Dr Gift Mugano
South Korea was separated from the North Korea in 1945. Between the years, South Korea was involved in a war which led to destruction of productive capacity and social infrastructure and loss of million of the Korean people.
After the war, South Korea had the following initial of dominant agricultural sector, with no capital formation in agricultural sector, abundant labour, poor natural resources, small private sector, weak technology base and low per capital income ($69-70).
The government then developed and the economic development plan covering period of 1962 – 1996. The government was motivated by the need to eradicate poverty, achieve economic autonomy and have legitimacy of military government since it was occupied by the United States forces.
This blueprint was implemented in five-year plans with annual growth rates averaging remarkable rates of between 7 percent and 10 percent.
First and second five-year plan emphasised on light industries, export-oriented development plan, investment in social infrastructure and development of key industries.
Third and fourth five-year plan, after success of the first and second five-year plan the government went on to upgrade industry and trade structure, develop defence industry, set up industries to manufacture intermediate inputs through its import substitution strategy.
Fifth five-year plan, government went on to implement heavy capital investment projects and the implementation of stabilisation programme (Industrial restructuring strategy).
Sixth and new economy five-year plan, after successfully implementing the inward looking approach dumped the strategy to outward oriented strategy.
This was through trade liberalisation, institutional reform and deregulation to promote private sector. The Government set up the Economic Planning Board (EPB) which was responsible for planning co-ordination, monitoring with other ministries and budget allocation.
Economic reconstruction and import substitution policy (1953-1960)
The government created import substitution policy on trade, capital and foreign aid. Protective measures for domestic industries were high tariff, quota restriction and prior import approval.
Initial import substation phase for non-durable consumer goods and their materials (flour, sugar, and textile), however, failed to establish the manufacturing sector and small domestic market was saturated.
Government embarked on post-war reconstruction which was completed. It went on to adopt regulated financial market by the government and low interest rate policy to encourage borrowing for local investment in manufacturing sector. Government also adopted multiple exchange rate system which was favourable for exports and penalised importers. As a result, foreign exchange rate was overvalued.
Policy reform and exported-led industrialisation policy (1961-1965)
The Park’s government set up the first 5-year economic development plan beginning 1962, and has achieved remarkable performance since then the country adopted export-led industrialisation policy and utilised abundant-labour.
The country exported labour-intensive manufactured goods promoted by government policy. The government switched to single floating exchange rate system from multiple exchange rate system, but still crawling peg policy.
However, it continued to adopt various incentive schemes for export promotion, i.e. income tax reduction, the rationing of medium and long-term loans, wastage allowance, import-export links, tariff exemptions on imports of capital goods and others. The Government tactfully adopted shortly high interest rate policy to mobilise domestic savings.
Heavy and petro-chemical industrialisation policy (1966-1979)
The government made “Heavy and Petro-chemical Industry Development Plan”. The strategic industries were shipbuilding, automobiles, steel products, machinery, metals and petro-chemicals. It shifted to capital-intensive industries from labour-intensive industries.
However, this required huge amounts of capital with long gestation period of investment and risk. As a result, the excessive investments in this project caused severe distortion in resources allocation at the expense of the labour-intensive industries.
The share of output in heavy and petro-chemical industry increased to 50 percent in 1980 from 33 percent in 1970 and began to appear as one of important export items. World market was very favourable later.
Industrial restructuring and the shift to open system (1980-1996)
The petro-chemical industry was severely hit by the second oil shock and socio-political situation was in turmoil due to military coup. New government adopted economic stabilised programme and also undertook industrial restructuring of the existing projects based on market function. Reduced government intervention encouraged private sector incentives. Since the mid-1980’s, Korea has to open up her market to resolve bilateral restrictions with US and other Western countries due to their chronic trade deficits since the 1970’s.
Import liberalisation was to promote international competitiveness of domestic industries which was protected. Korea’s labour market became tight, resulting in higher real wage and labour-intensive industries moved to Southeast Asia.
Korea’s industries were shifted to high tech industries such as micro-electronics, bio-tech, new metals, and information industries. High tech industries required large-scale investment, which is risky due to the short life cycle of product.
The government embarked on industrial restructuring and stabilisation policy. This saw government undertaking industrial restructuring of the existing projects based on market function, reduced government intervention and encouragement of private sector incentives
The stabilisation policy aimed at ensuring price stability and balance of payment of equilibrium. The country witnessed high economic growth through rising exports of heavy industrial capital products. This was blessed by “Three lows”: low oil price, low interest rate and weak (low) US dollar. As a result, export growth in HIC products led to continued growth of current account surplus.
Financial crisis and policy reforms (1997-2006)
The road to success was not easy as the economy went into financial crisis. The major causes of the financial crisis were, weak and lagged financial sector/lack of transparency, government intervention in capital markets, financial liberalisation under fixed exchange rate system, lack of consideration of exchange rate risk, high short-term capital inflow/excessive borrowing, term-mismatch of assets/liabilities of external debt, premature liberalisation of financial institutions, failure of prudent supervision of financial institutions, panic and moral hazard in financial sector, weak macroeconomic management by government and over-investment in key sector (real estate/heavy industry).
The government made a number of financial sector reform which include the strengthening enforcement of prudential and capital adequacy requirements.
Summary of economic performance
The economy shifted from agriculture to manufacturing. Exports rose from US$ 100 million in 1964 to exports exceeded to US$1 Billion 1971 and exports exceeded US$10 Billion 1977. Between 1960 and 2008, exports increased by 14 000 times while foreign reserves shot up by 1 300 times.
Other achievements/scale of Korean economy
South Korea is first in the world in ship building with 35,2 percent of world production followed by Japan with 29 percent. It is again first in DRAM making with 48,5 percent of world production. She is fifth both in automobile production with 5,5 percent of the world output and iron and steel production with 4,3 percent of world output.
The rankings in the world by sectors reveal that South Korea is third in the world in domestic films with a staggering 59 percent of world market, nineth in research and development investments, sixth in the world in patent rights and fifth in the world in foreign reserves.
In addition South Korea boasts of successful international brands such as Samsung, KIA Motors, Hyundai Motors, Sony to mention but a few.
I had an opportunity to visit Seoul, the capital city of South Korea in May 2009. During my three week stay, I had also an opportunity to visit KIA Motors, Hyundai Motors, POSCO and various companies. Seoul smells money!
The infrastructure and state of development together with the highlighted achievement above one would be forgiven to doubt that South Korea’s economy was one point in time in 1945 poor than our in laws in Ghana.
Factors which led to success of these strategies
These programmes were supported by the masses through Saemaul Movement (New Village Movement) and Saemaul Movement. These were Government-initiated Community Movement. These communities were involved in large-scale investment projects which were undertaken for the improvement of physical infrastructure and farm income; changing rural people’s way of thinking and life style by means of educational campaign.
There was also increased emphasis on rural infrastructure development; road, village restructuring and water supply under initiated in 1972. The Government got foreign aid from 1954 – 1961 which they utilised properly.
There was also foreign capital inflow between 1965 – 1997. It received repatriation fund loans after normalization of diplomatic relations with Japan in 1965. The Bank of Korea provided repayment guarantee for foreign loans, external debt guarantee by public body. There was administrative support from the Government as it provided a platform for monthly export promotion meeting. For the period from 1963 – 1979 there were 177 meetings were held.
These meetings included the President, Prime Minister, Deputy Prime Minister and Key Ministers as key leadership and supporting institutions like Korea International Trade Association, Korea Trade Investment Promotion Agency, Federation of Korean Industries and Korea Chamber of Commerce.
These meetings would get briefings on export developments, bottlenecks and constraints and proposed solutions.
The Government implemented export targeting strategy where each firm set export targets based on projected sales abroad. This seems simple and straightforward but is not. African leaders and institutions in many cases lose focus.
The Korean development experience may provide diverse lessons with the peoples of developing countries. Some they may be useful lessons even now. However, international environments have been change now, and they may not be transplanted to developing countries since they have different historical, cultural, political, institutional and socio-economic apparatus. What is clear from this case study is that economic development is not only dependent upon economic factors but also non-economic factors such as political stability, strong willingness and commitments to development by people and Government, and good governance, etc.
- Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness. He is a Research Associate of Nelson Mandela Metropolitan University & Visiting Lecturer at the University of Zimbabwe’s Graduate School of Management. Feedback: +263 772 541 209 or gmugano@gmail.com