KIME Mideast Studies
Korea Institute of the Mideast Economies
Date: Friday, March 16, 2001
Place: Conference Hall, Hankuk University of Foreign Studies, Seoul Korea
Organizer: Institute of Middle East, Center for Foreign Studies, HUFS
Co-organizer: Korean-Turkish Academic Society
In a broad senses, a modernization can be to define that structural change is advanced generally from all fields of politics, economy, society, culture and sense of value back and the process that it sees creates the life condition which improves from go backwards condition. This case transference term, as the traditional things the fact that the retrogression or underdevelopment does, when advanced or as the modern time sees the fact that it improves, modernization is a possibility as also the process which the traditional society executes in the modern society doing.
Modernization of Korea was propelled the modernization which puts an emphasis in economic development in hopes of the solution of poverty problem as short cut of modernization and met the good results with propulsion of the economic development plan which is started from 1962 years. But the rapid modernization that is centered on economic development gets up a new problem in the Korean society and re-inspection against a modernization strategy is requested. Today Korean economy has many tasks that are realization of the social justice through just distribution of wealth, moral sincerity recovery, removal of environmental pollution due to the industrialization; maintenance of international competitiveness through technical innovation and problem of industrialization is caused by it simultaneously.
This paper aims to examine modernization and Korean economy, economic development and industrialization in Korea, and the success of Korean industrialization and government role in economic development. It also deals with the impact of Korean modernization and problems in the future.
1. The Definition of Modernization in the Economic Aspect
Modern society is industrial society. To modernize a society is, first of all, to industrialize it. Historically, the rise of modern society has been inextricably linked with the emergence of industrial society. All the features those are associated with modernity to be related to the set of changes that, no more than two centuries ago, brought into being the industrial type of society. This suggests that the terms industrialism and industrial society imply far more than the economic and technological components that make up their core. Industrialism is a way of life that encompasses profound economic, social, political, and cultural changes. It is by undergoing the comprehensive transformation of industrialization that societies become modern.
Modernization is a continuous and open-ended process. Historically, the span of time over which it has occurred must be measured in centuries, although there are examples of accelerated modernization. In either case, modernization is not a once-and-for-all-time achievement. There seems to be a dynamic principle built into the very fabric of modern societies that does not allow them to settle, or to achieve equilibrium. Their development is always irregular and uneven. Whatever the level of development, there are always "backward" regions and "peripheral" groups. This is a persistent source of strain and conflict in modern societies. Such a condition is not confined to the internal development of individual states. It can be seen on a global scale, as modernization extends outward from its original Western base to take in the whole world. The existence of unevenly and unequally developed nations introduces a fundamental element of instability into the world system of states. Modernization seems to have two main phases. Up to a certain point in its course, it carries the institutions and values of society along with it, in what is generally regarded as a progressive, upward movement. Initial resistance to modernization may be sharp and prolonged, but it is generally doomed to failure. Beyond some point, however, modernization begins to breed discontent on an increasing scale. This is due in part to rising expectations provoked by the early successes and dynamism of modern society. Groups tend to make escalating demands on the community, and these demands become increasingly difficult to meet. More seriously, modernization on an intensified level and on a world scale brings new social and material strains that may threaten the very growth and expansion on which modern society is founded. In this second phase, modern societies find themselves faced with an array of new problems whose solutions often seem beyond the competence of the traditional nation-state. At the same time, the world remains dominated by a system (Encyclopedia Britannica, 1994-2000).
Modernization implies an approach toward the institutions, structures, and values of Western society. According to S. M. Eisenstadt, historically modernization is the process of change toward those types of social, economic and political systems that have developed in Western Europe and North America from the seventeenth century to the nineteenth and have then spread to other European countries and in the nineteenth and twentieth centuries to the South American, Asian, and African continents.
Economic growth, defined as an increase in per capita incomes, has been accompanied by an expansion of modern and a contraction of the traditional sector; with increased urbanization, a marked change in the structure of output and employment, increasing literacy, and a decrease in production for domestic use. The employment consequences of modernization in the sense of movement toward the values and institutions of the West, has certain validity. There has been something like a linear, irreversible progression, marked by increase in per capita incomes, urbanization, industrialization, increased literacy, communications, social mobility, and other indexes (Edward S. Mason et al., 1980: 31-32).
Economic modernization, particularly in the early stages of development, requires transformations that are injurious to certain groups, though they may be advantageous to others. An increase in the rate of savings may demand unpopular increases in the level of taxation. A redistribution of agricultural land or changes in land tenure will meet with opposition from vested interests. Changes of this sort are difficult to bring about under any system of government, but they are particularly difficult in a full-fledged democracy. (ibid.: 37-38)
In many, if not most, less-developed countries economic development has been accompanied by a strengthening of the administrative structures and processes through which public policies are formulated and put into effect. The division of labor, the specialization of function, which Riggs characterizes as the essence of modernization, is as evident in public administration as it is in economic organization and the development of social institutions. It would be difficult to deny that the industrial societies of Communist Europe are modern, even though political control is highly centralized. Similarly, the modernization process in the Third World need not move and certainly as yet has not moved clearly in the direction of political democracy. (Ibid.: 39-40).
2. The Changes of Korean Society
Modernization in the societies of the Third World has not, in general, led in the direction of political democracy, and Korea is no exception. The form that authoritarian government has taken in Korea, however, has been powerfully shaped by local circumstances. The invasion from the north in 1950 and the possibility of renewed invasion is considered sufficient justification for maintaining the fifth largest standing army in the world. The size of the armed forces, the government positions offered to retired officers, the sizable fraction of the population that has experienced military service, and the equally large fraction held in readiness for future military service have given a pronounced cast to the society.
Korean Society has also been deeply influenced by the two countries with which it has been in close contact-Japan during the thirty-five years of colonial rule and during the period since 1965 when the transfer of capital and technology has been large; and the United States, whose economic and military assistances has been vital to the continued existence of Korea. Trade relations with Japan and the United States still account for over one-half of Korea's exports and imports, though this percentage will probably decline over time. A second respect in which authoritarian government in Korea differs from that in most other less-developed countries is in the heavy emphasis placed on economic growth as a national objective. Not only has the increase in national income since 1963 been remarkable, but all elements of the population, though not in the same measure, have shared this prosperity. (ibid.: 54-55)
3. Korean Economy in the Process of Modernization
Lee Ho Sik classified the Korean Economy into 9 categories in his writings, Modern Economic Growth in Korea; 1) The era before modern capitalism: - 1876, 2) The first trial to the modern capitalism and the Japanese Occupation: 1876 - 1945, 3) The liberation and the U.S. military governing: 1945 - 1948, 4) Korean War and reconstruction: 1948 - 1961, 5) The military coup and new economic policy: 1961, 6) The plans for the development: 1962 - 1971, 7) The oil shocks and the effects: 1972 - 1979, 8) The redirection of economic policy after the oil shocks, and 9) the newly emerging problems in Korea.
For a long time, before the modern time, Korea had been a feudalism society based on the Confucianism. In the Confucianism, the commercial activity was considered as the humble thing and the merchants were treated as the lowest class of the society. As a result, even though overall Korean culture had been well developed, the economy system was very inefficient.
At the late of 19th century, Korea woke up from the long dream, and started to build modern economy system. Chosun Dynasty arranged the currency system, and the old fashioned paddlers started to build new organizations. Economists think that era as the starting line of modern economy.
But unfortunately, the trial of the modern economy system by Chosun Dynasty failed and the dynasty corrupted by the force of Japan. At that time, Japan had already succeeded in modernizing its social system earlier than Korea and started dreaming of the imperialism and expansionism. Korea was the first shape-goat of the ambition. From 1910 to 1945, Korea was colonized by Japan and the economy was distorted for the favor of Japan. For an example, Korea had to export half of rice produced to the Japan. It means Korean people could consume only a third of the rice they used to before the Japanese Occupation. The only desirable thing, which happened during the Japanese Occupation, was that it destroyed the old feudalism social system.
In 1945, Korea got liberated from Japan. But on the liberation, the U.S.A. and the U.S.S.R. decided to divide Korea, and until nowadays Korea has existed as two Koreas - South and North Korea. The division of Korea caused the economy shock in South Korea because most of electricity and mineral had been produced in North Korea.
From 1945 to 1948, America military government governed Korea. The economy was dependent on the aid of the U.S.A. Up to 1948, the U.S.A. supported grain and cloth of $ 4,300 million. At the period, the whole Korean economy was related with the aid and the economy system is called the 'aid economy'.
But in 1950, Korean War broke out and it destroyed most of facilities and infrastructure in Korea. When it finished at 1953, there was nothing but terrible poverty in Korea. But at the same time, the war made all people equal. After the war, there was no richer nor poorer. Even born as the humble, if he succeeds in business, he could get respected. And the widespreader idea of equality became the biggest advantage of the later development.
From 1954 to 1961, Korean economy system was reconstructed by the aid of the U.S.A. again. Korea could manufacture cotton yard, flour and sugar by the help of the U.S.A. The products were consumed domestically, and that kind of economy is called an import-substitution industrialization'.
1962 is a very important year for Korean economy. In 1961, by military coup, General Park, Jung Hee became president and accelerated the new building of economy. To grow up the economy, he used all means whether the method was moral or not. Since 1962, Korean economy has grown faster than any other countries.
Military government could conduct the policy mentioned above very powerfully. Even though the policy is sometimes blamed because it enhanced the gap between the rich and the poor, it is evaluated as a success and the locomotive of the development.
From 1962 to 1966, the first plan for the development was conducted. The purpose of the plan was to substitute the import of cement, refined oil, and fertilizer with domestic product and to build the infrastructure such as roads, rails, and power plants. During this period, the rate of economic growth was 7.9% and the rate of unemployment got lowered from 8.2% to 7.1%.
From 1967 to 1971, the second plan was conducted. During this period, the goods like the shoes, flying wood, bag and cloth started to export. Those products were competitive in the international market because of the cheap labor force in Korea. Due to these industries, Korea manufacturing industry could grow up to 22% a year and Korea could gain the accumulated capital for further investment.
In 1973, the first oil shock broke out. At that time, Korea started to invest on the heavy industries such as oil refinery, motor and ship building, and the oil shock gave very big damage to Korean economy. But after the first oil shock, Middle Asia got in the boom of construction and Korea became the most beneficiary of the boom. As a result, it was the first oil shock, which gave Korea a chance to organize the industry more efficiently than ever. After overcoming the risk, Korean economy grew by the record-breaking rate.
But in 1979, the second oil shock was proven to be huge disaster for Korean economy. Before the second oil shock, the excessive investment on the heavy industry, the unstable monetary policy and nationwide trend of speculation had been weakening the economy. And the second oil shock aggravated the situation.
In the early 1980s, after the second oil shock, the world economy suffered from the stagflation, and it caused the high rate of unemployment. It resulted in the new trend of the protectionism. To Korea, which was highly dependent on international trade, that trend of protectionism made the economic situation worse.
To overcome the difficulty, the Korean government had to change the priority from the economic growth to the economic stability and it resulted in low inflation of about 6% from 1982 to 1988. The stable economy made export increase steadily and improved the balance of payment. At last in 1986, the export exceeded the import.
Since 1962, the main purpose of Korean economic policy had been focused on the development of economy to escape from poverty. But such unbalanced development has caused many side-effect on the economy and now Korea is challenging the newly emerging problem such as the black market, the gap between the poor and the rich, the unfair taxation, and the lack of welfare system.
Now, Korea is about to join OECD, which consists of the developed countries. But just a few Korean think of Korea as the developed countries. To become a true developed country, Korea must solve the problems mentioned above.
Prior to the currency crisis turned into economic crisis last November, Korea enjoyed the reputation of having achieved the "rags to [near] riches" dream over a mere few decades. Between the early 1970s and 1997, its GNP per capita increased 40 times, from around US$250 to over US$10,000. It metamorphosed from a largely agrarian subsistence economy into a new industrial "dragon". With over US$12,000 per capita GNP as the goal for 1997 prior to the crisis, the "miracle of the Han River" had appeared well established and sustainable. Korea's social indicators progressed with the positive economic indicators. The average life expectancy at birth rose from 60 years in the early 1970s to 75 years in 1997; the infant mortality rate fell from 40 per 1000 live births to below 10 over the same period; the number of people per physician changed from 2,100 to less than 1,200; the primary enrollment ratio reached nearly 100% from as early as the 1970s and it was accompanied by rapid improvements in the secondary and tertiary enrollment ratios for both sexes; and full employment has been more or less the norm. Advance in gender equality has also been notable, especially in policy, legislation and infrastructure terms as well as in employment and related support service such as job training, maternity protection and day care. In the long-neglected environment field, too, serious initiatives have emerged as evident, in part, in the successive upgrading of the responsible government authority from a Bureau (1980) to an Office (1990) and then to a Ministry (1994). While accurate poverty statistics are unavailable, the number of persons eligible for public assistance declined from 2.1 million in 1989 to 1.2 million in 1997. Korea's Human Development Index for 1994-ranked 32nd among the 64 "High Human Development" countries in the world.
The above economic and social progress was achieved based on twin development strategies: modernization and export-oriented industrialization, supported by the underpinning human resource development and seven successive economic development plans. The most recent "Five-Year Plan for a New Economy (1993-1997)" had sought to achieve competitiveness in the global economic environment through, inter alia, industrial restructuring, market liberalization, financial sector and institutional reforms, administrative deregulation, tariff cuts, development of science and technology, and promotion of entrepreneurial initiatives. The implementation of the Plan was inconclusive, however, due to resistance from vested interests, pervasive mismanagement and inconsistency of policy (Pak Po-Hi, 1998).
4. The Process of Modernization in Korea
Throughout its long history, Korea was secluded from the outside world, particularly the Western world. The country was often described as the Hermit Kingdom of the Orient. This changed in the latter part of the 19th century, when Korea was forced to open its doors to Japan and the Western powers. In 1876 Japan forced Korea to open its ports to Japan by a treaty of friendship Korea signed similar treaties with the US, Russia, Germany, Great Britain, France, Italy and China during the period of 1876 - 1886.
Korea was almost entirely an agrarian economy before the Japanese colonization of 1910. During the colonial era of 1910 to 1945, the Korean economy experienced rapid structural transformation. The structural pattern of this development was largely determined by the Japanese colonial regime. As a result, the Korean economy experienced what is known as colonial enclave industrialization. During this period, the share of manufactures in net commodity-product grew from less than 4 percent to over 20 percent. Japanese colonial rule ended in 1945 with the conclusion of World War II (Il Sakong, 1993; 1).
<Table 2-1> Net Value of Commodity-Product, 1910-1941
The nation's liberation was marred by the partition of Korea into two parts, North and South. South Korea was occupied by US military forces until 1948 when the government of the Republic of Korea was established. Among 1945 and 1950 Korea was in a rather chaotic situation. Economically, the partition had crippled the nation. The South was primarily agricultural while the North possessed most of the natural resources and the heavy industry established by the Japanese. The withdrawal of Japanese manpower, particularly skilled manpower, was another detrimental factor for the Korean economy immediately after liberation. Negative political and administrative factors vacuum created turmoil on all fronts. The US military government that existed during 1945-1948 was not fully prepared, and consequently it was not helpful in improving the situation (Ibid; 1-2).
Byung-Nak Song says that the period 1945-53 was one of interrupted development and social chaos. Economic development was greatly hindered after liberation by the division of the country into North and South in 1945, political turmoil during the American occupation (1945-8), and the Korean War (1950-3). The Korean War destroyed almost two-thirds of the nation's productive capacity, and almost 1 million civilians were killed. Total industrial production in 1953 was estimated to be not much more than one-third of the production level of 1940. The South Korean economy began a solid recovery immediately following the deviating war During 1953-57, GNP in real terms grew at about 5 percent per year. The relatively high economic growth during 1953-57, however, was accompanied by rapid inflation. The wholesale price index increased at an average annual rate of 20 to 30 percent for the period. During this period, foreign aid was an important factor in the nation's economic growth.
Korea's first republic was founded by the President Rhee in 1948 Recent economic differences between North and South is wider and heavier than 1980s. South Korea's GNP in 1995 increased conspicuously by 150.6 times to $451.7 billion since 1965, while the North remained with a growth of only 11.7 times to $22.3 billion during the same period. According to a recent report comparing the North-South economic and social aspects announced by the National Statistical Office, South Korea's GNP difference with the North last year widened by 20.3 times in 1995 from 17.8 times in 1994.
<Table 2-2> North-South GNP Comparison ($100million)
He devoted to solidifying the new nation and rehabilitating the Korean economy until he was ousted by the student revolt in 1960. Under his leadership, however, Korea laid a foundation for successful outward-oriented economic growth by investing in education, introducing land reform, and completing the first stage of import substitution. A military coup, led by General Park Chung Hee who became president of ROK later, succeeded in 1961, and Korea witnessed the emergence of a political leadership committed to economic development.
Any way, the period among 1953 and 1961 was one of slow recovery of the war-ravaged economy, while economic policy focused on import substitution and massive investments in education. The emphasis on import substitution was clearly a mistake, but private and public investment in education turned out to pay off handsomely in terms of producing a well-educated labour force that would provide the backbone of the labour-intensive industries in the early 1960s. The period from 1962 to 1989 has been one of rapid growth, beginning with the inauguration of systemic economic planning under the First Five-Year Plan (1962-6) (Byung-Nak Song; 45).
1. The Economic Circumstances before Economic Development Plan (1962)
The Japanese, who dominated Korea from the late 1890s to 1945 and who governed Korea as a colony from 19l0 to 1945, were responsible for the initial economic modernization of Korea. Before 1900 Korea had a relatively backward agricultural economy. According to scholar Donald S. Macdonald, for centuries most Koreans lived as subsistence farmers of rice and other grains and satisfied most of their basic needs through their own labor or through barter. Artisans in a few population centers produced the manufactures of traditional Korea--principally cloth, cooking and eating utensils, furniture, jewelry, and paper--. <Table 3-1> shows the manufacturing production between South and North Korea in 1939.
<Table 3-1> Comparison of Manufacturing Production between South and North Korea, 1939a
Note: a The breakdown of manufacturing production between South and North Korea was based on the production data by province. The breakdown between the South and North will not therefore be exact because the 38th parallel did not match the provincial boundaries.
b Share of the South in All Korea
Following the annexation of Korea in 19l0, Japan thrust a modern blend of industrial capitalism onto a feudal agrarian society. By the end of the colonial period, Japan had built an extensive infrastructure of roads, railroads, ports, electrical power, and government buildings that facilitated both the modernization of Korea's economy and Japan's control over the modernization process. The Japanese located various heavy industries--steel, chemicals, and hydroelectric power--across Korea, but mainly in the north. <Table 3-2> indicates net commodity-product in South and North Korea during 1939-1940.
<Table 3-2> Net Commodity-Product In South And North Korea, 1939-1940 Averages
(Unit: million K￥ at 1936 market price)
Note: a Share of the South in All Korea
The Japanese government played an even more active role in developing Korea than it had played in developing the Japanese economy in the late nineteenth century. Many programs drafted in Korea in the 1920s and 1930s originated in policies drafted in Japan during the Meiji period (1868-1912). The Japanese government helped to mobilize resources for development and provided entrepreneurial leadership for these new enterprises. Colonial economic growth was initiated through powerful government efforts to expand the economic infrastructure, to increase investment in human capital through health and education, and to raise productivity. <Table 3-3> indicates the factory labor force during 1912-1940.
<Table 3-3> The Factory Labor Force, 1912-1940.
(unit: numbers of workers)
Note: a Includes other non-Koreans.
In some respects, South Korean patterns of development after the early 1960s closely followed the methodology introduced by the Japanese fifty years earlier--industrialization from above using a strong bureaucracy that formulated and implemented economic policies. Many of the developments that took place in Chosen, the Japanese name for Korea during the period of colonization, had also occurred in pre-World War II Japan; they were implementation of a strong education system and the spread of literacy; the rise of a strong, authoritarian government that combined civilian and military administration to govern the state with strict discipline; the fostering and implementation of comprehensive economic programs by the state through its control of the huge national bureaucracy; the close collaboration between government and business leaders; and the development of industries by the major Japanese zaibatsu (commercial conglomerates).
Some political analysts, for example, Bruce Cumings and Gavan McCormick, have been impressed with the common elements in prewar and postwar economic growth in South Korea and especially with top-down government management of the economy. Economists, such as Paul W. Kuznets, however, also draw attention to the dysfunctional aspects of the colonial legacy and find some of the discontinuities important.
It is also important to note that between the end of World War II and Park Chung Hee's ascension to power in 1961, there was a major rupture, both politically and economically, from the Japanese colonial period. There was considerable disruption after 1945 because of plant exhaustion; the loss of linkages with Japanese capital and with upstream and downstream industrial facilities; the loss of technical expertise, distribution systems, and markets; and the subsequent obliteration of the industrial plant during the Korean War (1950-53).
These circumstances had thrown South Korea's economy into complete chaos. Even if the occupation forces had arrived with a carefully laid economic plan, the situation would have been difficult because the Japanese had developed Korea's economy as an integral part of their empire, linking Korea to Japan and Manchuria.
The division of Korea into two zones at an arbitrary line further aggravated the situation. There were many inherent problems in building a self-sufficient economy in the southern half of the peninsula. Most of the heavy industrial facilities were located in northern Korea--the Soviet zone--including the chemical plants that produced necessary agricultural fertilizers. Light industries in southern Korea had been dependent on electricity from the hydraulic generators located on the Yalu River on the Korean-Manchurian border; electric generating facilities in the south supplied only 9 percent of the total need. Railroads and industries in the south also had been dependent upon bituminous coal imported from Manchuria, Japan, and the north (although the south had been exporting some excess anthracite to the north). <Table 3-4> shows annual growth rate of GNP by Industrial Origin during 1953-1976.
<Table 3-4> Annual Growth Rate Of GNP by Industrial Origin, 1953-1976.
(unit: %, based on 1970 constant price data)
The problems were compounded by the fact that most of Korea's mines and industries had been owned and operated by Japan. As the United States military government let the 700,000 Japanese depart from South Korea in the months following the start of the American occupation, almost all of the mines and factories--now enemy properties vested in the military government--were without managers, technicians, and capital resources. This situation led to severe problems of unemployment and material shortages.
The months after the arrival of occupation forces also witnessed a vast inflow of population. South Korea's population, estimated at just over 16 million in 1945, grew by 21 percent during the next year. By 1950 more than 1 million workers had returned from Japan, 120,000 from China and Manchuria, and 1.8 million from the north. The annual rate of increase of births over deaths continued at about 3.1 percent. Since rural areas were inhospitable to newcomers, most of the refugees settled in urban areas; Seoul received upwards of one-third of the total. The situation was further aggravated by scarcities of food and other commodities and by runaway inflation, caused in part by the fact that the departing Japanese had flooded Korea with newly printed yen.
The social unrest created by these developments can be easily surmised. By 1947 only about half the labor force of 10 million was gainfully employed. Labor strikes and work stoppages were recurrent phenomena, and demonstrations against the United States military government's policies drew large crowds. Temporary stoppages of electricity--supplied from the northern areas--in the early part of 1946 and late 1947 plunged the southern region into darkness on each occasion, deepening the despair of the populace. The disillusioned and disconcerted people paid keen attention to political leaders of various persuasions who offered new ways of solving the Korean problem (Encyclopedia Britannica: 1999).
2. Korean Economic Development during 1962 - 1996 Years
The 1960s and 1970s marked Korea's great leap toward a semi-developed state, and the 1970s and 1980s saw the transition from semi-development to economic maturity in Korea. Can Korea continue to grow rapidly and follow Japan into the ranks of non-western advanced countries? Both Korean and foreign experts have tried to answer this question. Generally, foreigners tend to be more optimistic than Koreans about the future of the Korean economy (Byung-nak Song, 1990; 231). Dr. Cho Soon also argues that Korea can be optimistic about the abundant growth potential of the country. The many scientists educated abroad can enhance the level of science and technology. There are many good, experienced administrators who can establish order and discipline. And above all, there are people who still work very hard. The Korean people are now, as ever before, demonstrating exuberant energy in their pursuit of economic gain. As long as these motives are guiding economic life, a significant slowdown in economic activity is unthinkable, and the growth of the economy is assured (Cho Soon, 1994; 196-197). Korea has attained the rapid economic growth except 1980 since 1960s. <Table 3-2> shows Korea's major economic indicators over the past five decades.
Table 3-2 Korea's Major Economic Indicators over the Past Five Decades
In short, Korea has achieved its high rate of growth by adopting an export-led growth strategy, which has allowed the country to make fullest possible use of its substantial endowment of human resources and to compensate for the shortage of poorly endowed natural resources. The energetic government in collaboration implemented the export-led growth strategy (Cho Soon, 1994; 178). We can find this fact through the performance of five-year plan in <Table 3-3>.
<Table 3-3> Performance of Korea's Five-Year Plan (Unit: %, millions of dollars)
b denotes figures (millions of dollars) of payment basis in 1966, 1971, 1976, 1981, 1986 and 1991.
c denotes figures of target of the plan.
Sources: Economic Planning Board; Bank of Korea, 1990, National Accounts.
Now the stage of extensive growth is over, Korea needs a much more liberal approach with respect to international trade and investment. Korea is now exposed to international competition, and the only good way to survive in it is to complete with other countries, playing by international rules of the game.
From the international perspective, all Asian newly industrializing economies, including Korea, are in transition. Korea's competitive advantage in labor-intensive manufactured goods is being eroded by rising wage rates, a diminishing rate of improvement in productivity, and increasing difficulties in achieving technological breakthrough. The technical gap with advanced country is not being narrowed, while the gap with later-developing countries - notably, the countries of the Association of Southeast Asian Nations - is being closed. There is no room for complacency, and the best to confront the future is to take risks by internationalization (ibid. 190).
3. The Pattern of Industrialization in Korean Economy
Industrialization is the process of converting to a socioeconomic order in which industry is dominant. The pattern of industrialization can also be viewed in terms of structural changes in production, trade and domestic demand within the manufacturing sector. <Table 3-4> shows that the relative importance of `early industries' such as food processing and textiles in total manufacturing production, exports, imports, and demand consistently declined during the year 1955-1975, while that of intermediate products and machinery gained considerably.
<Table 3-4> Structure of Mfg. Production, Trade and Demand by Major Sector, 1955-1975
(Unit; based on 1968 constant world-price data)
Note: a Excludes natural-resources-intensive, non-competitive imports.
According to <Table 3-5>, in 1953-1955, Korean manufacturing lagged substantially behind the predicted GNP shares in only two sectors - food and chemicals. In textiles, Korea was more developed than the typical country. Other sectors were about as developed as those in nations of similar size and income. By 1960-1962, Korea had drawn even with the Chenery-Taylor regression expectations in food and chemicals, and had substantially exceeded the norm in textiles and clothing, even before these industries became leading exports. By 1972-74, Korean output was well above the norm in several sectors: food, textiles, clothing, paper products, chemicals, non-metallic minerals, and metal products. The last three sectors demonstrate the degree of progress in the import substitution of key producer goods, convincing evidence that Korea has been able to break out of the import-substitution dead end typical of many developing countries and move towards a modern, integrated manufacturing structure producing both intermediate and capital goods (ibid.: 142-147).
<Table 3-5> Korean Industrial Structure, 1953-1974, Compared with Chenery-Taylor Norms
Note: C-T Korea a means Chenery-Taylor Korea a.
a Total for Korea may not add due to rounding and omission of `miscellaneous' industry.
Memo itemb is manufacturing share of GDP at factor cost.
1. The Success of Korean Industrialization
Korea's successful economic growth in modern times has deep roots. In particular, the Confucian emphasis on education and discipline, the tradition of an industrious agricultural labor force, and the traditional innovative potential of the Korean people appear to form the foundation of Korea's recent advance. No less important, however, the period of Japanese colonial rule (1910-45) and the North-South division of the country also has profoundly shaped the structure and distortions of Korea's modern economic growth Byung-Nak Song divides Korea's long-term development into the three periods. According to him, the first is the period of very slow development of the traditional agrarian economy during Yi Dynasty (1392-1910). The second is the period of colonial development and destruction during the Korean War (1950-3). The third is the period of post-war recovery and rapid growth since 1954. (Byung-Nak Song; 28).
The most important factor of Korean economic growth was a government's will to transfer the labor force from latent unemployment to employment in the process of economic development. In 1960s, Korea had a high quality and plentiful low price labor force. Foreign capital played a great role to set on labor force, potential for development. Owing to the lack of capital accumulation in agricultural sector, influx of foreign capital was an indispensable factor to develop the country at the outset. In short, a basic axis in the Korean economic growth was an effective combination of labor force, potential for development and foreign capital, ignitable factor. A strong developmental will of Korean government combined two important factors effectively and sought the exit in the foreign export market. Therefore basic model of Korean economic growth characterized as a government-led, foreign capital-depended, industrialization-promotion and export-oriented.
Korea's remarkable economic success of the last quarter century is often cited as a model of sound economic planning, efficient resources allocation, and effective cooperation between government and business. The rapid development was led by export-oriented industrial expansion and was achieved in spite of poor natural resource endowments. Korean economic growth characterizes many factors, including investment and rapid capital growth, expansion of industrial productivity, and the development of human resources and labor productivity. Other contributing factor is the favorable worldwide conditions prevailing during the 1960s. It contains Korea's political stability, the commitment of government for economic development - by the launching of the First Five-Year Economic Development Plan, 1962-66 -, the outward-looking strategy of industrialization, the vitality and entrepreneurship of leaders, the grassroots support and participation in rural transformation, and the close government-business interplay in Korean Economic development. In the course of Korea's economic development, education by the Confucian cultural basis played a great role to enhance the quality of the labor (Seong Min Hong, 1992 a; 22-23).
In 1963, Korea switched its national development strategy from an inward, agriculture - and rehabilitation - oriented focus to an outward, manufacturing - and export - oriented focus. The new development strategy immediately fostered disparities between agriculture and industry - that is, between the rural and urban sectors. By the late 1960s, over urbanization_ or over concentration_ of population in the largest cities, especially Seoul had emerged as a major social issue. Squatter settlements in Seoul also expanded rapidly due to the continuous immigration of poor rural people. To tackle this problem, the government started the Saemaul Undong or New Village Movement, in 1971. Its purpose was to enhance the household incomes and living conditions in rural areas to encourage people to stay on the farm. Through this movement the government expanded its investment in rural areas. In the mid-1970s as much as 10% of the total national investment was allocated each year to rural areas through this movement. As a result of these programs and an extensive price-support system for rice, rural household income was raised to almost the same level as urban household income by 1975 (Byung-Nak Song; 169-171).
Meanwhile Korea has completed three decade of rapid industrialization based on the export of manufactures, a course to which it was impelled in the 1960s by the meagerness of its natural resources. You can see this fact by the changes of industrial structure in <Table 4-1>. Above all, the motives of Korea's rapid economic growth stemmed from the will of which Korean government that was eager for industrialization. It was embodied by Saemaul Undong (New Village Movement) in the early 1970s.
<Table 4-1> Changes in Korean Industrial Structure
2. The Government Role in Economic Development
In 1961 General Park Chung Hee overthrew the popularly elected regime of Prime Minister Chang Myon. A nationalist, Park wanted to transform South Korea from a backward agricultural nation into a modern industrial nation that would provide a decent way of life for its citizens while at the same time defending itself from outside aggression. Park sought both legitimacy for his regime and greater independence for South Korea in a vigorous program of economic development that would transform the country from an agricultural backwater into a modern industrial nation. Park's government was the beneficiary of the Syngman Rhee administration's decision to use foreign aid from the United States during the 1950s to build an infrastructure that included a nationwide network of primary and secondary schools, modern roads, and a modern communications network. The result was that by 1961, South Korea had a well-educated young work force and a modern infrastructure that provided Park with a solid foundation for economic growth.
The Park administration decided that the central government must play the key role in economic development because no other South Korean institution had the capacity or resources to direct such drastic change in a short time. The resulting economic system incorporated elements of both state capitalism and free enterprise. The economy was dominated by a group of Chaebol, large private conglomerates, and also was supported by a significant number of public corporations in such areas as iron and steel, utilities, communications, fertilizers, chemicals, and other heavy industries. The government guided private industry through a series of export and production targets utilizing the control of credit, informal means of pressure and persuasion, and traditional monetary and fiscal policies.
Park's government hoped to take advantage of existing technology to become competitive in areas where other advanced industrial nations had already achieved success. Seoul presumed that the well-educated and highly motivated work force would produce low cost, high-quality goods that would find ready markets in the United States and the rest of the industrial world. Profits generated from the sale of exports would be used to further expand capital, provide new jobs, and eventually pay off loans.
In 1961 Park extended government control over business by nationalizing the banks and merging the agricultural cooperative movement with the agricultural bank. The government's direct control over all institutional credit further extended Park's command over the business community. Beginning in the 1960s, the Economic Planning Board allocated resources, directed the flow of credit, and formulated all of South Korea's economic plans. In the late 1980s, the power to allocate resources and credit was restored to the functional ministries. In 1990 the Economic Planning Board primarily was charged with economic planning; it also coordinated and often directed the economic functions of other government ministries, including the Ministry of Finance.
President Park's first major goal, which was immediately successful, was to establish a self-reliant industrial economy independent of the massive waves of United States aid that had kept South Korea afloat during the Rhee years. Modernizing the economy and maintaining overall sustained growth were additional goals in the 1970s. Significant economic policies included strengthening key industries, increasing employment, and developing more effective management systems. Because South Korea was dependent on imports of raw materials, such as oil, a major government objective was to significantly increase the level of exports, which meant stressing greater international competitiveness and higher productivity. The early economic plans emphasized agriculture and infrastructure; the latter were closely tied to construction. Later, the emphasis shifted consecutively to light industry, electronics, and heavy and chemical industries. Using these strategies, an export-driven economy developed.
The government combined a policy of import substitution with the export-led approach. Policy planners selected a group of strategic industries to back, including electronics, shipbuilding, and automobiles. New industries were nurtured by making the importation of such goods difficult. When the new industry was on its feet, the government worked to create good conditions for its export. Incentives for exports included a reduction of corporate and private income taxes for exporters, tariff exemptions for raw materials imported for export production, business tax exemptions, and accelerated depreciation allowances (Encyclopedia Britannica, 1994-2000).
The export-led program took off in the 1960s; during the 1970s, some estimates indicate, Seoul had the world's most productive economy. The annual industrial production growth rate was about 25 percent; there was a fivefold increase in the GNP from 1965 to 1978. In the mid-1970s, exports increased by an average of 45 percent a year. <Table 4-2> shows plan targets and actual performance during 1962-1976 years.
<Table 4-2> Plan Targets and Actual Performance
Note: a Input-output tables 1965, 1970, 1978. ROK inventory changes are included in the plan estimates, but the `actual' national income accounts data do not provide this on a sectoral basis. These data were therefore estimated from IO tables to provide consistent sectoral allocations inclusive of inventory adjustments.
3. The Limits of Korean Economic Development
By the end of the 1950s the experience gained from efforts to promote economic development showed great differences among developing countries. Some had broken away relatively quickly from the import-substitution, government-control and -ownership pattern that had been the early development wisdom. Others persisted with the same policies for several decades. A great deal was learned from the experiences of different developing countries. The importance of agriculture despite early emphasis on industrialization through import substitution, a first major lesson of postwar experience was that there is a close connection between the rate of growth in the output of the agricultural sector and the general rate of economic development. The high rates of economic growth are associated with rapid expansion of agricultural output and low rates of economic growth with the slow growth of agriculture. This is (in hindsight, at least) to be expected, since agriculture forms a large part of the total domestic product and of the exports of the developing countries. What is more interesting is that the expansion of agricultural output was by no means confined to those countries with an abundant supply of unused land to be brought under cultivation. Taiwan and South Korea, with some of the highest population densities in the world, were able to expand their agricultural output rapidly by a vigorous pursuit of appropriate policies. These included the provision of adequate irrigation facilities, enabling a succession of crops to be grown on the same piece of land throughout the year; the use of high-yielding seeds and fertilizers, which raised the yields per acre in a dramatic fashion; provision of adequate incentives for producers by setting producer prices at reasonable levels; and improvements in credit and marketing facilities and a general improvement in the economic organization of the agricultural sector. Agricultural development is important because it raises the incomes of the mass of the people in the countryside (Encyclopedia Britannica, 1994-2000).
The reconstruction of Korea's war-torn and aid-dependent economic base began in 1953. Despite massive inflows of foreign assistance, however, economic growth during the post-Korean War reconstruction period was disappointing. In the early 1960s, the pace of growth began to accelerate, a process, which has continued to the present. This continuous progress since the early 1960s has substantially altered the structure of national product and employment and the patterns of national expenditure and trade.
The basic change from an inward-looking, import-substituting industrialization strategy to an outward-looking one, which took place in the early 1960s, is in large part responsible for the remarkable growth and structural change in later years. This viewpoint is supported by the phenomenal growth of commodity exports, which has averaged more than 35% a year in real terms since the early 1960s, thereby surpassing the real growth rate of GNP (Edward S. Mason et al., 1980: 123-4).
Korea is no longer a minor supplier of export commodities but is a major factor in world markets capable of arousing protectionist sentiment in the United States and in other industrialized countries. In addition, the cost of imported energy with which to fuel the continued growth of manufacturing has risen precipitously, while energy conservation programs in the industrial world threaten to slow down the growth of the export markets which are more critical to Korean expansion. Fortunately, none of these fears materialized during the recent oil crisis and ensuing world recession. Rather, Korea was able to maintain its historic growth rate of 9% throughout 1974 and 1975, and actually increased this rate to 16% in 1976. Although the oil crisis initially enlarged the balance-of-payments' deficit, it also opened up new opportunities to Korea. Foreign exchange earnings from construction contracts in the Middle East grew rapidly after 1976. Thus Korea enjoyed a surplus in its transactions with the Middle Eastern countries in 1977, as well as overall balance in its foreign accounts fort he first time in modern history.
Furthermore, the rate of inflation fell to around 10% in 1976-1977, consistent with Korea's experience during the 1960s and other indication of the structural changes. Nevertheless, inflation has always been the weak point of Korea's development policy, and numerous attempts to stabilize the price level have failed. This is due mainly to the government's preference for growth rather than stability and to its failure adequately to manage domestic demand (ibid. 124).
The Korean economy is now led by an experienced group of entrepreneurs who have shown their capacity to move into new areas of production and exploit new overseas markets in the Middle East and elsewhere. Their capabilities will be tested as Korea gradually loses, with increased wage costs, its comparative advantage in light manufactures to latecomers among less-developed countries. This process is already well under way. The Korean economy now confronts significant changes in domestic requirements. The improvement in standards of loving with substantial increases in income is bringing with it a shift in economic and social objectives the government can no longer ignore. Better housing, improved health care, a large public contribution to education, urban transportation, and demands for pollution control and improvement in the quality of environment, all represent pressing needs. Expenditure on these objectives cannot be expected to carry with it the increases in productivity that has accompanied investment in manufacturers. The shifts in domestic requirements occasioned by increases in demands for social services and military expenditures can hardly fail to diminish to some extent the prospective rate of growth (ibid.: 489-492).
During the period of rapid economic growth, the relations of government to business have been unusually close with government clearly in the driver's seat. Government has strongly influenced the direction and rate of industrial expansion by controlling the allocation of domestic credit and access to foreign capital and through a complex network of incentives and disincentives and command decisions. In general, this industrial expansion has exploited effectively Korea's comparative advantage with timely adaptation to changes in factor proportions and changing market opportunities. In this process there has emerged a sizable number of efficient large-scale enterprises and a group of venturesome entrepreneurs.
In the area of trade and finance, Japan has become Korea's most important market and source of supply. Although Korea's balance of payments has improved markedly and may be in surplus in the next few years, its trade imbalance with Japan has not narrowed. One of the major factors underlying this lopsided trade relationship is the absence of complementary trade between two countries. In the future, these trade relations with Japan may well become even less complementary and increasingly competitive in the rest of the world. As Korea steps up her export drive in the fields of heavy industry and chemicals, competition will no doubt intensify. In its trade relations with Japan, as well as with the United States, Korea is ceasing to be a dependent hanger-on and is becoming a fully independent trade rival and partner (ibid.: 494-498).
Over the past 40 years, South Korea's economic growth has been spectacular. Korea has advanced from being one of the world's poorest countries in the 1950s to one of the richest in the 1990s. In fact, in 1996 it was designated a high-income country by the World Bank and joined the Organization Economic Cooperation and Development (OECD) in Paris as an industrialized, aid-giving country. But that was before it became the principal victim of the 1997 Asian crisis.
Entering the 1960's, the world was attracted by Korea's highly economic growth that is so called 'Miracle on the Han River' with the drastic propulsion of economic development plan. We can summarize the factors of economic development in Korea as following four fields; 1) the appearance of propulsion influence of economic development plan (establishment of political leadership), 2) Korean people's strong will (improvement of sense of value and change of national immediate necessity as social whole), 3) lower labor force, and 4) improvement of international situation. Besides many technical innovations, formation of new (overseas) market, new discovery of resources, stability of domestic politics and conversion of foreign assistance policy and improvement of specialty manpower due to the development of education in the 1960's were contributed Korean economic growth.
Korea's successful industrial growth began in the early 1960s, when the government instituted sweeping economic reforms emphasizing exports and labor-intensive light industries. The government also carried out currency reform, strengthened financial institutions, and introduced flexible economic planning. South Korea's rapid and sustained development can be ascribed to a peculiar combination of social and economic factors: the high level of industriousness and literacy among the people, the introduction in the early 1960s of economic reforms (including land reform) aimed at expanding exports and labor-intensive industries, the gradual removal of import barriers, the extreme flexibility of economic management (always ready to react to signals and incentives coming from the economy), the close cooperation between government and private industry, and the autonomy of the banking system and the development of an efficient financial market (Michael P. Todaro, 2000: 533).
However crucial problems are becoming obstacles of Korea's economic growth as a secondary effect of rapid economic growth and conversion of new economic policy and economic structure is a main task to cope with them in the future. Nowadays Korean society has some secondary effects of rapid economic growth that contain the gulf between rich and poor, degradation of the social justice which is caused by an omnipotent materialism thought, overpopulation of urban population and decrease of rural population, and environmental pollution.
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President Park's economic policy can be summed up as follows;
The share of finished consumer goods in total production remained almost unchanged between 1955 and 1975. The production and export shares of machinery industry also increased from 1955 to 1963, while machinery imports as a percentage of domestic demand declined substantially.
The Chenery-Taylor regression is based on cross-country data covering 50 countries for the period 1950 to 1963. It treat value added per capita for 12 manufacturing sectors as a ogarithmic function of income per capita, population, and the respective shares of primary and manufactured exports in GNP.
Saemaul undong is a comprehensive rural development program that government and non-government organizations have implemented since 1970 to raise the standards of living. The ideology of the saemaul undong originated in traditional community life because Korean villages have a long tradition of self-government. This movement adopted diligence, self-help, and cooperation as its motto and stressed an extension of the idea of the community to encompass the entire nation. Saemaul undong was designed to increase farm household income by improving the agricultural infrastructure and seed varieties and by the application of new farming techniques. It also promoted cooperative production among households to increase farm output.
Few Koreans had owned or managed larger corporations during the Japanese colonial period. After the departure of the Japanese in 1945, some Korean businessmen obtained the assets of some of the Japanese firms, a number of which grew into the chaebol of the 1990s. These companies, as well as certain other firms that were formed in the late 1940s and early 1950s, had close links with Syngman Rhee's First Republic, which lasted from 1948 to 1960. It was alleged that many of these companies received special favors from the government in return for kickbacks and other payments.
The Economic Planning Board was created in 1961 and became the nerve center of Park's plan to promote economic development. It was headed by a deputy prime minister and staffed by bureaucrats known for their high intellectual capability and educational background in business and economics. The board was complemented by the Korea Development Institute, an independent economic research organization funded by the government. Other government bodies directing the economy included the Office of the President, which included a senior secretary for economic affairs; the Ministry of Finance; the Ministry of Trade and Industry; the Ministry of Labor; and the Bank of Korea, which was controlled by the Ministry of Finance.
Korea imports mainly capital and intermediate goods from Japan; it sends in return mainly agricultural products and some labor-intensive manufacturers including parts for Japan's consumer electronics exports, but most manufacturers have difficulty in penetrating Japan's protective barriers.