South Korea’s Economy

Timing and Severity of Nation’s Downturn

South Korea’s economy is deemed to be the biggest economy in Asia. Its economic superiority is only rivaled by other Asian giants such as Japan, China and India. The timing of South Korea’s economic downturn coincided with the 2007/2008 global financial downturn. This economic downturn affected South Korea’s economy because South Korea is predominantly and export-oriented economy.

When then global financial crisis hit, South Korea’s gross domestic product (GDP) shrunk from 5.1% in 2007 to 0.2% in 2009 (Taiwan Institute of Economic Research, 2009). The nation has since been able to recover from the economic meltdown after it posted better GDP projections in 2010.

Comparison with the Experience of the US Economy

South Korea’s economic downturn has a strong resemblance to the US economic downturn. South Korea’s dominance in the Asian market is attributed to the resemblance of its economy to Taiwan (Taiwan Institute of Economic Research, 2009).

The resemblance to Taiwan’s economy makes South Korea the biggest export competitor of the US. Part of the reason advanced for South Korea’s economic downturn was the fluctuation in crude oil prices. This fluctuation in prices is widely similar to US’s experience of the global financial downturn because South Korea and the US share a strong reliance on international oil imports for production (Taiwan Institute of Economic Research, 2009, p. 6).

The slide of the US dollar during the global financial downturn also affected South Korea and the US in equal measure. The impact of exchange rate fluctuation on South Korea was especially witnessed by the fact that most of South Korea’s stock market was valued in foreign currencies. Obviously the weakening of the US dollar also affected the US economy because it amounted to a loss in value for US assets.

Transmission Mechanisms of the Global Financial Downturn

The global economic downturn in South Korea was attributed to fluctuation in the prices of raw materials and energy. However, a significant portion of the downturn can be attributed to the weakness of the US economy. The US had a strong impact on South Korea because the US is South Korea’s second biggest trading partner.

In fact, after China, the US is considered to be South Korea’s biggest trading partner. The US accounts for about 10% of South Korea’s export (Top Foreign Stocks, 2010, p. 1). Similarly, this percentage amounts to $37.7 billion of South Korea’s export. The volume of South Korea’s export therefore significantly reduced with decreased imports from the US.

South Korea’s economy is also supported by foreign investors because South Korea was able to attract a lot of foreign investments during its period of economic boom. For instance, South Korea was able to be less dependent on the US by increasing its trade relations with other foreign investors (such as European investors) (Taiwan Institute of Economic Research, 2009).

Due to the strong economic ties with foreign partners, the global economic downturn significantly affected South Korea’s economy because there were less capital inflows from foreign investors. The economy therefore slid into a slump.

Response of Policymakers (Fiscal and Monetary)

After the global economic meltdown, South Korea’s policy makers have significantly relaxed their monetary policies. For instance, the country’s base rate lending has been reduced to significant lows. Other economic reform programs were also launched, including the 50 trillion KRW green new deal that was launched by the Korean government in 2009 (Taiwan Institute of Economic Research, 2009). This economic program is expected to be completed in 2013.

The main objective of the economic program is to create more jobs (about a million). Other auxiliary goals of the project is to create more “green” jobs for the Korean public in response to climate change concerns and environmental pollution (Taiwan Institute of Economic Research, 2009, p. 10).

References

Taiwan Institute of Economic Research. (2009).The Analysis of Global Economic Crisis and Situations in Asia. Retrieved 26 November, 2011, from: http://english.tier.org.tw/eng_analysis/FS200907.asp

Top Foreign Stocks. (2010). South Korea by the Numbers. Retrieved 26 November, 2011, from: http://topforeignstocks.com/2010/11/11/the-top-trade-partners-of-south-korea/