WEDNESDAY, MAY 3, 2006
South Korea is the country in which LG, a multinational corporation, (companies based in many countries) is based. The article presents us with LG’s aim to increase its market share in Europe by 30%. By the fact that Korea has chosen to develop by exporting its industrial goods, like mobile phones, we also see the strategy this country has chosen to develop and we could thus examine the advantages and disadvantages of this strategy.
South Korea is categorized in the Newly Industrialized countries (NIC) (developing countries which have recently developed their industry both rapidly and successfully). The characteristics of these countries are:
In order for Korea to become a NIC it has taken advantage of its comparative advantage -a concept according to which the country with the lowest opportunity cost (amount of good X that has to be sacrificed to produce Y) is better off producing that good- in labor. Korea due to its large population of 47.7 million has very cheap labor possibly because its population isn’t as educated as the population of developed countries and thus is willing to accept much lower wages out of a need to work and also because the large amount of labor means that finding a job will be harder.
As a result Korea uses her labor to create cheap industrial goods to export as a means of achieving development, because although Korea has achieved high growth levels there is a big difference between growth and development. Growth is the increase of the GDP of a country (the value of everything produced in a country by domestic and foreign firms in a year including depreciation). Contrastingly development as defined by economist Dudley Seers is growth in a country’s economy with reduction in poverty, both absolute (people living below the average income deemed necessary to survive) and relative (people living with the average income deemed necessary to survive), inequality (see figure 1) and unemployment.
Here we see Korea is using exports of industrial goods (cell phones) thus it has moved to an outward looking attempt so as to achieve development. The advantages of this are numerous.
On a Microeconomic level, we achieve internal and external economies of scale due to the increased production and thus, productive efficiency. Increased competition between foreign and domestic firms will probably lead to low prices, consumer sovereignty and greater choice for consumers in S. Korea. Finally, increased allocative efficiency (providing international competition operates in the S. Korean market) leads to better use of resources.
On an internal macroeconomic scale, exporting industrial goods is responsible for economic growth (measured through GDP). It could also reduce poverty both absolute and relative (assuming that the benefits are trickled down to all segments of the population). Thus if successful it will reduce income inequality as measured through the Lawrence curve since people will have the ability to make income abroad. S. Korea’s use of labor intensive production could employ more people in the labor market and reduce equilibrium and disequilibrium unemployment. The case for real wage unemployment, usually caused due to the imposition of a minimum wage by labor unions is examined in the figure below, the red area illustrates disequilibrium unemployment and the green area illustrates unemployment without W1.
Exporting industrial goods could also lead to an increase in aggregate supply and drive prices down with domestic consumers no longer being affected by inflation due to imported low prices.
On an external macroeconomic level, exporting industrial goods may lead to an increase in industrial production which could lead to an increase in exports leading to an improvement in the value of the S. Korean Won. Increased industrial production in S. Korea may effectively reduce import levels something that would improve the trade balance in their current account balance.
CRITICAL STATEMENT: The article could have provided us with more in depth information about the impact of LG’s strategy would have in Asia. What’s more it could have given us more details concerning the reasons for which multinationals choose to go to Asian countries especially Korea in order to seek labor. Finally if the article had provided me with information concerning the S. Korean market in general it would have been easier to examine the exact impact of the advantages of their development strategy in the S. Korean economy.