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South Korea’s Catching-Up Process

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Abstract

In the 1960s, about two decades after Japan’s economic takeoff, also South Korea underwent a period of extended growth and managed to rise to the ranks of high-income countries. This Chapter sheds light on the factors that enabled the “Miracle on the Han River”. It analyzes the South Korean export promotion strategy as well as the subsequent HCI drive (including the associated building up of macroeconomic imbalances), and the role that chaebols and industrial policies played in this context. In addition, the Chapter discusses why South Korea was hit so hard by the Asian Financial Crisis, which drastic (IMF imposed) reforms had to be undertaken, and in how far the economic situation and policy reactions differed during the Global Financial Crisis.

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Fig. 3.1

Source World Bank (2021). Notes GDP per capita in constant US$2010

Fig. 3.2

Source World Bank (2021), own calculations

Fig. 3.3

Source Maddison Database

Fig. 3.4

Source Frank et al. (1975), Yoo (2017)

Fig. 3.5

Source Cho (1989)

Fig. 3.6

Source Kwack (1985), Yoo (1991)

Fig. 3.7

Source Kim (1990)

Fig. 3.8

Source Lee (1991: 452)

Fig. 3.9

Source Lee (1991: 452)

Fig. 3.10

Source Nam (1993: 156, Table 6.1). Note “AA” stands for automatic approval

Fig. 3.11

Source Cho (2002a: 50)

Fig. 3.12

Source Cho (2002a: 50)

Fig. 3.13

Source IMF, International Financial Statistics (IFS) (2021). Note Won per U.S. dollar, period average

Fig. 3.14

Source Ministry of Foreign Affairs and Trade (MOFAT) data, Cho (2012: 11, Table 3). Notes ASEAN = Association of Southeast Asian nations; EU = European Union

Fig. 3.15

Source Yoon (2011)

Fig. 3.16

Source Koo (2011). Notes Grade C: “signs of insolvency but viable”; Grade D: “nonviable”

Fig. 3.17

Source IMF, Global Economic Outlook

Fig. 3.18

Source Bank of Korea

Notes

  1. 1.

    South Korea first became a high-income country in 1993, then briefly lost its position after the 1997 financial crisis, and in 1999, it regained high-income status.

  2. 2.

    For an overview of South Korea’s presidents between 1948 and 2020, see Table 3.2.

  3. 3.

    The output share of mining increased from 1.08 to 2.25%.

  4. 4.

    According to Jeon and Kim (2000), the tenancy rate declined from 52.4% in 1944 to 5.2% in 1955.

  5. 5.

    However, such a rapid expansion of the educational system was also associated with problems such as overcrowded classrooms and double or even triple shifts in 40% of all classrooms (Lee 2008; Sorensen 1994). Therefore, some researchers argue that the rapid expansion came at the expense of quality (Lee 2012).

  6. 6.

    See Park (2019) on synergy effects between land and educational reforms.

  7. 7.

    Cf. Economic Planning Board (1961).

  8. 8.

    As we will see, also throughout the subsequent 5-year plans, the policy course changed according to the varying economic conditions as well as changing views on the role of the government and markets (Park 2018).

  9. 9.

    Regarding the main driver of the rapid export expansion in the 1960s, there are partly opposing views. Early studies in the 1970s argue that the development strategies switch from import substitution to export promotion in the middle of the 1960s and the less interventional trade policy as well as increased liberalization were the main reasons for increasing exports (Cole and Lyman 1971; Frank et al. 1975; Hong and Krueger 1975; Krueger 1979). In the late 1980s, economists began to increasingly underline the importance of industrial policy, including subsidies, tax incentives, and administrative support (cf. Rodrik 1995). More recently, the foreign exchange system reform of 1961 came more in the focus of research (see Yoo 2017).

  10. 10.

    Cited in Lal (1986).

  11. 11.

    Moreover, Taiwan had succeeded to mobilize savings and stabilize inflation after increasing the interest rates (Cho 1989).

  12. 12.

    The third point of the Nixon doctrine states: “Third, in cases involving other types of aggression, we shall furnish military and economic assistance when requested in accordance with our treaty commitments. But we shall look to the nation directly threatened to assume the primary responsibility of providing the manpower for its defense”.

  13. 13.

    However, Lane (2019) finds that while South Korea’s HCI policy positively impacted forward-linked industries it negatively impacted backward-linked industries.

  14. 14.

    The interest rates of the NIF and some of the special funds (Machinery Industry Promotion Fund) were 3–5% lower than the interest rates of general bank loans (cf. Cho and Kim 1997; Kim 1990).

  15. 15.

    The import liberalization ratio is defined as the automatic approval items divided by the total number of commodity class.

  16. 16.

    According to Collins and Park (1989), this opportunity was “good fortune”.

  17. 17.

    According to Sakong and Koh (2010), the ZBB most likely also had an announcement effect.

  18. 18.

    Namely 98.6%, cf. Kim and Seong (1997).

  19. 19.

    Nam (1993) reports even lower levels for the 1980s (23.7% for 1983 and 19.3% for 1987).

  20. 20.

    However, the strong yen also led to an increase in the prices of capital imports from Japan for South Korean companies, which, in general, had a negative effect on the current account balance. As shown in the data, the positive effect of the yen appreciation outweighed the adverse impacts (Cho 1995).

  21. 21.

    Perkins (1997) distinguishes between four phases of economic policy experience. While the first two phases are marked by President Park, the third phase with the election of President Roh in 1987 and President Kim in 1993 are the cornerstones for the fourth phase of increasing democracy. However, as Perkins (1997) notes, the increasing democratic influence was based on reform ideas that were already developed in the previous phase.

  22. 22.

    An excellent overview of the most important financial liberalization measures during the 1990s is provided by Chang et al. (1998: 737, Table 1).

  23. 23.

    Among others, Australia, Britain, Canada, France, and Germany.

  24. 24.

    Cf. New York Times (1997) 04.12.1997.

  25. 25.

    Lee (1999b) reports that the call rate was first raised by 8.4 percentage points between the 1st and 3rd December 1997 (from 12.3 to 20.7%). On the 23rd of December, it then further increased to 30.1%.

  26. 26.

    However, this policy was subsequently reversed and the South Korean government was allowed to maintain a budget deficit of up to 0.8% of GDP (Shin and Chang 2003).

  27. 27.

    These guarantees are also referred to as cross-debt guarantees. One affiliate guarantees to pay back the debt of another affiliate in case that this affiliate is not able to repay the debt on its own (Graham 2003a).

  28. 28.

    Six swaps of businesses among the chaebols that were actually implemented included (1) the annexation of Kia motors by Hyundai motors, (2) the takeover of Samsung motors by Renault, (3) the merging of Aerospace portions of Hyundai, Samsung and Daewoo into the Korea Aerospace Industries, (4) Semiconductor portion of LG went to Hyundai, (4) the takeover of power components of Samsung Heavy Industries and Hyundai industries by Korea Heavy Industries and Construction (Hanjung) (cf. Heo and Woo 2006).

  29. 29.

    That is, this debt was not subject to any repayment burden.

  30. 30.

    The increasing presence of foreign bank branches was the consequence of the liberalization measures installed after the Asian Financial Crisis (see also Sect. 3.9.3.2).

  31. 31.

    Please note that all information on the number of firms assigned to each grade is obtained from Koo (2011).

Abbreviations

ADB:

Asian Development Bank

AFC:

Asian Financial Crisis

ASEAN:

Association of South East Asian Nations

BIS:

Bank of International Settlements

CD:

Certificate of Deposit

CDMA:

Code Division Multiple Access

CDO:

Collateralized Debt Obligation

CESP:

Comprehensive Economic Stabilization Program

CMO:

Collateralized Mortgage Obligation

CPI:

Consumer Price Index

ED Plan:

Economic Development Plan

EPB:

Economic Planning Board

EXR:

Exchange Rate

FDI:

Foreign Direct Investment

FI:

Financial Institution

FR:

Foreign Reserves

FSC:

Financial Supervisory Commission

FSS:

Financial Supervisory Service

GDP:

Gross Domestic Product

GFC:

Global Financial Crisis

GNI:

Gross National Income

GNP:

Gross National Product

HAN:

Highly Advanced National R&D

HCI:

Heavy and Chemical Industry

HDTV:

High Definition Television

IBTDP:

Industrial Base Technology Development Project

ICT:

Information and Communication Technology

IFS:

International Financial Statistics

ILO:

International Labor Organization

IMF:

International Monetary Fund

ISI:

Import Substitution Industrialization

KAIST:

Korea Advanced Institute for Science and Technology

KAMCO:

Korea Asset Management Corporation

KDI:

Korean Development Institute

KDIC:

Korea Deposit Insurance Corporation

KIST:

Korea Institute of Science and Technology

LTD:

Loan-to-Deposit Ratio

M&A:

Merger and Acquisition

M2:

Money Supply 2

M3:

Money Supply 3

MBS:

Mortgage Backed Securities

MIC:

Ministry of Information and Communication

MOFE:

Ministry of Finance and Economy

MOU:

Memorandum of Understanding

NBFI:

Non-Bank Financial Institution

NIF:

National Investment Fund

NPL:

Non-Performing Loan

NRP:

National R&D Project

OECD:

Organisation for Economic Co-operation and Development

OPEC:

Organization of the Petroleum Exporting Countries

POSCO:

Pohang Iron and Steel Company

R&D:

Research and Development

SME:

Small and Medium-Sized Enterprise

SOE:

State-Owned Enterprise

SSA:

Sub-Saharan Africa

TFP:

Total Factor Productivity

USA:

United States of America

WDI:

World Development Indicators

ZBB:

Zero-Based Budgeting

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Appendix

Appendix

See Table 3.10.

Table 3.10 Economic Development (ED) Plans, 1962–2007, overview

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Glawe, L., Wagner, H. (2021). South Korea’s Catching-Up Process. In: The Economic Rise of East Asia. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-87128-4_3

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