Korea’s Economic Development and Lessons for Developing Countries Chong-Sup Kim Seoul National University

Contents 1. 60 years of the Korean Economy 1 2. Korea’s Trade and Trade Policy 2 3. The Role of the Government 3 4. Lessons 4 5. Challenges 5

1 60 years of the Korean Economy

Economy after the Liberation In the colonial period The southern region produced agricultural products The northern part produced electricity, chemical and mineral products. As a result, after the liberation agricultural production was abnormally higher in the South than in the North But, the output from mining and manufacturing sectors was higher in the South.

Korean War- 1950

Korean War Industrial facilities were reduced by 43%, power plants by 41%, and coal-mining by 50%. Number of deaths in South Korea was 1.3 millions. Per capita GDP reduced from $90 in 1949 to $67 in 1953.

Reconstruction based on Foreign Aid ($ million) 1953 1954 1955 1956 1957 1958 1959 1960 U.S. bilateral 12.8 108.4 205.8 271 368.8 313.6 219.7 245.2 CRIK 158.8 50.2 8.7 0.3 ― UNKRA 29.6 21.3 22.2 22.4 14.1 7.7 2.5 0.2 Total 201.2 179.9 236.7 293.7 382.9 321.3 222.2 245.4 Total imports 345.4 243.3 341.4 386.1 442.1 378.2 303.8 343.5 Aid/IM(%) 58.3 73.9 69.3 76.1 86.6 84.9 73.1 71.4 IM/GNP(%) 12.9 7.3 9.8 13.1 12 10.7 10.1 12.6 Note: CRIK stands for Civil Relief in Korea program. UNKRA stands for United Nations Korean Reconstruction Agency

Average Annual Aid Received ($ million) Period Total U.S. 1948-55 150.9 84.4 1956-60 299.7 290.3 1961-65 185.8 1966-71 91.2 1972-77 2 1978-83 0.2

Economic Conditions of East Asian Countries in 1960 Country GDP/worker (dollars) Secondary Schooling (years) Hong Kong 2247 1.36 Indonesia 638 0.08 Korea 904 0.66 Malaysia 1420 0.44 Philippines 1133 0.56 Singapore 1658 1.17 Taiwan 1256 0.72 Thailand 943 0.23

Military Coup and Economic Development- 1961

Korea’s Growth Trend 5,000 10,000 15,000 1945 1953 1962 1970 1980 1990 1998 2007 7,355 Financial Crisis 12,197 7 ‘Five-Year Economic Development Plans’ End of the Korean War 67 87 OECD Member Liberation from the Japanese Colonial Rule 21,695 Per capita income (US$) 20,000 20,759 17,193 2009 2010

Changes in Industrial Structure 2008 Services Agriculture-Fisheries Manufacturing 1960 Manufacturing Agriculture-Fisheries Services <Shares in employment>

Employment Share of Manufacturing De-industrialization Japan Korea De-industrialization UK France US

What about Output Share of Manufacturing? Korea Japan France US UK

Growth by decades 9.4 8.7 7.6 6.2 4.4 ‘1963 ~69 ‘1970 ~79 ‘1980 ~89 ‘1990 ~99 ‘2000 ~09

2 Korea’s Trade and Trade Policy

Main Export Products $ billion 466 172 autos (10.6) semicon (15.1) 65 Ships (10.0) textile (11.7) Computer (8.5) 17 Semicon (7.0) Semicon (9.3) autos (7.7) textile (16.0) Shoes(6.6) 0.84 petroch (5.3) Cellular (7.7) Steel (5.4) 0.03 textile (40.8) Video equip. (5.6) Ships (4.5) Shoes (5.2) LCD(6.4) Iron (13.0) Ships (3.6) Ships(4.4) Wood (11.0) Tungsten (12.6) petroch(6.4) Sound prod (3.4) Computer (3.9) Cellular (4.6) Wigs (10.8) Thread (6.7) Share in ( ) 1960 1970 1980 1990 2000 2010

Main Export Partners 466 $ billion 172 China (25.1) 65 USA (21.8) USA (10.7) USA (29.8) 17 Japan(11.9) Japan (6.0) USA (30.0) Japan(19.4) China(10.7) 1 Japan(17.1) H.K.(5.8) H.K. (5.4) H.K.(6.2) SaudiA(5.3) USA (49.8) Germany (4.4) Singapore (3.3) Japan (24.5) Germany (4.9) Taiwan(4.7) H.K.(3.8) Taiwan (3.2) Singapore (2.8) Germany(2.9) H.K.(4.6) Canada(2.7) Share in ( ) 1971 1980 1990 2000 2010

Outward-looking Development Strategy Part-01 Economic growth Reproduction Export Promotion Manufacturing Processing Private Enterprises Gov’nment Technology development Financial  tax support Well-educated labor force Foreign technology import Capital goods import Raw materials Import Foreign capital inducement (Economic aid, external debt)

Government-led export promotion 1960s and 1970s - Outward-looking development strategy Labor-intensive industries Heavy machinery and chemical industries - Government-led export promotion President chaired monthly trade meeting

3 The Role of the Government

The Question about government intervention What can the government do to spur economic growth? Did the interventionary economic policy spur the rapid industrialization and growth of Korea during the last three decades? Can this experience be applied to other countries? Can government policies as directed credit policies help promote industrialization and growth in the early stages of economic development?

Key Features of the Korean Economy before the 1990s Export-oriented economy Government-led growth strategy Active Industrial policy Chaebol-dominated economy Highly regulated financial market as a tool for financial resource mobilization for growth

Five-year Economic Development Plans State-led Planning (1962-76); 1st, 2nd, and 3rd Five-year Economic Development Plans Focused on setting up sectoral investment plans and mobilizing and allocating domestic and external resources to support the implementation of the plans Indicative Planning (1977-91); 4th, 5th, and 6th Five-year Economic Development Plans Strategic Planning (1992-96); 7th Five-year Economic and Social Development Plan

Five-Year Economic Development Plan: Targeting Investment First Plan (1962-66) : Development of basic industries for import substitution and expansion of SOC's Second Plan (1967-71) : Development of labor-intensive manufacturing Heavy and chemical industrialization from the Third Plan (1972-76) into the Fourth Plan (1977-81)

Economic Development Plan Different from 'Planned Economy' of Socialist Countries A combination of government-led economic development and private efforts based on market economy Served as a political tool for mobilizing and directing economic activities towards achieving quantitative growth targets such as Gross GNP, Per Capita Income, and Total Exports Flexible implementation of the Plan adapting to constantly changing world and domestic economic environments

Industrial policy in the 1970s: the HCI drive In the 1970s, industrial policy shifted toward promoting the buildup of HCIs. A departure from the export-oriented, non-sectoral-biased strategy Targeted credit subsidies Creation of National Investment Fund (NIF), and expanded BOK discounts. Selective protection Entry regulations Government-directed industrial decision making

HCI Promotion Plan Declared (1973) HCI Promotion Plan (1970s) 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

Industrial Structure HCIs 100% 90% 80% Service 70% Power/Gas/Construction Metal/Machinery 60% Basic Metal 50% Petrochemical 40% Light 30% Mining Agriculture 20% 10% HCIs 0% 1970 1975 1980 1985

Composition of Export 90 80 70 HCIs 60 Metal/Machinery 50 Basic Metal 40 Petrochemical Light 30 20 10 1970 1975 1980 1985

Consequences Negative Positive Inappropriate scale choices Excess capacity Excessively capital-intensive investment High leverage ratio The retardation of trade and financial liberalization A rise in the level of industrialization Creation of world-competitive firms Creation of leading export sectors

4 Lessons

Comparative Perspective Government intervention was common in developing countries. But the experience in most developing countries was not so encouraging. Where does the difference come from?

Less Distortionary Policy In Korea, the government targeted its credit support programs primarily at promoting exports and industrialization. The support was not targeted at specific industries (except the support to HCIs), and was temporary. In most of developing countries the support and protection was directed to selected industries.

Consistent Policies Exchange rate policies provided competitive and stable real exchange rates. Wage policies ensured that real wage growth was in line with productivity growth. Korea avoided hyperinflation with a reasonably balanced budget and income policies.

Lessons The intervention may be helpful in the early stages of economic development. But as economic development advances, the role and scope of government intervention must be reappraised with a view toward fostering greater reliance on market forces.

5 Challenges

Challenges Aging Society China Risk Social conflict Concentration Aged society 14% (2019) Super-aged society 20% (2026) China Risk Exports: 37.0% China(25.1%)+H.K.(5.4%)+Singapore(3.3%)+Taiwan(3.2%) Social conflict GINI: 0.306(2003), 0.314(2009) Concentration

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