ECON1102: The Economy Performance of South Korea in the Past Twenty Years - Accounting And Finance Assessment Answer

Subject Code: ECON1102

Accounting And Finance Assessment Answer

Assignment Task: Introduction The economy of The Republic of Korea (South Korea) is the 4th largest economy in Asia and the 11th largest in the world (World Bank 2016). It is famous for its transformation from the poorest country to a developed, high-income country in an era. The economic rise brought South Korea to the ranks of elite countries in the Organization for Economic Cooperation and Development (OECD). However, the country’s economy was hit hard by the Asian Financial Crisis (AFC), which led to a huge bailout from the International Monetary Foundation (IMF). South Korea rebound quickly after the government’s strong fiscal and monetary policies. Following with continuous growth, the once contracted economy made a boom and earned a reputation as a successful exporter of technologically advanced goods. The report uses three macroeconomic indicators to demonstrate the economic performance of South Korea in the past 20 years. The session of gross domestic product (GDP) provides with the major fiscal and monetary policies published by the government to recover and develop. The session of inflation will introduce the Inflation Targeting System and other policies which helped the country to rebound from the Global Financial Crisis (GFC). The unemployment rate is also discussed to suggest the performance of the labour market. Lastly, the report illustrates two series of policy recommendations to help the economy to be consecutively stable and prosperous. Macroeconomic Indicators GDP GDP is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period (Investopedia 2018). Figure 1 shows the South Korean economy continued strong growth in GDP for the first half of the The 1990s. However, things changed dramatically as the financial crisis swept across Asia. South Korea’s chaebol, a highly indebted operation, was devastated. This led to a large amount of international capital flowing out, the foreign exchange reserves falling sharply, and the currency depreciating rapidly (Ssangyong n.d.).

                    Figure 1: GDP, Current US$ Note. From World Bank Data (WBD 2018)

The liquidity crisis resulted in an over 5% decrease in annual GDP growth. Korean government reacted quickly to the predicament with main measures as follows: 1 Applied a bailout of USD58.3 billion loan by the IMF to restructure and modernize the economy (Martin 2011);

Figure 2: Government Spending, per cent of GDP Note. From the Global Economy 2018

Increased government spending and cut taxes to revitalize the economy; 3 Immediately closed the most troubled financial institutions, helped to restructure and recapitalize some weak but solvent institutions (Martin 2011); 4 Deposit insurance system funded by government-guaranteed bonds to protect depositors and prevent bank runs (Hye &Edo 2008).

Figure 3: GDP growth rate Note. From World Bank Data (WBD 2018)

Figure 3 reflects that after the 7% shrinking of the South Korean economy in 1998, the GDP growth rate rapidly increased over 10%. Compared with other Asian countries heavily affected by AFC, Korea was the first to recover. GDP growth remained relatively stable for a decade, despite 2001, which was a problematic year due to the end of the boom in the Information and Communications Technology industry and the attacks on the World Trade Centre in New York (Hye &Edo 2008). There was also a drastic drop in 2008 because of the GFC. One of the main reasons for the overall improvement of the country’s GDP is increasing spending on Research &Development (R&D). Since the AFC, Korea has promoted the development of high technology into the national strategy. Chart 1 suggests that compared to average OCED countries, Korea’s spending in R&D occupied an increasing part of GDP. Through technology innovation and industrial upgrading, South Korea’s electronics, automobile and steel industry have achieved new leaps (Blooming 2015). Policy recommendations (a) Downward Economy The previous discussions suggest that though the Korean economy performed relatively well in the past 20 years, it was now in a down on the whole. The economy is experiencing a very low growth in GDP and even decrease in export. It is reasonable for the government to enhance the international above question competitiveness of export. Fiscal Policy: 1 Further, improve the export subsidies to reduce marketing costs; 2 Provide export credit insurance, finance and the promotional activities to stimulate exports (WTO n.d.). Trade Policy: 1 Further, pursue comprehensive free-trade agreements with major trading partners or regional groups; 2 Reduce the customs tariff to attract investments and expenditures. In the meantime, it is vital to stimulate the overall productivity of the country. Suggestions are as follows: 1 Increase in government spending. 2 Increase the transfer payment and cut the tax to relief the contraction (Ben, Nilss & Robert 2014). Using the Keynesian Model, we can simply illustrate the principle:

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