarkable change extensively. Korea has achieved "the economic miracle on the Han River." Since Korea embarked on economic development in earnest in 1962, its economy has grown at one of the fastest paces in the world. As a result, Korea that has a long history among one of the world's poorest agrarian societies, has emerged as an upper middle-income, fast industrializing country. The economic front was more so, as witnessed by Korea's laurels to step forward as the world's 11th largest nation in terms of gross national product and 12th largest trading country in 1994.
With the dawning of 1990s, Korean economy has faced the limit of growth including high wage and environmental issue owing to the past rapid economic growth domestically. Externally it also has faced the difficulties under the WTO system. Now the aftermath of rapid economic growth has come to appear as a form of high wage and decreases of price competitiveness in the foreign market. In addition to it, Korea has to prepare for the provision against unification expense concerning the unification of the Korean peninsula. However, highly skilled manpower in the high technology industry and Korean's diligence that still work hard in their position are promising to re-take off in Korean economy.
In this respect, this paper puts its main emphasis on comprehensive understanding of Korean economy. Considering a wide scope of Korean economy, my study intends to deal with general view of Korean economy, the rise of modern economy and economic development, Korea's role in the global economy, and lastly potential for the economic cooperation with turkey.
1. Land and People
The Korean peninsula extends southward from the north eastern section of the vast Asian continent, spanning 1,000km north to south. It shares most of its northern border with China and touches Russia. Since 1948, the peninsula has been divided into two parts, the Republic of Korea in the south and the Democratic People's Republic of Korea in the north.
The Korean peninsula is 222,154km2, almost the same size as the U.K. or Romania. The administrative area of the Republic of Korea is 99,392km2, slightly larger than Hungary or Portugal and a little smaller than Iceland.
Korea has a varied terrain, though about 70% of the territory are mountainous. The spectacular T'aebaek mountains run the full lengths of the east coast, where the lashing tides of the East Sea, have carved out sheer cliffs and rocky islets. The western and southern slopes are very gentle, forming plains and many shore-line is dotted with over 3,000 islands.
Considering the size of its territory, Korea has a relatively large number of rivers and streams that have played important roles in developing industries and lifestyles. The Yellow Sea, lying between Korea and the People's Republic of China, and the ocean south of the peninsula from a continental shelf with the shallow sea floor providing valuable resources for the fishing industry. Surrounding the peninsula on three sides, the sea has played a remarkable role in Korean life since ancient times, contributing to the early development of shipbuilding and navigation skills. In recent years, the seabed off the south-western coast has been explored for petroleum deposits (Korean Overseas Information Service, 1995; 5-7).
Korea enjoys four seasons and a variety of different weather types. Located in the East Asian monsoon
belt, the peninsula has hot, humid summers and long, dry, cold winters. Spring and autumn are rather short,
but very pleasant with crisp weather and many days of sunshine. Temperatures range from a low of -15℃
(5℉) in winter to a high of 34.7℃ (94.5℉) in summer. The three months of June, July and August have
the heaviest rains, with July usually being the wettest month of the year. Winter starts in late November and
lasts until early March. It is dominated by a high pressure zone caused by cold blasts of air from Siberia.
There is little precipitation and the skies are usually clear. Winter in South Korea is generally not as severe
as it is in the North (ibid; 8-9).
2) People and Population
The Koreans one ethnic family speaking one language. Linguistic and anthropological studies as well as legendary sources clearly distinguish Koreans from the Chinese and the Japanese. Sharing distinct physical characteristics, they are believed to be descendants of several Mongol tribes which migrated onto the Korean Peninsula from Central Asia.
Koreans were homogeneous people by the beginning of the Christian era. In the seventh century A.D., they were politically unified for the first time by the Shilla Kingdom (57 BC - AD 935) and subsequently witnesses a great cultural flowering. The Korean people struggled successfully for millennia to maintain their cultural and political identity despite the influence of neighboring China and the more recent aggressive inclinations of the Japanese. They are proud people with one of the longest national histories in the world.
The Republic of Korea had a population of 44.5 million in 1994 and registered a density of 447 persons
per square kilometer. The population of North Korea was 23.5 million in 1994. Minority groups are
almost nonexistent in Korea, apart from some 30,000 Chinese whom are mostly long-term residents in the
capital area (ibid; 9-11).
2. An Overview of Korean Economic History
The Korean race is believed to have moved to the Korean peninsula at the beginning of the New Stone Age, or 2000 to 3000 years before Christ. As an independent country, however, the history of Korea goes as far back as AD 668, when the Silla Kingdom (57 BC - AD 935) completed the conquest of two other early Korean kingdoms - Koguryŏ and Paekche. With the unification of the country under the Silla, the Korean people came under the rule of a single monarch - making the beginnings of a unified culture and history that was to persist, with only occasional interruptions, until this century. From the unification of the country by Silla until the colonization by Japan in 1910, Korea remained an independent nation - a period spanning more than twelve centuries. Since AD 668 Korea, as the second oldest independent nation in the world, has been a country consisting of a single race, language, and culture. The strong sense of unity - racial, cultural, and linguistic - is a fundamental quality of Koreans that dates back to the seventh century (Byung-Nak Song, 1990; 29).
Meanwhile, Dr. Hochin Choi classifies Korean economy with six periods, from the primitive ages through
the Japanese colonial period that ended in 1945:
1) The Primitive Society
2) The Ancient Society (57 BC - AD 675)
3) The Formation of the Feudalistic Society (676 - 918)
4) The Development of the Feudalistic Society (918 - 1391)
5) The Completion of the Feudalistic Society (1392 - 1910)
6) The Collapse of the Feudalistic Society (1910 - 1945)
The Ancient Society (57 BC - AD 675) under the Three Kingdoms, Koguryŏ, Paekche and Silla was characterized by its land systems, taxation systems, and slavery. The formation period of the Feudalistic Society (676 - 918) under Unified Silla encouraged the territorial unification and the centralization of feudalistic power. Under the Koryŏ Dynasty, the development period (918 - 1391) started land reforms, the expansion of privately owned land, the weakening of the centralized government, and the beginning of the handicraft industry. Also domestic trade and commerce, foreign trade and peasant revolts increased during this period, (1392 - 1910) under the Chosŏn Dynasty was characterized by land surveys, the development of a private handicraft industry, the enhancement of the exchange economy, and the peasant revolts, the chief of which was the Tonghak rebellion. The later part of the Chosŏn Dynasty was marked by changes in land control and ownership, particularly the increase of bureaucratic ownership of land and peasant-originated land ownership (Hochin Choi, 1971; 12-13).
In this period, which was the beginning of the modernization of Korean industry, the handicraft industry flourished. This industry has been the basis of the division of labor, the wage-labor system, the systematic manufacturing process, and the monetary economy. During the later part of the 19th Century and the early 20th Century, Korea faced the intrusion of foreign powers which caused less than normal growth in Korean industry. The Japanese colonization which started in the early 1900's particularly distorted the balanced growth of the Korean economy after World War 1 (ibid.; 13-14). (UC Berkeley - Berkeley Art Museum and Pacific Film Archive)
3. Opening - Up and Transition to Modern Economy
Throughout its long history, Korea was secluded from the outside world, particularly the Western world. The country was often described as the Hermit Kingdom of the Orient. This changed in the latter part of the 19th century, when Korea was forced to open its doors to Japan and the Western powers. In 1876 Japan forced Korea to open its ports to Japan by a treaty of friendship. Korea was almost entirely an agrarian economy before the Japanese colonization of 1910. During the colonial era of 1910 to 1945, the Korean economy experienced rapid structural transformation. The structural pattern of this development was largely determined by the Japanese colonial regime. As a result, the Korean economy experienced what is known as 'colonial enclave' industrialization. During this period, the share of manufactures in net commodity-product grew from less than 4 percent to over 20 percent. Japanese colonial rule ended in 1945 with the conclusion of World War II (Il Sakong, 1993; 1).
The nation's liberation was marred by the partition of Korea into two parts, North and South. South Korea was occupied by US military forces until 1948 when the government of the Republic of Korea was established. Among 1945 and 1950 Korea was in a rather chaotic situation. Economically, the partition had crippled the nation. The South was primarily agricultural while the North possessed most of the natural resources and the heavy industry established by the Japanese. The withdrawal of Japanese manpower, particularly skilled manpower, was another detrimental factor for the Korean economy immediately after liberation. Negative political and administrative factors vacuum created turmoil on all fronts. The US military government that existed during 1945-1948 was not fully prepared, and consequently it was not helpful in improving the situation (Ibid; 1-2).
Byung-Nak Song says that the period 1945-53 was one of interrupted development and social chaos. Economic development was greatly hindered after liberation by the division of the country into North and South in 1945, political turmoil during the American occupation (1945-8), and the Korean War (1950-3). The Korean War destroyed almost two-thirds of the nation's productive capacity, and almost 1 million civilians were killed. Total industrial production in 1953 was estimated to be not much more than one-third of the production level of 1940. The South Korean economy began a solid recovery immediately following the deviating war. During this period, foreign aid was an important factor in the nation's economic growth.
Korea's first republic was founded by the President Rhee in 1948
Source: The Korea Economic Weekly, December 9, 1996. He devoted to solidifying the new nation and rehabilitating the Korean economy until he was ousted by the student revolt in 1960. Under his leadership, however, Korea laid a foundation for successful outward-oriented economic growth by investing in education, introducing land reform, and completing the first stage of import substitution. A military coup, led by General Park Chung Hee who became president of ROK later, succeeded in 1961, and Korea witnessed the emergence of a political leadership committed to economic development.
Any way, the period among 1953 and 1961 was one of slow recovery of the war-ravaged economy, while
economic policy focused on import substitution and massive investments in education. The emphasis on
import substitution was clearly a mistake, but private and public investment in education turned out to pay
off handsomely in terms of producing a well-educated labour force that would provide the backbone of the
labour-intensive industries in the early 1960s. The period from 1962 to 1989 has been one of rapid
growth, beginning with the inauguration of systemic economic planning under the First Five-Year Plan
(1962-6) (Byung-Nak Song; 45).
1. The Roots and Success of Korean Industrialization
Korea's successful economic growth in modern times has deep roots. In particular, the Confucian emphasis on education and discipline, the tradition of an industrious agricultural labour force, and the traditional innovative potential of the Korean people appear to form the foundation of Korea's recent advance. No less important, however, the period of Japanese colonial rule (1910-45) and the North-South division of the country also has profoundly shaped the structure and distortions of Korea's modern economic growth (Byung-Nak Song; 28).
A basic model of Korea's economic development can be summarized as Figure 3-1. The most important
factor of Korean economic growth was a government's will to transfer the labor force from latent
unemployment to employment in the process of economic development. In 1960s, Korea had a high
quality and plentiful low price labor force. Foreign capital played a great role to set on labor force,
potential for development. Owing to the lack of capital accumulation in agricultural sector, influx of foreign
capital was an indispensible factor to develope the country at the outset. In short, a basic axis in the
Korean economic growth was an effective combination of labor force, potential for development and
foreign capital, ignitable factor. A strong developmental will of Korean government combined two
important factors effectively and sought the exit in the foreign export market. Therefore basic model of
Korean economic growth characterized as a government-led, foreign capital-depended,
industrialization-promotion and export-oriented.
Figure 3-1 Basic Model of Korea's Economic Development
Korea's remarkable economic success of the last quarter century is often cited as a model of sound economic planning, efficient resources allocation, and effective cooperation between government and business. The rapid development was led by export-oriented industrial expansion and was achieved in spite of poor natural resource endowments. Korean economic growth characterizes many factors, including investment and rapid capital growth, expansion of industrial productivity, and the development of human resources and labour productivity. Other contributing factor is the favourable worldwide conditions prevailing during the 1960s. It contains Korea's political stability, the commitment of government for economic development - by the launching of the First Five-Year Economic Development Plan, 1962-66 -, the outward-looking strategy of industrialization, the vitality and entrepreneurship of leaders, the grassroots support and participation in rural transformation, and the close government-business interplay in Korean Economic development. In the course of Korea's economic development, education by the Confucian cultural basis played a great role to enhance the quality of the labor (Seong Min Hong, 1992 a; 22-23).
In 1963, Korea switched its national development strategy from an inward, agriculture - and rehabilitation - oriented focus to an outward, manufacturing - and export - oriented focus. The new development strategy immediately fostered disparities between agriculture and industry - that is, between the rural and urban sectors. By the late 1960s, 'over urbanization' or 'over concentration' of population in the largest cities, especially Seoul, had emerged as a major social issue. Squatter settlements in Seoul also expanded rapidly due to the continuous immigration of poor rural people. To tackle this problem, the government started the Saemaul Undong or New Village Movement, in 1971. Its purpose was to enhance the household incomes and living conditions in rural areas to encourage people to stay on the farm. Through this movement the government expanded its investment in rural areas. In the mid-1970s as much as 10% of the total national investment was allocated each year to rural areas through this movement. As a result of these programmes and an extensive price-support system for rice, rural household income was raised to almost the same level as urban household income by 1975 (Byung-Nak Song; 169-171) .
Meanwhile Korea has completed three decade of rapid industrialization based on the export of
manufactures, a course to which it was impelled in the 1960s by the meagreness of its natural resources.
You can see this fact by the changes of industrial structure in Table 3-1. Above all, the motives of
Korea's rapid economic growth stemmed from the will of which Korean government that was eager
for industrialization. It was embodied by Saemaul Undong (New Village Movement) in the early
Table 3-1 Changes in Korean Industrial Structure
2. The Process of Korean Economic Development (1962 - 96)
The 1960s and 1970s marked Korea's great leap toward a semideveloped state, and the 1970s and
1980s saw the transition from semidevelopment to economic maturity in Korea. Can Korea continue
to grow rapidly and follow Japan into the ranks of non-western advanced countries? Both Korean and
foreign experts have tried to answer this question. Generally, foreigners tend to be more optimistic than
Koreans about the future of the Korean economy (Byung-nak Song, 1990; 231). Dr. Cho Soon also
argues that Korea can be optimistic about the abundant growth potential of the country. The many
scientists educated abroad can enhance the level of science and technology. There are many good,
experienced administrators who can establish order and discipline. And above all, there are people who
still work very hard. the Korean people are now, as ever before, demonstrating exuberant energy in their
pursuit of economic gain. As long as these motives are guiding economic life, a significant slowdown in
economic activity is unthinkable, and the growth of the economy is assured (Cho Soon, 1994; 196-197).
Korea has attained the rapid economic growth except 1980 since 1960s. Table 3-2. shows Korea's major
economic indicators over the past five decades.
Table 3-2 Korea's Major Economic Indicators over the Past Five Decades
.In short, Korea has achieved its high rate of growth by adopting an export-led growth strategy, which has allowed the country to make fullest possible use of its substantial endowment of human resources and to compensate for the shortage of poorly endowed natural resources. The export-led growth strategy was implemented by an energetic government in collaboration (Cho Soon, 1994; 178). We can find this fact through the performance of five-year plan in Table 3-3.
Table 3-3 Performance of Korea's Five-Year Plan
(unit: %, millions of dollars)
Now the stage of extensive growth is over, Korea needs a much more liberal approach with respect to international trade and investment. Korea is now exposed to international competition, and the only good way to survive in it is to complete with other countries, playing by international rules of the game.
From the international perspective, all Asian newly industrializing economies, including Korea, are in
transition. Korea's competitive advantage in labor-intensive manufactured goods is being eroded by rising
wage rates, a diminishing rate of improvement in productivity, and increasing difficulties in achieving
technological breakthrough. The technical gap with advanced country is not being narrowed, while the gap
with later-developing countries - notably, the countries of the Association of Southeast Asian Nations - is
being closed. There is no room for complacency, and the best to confront the future is to take risks by
internationalization (ibid.; 190).
3. The Foreign Trade Policy and Liberalization of Korea
Since 1962 the Korean government has consistently pursued an Outward-Looking Foreign Trade Policy, and, as a result, trade volume expanded more than 258 times between 1962 and 1989, with her export-import volume totaling $123.8 billion in 1989, which raised Korea to the rank of the 12th largest trading country in the world. As a consequence, the ratio of foreign trade to GNP rose nearly threefold from 20.9% in 1962 to 74.5% in 1989. During the same period, the Korea's export growth rate averaged 31.0% annually, and its import growth rate was 20.1% (Seong Min Hong, 1992; 24-25). 1989 saw the beginning of a short transitional period, in which Korea adapted to the loss of markets for labour-intensive manufactures. Although a current-account surplus of $5.1bn was earned and foreign debt was further reduced, exports succumbed to the twin pressures of currency appreciation and high wage increases.
In 1982, for the first time since World War Ⅱ, Korea registered a trade surplus with respect to the United States that amounted to about $0.3 billion. It caused the United States to request a more substantial import liberalization from government that was conducive for Ministry of Finance and Mistry of Trade and industry undertaking the Five-Year Tariff Programme (1984-88) and Long-Term Import Liberalization Schedule (1984-88), respectively. The rapidly rising trade surplus caused the direct and fierce intervention of US government. The Korean government decided to solve the current-account surplus problem by completely liberalizing the imports of manufactures, for example, by increasing the number of AA items and lowering the rates of tariff as scheduled, making special concessional tariff cuts, eliminating the Surveillance List, and revising Special Laws that used to restrict imports even for items on the list of automatic approval. The external pressures on Korea to open up its domestic market completely provide a new growth potential if the government gives positive responses to these pressures. In the absence of systematic responses, there is the danger of chaotic destruction of Korea's service and agricultural sectors (Wontack Hong, 1994; 458-465).
Liberation in Korea changed the pattern of market share by region in the world (See Table 3-4). This
reflects the change of economic circumstances and means that Korea weakened its competitiveness in the
international market. According to Table 3-4, Chinese sphere such as China and Hong Kong were
Korea's largest export markets, occupying a 20.2 % share of the overall export market. The figure is up by
11.4 % over the same period of last year. The next biggest was the ASEAN market, accounting for
15.5%, with a sharp increase of 21.7% from 1995. Export shares of Central and South American markets
also recorded a plus growth of 17.4%. Export shares of the US and Japan markets decreased by 7.8%
and 5.6% over the same period of last year. This means that Korea is losing its market share to
competitors such as China, Twain, Hong Kong and Singapore. Meanwhile, imports of consumer goods
from the US and EU markets in the period increased sharply by 14 to 22 percent.
Table 3-4 Korea's 1996 Export Share by Region
1. New Economic Order in the World
The present stage of world order after the end of the cold war displays no simple pattern. The United States is no longer hegemonic over the capitalist economy in the manner that it achieved in the 1940s, 1950s, and 1960s. But in some fields, particularly the military and the cultural, its dominance is greater in the 1990s than it has ever been. The collapse of Communism and the disintegration of alternative development strategies in the Third World has reunited the global political economy around the ideological principles of the United States. Meanwhile regionalism is in part a response to this situation. The United States, the European Union, and Japan might use the undoubted economic dominance that they enjoy in their regions to establish a political and security framework and a set of economic institutions which promote prosperity and development through trade, investment and aid. If such regionalist projects embrace open regionalism, they would still be compatible with the pursuit of policies at the global level through the G7 to stabilize the world economy and maintain economic growth (Andrew Gamble and Anthony Payne, 1996; 260-261).
The Gulf War dramatically enhanced the role of Japan and an economically united Europe and sharply reduced the role of the Soviet Union. The other transformation is the change in the underlying economic capabilities that the payments at the time of the Gulf crisis also reflect. A truly Tripolar World Economic Structure emerged, with sharing of burdens and responsibilities among a Unified Europe (EU), Japan, and the United States. USA will no longer dominate. A United Europe will become the world's largest market and biggest creditor nation and a leader in many key technologies. The Big Three of economics, therefore, became displace the Big Two of nuclear power. The most important thing is the appearance of the Bloc Economy that the Big Three ever had. European countries formed a single EU market, United States is now forming NAFTA with Canada and Mexico, and Japan, even though hard to organize it, is planning East Asia or Pacific Economic Community to cope with regional protectionism of the world trade. In the future, Regional Economy will play a great role in the world trade with the Big Three.
In short, a new world order is complex and flexible. According to Andrew Gamble and Anthony Payne'
view, there would be no hegemony, and no requirement for one. Some steering functions for the world
economy might be taken on by G7, or possibly the G3 if the European Union succeeds in forging a
coherent political will. In such a world regionalism would have a role, as one level of governance, as a
means for states to manage certain common problems which were identified as being handled best at a
regional level (Andrew Gamble and Anthony Payne; 264). At any rate, the process of the new order in the
world economy has been accelerated since the late 1980s. This trend will add more uncertainty to the
developing country's economy. Big three superpowers will play a major role in the course of reshaping of
the new world economic order. Thus flexible changes in the world order would be expected and
developed in the near future.
2. Korean Economy in the Global Economy
The most challenging task that the Korean economy faces today is how to overcome the protectionism and economic regionalism that is now prevalent in the world economy. In this regard, the new Korean government puts much emphasis on establishing a basic orientation for foreign trade policies to correspond to ever changing international conditions. In the case of the Korean economy, which has a high degree of dependency on foreign transactions, it is almost impossible to separate domestic policy and foreign trade policy because these policies are so closely interrelated. Therefore, the direction that the international economic order takes, which is strongly influenced by the three economic superpowers, the US, Japan, and the European Union, will have a great deal of influence on the Korean Economy (The IPE program, 1995; 51).
Prof. Cae-One Kim urges that Korea's interest in the tripolar economic system led by the US, Japan and EU as follows. First of all, this system playes a major role in almost all areas of the world and Korean economy: from trade and capital movement, to finance and technology cooperation. Therefore, it is obvious that Korea's relationship within this system will have a great impact on its economic development. In Korea's experience, each economic bloc shows some different and unique characteristics in its relationship with Korea. For example, the US is Korea's biggest trade partner, especially in export, but Japan is the country from which Korea imports the most. The EU, despite its important role in international trade, accounts for a very small portion of Korea's Trade. On the other hand, the US and EU play a major role in the areas of capital and financial cooperation, and Japan in the area of technology cooperation(ibid.; 53-54). Table 4-1 shows that Korean trade has a high degree of dependency on the exports to U.S. and the imports to Japan.
The major actors are the three economic super powers. Their arbitrary and unilateral foreign economic
policies sometimes cause confusion in the world economy and have a significant impact on Korea's foreign
trade. Because Korea is heavily dependent on the U.S. and Japanese markets, their mutual relations and
game plans are inevitably major concerns for Korea and other small economics (ibid.; 54-55).
Table 4-1 Major Trading Partners of ROK
(% of total trade)
3. Korea's Role under the WTO System
Korea has emerged as on of the most successful NICs (Newly Industrializing Countries) and an inspiration to other developing countries. The success of this approach is clearly shown by the fact that from 1962 to 1989 Korea's Gross National Product grew, in real terms, by an average annual rate of 8.5 percent, reaching $210 billion in the latter year, compared with $2.3 billion at the start of the First Five-Year Development Plan. During the same period, per capita GNP increased from $87 to $4,968 in the current prices. During the past two-and a-half decades, there has been a marked quality change in the nation's industrial structure in response to fast-paced economic development. Korea also witnesses radical changes of the world economic environment and domestic situations. Therefore Korea must find way to solve various problems besetting its economy, which range from mounting inflationary pressure, high cost of wage and services to lagging technological innovation, and expanding economic infrastructures (Seong Min Hong, 1992; 23-24). On the international side, Korea faces uncertainties stemming from such international environment as WTO and OECD.
Now Korea has moved from a stage where its advantage lay in cheap manual labour to one where that
advantage lies rather in relatively cheap skilled labour and line management. Its exports are no longer
dominated by textiles and clothing, but include ships, motor vehicles, integrated circuits and consumer
electronics. Table 4-2 shows recent Korea's industrialized export products.
Table 4-2 Ranking of Korea's 10 Major Export Commodity Groups
($ million, %)
Korea now seeks increasingly to develop its own technology and to sell under its own brand names. Its growing wealth is shared more equally than in many other rapidly developing countries, its farming is firmly based on the owner occupation of small holdings and it has coped impressively with its dependence on energy imports. The fall in export volume experienced in 1989 illustrates the difficulties to the transition Korea is making to knowledge - based, high - productivity export sector. Exports remained too sensitive to price considerations to weather the combined effects of a rising currency and soaring wages (EIU, 1995; 14).
Globalization characterizes today's world economy to the extent that private firms are increasingly carrying
out their business on a global scale. Intensifying competition in international markets, globalization no longer
confines the economic activities of private firms within national boundaries. Consequently, globalization
highlights two trends in the international division of labor: in one, the performance of firms within an industry
is increasingly identified with the performance of the nation; in the other, there is a strong interaction effect
between the investment strategies and technological sophistication of the firms and changing trade patterns
(Honggue Lee, 1996; 4-5). As you see Table 4-3 Korean Firms' Overseas Investment has increased and
extended with the open-door policy. The area of foreign investment has broadened steadily all over the
world. But it still leaves a problem that Korea's Foreign investment is concentrated with South East Asia
Table 4-3 Korean Firms' Overseas Investment
In the rapidly changing world economic order, institutional reforms are indispensable to response the
challenges of the new world economic circumstances such as WTO and OECD. The old institutions in the
early stage of economic development do not function effectively to meet the challenges ahead. Korea
pursues an open economy and efforts in search of internationalization. When we can accommodate
globalization into our indigenous culture, Korea will take a step forward in re-taking off and entering into
the international society.
1. Turkish Economy
Since the Second World War the Turkish economy has been transformed by the strategy growth of industry and services, and the consequent decline in the share of agriculture in national income. Its economic growth rate, albeit erratic, has been one of the highest in the OECD. Turkey followed a classic path of import-substitution industrialization up to 1980s. Since then it has moved to a greater degree of outward orientation and international competitiveness. In 1994 agriculture, forestry and fishing accounted for 15.8% of GNP (42% in 1960), compared with 27.1% for industry (16% in 1960), 6.7% for construction (6% in 1960) and 50.4% for services (36% in 1960). The vast majority of industrial development has been concentrated in the north and west of the country, in the Istanbul-Izmit region, Ankara and Bursa, but there are also important industrial centers on the Mediterranean coast (Adana, Mersin and Iskenderun) and in the western part of the Black Sea littoral (Eregli-Zonguldak).
The most striking features of trends in 1994 were the rise in average consumer price inflation to 106.4%,
from 66.1% in 1993, and the fall in GNP of 6%, compared with an average annual rise of 6% over the
previous four years. Both feature were the results of the severe financial and balance of payments crisis
encountered in the first quarter of 1994, and the government's attempts to deal with it, notably through
allowing a massive devaluation of the lira and ordering large increases in the prices of state-sector products
and services. However, it is likely that the real fall in economic activity was less steep than the official
figures suggest, due to the large size of the unrecorded informal economy (EIU, 1996; 11-12). Turkish
recent economic structure shows in Table 5-1.
Table 5-1 Turkish Economic Structure
Turkey followed the formation of the European Economic Community with great interest from the outset. Following the signing of treaty of Rome on July 31, 1959, Turkey applied for associate membership, with full membership in view in the future. In Turkey's trade relations, the EU countries first, followed by the USA, Switzerland, Austria and Japan. In imports from the OECD countries, the first ranking non-EU country is the USA. In fact, the USA comes second after West Germany in Turkey's import list. Imports from the USA were valued at 1.519 million dollars in 1988, 2.289 million dollars in 1990 and 2.241 million dollars in 1991. Imports from Japan have also followed a similar pattern. Imports, valued at 394.1 million dollars in 1988, 1.119 million dollars in 1990, 1091.9 million dollars in 1991. Import from other non-EU OECD countries have also gone up from 1,705.1 million dollars, to 4828.3 million dollars in 1991.
Until 1984, Turkey's foreign trade with Islamic countries increased but has begun to decline in recent years. A major part of Turkey's foreign trade with Islamic countries was with Iraq and Iran. Trade with these countries, which reached a record level in 1985, maintains a level of importance despite a fall in the 1986-1988 period. Nevertheless exports to these two countries went into steady decline in the 1988-1991 period. On the other hand, exports to Saudi Arabia have steadily increased since 1988. Exports to Iraq and Kuwait have sharply declined because of the Gulf War in 1990. Together with official contacts with the new republics of the former Soviet Union since the end of 1989, Turkey, for the first time, signed a five year period "Commercial and Economic Cooperation Agreement" with the Russian Federation on February 15, 1991 (Turkey, 1993; 152-156).
Work on free zones in Turkey dates back about 200 years. Since 1980 efforts to build free zones have
been initiated again on a larger scale and Free Trade Zones Law was put into force and published in the
Official Gazette on June 15, 1985. Since 1985, when the Law (No. 3218) was put into force, the places
and boundaries of the Mersin, Antalya, the Aegean, Istanbul Atatük Airport, Istanbul Shore Banking,
Adana-Yumurtal܆k, Istanbul Thrace and Trabzon Free Zones; a total of eight zones have been
determined and Mersin, Antalya, the Aegean, Istanbul Atatük Airport and Trabzon Free Zones have
started operating. As the end of April, 1992, totals of 1,289 firms - 170 of them foreign - have officially
applied to the authorities to operate in these zones. Permission has been granted to 886 firms - 128 of
them foreign. 488 of these firms - 63 of them foreign - have been given (ibid; 87-88).
2. Economic Relations between Korea and Turkey
Turkish government restricted the foreign capital investment before 1980. The foreign capital framework decree 8/163 dated January 24, 1980, changed the organizational and legal background of foreign capital and had a positive impact on the inflow of foreign capital into Turkey. The amount of authorized foreign capital increased even more after 1984. In 1984, the figure was $271 million and then rose to $824.4 million in 1988, to $1784.3 million in 1990, to $1909.4 million in 1991. The fields most popular for foreign capital investors in the 1980s proved to be tourism, military aircraft, electronics, food, tobacco, the motor industry and banking. Investments made in telecommunications, textiles, agro-industry based on frozen fruits and vegetables and integrated poultry and meat plants have almost been completed (ibid.; 91).
Korea's trade volume with Turkey, which stood at $12 million in 1975 increased continuously and hit the ceiling to $751 million 1993. But in 1994 there was a sharp decline and a drop in volume to $410 million. It was due to decrease in Korea's export volume to Turkey from $610 million by 55% to $276 million in 1994. The major cause of rapid decrease in Korea's export to Turkey is due the shrink from Turkish domestic demand. Therefore Korea's major export items which consist of car, electronics & electricity and textile goods decreased to 85%, 64% and 26% respectably.
At the same time trade items in trade pattern shows not to diversify between two countries and mainly to
rely on the confined items greatly. In Korea's export-import to Turkey, Korea export Machinery,
transportational machinery, electronics & electricity and textile goods over 80% and import iron & steel
goods over 70%. This reflects Korea's trade with Turkey mainly relies on the limited items. Table 5-2
shows that Korea's trade to Turkey has continuously increased since 1980s (Hanuksuchulipunhang, 1995;
Table 5-2. Trends of Korea's Exports/Imports to Turkey
(Unit: $1,000, %)
Meanwhile Korea's direct investment to Turkey began with $0.35 million at first in 1987. About $20
million of Korea's direct investment in 6 units was permitted by the Turkish government and invested about
$18 million in 6 units that include manufacture, trade and mining industry till the end of June, 1995. Table
5-3. shows recent Korea's direct investment to Turkey. Besides Hyundai established car assembly plant in
In order to supply car accessories, Korea's Halla contracted the joint-venture agreement with Turkish
partner in January 22, 1997 and Hanil also contracted the agreement at the early of 1997.
Table 5-3. Recent Korea's Direct Investment to Turkey
(Unit: $ thousand)
Source: Bank of Korea, December, 1994.
The international economic situation has been rapidly changing since the beginning of 1990s and the advanced countries are strengthening free trade under the WTO system. The International labor market has been also greatly varied owing to the changing pattern of international division of labor. For this reason, recently multinational companies seek another way to escape tariff barriers and to invest directly in the low wage countries in the form of joint-venture. This way is the second-best policy to raise the productivity and the revenues. Moreover, the world economic system faces new tripola system consisting of US, EU and Japan after the Gulf War. Because of this, new era which is co-existing with globalization and regionalism , and the mixed society between open market and trade barrier appeared in the world.
Korea has emerged as one of the most successful NICs and an inspiration to other developing countries. It has pursued consistently an Outward-Looking Foreign Trade Policy since 1962 and became the 11th largest trading country in the world. Korea also became the 29th member of OECD, the second Asian Country on October 11, 1996.
Korea has a highly skilled human resources and the Middle East has a plentiful natural resources. These two resources have to be combined by man made resources that needs a huge capital. The economic cooperation between Korea and the Middle East must bring the focus on this point. The cooperation of joint-venture that can use the capital effectively is a favourable means. To combine these resources effectively, Korea has to prepare a plan to enter the Free Trade Zone in the Middle East.
Korea has advanced into the Middle East actively since 1970s and gained experiences in the region. This lesson leaves us a good chance for cooperation. The Korean economy has a high dependency that its trade and investment are severely concentrated on US, Europe and Japan. The Middle East, however, is a good partner to cooperate. The economic cooperation between Korea and the Middle East is very important in the dimension of combining human resources with natural resources.
To Korea, Turkey is a very important country. Turkey recognized Korean government in 1949 and participated in the Korean War (1950-3). In 1957, Turkey became the first nation that had established diplomatic relations with Korea officially in the Middle East. Any way two countries formed a friendly relationship and has continued good relations untill now. Korea and Turkey contracted an agreement for the promotion of commerce and economic technology in 1977. Two countries also contracted an agreement for the prevention of double taxation and an agreement for the guarantee of investment in 1986. In accordance with them, Korean companies began to invest to Turkey in the type of joint-venture. This is a good sign to cooperate in the future.
The most important thing to promote economic cooperation between Korea and Turkey is to understand
and to narrow the cultural gaps. To know each other, everymen has to meet frequently. As ASIANA Air
is put on the Turkish line, relations between two countries will be strengthened and developed. Opened
regular air line between Seoul and Istanbul, it will play a great role in combining the two countries.
ASIANA's role will be great in Turkey because Turkey has a plentiful tourism resources. Besides, this
opportunity will give a derivative chance to make two countries cooperate with each other.
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Publisher: Korea Institute of the Mideast Economies (KIME). Editor: Dr. Seong Min HONG.
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