Source: COMPARATIVE ECONOMICS IN A TRANSFORMING WORLD ECONOMY by J. BARKLEY ROSSER, JR.
,
and MARINA V. ROSSER
South Korea Political Economy
19 North and South Korea: The Lingering Shadow
of the Cold War
THE SOUTH KOREAN ECONOMY
The Stages of Development and Indicative Planning
The South Korean economy has been a global superstar, having experienced the highest rate of real per capita
economic growth in the world during 1980–1992.
Growth slowed somewhat but was still impressive during 1993–1997,
but then it fell into a sharp recession in 1998 as South Korea suffered severely from the Asian financial crisis.
It recovered quickly the following year but has slowed down somewhat since.
In conjunction with the crisis, President Kim Dae Jung instituted a wide-ranging reform effort that followed
-IMF recommendations to privatize the banks,
-reduce the size and power of the chaebol,
-and open the economy to greater capital mobility.
Some critics suggest that it was the effort to do this when the ROK joined the OECD a few years earlier that made
South Korea vulnerable to the international financial speculative attacks.
that came from outside after the Asian financial crisis started in
Thailand and spread to Indonesia and the Philippines.41
The East Asian NICs have much in common:
-a strong emphasis on education and a tradition of hard work associated with the Confucian
heritage,42
-significant state infrastructure development, and a strong market orientation.
Nevertheless, these economies exhibit major differences,
South Korea having more state involvement in its
-economy and higher levels of corporate concentration in the chaebol than the others.
-most indicatively planned market capitalist economies, sharply contrasting with the laissez-faire
system of Hong Kong.
-Whereas the chaebol dominate the South Korean economy more than do the keiretsu in Japan,
Taiwan’s economy has a competitive small-business market structure in most industries.
The ROK had a pathetic start after 1945 (the period of U.S. military rule from 1945 to 1948)
was a complete loss in terms of economic growth, and production in most sectors declined.
The main achievement of the Syngman Rhee regime (1948–1960)
- was land reform (which laid the groundwork for later increases in agricultural productivity.43)
Whereas GDP grew at an annual rate of about 3 to 4 percent during 1953–196044 per capita income
-Barely rose because of rapid population growth45 and remained under $100 per year.
The Rhee regime was
corrupt,
mismanaged macroeconomic policy,
was excessively protectionist with a strong import substitution policy,
and began some of the chaebol through political links.
Student demonstrations in 1960
-brought down the government,
-and elections were held.
But in 1961 Park Chung-hee took power in a military coup and ruled
-until his assassination in 1979.
His authoritarian regime instituted
-indicative planning and initiated the takeoff of rapid growth.
Some argue that the growth occurred despite of planning,
and that it was currency and exchange rate unification,
budget deficit reductions,
and the shift from import substitution to export promotion that caused the expansion. 46
Others argue that the Park regime’s manipulation of market prices and investment significantly stimulated the high
growth rate.47
In contrast to both Japan and France,
the Economic Planning Board (EPB) in South Korea could force government budgets to be in accord with
its plans.
Table 19-2 summarizes the performance of the plans.
In general, actual performance outstripped planned targets.
1) Initially came the Nathan Plan, developed in 1954 by a U.S. consulting firm. Not implemented, it
underlaid Park’s First Five-Year Plan beginning in 1962.48
This first plan of guided capitalism had little detail and was revised in 1964 to emphasize industrial
growth rather than food self-sufficiency at the time of the macroeconomic stabilization.
Its goals were to increase energy production, grain production, and import substitution industries. Government
provided one-third of investment funds.
Sources: Data for the first five plans are from Paul W. Kuznets, “Indicative Planning in Korea,” Journal of
Comparative Economics 14 (1990): 670, and for the remaining two are constructed from the same source, p. 662;
Asian Development Bank, Asian Development Outlook 1992 (Hong Kong: Oxford University Press, 1992), p. 84;
Economist Intelligence Unit, Country Report: South Korea, No. 1 (1993): London: The Economist 3; and Dilip K.
Das, Korean Economic Dynamism (New York: St. Martin’s Press, 1992), p. 3. Actual growth figures are from
“Leading Economic Indicators,” Korea’s Economy 2001, Vol. 17 (Washington, D.C.: Korea Economic Institute,
2001), front table.
The Second Five-Year Plan (1967–1971) resembled the original version of the First Five-Year Plan, but it emphasized
textile exports as a leading sector and increasing the public sector for social overhead capital investment. 49 This plan
was more detailed, having been developed from an input-output model of the economy. Actual performance easily
exceeded targets for the first two plans.
The Third Five-Year Plan (1972–1976) emphasized balanced regional development and improved quality of
life for workers,50 focusing on rural development through the new village movement to utilize excess rural labor for
rural revitalization. It had a prescriptive rather than an indicative drive to build up heavy and chemical industries,
which was implemented partly by the government taking over the banks and directly controlling investment, a policy
many thought was overdone. Plan performance exceeded targets, despite the first oil price shock, but foreign
borrowing left the ROK with a large foreign debt burden that remains today.
The Fourth Five-Year Plan (1977–1981) was the only one to fall short of its targets. Industrial policy shifted
toward electronics, machinery, and shipbuilding, with lower foreign borrowing. The second oil price shock combined
with the political upheavals following President Park’s assassination by the Korean CIA director in 1979 to thwart
this plan. The year 1980 was the only one since the Korean War in which the ROK had negative economic growth
except for 1998. General Chun Doo-hwan seized power in 1980 and ruled until he retired voluntarily in 1988.
After Park’s death, planning shifted back toward the looser indicative style from the more command-like
prescriptive style.51
The Fifth Five-Year Plan (1982–1987) had sectoral goals similar to those of the previous plan, adding price
stabilization, regional equality andsocial welfare, and the encouragement of competitive market forces, the last
directed at the powerful chaebol, which had sharply increased their share of output during the previous decade. This
plan exceeded its targets with the aid of declining oil prices, declining world interest rates, and the appreciation of the
yen. Japan then US- the ROK’s trading partners and has been its leading source of licensed technology.52
The Sixth Five-Year Plan (1987–1991) expanded state welfare programs and emphasized domestic research and
development. It also called for liberalization of the financial system, which had been strictly controlled,53 including
partial reprivatization of the banks, while curbing ongoing real estate speculation. This plan also exceeded its targets.
The Seventh Five-Year Plan (1992–1996) moved further toward high technology and greater free marketization under
the new democratic regime of Kim Young Sam. During 1992 and 1993 this plan was below its target, but was above
it again in 1994 and 1995. Debates over the role of indicative planning in South Korea resemble debates in other
countries with such planning. Critics charge that sectoral targets have been wildly off and that outperforming planned
targets proves the uselessness of plans rather than their effectiveness.
They also point out that when planning had a strong element of command in the 1970s, inefficiencies arose as
investment became overly focused on heavy industry and chemicals.54 Defenders of planning claim beneficial effects
of the information-sharing mechanism arising from the planning process similar to that in French-style concertation,
as discussed in chapter 7.55 But the recent trend has been toward looser indicative planning, (especially under Kim
Dae Jung and the influence of the IMF after the 1997 crisis).
South Korea’s high degree of state intervention relative to the other NICs reflects its higher levels of industrial
concentration due to the chaebol.56 Domination of the ROK economy by a small number of large firms simplifies
information gathering and coordination between planners and decision-making managers. The chaebol have benefited
from this planning, particularly its industrial policy aspect.
Industrial Policy and the Chaebol
South Korea has followed Japan with respect to industrial policy, viewing imitation as key to competing with the
former colonial master. In both countries, the pattern of exports and imports evolved as each country climbed a
developmental ladder from exporting primary commodities and low-skill, labor-intensive products to higher-skill,
high-technology ones.
In both countries infant industry protectionism was used, often backed by state-directed investment, until the next
targeted industry achieved a certain level of development and exports.
The Korean pattern of development has involved decade-long spurts.
During 1946–1953 the country generally produced simple commodities and imported many goods.
For 1954–1962 the import substitution strategy was top priority.
In 1963–1972 labor-intensive light industries led export expansion.
During 1973–1982 the emphasis was on capital intensive heavy industries.
The period 1983–1992 saw the shift to technology-intensive industries based on the strong technical
education of the South Korean population—between 1953 and 1986, the number of scientists and engineers rose from
4,157 to 361,330—and exploding R&D spending, which rose between 1971 and 1986 from 10.67 billion to
1,523.28 billion won.58
From 1963 to 1987 the percentage food and live animal exports fell from 21.6 to 4.3 and that of industrial
raw materials exports fell from 28.4 to 1.6, while the percentage of engineering products exports rose from 5.7 to
41.9.59 The driving engines of this expansion were the chaebol.
The chaebol are more like Japan’s prewar zaibatsu than the modern keiretsu. Like the keiretsu they are technically
groups of companies60 rather than a single conglomerate. But all the companies in the group are entirely owned by a
single family, thus making them more like the zaibatsu.
The major difference between the chaebol and both Japanese forms of enterprise is that the latter had or have a
(Japanese) bank at their base, whereas the chaebol do not.
For an extended period of time all the banks in South Korea were state-owned, making the chaebol dependent on state
credit institutions.61 Privatizing banks has been a major aspect of recent reform efforts in South Korea.
The major chaebol developed in two generations. Samsung and Lucky-Goldstar are the largest of the first generation,
which began during the Syngman Rhee regime in the 1950s.
The second generation began in the 1960s under the Park regime, and Hyundai and Daewoo were its largest members.
A few chaebol developed out of old firms founded by Japanese capitalists, Sunkyong being the largest of these.
In 1997 these five were the largest chaebol in the ROK by sales, their rank order being Hyundai, Daewoo,
Samsung, Lucky-Goldstar, and Sunkyong.
By 2001 this had changed, with Daewoo’s bankruptcy and the partial breakup of Hyundai, with a clear top
five in order: Samsung, Hyundai “MH” Group, Lucky-Goldstar, Sunkyong, and Hyundai Motor.
The share of all exports from the nine largest chaebol trading companies rose from 13 percent in 1975 to 54.2
percent in 1984.62 The share of GDP attributable to the 10 largest chaebol rose from 15.1 percent in 1974 to 67.4
percent in 1984, the three largest alone being responsible for 35.8 percent of 1984 GDP,63 an almost unheard-of degree
of concentration in a market economy.
The chaebol were encouraged under Rhee and Park, especially under Park if they went along with
government plans. But concern about concentration led Chun to pressure the chaebol to open up ownership to the
public and to sell some less related subsidiaries. Pressure on the chaebol intensified under Kim Young Sam because
of links between them and the previous military regimes, especially on Hyundai, then the largest.64
Despite these efforts, domination of South Korea’s economy by the chaebol is likely to continue. The most likely
mechanism for ending chaebol domination would be their failure to grow while new firms grow faster.
This has been the pattern in the United States and other mature industrialized economies, where older and larger firms
have often lost their dynamism. This pattern represents a possible threat to South Korea’s dream of continued rapid
growth, especially relative to other NICs, such as Taiwan, with comparable levels of education but much lower levels
of industrial concentration.
The most intense efforts to reform and restructure the chaebol came under Kim Dae Jung in the aftermath of the 1997
Asian financial crisis and in response to pressure from the IMF when it provided a financial bailout for the ROK. The
high indebtedness of the chaebol, which reflected their de facto soft budget constraints produced by the state-owned
banks, were denounced as examples of Asian crony capitalism. Reforms involved privatizing the banks, reducing the
debt levels of the chaebol, increasing the transparency of their affiliations and governance structures, and reducing
their size by pressuring them to spin off related companies.
The most dramatic development in connection with the chaebol came in 1999, when the second largest one, Daewoo,
experienced a financial crisis and was forced into official bankruptcy and extensive restructuring. Daewoo’s problems
arose because it went against the government’s request to downsize and had gone on a binge of debt accumulation to
buy up troubled companies during the broader financial crisis.
However, despite breaking up Daewoo, the government established a bond stabilization fund that has continued to
prop up its remnants, although Daewoo’s founder was forced out of the firm’s management.
South Korea among the NICs
Among the rapidly growing East Asian economies are four subgroups based on relative per capita incomes. These
subgroups exhibit a Gerschenkronian relationship with each other:
Growth rates tend to decelerate for the highest-income East Asian economies and to be higher for the lowest income
ones.
At the top is Japan, the regional leader, which since the early 1990s has been in a state of stagnation or even
recession (as described in chapter 6 in terms of the flying geese theory).
At the bottom and growing rapidly is the People’s Republic of China (PRC), as discussed in chapter 15.
The second highest group is the upper tier of NICs: Hong Kong, Singapore, Taiwan, and the ROK. The lower tier of
NICs, lying below them but above China, includes Thailand, Malaysia, and Indonesia, although China may be
surpassing some of them, much as Singapore and Hong Kong have surpassed Japan in some ways.
Table 19-3 presents data on the characteristics and performance of the seven upper- and lower-tier NICs. Generally,
the ROK compares well with its fellow upper-tier NICs except for its foreign indebtedness.
Within the upper-tier NICs, Taiwan and South Korea are closer to each other than to the others in many ways. Hong
Kong and Singapore are both almost completely urban, with virtually upper-income status, whereas Taiwan and South
Korea are still middle-income countries with substantial rural sectors, though close to becoming upper income. Taiwan
and South Korea have in common experience as Japanese colonies prior to 1945, being the capitalist portions of
systemically divided nations, and having recently moved toward democratization of their political systems.
Important differences between them include that, relative to Taiwan, South Korea has
1. fewer small businesses,
2. a lower savings rate,
3. a less equal income distribution,
4. less agricultural production,
5. less FDI,
6. more borrowing from abroad,
7. more state ownership of enterprises,
8. more regulation of industry,
9. a more overvalued exchange rate,
10. a more closed and restricted credit market,
11. more controlled markets,
12. and more real estate speculation.66
Many of the NICs experienced sharp recessions and currency devaluations during 1997, along with capital flight and
stock market crashes.
The countries worst hit were Indonesia and Thailand, while the least affected were those dominated by ethnic Han
Chinese: Singapore, Hong Kong, and Taiwan. South Korea experienced sharp negative impacts but rebounded more
swiftly than the other countries that were hit hard.
However, South Korea’s unemployment rate remained substantially higher than it had been in the past—over 6 percent
even in 1999 compared to around 2 percent prior to the crisis.
The distribution of income became noticeably more unequal; the Gini coefficient remained about .283 between 1990
and 1997 but then jumped to .316 in 1998 and to .321 in 1999. 67
This crisis provided a permanent dent in the reputation of the Asian tigers that will not disappear soon.
