Korea’s growth miracle: 1953 – present
In the aftermath of the Korean War, South Korea was one of the poorest economies on the planet. The war caused mass casualties and displacement of people, while also devastating the country’s infrastructure. In 1953, South Korea’s GDP per capita was lower than those of Somalia and Haiti, which remain two of the world’s poorest countries today, and the economy was almost entirely dependent on foreign aid. Only around a fifth of Koreans were literate, while the majority lived in poverty.
2023 marks 70 years since the Korean Armistice Agreement, which brought an end to active conflict between North and South Korea. The economic paths of these two countries have diverged markedly in recent decades, having seen roughly equivalent living standards until the early 1970s. Since then, South Korea has experienced unprecedented growth, stimulated by market reforms, effective use of foreign aid, and an export-led growth strategy. Key to this development has been the partnership between the government and major conglomerates, known as chaebols, which have come to dominate the South Korean economy and helped make Korean products competitive on the global stage. This development has seen South Korea’s economy grow to be the world’s 13th largest, according to Cebr’s latest World Economic League Table. Meanwhile, North Korea’s development has, at best, stalled.
On a recent visit to the peninsula, I saw the fruits of South Korea’s economic development first hand. Seoul is a bustling metropolis, the fourth largest in the world, and home to around half of the country’s total population. The nation’s high-speed rail network is extensive, ranking as the ninth largest in the world, and connecting the capital with other major cities, including Incheon, home to the country’s main airport, and Busan, a port city and strong candidate for the 2030 World Expo. Development has spread across the country, even away from the mainland. The domestic flight path between Seoul and Jeju Island is the world’s busiest in terms of number of passengers carried. Meanwhile, the ever-growing ‘Korean wave’ of popular culture points to a flourishing arts scene. The Government’s active push of Korean cinema, music, and food onto foreign audiences suggests that export strategy is still at the forefront of policymaking.
The demographic challenge
Despite its status as a developed economy, and one with continually strong growth prospects, Korea faces a number of structural hurdles. The most significant is its demographic position, with Korea currently experiencing rapid societal ageing. The country has the lowest fertility rate in the world, at just 0.78 children per woman. This is far below the 2.1 threshold required to maintain a stable population and makes it the only country in the world with a fertility rate less than one. This problem is set to be exacerbated in the coming decades, as better living standards translate to longer life expectancy. Combining these factors, South Korea’s old-age dependency ratio – defined as the number of over 65s as a proportion of the working age population – is increasing markedly and is projected to be the highest in the Organisation for Economic Cooperation and Development (OECD) by the 2060s. This brings a range of economic problems, including a shortage of workers, pressure on public finances, and ultimately a drag on growth.
The issue of future workforce shortages could be partially offset by higher productivity. However, this is another area in which South Korea faces a significant problem. Productivity is much lower than in other developed nations, with output per hour worked being the fifth lowest in the OECD in 2021. There are several reasons behind such weak productivity. Presenteeism is widespread amongst Korean employees, meaning aggregate hours worked are far above the OECD average. Meanwhile, the country’s notorious after-work drinking culture is not the most conducive to productive activities the next day. Besuited office workers being held up by their colleagues having drank to excess was not an uncommon sight during my recent visit…
Figure 1: GDP per hour worked amongst OECD countries, 2021, USD
Overreliance on major corporations
Perhaps the most significant factor holding back South Korea’s productivity is the very reason for its success over recent decades: the dominance of the chaebols. Though several of the chaebols are now world leaders in their respective fields, notably Samsung, there remains a culture of protecting domestic businesses from foreign competitors. This need not necessarily be in the form of traditional protectionist measures, such as import tariffs. The most peculiar instance I encountered was that of Google Maps, which does not work in Korea. Though the official line is that the Government refuses to provide satellite imagery to Google for security reasons, several Koreans on my recent visit suggested this was another case of the Government not wishing to expose Korean firms to external competition. The Korean navigation software options were not as comprehensive or efficient as those I am used to in the UK.
The dominance of the chaebols also holds back entrepreneurship in South Korea. Alongside positions in the medical and legal professions, the most attractive options for Korean graduates are entry-level positions at the chaebols. Given the limited pool of openings and high educational attainment, competition for places is intense. As such, many of Korea’s brightest end up working in a corporate setting, whereas they may have been more likely to dedicate themselves to a start-up or a research position in another country. Moreover, for those who do opt for the entrepreneurship route, the size and resources of the chaebols make market entry and sustained competition a thankless task.
Future outlook: continued growth and the prospect of reunification
Though demographics and productivity pose significant challenges to South Korea, its economic prospects are still overwhelmingly positive. On several typical measures of economic performance, including educational attainment and the unemployment rate, the country ranks as one of the strongest in the OECD. Cebr’s forecasts see South Korea maintaining its impressive growth performance. In the coming five years, we forecast Korea’s annual growth rate to match or exceed the global average on three occasions, a significant feat given its already strong level of economic development. We expect Korea to enter the world’s top ten largest economies in 2026, overtaking Canada, Iran, Italy, and Russia, and becoming Asia’s fourth largest.
This anticipated growth does not account for the prospect of reunification, which remains a prominent political question on the peninsula. In the event of reunification, significant time and investment would be required to bring North Korean living standards up to those of their Southern counterparts. Per capita GDP in the South is currently around 30 times higher, while education and skills levels are close to incomparable. Nevertheless, the North’s superior natural resources and population of around 26 million would bring economic opportunity. Indeed, a unified Korea possessing South Korean living standards would currently rank as the world’s eighth largest economy and could rank as high as the sixth largest by 2037, overtaking the UK in 2032. Despite steps towards more positive relations in recent years, notably the 2018 summit series and peace process, reunification remains a mere hypothetical. Any concrete steps towards it would require much greater cooperation not least between the two Koreas, but also between external powers.
Figure 2: South Korea World Economic League Table (WELT) ranking, actual and forecast, 1999 – 2037
For more information contact:
Sam Miley, Senior Economist – Email: firstname.lastname@example.org – Phone: 020 7324 2874
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.