ECONOMIC DEVELOPMENT OF SOUTH KOREA UNDER PARK CHUNG HEE(1961-1979)How South Korea escaped poverty and became one of the richest countries in the world

Hyunsu “Philip” Cho

Edmonds-Woodway High School

POVERTY IS A STUBBORN THING

► Despite trillions of aid given, 2.6 billion live w/ less than $2 a day

► Countries in Africa and Lat. Am. are still dependent on commodity exports

► Productivity has stagnated in Lat. Am. - falling behind in int'l competition

SOUTH KOREA IN 1950S

► GDP per capita around $100, poorer than Philippines

► Ravaged by the Korean War (1950-3)

► Large standing army - menace from North

► Largely agarian country

► Lack of natural resources - coal, iron, copper, oil

SOUTH KOREAN ECONOMY ROARS

► GDP growth averaged 9-10% a year

► Manufactoring sector took greater share of the economy (close to 30% - comparable to West Germany)

► “Boys who grew up working in rice paddies found themselves building oil tankers and designing semiconductor chips.” - Mark L. Clifford

RESEARCH QUESTIONTO WHAT EXTENT did Park Chung Hee’s iron rule contribute to South Korea’s economic growth?

POSTWAR SITUATION

► Sense of desperation

► U.S. aid kept people barely alive: 1/2 of national budget

► 1/5 of adults unemployed; social unrest fueled by unemployed youth

► Menace from the North

► Traditional social structure dismantled

► Land Reform: wiped out traditional landed aristocracy

► Tepid economic growth, lack of manufacturing base

► Democracy seemed helpless in mounting economic challenges

► Capital shortage kept businesses from growing

PARK STAGES MAY 16 REVOLUTION

► seized the capital + other important cities

► purged politicians on corruption charge

► brought businessmen into submission (June 14 law)

► The military was the most modern sector of that time

“Western democratic institutions do not harmonize with the underdeveloped conditions of Korea.” – Park

PARK’S “DEVELOPMENTALISM”

► Economic growth as the historical goal, to be achieved at all cost

► “In human life, economics precedes politics or culture.” – Park

► “Guided Capitalism”: The state as the engine of economic development

► central planning + gov’t intervention in the market

► industrial policy, corporate state

► Influenced by state-planning in Manchukuo

KOREAN CORPORATE STATE

► The state intervenes in individual firms’ decisions

► Economic Planning Board (EPB) : planning, national budget

► Ministry of Finance (MoF) controlled the banking sector

► Nationalization of banks

► Extraordinary power over credit-starved businesses

► All businesses were required to join associations

► Policies, regulations, orders move quickly from ministries to firms

► domestic cartels – steady stream of profit

► Enfoncement devices

► Cutting off credit line • Personal connections

► Arbitrary tax audit • Uneven law enforcement

EPB (Economic Planning Board)

Other Gov’t Ministries

MoF (Ministry of Finance)

state-ownedbanks

MTI (Ministry of Trade + Industry)

industry/business

associations

FKTU (Federation of Korean Trade

Unions)

(gov’t-controlled)

industrial unions

Businesses

Top-down, General Headquarter style- Park himself made major decisions

National BudgetCoopted labor

KOREAN CORPORATE STATE (CONT.)

► Pro

► Allows for great flexibility in policy implementation

► Channel of communication b/w gov’t and private sector

► Unlike Mussolini, Park utilized corporate state to the fullest

► Con

► Coercive element – individual initiatives are often compromised, tight gov’t control, the state always had upper hand

► Red tape – maze of permits, regulations, and licenses

► Institutionalized corruption

► favors big business over small business

EXPORT-ORIENTED INDUSTRIALIZATION (EOI)

► Early 1960s: dollars began to run out; U.S. threatened to cut aid

► 2nd FYP: Build industries targeted to export markets

► 1960s: S. Korea utilized cheap labor – light manufacturing

► Huge incentives for exporters

► Import license conditional on export performance

► Tariff exemption for raw materials and machinery

► Exporters could automatically borrow against overseas orders

► More credit to companies w/ superior export performance

► Coercive element: Corporate state had business go along

EXPORT-ORIENTED INDUSTRIALIZATION (EOI)

► Monthly Export Promotion Meeting

► President, gov’t officials, academics, reps from trading companies – “rapid response team” for exporters

► Export Day (11/30)

► “Export towers” to companies w/ best export performance

1st Export Promotion Meeting (1960)

Park hands over export towers

KOREA TRADE PROMOTION AGENCY (KOTRA)

► Scoured the world for new export markets

► Helped Korean businesses how to market their products in foreign countries

► Key to overcoming the obstacles early exporters faced

RESULTS (1961-73)

► HUGE SUCCESS!

► Exports skyrocketed; trade deficit stayed under $1 billion

► S. Korea established a firm international standing in light industries – shoes, wig, clothes, plywood etc

► Foreign borrowing + direct investment plugged the gap

► Exports: $33 million -> $3.3 billion (100 times)

► Imports: $343 million -> $3.8 billion (11 times)

► Raw materials + machinery for export industries

► Investment: 6% of GDP -> 23% of GDP

WHAT’S GOOD ABOUT EOI?

EOI (EXPORT PROMOTION)

► Taiwan, South Korea

► Selective, short-term protection – international competition makes infant industries grow up

► Up-to-date machinery introduced

► Experience w/ overseas market

► Gov’t complements market forces

► Correction of market failure – high set-up costs of exports; imperfect information

► Meritocracy in allocating credit

► Reduced possibility of BoP crisis

► Selective use of FDI (Foreign Direct Investment)

ISI (IMPORT SUBSTITUTION)

► Latin America, Soviet Union, Mussolini’s Italy, North Korea

► Blanket, permanent protection – infant industries don’t grow up

► Lack of competition →drag in int’l competitiveness

► Inflated wages

► Tried to reinvent the wheel: expensive intermediate goods

► Gov’t resists market forces

► Balance of Payment crisis lowers quality of inputs

► Dependence on FDI and foreign aid

THE BIG PUSH (1973-79)

► North Korea continued its offensive; U.S. threatened to withdraw its troops

► Yushin Constitution

► Nation ruled under martial law; Korea became Single Party State

► Park turned into dictator

► KCIA censored the press, eavesdropped phone calls

THE BIG PUSH (1973-79)

► HCI (Heavy & Chemical Industries) Plans – 4th FYP

► Aim: build up defense

► Shipbuilding, machinery, chemicals, steel, electronics, automobile

► Unprecedented industrial expansion

► Good: gain experience in heavy industries, which create far more added value; acquire managerial skills; economies of scale

► Korea became competitive in semiconductor, shipbuilding, steel

► Bad: policy loans caused massive inflation in 1970s; some target industries didn’t work out in the end (i.e. aluminum)

“REVERSE BRAIN DRAIN”

► Lure Koreans who’d been educated overseas with attractive pay packages

► Cutting-edge managerial techniques and scientific knowledge

► KAIST (Korea Institute of Science of Technology)

► engineering education

POSCO: INTEGRATED STEEL MILL

► State-owned enterprise

► World Bank refused to finance the project

► Park Tae Joon used personal connection in Japan to channel reparations (for past colonization)

► Ran like military

► Rapid construction schedule + high quality standard

► Long work hours (60-70 hour work week)

► Became one of the largest, most efficientsteel maker in the world

► Opened up the way for heavy industries

RISE OF CHAEBOLS

► National conglomerates (groups) run by founding families

► Profitable firms subsidize less profitable firms within the conglomerate (cross-subsidization)

► Factors

► Scarce credit + abounding investment opportunities

► Red tape – lots of paperwork

► Export promotion – bigger is better in export market

► State-owned banking sector – political clout was a must to secure loans

► Quite a few became successful global multinationals

PARK: A HERO OR A VILLAIN?Controversy still continues

CONSERVATIVE HISTORIANS

► Economic growth was impossible w/o Park

► Western-style democracy isn’t fit for an undeveloped country like Korea

► Nonpartisan planning is the way to rapidly modernize

► Park had a grand vision for economic development

Kim Seong Jin – President Park’s former secretary

EVALUATION OF ARGUMENT

► Strength

► EOI wasn’t as politically palatable as ISI (popular in 3rd world countries)

► Businesses were reluctant to export if left on their own

► State autonomy allowed for quick policy decisions

► Capital market hadn’t fully developed (curb market)

► Weakness

► Park didn’t have a “vision” (1st FYP didn’t include export promotion)

► Park adjusted his strategies according to economic realities

► He listened to U.S. AID advisers + foreign-educated technocrats

► Park was luckier than his Latin American counterparts

EXTERNAL FACTORS

► Military/Economic alliance with the United States

► U.S. wasn’t so friendly w/ some Latin American countries

► U.S. aid $3 billion by 1968; Vietnam gave military contracts

► The Cold War: need to contain North Korea

► U.S. gave Korea considerable freedom in economic policy

► 1960s: rise of international division of labor

► Labor cost too high in developed countries

► Opposition was weak/unorganized; the state was autonomous

► Anticommunism: leftists and labor unions were repressed

► Land reform of 1950s: landed aristocracy wiped out

► Bourgeoisie lost wealth during wartime; industrialists and businessmen were dependent on the state for foreign aid

LIBERAL HISTORIANS

► Harms done by Park’s iron rule outweigh benefits of economic growth

► South Korea’s economic development was mainly driven by external factors above Park’s control

► Chaebols became a huge liability

► Expansion into many different fields of production, regardless of profits

► High debt-equity ratio – vulnerable to recessions

► Corrupt gov’t-business alliance

Jin Jung Kwon – a social critic

EVALUATION OF ARGUMENT

► Strength

► Democracy and economic development aren’t mutually exclusive

► Labor sacrificed too much

► Jeon Tae-il (labor activist) burned himself in 1970

► External factors

► 1997 financial crisis: gov’t allowed chaebols to borrow excessively

► Weakness

► Efficient developmental state requires autonomous state

► Initial phase of development entails hard time for labor

► Economy of scale is necessary to compete in global market

► Gains in competitiveness stuck after 1997 financial crisis

► Not every leader can take advantage of good environment

LIBERTARIANS / NEOCLASSICALS

► Park instilled into people the value of thrift and hard work

► Although circumscribed, private property encouraged investment

► Korea had (virtual) free trade

► Park contained communist North

► Park is guilty of central planning

► Economy is best left to the individual

► Economic freedom and political freedom are intertwined

Kim Jeong Ho – president of Center for Free Enterprise (CFE)

EVALUATION OF ARGUMENT

► Strength

► Saemaul (New Community) Movement mobilized idle workers in countryside

► Businessmen and entrepreneurs maintained their roles

► Exporters didn’t pay tariffs on raw materials + machinery

► Businessmen couldn’t speak up against gov’t, fearing their credit lines might be cut off

► Weakness

► Corporate state forced businesses to invest more than they would otherwise; cult of austerity induced people to save

► Gov’t intervention corrected market failures in exports

► Gov’t selectively protected + nurtured infant industries

CONTRARIAN

► Chaebols served to protect national economy from predatory foreign capital

► Park’s developmental state offers model for “economic democracy”

► State-owned financial sector

► Extensive control over capital

► A democracy is powerless if it cannot contain the excesses of the market

Chang, Ha-Joon – author of23 Things They Don’t Tell You About Capitalism

EVALUATION OF ARGUMENT

► Strength

► Profits made by chaebols stayed within the border

► Corporate state ensured that businesses act in accordance with the national interests

► Weakness

► Modern nations with sizable population have representative democracy. Putting too much financial power to politicians is like putting all eggs in one basket.

► Corporate state requires autonomy of the state – interest groups hamper such development.

► Chaebols are just like other multinationals of the world

CONCLUSION

► Park has built a “Tiger Daddy State”

► Economic development in exchange for political freedom

► Single party corporate state speeded up development

► Businesses were forced to compete overseas

► Park was pragmatic and flexible

► Took maximum advantage of int’l + domestic politics

► EOI as result of policy adaptation

► Acknowledged role of businessmen and entrepreneurs

► Recognized need for advanced foreign technology

► While developmental state is somewhat at odds with interest group democracy, Park didn’t need iron rule to advance his agenda; state autonomy had been established since 1950s

CONCLUSION

► It takes right kind of “parenting” to develop a country’s industrial base to internationally competitive level

► Park’s South Korea: too authoritarian

► Latin America: too overprotective

► Somewhere in the middle

► Alexander Hamilton’s American School

► France and Quebec: “indicative planning”

► Countries should integrate into world economy, on their own terms

► Infant industries need some time to grow and mature

► The individual cannot overcome market failures

► The individual succeed only so far as his country provides him opportunities to do so

BIBLIOGRAPHY

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BIBLIOGRAPHY

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