INTERNATIONAL STUDIES 2064
The Political Economies of
Lebanon and South Korea
A Compare and Contrast Essay
Clay Thompson
10/10/2012
Freshman
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The political economy of a country is all about finding the “middle ground.” The
dictionary definition of the “middle ground” is the area of compromise or possible agreement
between two extreme positions, usually political ones. In the case of a country’s political
economy, we are looking at finding the middle ground between the ideological extremes of a
command economy1 and a neo-liberal economy2. Countries found in this “middle ground” are
prosperous for a number of reasons: they continue to grow and develop, they have the five keys
to prosperity with justice, they are diversified in all economic sectors, and they apply the logic
stream. The United States, Germany, and Great Britain are all considered prosperous countries
by this definition and are found in the “middle ground.” Lebanon and South Korea are two
examples of countries that are working to find the right of amount of regulation and become
prosperous. They both have a past filled with conflicts and crises’ that have hurt them greatly
economically, yet they are also examples of two countries that have had many moments of
prosperity and wealth. South Korea is “currently ranked 13th for its gross domestic
profit3”(Central Intelligence Agency: “Korea, South”), and “Lebanon maintained 8% average
growth from 2006 to 2010” (Central Intelligence Agency: “Lebanon”). In this paper, I will argue
that both South Korea and Lebanon have similarities in their history, yet they differ in the
specifics of their economy and their progress towards prosperity. The first section of my paper
will explain the economic histories of the two countries. The next section will describe the
current economic conditions and the ways the countries are applying certain economic values.
The final body paragraph will give foresight into where the political economies are possibly
headed in the near future and how trade can assist them.
1
An economy in which production, investment, prices, and incomes are determined centrally by the government
(Hierarchy).
2
Relating to or denoting a modified form of liberalism tending to favor free-market capitalism.
3
A measure of a country's overall economic output. It is the market value of all final goods and services made
within the borders of a country in a year.
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Lebanon has a very unique economic history with moments of stability turned into chaos.
“Lebanon was once deemed the title “The Switzerland of the Middle East” for its roles as a
respected hub for banking and trading” ("The Lebanese Political Economy: A Brief Historical
Survey”). During the time period of 1943-1975, Lebanon maintained a well-rounded economy
with high growth rates and a climbing per capita income. Yet starting in 1975, Political disputes
arose and Israeli Incursions into the country froze nearly all economic activity. There was lots of
civil unrest, and by the 1980’s the governmental authority had all but disappeared. Without
governmental regulation, there was no real control of shipping ports and no collection of
required utility bills and taxes. Therefore, the mounting military costs with the low governmental
revenues plunged the country into a vicious cycle of inflation. It wasn’t until Syrian troops
stepped in and enacted a cease fire that the unrest subsided. The majority of the fighting was
thankfully finished yet “Lebanon had been left with a devalued currency, approximately $25
billion in damage to infrastructure, and major loss of manpower due to emigration”("The
Lebanese Political Economy: A Brief Historical Survey”). There were also major losses of
opportunity costs4 in regards to what could have been accomplished if it had not been for the
civil war. After the cease fire, Rafiq Hariri was appointed new prime minister for Lebanon and
was deemed as the economic savior for encouraging Syrian troop assistance. Hariri’s first steps
as prime minister were to eliminate the taxes on capital gains and place a mere 10% flat rate on
personal and corporate income. These decisions allowed people to worry less about saving, and
continue with their normal routines of work, spending, and taking risks. Economic growth
proceeded once more, and inflation dropped from a grand 120% to 3%. During this time, Hariri
had to borrow heavily from domestic banks causing internal public debt to rise from a mere 1.5
billion to 13 billion. He increased entitlement spending and spent tax money in areas such as
4
The cost of what you didn't do or the loss of potential gain from other alternatives when one alternative is chosen.
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public education, and small business loans. This entitlement spending created jobs and increased
public content. Unfortunately, the large debt continued to shadow the government and eventually
higher taxing was required. Indirect taxes, such as increased sales taxes, were put into place and
caused more burdens on the lower classes. The unfair economic inequalities and other
governmental corruption issues sparked civil unrest yet again. The Lebanese Army and media
acted quickly though and were able to effectively control it and make things appear as
reconstruction was going accordingly to plan to the outside world. Eventually Hariri was
replaced by Al-Hoss with intentions of economic reform. The years under Al-Hoss were
characterized by recession and little in the way of economic change, thus Hariri was welcomed
once more. In Hariri’s second appointment he increased tourism and decreased interest rates of
the public debt. As a result of the policies, the Lebanese economy experienced slight growth yet
was far from developing a prosperous economy.
Over the past four decades, South Korea has grown from an economy comparable to that
of a poorer country in Africa or Asia, to one of the world’s most prosperous economies. As with
Lebanon the journey has not been without its hiccups; the Korean War in the 1950s caused
massive devastation to the economy. “South Korea’s GDP was a low $1.5 billion and its per
capita GDP was only $70”(Heo 2). In the years following the conclusion of the war, the South
Korean government, subsisting initially on aid from the U.S., adopted an import substitution5
plan that was not successful therefore the government switched to an outward-looking plan.
Intentions were to promote labor intensive manufacturing to increase competitiveness for cheap
goods international. The results were impressive; the economy grew with a growth average of
9% from 1960 to 1990. “South Korea began to be a major producer of automobiles, fabrics,
telecommunication and sound equipment, electronics, and steel” (“South Korea: The Comeback
5
A government policy when the government attempts to replace imports with domestically produced goods
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Kid of Asia"). The manufacturing industry grew to account for 35% of GDP with service and
agriculture accounting for the rest. The agriculture sector only accounted for around 8% of GDP
though, which meant South Korea had to import most agriculture products, especially oil. This
sector concentration accounted for the increasing income disparities and rising gini coefficient6
in the country. When the 1980 global oil shock occurred, South Korea was at its breaking point
and ready for an economic and political overall. Civilians pushed for greater human rights and
for a political change to democracy. The push was quelled though and Dictator Chun Doo-Whan
was put into power. The Chun administration emphasized solid business environments and
economic infrastructures while also worked to stop unfair relationships between large firms. The
people of South Korea experienced growth under the Chun administration with averages of 8%
growth. Civilians still desired for democratization though and in 1992, the people finally
received their first civilian president. This democratization has had many positive effects on
Korean society. “It has resulted in better reflections of public opinion in policymaking, the
creation of fair elections, as well as the freedom of speech”(Heo). The downside to the increase
in heteronomy7 was that labor unions8 formed to promote better working conditions which led to
wage hikes which in turn led to more inflation on goods and a loss of international
competitiveness. As a result, South Korea was in bad shape when the 1997 Asian economic
crisis hit. This crisis identified the structural weakness in the South Korean economy. Foreign
Reserves were insufficient, borrowing from other companies was extensive and the corporate
debt/equity ratios9 were extremely high. “Many of the country’s largest conglomerates, known as
6
Common measure of inequality. The higher the Gini Coefficient, the higher the inequality in the region being
measured.
7
Heteronomy refers to action that is influenced by a force outside the individual. In the case of politics, it is
governance from the people.
8
An organized association of workers formed to protect and further their rights and interests.
9
Financial ratio indicating the relative proportion of equity used to finance a company's assets.
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chaebol10, had gone bankrupt.In order to prevent a total collapse of the economy, the IMF11
bailed South Korea out with one of the largest emergency loans ever granted”(“South Korea: The
Comeback Kid of Asia"). Extensive reconstructing took place after the crisis, and the banking
and corporate sector once again progressed, allowing South Korea to pay off the IMF loan in
mid-2001. South Korea defers from Lebanon in fact that it has more sectoral diversification and
more competitiveness on an international scale.
In the last decade, Lebanon has held a free-market structure and a laissez-faire attitude.
The Lebanese economy is primarily service oriented with 75.7% (2011 est.) of GDP coming
from the service sector (Central Intelligence Agency: “Lebanon”). The main contributors to this
stove-pipe concentration12 are the banking and tourism industries which are booming. It was
expected that when the financial crisis of 2007-2010 hit, Lebanon would suffer along with many
other countries, yet the Lebanese banks were left unscathed, due to their strict banking
regulations. Moreover, the Beirut stock market experienced an increase of 51%, causing MSCI13
to rank it as the world’s best performer in 2008. It was one of only seven countries in which the
value of the stock market increased in 2008. With the economy showing strong signs of
resilience, the World Bank project economic growth at 3.8% in 2012, compared to 2.5% for the
global economy. This projected rate would have made Lebanon the third fastest growing
economy in the MENA14 region behind Iraq and Morrocco. Unfortunately, this has not held true
for Lebanon. In early 2011, the Lebanese government collapsed due in part to the backing of the
10
A form of large business in South Korea, a conglomerate consisting of many companies centered around a parent
company. They are family controlled and have strong ties to government.
11
International Monetary Fund: a United Nations agency to promote trade by increasing the exchange stability of
the major currencies.
12
The organization of an economy where concentration is based primarily on one aspect or one sector.
13
MSCI is a leading provider of investment decision support tools to around 6,200 clients worldwide, ranging from
large pension plans to boutique hedge funds
14
Acronym for “Middle East and North Africa” that is often used in writing. The term covers an extensive region,
extending from Morocco in northwest Africa to Iran in southwest Asia.
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Special Tribunal for Lebanon and the social unrest in neighboring Syria. This has caused
economic growth to slow to 1.5%. There were high hopes for the summer season that tourism
would provide a boost yet it was a season of cancelled tourism due to blackouts and domestic
political troubles. Simon Neaime, head of the American University of Beirut’s economics
department, has now forecasted that economic growth could fall to 1% by the end of 2012.
South Korea is currently known as one of the worlds’ most technologically advanced and
digitally connected countries. It has emerged over the years as a leader in electronics, as well as
mobile phones. As with so many other countries, “the global economic downturn in late 2008
caused South Korean growth to slow to 0.3% in 2009” ("Background Note: South Korea”). Its
key automotive industry suffered as customers from the U.S. and Europe deferred
consumption15. The governmental reaction was almost immediate though; a $120 billion dollar
bailout package was issued in 2008, and a $38 billion dollar stimulus package in 2009. Since
then, South Korea has slowly progressed through the global recession. Low interest rates and tax
cuts increased productivity and export demand increased from the emerging economies in Asia,
primarily China. South Korea currently rests at 3.6% growth and the landmark U.S. - Korea Free
Trade Agreement was recently entered into force. It is the goal of this agreement that exports
will expand by billions of dollars annually for both South Korea and the U.S. providing
thousands of new export-related jobs for citizens. South Korea is different than Lebanon in
recent years for the facts that it is not facing as much political tension, and it continues to export
various goods with increases in productivity.
For both economies, the future economic potential holds many questions. Economies
tend to shift when there are problems elsewhere in the world. “Consumer confidence in Lebanon
is at an all-time low” (Bedard). Consumers are playing it safe and not spending near as much as
15
When money is loaned, the lender delays spending the money on consumption goods.
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years past. It is not only the consumers though; the government is at the end of its spending
limits due to the massive public debt. It is also worth noting that following the collapse of
Hariri’s government, some Lebanese have converted their savings into dollars and/or transferred
money out of the country. It is for these reasons that many researchers suggest Lebanon could
fall into a recession. The concerns of the political instability and tension in the surrounding
Middle Eastern Countries, particularly Syria only adds to the problems. If the situation descends
further into sectarian armed conflict, there is a good chance of spill-over of sectarian friction into
Lebanon. Investment banks and international agencies believe that Lebanon can maintain a high
growth rate in the following years if the situation in Syria becomes stable but that is a large
unknown. South Korea, on the other hand, continues to prosper. It does have challenges to
overcome though, including an inflexible labor market, and a heavily reliance on exports.
Exports account for nearly half of the total economic input. The U.S. - Korea Free Trade
Agreement has created a solid relationship for trading between the two countries, yet there is
uncertainty of whether the global recession will end soon and whether the demand for South
Korean goods will continue. If the countries South Korea has exposure with melt down in a
financial crisis, South Korea will certainty feel the heat. Trade is going to be vital to both these
economy’s success in the future, as it is for most economies. It is the goal of economies to export
what they can make efficiency, and import what they need. The term that describes this is
comparative advantage. This kind of trade allows countries to specialize yet it also creates
interdependency. There is no international government to make sure trading goes smoothly, so a
country can cut off another if it is in their best interest. This is defined as economic nationalism
and it is one of the five major problems confronting the world economy. So the question that
remains is how South Korea and Lebanon can use international trade as their engine of growth so
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that they don’t continue having economic downfalls in the future. South Korea is largely capital
intensive16 and exports automobiles, ships, electronics, and textiles. South Korea takes the profits
from these sectors and applies the Factor Price Equalization Theory, by investing in the other
sectors. The agriculture sector in South Korea has always maintained very protectionist ideas.
For example South Korean rice has been four times as expensive as the average price on the
market in past years. This is in the process of being reversed through an agreement with the
WTO17, and by 2014 the rice market will be freely open. This market openness allows for more
cooperation between countries. Sectoral diversity18 is going to be the key to continue growing
and prospering for South Korea. Lebanon on the other hand is very service oriented and relies on
importing many consumer goods. The dependence on tourism and banking leaves the economy
vulnerable to political instability as seen in Lebanon’s past. In the future Lebanon needs to put
more focus on its agriculture and industry. Lebanon is ideal for agriculture, with lots of water
availability and soil fertility; it has the most cultivable land among Middle Eastern countries. Oil
has also been discovered inland, and it would be worthwhile to explore this natural capital19.
Industry accounts for 20% of GDP and is concentrated in small businesses that package imported
goods. Lebanon needs to increase import substitution so it does not have so much
interdependency on foreign importing. If both these economies can work at diversifying, and
maintaining their international trade relationships, they have a good chance of prospering in
upcoming years.
16
Describing an industry or sector of the economy that relies relatively heavily on inputs of capital, usually relative
to labor, compared to other industries or sectors.
17
World Trade Organization: an international organization based in Geneva that monitors and enforces rules
governing global trade
18
Having aspects of each economic sector, not concentrating on only one.
19
A stock of natural resources- such as land, water, and minerals- used for production. Can be either renewable or
nonrenewable.
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In conclusion, the economies of Lebanon and South Korea have had low points as well as
high points in their history. Lebanon is currently struggling to stay afloat economically due to
political tensions and reliance on the tertiary sector, while South Korea is growing and
prospering. Both countries have many economic factors that can help them succeed in the future.
Lebanon has a strong tourism and banking sector, as well as the opportunity to progress in
various other sectors such as agriculture. South Korea has a very strong foundation in
manufacturing and a government that spends money on entitlements and social needs. IN the
end, Lebanon and South Korea have both achieved the “middle ground’ at one point or another,
and they can find it again if they apply the concepts and theories of political economy in the
future and not repeat past mistakes.
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Works Cited
"Central Intelligence Agency: Korea, South." Central Intelligence Agency. Web. Oct.
2012. <https://www.cia.gov/library/publications/the-world-factbook/geos/ks.html>.
"Central Intelligence Agency: Lebanon." Central Intelligence Agency. Web. Oct. 2012.
<https://www.cia.gov/library/publications/the-world-factbook/geos/le.html>.
Heo, Uk, Houngcheul Jeon, Hayam Kim, and Okjin Kim. The Political Economy of South
Korea: Economic Growth, Democratization, and Financial Crisis. Baltimore, Md., USA:
University of Maryland School of Law, 2008. Print.
"Background Note: South Korea." U.S. Department of State. Web. Oct. 2012.
<http://www.state.gov/r/pa/ei/bgn/2800.htm>.
Conerly, Bill. "South Korea Economic Forecast, 2012-2013: A Business Perspective."
Forbes. Forbes Magazine, 27 Dec. 2011. Web. Oct. 2012.
<http://www.forbes.com/sites/billconerly/2011/12/27/south-korea-economic-forecast-20122013-a-business-perspective/>.
"The Lebanese Political Economy: A Brief Historical Survey." Yahoo! Contributor
Network. Web. Oct. 2012. <http://voices.yahoo.com/the-lebanese-political-economy2746975.html?cat=7>.
"Profile of Lebanon: Economy." Embassy of LEBANON. Web. Oct. 2012.
<http://www.lebanonembassyus.org/country_lebanon/economy.html>.
Bedard, Evan. "Trends Indicate Lebanon Could Slip Into Recession in 2013, Experts
Say." LoanSafe. 12 Sept. 2012. Web. Oct. 2012. <http://www.loansafe.org/trends-indicatelebanon-could-slip-into-recession-in-2013-experts-say>.
“South Korea: The Comeback Kid of Asia." Thomas White, Global Investing. Web. Oct.
2012. <http://www.thomaswhite.com/explore-the-world/south-korea.aspx>.
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