South Korea’s Export-led
Growth
The Korean Economy in 1961
• Per capita GDP (or GNP) US$ 82.• Industry structure :
-Agriculture 40%
-Manufacturing/Mining 15%
• Cement, Plate glass, Fertilizers,
• Light industries processing US aid
materials (cotton, wheat, sugarcane syrup)
• Illiteracy rate 28% (mostly elders)
Absolute Poverty!
• Two round annual cultivation – rice
(summer) and barley (winter)
• Chronic shortage of food grain : The
stock of rice used to be exhausted one
month ahead of barley crops. “Grass
roots-Pine tree skins”
• “Spring starvation” or “barley hill” came
every year in May throughout the entire
history of Korea.
Competing for Jobs in
Manufacturing
• Jobs in manufacturing industry had been
occupied exclusively by workers of
industrialized economies.
• Undertaking industrialization by
developing economies takes jobs away
from workers of industrialized economies,
either indirectly by import substitution or
directly by export promotion.
Stages of Manufacturing Activity
Primary Materials Part &
Assembly
Resources
Components
• Technologically accessible :
• Techno. not accessible :
Industrial Activities and Catch-Up
• Pre-Industrial economies (may) provide
raw materials and buy industrial products.
• Catch-up begins with joining in either
accessible assembly
or P&C
or
both.
The First Stage of Industrialization
<1>Technologically Accessible Manufacturing
<2>Factories, Machinery-Equipments, and
Technology
<3>Provision of Materials and PartsComponents
<4>Marketing of Industrial Products
“Begin with affordable technology. Build
factory, get machinery/equipment and
materials/ parts/components. Operate
factory to produce. Sell the products.”
<1>Technologically Accessible
Manufacturing
• Unskilled workforce could not afford high
value-added manufacturing which are either
capital intensive or high-tech intensive or
both.
• South Korea started with low value-added
manufacturing of simple labor-intensive
goods such as plywood, garments and wigs,
since they were the only accessible
industrial activities for her workforce.
<2>Factories, MachineryEquipments, and Technology
• Capital was needed for investment in
building factories and acquiring
machinery-equipment.
• Domestic capital for factory site and
construction works.
• Foreign capital for importing machinery
and equipment, and licensing foreign
technology.
Capital Policy
1. Domestic Capital
2. Foreign Capital
1. Domestic Capital
1.1 High Deposit Rate, Low Loan Rate
1.2 Development Inflation and Forced
Saving
1.1 High Deposit Rate, Low Loan
Rate
• Interest rates were desired to set high
for deposits to mobilize domestic capital
on one hand, and
• low for loans to encourage industrial
activities on the other.
• But interest rates of this kind impose loss
on commercial banking and many
occasions.
continued
• Military government forced major stockholders of commercial banks to donate
their shares, after the coup d’etat in 1961,
for pardoning their “illicit fortune making”
to take over the control of all
commercial banks, and
• enforced the upside down structure of
interest rates.
1.2 Development Inflation and
Forced Saving
• Poor Koreans were unable to generate
enough savings to meet everlasting
excess demand for cheap bank loans.
• Chronic savings-investment gap as well
as the loss of commercial banks was
covered by increasing money supply.
• Forced saving by Development Inflation
2. Foreign Capital
2.1
2.2
2.3
2.4
No FDI!
Foreign Loan Was Not easy!
How To Break Through?
Deferring Foreign Exchanges Gap
2.1 No FDI!
• Widespread misgivings : “Foreign capital
is the vanguard of hostile invasion!”
• The idea of inviting FDI was rejected in
favor of fostering indigenous firms.
• As for foreign capital, Koreans’
borrowing was preferred to foreignowned firms.
2.2 Foreign Loan Was Not Easy!
• Global investors rated South Korea as
‘non-investable’ in 1960s under still
hostile inter-Korean confrontation.
• No Korean entrepreneur had been able
to draw any foreign loan on his own.
Samsung Electronics was able to borrow
on its own in international financial
market for the first time as a Korean firm
only in early 1980s.
2.3 How to Break Through?
• Sovereign debt guarantee : the Korean
government selected promising industrial
projects and let government-held
commercial banks guarantee the repayment
of principal and interest of the loan.
• But massive inflow of loans from Japan
actually took place after normalization of
Korea-Japan relation, and this facilitated
loans from other countries.
2.4 Deferring Foreign Exchanges
Gap
• Foreign lenders are only concerned with
safe repayment of interest and principal
for their loan.
• Repayment must be made not in Korean
currency but in foreign exchanges.
• Foreign loan does not solves foreign
exchanges gap but only defers it from
the time of importing foreign machineryequipment to repaying the loan.
<3>Provision of Materials and
Parts-Components
• All the materials and parts-components
were to be imported from abroad, in fact
mainly from Japan.
The more South Korea exported to the
USA, the more South Korea had to
import from Japan.
• South Korean government began to
encourage their localization later.
<4>Marketing of Industrial
Products
• Domestic market of South Korea was
thin and small then, and did not have
purchasing power sufficient enough to
buy up what was produced.
• Import substituting industrialization
limits the market for industrial products,
and hence jobs created, by domestic
market.
• Had to aim at world market.
Nature of Early Stage Catch-Up
• Countries commanding the on-going
industrial process is outsourcing simple
labor intensive segment to LD economies.
• This segment is connected with upstream of
parts-components and material, and
downstream of marketing.
• This outsourcing is the only accessible
chance for developing economies to start
catch-up by export promotion.
Need for Foreign Exchanges
• Foreign exchanges are essential for
attaining equipment-machinery,
technology licensing, parts-components,
and material.
• When traditional export cannot provide
sufficient amount of foreign exchanges,
then it is inevitable to try to export the
industrial products as new export items.
Dollar Earnings?
• In 1960 South Korea exported US$32.83
million and imported US$343.53 million
with trade deficit of US$310.07 million.
• The deficit was covered mainly by the US
economic aid of US$245 million. Still short!
• The Korean government lent the Korean
currency to the US troops in Korea for their
local spending, and the Americans paid
back the loan in US dollars. This sum
amounted to 62.6 million dollars in 1960.
Export
• Agro-fishery-mining products such as rice,
squid, iron ore, and tungsten were the
major export items until 1962, accounting
for more than 80% of the total export.
• South Korea might then have had
comparative advantage in agro-fisherymining, but its production capacity could
not generate enough foreign exchanges
needed for early stage industrialization.
Export-led Growth 1
• Exporting manufactured goods became an
imperative for South Korean
industrialization.
• Production of plywood, garments, wigs,
shoes,… to sell to foreign markets became
the core of new industrial activities.
• Expansion of export led both economic
growth and growth of import in partscomponents and materials.
Localization: Equipment-Machinery,
Parts-Components, and Materials
• Expanded export augmented demand for
equipment-machinery, parts-components,
and materials.
• Their localization called forth
development of heavy and chemical
industry, the task of which was basically
import substitution.
Heavy and Chemical Industry
• Heavy and chemical industry is highly
capital-intensive, and its average cost
declines as production scale expands
due to increasing returns to scale.
• Localization demand was certainly nonnegligible, but was not big enough to
absorb scale economies to a full extent.
• HCI production had to aim at export
from the beginning.
Technological Up-Grading
• HCI is by no means simple labor
intensive, and requires advanced knowhow on technology.
• Partners of industrialized economies will
not transfer technology of high level.
• Reverse engineering : recruit cooperative
expertise and mobilize them with
extensive support.
R&D
• Steel : POSCO’ finex method
• Shipbuilding : ‘Hyundai Heavy Industry’s
LNG tankers.
• CDMA : ETRI
• Passenger Cars : Pony Design at Torino
• Semi-conductors : Samsung’s Palo Alto
Lab.
Export-led Growth 2
• The entire global market is the market
for the South Korean HCI
• Failure in HCI export means failure both
in business and nation economy of
South Korea.
• Under current trend of globalization, any
economic growth will depend more and
more upon export and trade.