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IPE of Korea:Development and Globalization

* Some parts of this note are summary of the references for teaching purpose only.

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IPE of Korea <Lecture Note 2> 13.03.15

Semester: Spring 2013 Time: Friday 9:00~12:00 am Class Room: No. 331 Professor: Yoo Soo Hong Office Hour: By appointment Mobile: 010-4001-8060 E-mail: yshong123@gmail.com Home P.: //yoosoohong.weebly.com

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The Cold War (1945-1991), the Korean War (1950-1953), the

Korean Economy from 1945 to 1960

USADemocracy

• Its government is chosen in free democratic elections

USSRCommunism

• One-party dictatorship• Elections controlled by the

Communist Party

World Divided by

Capitalist• Business and property owned by

private individuals, market mechanism with government intervention

State-owned planning• Economy is planned and

managed by the government with social/state ownership

Freedom• Individual rights are protected, the

government does not interfere with people’s lives.

Control• The state is more important than

the individual, people’s lives are tightly controlled.

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The Cold War [1945-1991]: An Ideological Struggle

Soviet & Eastern Bloc

Nations“Iron Curtain”

US & the Western

Democracies

GOAL spread world-wide Commu-nism

GOAL “Contain-ment” of Commu-nism & the eventual collapse of the Communist world. METHODOLOGIES

1. Espionage [KGB vs. CIA]2. Arms Race [nuclear escalation]3. Ideological Competition for the minds and hearts of Third World

peoples [Communist govt. & command economy vs. democratic govt. & capitalist economy] “proxy wars”

4. Bi-Polarization of Europe [NATO vs. Warsaw Pact]

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Division of the World

• First World: The United States and Western Europe (also Turkey, Aus-tralia, South Africa, Japan)

• Second World: Soviet Union, Eastern Europe (Poland, Czechoslova-kia, Yugoslavia, Romania, Bulgaria, Hungary)

• Third World: Latin America, China & East Asia, Africa & Middle East, India (former colonies)

• Each believed that theirs was the best.

• USA – worried that Russia was trying to spread communism throughout Europe and the rest of the world. Believed that other countries should be run in the American way.

• USSR – believed that capitalist countries wanted to undermine communism in Russia. Believed that other countries should be run in the communist way.

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Response of USA

• 1949 : China communist, PRC– A massive huge communist state

• American intelligence team reported to President Truman that Stalin was using Cominform (Communist Information Bureau – coordinates work of the Communist Parties of eastern Europe ) to help Communists win power in Asia (Malaya, Indonesia, Burma, the Philippines and Korea…) .

• Conspiracy hypothesis: communist countries acting together to spread communism

• Anxiety of the communists overrunning all of Asia, with country over country being toppled like a row of dominoes

• ‘Contain’ communism, that is ‘to stop communism from spreading’: ‘Policy of containment’

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• 1904 -1945 Japan controlled Korea

• August 1945: Russian forces in the NORTH, American troops the SOUTH

• The two halves were divided by the 38th parallel, intended to be temporary

• Both armies would be withdrawn from their respective areas so that the United Nations (UN) could organize an election for a united Korea

• When the Cold War began, no agreement could be reached for its reunification.

• Soviet Union wanted unification under Kim, US wanted unification under Rhee even though both withdrew their troops between 1948 and 1949.

Before the War

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MAPS

E A S T S E A /

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Russia and the Korean War

• USSR shared a common border with Korea• Korea under Kim’s rule would strengthen its security• Give access to natural resources like water• Keeps Japan at bay• Involved indirectly by sanctioning Kim’s intention of invading South Korea• Opportunity to attack South Korea was available after America’s announcement of its defensive perimeter• Kim Il Sung made known his plans to Stalin and Mao; soviet military ex-

perts helped draw up final plan of attack.

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USA and the Korean War

• Initially focused on Japan in its policy towards Asia.• Demilitarization and democratization of Japan• With the start of the cold war, control of Japan became even more crucial –

to contain the threat of Soviet expansion and communism across Asia• Communist Party of Japan gaining popularity due to damages incurred by

Japan’s industries and agriculture• As cold war progresses, USA recognized that communist forces in China,

South Korea and Vietnam ought to be contained – supported anti-commu-nist forces in these countries

• American policy of containment was not very successful . By 1950, it had ‘lost’ China to communism and communist forces were growing in strength in Indochina and Kim Il Sung was determined to reunite Korea under his authoritarian rule.

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The Start of the Korean War

• North Korea invaded South Korea on June 25, 1950.• Most leaders in the United States were surprised by this attack.

– American troops stationed in South Korea since WW II had recently completed their withdrawal.

– The United States was not well prepared to fight in Korea; however, the decision to fight was made quickly.

• Truman decided that the United States would take a stand against Com-munist aggression in Korea.

• The United Nations Security Council voted unanimously in favor of the use of force in Korea.

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US Involvement in the Korean War

USA’s involvement in the war:• Supplied troops and military supplies to South Korea• Pushed for resolution through UN security council for military action to be

taken by UN members against North KoreaQuestion : Why didn’t the Soviet Union use its veto rights?

Motivation behind USA’s involvement:• Domino theory• Conspiracy theory behind the invasion• to send a strong signal to the international community on its strong com-

mitment to resist the spread of communism

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US and UN Involvement

Role of the United States• South Korea was where the

United States had to take a stand against Communist aggression.

• Truman ordered American naval and air forces to sup-port Korean ground troops.

• Truman asked the United Nations to approve the use of force to stop the North Korean invasion.

Role of the United Nations• The UN Security Council

supported the use of force in Korea.

• Truman sent ground troops to Korea.

• The troops sent to Korea were to be a United Nations force.

• Instead of calling this a war, the whole effort was re-ferred to as a UN police action.

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Combat in the Korean War

• Offensives from Inchon and Pusan resulted in the destruction or surrender of huge numbers of North Korean troops.

• By October 1950 all of South Korea was back in UN hands.

The InchonLanding

• UN forces made an amphibious landing behind North Korean lines at the port city of Inchon.

• MacArthur’s surprise attack worked beautifully.• The September 1950 invasion at Inchon was a key victory for UN

forces.

North Koreaon the Run

• UN forces had begun to move into North Korea, but the when 260,000 Chinese troops joined the North Koreans the UN began to retreat.

• UN forces retreated all the way back to Seoul. It was the longest fallback in U.S. military history.

UN Forces Retreat

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• 1950 to 1953, North Korea in-vades South Korea.

• North Korea was a communist nation and South Korea was a democracy.

• First war of “containment” policy to stop communism

• “Police Action” not a declared war

• President Truman leads United Nations.

• General Douglas MacArthur commands US and UN troops.

• Called “forgotten war”.

Process of the Korea War

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"The Security Council, "HAVING DETERMINED that the armed attack upon the Republic of Korea by forces from North Korea constitutes a breach of the peace, "HAVING CALLED FOR an immediate cessation of hostilities, and "HAVING CALLED UPON the authorities of North Korea to withdraw forthwith their armed forces to the 38th parallel, and "HAVING NOTED from the report of the United Nations Commissionfor Korea that the authorities in North Korea have neither ceased hostilities nor withdrawn their armed forces to the 38th parallel and that urgent military measures are required to restore international peace and security, and "HAVING NOTED the appeal from the Republic of Korea to the United Nations for immediate and effective steps to secure peace and security, "RECOMMENDS that the Members of the United Nations furnish such assistance to the Republic of Korea as may be necessary to repel the armed attack and to restore international peace and security in the area."

UN Resolution of 27 June 1950

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China’s concerns:- China wanted to maintain North Korea as a buffer state from the Americans in Japan and South Korea.

- They saw the American invasion as a threat to their borders.

China’s involvement in the war:- Attacked South Korea and American troops at the end of October.- Came about as a result of MacArthur’s troops reaching the Yalu River, close to Chinese border.- Mac Arthur ignored Chinese warning that they would attack should Mac Arthur moved further .

China and the Korean War

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The Shifting Map of Korea(1950-1953)

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Fighting Ends in Korea

Negotiating for Peace• In July 1951 peace talks began.• One major obstacle was the loca-

tion of the boundary between the Koreas.

• Meanwhile battles such as Bloody Ridge and Heartbreak Ridge con-tinued, inflicting heavy casualties on both sides.

• In October 1951 peace talks stalled over prisoners of war.

• Negotiators in Panmunjom con-tinued to argue over the details of a peace agreement throughout 1952.

Events of 1953• In 1952 Dwight D. Eisenhower—

who promised to end the war—was elected president.

• Fighting remained deadly—in the final two months of the war, UN forces lost 57,000 men and the Communists lost 100,000.

• An armistice agreement was fi-nally reached on July 27, 1953.

• The Korean War left the map of Korea looking much as it had in 1950.

• The human costs were huge.

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Consequences of the Korean War

• Marked the start of the Cold War arms race (conventional and nuclear)• High increases in USA’s military budget to position itself as a global ‘po-

liceman’ against communism – by 1953, US military production was 700% higher than in 1950.

• Japan’s economy ballooned – boosted by the US troops stationed in Japan.

• Sovereignty was returned to Japan through the San Francisco Peace Treaty (in return it signed a security agreement with USA).

• Japan also signed a trade boycott (the Yoshida Letter) against communist China (to weaken and eventually cause the collapse of Mao’s regime

• Taiwan became more important strategically to USA – more military and economic aid provided for Taiwan

• 20-year period of Sino-American hostility followed• USA signed two new Cold War treaties with Philippines, Australia and

New Zealand.

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Results to S Korea

• S Korea remained ‘free’

• Containment had worked

• Both Koreas badly damaged

• The human cost

• Still two separate countries today

• Still US troops in Korea

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The Cost in Human Life

Casualties in the Korean War

780,000500,000

70,000

30,000

4,500

NK & Chinese soldiersand civilians

SK civilians

SK soldiers

USA soldiers

Other UN soldiers

The Role of the Korean War in Post-WWII Japanese Economic Development

• Japan becomes factory for US war effort in S. Korea making items like rope, canvas for bags and tents, uniforms, etc.

• Influx of capital and increase in Japan’s industrialization to aid war effort stimulated Japanese economy.

• Timing of war perfect catalyst for economic development of Japan in the 1950s

• Most Japanese infrastructure rebuilt by 1950• By 1952 industrial production equal to that of

1931• Korean war as boost to Japan’s economy• By 1955 reconstruction of Japan complete. • Possible because of national group effort to

rebuild Japan. The Japanese people were willing to postpone their economic improvement to ensure Japan’s economic development.

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After the Korean War (1953~A Few Years)

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Situation from 1945 to 1960 − Poorly endowed with natural resources and devastated by the Korean

War (1950~1953), Korea until the end of the 1950s had remained an agrarian society and its industrial activities were mostly confined to light industries such as simple assembly and procession of raw materials.

− During this period, the Korean government had implemented two impor-tant policies; (1) compulsory education and (2) land reform.

− The introduction of compulsory education helped create an abundant pool of knowledgeable people that would be instrumental for industrialization in later years.

− The land reforms done twice in 1947 and 1949 respectively laid another foundation for later industrialization, in that more equated wealth distribu-tion enabled to give equalized opportunities for the people.

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− The three-year war devastated almost completely the country’s emerging industrial bases. Postwar efforts to re-build the country’s roads and rail-roads, buildings and plants had shown only minor achievement, because of the limitations of the government budget and the shortages of neces-sary resources.

− Industrial and trade policies during the postwar 1950s had been based on important-substitution that aimed to restrict imports and try to produce daily necessaries. High tariffs were levied and the quantities of imports were tightly controlled in order to protect domestic industries.

− The restoration of domestic consumer goods industry was aided by over-valued foreign exchange rates, but this had detrimental effects on exports so that the yearly volume of exports decreased until 1960.

− After the military coup in 1961, the new political leadership decided that modernization of the Korean economy and rapid economic growth should have the highest priorities.

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From Independence to the Korean War (1945~1950)

Shortage of capital and technology(monopolized by the Japanese)

Supply-side Demand-side

Immense immigration of theoverseas Korean people (10%)

Shortage of natural resources and electricity

(separation of North and South)

Monetary expansion by the Japanese (war financing)

Hyperinflation

** (Agricultural) land reform in 1950

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From the Korean War to 1960 (1950~1960)

• 1 million casualties (Some estimate 3 million)

• Economic losses over US$ 3 billion

The Korean War

• The US$ 2.3 billion aid through 1953~1961

• Foreign aid mostly contributed economic recovery

• However, they are mostly through consumer goods which didn’t contribute to the accumulation of capital resources

The Korean War

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Outward-Looking Development

Overview of the Korea’s Development Process

− Korea’s industrial transformation and increase in income levels have been

achieved through the intensive learning processes where technological capability building and human resource development has played a deci-sive role.

− Another distinctive aspect of Korea’s industrialization process is the active role that government played in a way to intervene into the market to initi-ate the great transformation.

− Korea’s development process can be divided into three stages;(1) Factor driven stage during 1960s and 1970s(2) Investment driven stage during 1980s and 1990s(3) Innovation driven stage in 2000s

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Korea: From Ash to a G20 Country

- GNP(1960): US $1.1 billion- GNP per capita (1960): $82- Exports(1960): $33 million- Industry: Plywood and wigs- Diplomacy: No member in

major international organi-zation

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- Korea was one of the least developed countries in terms of industrial development in the early 1960s. It has been transformed into one of leading industrial countries in the world during the last 50 years.

• Pop: 50 million• GDP (2010f): US$1,012.4 billion

(14th)• GDP per capita (2010f): $20,450• Exports (2010f): $459,803 million

(12th), (In 2012, 8th in world trade)• Industry: Semi-conductor, Smart

phone, TV, Auto, Shipbuilding, etc.

• Diplomacy: UN, OECD, G20, etc.

• Pop: 25 million• GNP (1960): US $1.1 billion• GNP per capita (1960): $82• Exports (1960): $33 million• Industry: Plywood and wigs• Diplomacy: No member in major intern’l organizations

1960 2010

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Transformation of the Korean Economy (1945~2000)

Growth trend in per capita GDP

LiberationfromJapanesecolonial rule

Five year economic development plan

5,000

10,000

67 87

10,307

6,742

Per capita GDP($)15,000

Source: KDI

Financialcrisis

2005200019801962 1970 19971953 19901945

16,460

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Changes in Dominant Industries and Top Exports

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FoodPlywoodWig

TextileHome electronicsIron & SteelOverseas construction

Home ElectronicsSemi-conductorsIron & SteelAutomobileShipbuilding

Semi-conductorsITAutomobileShipbuildingTextilePetro-chemicals

Semi-conductorsMobile communicationsDigital home electronicsE-commerceBio productsFine parts

1960 1970 1980 1990 2000

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Development Stages in the Korean Economy

Stages of Development

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Aid,Laborintensiveproduction

1950s 1970s 1980s 1990s 2000s1960s

ImitationSimple tech.Import of oldplant/machinery

Heavy industryAssimilationMinorinnovations

R&DNew product development

R&D intensiveincrease in scienceNew productinnovation

Innovationfrontier

Agricul-tural

Economy

Invesment-driven Economy

“Extensive Growth”

Innova-tive

Economy

“Intensive Growth”

Tradi-tional

Factor-driven Econ-omy“Extensive Growth”

Outward-looking

Innovative Catch-upTransition to Innova-tion-driven Economy

Outward-looking

Imitative Catch-up

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Focus of Economic Development Strategy in Each Administration

Found the Country(Lee Seung Man’s Ad-

ministration)

• Establish the Coun-try

Rapid Growth(Park Chung Hee’s Ad-

ministration)

• Income Substitution Industry

• Export-led Economy• Develop Heavy-

Chemical Industry

Stable Growth(Chun Doo Hwan’s Ad-

ministration)

• Economic Stabiliza-tion

• Adjust Heavy-Chem-ical Industry

Market & Open Econ-omy

(Kim Dae Jung’s Admin-istration)

• Overcome Financial Crisis

• Knowledge-based Economy

Internationalization(Kim Young Sam’s Ad-

ministration)

• Opening• Competition• Step forward to In-

ternationalization

Democratization(Roh Tae Woo’s Admin-

istration)

• Private-Driven Eco-nomic Operation

• Promote Deregula-tion

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Launching Industrialization: 1960s − The majority of workforce was employed in the agriculture, forestry and

fishery sector, mostly producing foodstuffs for domestic use. But the very limited area of arable land available did not allow much scope for expan-sion for output or the production of substantial quantities of exportable agricultural products.

− In the mining sector there was no natural endowment of resources, ex-cept for limited quantities of tungsten and some other exportable miner-als. In the manufacturing sector, 80% of the products were consumer goods, particularly food and textiles.

− Services such as transportation and electricity were in extremely short supply.

− The development strategies of the 1960s aimed at terminating the vicious cycle of low savings, low investment and low growth, through policies de-signed to promote an increase in government savings, and a rise in for-eign capital flow, with priority attention given to export-led industrialization.

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− The development strategy of the 1960s was based on the promotion of both the export and import-substitution industries, starting out from the la-bor-intensive light manufacturing sectors.

− In a country such as Korea, with limited raw materials, a non-integrated industrial structure, and a skilled labor force that receives low real wages, it is inevitable that export should consist mainly at this stage of labor-in-tensive processing of imported raw materials and intermediate goods.

− The capital accumulation which has been attained through this process can be used both for the development of the agricultural sector and for the promotion of the heavy and chemical industries in order to accelerate the industrialization process.

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Economic Conditions of the Early 1960s

Abundantlabor

Strongeconomic will

High level ofeducation?

Capitalshortage

Weaktechnology base

Underdevelopedprivate sector

Source: KDI

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4040

Working of the Outward-looking Development Strategy

Source: KDI

Economic growth

Reproduction

Foreign capital in-ducement

(Economic aids/  external debt)

Manufacturingprocessing

Financial   tax support

Technologydevelopment Well-educated labor

force

Foreign technologyimports

Capital good imports

Raw material imports

Export promotion

Govern-ment

enterprisesPrivate

Initial Conditions before Take-off

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Korea was war-torn and divided, and was one of the poorest country with per capita GNP of $89 in 1961 (101st out of 125 countries)

• Vicious cycle of low savings and low growth

* Domestic private savings : only 5% of GNP in 1961

World view on Korea

- “Korea’s prospect for development is anything but bright!” (A World Bank report)

- “No hope for democratization” (The Times)

* The three slides here are borrowed from the ‘required reading 2’: KDI

Outward-looking Development Strategy

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Policy shift from “Import Substitution” to “Export Promotion” in the early 1960s

• Export-promotion policy focused on labor-intensive industries in view of abundant and well educated labor force

• Key steps: Implementation of exchange rate reform (1964) and export in-centive system such as export financing

International relations with Japan and United States

• Relations with Japan were normalized in 1965 despite fierce objection from Korean Citizens.• Dispatched Korean troops to the Vietnam War during 1965-1973 to support

the US forces.

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A total of reparations from Japan: US$ 500 million

• 300 mil $: for free (Japanese grants), 200 mil $: Japanese governmental loans (maturity: 20 years with 7-year grace period, interest rate: 3.5%)

• Use of the funds: construction of POSCO (Grant: 30.8 mil $, Loans: 88 mil $), Gyeongbu (Seoul-Busan) Express Way (6.9 mil $), and Soyang River Dam

• Burma, Philippines, Indonesia, Vietnam also received reparations from Japan.

Phase – I Model

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Government

ChaebolsFinance Labor

National mobilization

Inflationary enforced savings

Low wage

Financial support

Labor in-put

Financial regula-tion

Suppressedlabor movementIndus-

trial Pol-icy

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The Role of the Government in the Phase- I Model

Concentration of capital ownershipand management by the government

Strong control of the government overfinancial institutions, resources allocations,

wages and prices

Government-led economic development strategies : Export-oriented industrialization : Growth first, distribution later : Leadership in tech capability building

Source: Lee, Jong Won. 2004.

The Five Year Economic Development Plan

Target GNP growth rate: 7.1%“Economy First” principle

• An emphasis on the light industries• Export-oriented development plan• Investment in infrastructure• Development of key industries

Interest rate reform(1965)- To mobilize domestic resources

Five Year Plan (1st & 2nd)

Increased tax revenues- Establishment of the NTS(1966)

Importance of foreign loans- Normalizing relations with Japan- The BOK provided repayment guarantees for foreign loans

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Korean Economic Development Model in the Catch-Up Period

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Authoritative government inin the center of development

motivated people

Intervention

Capital financingthrough foreign loans

Export Promotion

Technology catch-up

Private enterpriseencouragement

High savings rate

Well-educatedwork force

Korean Chaebol

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Owner(family)

Owner(family)

Holdingcompany

Affiliated companies

Affiliated companies

Export Promotion Policies − The Korean government provided a set of incentives that made exporting

a profitable activity for private-sector entrepreneurs.

− The private sector, encouraged by comprehensive incentives, channeled resources into export oriented activities with little direct involvement by the government.

− Spurred by the government’s export-promotion policy and favorable trade environment, the labor intensive light manufacturing sectors recorded re-markable export growth and absorbed large numbers of unskilled and semi-skilled labor.

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Major Macroeconomic Performance (1961~1970)

0

5

10

15

20

25

30

35

1961 1962 1963 1964 1965 1966 1967 1968 1969 1970GNP growth rate CPI increase rateGrowth investment ratio National saving ratio

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Upgrading Industrial Structure: 1970s − In the mid-1970s, faced with sudden wage hikes, the Korean government

adopted a new set of development strategies, shifting from the promotion of labor-intensive export industries in the 1960s to the development of heavy and chemical industries.

− In order to finance the massive investment requirements of the HCIs, the government established the National Investment Fund which provided long-term subsidized loans to strategically selected heavy and chemical industries to develop their capital formation in an effective and orderly manner.

− In addition, most of Korea’s concessionary loans were given by special-ized banks and non-bank financial institutions, many of which were under direct control of the Ministry of Finance.

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− The development of heavy and chemical industries is seen as a means for the economy to adapt itself to changes in its international and domes-tic environments, and a move towards a more resilient economy, capable of further growth and maturity.

− The targeted industries including machinery, metallurgical, chemical and shipbuilding industries are leading industries that provide a strong driving force for the development of other industries.

− Alongside the industrial targeting, the plan had stated the importance of technological and human resources development with strategies of up-grading those factors of technology and technical manpower.

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− In order to develop the HCIs, the government took on the major burdens of investment risk. With the risk of investment reduced, and the prospects of return buoyed by the government drive, major corporations, primarily chaebols, made excessive investment in certain sectors such as machin-ery.

− The premature and excessive investments in HCI’s caused severe distor-tions in resource allocation especially at the expense of upgrading the la-bor intensive industries.

− This policy shift deepened the industrial structure, but also accelerated in-flation & wage hikes and increased economic inefficiencies.

− Large enterprises were crucial in the process of heavy-chemical industrial-ization, but the importance of large enterprises led to the concentration of economic power in the hands of a few big Korean businesses or “chae-bols”.

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HCI Promotion Plan

Nixon Doctrine (1969): Needs to prepare self-defense system(need to develop military industries)

Unstable political situation

HCI Promotion Plan Declared (1973)

Challenges to the postwar free trade system: Diversity became a key to continuous successful exports growth: labor disputes start

Changed economic environment

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5555

HCI Promotion Plan

Monetary and financial support:Policy loans for HCI industriesPreferential interest rates-Even below the inflation rate

• Industrial policy• Government-Chaebols al-

liances

Source: Rhee

StrategicIndustries

Electronics Steel

Nonfer-rous

metal

Machin-ery

Shipbuilding

Petrochemicals

Taxation and fiscal support:The special tax reductionand exemption law (1974)

Growth Rates in GDP and Exports (1970s)

8.80 8.50

12.80

8.10

6.60

11.80

10.309.40

7.108.00

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1970 1971 1972 1973 1974 1975 1976 1977 1978 19790.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Exports(US$ million) Real GDP growth rate(%)

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Total External Debt/GDP

0

10

20

30

40

50

60

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97

HCI drive & rapid increase of foreign debt

(%)

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Rationalizing Industrial Structure: 1980s

− During the 1980s, the Korean economy had continued its high growth trend with improvement in balance of payment. The Korean economy, however, paid high price such as increased labor disputes in the process of democratization.

− Coping with the new challenges, promotion of economic autonomy was one of the key policy goals during the 1980s. The government simplified various procedures for approval and authorization that had hindered pri-vate initiatives and creativity.

− Economic deregulation, which reduced government intervention and al-lowed more individual freedom, was actively pursued. Steps were also taken toward the internationalization and liberalization of the economy.

− Anticipating the Seoul Olympic Games in 1988, the government began to pursue more active internationalization policies.

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− The accelerated import liberalization policies during the five years of the sixth economic development plan resulted in an almost complete liberal-ization of manufactured imports. Tariff rates were also substantially low-ered.

− Fair trade and competition policies were strengthened to reduce the ineffi-ciencies of domestic industrial structures and curtail abusive practices of monopoly enterprises.

− In addition, the government exerted major efforts to improve income dis-tribution and to enhance social equity. It is worth noting that social equity and welfare was significantly improved for the late 1980s.

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Major Macro-Economic Indicators by Economic De-velopment Plan Period

Period Growth RateInvestment Ratio

(Investment/GNP)

Savings Ratio (Savings/GNP)

Domestic Foreign

1953~1961 14.43 10.38 2.15 8.41

1962~1966 7.67 15.7 7.9 7.9

1967~1971 10.67 25.4 15.11 10.25

1972~1976 11.20 27.0 20.4 6.7

1977~1981 5.9 30.9 25.5 5.6

1982 27.0 22.4 4.5

1983 31.8 24.4 2.9

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Economic Stabilization

• Chronic inflation • Imbalance of current account• A large amount of foreign debts• Investment distortions

− Economic problems in the late 1970s

Economic growth couldn’t be sustained without controlling inflation

• Curtailing aggregate demand through monetary and fiscal tightening• Regulate factor costs such as wages and interest rates

− Changed economic environment

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Major Macro-Economic Indicators by Economic De-velopment Plan Period

1st Plan:

1962~662nd Plan: 1967~71

3rd Plan: 1972~76

4th Plan: 1977~81

5th Plan:1982~86

6th Plan:1987~91

NewEconomic

Plan:(1993~97)

Economicgrowth(%) 7.8 9.3 8.0 5.6 8.8 9.6 6.8

Total investment

rate(%)15.1 26.4 27.8 35.5 29.4 34.8 35.2

Foreigndebt

($100 mill.)11.0 31.0 105.3 324.9 445.1 391.4 1,544.0

Trade ratioto GNP(%) 46.25 5.1 47.6 20.6 10.05 15.66 12.19

BOP($100 mill.) -3.2 -26.5 -49.0 -151.9 -19.0 -181.6 -469.5

Inflation(%) 16.3 7.8 19.7 19.3 1.0 2.6 3.7

Notes: 1) Economic growth rate refers to the growth in GNP

2) Inflation rate is the average annual percentage increase in PPI

3) The growth, investment, and export figures are annual averages, while the rest refers to the final figures at

the end of the development period. Export figures are based on custom clearance.

Source: Economic Planning Board; Bank of Korea; National d Bureau of Statistics. 62

Liberalizing the Economy: 1990s − There were several problems that were not present at the previous years

in the late 1980s. Manufacturing wages rose rapidly, surpassing the pro-ductivity growth. Combined with the appreciation of the Korean currency, the competitiveness of the Korean economy deteriorated.

− Confronted with the new challenges, the new government initiated a se-ries of economic reforms known as the Five-Year New Economy Plan.

− The new democratic order that gives more individual freedom and the movement toward internationalization calls for clearly defined economic rules and systems that are more consistent with the international norm.

− Financial reform was on the top of the policy priorities. Interest rates had been rationalized since the late 1980s and the financial reform measures were culminated in 1993 when the new government implemented “Real-name financial transaction system”.

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Phase – II Model

6464

Foreign Capital

Financial support

Market suppression

Investor-oriented gover-nance

Coordination

Labor mar-ket

Flexibility

Government

Finance Chaebols Labor

Economic liberalization and opening

6565

The Role of the Government in the Phase- II Model

Reducing government intervention in the market and private sector

Liberalizing the economy and coordinating

Government-supported, innovation-oriented development strategies : Innovation-oriented industrialization : Improving business environment and infrastructure

Source: Lee, Jong Won. 2004. (Some of the following pages also are from Lee.)

Key Features of the Korean Economy before the 1990s

− Export oriented economy

− Government-led growth strategy

− Industrial policy

− Chaebol-dominated economy

− Highly regulated financial market as a tool for financial resource mobilization for growth

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Pitfalls of Government-led Development and Changes in Development Strategy (1980~2000)

• Increased production cost• Efficiency loss• Weakened export competitiveness

Financial suppressiondue to prolonged

government intervention

Excessive wage growth

Over-investment in HCI

• 1979 : Negative export growth for the first time since 1960• 1980 : Negative economic growth ( -3.9%)

Source: KDI

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Pitfalls of Government-led Development and Changes in Development Strategy (1980~2000)

Source: KDI

Phasing-out of policy loans and interestrate deregulation

Stabilization policy in the early 1980s

Budget freeze/cut

Investment adjustment in HCI

Results

Strong exportsCurrent account

surpluses

DisinflationInflation

at around 3%

High economic growth

GDP growth of8% per annum

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Delayed Economic Reform and Financial Crisis in 1997

Source: KDI

Increased corporate

failure

Heavy corporatedebt leverage

Labor marketrigidity

Continued governmentintervention

IMFrescue package

Deterioratedfinancialsoundness

South East Asiancrisis

• Massive capital outflow• Denied rollover of short

term external debt

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Korea’s Macroeconomic Performance − The Korean economy has continued high economic growth since its

march on industrialization, with cyclical fluctuations.

− The average GDP growth rate of the 1960s was 8.5%, two times higher than that in 1950s. The average GDP rate of the 1970s was 7.7%, but the 1970s show 8.8% economic growth rates, higher than the previous decade. High growth trend has continued in the 1980s with average GDP growth rates of 9.1%, but as the economy enters into a matured stage of economic development in the 1990s, the economic growth rate came to be lowered, 7.2%.

− The year of 1998 showed a negative economic growth because of the fi-nancial crisis took at the end of 1997. The growth trend recovered to be positive afterwards, but on the average far lower than the previous decades. The growth trend after the financial crisis manifests that Korea is now entering into a lowered growth path.

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− Another feature is the continued rise in savings and investments rates. Savings and investment rates, measured as the percentage share of GDP, had remained quite low at the 1950s, just around 11%.

− These two started to increase as the full-scale industrialization unfolded in the 1960s, rapidly growing afterwards until reaching the peak in the 1990s with 35% savings and 37% investment rates.

− The rapid increases in the 1970s were the result of the HCI policies, whereas the steep increases had been slowed in the 1980s due to the stabilization and rationalization policies.

− There appears a clear turn of the trend after the peak: since the 1990s the Korean economy becomes less and less dependent upon physical in-vestment.

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Korea’s Industrial and Trade Structures − The process of industrialization has been accompanied with radical

changes in industrial structure.

− The primary sectors including agriculture, forestry and mining took the majority share of 48% in 1953; but as the industrialization proceeded since the 1960s, the share of primary sectors rapidly decreased, to be-come 5% in 2000. Instead, the share of manufacturing and services steadily increased: reaching 29% of manufacturing and 65% of services in 2000.

− The sectoral composition of manufacturing has also changed over the years.

− Until the early 1970s, manufacturing was mainly composed of light indus-tries such as textile and apparel. Entering into the 1980s, the share of heavy-chemical industries exceeded half of manufacturing and continued to increase afterwards: as of 2000, about 80% of manufacturing are com-posed of heavy-chemical industries.

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− Along with the changes in industrial structure, the leading industries in manufacturing are changing for the different stages of economic devel-opment.

− Until the early 1980s food & beverage and textile & apparel are leading in manufacturing growth with the share of about half of manufacturing, but the growth of these two sectors has been slowed over the years.

− Electrical & electronic products and automobile has take the leading role in 1990 and the chemical industry take part in later, with higher growth rates of all these three industries than that of light industries.

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The Production Structure of the Korean Economy, 1953-2008

Agriculture, Fishery &

MiningManufacturing

Share in manufacturing

ServicesLight in-dustries

Heavy-chemical industries

1953 48.4 9.0 78.9 21.1 42.6

1960 38.9 13.8 76.6 23.4 47.3

1970 28.7 21.3 60.8 39.2 50.0

1980 16.7 28.6 45.6 54.4 54.7

1990 9.3 28.9 32.6 67.4 61.8

2000 5.3 29.4 20.7 79.3 65.3

Unit: %

Source: Bank of Korea, National Accounts, each year

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− The changing composition of manufacturing is the result of changes in factor conditions of the economy, which is also manifested in trade struc-ture.

− During the earlier years of economic development, textile and apparel in-dustry was the only sector that shows comparative advantages. And then electrical and electronic products became to contribute positively to the trade balance since the early 1970s, followed by transportation equipment including automobile and ships.

− Chemicals as a whole becomes trade surplus only after the mid-1990s, but the composition of chemicals sectors changed greatly. At earlier stages of development, Korea’s chemical industry has shown strong competitiveness in industrial chemicals, but heavily depended upon im-ported materials and fine chemicals.

− Machinery is the least developed sector in terms of international competi-tiveness, but with gradual improvement.

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Success Elements of Korea’s Economic Growth − Korea’s rapid economic growth and industrial transformation is generally

treated as a success story in modern world economic history. As economic backwardness in general gives an opportunity for catch-up growth, so Korea’s rapid economic development shares common elements of success with the experience of late industrializing countries.

− The high rates of investment and savings imply that Korea’s economic trans-formation has been achieved by the massive capital investment.

− Industrial and labor compositions have been changed in the direction of higher productivity, as the share of manufacturing has steadily increased. Trade structures has also fundamentally changed from a primary goods ex-porter to manufactured products.

− The changes in the structures of industry, employment and trade have been preceded with great improvements in human resources and technology, two most important factors for sustaining economic growth that enables efficiency gains. Korea’s industrialization process is not only the process of capital ac-cumulation; but it is also the learning process, a key concept of the knowledge economy.

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− The successful transformation has been possible through government’s right policy framework and industry’s active engagement. Government set the development goals that clearly indicate where the country should move forward.

− And there have been several trials and errors- for example, the HCI drive had caused serious distortions in resource allocation and over-invest-ment. The Korean government responded to the mistake through rational-ization policies that aimed to restore the market mechanism.

− There are two areas where government’s intervention in general has brought great positive effects: human resource development and science and technology. The investment in public goods such as education and innovation is always advocated as one of the priority areas of the gov-ernment.

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Problems of Korean Economic Development

− Korean economy in the 1990s faced the urgent need to reform its eco-nomic system. Despite the efforts of the government, however, reform and restructuring were unsuccessful.

− Previous administrations induced businesses to invest in selected indus-tries, often forcing financial institutions to make the necessary funds available. Financial institutions were guaranteed survival regardless of their management practices. Likewise, politically backed chaebols en-joyed various privileges.

− The mechanism of resource allocation that the government wielded dis-cretionary power over the market approached the limitations when the economy grows bigger and need to enhance the autonomy of the market. The government thereby hampered the economy’s efficiency and reduced its growth potential.

− Rather than maximizing their profits through open market competition, many firms focused on increasing their profits by exerting political and economic influence, often breaking or bending the rules.

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− Despite the accelerated globalization and information revolution of the early 1990s, government policies failed to facilitate the Korean economic system’s integration into the new international environment.

− The fact that the Korean economy was losing long-term competitiveness became clearer as international market conditions deteriorated. The price of exports fell dramatically in 1996 with some industries entering a slump, seriously damaging debt-ridden business with excess production capacity.

− By early 1997, the financial state of many chaebols reached a point of no return, causing Korea’s international credibility to fall and hence exacer-bating the nation’s economic crisis.

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Financial Crisis in 1997 − Korea’s financial sectors had been regulated by the government so that

financial market liberalization pursued throughout the mid-1990s rendered Korean banking system rapidly exposed to outside shocks without due preparation.

− As economic conditions deteriorated with the October 1997 onset of the foreign exchange crisis in Southeast Asia, the confidence of foreign finan-cial institutions and investors in the Korean economy started to wane.

− In 1997, many banks and financial institutions became insolvent as they were saddled with the huge unpaid debts of bankrupt chaebols.

− The Korean foreign exchange crisis was the product of two events:(1)The share of short-term debt increased quickly, exceeding that of

long-term debt by 1994.(2)Foreign analysts downgraded the prospects for the Korean economy,

further exacerbating the capital flight.

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− More fundamental aspect is the continued erosion of the Korean economy in terms of international competitiveness. The underlying causes of finan-cial insolvency and the bankruptcies of the large firms lies in the deterio-rating profitability of the businesses in tandem with rising wages and low-ered productivity since the late 1980s.

− Firms had neglected changing their strategies and upgrading non-price factors of competitiveness. Instead, large enterprises opted to expand their business scale, which were possible through increased borrowing from the banks.

− The failure of government to build a new economic system has been also considered one factor of the crisis. Under the authoritarian regimes during 30 years of economic development before the crisis, the government had intervened severely into the market. Despite the government’s effort to enhance market functions, the pervasive cronyism between political and business circles had detrimental effect on the economy as a whole.

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Reaction to the Financial Crisis − Corporate restructuring has been a major goal of post-crisis reforms in

Korea. Both the government and business leaders had agreed upon five principles of corporate restructuring:

(1) Ensuring the transparency of corporate management(2) Dismantling cross-debt guarantees among affiliates(3) Significantly improving capital structure(4) Identifying core businesses and strengthening cooperative relation-

ships with small and medium-size companies(5) Enhancing accountability of controlling shareholders and of man-

agement

− Since the financial crisis in late 1997, Korea has made positive inroads into reforming its weak financial sector by making purchases of non-per-forming assets from, and injecting funds into severely undercapitalized banks.

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Reforms in Four Major Sectors of the Economy

Financial sector Public sector

- Restructuring in banks and non-bank financial institutions- Liberalization of foreign exchange transactions and capital account

− Privatization of state-owned Enterprises (SOEs)

Labor market Corporate Sector

- The tripartite committee established

- Conglomerates restructuring- Corporate workout program and nonvi-able firm exit- Enhancement of corporate governance

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Swift Crisis Resolution and Economic Recovery

Source: KDI

• Early graduation from the IMF program

(Foreign reserves of more than US$90 billion)

• Rapid economic recovery(GDP growth:1998: -6.7% → 1995: 10.7% )

• Social stability with productive welfare system

Comprehensive economic reform

Expansion ofsocial safety net

Fullliberlization of capital market

Crisis resolution measures Results

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Korean Exports and Its Structure − The export shares of both high and medium-high technology products

have increased steadily during 1992-2003.

− In the high-technology group the export share of radio, TV & communica-tion equipments increased from 8.5% in 1992 to 14.5% in 2003, the largest increase by product. In addition, the export share of medium-high technology products increased from 20.4% to 33.8% in the same period, in particular, the auto industry which more than doubled.

− In contrast, the shares of both low and medium-low technology products decreased, though the decline in low technology products was much steeper. Indeed the export share of textile, apparel & footwear alone, which were major export sectors up until early 1990s, decreased from 25.4% in 1992 to 8.0% in 2003.

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Foreign Relations in the Phase-I

S. Korea and N. Korea: Capitalism vs. socialism

Korea-Germany: Miners and nurses; First international loans (1964)

Korea-Japan: Normalization Treaty (1965)

Korea-US: Korean troops to Vietnam (1965)

Nixon Doctrine: 1968 -> Triggered HCI launch

The First and Second World Oil Shock: The Middle Asia Boom (1973, 1978)

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Foreign Relations in the Phase-II

APEC: 1998

Korea-China: Normalization of diplomatic relations (1992)

WTO: 1995

OECD: 1996

East Asian Crisis and IMF: 1997-8

ASEAN+3 (APT): 1997

FTAs

World Economic Crisis and G20: 2010

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Discussions and Implications

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Strategies for Securing National Competitiveness

Acquisition of World-top-class Technologies - Korea should pour more R&D efforts to core technologies and emerging technologies on the basis of strong basic science World Class Education for HRD - For this and stronger international competitiveness, the Korean education system should be reformed as quickly and broadly as possible Innovation-driven Economy and Innovation of NIS - Through a balanced and efficient NIS, Korea should realize an innovation- driven economy ahead of China Active Opening of the Economy - All these require active opening of the economy to the world. The whole country should be a ‘special economic zone’

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Challenges to the Korean Economy

− Losing Growth Momentum− Growth vs. Distribution (Polarization)

• Labor Markets • Education• Agriculture

− Geopolitical Risk: North Korean Nuclear Problem − China Factor− Aging Problem − G20 Member and Contribution to the World− Regional Integration and Unification

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References Chung, Duck-Koo and Eichengreen Barry. 2004. The Korea Economy Beyond Crisis.

Edward Elgar.

Jwa, Sung-Hee. A New Paradigm for Korea’s Economic Development: From Govern-ment Control to Market Economy. Palgrave.

Kim, Joon-Kyung et al. 2005. “Trade, Investment and Economic Integration between South Korea and China: A Step toward East Asian Regionalism”.

Sakong, Il. 1993. Korea in the World Economy. Institute for International Economics.  Soh, Changrok. 1997. From Investment to Innovation?: The Korean Political Econ-

omy and Changes in Industrial Competitiveness. International Trade and Business Institute.  Song, Byung Nak. 1990. The Rise of the Korean Economy. Oxford University Press.

Tcha, Moon Joong and Chung-Sok Suh. 2003. The Korean Economy at the Crossroads. Routledge Curzon.

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