IPE of Korea <Lecture Note 2> 13.03.15
IPE of Korea:
Development and Globalization
* Some parts of this note are summary of the references for teaching purpose only.
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
1
The Cold War (1945-1991), the
Korean War (1950-1953), the
Korean Economy from 1945 to
1960
2
World Divided by
•
USA
Democracy
Its government is chosen in free
democratic elections
•
•
Capitalist
•
•
Business and property owned by
private individuals, market
mechanism with government
intervention
Freedom
Individual rights are protected, the
government does not interfere
with people’s lives.
USSR
Communism
One-party dictatorship
Elections controlled by the
Communist Party
State-owned planning
•
•
Economy is planned and
managed by the government with
social/state ownership
Control
The state is more important than
the individual, people’s lives are
tightly controlled.
3
The Cold War [1945-1991]: An Ideological Struggle
Soviet &
Eastern Bloc
Nations
“Iron Curtain”
US & the
Western
Democracies
GOAL  spread worldwide Communism
METHODOLOGIES
GOAL  “Containment”
of Communism & the
eventual collapse of the
Communist world.
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]
4
Division of the World
•
First World: The United States and Western Europe (also Turkey,
Australia, South Africa, Japan)
•
Second World: Soviet Union, Eastern Europe (Poland,
Czechoslovakia, 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.
5
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’
6
Before the War
• 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.
7
MAPS
EAST SEA
/
8
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 experts
helped draw up final plan of attack.
9
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 anticommunist 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.
10
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
Communist aggression in Korea.
•
The United Nations Security Council voted unanimously in favor of the use
of force in Korea.
11
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 Korea
Question : 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
commitment to resist the spread of communism
12
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
support 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
referred to as a UN police
action.
13
Combat in the Korean War
The Inchon
Landing
•
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.
•
Offensives from Inchon and Pusan resulted in the destruction or
surrender of huge numbers of North Korean troops.
North Korea
•
on the Run
By October 1950 all of South Korea was back in UN hands.
•
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
14
15
Process of the Korea War
•1950 to 1953, North Korea
invades 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”.
16
UN Resolution of 27 June 1950
"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 Commission
for 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."
17
China and the Korean War
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 .
18
The Shifting Map of Korea
(1950-1953)
19
Fighting Ends in Korea
Negotiating for Peace
• In July 1951 peace talks began.
• One major obstacle was the
location of the boundary between
the Koreas.
• Meanwhile battles such as Bloody
Ridge and Heartbreak Ridge
continued, inflicting heavy
casualties on both sides.
• In October 1951 peace talks
stalled over prisoners of war.
• Negotiators in Panmunjom
continued 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
finally 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.
20
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
‘policeman’ 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.
21
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
22
The Cost in Human Life
Casualties in the Korean War
4,500
30,000
NK & Chinese soldiers
and civilians
70,000
SK civilians
500,000
SK soldiers
780,000
USA soldiers
Other UN soldiers
23
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.
24
After the Korean War (1953~A Few Years)
25
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
important 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
distribution enabled to give equalized opportunities for the people.
26
− The three-year war devastated almost completely the country’s emerging
industrial bases. Postwar efforts to re-build the country’s roads and
railroads, buildings and plants had shown only minor achievement,
because of the limitations of the government budget and the shortages of
necessary 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
overvalued 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.
27
From Independence to the Korean War (1945~1950)
Supply-side
Demand-side
Shortage of capital and technology
(monopolized by the Japanese)
Immense immigration of the
overseas 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
28
From the Korean War to 1960 (1950~1960)
The Korean War
• 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
29
Outward-Looking Development
30
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
decisive 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
initiate 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
31
Korea: From Ash to a G20 Country
- 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.
•
-•
-•
-•
•
•
-
1960
2010
Pop: 25 million
GNP(1960):
GNP (1960):US
US$1.1
$1.1 billion
billion
GNP per
per capita
GNP
capita (1960):
(1960):$82
$82
Exports (1960): $33
$33 million
Exports(1960):
million
Industry: Plywood and wigs
Industry: Plywood and wigs
Diplomacy: No member in
Diplomacy:
member in
major intern’lNo
organizations
major international
organization
• Pop: 50 million
• GDP (2010f): US$1,012.4 billion
(14th)
• GDP per capita (2010f): $20,450
• Exports (2010f): $459,803 million
(12th), (In 2012, 8th in world trade)
• Industry: Semi-conductor, Smart
phone, TV, Auto, Shipbuilding, etc.
• Diplomacy: UN, OECD, G20, etc.
32
32
Transformation of the Korean Economy (1945~2000)
Per capita GDP($)
15,000
16,460
10,307
10,000
6,742
5,000
Liberation
fromJapanese
colonial rule
67
1945
1953
Five year economic
development plan
Financial
crisis
87
1962
1970
1980
1990
1997 2000
2005
Growth trend in per capita GDP
Source: KDI
33
Changes in Dominant Industries and Top Exports
Textile
Home
electronics
Iron & Steel
Overseas
construction
Home
Electronics
Semi-conductors
Iron & Steel
Automobile
Shipbuilding
Semi-conductors
IT
Automobile
Shipbuilding
Textile
Petro-chemicals
Semi-conductors
Mobile
communications
Digital home
electronics
E-commerce
Bio products
Fine parts
Food
Plywood
Wig
1960
1970
1980
1990
2000
34
34
Development Stages in the Korean Economy
Stages of Development
1950s
Aid,
Labor
intensive
production
Traditiona
l
Agricultural
Economy
1960s
Imitation
Simple tech.
Import of old
plant/
machinery
1970s
Heavy industry
Assimilation
Minor
innovations
Imitative Catch-up
Factor-driven Economy
“Extensive Growth”
Outward-looking
1980s
R&D
New product
development
1990s
R&D intensive
increase
in science
New product
innovation
Innovative Catch-up
Transition to
Invesment-driven
Innovation-driven
Economy
Economy Outward“Extensive Growth”
looking
2000s
Innovation
frontier
Innovative
Economy
“Intensive
Growth”
35
35
Focus of Economic Development Strategy in
Each Administration
Found the Country
(Lee Seung Man’s
Administration)
• Establish the
Country
Democratization
(Roh Tae Woo’s
Administration)
• Private-Driven
Economic Operation
• Promote
Deregulation
Rapid Growth
(Park Chung Hee’s
Administration)
• Income Substitution
Industry
• Export-led Economy
• Develop HeavyChemical Industry
Internationalization
(Kim Young Sam’s
Administration)
• Opening
• Competition
• Step forward to
Internationalization
Stable Growth
(Chun Doo Hwan’s
Administration)
• Economic
Stabilization
• Adjust HeavyChemical Industry
Market & Open
Economy
(Kim Dae Jung’s
Administration)
• Overcome Financial
Crisis
• Knowledge-based
Economy
36
36
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
expansion for output or the production of substantial quantities of
exportable agricultural products.
− In the mining sector there was no natural endowment of resources,
except for limited quantities of tungsten and some other exportable
minerals. 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
designed to promote an increase in government savings, and a rise in
foreign capital flow, with priority attention given to export-led
industrialization.
37
− The development strategy of the 1960s was based on the promotion of
both the export and import-substitution industries, starting out from the
labor-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 laborintensive 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.
38
Economic Conditions of the Early 1960s
Capital
shortage
Weak
technology base
Underdeveloped
private sector
Abundant
labor
?
High level of
education
Strong
economic will
Source: KDI
39
Working of the Outward-looking
Development Strategy
Economic growth
Foreign capital
inducement
(Economic aids/external debt)
Manufacturing
processing
Export promotion
Private
enterprises
Financial tax support
Capital good imports
Governme
nt
Raw material imports
Foreign technology
imports
Source: KDI
Technology
development
Well-educated labor
force
40
40
7
Initial Conditions before Take-off
 Korea was war-torn and divided, and was one of the poorest country
with per capita GNP of $89 in 1961 (101st out of 125 countries)
• Vicious cycle of low savings and low growth
* Domestic private savings : only 5% of GNP in 1961
 World view on Korea
- “Korea’s prospect for development is anything but bright!” (A World Bank report)
- “No hope for democratization” (The Times)
* The three slides here are borrowed from the ‘required reading 2’: KDI
8
Outward-looking Development Strategy
 Policy shift from “Import Substitution” to “Export Promotion” in the
early 1960s
• Export-promotion policy focused on labor-intensive industries in view of
abundant and well educated labor force
• Key steps: Implementation of exchange rate reform (1964) and export
incentive system such as export financing
 International relations with Japan and United States
• Relations with Japan were normalized in 1965 despite fierce
objection from Korean Citizens.
• Dispatched Korean troops to the Vietnam War during 1965-1973 to support
the US forces.
9
 A total of reparations from Japan: US$ 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
Government
Financial
regulation
Industrial
Policy
Finance
Labor
Chaebols
Financial
support
Suppressed
labor movement
Labor
input
Inflationary
enforced
savings
Low
wage
National mobilization
44
44
The Role of the Government in the Phase- I Model
Concentration of capital ownership
and management by the government
Strong control of the government over
financial 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.
45
45
The Five Year Economic Development Plan
Interest rate reform(1965)
- To mobilize domestic resources
Five Year Plan (1st & 2nd)
•
•
•
•
An emphasis on the light industries
Export-oriented development plan
Investment in infrastructure
Development of key industries
Increased tax revenues
- Establishment of the NTS(1966)
Importance of foreign loans
- Normalizing relations with Japan
- The BOK provided repayment
guarantees for foreign loans
Target GNP growth rate: 7.1%
“Economy First” principle
46
Korean Economic Development Model in the Catch-Up
Period
Capital financing
through foreign loans
Private enterprise
encouragement
Authoritative government in
in the center of development
Export Promotion
motivated people
High savings rate
Intervention
Technology catch-up
Well-educated
work force
47
47
Korean Chaebol
Owner
(family)
Owner
(family)
Holding
company
Affiliated companies
Affiliated companies
48
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
remarkable export growth and absorbed large numbers of unskilled and
semi-skilled labor.
49
Major Macroeconomic Performance (1961~1970)
35
30
25
20
15
10
5
0
1961 1962 1963 1964 1965 1966 1967 1968 1969 1970
GNP growth rate
Growth investment ratio
CPI increase rate
National saving ratio
50
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
specialized banks and non-bank financial institutions, many of which were
under direct control of the Ministry of Finance.
51
− The development of heavy and chemical industries is seen as a means
for the economy to adapt itself to changes in its international and
domestic 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
upgrading those factors of technology and technical manpower.
52
− 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
machinery.
− The premature and excessive investments in HCI’s caused severe
distortions in resource allocation especially at the expense of upgrading
the labor intensive industries.
− This policy shift deepened the industrial structure, but also accelerated
inflation & wage hikes and increased economic inefficiencies.
− Large enterprises were crucial in the process of heavy-chemical
industrialization, but the importance of large enterprises led to the
concentration of economic power in the hands of a few big Korean
businesses or “chaebols”.
53
HCI Promotion Plan
Unstable political situation
Nixon Doctrine (1969):
Needs to prepare self-defense system
(need to develop military industries)
HCI Promotion Plan Declared (1973)
Changed economic environment
Challenges to the postwar free trade system
: Diversity became a key to continuous
successful exports growth
: labor disputes start
54
HCI Promotion Plan
Taxation and fiscal support:
The special tax reduction
and exemption law (1974)
Electronics
Nonferrou
s
metal
Steel
Strategic
Industries
Petro
chemicals
Machinery Shipbuilding
• Industrial
policy
• Government-Chaebols
alliances
Monetary and financial support:
Policy loans for HCI industries
Preferential interest rates
-Even below the inflation rate
Source: Rhee
55
55
Growth Rates in GDP and Exports (1970s)
16,000
14.00
12.80
14,000
12.00
11.80
12,000
10.30
10.00
9.40
10,000
8,000
8.80
8.50
8.10
8.00
6.60
8.00
7.10
6.00
6,000
4.00
4,000
2,000
2.00
0
0.00
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979
Ex ports(US$ million)
Real GDP growth rate(%)
56
Total External Debt/GDP
(%)
60
50
40
30
20
10
HCI drive & rapid increase of
foreign debt
0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97
57
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
private initiatives and creativity.
− Economic deregulation, which reduced government intervention and
allowed 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.
58
− The accelerated import liberalization policies during the five years of the
sixth economic development plan resulted in an almost complete
liberalization of manufactured imports. Tariff rates were also substantially
lowered.
− Fair trade and competition policies were strengthened to reduce the
inefficiencies of domestic industrial structures and curtail abusive
practices of monopoly enterprises.
− In addition, the government exerted major efforts to improve income
distribution and to enhance social equity. It is worth noting that social
equity and welfare was significantly improved for the late 1980s.
59
Major Macro-Economic Indicators by Economic
Development Plan Period
Period
Growth Rate
Savings Ratio (Savings/GNP)
Investment Ratio
(Investment/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
60
Economic Stabilization
− Economic problems in the late 1970s
• Chronic inflation
• Imbalance of current account
• A large amount of foreign debts
• Investment distortions
Economic growth couldn’t be sustained
without controlling inflation
− Changed economic environment
• Curtailing aggregate demand
through monetary and fiscal tightening
• Regulate factor costs
such as wages and interest rates
61
Major Macro-Economic Indicators by Economic
Development Plan Period
1st
Plan:
1962~66
2nd
Plan:
1967~71
3rd
Plan:
1972~76
Plan:
1977~81
Plan:
1982~86
Plan:
1987~91
New
Economic
Plan:
(1993~97)
4th
5th
6th
Economic
growth(%)
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
Foreign
debt
($100 mill.)
11.0
31.0
105.3
324.9
445.1
391.4
1,544.0
Trade ratio
to 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
productivity 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
series 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 “Realname financial transaction system”.
63
Phase – II Model
Government
Foreign
Capital
Coordination
Investor-oriented
governance
Financial support
Finance
Labor market
Labor
Chaebols
Market suppression
Flexibility
Economic liberalization and opening
64
64
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.)
65
65
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
66
 Pitfalls of Government-led Development and Changes
in Development Strategy (1980~2000)
Financial suppression
due to prolonged
government intervention
Over-investment in
HCI
Excessive wage
growth
• Increased production cost
• Efficiency loss
• Weakened export competitiveness
• 1979 : Negative export growth for the first time since 1960
• 1980 : Negative economic growth (3.9%)
Source: KDI
67
 Pitfalls of Government-led Development and Changes
in Development Strategy (1980~2000)
Stabilization policy
in the early 1980s
Results
Budget freeze/cut
Disinflation
Phasing
-out of policy
loans and interest
rate deregulation
Strong exports
Investment
adjustment in HCI
High
economic growth
Inflation
at around 3%
Current account
surpluses
GDP growth of
8% per annum
Source: KDI
68
 Delayed Economic Reform and Financial Crisis in 1997
Heavy corporate
debt leverage
Labor market
rigidity
South East Asian
crisis
Increased
corporate
failure
Deteriorated
financial
soundness
Continued
government
intervention
• Massive capital outflow
• Denied rollover of short
term external debt
IMF
rescue package
Source: KDI
69
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
financial 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.
70
− 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
investment.
71
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
become 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
industries 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 composed of heavy-chemical industries.
72
− Along with the changes in industrial structure, the leading industries in
manufacturing are changing for the different stages of economic
development.
− 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.
73
The Production Structure of the Korean Economy,
1953-2008
Unit: %
Share in manufacturing
Agriculture,
Fishery &
Mining
Manufacturing
Light
industries
Heavychemical
industries
Services
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
Source: Bank of Korea, National Accounts, each year
74
− The changing composition of manufacturing is the result of changes in
factor conditions of the economy, which is also manifested in trade
structure.
− During the earlier years of economic development, textile and apparel
industry 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
imported materials and fine chemicals.
− Machinery is the least developed sector in terms of international
competitiveness, but with gradual improvement.
75
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
transformation 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
exporter 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
accumulation; but it is also the learning process, a key concept of the
knowledge economy.
76
− 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-investment.
The Korean government responded to the mistake through rationalization
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
government.
77
Problems of Korean Economic Development
− Korean economy in the 1990s faced the urgent need to reform its
economic system. Despite the efforts of the government, however, reform
and restructuring were unsuccessful.
− Previous administrations induced businesses to invest in selected
industries, often forcing financial institutions to make the necessary funds
available. Financial institutions were guaranteed survival regardless of
their management practices. Likewise, politically backed chaebols
enjoyed various privileges.
− The mechanism of resource allocation that the government wielded
discretionary 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.
78
− 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
exacerbating the nation’s economic crisis.
79
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
financial 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.
80
− More fundamental aspect is the continued erosion of the Korean
economy in terms of international competitiveness. The underlying
causes of financial insolvency and the bankruptcies of the large firms lies
in the deteriorating profitability of the businesses in tandem with rising
wages and lowered 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.
81
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
relationships with small and medium-size companies
(5) Enhancing accountability of controlling shareholders and of
management
− Since the financial crisis in late 1997, Korea has made positive inroads
into reforming its weak financial sector by making purchases of nonperforming assets from, and injecting funds into severely undercapitalized
banks.
82
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
nonviable firm exit
- Enhancement of corporate governance
83
Swift Crisis Resolution and Economic Recovery
Crisis
resolution measures
Results
• Early graduation from the
Full liberlizationof
capital market
IMF program
(Foreign reserves of more than
US$90 billion)
• Rapid economic recovery
Comprehensive
economic reform
Expansion of
social safety net
(GDP growth:
1998: -6.7% → 1995: 10.7% )
• Social stability with productive
welfare system
Source: KDI
84
 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 &
communication 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.
85
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)
86
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
87
Discussions and Implications
88
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’
89
89
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
90
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Edward Elgar.
Jwa, Sung-Hee. A New Paradigm for Korea’s Economic Development: From
Government 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 Economy
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.
91