The Korea Times Articles - 2010
Korea: From Rags to Riches
February 5, 2010
By Chang Se-moon
Korea’s economic development since the end of World War II has been truly remarkable.
Korea hosted the Asian Games in 1986 and the Summer Olympics in 1988, joined the OECD in 1996, and is the host of the G-20 summit in 2010.
OECD reported that Korea’s GDP per person in 2007 was $24,800, and Korea is currently one of the top 10 exporters in the world. The beginning of this phenomenal growth, however, was not all that pretty.
When Japan surrendered unconditionally to the Allied Forces on Aug. 15 in 1945, the date also marked the end of the 35 years of Japan’s occupation of Korea. In September 1945, the Allied Forces Supreme Command also announced what was then thought to be a temporary split of Korea into two along the 38th parallel. On Aug. 15, 1948, South Korea was born through the U.S.- sponsored general election, while on Sept. 9 in 1948, North Korea was born with the backing of the Soviet Union.
What was a life like at that time? Professor Choi Ho-jin tells us that when the Japanese occupation ended, most industries were owned by the Japanese and there was no industrial basis for the new Korea to rely on. From 1946 to 1948, there were shortages of everything, half the government budget was in deficit and was funded by the printing of more money, leading to a rapid inflation.
In less than two years after the new Korean government was formed, North Korea invaded the South on Jun.
25 in 1950, and the Korean economy again came to a grinding halt. When the Korean War ended on July 27, 1953, Korea had to crawl up from the total destruction of its economy. How was Korea able to achieve such remarkable development from complete wreckage?
For any economy to be able to grow, it has to have national security. That security umbrella was provided by the United States through the U.S.-Korea Mutual Defense Treaty that was signed in January 1950. The Treaty did not prevent the Korean War from breaking out, but on cessation of the war provided a secure environment that continues today. Even the relationship between Korea and Japan became cooperative with the signing of the Korea-Japan Agreement on June 22, 1965. The Korea-Japan Agreement is better known as the Japan-Korea Agreement outside Korea.
Although the stock market opened in August 1955, the rest of the 1950s were more for survival than for growth.
The hard times continued through the first half of the 1960s. Signs of economic life began to appear, however. Currency reform was carried out in March 1961 to control inflation by converting 10 “hwan” to 1 won. The first five-year economic plans were announced in January 1961. These plans were renewed in 1966, 1971, and again in 1976, providing the roadmap for Korea’s subsequent development.
Five-year economic plans were designed to industrialize Korea though massive support of selected industries and ultimately achieve economic independence.
To be successful, Korea had to earn foreign currency reserves. This recognition led to what former Prime Minister Nam Duck-woo characterized as export-oriented outward development strategy. It is important to understand that the success of the export-led development strategy was made possible, largely due to goal-oriented government leadership, highly educated technocrats, and hard-working Korean people who were well-educated.
The government role was particularly noticeable in pursuing the export-led industrialization policy. According to Nam, the Korean government had to take the initiative in the 1960s in almost all areas of development by introducing new institutions, building social infrastructure, negotiating with foreign governments and international organizations, undertaking strategic investment projects and mobilizing people to fulfill development objectives.
Argument in favor of a stronger market economy appeared much later in the 1990s, long after the Korean economy overcame many initial hurdles in economic development.
Role of Education
The role of education should not be underestimated. Korean parents have long been obsessed with fervor for child education. Some believe that the emphasis on education is based on Korea’s Confucian heritage. In the 1950s and 60s, parents literally sacrificed themselves to provide better education for their children. The Korean manpower in the 1960s was like oil or natural gas in capped wells that was about to explode and ready to accept the challenge the government presented.
Many Korean parents sent their children overseas for education sometimes even at pre-school ages. When these youngsters were sent overseas, usually to the U.S., their mothers went with them, leaving the fathers at home.
These men were sometimes referred to as wild “goose dads.”
Korea’s industrial policies in the 1970s were centered on the promotion of exports, self sufficiency in grains such as rice, and heavy industry. By all accounts, these policies have been successful.
The share of manufacturing and mining in gross national product averaged 15.7 percent from 1963 to 1973, but increased to 31.5 percent from 1987 to 1991. The share of exports in gross national product averaged 14.5 percent from 1963 to 1973, but increased to 31 percent from 1987 to 1991.
As the growth of the Korean economy continued in the 1980s, some interesting developments also emerged.
One was the growth of Korean conglomerates known as chaebol, the family- owned business groups. The government support of the private sector during the early years of development inevitably led to the creation of chaebols.
Some chaebol such as Samsung and Hyundai eventually became worldclass businesses, contributing significantly to the speeding up of the economic growth.
The other interesting development was the increase in lawsuits in other countries against Korean products.
These lawsuits may have been responses to the increasing competitiveness of Korean products in world markets.
According to a POSCO study, the number of lawsuits in foreign countries against imports from Korea numbered only five in the 1960s, but increased to 59 in the 1970s, 171 in the 1980s, and at least 114 in the 1990s.
The market economy on which Korea’s development relied on was not meant to be smooth sailing. Sure enough, a severe financial crisis hit the Asian countries when businesses in Thailand were not able to make payments on overseas loans. One of the major causes of the 1997-98 Asian financial crisis was that the domestic value of domestic currencies was arbitrarily low so that businesses could borrow money cheaply from other countries.
When Korean businesses borrowed money from other countries, for instance, all they had to pay was the then exchange rate of 800 won, not the real cost of 1,200 won, for every dollar they borrowed. This means that foreign loans were cheap and Korean businesses borrowed more than they should have. When short-term profits were not large enough to cover debt obligations, a crisis unfolded. In November 1997, Korea requested help from the IMF. Korea paid off the IMF loans ahead of schedule, however Korea was applauded as a model country which successfully surmounted financial crisis, with combined efforts by the government and citizens.
Korea also paid serious attention to one key ingredient for development, which is technology. Korea established the Ministry of Science and Technology in 1967, and the Korea Institute of Electronics Technology (KIET) in 1976 as part of the 4th five-year development plan. Korea also enacted a law for the Promotion of Technology Development in 1972. All these early efforts appear to have paid off and led to many Korean companies such as Samsung Electronics, LG Electronics, Hynix Semiconductor, and others, competing successfully at the cutting edge of global technology these days.
Korea’s success has been largely thanks to strong but efficient governance, competent economic planners, an educated workforce, and hard-working people, all of which together made the Miracle on the Han River possible.
|Who Is Chang Se-moon?
The writer is a professor of economics and director of the Center for Business & Economic Research at the University of South Alabama. Chang received his B.A. degree from Seoul National University and his Ph.D. degree from Florida State University. Chang was president of the National Association for University Business & Economic Research (AUBER); president of the Korea-America Economic Association (KAEA); president of the Planning Division for Human Services, United Way of Southwest Alabama; president of the Homeless Coalition of Mobile; and general chair of the Mobile United.
Currently, he is an associate editor of the North Korean Review, a columnist to The Korea Times, and a panelist of the quarterly CESifo World Economic Survey.