Download Korean Economic Development at a Glance Keuk

Korean Economic Development at a Glance
Keuk-Je Sung, Ph.D.
Graduate School of Pan-Pacific International Studies
Kyung Hee University
Republic of Korea
1. Introduction
“Bottomless pit”, “Nightmare” and “A sick society”1 were the words by the Americans
describing Republic of Korea (hereinafter Korea) until the early 60’s. Korea was one of the
poorest countries in the world and per capital income was less than 100 USD. She has
received a huge amount of foreign aid until the early 60’s, ranking within the top 5 aidrecipient countries in the world. During 3 decades until 1975, Korea received 6 billion USD,
which is almost the same amount that the whole African continent has.
Now Korea is the largest exporter in the world for memory chips, shipbuilding, LCD panels
and many others. Total export was over 422 billion USD in 2008. Per capita income has
surpassed 20,000 USD, and its economic size is approaching 1 trillion USD, bigger than any
European countries except UK, France, Germany, Italy and Spain. In August 2009, it has
launched its own satellite into the space from the local launching center. Korea is also a donor,
not a recipient, country in foreign aid.
<Graph 1> % of per capita income against that of US
100
90
80
70
60
50
40
30
20
10
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
0
Argentina
Denmark
Ghana
Korea
Thailand
Source: University of Pennsylvania World Table 6.2 (http://pwt.econ.upenn.edu)
Korea does not have enough natural endowments like crude oil or gas; nor iron ore or coal.
Geographical location is rather isolated in the Far East and the land is not large enough to
feed the population. Then, what has made this rapid transformation possible? Was there a
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P. 46 of Woo
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miracle? If such phenomenal economic growth can be replicated in other developing
countries, then this would provide a great opportunity to the developing world, even to the
whole world, as the poverty can be eliminated within one generation. If all the countries in
the world can enjoy 20,000 USD per capita income, there is hardly any doubt that the poverty
is no longer a problem, and there will be rare conflicts around the world.
Against this backdrop, this commentary will investigate the rapid economic growth of Korea
during the past 50 years, albeit briefly, and draw lessons for economic development. There
have been numerous papers and books on economic growth including that of Korea, but this
commentary will look at the Korean economic growth from a rather holistic and policyoriented view, not from the analytical or theoretical view.
2. Economic Policies of Korea in different phases
2.1 Reconstruction (1945-1960)
Korea was a peaceful kingdom during the past two thousand years, and the last dynasty lasted
about 600 years. She was no different from any other kingdoms around the world. In 1910,
however, Japan annexed Korea by force, and ruled her for 36 years until Japan has declared
defeat of the 2nd World War in 1945. Japan suddenly withdrew from Korea, and Korea was
divided into two halves; the north one governed by Soviet Union and the south by US.
Accordingly two governments were established, and the northern government invaded South
Korea in 1950. Korean War broke out, and lasted as many as 3 years. It was an all-out war,
not a guerilla one in many civil wars, and caused over 2 million injuries and deaths. United
Nations sent allied forces, led by the US. In the end, the war mostly between US and China.
US has close to 50 thousand casualties. Finally, on July 1953, the parties involved agreed on
cease fire. Still this state of war remains.
During the war, virtually all, if any, industrial base was destroyed. There were not much
industrial base during the colonial days, but any such base has been destroyed. Korea had to
rely on foreign aid, mostly from the US. Korea depended mostly on foreign aid for financial
difficulties. Reconstruction from the damage by the war was the main policy goal, and the
trade policy was import substitution like many other developing countries which experienced
colonial rulings. Democratic political system was introduced by the US, but the political
situation remained very unstable. The remarks in the first part of this commentary were made
around the end of this period.
2.2 Systematic Economic Development (1961-1979)
2.2.1 Early Period for Neutral Export Promotion
Mindful of the political turmoil, economic stagnation and constant military threat from North
Korea gave rise to a military coup in 1961, led by two-star general Park Chung Hee. He was
elected as the President the next year, and retained his presidency for as many as 18 years
until 1979 when he was assassinated during a dinner party. Anyhow, he was the first political
leader who initiated the systematic economic plan.
Economic situation at the time was not favorable for development at all; capital, technology
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or natural resources were all not enough. The only factor of production Korea had was
abundant labor, but such abundance can work as a disadvantage if the population is not well
educated enough. Luckily, Korea had a long tradition in placing higher priority to education,
and people were relatively well educated than most other developing countries. Political
situation was even worse; to the north was the major enemy North Korea, to the left the major
participant in the Korean War China, to the right the former colonial ruler Japan. Korea and
Japan had not even re-established the normal diplomatic relationship until 1965. There was
20 years vacuum between the two countries. To the south was the Pacific Ocean. In a sense,
Korea was completely segregated from the neighbors, and the only ally they can rely on was
US.
The main trade and economic development policy during this period was export promotion.
This distinguished Korea from many developing countries, as most developing countries
focused on import substitution as they did not have enough capital and foreign reserves for
import. Instead, Korea looked outward and adopted export-oriented policies. Import was,
however, not freely allowed, but as far as such import was related to export, import was also
allowed under favorable regulations. In a sense, Korea rightfully chose open-door trade
policy based on Ricardo’s Comparative Advantage Theory. But, in a sense, she did not have
many choices as foreign currency earning was a pre-requisite to import factors of production
such as capital goods, raw materials and technology.
During this period, export of any product was given incentives by the government, including
tax and financial support. One thing to note was that the banks were nationalized during the
military coup. Financial support played a big role by extending policy loans at much lower
interest rates. For the business firms, this access to loans was very attractive, and also
provided an implicit guarantee by the government for bailing out if the investment turned our
sour. All governmental agencies actively supported export, and surprisingly export has grown
close to 30% a year during this period, and the economy grew almost 10% a year. The catch
phrase at the time was “we can live better”, and “re-building the country through export”.
<Graph 2> Export volume and ratio of export to GDP (million USD and %)
450000
60
400000
50
350000
300000
40
250000
30
200000
150000
20
100000
10
50000
0
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
0
export
ratio
Source: Bank of Korea (http://www.bok.or.kr)
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2.2.2 Targeted Industrial Policy from the mid-70’s
Rapidly increasing export began to face trade barriers from the developed countries, and
policy makers felt a need to upgrade export items in the early 70’s. In addition to this, policy
change by the US to reduce US troops in Korea prompted the Korean government to develop
its own military industry. This change in situation dramatically transformed Korean trade and
industrial policy from neutral export promotion toward targeted industrial development. Six
heavy and chemical industries2 (HCI drive) have been selected, and most of the financial
resources3 were poured into the development of these six HCI. Support to other industries
was discontinued, and import of these industries was discouraged. Some described this period
as the “dark age” of Korean trade policy.
The performance of these six industries was not as good as expected; productivities were
mostly quite low. Internally, government has sharply increased the money supply to support
HCI drive, and in order to attract skilled workers from other industries, wages have also
increased quite fast. All these added to create inflation. Moreover in 1979, there was the 2nd
oil shock and export market was not favorable. Korea experienced the first negative export
growth in 1979. Foreign reserves almost dried out. The country was in serious trouble.
However, one aspect of HCI drive needs attention; HCI was not promoted to substitute
import, but rather to promote export. The investment scales of industries were far greater than
what local economy needed. Export promotion still lived on even during the HCI drive.
2.3 Market-friendly Development Policy (1980-1996)
The strong man who pushed the whole economy during the past 20 years was assassinated by
the head of the Korean CIA, by accident or design; we still do not know the exact motivation
as he was quickly executed. Only two months later after the assassination, another military
coup took place by another two-star general. General Chun Doo-Whan took power, and he
was elected as the president in 1981 and remained as president until 1987. In 1980, there was
a serious riot in the southern city of Korea for democracy, but it was brutally suppressed by
the military. On top of this, the weather in 1980 was bad for the crop. All these added up to
make Korea face the first negative economic growth in 20 years.
Chun’s political policy was quite dictatorial, but economic policy was not; the government
tried to restore market-friendly development policies, and this was a big turn-around of
Korean economic policy. The first task lying ahead was controlling inflation, which exceeded
30% a year. Government budget was frozen, and massive campaign was launched to contain
inflation, sometimes involving coercion to the private sector utilizing political power. The
catch phrase this time was “burden sharing”. Remarkably, the inflation rate reduced below 3%
within 3 years, and ever since, inflation is not a major concern in Korea even today.
2
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Petrochemical, automobile, shipbuilding, machinery, electronics and steel.
In late 70’s, this amounted to 80% of available investment rexsources.
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<Graph 3> Consumer price index of Korea (annual %)
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Source: Bank of Korea (http://www.bok.or.kr)
The next task was the financial liberalization. Government has stopped providing policy
loans to private firms and interest rate differentials were eliminated. Also the over-investment
in the HCI sector was reduced and/or adjusted. At the same time, market opening was
implemented. All these policies were to introduce more competition in the economy, and to
reduce government intervention in the market.
The result showed up rather quickly. Export has regained it growth, and so did the economic
growth around 8% a year. In 1988, Korea hosted the 24th Summer Olympic Game, and in
1995, her per capita income has reached 10,000 USD. OECD (Organization of Economic
Cooperation and Development), the so-called “rich men’s club”, invited Korea to become a
member and Korea joined OECD in 1996. Also in 1987, political democracy was introduced,
and labor disputes were allowed for the first time.
2.4 Financial crisis and restructuring (1997-1999)
Everything looked rosy until the middle of 90’s. There was even a forecast that Korea may
join the G7 if the current trend continues. But legacy lived on, and bad habits die hard.
Private firms continued borrowing from the banks and investing in every business, believing
that the government will bail them out in the end: “too big to fail”. Some business
conglomerates had over 1,000% debt ratio. Deregulation did not take place at the working
level, and intervention in the financial sector still remained. Labor unions become quite
militant, and asked for excessive wage increase. Indeed, all these problems were thought to
be tackled out, but only partially, and were swept under the rug, as the economy continued
growth over 8% a year.
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<Graph 4> Debt ratio and sales growth rate in manufacturing (annual %)
600.0
70.0
500.0
60.0
50.0
400.0
40.0
300.0
30.0
200.0
100.0
0.0
20.0
10.0
0.0
Source: Bank of Korea, broken line for the sales increase on the right hand scale
Similar pattern of economic policy was pursued in many East Asian economies, and the sign
of breakdown showed up firstly in Thailand in the summer of 1997. Suspicion on Asian
economic growth model has quickly spread over the whole Asia and Korea was not an
exception. East Asian financial crisis broke out. Foreign lenders stopped extending maturities
of existing loans, and Korea faced liquidity problem. Finally, Korea asked assistance to the
IMF and the IMF announced the largest rescue package in its history until that time.
IMF has delivered 46 billion USD, but it is still questionable whether such package has really
cooled down the wide-spread panic over the Korean economy. At any rate, the financial
market began to be stabilized in the next several months, and foreign lenders also allowed the
extension of loans. In the meantime, IMF recommended Korea to fully liberalize financial
market, strike out burdensome regulations, and provide social safety net.4 There was massive
economy-wide restructuring in the economy, and 160 billion USD were poured in the
restructuring. Of course, unemployment rate has gone up and the new social safety net
provided some, if not enough, comfort.
Once again surprisingly, Korean economy bounced back. In 1998, the economy achieved
10.7% economic growth against -6.7% decline in the previous year, and in 1999, Korea has
paid back all the loans extended by the IMF. Usually, IMF programs took 5 to 10 years to
show effects, sometimes never, but it took just 2 years for Korea to graduate from the IMF
program. The major reasons were the financial market liberalization and the sudden drop in
investment which enabled Korea to enjoy trade surplus. Through liberalization, Korean assets,
including stocks of major Korean companies and real estates, were sold at lower prices to
foreign investors. The drop in investment created a wedge against savings, and export has
accordingly increased rapidly, since financial crisis hit only East Asian economies and export
4
This last recommendation is quite atypical of IMF recommendations; most countries which received IMF
assistance faced government budget deficit, which was the main cause of economic crisis. But Korean
government did not much debt; Korean government has not introduced social welfare system until 1997. The
major cause of the financial crisis of Korea was the mismatch of loan maturities.
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demand still remained from non-Asian economies. Since the financial crisis, Korean
economy has regained economic growth around 5%, and accumulated foreign reserves over
200 billion USD, the 6th largest in the world.
3. Lessons and Implications
Nobel laureate Robert Lucas once mentioned that applying Korean economic development
experience to developing countries is like telling “an aspiring young basketball player to
become Michael Jordan”.5 The exact meaning of his comment is not clear, but what he
meant seemed to be the right combination of internal and external situations during the
development; sizable population with relatively high education, proper choices of economic
policies and favorable external conditions. Brief explanations for each are in order.
Korea now has about 48 million people, and literacy rate is almost 100%. The ratio of college
students in the age group of 20-24 is almost the highest among the OECD countries, and
Korea sends the largest number of students to US, more than China or India do, during the
past 3 years. Korean government spends large amount of resources for education, and private
spending for education is also very high among the OECD members. During the take-off
period in the 60’s and 70’s, a large number of vocational schools and intra-firm engineering
schools were established to produce skilled engineers. High priority to education seemed to
come from Confucian tradition, but basically Korean society is very competitive, and
education can be a good inter-generational inheritance without tax.
<Table 1> Composition of government expenditure, FY 2007 (%)
economic
social
Country
defense
education
affairs
protection
Korea
8.8
22.1
12.2
15.9
USA
11.5
10.0
18.6
16.9
France
3.4
5.4
42.4
11.2
Germany
2.3
7.2
46.5
8.8
Portugal
2.4
8.2
38.2
12.6
Japan
2.5
10.4
34.1
10.8
Source: OECD.StatExtracts (http://stats.oecd.org)
Economic policies are still under debate. Regarding the neutral export promotion policies in
the 60’s, there is not much disagreement. Without any industrial targeting, it was the right
choice for a small economy. However, it is true that a lot of incentives were provided to the
exporters, and all the burden must have fallen onto the general public. People had to suffer,
but did not complain. Appropriateness of industrial targeting in the middle of 70’s toward
heavy and chemical industries (HCI drive) is still questioned. It is true that most of the large
Korean exports these days are from these industries, including petrochemical, shipbuilding,
automobile and electronics. However, some shipbuilding and memory chip industries became
quite successful without any governmental support. Some argue that such industries require
5
Lucas
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huge initial investment, and without government support, such industries could not have
started; they claim that these industries have market failure aspects.
<Graph 5> Investment rate as % of GDP
50
45
40
35
30
25
20
15
10
5
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
0
Argentina
Denmark
Ghana
Korea
Thailand
Source: University of Pennsylvania World Table 6.2 (http://pwt.econ.upenn.edu)
There are not many doubts that the external environment was favorable to Korean economic
development. Developed countries did not raise much trade barrier in the 60’s toward imports
from developing countries. Korea also benefitted from the unexpected demand from the
Vietnam War, sudden construction boom in the middle east, and the so-called 3 lows in the
80’s; low interest rate, low oil price, and low Korean currency. These 3 lows greatly helped
Korean HCI as they relied heavily on oil and foreign borrowing, and products from these
industries competed against Japanese ones. Sluggish demand after the 2nd oil shock also
contributed to contain inflationary pressure in the early 80’s.
Financial crisis in Korea is sometimes called a “disguised blessing”. Korean firms invested
heavily in the early 90’s believing that the over-investment could be buried under the carpet
of fast growing sales; the moral hazard of “too big to fail”. One day or another, this overinvestment should have been adjusted, and the East Asian financial crisis has pulled out this
problem earlier while all other economies still enjoy economic growth in the late 90’s. If the
adjustment had to come about in recent years, Korea could have gone through a deep and
long adjustment process. Korean economy is already recovering from the global financial
crisis, the fastest among the OECD members.
4. Concluding Remarks
Going back to the initial question, was there a miracle? The answer is yes and no. The answer
is yes, because the external environment was quite favorable, and internally, economic policy
has turned around toward market friendly measures in the right timing. However, the answer
is also no, because people had to suffer from the incentives given to the firms. The resources
came from the savings of the people, and they could not consume as they wanted. Also, there
was not, even now, enough social safety net. You have nobody else to turn to when you don’t
have money. They also had to pay for the private education since the government gave
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support only to the primary education.
One more achievement to note is the trees in the mountain. Korean mountains have virtually
no trees after the Korean War; most mountains were bold until the 70’s. April 5 was
designated as the day for planting trees. The oversight of mountain trees was relegated to the
police, and cutting trees faced severe penalties. As of now, all mountains in Korea are thickly
covered by tress and wild animals are coming back. During 60’s and 70’s, there were many
casualties due to the burning of low calorie coal which emits carbon monoxide.
<Table 2> Amount of trees (m3/ha)
1940
1960
1970
1980
1990
2004
2008
US
Japan
Denmark
China
14
9
10
22.2
38.4
76.4
103
116
171
153
67
Source: Korea Forest Service (www.foa.go.kr)
Looking back, old saying reminds us of “no free lunch”; no pain, no gain. Korean people
suffered, but endured. They saved, and invested in capital and education. Also, external
environment was favorable, and government policies were mostly in the right direction.
Whether we call it a miracle or not depends on one’s own interpretation. END.
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C. V. of Sung, Keuk-Je
March 2012
Education
1976
BA in Economics, Seoul National University
1985
Ph.D. in Managerial Economics and Decision Science, Kellogg Graduate
School of Management, Northwestern University, USA
Previous Positions
1985-1995
Research Fellows, KISDI (Korea Information Strategy Development
Institute) and KIEP (Korea Institute for International Economic Policy)
1988-1991
Special Advisor to the Minister of Communication and Information
1987-1991
Korean Delegation for Telecommunication Negotiation with the USA
1991-1993
Korean Delegation for Services Negotiation in Uruguay Round
1994-1995
Economist, President’s Office of the Republic of Korea
1995-present Professor at Graduate School of Pan-Pacific International
Studies , Kyung Hee University
2000
Head, International Trade Law Counsel, Ministry of Foreign Affairs
and Trade, and Korean Head Delegate for the Services Negotiation in
WTO
2004-2006
President, Korean Association of Negotiation Studies
2009-2010
President, Korea Association of International Development
Cooperation
Current Positions
Professor, Graduate School of Pan-Pacific International Studies, Kyung Hee
University
Director General, ASEM-DUO Fellowship Secretariat
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