Asian Economic History


Brief Economic History and Government Policy
Korea was one of the poorest countries in world after experiencing two wars. World War II and Korean war (1950 ~ 1953). The country even experienced a food shortage so that it had to heavily rely on the foreign aid. Yearly per capita consumption was a mere $88 as late as 1965. However, since 1965, Korea has been transformed from its underdeveloped agricultural economy to a leading Newly Industrializing Country. Between 1965 and 1981, its gross national product GNP multiplied twenty times from $3 billion to $63 billion and per capita GNP increased sixteen times from $88 to $1,554.
There have been many explanations for Korea's successful story. Among those, the strong role of government would be probably the most important one. At the same time, this would be also responsible for current recession.
After Koran war, the government in fact had no sense of direction and also due to the unstable political situation, the country didn't have specific economic policy until 1961 when military government came to power and established the major institution guiding its economic planning called Economic Planing Board (EPB). This government set economic development as the top national priority and recognized the financial system in support of economic development plan. To achieve this purpose, it focused its policies mainly on export expansion moving its emphasis from import substitution. The result was considered quite successful for economic growth. Between 1965 and 1973, exports grew at average annual rate of 45%, from $175 million to $3,271 million. The success of the expansion was due primary to three factors (Kwack, 72). The first was a favorable international economic environment, which saw total world imports expand from $175 billion in 1965 to $536 billion by 1973. This boom in imports of the world reflected the fact that the industrialized had not yet erected import barriers against exports from developing countries and were, on the contrary, quite active importers of cheaper goods from Newly Industrializing Countries such as Korea. A second significant factor was the Korean government's policy of promoting exports, which was set in motion in 1965. Initially, the government introduced a number of fiscal and financial incentives, which I will discuss more later. A third factor was Korea's abundant and highly productive labor force. This gave Korea a strong comparative advantage in producing labor intensive products and provided the impetus for the notable expansion for exports. In order to expand total exports over time periods, however, Korea turned to new export industries that were expected to have a comparative advantage with abundant labor, but skilled labor at this time, such as shipbuilding, electronics, and steel industries. This attempt was viewed as a manufacturing shifting of its emphasis from light industries to heavy industries which later started to produce intermediary goods as substitutes for imports (Kwack, 77). However, this government's promotion of heavy industries for large-scale economies led to under-investment in light manufacturing industries causing productive gap between small and large firms. Actually, the large firm that runs heavy industries has been given priorities, and small and medium firms relatively disregarded in government's allocation of loanable funds and other administrative preference. As a result, conglomerates later known as chaebol (family owned conglomerate) have been formed through this expansion of heavy industries.
Government's Policy Before 1961
As seen above, the Korean government has been focused on import substitution for economic growth during 1953 ~ 65 period and followed by export expansion policy after 1965. However, to progress its policy efficiently, the government had to face to one of serious problem, poverty. After two major wars, the country even with a food shortage experienced lack of capital. There was no source for savings and investment to finance economic growth domestically, so it depended heavily on foreign capital which inflow in a form of mostly aid and loan in the early stage of economic growth. The proportion of foreign capital to total capital formation in 1965 was approximately 40 percent.
In addition to inflow of foreign capital, the government faced allocation of capital with using its financial system. Before the military government in 1961, the loan decisions of commercial banks were heavily influenced by political interference (Haggard, 26). Well, in fact the loan decisions in Korea mostly were