Strong government-business ties are crucial in economic development. A country’s political establishment or government formulates and implements economic and regulatory policies that determine its developmental state. Political decisions and economic management are inextricably linked. In this view, a nation’s economic success depends on its political system and laws governing key sectors such as trade, labor markets, manufacturing, and foreign investment, among others. This report provides a meso-analysis of South Korea’s political economy. It evaluates the interrelations between S. Korea’s political, legal, and economic systems to determine its attractiveness for Foreign Direct Investment (FDI).
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Political economy is defined as the “interplay between economics, law, and politics” of a country (Hill 44). A nation’s political economy determines the formulation and implementation of public policy in a socialist, capitalist, or communist system. State-led economic policies and interventions determine the utilization of economic resources to expand national GDP. Therefore, political economy provides a framework for a meso-level analysis of the key economic, legal, and political factors that interact to influence economic progress. It helps us understand the interrelated aspects of country’s politics, law, and economics.
South Korea has enjoyed a steady economic growth since the 1960s. The country weathered the 1997/98 financial crisis to record a remarkable GDP growth of 9.3% in 1999 (Central Intelligence Agency par. 1). The recovery is attributed to strong financial reforms that included liberalisation of capital markets. Its GDP growth, which declined to 2.3% due to a global slowdown, grows at an average of 5.3%, making 12th biggest economy globally (CIA par. 4). Korea has a strong export sector that is driven by electronic products and attracts FDI inflows. The country also has a competitive tax policy among OECD countries, a liberalised service sector that favors technological innovation, and has ratified Free Trade Agreements (FTAs) with the EU and the US.
South Korea’s economy experiences various challenges. It’s high dependence on exports (constitute 50% of its GDP), an aging population, low import volumes, poorly resourced SMEs, and dominance by multinationals (chaebols) in key sectors constitute a potential threat to sustained economic growth. Korea’s SME sector contributes about “40% of its exports and 80% of employment” (DataMonitor International par. 7). However, since 2005, interventionist policies have reduced the level of competitiveness of SMEs, resulting in a decline in FDI inflow into the sector. Nuclear threats from North Korea and growing apathy towards multinationals are risks to S. Korea’s economic growth prospects.
Korea’s political landscape is characterised by a centralised authority, strong foreign relations, and state-led economic reforms. The S. Korean president is a key figure in the country’s economy who heads committees that formulate key economic policies, such as the nation’s ‘747 Vision’ (DataMonitor International par. 11). The political will to initiate reforms in the wake of financial crises, such as the 1997/98 economic crisis, has been instrumental in maintaining economic progress. According to DataMonitor International, South Korea has strengthened its military ties with the US, China, and Russia, as relations with its neighbor (N. Korea) remain tense (par. 18). It has also ratified FTAs with large economies, including the US.
S. Korea’s politics has had military influence over the years because of coups in 1961 and 1980. In addition, due to worsening relations with the North, security issues dominate public policy. Political violence, including student protests, is another challenge to the country’s relative stability. Strong ties with the EU and the prospect of better relations with North Korea, including creating a “joint economic city of Haeju”, will improve Korea’s politics and public policy (DataMonitor International par. 14). However, uneasy relations on the Korean peninsula coupled with a nuclear threat from N. Korea are a cause for concern in S. Korea.
South Korea’s judiciary comprises of a constitutional court that was created in 1988 to guide public policy implementation by the state. The court acts as a check-and-balance mechanism to ensure that all enacted laws are constitutional. S. Korea has the best regulatory incentives among OECD countries that attract transnational firms into the country. Its income tax exemptions for multinationals, financial grants to firms investing in the technology sector, and multiple Free Economic Zones have had a transformative impact on the country’s economy (OECD par. 2). In addition, S. Korea has favorable tax policies, which, coupled with a non-mandatory requirement to reinvest earnings, has made the country an attractive investment destination.
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S. Korea’s judicial system, unlike Western systems, lacks juries, which reduces the level of public participation in the judicial process (OECD par. 4). Another challenge relates to an inefficient customs clearance process that encompasses nine steps. The long customs procedure causes delays in clearance, leading to reduced import flows. According to DataMonitor International, S. Korea’s system for the protection of intellectual property rights (IPR) is weak, giving way for copyright infringement (par. 19). The weak system has contributed to a significant decline in FDI inflows. Nevertheless, entitlement to tax abatements that give tax reliefs to investors and the tax treaties with foreign countries have increased FDI flows to S. Korea.
Interrelationships between Economic, Political, and Legal Aspects
S. Korea structural reforms and regulatory policies are products of government-led interventions. The political system liberalised S. Korea’s financial markets and enacted economic blueprints, such as the ‘747 Vision’. The political will to bring about economic transformation is also evident in Korea’s post-financial crisis policies. The ratification of FTAs with big economies, such as the US, also has political underpinnings. In addition, the initiative to improve stability on the Korean peninsula through a joint economic zone has political and legal implications for S. Korea. S. Korea’s regulatory incentives, including tax reductions for foreign investors, are central to the state’s policy to increase FDI inflows. In addition, the creation of favorable tax statutes and Free Economic Zones aim to create attractive economic conditions for foreign investment.
The Attractiveness of South Korea for FDI
South Korea’s regulatory incentives, including tax reductions, relaxed tax policy, and cash grants to investing technology firms, create a positive environment for FDI inflows. Among OECD countries, S. Korea has the most favorable regulatory incentives and deregulation policies (OECD par. 12). In addition, the country’s exports constitute about 50% of its net GDP. Political stability and responsiveness to economic and regulatory challenges make the country attractive for FDI. S. Korea’s policies promote technological innovations and exports, which account for 9.1% of its GDP annually (OECD par. 15). Thus, the state-led reforms and regulatory framework create a pro-investment environment. However, customs clearance delays and ongoing nuclear threats from N. Korea may discourage foreign investors.
Political economy is inextricably tied to economic success. It entails the political, economic, and legal factors that interact to influence a country’s economic progress. S. Korea’s economic progress to become an OECD nation stems from the interplay of economic reforms and pro-investment laws and regulations implemented by the political system. The structural reforms and tax incentives make the country a favorable destination for FDI inflows.
Central Intelligence Agency [CIA], The World Fact Book: Korea, South. 2015. Web.
DataMonitor International, Republic of Korea: Country Analysis Report – In-depth PESTLE Insights. 2012. Web.
Hill, Charles. International Business: Competing in the Global Marketplace. New York:McGraw-Hill Education, 2005. Print.
Organisation of Economic Cooperation and Development [OECD]. Korea: Progress in Implementing Regulatory Reform. Paris: OECD, 2007. Print.