Historical background

An independent Korean state or collection of states has existed almost continuously for several millennia. Between its initial unification in the 7th century - from three predecessor Korean states - until the 20th century, Korea existed as a single independent country. In 1905, following the Russo-Japanese War, Korea became a protectorate of imperial Japan, and in 1910 it was annexed as a colony. Korea regained its independence following Japan's surrender to the United States in 1945. After World War II, a Republic of Korea (ROK) was set up in the southern half of the Korean Peninsula while a Communist-style government was installed in the north (the DPRK). During the Korean War (1950-53), US troops and UN forces fought alongside soldiers from the ROK to defend South Korea from DPRK attacks supported by China and the Soviet Union. An armistice was signed in 1953, splitting the peninsula along a demilitarized zone at about the 38th parallel. Thereafter, South Korea achieved rapid economic growth with per capita income rising to roughly 14 times the level of North Korea. In 1993, KIM Young-sam became South Korea's first civilian president following 32 years of military rule. South Korea today is a fully functioning modern democracy. In June 2000, a historic first North-South summit took place between the South's President KIM Dae-jung and the North's leader KIM Jong Il. In October 2007, a second North-South summit took place between the South's President ROH Moo-hyun and the North Korean leader. Harsh rhetoric and unwillingness by North Korea to engage with President LEE Myung-bak following his February 2008 inauguration has strained inter-Korean relations.

Economic overview

Since the 1960s, South Korea has achieved an incredible record of growth and integration into the high-tech modern world economy. Four decades ago, GDP per capita was comparable with levels in the poorer countries of Africa and Asia. In 2004, South Korea joined the trillion dollar club of world economies. In 2008, its GDP per capita was roughly the same as that of the Czech Republic and New Zealand. Initially, this success was achieved by a system of close government/business ties including directed credit, import restrictions, sponsorship of specific industries, and a strong labor effort. The government promoted the import of raw materials and technology at the expense of consumer goods and encouraged savings and investment over consumption. The Asian financial crisis of 1997-98 exposed longstanding weaknesses in South Korea's development model including high debt/equity ratios, massive foreign borrowing, and an undisciplined financial sector. GDP plunged by 6.9% in 1998, then recovered by 9% in 1999-2000. Korea adopted numerous economic reforms following the crisis, including greater openness to foreign investment and imports. Growth fell back to 3.3% in 2001 because of the slowing global economy, falling exports, and the perception that much-needed corporate and financial reforms had stalled. Led by consumer spending and exports, growth in 2002 was an impressive 7% despite anemic global growth. Between 2003 and 2007, growth moderated to about 4-5% annually. A downturn in consumer spending was offset by rapid export growth. In 2008, inflation increased in the face of rising oil and food prices before easing in the fourth quarter. Korea was hit hard by the global financial turmoil that began in September 2008. Stock prices fell by more than 40% for the year and the value of the won fell by approximately 26%. Korean GDP shrank in the fourth quarter and GDP growth for the year was just 2.2%. The Korean government adopted several measures to combat the credit crunch and stimulate the economy.