Introduction
South Korea has one of the most fascinating economic histories in the world. A country that was once threatened with war and instability, overcame all the odds to become a shining star in the Asian region and around the world. How did South Korea rise to attain its current economic status?
This research explores South Korean economic rise, with emphasis on its economic progress after the Korean War. Of importance will be the country’s regime change and elements of its social and economic development and how they influenced each other. Additionally, the research will cover dramatic political move during 1970s and the social move of 80s.
Background of South Korean Economy
Like many other countries round the world, Korea entered a window of reconstruction at the end of the Second World War in mid 1940s. The emergence of opposing administration on the Korean peninsula was to test the progress of the region as the two sides struggled to replace the colonial government and promote economic development.1 The U.S. military took charge of the southern region while USSR controlled the northern part by establishing a Korean rule.
This decolonization process did not go unnoticed. There was severe disruption of trade between Korea and Japan, which led to immense economic interference. As a result, the U.S. administration initiated strategies, aimed at salvaging the situation. These included the privatization of all assets, which were under the management of the Japanese government.
In 1948, the first South Korean government was established, which initiated land reform efforts that resulted into democratic ownership of land.2 Unfortunately, the 1950s was to be remembered negatively as the Korean War broke, lasting for three years and resulting into the death of more than one and half million people. Besides the massacre, the Korean War equally destroyed the economic foundation, which had been laid at the end of the Second World War.
After the end of the Korean War in 1953, South Korean leaders were tasked with formulating strategies, which were to promote economic growth in the region. Some of the policies augmented the expansion of native industrial firms. This idea was an emulation of most countries around the world whose economies were thriving after WWII.
In order to achieve this, the South Korean government identified a number of firms in the country and bestowed certain powers upon them, which permitted them to acquire foreign currencies and borrow money from banks at affordable rates. Additionally, the administration initiated tariff barriers together with a ban on manufacturing imports, in order to promote the advancement of domestic firms and allow them to import new technology.
Following the import-substitution industrialization (ISI) policy, most entrepreneurs sought to maximize on favors and bribing of politicians and other influential people in order to advance their interests. Nevertheless, this behavior commonly referred to as directly unproductive profit-seeking activities (DUP), negatively affected the economic growth in South Korea, leading to the First Republic in April 1960.
Reconstruction
As mentioned above, the Korean War had significant economic impact. For instance the war damaged private dwellings, plant and equipment, infrastructure and public facilities. The total damage resulting from the war was approximated to be $3.0 billion, an equivalent of the combination of the country’s GNP for 1952 and 1953.
However, the country experienced an exponential economic growth between 1953 and 1957, registering an annual growth rate of 5%, with an exception of 1956, which recorded a lower percentage. In the same year, the agricultural sector experienced the least growth of about 6% per year, compared to mining and manufacturing which had almost 15% growth rate. By contrast, South Korea realized a declining GNP economic growth between 1958 and 1960, averaging at less than four percent annually.
During this time, the country’s population increased at 2.9% annually.3 As a result, per capita income almost remained unchanged as the growth of mining and manufacturing dropped from 15% to about 9%. This economic stagnation was attributed to a financial stabilization program, which had been implemented in 1958 and 1959.
It is also important to mention that a large portion of South Korea’s imports were funded by foreign grants from 1953 to 1960. The two main sources for the grants were the United Nations Korea Reconstruction Agency, UNKRA together with the United States bilateral assistance program. Between 1953 and 1960, UNKRA’s aid totaled to $120 million while the U.S. aid was approximately $1,745 million. Notably, the American aid included a $158 million of PL 480 goods.
The main role of the two aids was to import food and industrial raw materials together with capital goods. During this time, up to 70% of the country’s imports were funded by foreign aid agencies. The most important contributor was the United States, which financed almost 80% of South Korea’s imports between 1956 and 1958.
Due to the effect of the foreign assistance, the country experienced rapid economic growth from 1953 to 1957 before the effects of inflation haunted South Korean economy, at a rate of almost forty percent per year. Indeed, the impact of inflation was being felt, prompting the need for a solution to reverse or stabilize the situation. As a result, the South Korean government signed an agreement with the Office of the Economic Coordinator on a special financial program, which was implemented from 1957.
Consequently, the inflation rate dropped while market prices stabilized. However, this was not to last due to the student revolution, experienced in the country in April 1960. The revolt led to the rise of another government, which abandoned the financial program immediately after taking office, leading to a sharp rise in prices of commodities by eleven percent.
It is also important to note that the period of rapid economic growth was characterized by a reduction in commodity exports. By the year 1957, they had dropped to less than a half of what was exported in 1953. They however began to increase during the recovery period. Generally, the impact of exports was almost negligible, totaling to 1.1 to 2.4 of the GNP. Mining, fishing and agricultural products continued to dominate the export market.4
Military Government
Following a student revolution that was witnessed in April 1960, the government of Chang Myon was overthrown in 1960. As a result, South Korean economy was controlled by the military from May 1961 up to the end of 1963. Due to the unstable social and political environment, the country’s economy stagnated. Similarly, the military was interested in the growth of the country’s economy, making it to adopt expansionary set of monetary and fiscal policies.
Unfortunately, the policies turned out to be unrealistic, resulting into inflation, hitting a high of fifteen percent annually between 1960 and 1963. Furthermore, the policies stimulated growth, with the country’s GNP rising by 8.8% in the year 1963. This stimulation was attributed to several economic reforms, which were enacted by the military government between 1961 and 1962.
Some of these reforms included tax and budget reforms, foreign exchange control system reforms and currency reforms. Besides these major reforms, South Korea’s economy was also subjected to a new budget, with the enactment of accounting laws. Additionally, there was need to revise tax laws mainly to increase domestic tax revenue and promote business internal saving.5
A major concern of the military government was its ability to earn foreign exchange and increase the country’s domestic savings, following a reduction of the United States funding aid in the year 1960.
Following the U.S. reluctance to fund the economy, South Korea continued to register a decrease in foreign exchange between 1961 and 1963. As a result, the government introduced import control measures coupled with import incentives like tax exemptions. By the fact that domestic savings averaged only at 4.3 percent, most of the investment bulk was funded.
Even though the country had witnessed a rapid commodity since 1959, it began at a low pace, without significance until 1963, when the economy registered $87 million, an equivalent of 3.3 percent of the GNP. In the same year, the value of exports significantly increased, hitting a total of more than 50%. The military government announced the First Five-Year Plan in 1961, which reflected the main economic policies of the government. Additionally, the government set 7.1 as the annual growth rate target, with the following economic priorities:6
The first item, which required the highest attention, was increment in the supply of energy, which included electric power and coal. Secondly, the government listed agricultural production and farmers’ income. This was essential based on the role that was being played by the agricultural sector. Thirdly, there was need for the government to expand major industries and social overhead capital.
Additionally, national land conservation and development was to be implemented through utilization of idle resources, which was mainly manpower. Moreover, the improvement in the balance of payments was to be realized through the expansion of the exports sector. The last item on the priority list of the military government was the advancement in technology. This was important in promoting several economic sectors and their expansion.7
Civilian government, 1964-1966
After three years of military rule, there was a general election in 1964, which paved way for a civilian government. This development saw South Korea’s GNP rise rapidly from 1964 to 1966, with an average of 9 percent growth rate. However, there was an increase in the rate of inflation in 1964, hitting the highest mark of 35%.
This did not last forever, as the rate dropped to 10 and 9% in 1966. It is worth noting that the rapid economic growth witnessed during the period was as a result of major economic reforms, which were implemented in 1964 and 1965. Additionally, the stabilization program that was initiated by the military government remained crucial in stabilizing the economy of South Korea.8
The most outstanding feature of the program was its strictness on controlling the supply of money, thus limiting the flow of money in four major sources, including bank reserves, central bank finances of the government, foreign sector deposits and fertilizer loans. The government also eliminated all existing financial deposits, starting in 1964 and allowed short-term borrowing alone.
The civilian government also made interest rate reforms, which increased the amount that was being charged on deposits and borrowed loans. This resulted into an exponential increase in bank time and saving deposits, hence expanding the supply of funds that were allowed for loaning. Foreign loans became more attractive since the interest rate reforms caused a major differential margin. Additionally, there was improvement in tax collection at the start of 1965.9
This was made possible through improved tax administration and implementation of changes in rates. Due to these reform strategies, the government registered increased tax revenues from 7.3% in 1964 to 10.8% of the GNP in 1966.
By this time, up to 75% of the government expenditure was being financed by domestic revenues, while a small portion of the fund emanated from the United States’ financial aid. During this time, there was also an increase in domestic savings by 1966. Following the tax drive and the interest rates reform of 1965, there was a remarkable rise in both government and private savings.
The growth of South Korea’s economy continued to expand rapidly from 1967 to 1971, characterized by stable market prices. The Second Five-Year plan further played a major role in attaining this economic growth together with the Overall Resources Budget for the implementation of the plan. The plan had an annual growth rate of 7% between 1967 and 1971.10 Basically, it was aimed at enhancing modernization of the industrial sector and the establishment of a self-supporting economy.
The success of the plan was evidenced by surplus profits and remarkable performance witnessed during its implementation period. The government also revised the plan annually, based on yearly performance and future prospects. As a result, the GNP surpassed the target figure as export goods and services hit the target mark by 1968, leading to an extensive government export drive.
Nevertheless, it is important to note that the trade did not show significant improvement despite the fact that there was a rapid increase in commodity exports. This was mainly attributed to an increase in imports. This increase in imports reflected the impact of a number of issues, including but not limited to increased demand for raw materials, trade liberalization and increased inflows of foreign loans.11 The country also recorded rapid accumulation of foreign exchange holdings, which augmented money supply.
Economy in 1970s
The period between 1970 and 1980 was a defining economic period in the history of South Korea. The country witnessed several political struggles, a major one being the assassination of President Park in the year 1979. It was believed that the president was assassinated by the South Korean Central Intelligence Agency boss. Despite the fact that there were strained political relationships in the country, its economy remained stable.
At the onset of the decade, there was need for money to finance huge development projects. This was made possible by the establishment of unique financial institutions together with directing all commercial banks to give loan preference to specific projects. It is important to note that by late 1970s, the policy loan had risen to up to 60 percent.12
There was slow growth in industrial production and construction between 1971 and 1972. As a result, South Korea’s GNP dropped to seven percent from 9.2% in 1971.
Additionally, there was an absolute drop in the Gross domestic investment by an alarming 12%.13 Among other factors, this was caused by external forces, which were affecting the country’s export markets like the United States and Japan. Additionally, the export sector was significantly hit by a surcharge that was introduced by the United States on most of its exports.
Moreover, there was financial pressure on most South Korean firms, which led to the slowdown. For instance, most domestic manufacturers had borrowed heavily from foreign lenders to import capital goods, which were necessary for industrial expansion.
Due to this economic stagnation, the government responded by an Emergency Presidential Decree for Economic Stabilization and Growth on the second day of August in 1972.14 The decree was composed of several economic reforms aimed at resuming the rapid economic growth that had been experienced before.
From 1972 to 1976, the Third Five-Year Economic Development Plan was instrumental in establishing and export-led economy by supporting high production in chemical and heavy industries. In other words, there were some industries, which received special financial privileges. These included household electronics, iron and steel and transport machinery, among others.
Developers of some industries like heavy and chemical industries were tasked with ensuring that young industries are fed with raw materials and capital goods. This approach was also aimed at minimizing the tradition of most industries being financed through foreign aid.
These industries were to be built towards the southern side of the country, far away from North Korea. The selection of the southern area was strategically chosen to allow industrial development in other areas apart from Seoul.15 Additionally, the idea was to create job opportunities in less developed regions of the country to promote national growth.
The five-year plan began in 1977 and ended in 1981. The plan was highly applauded for promoting the establishment of industries that were capable of competing favorably with other industries in the export market around the world. Importantly, this category of industries mainly included labor-intensive and technology-intensive firms, say, shipbuilding, machinery and electronics.16
As mentioned before, the plan had significant emphasis on chemical and heavy industries, including but not limited to petrochemicals and steel. From this plan, several results were realized, which were vital in promoting economic growth. For instance, there was a significant growth of 51.8% in heavy and chemical industries by the year 1981.
On the other hand, their direct exports rose to 45.3%. In explaining these results, analysts believe that that there was excellent performance in certain industries like shipbuilding, steel and iron. Consequently, it was possible to produce high-quality products at relatively low costs.
This was a boost to South Korea since most of the heavy and chemical industries around the world suffered greatly in 1970s.17 There was also remarkable growth in machinery industries as it experienced double investments in certain sections like construction equipment, electric power generation and diesel engines among others. Above all, the growth was enhanced by the government’s support.
Following the global recession that was experienced in the late 70s, South Korea was not an exception. This recession emanated from high levels of inflation around the world with rising fuel prices. As a result, the country’s industrial structure lost balance, breeding severe inflation since the country had widely invested in heavy industries, yet the products lost the market.18
As a way of salvaging the country’s economy from the effects of inflation, the government implemented the Fifth Five-Year Economic and Social Development Plan from 1982-1986. The main driving force behind this idea was the need for the country to divert its investment efforts from heavy and chemical industries to technology-oriented industries.19
The shift was to focus at electronics and information equipment. Due to ready market and high demand for these products, there were reasons, which necessitated improving the quality of the products produced.
By the time the fifth-year plan ended, the government decided to advance the program by launching The Sixth Five-Year Economic and Social Development Plan that was to run from 1987 to 1991.20 It therefore embraced the previous plan’s ideas and vision. In order to realize success, the government promoted import liberalization and eliminated business barriers, which were mainly imposed on imports.
It is worth noting that most of these decisions were triggered by the need of protecting the country’s economy from severe effects of the market. Some of the dreaded effects included monetary expansion and pending industrial modification, emanating from the presence of excess funds.
Moreover, Seoul played a major role in facing out any form of direct assistance to specified firms. It was to emphasize the training of human resource and resource development. To achieve this target, Seoul increased the ratio of research and development to more than 3% of the GNP by the end of the Sixth Five-Year Economic and Social Development Plan in 1991.21
Between 1992 and 1996, the government launched the Seventh Five-Year Economic and Social Development Plan whose main objective was to advance technology in the country.22 This was to be realized by establishing advanced technology fields, including bioengineering, microelectronics, and optics among others. Through joint collaboration, the government and the industry developed high-technology facilities, which were evenly distributed around the country, covering up to seven provinces.
Current economic status
In 1997, South Korea was hit by the worst financial crisis to have been experienced throughout its history. As a result, Seoul sought the intervention of the IMF for a bailout of $58 billion in order to manage the situation. It is in the same year that Kim Dae Jung was elected as the president, making history to have worn the presidency from opposition.23
The country further experienced a collapse of financial institutions, resulting from the overuse of credit cards by consumers. This significantly affected economic growth of the country, falling to a low of 3.1%. The population of credit card holders increased in 2004, with majority of people being unable to pay back their debts.
South Korea is among other nations with a market economy. Its economy is ranked position fifteen based on GDP ranking and is categorized among the G-20 major global economies. It is a member of OECD and prides to be among the famous Asian Tigers. The country registered the fastest economic growth in 60s and is still among developed countries with fastest growing economies.24 Due to the absence of minerals in the country, South Korea adopted an export-led economy, concentrating on the manufacturing industry.
Following this, it was ranked as the 7th largest exporter in the world in 2010. It is faced with the problem of overpopulation. Additionally, North Korea’s military advancements have continuously affected the country’s stock market. It is however considered to be among the economies of the future together with BRIC. Importantly, it survived the global financial crisis of 2007-2008.25
Conclusion
From the above analysis, it is evident that the history of South Korea’s economy is quite fascinating. Since 1953 after the Korean War, the country has maintained a progressive economic trend with minimal crises. Nevertheless, political leaders played a major role in shaping the country’s economy through implementation of several Economic and Social Development Plans. It is remains to be one of the promising global economies.
Bibliography
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Heo, Uk, and Terence Roehrig. South Korea Since 1980. Cambridge: Cambridge University Press, 2010.
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Footnotes
1 Sŭng-hŭm Kil and Chung-In Moon. Understanding Korean Politics (Albany: SUNY Press, 2001), 13.
2 Ibid.
3 Ibid., 14.
4 Ibid., 15.
5 Ibid.
6 Ibid., 16.
7 James Wang, Comparative Asian politics: power, policy, and change (New Jersey: Prentice Hall, 1994), 236.
8 Ibid.
9 Jongryn Mo and David Brady, The Rule of Law in South Korea (California: Hoover Press, 2009), 148.
10 Ibid.
11 Ibid., 149.
12 Young-Iob Chung, South Korea in the Fast Lane: Economic Development and Capital Formation (UK: Oxford University Press, 2007), 14.
13 Ibid.
14 Ibid.
15 Ibid., 15.
16 John Lie, Han Unbound: The Political Economy of South Korea (UK: Stanford University Press, 2000), 77.
17 Ibid.
18 Uk Heo and Terence Roehrig, South Korea Since 1980 (Cambridge: Cambridge University Press, 2010), 83.
19 Ibid.
20 Grahame Thompson, Economic Dynamism in the Asia-Pacific: The Growth of Integration and Competitiveness (London: Routledge, 1998), 41.
21 Ibid.
22 Martin, Hart-Landsberg, “The South Korean Economy and U.S. Policy. Asian Perspective, 28. no. 4 (2004): 89.
23 Marcus Noland, “South Korea’s Experience with International Capital Flows,” National Bureau of Economic Research, 2007, www.nber.org/chapters/c0155.pdf.
24 Publishing OECD Publishing, OECD Economic Surveys: Korea 2010 (NYC: OECD Publishing, 2010), 57.
25 Mark Manyin, “South Korea-U.S. Economic Relations: Cooperation, Friction, and Future Prospects,” CRS Report for Congress, 2004, www.fas.org/man/crs/RL30566.pdf.