South Korea has a strong, diversified industrial and manufacturing base that has allowed it to avoid recession since the global financial crisis. However, its open economy and dependence on exports makes it vulnerable to external shocks. South Korea's large trade surpluses and foreign exchange reserves have contributed to its status as one of the strongest emerging markets. But its potential growth rate has declined and population aging poses challenges to long-term growth without policy changes.

1. A2 Macro Revision: South Korea
Chart 1: Real economic growth and the current account
South Korea is the 15th-largest in the World with a relatively high GDP per capita. It has a
strong, diversified and internationally highly competitive industrial and manufacturing base.
It is one of only two OECD countries to have avoided a recession since the start of the global
financial crisis. And South Korea is also one of the relatively few countries to have escaped
the middle-income trap.
South Korea’s economy is very open (import + exports amount to 114% of GDP) and heavily
dependent on exports. As a result, South Korea is vulnerable to external shocks in the Asian
region and wider global economy. Korea’s main exposures are to China, the USA, the EU.
and Japan and significant value chain links with these and other Asian countries.
The country’s large and sizeable trade and current account surpluses and a vast amount of
FX reserves make that the country is among the strongest and thus safest emerging
markets. The country operates with a managed floating exchange rate.
The IMF estimates that Korea’s potential growth rate decreased from around 7 percent
during 1990-97 to 4¾ percent during 2000-07 and further to 3¼–3½ percent in 2011–12.
The country's prosperity has been concentrated lately within the highly competitive export-
Real GDP and Current Account (%)
South Korea - Growth and Current Account
Real GDP, annual % change Current account balance, as a percentage of GDP
Source: Reuters EcoWin
05 06 07 08 09 10 11 12 13 14 15
0
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7
Percent
0
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2. oriented conglomerates, whereas household income growth and service sector productivity
have been sluggish. Moreover the population is aging rapidly. On current trends, the
working age population is projected to peak in 2016, and Korea is expected to become one
of the oldest countries in the OECD by 2050, with the dependency ratio increasing rapidly.
Korea’s employment rate is below the OECD average, particularly for women—their
participation rate was around 60 percent in 2012 compared to 70−80 percent in the most
advanced countries—and for young males, due to high enrolment in tertiary education and
mandatory military service.
According to IMF and OECD research, without offsetting policies, Korea’s potential real GDP
growth would decrease to around 2–2½ percent by 2025 and its per capita GDP would cease
to converge with other high income countries and instead plateau at the present rate (about
65 percent of the U.S. level).
Sources: IMF Staff Review of South Korea (2013) and OECD World Economic Outlook (April
2013)
Revision questions
1/ Define the following terms (3 marks each)
1. Middle income trap
2. Open economy
3. Export oriented conglomerates
4. Dependency ratio
5. Participation rate
2/ The South Korean economy is vulnerable to global external shocks. Identify and analyse
how two of these shocks could affect the macroeconomic performance of the South Korean
economy (8)
3/ Assess the relative merits of a country such as South Korea choosing to operate with a
managed floating exchange rate rather than a free floating exchange rate (12)