Trade is among the most vital interactions between countries, and one influential player in the global market is South Korea (SK). Having overcome several economic troubles in recent decades with relative ease, SK has a strong position in international trade (Kang et al., 2020). For example, SK has been quite active in terms of import and export, maintaining its competitiveness by supplying such products as electronic and transport equipment (Kang et al., 2020). As a result, the state has developed important relationships with other countries, and now many Asian and African nations depend to a certain extent on trade with SK (Kang et al., 2020). The trade history of South Korea can be characterized by the government’s experience with import substituting industrialization, which has affected SK’s role in contemporary global commerce.
To understand the significance of import substituting industrialization (ISI) for SK, one must explore the country’s background concerning trade. Although SK is currently among the worldwide leaders in electronic products, for many years until the beginning of the XX century, agriculture comprised approximately 90% of Korean economic activity (Kang et al., 2020; Stephens, 2022). As Korea became a Japanese colony in the early 1900s, its trading became dependent on the Japanese Empire and embraced the colonizer’s policies (Gupta, 2019; Stephens, 2022). For instance, occupied Korea saw an increase in agricultural productivity due to the development of rural infrastructure for rice cultivation (Gupta, 2019). Accordingly, Japan and colonial Korea formed a trading relationship, but while the former state was economically advancing, the latter was facing a crisis (Chey, 2019). Korea was freed from Japan’s rule in 1945 and focused on national independence (Chey, 2019). Consequently, prior to the middle of the XX century, Korea’s trade was controlled by the Japanese government, which promoted agriculture but caused some damage to the colony.
After gaining its independence, Korea’s trade policy concentrated on import substituting industrialization. Chang (2014) defines ISI as a replacement of imported manufactured goods with those of domestic producers. Korea’s experience with ISI started in the 1950s, with a focus on multiple exchange rates and tariffs (Gupta, 2019). Chansa et al. (2019) propose that ISI was utilized to achieve the following goals:
- Make SK self-reliant;
- Provide sufficient employment for the citizens;
- Improve the balance of payments;
- Build capital infrastructure.
Although SK did not follow ISI for a long time, the country has learned from the approach. ISI was the first of the three phases of industrial policies and was replaced by an export-led strategy in 1961 following a change of administration (Chansa et al., 2019). On the one hand, ISI facilitated subsequent industrial development, encouraged labor-intensive activities, and substantially contributed to gross domestic product growth (Chansa et al., 2019). On the other hand, export-based policies targeted specific sectors with subsidized credit and managed to access foreign exchange (Gupta, 2019). SK’s experience with ISI can be characterized by a lack of international trade but has established a basis for future export operations.
The implementation of ISI policies has both advantages and disadvantages. ISI is meant to safeguard domestic non-competitive industries by using trade barriers so that local businesses can withstand contest with imported goods (Oqubay et al., 2020). However, ISI does not guarantee that the efficacy of protected enterprises will increase automatically and promptly (Oqubay et al., 2020). Moreover, this kind of policy may result in the permanent preservation of inefficient and uncompetitive companies, thus preventing international trade (Oqubay et al., 2020). Therefore, the benefits and costs of ISI are as follows:
- Protection of domestic businesses;
- Opportunities for local enterprises to expand;
- Comprehensive management is necessary;
- Decreased trade with other countries.
The role of ISI in SK’s trade is quite a vast topic that requires a thorough investigation. For instance, to understand ISI’s usefulness, it is important to assess further the negative effects of Japanese colonization and the Korean war, which shortly preceded SK’s adoption of ISI (Chansa et al., 2019; Kurt, 2019). The two historical events have hindered Korea’s trade, and a more detailed examination may assist in explaining why the country chose ISI instead of focusing on another approach for trade policies. Furthermore, since ISI has facilitated SK’s development, as discussed above, it is significant to analyze the government’s particular practices that enhanced domestic businesses and created opportunities for successful export. Finally, as ISI has both benefits and costs, it is noteworthy to determine how to increase advantages and minimize potential losses. Consequently, further research is needed to explore the specifics of ISI in SK.
To summarize, South Korea’s experience with import substituting industrialization was a result of difficulties caused by Japanese colonization but has prepared the country for participating in international trade. Although Japan facilitated agricultural productivity in Korea, the colony encountered a crisis that prevented local businesses from being able to contest with global manufacturers. ISI policies helped SK recover and increase its competitiveness, thus preparing the country for subsequent export-centered operations and contributing to the country’s current success in the global market.
References
Chang, H. J. (2014). Economics: The user’s guide. Penguin Books.
Chansa, F., Mubanga, N., Mudenda, D., & Ndulo, M. (2019). Industrial growth and policy in Zambia: Lessons from South Korea. African Journal of Economic Review, 7(2), 1-26.
Chey, H. K. (2019). International political economy thought in pre-modern and colonial Korea. International Trade, Politics and Development, 3(1), 11-29. Web.
Gupta, B. (2019). Falling behind and catching up: India’s transition from a colonial economy. The Economic History Review, 72(3), 803-827. Web.
Kang, D., Heo, P. S., & Lee, D. H. (2022). Global trade of South Korea in competitive products and their impact on regional dependence. Plos One, 17(5), 1-20. Web.
Kurt, Ü. (2019). The relationship economic complexity and education expenditure: An empirical analysis on South Korea. International Journal of Economics and Financial Issues, 9(2), 73-79. Web.
Oqubay, A., Cramer, C., Chang, H. J., & Kozul-Wright, R. (2020). The Oxford handbook of industrial policy. Oxford University Press.
Stephens, H. (2022). Rice cycles and price cycles: Local knowledge and global trade in Korea, 1870–1933. Journal of the History of Economic Thought, 44(1), 51-71. Web.