Role of Government and Institution in Economic Growth of Korea - Case Study Example

Role of Government and Institutions in Economic Growth of Korea Student’s name: Institution: Instructor: Subject: Role of Government and Institution in Economic Growth of Korea Korea is ranked among the world’s top economic powers in terms of the Gross domestic and seventh in terms of manufacturing of the value added goods ( Klinz, 2010). It has also achieved a phenomenal growth in its exports which have increased significantly between 1980 and 2007. There are several forces that lead to the reevaluation of the optimal role of the government in the development of the economy (Joan, 2011). The policy-makers and the economists did come to the realization that the growth in performance of most of the developing countries that were happening in 1980s had been abysmal. And despite the poor growth of majority of the East Asian and some South Asian countries, this government continued playing a very active role that gave remarkable results. At that moment there was unfavorable international environment, however the country was able to maintain and in some situations improve on its previous development momentum (Tellis, 1987). Instead of adopting the deflationary government expenditure and the macroeconomic policies and the restrictive import and wage practices, this successful Asian country exported its way out of the crises. This essay looks in to the roles that the government and other institutions played in the economic growth of Korea between the years 1980 and 2007. The government made a decision of shifting from import-substitution to export promotion. As a result, it was able to promote expenditure switching among the imports and domestic goods. In this case, the government took a set of market friendly policy and institutional reforms as it continued to invest in human capital and the infrastructure. It also engaged in indirect and direct promotion of the selective industrial policy. There was a backlash in the OECD countries against the neo-liberal philosophy of the eighties that had led to low rate of economic growth and very high cases of unemployment. There was so much pressure to the government to address these issues based on the previous experiences from governments from other countries. In United States, democrats had replaced Republicans, in most of the European countries the labor-Governments had replaced Conservative governments and there was the international influence from Japan where the governments had been playing a very active economic role It was now very clear on the Korea government that it needed to act else it would face very fatal consequences. The mixed successes of the LDCs with the market reforms during the eighties led the international institutions to the understanding that with capable and committed governments that can be able to promote and manage the successful reforms and even the market oriented reform, pushing the country in the right direction would be a smooth path. Failure to this, the reform efforts would flounder and be derailed or be captured by some special groups that have special interest who are of actual or potential looser from the reforms. It is at this time that the problem shifted from minimizing government role toward making it more effective. During this period, the government played the centre and pervasive role both in establishing the institutional and economic conditions that were necessary for the occurrence of the Industrial revolution and for promoting its spread in order to follow the European nations. Whenever the government was able to reduce the risks associated with the private transactions by the promulgating laws that limited the ability of government and the citizens to engage in entrepreneurship, there was increase of the security of the property rights and the enforcing of the private contracts. The government was able to increase the supply of factors that established the removal of the legal barriers to the mobility of labor in the regions and sectors. This was through establishing of immigration laws and again by setting of the conditions for the foreign capital inflow and the foreign investment. The governments increased the domestic supply of the skills through fostering the investment in education and in the situations that were necessary, the import of foreign workers who were skilled. The government increased the supply of the domestic finance through promoting the establishment of the investment banks, the formation of financial intermediaries and direct finance of the industrial enterprises. The governments promoted the import of technology in the less advanced European countries that prevented its export from the first comers to the industrial revolution. The government was the source of the externality of the private investment. It was able to foster the buildup of the transport of infrastructure by various means. These included the direct investments in the direct transport modes, the provision of the finance that was used for building the railroads and the canals and the granting of the substantial incentives, like the right of way used for building the transport by the private sector. Institutions also played a major role in the development of the economy of Korea. Among the most developed group of the transitional economies was the intermediate in the social-potential and the economic degrees of the institutional development (Elite, 2010). The process of economic, social and political modernization had been proceeding far enough so as to set the path of self-sustained economic development. There was characteristic of rapid and unbalanced social transformations that led to a high degree of social tensions and political instability. Though promotions of the industrialization did play a role in explaining the inter country differences in the rate of growth, Industrialization was not a primary force that was responsible for Korea economy to grow (Tellis, 1987). The industrial sectors of the economies remained highly undeveloped and with handicraft industry and putting out the system which were predominant in most countries. The highest levels of industrialization that were achieved earlier on were the establishment a number of small scale, power-driven factories plus a very small number of the modern large scale factories that were managed financially by the foreigners. More to this, a large number of the countries suffered from the disease of deindustrialization because of the primary reliance on their export oriented extractive sectors for the economic dynamism. One of the most institutions that led to rapid growth in economy is the technology. The technological change in this industry flowed from the accumulation of the technological capability over time. In this case, the term “technology” refers to both the collection of the physical processes and the transformation of the inputs into the outputs and the knowledge and skills that are able to structure the activities which involves carrying out of these transformations (Guo & Feng, 2007). Technology is the application of knowledge practically and the skills in the establishment, improvement, operation and the expansion of the facilities for the transformation and to the designing and improving the outputs from it. The technology capability constitutes of three elements which are innovation, production and investment which includes the duplication and expansion. Korea has a tradition which is long that is based on own civilization and the scientific achievements. With the help of the government, Korea was able to build companies that have the production capabilities, investment capability and innovation capabilities. With these three qualities, the companies were able to conquer both domestic and foreign markets. Korea’s economy weathered the global financial crises favorably through the favorable conditions that were created by the institutions (Prith, 2007). Institutions concerned with human resource made a ready market access for America’s Auto workers. The United States of America and the Korea had agreed through a number of significant improvements that it will enhance the market access for the United States auto companies through addressing the way of Korea system of the automotive safety standard. It proposed that the Korean environmental standards would serve as a barrier for the United States to export. According to Ping (1999) the progresses were then made in several additional areas of the automotive policies which included the transparency and the acceleration of tariff reductions on the electric car that was to create the export opportunities for the emerging green technologies. In addition, adjustments were made to the truck tariffs and the general auto trucks to give the United States auto companies and their workers a chance to build up more export business in Korea before the United States tariffs on Korean autos came down. Gilbert (2004) observes that through this project, there were more economic benefits for the Americans on the basis of tariff cuts and adjustments alone. Through this relationship, Korea was to benefit more. The Korea economy grew at approximately 5.8 % at this period. There was more gain from a level playing field. The America manufactures and the farmers improved their competitive positions from the tariff cuts in the agreement. Today Korea’s tariffs on the imported agricultural goods average at 54 % which is compared to 9 % levied by the United States levied on the same imports. The average Korea’s tariff on the non-agricultural goods is more than the twice that of the United States. Through the elimination and reduction of tariffs in the U.S.-Korea trade agreement, the American manufactures and farmers became more competitive in the Korean market which helped the Korean to grow more jobs at home. A competitive environment was created and the Americans used to be the Korea’s biggest trading partners. Korea further engaged with market with other countries like China, European Union and Japan in 2003 (Adelman, 1999). This created a competitive share of Korea’s import market for the goods from all the countries. At the same time, Korea’s import market for the goods felled by from 21 percent to 9 percent which was a smaller share than the European Union that was preparing to secure more of the Korean Market through implementation of free trade agreement in the next summer. At the same time, the market in China shares had increased from 7 percent to 18 percent. The U.S. – Korea trade agreement was helping the companies in America to regain a strong hand in the market place of Korea which made sure that the services and the goods sold there were made in America. The American found out that those benefits would be in jeopardy if they did nothing while the Korea moved forward on the agreements with other countries. In conclusion, Korea had major achievements in the recent years that led to the growth of its economy even though there were problems all over the world. Through good governance, setting of professional institutions and good relationship with other countries, Korea was able to achieve remarkable achievements. In recent years, the economy of Korea has weathered the global financial crisis favorably; however it is facing a new hurdle of fiscal crises in the advanced countries as it is trying to pre-crises growth track (Sachs & Warner, 1997). The fiscal crises cannot be resolved in short term which brings out the possibility that both the global and the Korean economy shall experience low growth for a prolonged period. In Korea, the resilient recovery in the private sector has yet to service as the policies of the governments have largely been exhausted which makes it difficult to find new relief remedy. With this drop back, the government has to put priority on the stabilizing the economy. At first, it should concentrate on stabilizing the inflation in order to boost the power of purchasing the households and to gain the consumer confidence. The process of stabilizing the markets that is vulnerable to the external shocks is also very important. On the corporate front, the businesses should focus on the strategies of overcoming the uncertainties. And with the global financial crises, the transitioning into the fiscal crises in the advanced countries and companies need to set up a response system for any recurrence of the crisis and be able to reform their structure of business so that they enable sustainable growth in a low growth economy. . Reference Adelman, I., R. (1999). 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