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The miracle on the Han River

By Donovan Chong
web posted November 15, 2021

It was called the “Miracle on the Han River.” Since 1960, South Korea made a massive rebound from one of the poorest countries in the world into an economic powerhouse. By 2016, South Korea’s real GDP was fifty-five times higher than it was in the year 1960. Drawing upon the strategies of OECD countries, South Korea began reforms to make its economy more market-oriented, furthering its economic growth into the twenty-first century. Recoveries of this nature are few and far between in the real world. Surely, there must have been factors which set South Korea apart from the rest of the third world, especially from its communist northern neighbor.

From the years 1910 to 1945, the Korean peninsula was under full Japanese control. Korea experienced economic growth during the 1930s and 40s, but when Japan withdrew from the peninsula after World War II, the Japanese took much of the new technology with them, leaving behind impoverished Koreans. Further exacerbating the situation was the start of the Korean War in 1950, when communist North Korean forces invaded the border between North and South Korea. A coalition of forces from the United Nations retaliated and sent the North Koreans back to their own border, where much of the fighting occurred until the year 1953 when a cease-fire was implemented. During the carnage, much of the capital stock and natural resources on the peninsula were destroyed. According to one of my grandparents who lived through the Korean War and its aftermath, eggs were an extremely scare commodity in the postbellum years in South Korea.

However, the government closely followed a plan similar to the one stated by the conservative economists Roy Ruffin and Paul Gregory. Firstly, the government made education mandatory and invested heavily into human capital. Secondly, the political situation in South Korea dramatically improved in 1987 when a constitutional democratic republic was firmly established. The lack of stable government has prevented many other impoverished countries from getting their economic engines up and running. South Korea also swung its markets wide open, making its name as one of the “four tigers” of Asia. According to Ruffin and Gregory, this factor alone increased their growth rate by one to two percent per year. Lastly, South Korea ran large trade surpluses for many years since 1996, which according to the Richmans’ article Free Trade vs. Balanced Trade would boost a country’s economy. Through these means, South Korea today has a GDP per capita of over $31,760, which is higher than numerous developed Western nations. On the other hand, the centrally planned North Korea followed none of these strategies, which is the reason why it arguably has the worst economy in the world today.

Unfortunately, in recent days South Korea has begun to encounter major economic problems. Household debt throughout the country is skyrocketing, and the population has begun to feel its constricting effects. South Korea’s economic progress may be slowing to a halt, despite President Moon Jae-in’s economically ill-advised attempts to stop it. Moon Jae-in’s administration has tried to control the rapidly rising prices of apartments by enacting over twenty policies, all of which have failed dismally. Some of the current administration’s policies have included increasing the minimum wage, shortening maximum working hours, forcefully building new residences, and implementing a “fair distribution of wealth,” as finance minister Hong Nam-ki stated. Hong Nam-ki has also claimed that South Korea should abandon the old economic model which generated the Miracle on the Han River and instead shift to an economic engine of “innovation and inclusiveness,” which is an economically useless statement. Indeed, numerous economic experts are claiming that the country is on the road to socialism.

To get back on the right path, South Korea must look to its past and realize that socialism and increasing government intervention are not the right answers. The controls on the housing market must be lifted and allow the free market forces to kick in again. Politicians should realize that the power they wield cannot overpower the laws of supply and demand. According to Keynes’ law, as demand for housing rises, pushing up prices, the supply should rise by itself without government intrusion. Inflation is on the horizon, however. Currently, interest rates are at 0.75% while inflation is already at 2.5%. As interest rates go up to counter inflation, I would repeal minimum wage laws so that the combined effects on unemployment would cancel each other out. Lastly, South Korea should attempt to reduce government consumption overall, which would reduce taxes. With less taxes, people will have more disposable income, which will alleviate the personal debt crisis without artificially devaluing the currency. Despite its current problems, South Korea must remember what distinguished itself from its northern brother and started the Miracle on the Han River. ESR

This is Donovan Chong’s first contribution to Enter Stage Right. (c) 2021 Donovan Chong

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