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Economics of South Korea

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There are several synonyms for collectivist economy. In some sense, it is possible to name it socialistic economy due to the method of ownership and rights distribution. Another name for collectivist economy is communist economy or centrally planned economy. This definition makes an emphasis on the collectivistic character of societal economic interests and ownership rights.

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The brightest example of the collectivist economy is the Soviet Union that functioned as the socialistic state for 70 years. However, even today, the People’s Democratic Republic of China, the republic of Cuba, and the Socialist Republic of Vietnam continue operating as collectivist economies.

South Korea is a country with a mixed economy. This type of economic system is ruled by the law of supply and demand with minor interactions of the state with an aim to reach the balance. The ownership and control over the main production means is in private hands. Nowadays, South Korea is considered one of the most fast-growing countries in the world with the nominal GDP of $1.151 trillion in 2012, placing the #15 in the list.  The impressive part of the South Korean GDP is contributed by the operations of private sector that accounts for major production giants, like Samsung, Daewoo, SsangYoung, Hyundai, Kia, etc. In addition, the country performs active export/import operations that are also characteristic of the open economy. South Korea is highly dependent on the expert constituent. The major engine of a progress is innovation and technological improvement that allows keeping the produced goods and services competitive internationally.

The comparison of economic indicators of South and North Korea leads to the following conclusions:

  • The GDP per capita of South Korea is 17,61 times higher than of North Korea. For the last three years, no growth in GDP per capita of North Korea was recorded. Notably, the GDP per capita growth of South Korea in 2012 compared to 2011 was 2.2%;
  • The GDP growth rate for the few past years in the South Korea was recorded at a high level at around 6.3% - 2.7% whereas the same indicator of North Korea was recorded at pitiful -0.9% - 0.8%;
  • The economy of North Korea is mostly dependent on agriculture that corresponds to 23.1% of the GDP and industry (47.5%). This dependence is a characteristic of the low-developed country. Contrary, the GDP of South Korea depends heavily on services (57.5%), which is the feature of the highly-developed countries. 65% of the labour force in South Korea are occupied in services, whereas only 6% in agriculture. In North Korea, agriculture gives employment to more than third of the labour force.
  • The revenue of South Korean budget is 84.9 times higher than the revenue of North Korean. This means the possibility of higher expenditures to the most important and strategic directions like education, innovation and technology, health care, etc. South Korea operates with a budget surplus, which is the sign of an efficient system. North Korea has a budget deficit that needs the external sources of funding. As soon as the country is closed, the shortages are re-laid to the decreased welfare of citizens (product crisis, famine, low quality of goods and services).

One of the key features of planned economy is the absence of competition. This feature is regarded to both national and international competitors. Therefore, in the state where the alternative is absent, any quality is sufficient to the customer.  Even if some kind of choice exists, the scale of production and quantity of goods are regulated manually in order to avoid over-production. In the situation of constant demand surplus, and supply deficiency, the quality of the goods and services is disregarded as all produced goods and services are consumed. When the state operates as the market economy, the firms run in highly competitive environment. The scale of production is not limited to the planned indicators. The only way for the firm to survive is to offer the highest quality and affordable price.

Innovation is the implementation of the new economic values through solutions that meet cardinally new requirements and needs of customers, or enhance the existing market requirements in value adding ways. In the economic system, innovation is a type of investment that results in more effective technologies, services, products, and ideas.

According to the Global Innovation Index Ranking, South Korea is placed #21 in the efficiency of investments in innovation list. In 2011, South Korea was placed number 4 in the ranking. Bloomberg Businessweek has ranked South Korea as the 2-nd most innovative country in the world, behind the US.As soon as the innovation is the catalyst to growth, it is essential that countries with mixed and market economies develop its potential. Thus, the enhancement of innovation for the South Korea means the ability to compete at the international level and expand to the international markets with new technologies and solutions. In other words, it is the vital factor in maintaining the GDP growth for the open and export-oriented economy. Besides, innovation is encouraged in South Korea because it reduces costs of production and enhances the efficiency.

 Looking at the figures 2 and 3, it is obvious that two countries have different patterns of GDP growth.

The collapse of the biggest source of support for the North Korea – Soviet Union – was detrimental for the state. The period from 1991- to 1998 was devastating for the North Korean economy. The period is characterized by the decline in economic output due to the deep political crisis and ineffective technologies. The country does not report accurate data. Therefore, it is difficult to give the reason for the expansive growth in GDP in 1999. By now, North Korea is in the list of the poorest and least developed economies with the reported GDP growth of 0.8% in 2011 and $1,800 GDP per capita compared to the South Korean $31,700.

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Contrary to the North Korea, South Korea experiences a stable and strong growth in GDP and private consumption. However, the open market economy is vulnerable to the external shocks.  The Asian Financial crisis changed the things quickly. The currency of the South Korea depreciated, and the GDP fall to the low level. However, with the financial assistance from the International Monetary Fund, extensive financial reforms, dynamic labour market, and flexible wage rates, South Korea recovered from the crisis. The tremendous GDP growth fell back due to the slowing of the global economy, decrease in exports (which is the main constituent of the economy), 11/09 attack. The constant reforms, liberalization of the market, bank privatization, restructuring of the hugest conglomerates, the economy recovered and continues to grow at the stable level.

 After the World War II, North Korea and South Korea were separated as countries with different political and economic systems. Whereas South Korea adopted the principles of mixed economy, North Korea operated as planned economy with communist society and principles. Having originally more generous resources that could have been used as a powerful platform for further development, North Korea has lost its chances to enhance the economy. It is one of the poorest states with the low GDP per capita ratio, stringent GDP growth rate, heavily dependence on agriculture and climatic factors, and permanent food shortages. The country experiences constant economic crisis that has no chances to over without introducing the principles of market economy.

The main advantage of planned economy is that wealth is equally distributed among the members of the society. The price is set at a level that is affordable for everyone. The government pays more attention to social benefits like free education, or healthcare. However, planned economy has a number of negative features. First of all, the price, quality, and quantity of production are not determined by the supply and demand. The quality of products and services is low due to the lack of choice and competition. Usually, all profit goes to the state and is redistributed among the members in equal parts. This method of organization gives no motivation and encouragement for efficient work. Besides, the state as a single planner decides the main items of expenditures. The decision is often biased. North Korea does not allocate funds for innovations. Nevertheless, the country provides finding to maintain the fifth largest army in the world.

The example of South Korea may be used to point out the advantages and disadvantages of mixed economy. The main advantage is the competitive market that leads to better efficiency, higher quality, and cheaper price. More people work harder in order to earn higher wages, try to acquire a better education and qualification. Market economy encourages innovations which improves the efficiency if economic system and standards of living. Among the main disadvantages are the distorted investment priorities, the gap between the rich and the poor, and the overproduction of goods. However, the comparison of two economic systems tells that mixed economy is the more effective way of ruling the state.

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