Introduction
Japan and Korea did not follow the same economic development models. While some similarities stand out between these two nations, it is clear that the internal and external circumstances in both countries were dramatically different. These differences in policies and strategies explain why models of economic growth in Japan and Korea were unique to each country.
Why some scholars think that Korea and Japan used similar economic models
Korea and Japan were countries that heavily relied on government intervention for the development of their economies. In Japan, the government was a key determinant of economic success, and it achieved this goal through centralized planning. It offered incentives to businesses as well as capital and information to crucial industries.
Furthermore, it protected businesses from foreign competition while at the same time encouraged competition within targeted industries. Likewise, South Korea’s government pursued an aggressive economic development agenda. The government took part in provision of investment resources among central industries. Korean exports were forced upon players who would pursue growth without compromise.
The focus on exports was also a crucial driver of economic growth in both countries. Their governments believed that it was crucial to maintain a healthy balance of trade by encouraging greater exportation and less importation.
These institutions used different policies to achieve this intention of being a net exporter. Nonetheless, most of their target markets were also quite similar, and they included countries in the west such as the US.
Both countries experienced periods of rapid economic growth rates but these were not without some fluctuations. In Korea, the problems were particularly common in the 60s and 70s. Likewise, Japan also underwent periods of economic stagnation within the 70s.
Prior to the economic boom in both countries, agricultural was the mainstay of both economies. However, these nations industrialized rapidly. Their products proliferated into the global market, and they changed their stories from that of desperate dependent nations to strong industrial economies.
Some scholars draw similarities between the central planning in both countries. Japan has the Ministry of Trade and Industry while Korea had the Economic Planning Board. These entities determined the pace at which economic growth took place through directed economic policies.
Why Korea and Japan did not ascribe to similar economic models
While both economies had immense government involvement in economic development, it is quite clear that the strategies pursued by these governments were quite dissimilar. Korea’s focus was on explicit export growth. It is worked with large Korean firms, known as chaebol, to set targets that would entitle them to immense benefits.
These incentives included tax cuts, preferential credit access, loan access and high administrative support. On the other hand, Japan’s export strategy was as a result of the growth of heavy industries.
Steel, electric and shipping industries had immense production capacities, which allowed them to supply material to the local market as well as to foreign consumers. Therefore, high export patterns were an outgrowth of investment in key industries in Japan while this was a direct goal for Korean players.
Japan largely marketed its goods to the local market while many products in Korea could not be sold domestically. These policies resulted in structural imbalances in Korea and strong market bases in Japan. The steel industry in Japan was initially expanded to include technology imports from countries like the US. At the time, these investment decisions seemed extravagant.
However, due to the rapid growth in other industrial sectors like shipping and automobiles, almost all the steel was absorbed by the local market. Therefore, the domestic-first principle was the guiding factor in Japan-led economic strategies. On the other hand, Korea produced several commodities that it did not sell locally; a case in point was the color TV.
The government did not allow the sale of these items until the 80s. As a result, all of the goods were directed to foreign markets. Several other products like telephones and phonographs were only available to overseas buyers. This export-first approach explains why manufacturing led to monetary imbalances as domestic investments far exceeded domestic savings.
Korea had greater foreign debt than Japan during its period of economic boom. While Japan had a healthy budget balance, Korea’s export-fist principle created gaps between productive investment and domestic savings. As mentioned in the latter paragraph, Korea had much less domestic savings than it ought to have had at its GDP. Therefore, insufficient funds to invest in future production were a problem.
As a result, the government decided to borrow the difference from foreign partners. Foreign inflow of capital was quite high in Korea compared to Japan and other countries with similar economic partners.
This occurred around the year 1985. On the flipside, Japan had healthy levels of domestic savings. Therefore, it did not need to borrow capital from foreigners and it kept its debt under control. In fact, initial investment led to greater investment in Japan, which was like a chain reaction.
The situations that led to economic fluctuations in both countries were different and the reactions of their governments to the same were also dissimilar. First, Korea’s volatility stemmed from its immense reliance on exportation strategies. Therefore, the sale of produce would dramatically decrease if external occurrences took place.
The government used to allow exporters to bring in raw materials, machinery and other components of production from external markets. Conversely, Japan’s fluctuations were brought on by its industry-dependence on oil for production. The latter government’s response to these fluctuations was more refined than South Korea.
In part, the Korean government was not as well-experienced as Japan’s government in dealing with the monetary consequences of the fluctuations. Japan often worked on correcting the money supply as well fixing its inflation levels. On the other hand, the Korean government responded by heightening domestic capacity or accessing foreign loans.
Korea and Japan’s approach to foreign policy and defense affected the economic outcomes. The Japanese model was one of neutrality, in that it pursued a pacifist agenda in international relations. This perspective stemmed from the wariness that the Second World War created.
The Japanese felt that the post-war period was an opportunity to concentrate on economic development, so their relatively low defense budget contributed to greater capital availability for business. On the other hand, Korea had a relatively high defense budget especially in the early phases of growth because of effects of the Korean War.
It should be noted while South Korea suffered from the effects of the war, Japan benefited from it by selling military supplies to the US Army. The latter was responsible for the earliest phase of the economic boom in this Asian country.
One of the most distinct differences between these two nations in terms of their economic development agenda was how they increased industrial capacity. Japan largely focused on creating new industries while Korea dwelt on expanding the capacity of existing institutions. In fact, this explains why a large gap existed between large firms and small ones.
The large firms in Korea (chaebol) grew and expanded while the small ones were not given a high priority. On the flipside, Japan attempted to pursue a bipolar strategy in which the government worked along side both small and large firms. Market concentration was much higher in the large-enterprise economy of Korea than it was in Japan.
While the problems in Korea seemed to be overpowering it, the government eventually found its niche and stabilized the economy. This was due to a combination of internal and external factors. First, the government decided to pursue economic stability policies rather than growth policies.
Korea’s leaders worked on inflationary pressures substantially and thus stabilized their economy. External factors that led to this stability included low interest rates, depreciation of the dollar as well as reduction of prices of raw materials and energy prices.
On the other hand, Japan continued to remain prosperous due to its own set of external and internal forces. The government continued to protect local investors and offer them capital. However, external factors like a free-floating yen, pressure from the US to open its borders to greater capital flow and forced higher prices for their products in the US market explained why they continued to stay successful.
Conclusion
The Japanese economic model was substantially different from the Korean one. Japan had a domestic-first principle while Korea was export-led. Large conglomerates were responsible for growth while both small and large firms were the mainstay of the Japanese economy. The prevalence or non-prevalence of foreign debt and government response to market fluctuations also explains why these economic models were different.