1. Korea’s Economic Development Experiences
Taeho Bark
The Graduate School of International Studies (GSIS)
Seoul National University
March 30, 2005

2. Contents Korea in the Late 1950s The Korean Economy 40 Years Later
Overview of Korea’s Economic Development
Evaluation of Korea’s Economic Development
Factors Contributing to the Success
Lessons from the Korean Experiences
Is the Korean Model Replicable?

3. 1. Korea in the Late 1950s
Largely rural peasant economy, wholly lacking natural resources
Has the highest density of people on arable land in the world
Exports were 3% of GDP (88% of which were primary products)
Crucially dependent on foreign aid-transfers (More than 10% of GDP)
The third poorest country in Asia with no hope for growth

4. 2. The Korean Economy 40 Years Later
Real GDP per capita grew 10-fold
- Almost 3 times that of Brazil and almost 3.5 times
that of Mexico in 2000
Exports grew on average by more than 30% a year over three decades and more
- Exports grew to 37% of GDP in 2000
- $ 253 bil (Manufacturing: 97%) in 2004
Dramatic improvements in the quality of life
- Infant mortality dropped, life expectancy rose, real
wage rose, unemployment fell
The 13th largest economy in the world
- FX reserves (4th), shipbuilding (2nd), steel (6th),
automobile (6th), DRAM semiconductors (1st)

5. 3. Overview of Korea’s Economic Development
< Export-led growth: >
Policies
- Currency devaluation
- Interest rate reform for high savings
- Nationalization of commercial banks
- Establishment of specialized banks
- Limited import liberalization
Export incentives: Industry Neutral
- Tax deduction, wastage allowances
- Export credit subsidies
- Based on export performance

6. 3. Overview of Korea’s Economic Development
< H & C industrial promotion: >
Policies
Designate the industries (steel, machinery, petro-chemical, shipbuilding, electronics)
Long-term subsidized loans: National Investment Fund (Credit rationing)
- Tax holidays and investment tax credits
- Accelerated depreciation
- Reduced export incentives
- Expansionary monetary policy
Government guarantee of foreign loans

7. 3. Overview of Korea’s Economic Development
< Stabilization, liberalization and renewed
growth: >
Policies
- Anti-inflationary policy measures
- The HCI drive was toned down
- Abolished preferential lending rates
- Privatized the commercial banks
- Deregulation
- Market opening (goods and services, FDI, financial markets)
- Financial support for small and medium firms

8. 4. Evaluation of Korea’s Economic Development
< Successful Aspects >
Rapid Growth
- GDP, Capital formation (Investment)
Strong export performance
Upgrading the economic structure
- Larger share of manufacturing industry
Establishing competitive heavy industrial sector
Establishing infrastructure for industrial development

9. 4. Evaluation of Korea’s Economic Development
< Negative Side Effects >
Price distortions
Distortions in financial sectors
- Non-performing loans
Excess capacity in some H&C sectors
- Overlapping investment
Increased economic power of Chaebols and resource- wasting competition out of dynastic pride
- Sales of the top five business groups: 50% of GDP (1991)
- SMEs were crowded out: handicap for competitiveness

10. 4. Evaluation of Korea’s Economic Development
< Negative Side Effects (Cont’d)>
Excessively high debt/equity ratios for Chaebols
- Moral hazard from government loan guarantees
Lack of foreign competition in the domestic market
- Producer protection policy: restrictive trade and FDI
policy
Nationalistic sentiments in the general public
Less focus on social welfare and environment protection programs

11. 5. Factors Contributing to the Success
Strong Political leadership and institutional building
- Early reform, well-prepared planning, administrative
support (export target, monthly export meeting presided
by the President, HCI Committee)
Consistent growth-oriented economic policy
- Outward-looking and industry-oriented development
strategy
- Stable macroeconomic policy
Interventionist policy based on technical and economic criteria
Risk-sharing among government, financial institution and business enterprises

12. 5. Factors Contributing to the Success
Emphasis on education and human capital
- Establishment of R&D centers, recruiting Korean scientists
and engineers from abroad
Dynamic entrepreneurship
Well-trained labor force
Successful borrowing from abroad
Relatively clean government officials
Eagerness to catch-up
Liberal world trading environment

13. 6. Lessons from the Korean Experiences
No secrete recipe, an outward orientation with strong incentives for exports and a commitment to growth through trade are the key
Address fundamental problems
- Remove bottlenecks and Tackle problems of poor
infrastructure
- Stick with reforms
- Sound macroeconomic policies
- Economic liberalization and importance of foreign trade
recognized

14. 6. Lessons from the Korean Experiences
Remove any bias against exports
- Realistic exchange rate – incentives for exporters
- Inputs for exports at world prices
- Incentives are uniformly applied across all exporters
Leaderships
- Strong commitment from President
- Large conglomerates
Political stability
- Consistent policy implementation
- Long-term goals can be set

15. 6. Lessons from the Korean Experiences
Policies need be closely monitored and modified if necessary
- Monthly export performance meeting chaired by
President
- H&C Committee
Investment in human capital and R&D
The competition in the domestic market
- Liberalization of trade and FDI must be continued

16. 7. Is the Korean Model Replicable?
Is export promotion policy possible?
- WTO prohibits trade distorting subsidies: export
subsidies, import substitution subsidies
- Allowed subsidies: R&D, environment, regional
development
Is specific sector targeting industrial policy possible? (especially for H&C sectors)
- Too much risks: financing, excess capacity in the
world, foresight and ability of government, able
entrepreneurs