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The Korean Miracle (1962–80) Revisited: Myths and Realities in Strategies and Development

  • Kwan S. Kim
Chapter
Part of the International Political Economy Series book series (IPES)

Abstract

South Korea’s ‘rags-to-riches’ development is often cited as a ‘man-made’ miracle. It is a miracle in the sense that in the span of the past three decades the country underwent the kind of structural transformation that today’s industrialized countries took almost a century to achieve.1 The transformation was accomplished with relatively equitable income distribution by international standards.2

Keywords

Direct Foreign Investment Foreign Investment Comparative Advantage Real Wage Capital Good 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 1.
    From 1954 to 1986, the mining and manufacturing sector increased its share of GDP from 12.0 per cent to 30.2 per cent with the share of agriculture in GDP decreasing from 44.6 per cent to 13.5 per cent. There was also a rapid change in the structure of foreign trade. In 1962, primary products accounted for almost three quarters of total exports with industrial products accounting for a quarter. By 1982 manufactures reached 94 per cent of the total exports. Heavy machinery and chemical products began to comprise an increasingly larger share in composition of exports, reaching close to a half of the total exports.Google Scholar
  2. 2.
    See Adelman (1974), Mizoguchi, et al. (1976), and Choo (1987).Google Scholar
  3. 3.
    Per capita income for 1962 was recorded at $87 in 1979 prices.Google Scholar
  4. 4.
    For the unique features of the Korean development, including the quality of the labor force, see the concluding section.Google Scholar
  5. 5.
    Since 1962 the real income of the poorest groups has risen at about the same rate as GNP with actual declines registered in their relative share in the total population: the proportion of the population considered poor fell from 40.9 per cent in 1965 to 9.8 per cent in 1981 and to 5.1 per cent by 1987. The land reform in 1949 provided a foundation for equitable growth. For instance, between 1947 to 1964 tenant farmers fell from 42 per cent of the total farm households to a mere 5 per cent, while tiller-owners increased from 16.5 to 72 per cent. Although the incidence of absolute poverty has diminished, the distribution of income in the relative sense seems to have worsened in recent years.Google Scholar
  6. 6.
    See discussion below on labor policy. Also Kim (1992).Google Scholar
  7. 7.
    See for instance, Balassa (1985), Bhagwati (1985), and Krueger (1980). For opposing views, see Amsden (1989), Jones and Sakong (1980), and Sen (1983).Google Scholar
  8. 8.
    The active government investment support, however, gave rise to budgetary deficits and exerted inflationary pressures on the economy in the early 1970s.Google Scholar
  9. 9.
    Real domestic savings doubled in 1965 and again doubled by 1967. The velocity of money was reduced, halving the rate of inflation over what it would have been without the cut in velocity induced by the change in the interest rate; the incremental capital output ratio declined by 30 per cent; and the investment rate rose as fast as the increase in savings permitted.Google Scholar
  10. 10.
    In passing, it must be noted that the practice of sector targeting, beginning in the Fifth Five Year Plan during the 1980s, has been gradually phased out as the economy becomes increasingly sophisticated and complicated to manage. Except for the high-tech sector which continues to receive government support, measures that can benefit all indiscriminately are now being implemented.Google Scholar
  11. 11.
    The earlier Second Five Year Plan (1962–1966) was fairly comprehensive in scope and rigorous in contents as it relied on sophisticated input-output tables. This framework was an attempt to provide an intersectoral investment plan consistent with accelerated growth of the economy. Because of inadequate resources devoted to the planning, the framework quickly became inadequate for projections after two years of use. Subsequently, top policy makers in Korea did not find that comprehensive, centralized planning would be of much material assistance in executing policy decisions. Instead, they adopted a more decentralized ‘indicative’ planning method.Google Scholar
  12. 12.
    For the details of incentive measures, see Hong, W. (1979) and World Bank (1981b).Google Scholar
  13. 13.
    The Korean experience thus differs from the neo-classical argument that price reforms are necessary for both informational and allocative purposes. I thank Howard Stein for reminding me of this difference.Google Scholar
  14. 14.
    Real export incentives were maintained at a relatively constant level after 1964, while sporadic efforts were made to reduce import restrictions. A World Bank study (1977b), demonstrated that, despite market variations from industry to industry, the average tariff rates were quite low (averaging about 9 per cent in 1965) even by international standards.Google Scholar
  15. 15.
    The public was constantly reminded of the importance of exports through cermonies, monthly export promotion meetings, and the presentation of awards to those who achieved most. Exporting was considered a patriotic duty.Google Scholar
  16. 16.
    This export success, however, should not make one forget that imports also kept growing at a quite considerable pace. From 1962 to 1980, imports attained an average growth of 20 per cent. This was much slower than export growth. It was not easy for Korea to hold imports down since the bulk of them were fuel, raw materials, and intermediate goods that went into the production of its exports.Google Scholar
  17. 17.
    A more meaningful indicator should incorporate other incentive and disincentive instruments, such as all forms of subsidies including interest subsidies, access to imported inputs or price reductions on overhead inputs.Google Scholar
  18. 18.
    This was largely caused by the appreciation of the Japanese yen that contributed to a two and a half fold increase in the real value of exports during this period.Google Scholar
  19. 19.
    The term ‘technology exports’ is used here in a broad sense to include the transfer of all forms of technical and engineering know-how including intergovernmental technical assistance and training.Google Scholar
  20. 20.
    Two legislative acts passed in the mid-1970s, the Technological Development Promotion Act and the Engineering Services Promotion Act, contained such provisions.Google Scholar
  21. 21.
    According to a study (Westphal et al. 1984, p. 510), in 1980 the basic interest rate charged to exporters of capital goods and related services by the Korean Export-Import Bank was 8 per cent and that charged to the buyers was 8.5 per cent, while the preferential rate on ordinary exporters was 12 per cent and the nonpreferential rate was 24.5 per cent.Google Scholar
  22. 22.
    The Korean Export-Import Bank, established in 1976, operates insurance and guarantee schemes, along with provision of export credit.Google Scholar
  23. 23.
    The Hyundai group (ranked eighth), followed by two other Korean firms, were the largest contractors among the developing countries (Engineering Export Promotion Council of India, 1981).Google Scholar
  24. 24.
    Direct foreign investment and international subcontracting have not been important in most Korean exports. Nor was the technology transfer emanating from foreign investment a significant factor.Google Scholar
  25. 25.
    Korea’s import policy in the 1980s became more liberal, particularly after 1985 when the country began to generate trade surpluses vis-à-vis the United States. The import liberalization ratio rose to 80 per cent in 1983, and to 95 per cent in 1988 when the number of the restricted items under a negative list system, in which import-prohibited items are to be listed, was drastically reduced to a few hundred. The tariff rate coninued to be reduced with the average rate for all imported products falling from 24 per cent in 1983 to 18 per cent by 1988. These measures notwithstanding,some imports, mainly the products in agricultural, chemical, machinery, and pharmaceutical industries, remained subject to restrictions either by inclusion in the negative list or through a series of protective laws and regulations. The basic thrust of Korea’s trade policy continued to be a cautious and calculated management: nonessential imports would be allowed so long as the country could afford it and as long as they would not severely injure domestic industries.Google Scholar
  26. 26.
    For the formula used, see Nam (1980).Google Scholar
  27. 27.
    The total number of agreements during the period was 1974.Google Scholar
  28. 28.
    Major financial reforms in 1964–5 drastically enhanced the intermediary role of banks in private capital markets.Google Scholar
  29. 29.
    Domestic saving as a percentage of GNP rose from a mere 3 per cent in 1962 to 16 per cent a decade later.Google Scholar
  30. 30.
    The government, confident of an improved investment climate in Korea, set itself an ambitious target of attracting US $2.5 billion in foreign investment during the Fifth Plan period (1982–1986).Google Scholar
  31. 31.
    Except in the free export zones where full ownership by foreigners was permitted.Google Scholar
  32. 32.
    Of the 855 industries listed in Korea’s Standard Industrial Classification, 521 items including large-scale projects in capital-intensive industries such as machinery, metals, electronics equipment, and chemicals, energy related or export-oriented projects, projects for manufacturing foodstuffs and medical products, or projects contributing to the development of domestic resources or the commodity distribution system, have all been open to foreign investment.Google Scholar
  33. 33.
    In this regard, the recent Foreign Capital Inducement Act (1982) added three important benefits to investors. The first benefit was allowance for foreign equity sharing up to 100 per cent. This provision applied to those projects introducing high-level technology into Korea, or those undertaken in free export zones or otherwise contributing to increased exports. The second provision exempted foreign invested enterprises from income and corporate and capital gains taxes as well as from import duties under reasonable conditions. The provisions covering a technology contract were more generous. Foreigners could be exempted from wage and salary income taxes. Finally, the legislation guaranteed the outward remittance of dividend and the repatriation of capital.Google Scholar
  34. 34.
    The largest four conglomerates are Hyundai, Dae Woo, Samsung, and Gumsung, which together recently accounted for close to 10 per cent of total exports. Furthermore, 10 Korean conglomerates were recently listed among the top 500 corporations in the world excluding the United States in Fortune magazine.Google Scholar
  35. 35.
    Another important benefit from supporting big business was the political funds the President could count on from them. While industrial capitalists’ survival and prosperity depended on the goodwill of the state authority, it was not unusual for the benefitted to return the favor by financial contribution for political causes.Google Scholar
  36. 36.
    Alarmed by the trends in industrial concentration, the government, beginning in the early 1980s, instituted policy reforms to pursue counter-measures against trust formation and to support small and medium firms. They currently account for more than 95 per cent of the total number of enterprises in Korea, employing roughly a half of its industrial work force and producing about a third of the total industrial output.Google Scholar
  37. 37.
    Note that the rate of change in labor’s share of GDP reflects the difference between the rates of change in real wages and productivity.Google Scholar
  38. 38.
    For data on industrial disputes, see the Bureau of Labor (1978).Google Scholar
  39. 39.
    The labor movement in Korea took on a new dimension in recent years as the country entered a period of political liberalization. The state strategy of labor containment worked well in the earlier days of labor surplus under a political regime possessing a highly developed repressive capacity. In the environment of political liberalization, the grip of the state apparatus over civil society is being loosened, and in the case of Korea a labor shortage, particularly for unskilled workers, has been growing for some time. Thus, the sudden eruption of labor disputes witnessed recently was a natural consequence of these developments.Google Scholar
  40. 40.
    As of 1982, it has a population of 38.7 million in an area of 98,000 square kilometers.Google Scholar
  41. 41.
    In the FFDP the agricultural sector received close to 10 per cent of the total investment.Google Scholar
  42. 42.
    For example, the agrarian population declined an average annual rate of 2.98 per cent between 1967 and 1979 (Kim, Kajiwara and Watanabe, 1984). One reason for the widening gap was that more productive labor consisting mostly of young, male workers tended to migrate to higher-wage urban areas, leaving behind older, female and child workers. The argument of rural labor-redundancy in the neoclassical development model is a myth when applied to the Korean experience.Google Scholar
  43. 43.
    Despite the initial success with new varieties, they proved very susceptible to disease and cold weather. The government’s overpromotion without careful research and planning was the main cause of the poor harvest in 1980.(Steinberg et al., 1982)Google Scholar
  44. 44.
    For example, throughout the 1970s the total arable land increased 12.7 per cent.Google Scholar
  45. 45.
    Subsequent plan documents have not referred to the explicit role of government to avoid any misunderstanding with foreign businesses.Google Scholar
  46. 46.
    For instance, in formulating the Second Five-Year Plan, a comprehensive resource planning framework based on a sophisticated dynamic input-output model was employed to calculate the required amount of investment at the sectoral level.Google Scholar
  47. 47.
    By the late 1970s, however, it became clear that the implementation machinery was working too effectively. Private companies blindly followed the government’s lead without paying much attention to the underlying economic ills characteristic of inflation and distortions in the economy; too many production units were crowded into too few strategic sectors, resulting in too much capacity too fast. Some of these sectors did not really possess a comparative advantage, revealing distortions in the allocation of resources. Excessive aspects of the command structure were gradually being discarded in favor of more initiatives from the private sector, and businessmen were urged to pay more heed to market signals and profits.Google Scholar
  48. 48.
    There is no implication that the Korean model would not apply to resource-rich developing economies.Google Scholar
  49. 49.
    In 1949 for the first time in the history of the nation, the universal compulsory education system for six years of primary schooling was adopted. This paved the way for an educational revolution based on individual initiatives during the 1950s, boosting the 30 per cent literacy rate in 1953 to 80 per cent ten years later. By 1970, the country’s literacy rate was one of the highest in the world: the median period of formal education of Korean youths (25–34 age group) was 6.76 years, which was slightly lower than that of Japan (7.84) but higher than that of France (5.01) and far above that of India (0.70) (UNESCO, 1973). Since public funds were limited to the elementary level of education, higher-level education had to be financed mostly from private sources. Nonetheless, enrollment in high schools rapidly increased in spite of a high rate of unemployed high school graduates and the limited absorption of the graduates by colleges. The strong aspirations for education among the Koreans have been a factor contributing to a relatively well-educated labor force.Google Scholar
  50. 50.
    Under the centuries-old Confucian ideology in East Asian societies, civil services have been accorded highest social hierarchy as a position, attracting the best minds to enter.Google Scholar
  51. 51.
    According to an estimate (Kim, 1970, p. 28), Vietnam-war related revenue accrued to S. Korea for year 1967 alone reached as much as $185 million, accounting for about 4.0 per cent of Korea’s GDP in that year.Google Scholar
  52. 52.
    For instance, the gross incremental capital-output ratio was estimated at around 2.4 (Westphal and Kim, 1977, pp. 5–11).Google Scholar

Copyright information

© Palgrave Macmillan, a division of Macmillan Publishers Limited 1995

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  • Kwan S. Kim

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