Economic Development in Korea and China

Abstract

In 1960, South Korea’s GDP per capita was only $79. South Korea was one of the poorest countries in the world, as can be seen from a comparison with North Korea at that time, which had a GDP per capita of $177.

1 The Dynamics of Economic Development in Korea

1.1 From a Developing to a Developed Country

In 1960, South Korea’s GDP per capita was only $79. South Korea was one of the poorest countries in the world, as can be seen from a comparison with North Korea at that time, which had a GDP per capita of $177 (Hwang 2010, p.131).¹ However, through double-digit economic growth rates every year from the 1960s onward, South Korea recorded a per capita GDP of $569 in 1974, surpassing North Korea’s $520 and completely overtaking it thereafter. By achieving sustained economic development ever since, the GDP per capita reached $31,838 in 2019, almost on par with Japan. In 1996, the country joined the OECD, which can be regarded as joining the ranks of developed countries, and currently ranks about 10th in the world in terms of GDP.²

South Korea’s rapid and sustained economic development has attracted global attention and has been called the “Miracle of the Han River.”³ It achieved economic development by increasing its presence in the world economy through increased industrial production and exports.

1.2 Internal Factors Behind Economic Growth: Development of Economic Policy

In the 1950s, South Korea achieved postwar recovery from the Korean War by choosing import substitution industrialization centered on the processing of U.S. aid goods, mainly wheat, raw cotton, and raw sugar, but the growth rate slowed down with the decline in U.S. grant aid.⁴ Against this backdrop, there were a series of political upheavals, such as the April Student Revolution in 1960, followed by the May 16 Military Coup in 1961, which led to the establishment of the Park Chung Hee administration.

The Park Chung Hee administration lasted for 18 years (1961–1979), but despite opposition to a long-term dictatorship, it achieved political stability without a change of government and implemented consistent economic policies under strong leadership. In this sense, it was a typical example of a “developmental dictatorship.”⁵ Initially, the Park Chung Hee administration had an ambitious plan to give priority to the construction of heavy chemical industries at the initiative of the government. However, this was met with opposition from the United States, and the necessary capital mobilization proved difficult. Therefore, the government adopted an export-oriented industrialization policy, in which the driving force for economic development was the increase in exports of labor-intensive light industrial products that utilize cheap and industrious labor. One of the reasons for this was the availability of cheap labor due to the existence of surplus labor in rural areas. However, at this time South Korea did not only specialize in light industry, but also promoted the import substitution industrialization of the heavy chemical industry.⁶ The main players in economic development were not state-owned enterprises, but rather chaebol, a group of private companies characterized by family management. Today, these include Samsung, Hyundai, LG (originally Lucky Gumsung), and SK (originally Sunkyung), all of which have become world leaders in semiconductors, automobiles, and other industries.⁷ But until the 1970s at least, economic development was led by the government, as banks and other financial institutions were effectively nationalized, and the government had the authority to introduce foreign capital.

In the 1970s, there was an emphasis on autonomous national defense in response to détente and the reduction of U.S. forces in Korea, which in turn called for the development of a full-fledged defense industry. This prompted a government-led effort to develop a full-scale heavy chemical industry to support the defense industry. Although the South Korean economy was hit by two oil shocks, the heavy chemical industrialization that was aggressively pursued during this period, together with the international economic boom favorable for Korean export drive (low oil price, low interest rates, and low foreign exchange rates) that followed in the 1980s, supported sustained economic growth through increased exports. In this way, the country has achieved sustained development by seizing the right opportunities, thanks to efficient cooperation between the public and private sectors led by the government. Although the government has been criticized for favoring conglomerates, this was an inevitable aspect of Korean-style development.⁸

Then, at the end of the 1970s, the country faced the crisis of stagflation associated with the second oil shock. The Park Chung Hee administration’s adherence to government-led growth-oriented policies made it difficult to make the necessary policy changes. However, the demise of the Yushin regime with the murder of Park Chung Hee and the establishment of the Fifth Republic regime (1981–1988) of President Chun Doo Hwan made it possible to shift to liberalization and stabilization policies.⁹ In addition, during the economic crisis that forced the IMF to make an emergency loan under the conservative Kim Young Sam administration (1993–1998) at the end of 1997, the change of government to the progressive liberal Kim Dae Jung administration (1998–2003) led to the implementation of neoliberal policies, including raising flexibility of the labor market based on the limited cooperation of labor unions, and the reintroduction of foreign capital. The crisis was overcome in a little over a year by bringing foreign capital back into the country.¹⁰ In this way, the crisis could be overcome by political changes and governmental changes that brought about the necessary policy changes.

1.3 External Factors Behind Economic Growth: Constraints and Opportunities

The external environment surrounding South Korea has been important as a driver of its economic growth. However, it did not work unequivocally in the favor of economic growth; rather, it was used as an opportunity by the South Korean government and businesses. As a divided country under the Cold War regime, South Korea was forced to confront North Korea militarily, a condition that was supposed to be unfavorable for economic development due to the burden on the defense budget and investment risks. The economic stagnation of North Korea, which was placed under similar constraints as South Korea, was due to its inability to overcome the disadvantageous conditions of military budget burden and capital shortage.

The differences between South Korea and North Korea can be found in the following two points. First, while China and the Soviet Union, which were supposed to help North Korea together, in fact intensified their confrontation in the 1960s and 1970s, Japan and the United States effectively supported economic development and political stability in South Korea through the division of labor cooperation.

Second, the South Korean government adopted a foreign policy of turning the external constraints imposed by the Cold War system and other factors into opportunities for economic development. This included economic cooperation with Japan following the normalization of diplomatic relations between Japan and South Korea in 1965, and the continued stationing of U.S. forces in South Korea following the deployment of South Korean troops to Vietnam and the acquisition of special demand due to the Vietnam War (Kimiya 2011, pp. 72–78). Furthermore, in the 1970s, South Korea was faced with the challenge of fostering its own national defense and the defense industry that would support it as a result of détente such as the U.S.-China rapprochement and the reduction of U.S. forces in South Korea, and it actively used heavy chemical industrialization to upgrade its industrial structure. Then, from the 1980s onward, as the global Cold War was coming to an end, South Korea sought to improve its relations with the former communist bloc countries with its Northern Diplomacy, which led to the cultivation of the former Soviet Union and Central and Eastern European countries as South Korean export markets and investment targets. Furthermore, from the 1990s onward, with the normalization of diplomatic relations between China and South Korea, South Korea sought to strengthen its economic ties with China and use this as an opportunity to further develop its economy.

1.4 Japan-South Korea Relations from an Economic Perspective

After the normalization of diplomatic relations between Japan and South Korea in 1965, South Korea began importing industrial materials and machines from Japan and processing the materials to make labor-intensive light industrial products such as textiles and miscellaneous goods, which were then exported to the United States and other developed countries. As a result, the more the economy grew, the more imports from Japan and the trade deficit with Japan increased. In parallel with light industry, South Korea also promoted heavy chemical industry and introduced the necessary technology and equipment from Japan. Japan was tolerantly supportive over South Korea’s economic cooperation in the heavy chemical industry. This is because South Korea’s national security is directly linked to Japan’s national security, and there was a high level of interest in heavy chemical industrialization, which was necessary for the development of South Korea’s defense industry. Thus, economic cooperation between Japan and South Korea was “security-based economic cooperation” in the sense of cooperating for the sake of national security.

However, since the 1990s, with the end of the Cold War and the securing of South Korea’s superiority over North Korea, relations between Japan and South Korea have changed from asymmetrical complementary relations into symmetrical competitive relations. In economic terms, Japan and South Korea are in a competitive relationship. As a result, in addition to confrontation over historical issues, this competitive relationship in security and economy has become more pronounced and is more likely to escalate into confrontation (Kimiya 2021a, b).

1.5 Outlook for the South Korean Economy

Even after becoming a developed country, the South Korean economy experienced the IMF economic crisis of 1997, among other problems, but has managed to overcome them and laid the foundations for today’s advanced capitalist country. Especially in the field of IT, such as the semiconductor industry, the country is one of the world’s leaders. At the same time, however, rather than raising the level of South Korean society as a whole, an increase in non-regular employment and social disparities has become a serious problem. There is a mismatch between a highly educated society and the Korean job market, a declining birthrate, and an aging population that is advancing at a pace rarely seen in the rest of world, and preparations for the reunification through peaceful coexistence with North Korea (Onishi 2014). And in terms of the COVID-19 pandemic in 2020, South Korea succeeded in keeping the number of victims to a relative minimum thanks to its effective quarantine system but suffered a serious economic blow.

What direction will the South Korean economy take? In a political situation where there is a pronounced division between the conservatives and progressive liberals, will it be possible to secure political guidance that will provide a direction for the South Korean economy? Necessary policy changes have historically been secured through political or governmental changes, but we need to keep a close eye on whether these mechanisms will continue to be secured.

2 The Opening of China and Subsequent Reforms

2.1 Development Under Mao’s Rule

When the People’s Republic of China was established in 1949, it was not a socialist country. To win the hearts and minds of the peasants, the Chinese Communist Party (CCP) implemented land reform. They confiscated land and other assets and tools from landlords and distributed them to the peasants. In the cities, capitalists and owners of small businesses that supported the revolution were allowed to keep their assets. Only a few years later, however, Mao Zedong launched the movement of socialist transformation and most private assets were expropriated. The first Five Year Plan started in 1953 with the help of the Soviet Union, and by 1956, a Soviet-style planning system was established. In the countryside, agriculture was collectivized, and People’s Communes were introduced, despite reluctance and resistance among some of the peasantry (Uno et al. 1986).

Mao was not content with the Soviet style, centralized planning system. He was also displeased with the leadership of Nikita Khrushchev, who bitterly criticized the brutal reign of Joseph Stalin in his 1956 secret speech. With an aim to catch up with industrialized countries and lead the international communist movement Mao embarked on a unique development strategy called the Great Leap Forward in 1958. It relied on decentralizing power to the provinces and on the revolutionary spirit of the workers and peasants. But excessive decentralization and enthusiasm without scientific and technological basis resulted in a catastrophic famine that claimed tens of millions of lives (Dikötter 2010). Except for a short period of time in the early to mid-1960s when material incentives were reintroduced, Chinese economic growth relied on the increase in the factors of production while productivity stagnated.

2.2 The Advent of “Reform and Opening”

In 1966 Mao launched a radical, political movement called the Cultural Revolution. His motives included power and revolutionary idealism, and the violent movement caused havoc among the elite and the public. After Mao’s death in 1976, the CCP leadership decided to change course and prioritize economic development. Their new measures were reforming the planning system and opening the national economy to the outside world. The planning system was problematic in two ways. First, it was not flexible enough to adapt supply to demand and caused an inefficient distribution of resources. Second, it failed to provide provinces, enterprises, and individuals with enough incentives to improve their productivity and avoid wasting resources. In China, however, there was an additional issue. Unlike the Soviet Union and the East European countries that suffered from labor shortage, China’s planning system could not accommodate the increase in the labor force. Therefore, initial reforms included the following measures: introducing market mechanisms (i.e., liberalizing prices); fiscal contracting of revenue between the central and provincial governments with a view to promoting regional development; enterprise reform (i.e., making enterprises responsible for their profits and losses); dismantling People’s Communes and reviving individual farming; and allowing individuals to start private businesses. These were theoretically justified later in 1987 by the judgment that China was still on the initial stage of socialism (Zhao 1987).

Externally, Mao had to emphasize “self-reliance” after Khrushchev pulled out Soviet engineers from China in 1960. Sino-Soviet relations deteriorated and ideological disputes and even border clashes erupted. In the post-Mao era, Deng Xiaoping, the champion of reform and opening policies, understood the importance of technology and the need to import it from abroad. Under his auspices, Special Economic Zones were set up to invite foreign investment. Overseas Chinese and the Japanese were the earliest to invest big in China. In 1979, which was the year China normalized its relations with the U.S., Japan started to provide Official Development Assistance (ODA) and strongly supported China’s reform and opening (Kokubun et al. 2017). The CCP stopped supporting the revolutionary movements overseas and turned to a moderate diplomacy with a view to preserving a peaceful international environment conducive to development. However, international competition with the Soviet Union continued. China carried on with its external aid and called it South-South cooperation, which constituted an important means of diplomacy with the developing world.¹¹

2.3 The Politics of Reform and Opening

Since the 1981 downfall of Mao’s heir, Hua Guofeng, CCP has asserted that reform and opening began at the Third Plenum of the 11th Central Committee in 1978. In reality, what CCP decided then was to free themselves from the shackles of Mao’s previous decisions and instructions, and to place economic development as their top target (CCP 1978). However, individual farming was flatly denied, and it was as late as 1984 that the phrase, “reform and opening” (gaige kaifang) appeared for the first time in the People’s Daily.¹²

Reform and opening policies did not enjoy smooth sailing. First, there was the ideological hurdle, since planning was considered a top element of socialism. Chen Yun, who ranked equal to Deng Xiaoping in terms of Party career and authority, insisted that planning was primary, and market was secondary. Conservative cadres were also wary that the Special Economic Zones functioned as conduits for foreign capital and liberal ideas to infiltrate. Second, government officials in charge of industries resisted giving up their power over the enterprises they administered. Third, since prices of basic goods such as energy and transportation had been set arbitrarily low, price reform had to be introduced in a gradual, selective manner to avoid inflation.

The policy process of China’s economic reform in the 1980s evolved around three policy groups, which was a typical case of the politics of transitional economies (Takahara 1992). First, there were the central planners, who argued planning was primary and that centralization of economic power was necessary to achieve macroeconomic balances in goods and money. Second, there were the productionist reformers, who promoted marketization and decentralization for the sake of growth but were reluctant to cancel the economic power of the government agencies since the enterprises still lacked the management capacity to do well in business by themselves. Third, the financial reformers aimed at thorough marketization, viz. dissolving the bureaucracy that administered planning and establishing an economic system in which the central government regulated the market through fiscal and financial policies. When the announcement of price reform triggered a run on the banks and caused inflation in 1988, central planners such as Premier Li Peng took over the initiative in policy making and tightened financial control in the style of a command economy. This resulted in stagflation, which constituted the backdrop for the student protests in 1989.

2.4 June 4th: The Rise and Fall of Political Reform

Deng Xiaoping and his colleagues were serious about reforming the political system, albeit in their own way. In early 1979 they forcefully suppressed people’s cry for political liberalization that filled the big-character posters on the so-called Democracy Wall in Beijing. In 1982, however, they abolished the CCP Chairmanship and introduced a system of collective leadership to prevent power concentration in the hands of one person. Division of labor was introduced among the members of the politburo standing committee, and the General Secretary, the new top leader, had very limited power. Institutionalization and legalization of government constituted an important part of the reform design. For Deng, promoting political reform was also a means to demote Hua Guofeng, Mao’s heir, whom he criticized for upholding Mao’s deity and cultivating a personality cult for himself (Takahara 1998).

In addition, following the advent of economic reform, CCP leadership began to perceive the need for further political reform in two distinct ways. In 1986 Deng called for the separation of the party and government, democratization, institutionalization and decentralization to increase efficiency and deprive the intermediate bureaucrats of their power over the enterprises. While this was for promoting economic reform, then Premier Zhao Ziyang perceived the need to deal with the pluralization of social interests and conflicts between them, an issue that newly emerged in society as a result of economic reform. He advocated organizing social interests into associations, galvanizing trade unions to truly represent the interest of the workers and creating mechanisms through which the CCP could act as mediator and coordinator of the interest groups.

The latter type of reform allowed the emergence of independent social actors and inevitably relativized CCP’s power, and eventually the two lines of thinking clashed over the handling of the students’ pro-democracy movement in April–June 1989. After the June 4th brutal suppression of the movement and the demotion of Zhao, strengthening CCP leadership became the norm and political reform was put on the back burner. Although China-USSR relations were normalized by Mikhail Gorbachev’s visit to Beijing in May, the socialist camp in Eastern Europe collapsed later in the year and the Western nations turned against China in the wake of the June 4th Incident.

2.5 Deng Xiaoping’s Southern Tour

Although Deng picked Shanghai CCP chief Jiang Zemin as Zhao’s successor to continue with economic reform, criticism of marketization and the opening of China became dominant among leadership. As a result, the Chinese economy stagnated. After a failed attempt in 1991, Deng made a southern tour centering on Guangdong province in early 1992 to revive the tide of reform and opening. This time he gained support of the growth-hungry localities and proved successful, after his pep talks were taken up by the Hong Kong press and then “imported” back into mainland China.

Deng asserted that a policy is socialistic, and not ideologically heretic, if it was advantageous for increasing three things: comprehensive national power, productive forces, and people’s living standards (Deng 1992). He argued that the Soviet Union and Eastern European socialist regimes failed because of their bad economic performance; the Cold War ended, and China should not miss this opportunity for development. At the 14th National Congress held in September 1992, the CCP discarded planning from its charter and declared that it aimed at establishing a “socialist market economy.” The central planners were defeated, and since then a major economic policy debate involved financial centralism (pursuing macroeconomic balances) and entrepreneurial localism (pursuing local government-led growth).

2.6 The Socialist Market Economy: Contradictions and Solutions

The champion of bold reform measures was Vice-premier Zhu Rongji, acknowledged by Deng as someone that understood economics. Zhu took the initiative in breaking the “three irons” in state owned enterprises (SOEs), viz. “iron rice bowls, iron wages and iron armchairs,” meaning whatever happens there is no dismissal, no wage decrease and no demotion of cadres. This resulted in an increase in laid-off workers who protested by sit-ins and road blockages, but Zhu pushed through with determination. He also introduced new measures for macroeconomic control, including the central bank system, state-owned commercial banks separated from policy banks, and a modern taxation system.

Deng’s southern tour emancipated people’s desires and triggered a staggering growth in the Chinese economy. Per capita GDP jumped from somewhat above 300 U.S. dollars in 1991 to just below 1,000 U.S. dollars in 2000 (The World Bank 2021). However, serious debates erupted within CCP over the contradictions between socialism and the market system. Zhu Rongji had introduced a modern company system in which the management held authority over personnel affairs. This conflicted with CCP’s organizational principle that “the party manages the cadres.” For economic efficiency, turning SOE assets into shares was desirable to facilitate their circulation and achieve an efficient distribution of resources. From a political standpoint, however, this would lead to privatization and undermine the basis of CCP’s rule. Some localities quietly started to sell their deficit ridden SOEs, more so after the eruption of the Asian Financial Crisis in 1997 (Takahara 2006).

Many enterprises dealt with the conflict over personnel affairs by making party committee members executive board members, and vice versa. In 1999 the CCP decided that the vital element of the socialist public ownership system was its qualitative superiority and SOEs need not be quantitatively dominant except in key sectors of the national economy such as infrastructure, public utilities, and defense industries. Jiang Zemin announced in 2001 that the CCP would admit private enterprise owners. In the following year, the CCP changed its self-identification from the vanguard of the working class to that of the working class, the Chinese people and the Chinese nation. Thus, the CCP pragmatically adapted their ideology to reality without worrying about being labelled revisionist. The pantheon of orthodox Marxism-Leninism, the Soviet Communist Party, had collapsed by 1991.