This chapter reviews the recent changes in
Korea and its future directions. The existing economic relationship between
Australia and Korea is summarised.

2.1. Korea
– Past and Present

Korea is now a major industrial nation after
rapid economic growth over the last three decades. The average annual growth
rate from mid 1960s to mid 1990s was over 8%. Over this period Korea built a
strong economy with enormous human and capital resources, and technological
capacity. Its manufacturing development, export growth, macroeconomic stability
and poverty reduction were impressive.

At the end of 1997, Korea suffered a
financial crisis with a rapid depreciation of the currency and drop in the
securities markets. In response to the crisis, the Korean Government initiated
a program to stabilise the economy and implement structural reforms that would
address the underlying causes of the crisis and return Korea to a path of
sustainable development. The policies being adopted in Korea in relation to
information and communications technology and other technologies and services will
move Korea towards the Australian/OECD structure. This involves rapid
structural adjustment out of labour intensive industries and into higher value
production activities.

Korea's early and strong rebound was due in
part to a recovery in confidence resulting from the sharp increase in foreign
exchange reserves related to the huge current account surplus. In addition a
wide range of structural reforms were introduced to establish a more market
oriented economy, thereby addressing the weaknesses that had made Korea
vulnerable to a crisis. The reforms included significant changes in the
financial system, the corporate sector, the labour market and government
regulation (This area of reform provides different types of opportunities for Australian
businesses, for example, advising on the reform and restructuring process such as the
privatisation of KEPCO's generating facilities as well as participating through
investment in the privatised KEPCO). This is in addition to the reform that has been underway in
respect of trade. While the reform process is still not complete, it has had a
positive impact on confidence, both within Korea and abroad, about the
country's prospects.

2.2. Korea
– The Future

There are risks to continued expansion in
the near term. On the domestic side, the major risk would appear to be
financial market instability, perhaps related to possible bankruptcies of large
companies triggering difficulties in financial institutions. The major external
influence will be developments in the USA where a slowdown will affect Korean
exports – as would setbacks in key Asian countries such as Japan and China.

The rapidity of the recovery owes much to
swift action by the IMF as well as to Korean nationalism (e.g. the switch away
from imports created not only a very sharp recovery in the balance of payments
and international reserves but also a platform for the sharp recovery in
activity and demand). The recovery also owes much to the competitiveness of the
"Korean model". Winning dominant market share in global growth industries
over two to three decades meant a focus on low costs and reasonable quality, as
well as on large capacity.

There is a potential risk that the reform
agenda will be derailed by the recovery, through complacency and/or reform
fatigue.

The crisis and the response to the crisis
have enabled Korea to move towards a more responsive and sustainable model.
Korea has a number of competitive attributes that should see it continue to
prosper in the long term.

One such attribute is the female labour
force, unable so far to participate fully in the economy to their full
potential for social and cultural reasons. Another attribute arises from the
liberalisation of restrictions over foreign direct investment, which have been
at levels ($US15.9 billion in 4,136 projects in 2000: Ministry of Commerce, Industry and
Energy, 8 January 2001) second only to China. With more and more foreign entrants to the
Korean market, surplus capacity will be absorbed within a short period and
foreign funds can be used to expand productive capacity using up-to-date
practices.

In short, there is scope for labour force
expansion and productivity growth, especially with the increased technical
transfers likely with foreign direct investment inflows.

Korea with its population of nearly 50
million is already a large market with sophisticated consumers. Even though
wealth may not be evenly spread throughout Korea, the greater Seoul conurbation
is probably of the order of 26 million people with many more people with
similar standards of living in the south eastern region around Pusan. This
wealth is seen, for example, in the growth of tourism in the 1990s which, after
the setback of the financial crisis in 1997-98, has resumed its upward path.
The availability of discretionary disposable income is seen on a smaller scale
in the example of the investment in the Korean entertainment industry by
Melbourne Aquarium.

An important factor in Korea, at least in
the political sphere, is the desire to be recognised as a major OECD country.
In terms of economic policies, this should involve continuation of reform and
moving towards a more market forces driven economy. At the same time the
economic policies do involve an interventionist approach as Korea strives to
build a knowledge based economy. This interventionist approach is encapsulated
in the following statement by the Minister of Science and Technology:

We have both a vision and a strategy for
making Korea an industrial powerhouse by boosting its scientific and
technological prowess in the 21st century. When we realise our vision, we
expect that Korea's competitiveness in the science and technology field will rank
seventh in the world, with its "informationization" index placing
fifth by 2025. By that time, the contribution of science and technology to the
nation's economic growth is likely to reach roughly 30 per cent.(Seo Jung-uck in Korea Economic Report, March 2001, at page 15.)

The growth of these industries not only provides
a direct source of economic growth but they also provide an indirect source
through the productivity improvements they bring to more traditional
industries.

Other aspects of the Korean Government's
long term approach are reviving provincial economies, improving the living
standards of lower income families, improving relations with North Korea, and
the realisation of democracy and human rights. (For example, see President Kim Dae-jung' s New Year Message, 1 January 2001.)

The realisation of these policies will be
beneficial to Korea, in particular, and to Australia.

2.3. Korea
and Australia

Korean and Australian GNP are about the same
size although Korea's population is almost 21/2 times that of Australia. In
terms of GNP per head (purchasing power parity) Australia is about $US22,000
while Korea's is about $US13,000.

The structures of the two economies are
different with Australia already having moved into the post-industrial society,
with services accounting for over 70% of GDP and manufacturing about 25% - in
Korea services share is 50% and manufacturing 40/45%.

In 2000 Korea was Australia's fourth largest
trading partner ($A13.8 million in two-way trade), third largest export market
($A9.0 million), and eighth largest source of imports ($A4.8 million).

In 2000 Australia was Korea's 10th largest
trading partner, fifth largest import source and 12th largest export
destination.

This important trading relationship between
Australia and Korea began in the 1970s when Korea began to purchase large
quantities of minerals. Australian exports to Korea are still dominated by
minerals and energy products followed by agricultural products. Some
manufacturing products, particularly in the form of automotive components, have
become important in recent years. In the services sectors, tourism and
education are growing and becoming significant. Australian imports from Korea
are mainly manufactured products such as motor vehicles, computers and
telecommunications equipment.

The trading structure generally reflects
that which Australia has with many countries, i.e. it is complementary in the traditional
sense with Australia supplying the raw materials and food for Korea's factories
and people. Nevertheless, there are indications of a mature trading
relationship evolving between two countries with advanced technological skills
such as the emerging exports of automotive components from Australia and the
presence of Australian banks in Korea.

Korean investment in Australia is about
$A770 million, e.g. in the electronics industry by Daewoo, Samsung and LG as
well as by POSCO in the resources industry (Interview on 9 March 2001 with Korea International Trade Association
(KITA)). There are other investments in the
resources area in addition to POSCO such as KEPCO and Korea Zinc. There are
apparently a few investments in the high technology area. One such investment
is that of the Anam Industries group (a Korean semiconductor manufacturer) in
Semiconductor Technologies Australia Pty Ltd – where the objective is to link
Australian strengths in intellectual property in software design with Korean
skills in manufacturing and marketing.

Australian investment in Korea is about
$A1,500 million. There is a range of different types of investment, e.g. from
Melbourne Aquarium's investment in an aquarium in Pusan to Britax Rainsfords'
(now part of Schefenacker International) investment in a Korean manufacturer of
mirrors for the automotive industry as well as the investment by Coca-Cola
Amatil. In the latter case Australian technology and management expertise was
used to put in place new manufacturing and business systems in an existing
Korean manufacturer.

Technology exchange between Korea and
Australia in a prospective and potential business context to date is limited
but growing.

In addition to examples already mentioned,
Korea's Optical Internet Research Center is opening research laboratories at
the University of Sydney (the Australian Photonics Cooperative Research Centre)
and the University of Melbourne (the Centre for Ultra Broadband Information
Networks).

Another example is the Korea-Australia
Science and Technology Exchange Centre (KASTEC), which is based at the Pusan
National University and at the CRC for Waste Management and Pollution Control
in Sydney. Its objective is to promote the exchange of environmental
technologies between Australia and Korea with a view to developing
demonstration projects and commercial linkages.

A bilateral Agreement on Scientific and
Technological Cooperation was signed on 17 September 1999. The Joint Committee
on Science and Technology established under the agreement first met in March
2001.

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