Once wracked by political chaos and poverty, South Korea has emerged as an Asian giant whose economy stands tall amidst a number of other competitors.Little wonder, then, its spectacular economic growth has been popularly called the "Miracle of the Han River". As a trillion-dollar-club economy that ranks as the world’s 10th largest, with a gross domestic product of $1.8 trillion in 2021, South Korea has only one track that lies ahead of it: that of sound growth, particularly by being a global innovation leader.
Key Takeaways
- South Korea's economy has been growing rapidly since the 1980s with no signs of slowing down.
- S. Korea boasts the 10th largest GDP in the world at more than $1.8 trillion in 2021.
- The economy is dominated by its services and industrial sectors, while agriculture makes up a very small portion of the economy.
A Brief History of South Korea's Economy
Going back in time, South Korea, also known as the Republic of Korea, suffered huge losses during the Korean War that lasted from 1950 to 1953. By the time the war ended, the nation’s economy was in shambles, infrastructure was destroyed, and there was heavy dependence on U.S. aid.
However, the country’s transformation from poverty to affluence has been phenomenal. South Korea became part of theOrganization for Economic Cooperation and Development(OECD) in 1996. There has been no looking back since then, and it is a fast-growing, highly industrialized nation that can serve as a role model for all developing nations. An important contributor to this growth process is the culture of innovation that prevails in South Korea, an atmosphere that is friendly for investors and extremely cordial with most of the countries in the Asian market.
GDP Composition
South Korea is categorized as a "high-income OECD" nation by the World Bank and is largely supported by its industrial and services sector but only a meager amount comes from the primary sector.
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Agriculture
In the initial years after the division of the Korean peninsula, agriculture contributed almost 50% of the nation’s GDP, but South Korea has been fast in shifting its base to the industrial sector. The agriculture sector's contribution to GDP dropped to 15% by the 1980s, sliding down below 10% by the late 1980s, and has stayed sub-5% since 1998. More recently, this number is less than 2%. The agricultural sector, including forestry, hunting, and fishing, as well as cultivation of crops and livestock production, employs a mere 4.77% of the population and contributes a small share of 1.69% to the GDP.
South Korea’s rugged topography leaves little scope for agricultural cultivation, as only 14.1% of the total land is arable. Therefore, the country has to rely heavily on the import of agricultural products and raw materials for processing.
With increasing urbanization and rising labor costs, people have moved away from the agricultural sector. The small production sector that remainsis substantially dependenton government subsidies and protectionist trade policies. South Korea imports feed grains, soybeans, wheat, and animal hides tooperate its livestock, and flour milling, and export-oriented industriessuch astextiles and leather goods.
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The major suppliers to South Korea for its food requirements are the U.S. (corn, meat, hides, soybeans, milling wheat, and cotton), China (starch and brew residues, frozen and preserved vegetables, rice, processed foods, soybeans), Australia (beef, wheat, sugar, dairy products), European Union (pork, wine, processed foods, dairy products), ASEAN (rubber, palm oil, bananas, oilseed meals), Brazil and Argentina (soybeans, soy meal, soy oil), and New Zealand (beef, dairy products, kiwifruit).
Industry
The industrial sector has been a consistent contributor to the nation's GDP over the years, absorbing approximately one-fourth of its labor force. Within the industry, which is composed of manufacturing, mining, construction, electricity, and waterand gas as its subsectors, manufacturing has been the engine of economic progress, especially during the 1980s.
Of the 34% share of industry to South Korea’s GDP, 23% was contributed by manufacturing alone in 1980. The share increased to 25% of the 39% contribution of the industrial sector in 1991 and in 2014, while manufacturing contributed 30% of the 38% industrial sector share to the gross domestic product. As of 2021, manufacturing accounts for 28% of GDP.
Other than manufacturing, mining activity has witnessed some steady growth in recent years, although it is limited to a few metals and minerals. South Korea produces steel, zinc, copper, gold, iron ore, lead, magnesite, barite, silver, and tungsten; however, domestic resources have not been able to cater to the demand of the industrial sector. Thus, South Korea needs to import mineral commodities to fill the gap.
South Korea’s largest industries are electronics, automobiles, telecommunications, shipbuilding, chemicals, and steel. The country is among the largest manufacturer of electronic goods as well as semiconductors, with globally popular brands such as Samsung Electronics Co. Ltd. and Hynix Semiconductor (SK Hynix Inc.).
The country’s automotive industry is highly developed and has a huge capacity for automobile production. Some of the well-known Korean brands are Hyundai, Renault Samsung, and Kia. South Korea’s government support has made the country one of the most active markets for telecommunications and information technology.
It is a booming mobile market and has one of the highest numbers of broadband services per capita in the world. South Korea is a world leader in shipbuilding; the top four out of the top eight enterprises are South Korean companies, with Hyundai Heavy Industries being the largest.
Services
The tertiary industry or services sector has gradually risen in terms of its contribution to the country’s GDP; from about 39%of the nation’s GDP back in 1965 to 50% by 1980 to 57% in the present times. However, the sector is yet to reach its optimal potential, as much of its growth has come by adding employees rather than through improving productivity.
The sector provides employment to over 70% of the Korean workforce. South Korea also lags behind countries like Japan (72%), the U.S. (79%), and the U.K. (81%) in terms of the share of GDP supported by the service sector according to its share of employment.
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The service sector should play a major role in the years to come as investment increases in areas like medical care, tourism, and education, which would, in turn, become employment generators for the nation’s youth.
The Bottom Line
South Korea has moved at a fast pace since the bifurcation of the Korean peninsula. The adoption of capitalist ways has worked well for the nation, which is characterized by low unemployment, low to moderate inflation, an export surplus, and fairly equitable distribution of income. However, a number of challenges remain in the form of an aging population, a rigid labor market, heavy dependence on imports, and a limited domestic market.
