__________________________________________________________ Analysis ______________________________________________________________
Institutions role on economic development: Insights from South Korea
What can Latin America learn from South Korea’s Economic Growth and Institutional Strengthening?
Around the world, we can find different geographical regions, some dominated by towering mountain ranges, others stretching across vast plains, some located above or below sea level, and others experiencing warmer or colder climates. But not only geography influences our realities, we also nurture from community-shared experiences, transforming into what we know as culture. This culture shapes us, forms part of our collective subconscious, and influences our daily decisions. Both of these variables, along with many others, have been used to explain economic development (or the lack thereof) in different regions.
From a geographical perspective, it has been argued that countries located in temperate regions tend to experience a much more pronounced economic growth compared to their tropical counterparts. The French philosopher Montesquieu claimed that warmer climates “bring out the worst in a human being,” asserting that people from nations with such climates were inherently lazy and despised the idea of working, something that contrasted with those from temperate regions. However, this perspective has been generally questioned.
Economists John Gallop and Jeffrey Sachs (1999), adopting a modern perspective, raised key questions on the impact of geography on economic development. In their studies, they questioned how transportation costs vary across economies, how fertility is influenced by the geographical environment, the burden that diseases impose on a country’s growth, and the extent to which differences in agricultural productivity are due to biological and geophysical factors. Their approach highlighted the determining role that natural conditions can have in shaping a nation’s opportunities and limitations.
Over time, various theories have also attributed these economic differences to cultural factors as well. Max Weber, in “The Protestant Ethic and the Spirit of Capitalism”, argued that Protestant values fueled the development of the capitalist system in Northern Europe, fostering a strong work ethic and encouraging the accumulation of wealth. In contrast, the Catholic tradition fomented a rather passive perspective on working and the wealth-accumulation culture, thus holding back capitalism development and economic growth. However, this theory would later be dismissed by Japan and the “Four Asian Tigers” (South Korea, Taiwan, Hong Kong, and Singapore), which experienced rapid economic growth without Protestantism as a foundation. Instead, Confucian values played a crucial role in fostering economic development.
At first glance, these theoretical arguments seem reasonable in explaining economic disparities. Nevertheless, when comparing countries with similar conditions such as those from Nicaragua and Costa Rica in the Americas, or North and South Korea in East Asia, it´s clear that the answers for the fundamental causes of such developmental differences cannot be found merely in geography and culture.
Precisely, this is where institutions come into the equation. Nobel laureates in economics, Simon Johnson, Daron Acemoglu, and James Robinson sought to answer in their research. Acemoglu and Robinson, in their landmark book “Why Nations Fail?”, argue that institutions play the central role in determining whether a nation prospers economically or remains trapped in stagnation and poverty. The authors explain how “inclusive institutions” foster innovation and growth, while “extractive institutions” concentrate power and resources hindering development (Acemoglu & Robinson, 2012).
South Korea is a prime example of a nation that strengthened its institutions to boost economic growth. Thus, in this brief article, we aim to analyze the principal characteristics of South Korean institutions that have been key in the country´s development. Moreover, we seek to identify why these institutions differ from those in less developed countries and what lessons can be learned from them.
Institutions: The Pillar of Development
Before making any distinction between inclusive and extractive institutions, it is crucial to understand what exactly institutions are in the first place and why their role is important in economic development.
Finding a clear definition of what institutions are can be challenging, as their meaning often varies depending on the context, sometimes referring to an established organization, the structure where it exists, or even a custom or tradition of a society. However, in institutional economics, it appears an agreement has been made, where institutions are widely understood as the “game´s rules” in a society, or said in a much formal way, the human-made constraints that shape human interactions. Simply put, they are the rules that facilitate transactions (Groenewegen et al., 2010).
Institutions exist within an institutional environment, a concept closely related to what we know as an economic system. This system, while it takes into account both the production and distribution of goods and services, also encompasses the set of norms and institutions that regulate how these activities are developed. In essence, and other words, an economic system consists of these institutions, that, when interconnected, influence how people organize their consumption, production, and distribution of goods and services within a society.
Moreover, institutions can be classified into two categories: formal and informal. The former includes laws, constitutions, and property rights, while the latter encompasses customs, traditions, and social norms. Formal institutions provide stability and foreseeability to the economic system; whereas while not being comprised in a legal framework, informal institutions affect the social and economic behavior of a community. By understanding the previously stated, we can define what is meant by inclusive and extractive institutions
Inclusive institutions are those that foster competition by protecting property rights and promoting social mobility, thereby contributing to sustainable economic development. By encouraging open markets, they allow international trade to flourish without unnecessary state-imposed restrictions. Conversely, extractive institutions concentrate power and resources in the hands of a small elite, creating inequalities and limiting opportunities for the majority. By restricting participation in economic activity, they discourage innovation and growth, diminishing long-term development.
The Korean Peninsula: An Institutional Contrast
The present-day Republic of Korea (South Korea) and the Democratic People’s Republic of Korea (North Korea) share a history marked by numerous conflicts and divisions that remain to the current date. In the early 20th century, the region was conquered and colonized by Japan in 1910, following the Russo-Japanese War. This continued until the end of World War II, in 1945, when Korea was divided into two occupation zones: North Korea under Soviet control and South Korea under U.S. influence.
In 1948, the division, initially considered temporary, became permanent with the establishment of two separate governments, laying the groundwork for the conflict that would erupt in the Korean War. To this day, both nations remain in a state of armistice, without a definitive peace treaty.
This is where institutions emerge as the key factor in economic development. After the peninsula was divided in 1945, North Korea, under Soviet influence, adopted a centrally planned economy based on communist principles, with strong state control over production and resource distribution. In contrast, South Korea, backed by the United States, implemented a market-oriented economic system that eventually evolved into a state-driven industrialization model based on capitalism. This institutional divergence has been decisive in shaping the economic paths of both nations, with South Korea becoming one of the world’s most dynamic economies, while North Korea continues to face structural challenges and economic isolation.
By adopting a market-oriented economic approach supported by strong state intervention, South Korea has achieved sustained growth since the 1960s. Its accelerated industrialization model was based on export promotion and the development of large business conglomerates known as chaebols, such as Samsung, Hyundai, and LG. Thanks to these strategies, the country has established itself as one of the world’s most dynamic economies, with a strong focus on technology and innovation.
In contrast, North Korea maintains a centrally planned economy that is highly controlled by the state. Unlike other Asian economies that have combined planning with growth strategies, North Korea has severely restricted private property and foreign trade. This model, combined with international sanctions and poor economic management, has led the country into recurring crises, the most devastating being the late 1990s famine, known as the “Arduous March,” in which, according to estimates, 600,000 to 3 million people died due to food shortages. While South Korea has embraced globalization, innovation, and competitiveness, North Korea has allocated much of its resources to military development and maintaining economic isolation, prioritizing armament over the well-being of its population.
Inclusive Institutions: Key Characteristics
South Korea’s institutions have matured through democratization processes, leading to greater transparency and government accountability. Even though South Korea had experienced decades of authoritarian regimes reminiscing the Korean War, its transition towards democracy in the 1980s, consolidated by the presidential elections of 1987, marked a turning point in its institutional development. Democracy has been crucial for political stability and institutional strengthening, fostering a climate of trust that has attracted foreign investment.
In terms of separation of powers, the country has a balanced system, where the executive, legislative, and judicial branches interact and oversee each other. The presence of an active parliament and constitutional courts allows the public to exercise control over political decisions, strengthening institutionality and ensuring resilience in spite of economic and political crises.
South Korea’s economic model follows the Asian model, where the government plays a central coordinating role. National agreements are reached between labor unions, employer associations, and the government. However, this model has not been extent of difficulties. In its early decades of growth, the South Korean government pursued a policy of strong intervention, providing subsidies and preferential loans to chaebols to drive industrialization. However, in the 1990s and 2000s, concerns over excessive concentration of power in these conglomerates led the government to implement reforms aimed at limiting their influence and promoting competition. These reforms included opening financial markets and encouraging the growth of tech startups. As a result, South Korea has managed to strike a balance between state intervention and an environment that fosters innovation and private sector growth.
Through subsidies, preferential credit, and favorable regulations, the government has supported the expansion of chaebols, which have played a crucial role in the country’s economic growth. Nevertheless, in recent decades, South Korea has taken steps to diversify its economy and reduce its dependence on these conglomerates by promoting the rise of startups and emerging tech companies.The rule of law is another key pillar of South Korea’s institutional success. A strong legal framework ensures property rights, enforces contracts, and combats corruption. Measures such as the establishment of the Anti-Corruption and Civil Rights Commission (ACRC) have strengthened public trust and reduced transaction costs, making the country more attractive to foreign investors.
Another crucial factor has been the adaptability of South Korean institutions. In response to economic crises, such as the 1997 Asian financial crisis, the country implemented structural reforms that liberalized financial markets, modernized labor policies, and shifted industrial strategies toward high-value-added sectors like advanced technology and the digital economy. This institutional flexibility has been essential in maintaining South Korea’s competitiveness in an era of globalization and digital transformation. A country that fails to adapt to global changes risks stagnation, and South Korea has demonstrated the importance of constant innovation and strategic economic evolution.
Finally, the South Korean education system has been a cornerstone of the country’s institutional and economic development. Designed to align with market needs, it has created a highly skilled workforce, fostering meritocracy, competitiveness, and social mobility. Investments in STEM education (science, technology, engineering, and mathematics) have positioned South Korea as a global leader in innovation and technological advancement.
Conclusions: The Path to Development
South Korea serves as a living example of how inclusive institutions can transform an economy. By prioritizing democracy, property rights protection, and a strong education system, the country has created an environment that favors innovation and development. When comparing this case to Latin America, we find that many countries in the region struggle with less inclusive institutions, where economic and political power is concentrated in the hands of a few, limiting development opportunities. However, South Korea’s success demonstrates that profound change is possible when institutions evolve to become more inclusive and aim to create opportunities for the population as a whole.
For Latin America, the key lessons include the need to strengthen democracy, improve education quality, invest in infrastructure, and foster an environment that encourages innovation and competitiveness. That said, it is important to acknowledge that there are no identical countries, and each has its own historical context. A system that works in one place may not work in another, making it essential to assess each case individually. However, one certainty remains: if the region can effectively strengthen its institutions, it will be able to overcome many existing barriers and achieve more equitable and sustainable economic development.
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