Korea existed as an independent country longer than most countries in the world, within the great tradition of East Asia. However, Korea fell behind Europe with the "great divergence" in the modern era, evolving into a state most remote from Europe’s warfare states. The country also lagged behind neighboring China and Japan economically and socially, and the elites did not carry out reform from above in time. Korea thereby failed to adapt to the tectonic changes of the international environment in the nineteenth century and became a colony of Japan. The Japanese colonial rule transformed the Korean economy with a strong state capacity, enabling the Koreans’ per capita GDP as well as their total GDP to increase. However, the living standard stagnated, suggesting that landlords benefited disproportionately from the growth. The growth was eventually unsustainable because of the war. The colonial rule left a negative as well as a positive legacy for the country’s future.

South Korea is facing a tectonic change of international environment. The original advanced countries are undergoing a stagnation never seen after 1945, while the growth of China and other developing countries is offsetting it globally. South Korea benefited much from the rise of the Chinese economy, the most remarkable benefit being the trade surplus; however, it is disappearing with China’s catch-up in technological capability. The rise of China poses a challenge to the US hegemony, undermining the rule-based order and making East Asia the arena of a hegemony contest, which is most threatening to countries like South Korea. The country needs the ability to manage relationships with the great powers to cope with it, but whether it has the ability is unclear. Compared with the nineteenth century, when Korea failed to adapt to a tectonic change, the overall ability has improved remarkably, but the ability to form domestic cohesion remains the least improved.

In 1997, a domestic financial crisis broke out with mass chaebol bankruptcy, and then a currency crisis broke out as Japanese banks suddenly pulled short-term loans out with a liquidity crisis at home. Japan was willing to provide the liquidity to cope with the situation; however, the United States brought the case to the IMF to open up South Korea’s capital market and realize its broader national interests in East Asia after the Cold War. South Koreans yet accepted the IMF conditionality willingly to utilize it as a momentum for the reforms they thought desirable. The country carried out thoroughgoing reforms while failing to consider the complementarities between the new and existing institutions. The reforms improved corporate governance and purged the system producing non-performing loans, but they undermined the mechanism of the high economic growth. They also led to the massive layoff of workers and the sale of assets to foreigners.

After the 1997 crisis, South Korea implemented the same industrial policy as before, promoting R&D as a major means. Yet moving labor from traditional to modern service industries came to mainly comprise the structural transformation. Some chaebol firms became true global players, but chaebol system has become less relevant for structural transformation while their corporate governance remains poor. Foreign ownership has not helped to improve it because of its own problems. The government promoted venture business aggressively, which was not so successful initially; however, venture business has become ever more important over the years. The inducement of foreign direct investment followed a similar pattern, but South Korea’s direct investment overseas came to outweigh foreign direct investment. The labor productivity and financial soundness of small and medium-sized enterprises fell in relation to large enterprises while they came to account for a higher share of employment, deepening the labor market dualism.

South Korea implemented vertical as well as horizontal industrial policies in the 1960s and 1970s. Though they performed better than in other developing countries, the cost of the vertical policy outweighed its benefit. Industrial policies went side by side with the emergence of chaebol in a full-fledged form. Chaebol led the structural transformation of the economy, but they also led the production of non-performing loans, helping to deepen the 1979 crisis. In the 1980s, the government lifted vertical policy but strengthened horizontal policy while restructuring chaebol. In the 1990s, South Korea jumped into the newly-emerging information and communication technology industries with industrial policy. Meanwhile, the government began to promote small and medium-sized enterprises and introduced fair trade policies in the 1980s. By the mid-1990s, chaebol emerged as global players in higher-technology industries; however, they had many problems, the financial market problem being the most serious, ready to precipitate a crisis.

The South Korean economy began to grow rapidly in the 1960s, enabling it to converge with the advanced countries in per capita product. It did so as the leadership change enhanced state capacity. The government intervened pervasively in the economy, making sure that firms receiving the favors used them properly. The size of the government itself was small, but the macroeconomic policy was inflationary. The resultant inflation affected the way financial policy, the most important policy at the time, worked. The export promotion policy degenerated as the government employed non-price measures while the price incentives fell in spite of the 1964 exchange rate reform because of inflation, whereas the reform helped to check import growth. Nonetheless, exports grew rapidly, providing important dynamism for the economy. South Korea coped with the emerging balance of payments problem by normalizing its diplomatic relationship with Japan and sending troops to Vietnam.

Economic growth slowed down as the reforms after the crisis introduced a less aggressive system. Banks lent money to households rather than firms as household loans were liberalized. The current account turned into a surplus, but it failed to produce the equivalent increase in net foreign assets because of the large net capital losses. The country now held more international reserves, but it was for self-insurance purposes after throwing open the capital market. The country failed to avoid a currency crisis in 2008, which was resolved through currency swap agreements. The growth rate fell further with the ensuing Great Recession, and the country faced a deflation threat in 2013, but it was slow to use fiscal policy to cope with it. South Korea fought the pandemic in 2020 well but is currently having difficulties with its disinflation policy as it has to heed the risks in international as well as domestic financial markets.

South Korea has become the only country to make the transition from a developing to a developed country after the Second World War; however, its development process has been a tortuous one. This book first explains how Korea failed earlier in history to become a colony and how its economy changed during the colonial period. The book then describes the provision of the conditions for future growth in 1945–1960 and explains the launching of the high economic growth in the 1960s. The book next discusses the development process after the high economic growth began until the 1997 crisis, examining the three conditions for sustaining growth: macroeconomic management, structural transformation, and social conflict management. After discussing the 1997 crisis and the ensuing reform, the book explains how economic development proceeded subsequently until today, again by examining those three conditions for sustaining growth. Finally, it briefly discusses questions for the future.

The period from 1945 to 1960 was a mixture of the darker aspects of the time and the brighter aspects of the succeeding period. While there were disorder, division, and war, many of the conditions for the subsequent development were provided during this period. South Korea became an exception among the ex-colonies by escaping from socialism and being closely integrated with advanced capitalist countries. The country built a system whereby private enterprises faced workers with poor labor rights while carrying out the land reform. After the war, the growth rate was not impressive, as the prevalent government failure made it impossible to overcome the market failure. Yet import-substituting industrialization proceeded, through which chaebol emerged as a major player in the economy. The country implemented disinflation, enhanced education level, and began to promote exports, providing a condition for future growth, but the former two rather helped precipitate a crisis in 1960.

The high economic growth created jobs to reduce inequality as well as poverty. However, in the 1960s and 1970s, the effect was more than offset by other factors, like the widening wage gap between skilled and unskilled workers. There was also a large amount of transfer to the rich through the real estate market, while fiscal policy transferred little to the poor. Industrial relations were repressive. In the 1980s, inequality slowed to widen as the offsetting factors weakened and the transfer through the real estate market decreased, but industrial relations became more repressive. South Korea sustained high economic growth through the democratization process because, while staving off a possible disaster, democratization was limited in scope. Democratization failed to narrow inequality as it interacted with other forces, but it led to reforms to enhance the transparency of the economy. Independent unions emerged with democratization, but it aggravated the non-performing loans problem.

The high economic growth was supported by an "aggressive but vulnerable system," with a large current account deficit and the firm-finance nexus tending to produce non-performing loans. It precipitated a crisis in 1972, but the government resolved it with an emergency decree. The government then launched a strong industrial policy backed by expansionary macroeconomic policy through the First Oil Shock, laying the ground for another crisis in 1979. The government carried out disinflation policy in the 1980s, and the high economic growth resumed, now with a lower inflation rate and a smaller current account deficit, culminating in a boom in 1986–1988. However, inflation and the current account deficit returned, though in a milder form. The country sustained the high economic growth by boosting construction investment, and then as facility and intellectual property investments increased to meet the emerging global boom. However, the non-performing loans and capital market openings made the economy vulnerable to crises.

Inequality of market income rose after the 1997 crisis and then leveled off while the government redistribution increased over the years; however, the transfer to the rich through the real estate market increased immediately before the crisis. The inequality of market income rose after the crisis as the massive layoff of workers and the slowdown of growth led to job shortages and as labor market dualism deepened between large enterprises’ and small and medium-sized enterprises’ workers and regular and non-regular workers. Inequality also widened as the labor share of income fell, though the rising share of capital income was retained within firms rather than distributed to households. Unions have often failed to represent the interests of the whole working class. Welfare expenditure has risen substantially to narrow the inequality of disposable income; however, the welfare system has problems of coverage and sustainability, which are aggravated by the population's aging.