South Korea’s Economic Development, 1948–1996
Summary and Keywords
At its independence in 1948, South Korea was an impoverished, predominately agricultural state, and most of the industry and electrical power was in North Korea. It faced a devastating war from 1950 to 1953, and an unpromising and slow recovery in the years that followed. Then, from 1961 to 1996, South Korea underwent a period of rapid economic development, during which it was transformed into a prosperous, industrial society. During these years, its economic growth rates were among the highest in the world. Under the military government of Park Chung Hee (Pak Chǒng-hǔi), which came to power in 1961, the state gave priority to economic development, focusing on a combination of state planning and private entrepreneurship. Possessing few natural resources, it depended on a low wage, educated, and disciplined labor force to produce goods for exports. As wages rose, economic development shifted from labor to capital-intensive industries. Focusing initially on textiles and footwear, South Korean manufacturing moved into steel, heavy equipment, ships, and petrochemicals in the 1970s, and electronics and automobiles in the 1980s. Two major reforms under the administration of Syngman Rhee (Yi Sǔng-man, 1948–1961) helped prepare the way: land reform and educational development. However, it was the commitment to rapid industrialization by the military governments of Park Chung Hee and his successor, Chun Doo Hwan (Chǒn Tu-hwan), that brought about the takeoff. Industrialization was characterized by a close pattern of cooperation between the state and large family-owned conglomerates known as chaebǒls. This close relationship continued after the transition to democracy, in the late 1980s and 1990s, but after 1987, labor emerged as a major political force, and rising wages gave further impetus to the development of more capital-intensive industry. In 1996, South Korea joined the Organization for Economic Cooperation and Development, being internationally recognized as a “developed state.” Although living standards still lagged behind those of North America, Western Europe, and Japan, the gap was significantly narrowed. After 1996, its economic development slowed but was still high enough to achieve a per capita income comparable to the countries of Western Europe and to shift from a borrower of to an innovator in technology.
Economic Development from 1948 to 1961
At its creation in 1948, South Korea ranked as one of the world’s poorest states. Twelve years later, in 1960, it remained so with a per capita income about the same as Haiti. A number of factors contributed to that poverty. South Korea was predominantly an agricultural society, but it did undergo some industrialization during the Japanese colonial rule, from 1910 to 1945, mostly in the northern provinces. The Japanese colonial administration created a professional civil service and an efficient, development-oriented state that worked closely with private business and banks to achieve economic targets. But it was a predatory, exploitative development designed to benefit Japan rather than Korea.
Korea was partitioned in 1945 by the Soviet Union and the United States, who then fostered the creation of two states: the Democratic People’s Republic of Korea (DPRK) in the north and the Republic of Korea (ROK) in the south. The DPRK inherited most of the industry, most of the mining, and more than 80% of the electric power generation. The ROK possessed most of the productive agricultural areas, but these were barely adequate to feed the densely inhabited country’s rapidly growing population. South Korea faced additional challenges: the repatriation of the large population of resident Japanese after the liberation resulted in a loss of many skilled workers, professionals, and teachers; an influx of refugees from the North; the loss of Japan as its main market for its agricultural exports; and a turbulent political situation in the country. These problems were compounded by the highly destructive Korean War, 1950–1953.
South Korea’s economic takeoff, its spurt of rapid industrialization and economic growth, began in the early 1960s under the direction of the military government. During nearly three decades of military-led governments, the economy was rapidly transformed in a process sometimes referred to as the South Korean “economic miracle” or the “miracle on the Han,” referring to the Han River that flows through Seoul. The years before 1961, by contrast, are dismissed as a time of stagnation, inflation, corruption, and dependence on foreign assistance. In fact, the period from 1948 to 1960 is sometimes seen as an interregnum between the development-oriented colonial state that preceded it and the military government that followed it.1 Real economic growth was only 4 percent a year, less than 2 percent per capita when the high birthrate is factored in.2 This real but modest rate of growth meant that, in 1960, the country was still extremely poor.
The years after the war, from 1953 to 1961, saw only a slow recovery despite the country being one the world’s largest recipients of foreign aid per capita. There was a lack of central planning and only modest investment in infrastructure. Misallocation of aid funds, government corruption, an unrealistically high exchange, political volatility, and the threat of renewed war with North Korea all made the country unappealing to domestic and foreign investors. Fear of recreating colonial dependency on Japan prevented Seoul from opening the country to trade and investment with its booming next door neighbor. With few natural resources, the country produced little that the rest of the world wanted, and its international trade was miniscule.
South Korea followed an import substitution industrialization policy typical of many postcolonial states after World War II. This was less a carefully constructed strategy for economic development than a rather haphazard system of protecting consumer industries such as food processing, textiles, and items such as toothpaste and soap. The over-valued currency kept its potential exports uncompetitive. South Korea’s exports in this period consisted mainly of small amounts of tungsten, rice, seaweed, iron, and graphite. In 1956, these amounted to $25 million against the import products amounting to $389 million, a huge deficit made up for by the infusion of U.S. aid funds.3 Almost all of the nation’s foreign exchange earnings came from the U.S. aid. In fact, the country was heavily reliant on American assistance, not only for postwar reconstruction but for public finances. American aid accounted for nearly 80% of all government revenues and a substantial portion of South Korea’s entire gross national product (GNP). Foreign aid, along with the inflated exchange rate, was also used to support crony capitalism. The state under President Syngman Rhee had close ties to elements of the business community, but these were used as a means to finance the regime by channeling U.S. dollars into government coffers. The government gave out import licenses to favored businessmen to buy commodities. Since the official exchange rate of the hwan did not reflect any market reality, this meant that import licenses were highly profitable.
Nonetheless, some of the basic foundations were being laid out for the country’s later economic growth. As riddled with self-serving, corrupt officials as it was, the Rhee administration also had many able and talented people in the areas of economics, education, and finance. To these were added a steady stream of South Koreans who were going to the United States to study science, engineering, public administration, economics, education, and a variety of other fields. They often were employed as young technocrats by the government. In 1958, the administration created the Economic Development Council, a body of these technocrats that began to draw up plans for long-term economic development. The Rhee administration, however, collapsed in 1960, before they could be implemented.
More importantly, two fundamental changes took place in South Korean society before 1961 that contributed enormously to the country’s economic takeoff. One was the rapid expansion of education. From 1945 to 1960, the enrollment in primary schools increased three times its size, secondary schools more than eight-fold, and higher education ten times. By 1960, 96% of all children of primary school age were attending school. Additionally, state and private groups carried out highly successful adult literacy programs. As a result, South Korea, in 1961, had the best-educated work force of any country with a comparable income level. The other major change was land reform, carried out in 1950 on the eve of the Korean War, which limited property holdings to 7.5 acres (3 hectares). In 1944, 3 percent of landowners owned 64 percent, but in 1956 the top 6 percent owned only 18 percent; tenancy had virtually disappeared.4 Traditional peasants became small entrepreneurial farmers, and many landowners invested in business or established schools.5 Land reform brought stability to the countryside and redirected much of the capital and entrepreneurial energy of the old landlord class toward commerce, industry, and education.
South Korea’s “economic miracle” began under the military government of General Park Chung Hee (Pak Chǒng-hǔi), who came to power in a coup in May 1961. The previous year had seen the overthrow of President Rhee’s authoritarian regime in a student-led revolt and a rather chaotic experiment in parliamentary democracy under Chang Myun (Chang Myǒn). Under Chang Myun, the government drew up a long-term plan for economic development that partially served as the basis for the new military regime.
The new military regime of Park Chung Hee did not have clear ideas about what to do about the economy. What it did have was a determination to end the country’s poverty. Partly this was a matter of national pride and a desire to free the nation from its “mendicant” status as an economic ward of the United States. Park questioned whether South Korea could preserve its “self-respect as a sovereign nation, independent, free, and democratic” while being so dependent on the Americans, who financed a little over half the government’s budget. This meant, he remarked, that the United States had “a 52 percent majority vote with regard to Korea.”6 Besides the desire to free their country from its economic dependency on America, the new military leaders were motivated by competition with a rapidly industrializing North Korea. It was clear that the country was falling behind North Korea, undermining Seoul’s claim as the legitimate government of all Koreans. Initially, the military leaders turned on the business community and its corrupt relationship between businessmen and the government. But after detaining and fining fifty-one prominent leaders, including Lee Byung Chull (Yi Pyŏng-ch’ŏl), the country’s richest, they began working closely with them to harness their entrepreneurial skills to the national effort at economic development. Park appointed thirteen to the Promotional Committee for Economic Reconstruction, with Lee as chair.7 In this way. the military government began its partnership with the country’s entrepreneurial elite.
Several steps were taken to direct the state toward economic growth: the development of five-year economic plans, the redirection of the economy from import substitution to exported-oriented industrial development, and state control over credit. The Park regime created an Economic Planning Board (EPB) staffed by technocrats to direct economic growth. The EPB head served as a deputy prime minister, outranking all other cabinet members. The state nationalized all commercial banks and reorganized the banking system to give control over credit.8 It then provided low interest loans to businesses according to the needs of economic plans. Most historians regard the First Five-Year Development Plan to be the point of economic take-off. Launched in 1962, it called for a 7.1 percent economic growth rate for 1962–1966, by encouraging the development of light industries for export. Despite skepticism by many American advisors that it was unrealistic, the target was exceeded with the economic growth rate averaging 8.9 percent, propelling South Korea on its path to rapid industrialization. Exports grew 29 percent a year, manufacturing 15 percent a year.9 A Second Five-Year Plan, 1967–1971, followed, which gave greater emphasis to attracting direct foreign investment and improving the basic infrastructure.10
A major feature of South Korea’s economic development was its focus on acquiring technical skills. The state created a number of centers to promote research and the dissemination of technical knowledge to business enterprises such as Korean Institute of Science and Technology (KIST), established in 1966. It also promoted technical education by expanding the number of vocational secondary schools and two-year technical colleges, and encouraged students to study abroad, although many of these did not return. At the same time, the Park administration made impressive progress in professionalizing the state bureaucracy. Officials received appointment through a highly competitive civil service examination system and were promoted based on clear guidelines for merit. Attracted by good pay and benefits, job security, and enhanced prestige, many of the country’s top university graduates as well as those with overseas degrees entered the ranks of the bureaucracy. As a result, a highly competent, respected set of officials were able to help guide and promote economic and social development.11
Since Park’s economic development policies were driven by economic nationalism and the desire to achieve autonomy for his country, he was concerned about avoiding foreign economic control. Consequently, he initially limited direct foreign investment into the country. Soon, however, on the advice of his economists, he began easing up on these restrictions. In 1966, the Foreign Capital Inducement Act exempted foreign managers from income taxes, provided tax holidays, and streamlined the process for investing in the country.12 Despite Park’s desire for autonomy, South Korean economic development was tied to the United States. Washington gradually began to reduce direct aid, but its technical assistance remained crucial to South Korea’s economic development. Perhaps most importantly, the United States absorbed the majority of the country’s exports. South Korea was also able to use political and military relations with the Americans for economic development purposes. Park sent 300,000 troops to support the Americans in Vietnam; in exchange, South Korean firms were to be given lucrative contracts to supply goods and services to the South Vietnamese, American, and allied military forces. South Korean firms such as Hyundai gained valuable experience in completing construction and transportation projects for the United States in Vietnam, experience that they applied to win contracts in the Middle East and elsewhere.
Japan was also important in South Korea’s economic development. Park normalized relations with Tokyo in 1965, over the heated objections of Koreans who feared a return of Japanese dominance, if not a revival of colonial hegemony. Korean cheap labor and Japanese capital and technology were a good match. In the years after the treaty, Japan was a major foreign investor in South Korea, second only to the United States. In the decade after the treaty, trade between the two countries expanded more than ten times; Japan supplied nearly 60 percent of foreign technology between 1962 and 1979.13 The U.S. market and Japan’s investments and technology transfers greatly facilitated South Korea’s economic transformation. Japan was also a useful model for imitation. During the colonial period and after, Koreans learned much from Japan about what a non-Western country could do to successfully modernize and industrialize. As one Korean put it, the policy of his country’s business community was “Do what the Japanese have done, but do it cheaper and faster.”14
In the 1970s, there were changes in the direction of economic development—a shift to heavy industry and the production of capital goods, accompanied by more restrictive policies on direct foreign investment. The change was motivated by a desire to become economically and politically autonomous. The United States started to appear less reliable as a military and political partner, as it established relations with the Peoples Republic of China in 1971–1972 and, as Americans began their withdrawal from Vietnam, President Nixon began calling for a reduction of U.S. forces in Korea. It now seemed to the leadership more urgent to make the country more economically self-reliant, able eventually to manufacture its own armaments and capital goods and to compete with North Korea’s own heavy industrial development. Self-reliance was reinforced in 1973 by new restrictions placed on direct foreign investment. The shift to these heavy and chemical industries required the government to play an even greater role in aiding and guiding industrial development. The companies favored by the Park regime were able to grow and expand, some into industrial giants.
The change in economic direction was accompanied by a more authoritarian turn by the Park regime. In 1963, the country was returned to civilian rule, although in reality, the power was still in the hands of the military. Park was elected three times in semi-open presidential elections: 1963, 1967, and 1971. Then, in 1972, he declared martial law and promulgated a new constitution that gave him nearly dictatorial powers. Using these powers, Park redirected the economy toward the development of heavy and chemical industries inaugurating the HCI (heavy and chemical industry) phase of South Korea’s economic development. In 1973, six industries were targeted: steel, chemical, metal, machine building, shipbuilding, and electronics. This stage of industrial development was concentrated in five small provincial cities, four of them in Park’s home area, Kyŏngsang, in the southeast part of the country: Yŏsu-Yŏchŏn, for petrochemicals; Ch’angwŏn, for machine-building; P’ohang, for steel; Okp’o, for shipbuilding; and the Kumi complex for electronics.15
Despite the fact that many foreign experts believed South Korea was neither ready nor large enough to support a heavy industrial base, the plan was largely successful. The economy grew by double digits despite a less favorable international situation in the 1970s. In the decade from 1972 to 1982, steel production increased fourteen times. The petrochemical industry did not become that competitive, but others such as steel, led by the state-owned Pohang Iron and Steel Company (POSCO), did. POSCO operated the world’s largest steel-making complex, an efficient operation that successfully competed in the world steel markets. Shipbuilding was another success story: in the 1980s, South Korea became the world’s second largest shipbuilder, with a reputation for being able to complete orders for new ships quickly and on time. These successes were tempered somewhat by the fact that the energy-intensive industries were launched at a time of sharp increases in petroleum prices, in 1973–1974. However, the outflow of foreign exchange to pay for more costly imported oil was soon compensated in part by the inflow of earnings from Korean construction companies and their workers in the Middle East. Thus South Korea weathered the economic crisis quite well. More serious problems were inflation, which reached an annual rate of 40 percent in late 1979, and the country’s mounting foreign debt. The country has become a major borrower to finance not just new investments but also huge infrastructure projects, such as expanded power generation, telecommunications, port facilities, and roads.
Big Business and the State
The South Korean government, after 1961, worked closely with selected business entrepreneurs to achieve development goals. These entrepreneurs created large family owned conglomerates known as chaebŏls. Eventually some grew to enormous size and came to dominate the economy. Under Park and his immediate successors, the state—through its ownership of the banks—poured credit into a few companies to develop industries targeted for development. The chaebŏls received exemptions from import duties on capital goods and special rates for utilities and the state-owned rail system. Firms engaged in enterprises not favored by the development plans found it difficult to gain access to credit: nor could they receive special discounts and exemptions. Each chaebŏl leader found it necessary to work closely with the government and contribute generously to pro-government political campaign coffers and to pet projects favored by regimes of Park and his successor Chun Doo Hwan.
A key to this alliance between big business and the state was the performance principle. The state constantly monitored chaebŏls to determine if they were using their support efficiently. They had to demonstrate their ability to produce results, that is, to efficiently meet economic targets and compete in the domestic and foreign marketplaces. When they were not performing well they lost state support. Thus performance in meeting economic targets, and not political connections, was the basis for preferential loans and other forms of state assistance. Another factor was that the government did not allow any chaebŏl to achieve a monopoly but rather encouraged competition among several in each industrial sector to keep them efficient. Corruption was generally not tolerated, at least the kind of behavior that reduced the efficiency of the firms. As a result, there was considerable fluctuation in the fortunes of the chaebol groups. Of the top 100 firms in 1965, for example, only 22 were in the top 100 for ten years. And only 30 of the top 100 firms in 1975 were still in the top 100 in 1985.16 The successful chaebŏls expanded rapidly, with the top ten conglomerates growing at three and a half times the GDP growth rate.17 As they grew, they tended to expand horizontally, branching out into a highly diversified range of activities, often far removed from their original core businesses.
Although most became publically traded, the chaebŏls were essentially family-run businesses. Family members held the top managerial positions with second tier offices staffed by those with school or hometown ties to them.18 Control was kept in the family by low inheritance taxes and marriage networks.19 Most were products of the post-liberation period. Of the fifty largest chaebŏls in 1983, only ten predated 1945.20 A majority were established in the 1950s and 1960s. Most were well established by 1980. Among those with colonial roots was Samsung, founded by Lee Byung Chull. Lee started out with a trading company in 1938. In the 1950s, he established the Cheil Sugar Refinery and the Cheil Textile Company. He developed a close relationship with the Rhee regime, which provided him with profitable import licenses in return for contributions to Rhee’s Liberal Party. Initially targeted by Park Chung Hee for corruption and cronyism, he soon established an important working relationship with the new military government. Lee’s new Samsung (Three Stars) group acquired a reputation for being efficient and well managed. Involved in many areas, in the late 1960s, Lee made electronics his prime focus. By the early 1980s, Samsung was one the world’s largest manufacturers of TV sets. In the mid-1980s, it moved into the semiconductor business promoted by the government.
Ssangyoung (Twin Dragons) was another older chaebǒl, originating in the late colonial period as a textile manufacturer. Under Park, its owner Kim Sung Kon (Kim Sŏng-gŏn) branched out into many industries, including trading, construction, and automobiles, becoming one of the six largest chaebŏls in the 1970s and 1980s. Most of the chaebǒl founders emerged after 1945. The most successful of these was Hyundai, founded by Chung Ju-yung (Chŏng Chu-yŏng), who started out with a construction company that worked for the U.S. Army and the Korean government. He came to the attention of the Park regime for his ability to complete tasks, such as a bridge over the Han River, ahead of schedule. After 1965, Hyundai Construction received many contracts to build in Southeast Asia during the Vietnam War, and in the Middle East in the 1970s. Chung established Hyundai Motors in 1967 to build the first South Korean car, which became known as the Pony. He established Hyundai Shipbuilding and Heavy Industries in 1973 in response to the HCI initiative. Later in the early 1980s, Hyundai entered the electronics industry and became in time the largest of the chaebǒls.
Another chaebǒl, Lucky-Goldstar was originally founded by Koo In-hwoi (Ku In-hoe) as Lucky Chemical Company in 1947, the country’s major toothpaste manufacturer.21 In the 1960s, he went into the electronics business under the Goldstar label. In 1995, the Lucky-Goldstar company changed its name to LG, eventually becoming one of the world’s largest consumer electronics firms. Daewoo began in 1967, as a trading company established by Kim Woo Jung (Kim U-jung). Having established a reputation for efficiency, Kim was given two failed enterprises—Shinjin, an unsuccessful automotive company, and the failing Okp’o shipyard—and managed to turn them into a major manufacturers of cars and ships. By the 1980s, South Korea’s economy was increasingly dominated by these largest of these family-owned conglomerates.
As the economy grew, South Korea underwent a radical social transformation. This was most clearly seen in the rate of urbanization. Millions of Koreans left their rural homes to find work in the urban areas. Parents sent their kids to the cities to get a better education, and their children seldom returned. In 1960, farmers made up 61 percent of the population. This fell dramatically to 51 percent in 1970, and to 38 percent in 1980.22 By comparison to the cities, development in rural areas saw much slower growths. In fact, industrialization in the 1960s came partly at the expense of the countryside, whose development was visibly neglected. Farmers suffered from low prices for their crops, prices set by the state to keep food relatively cheap. Then, in part to shore up his rural base of political support, Park launched the New Village (Saemaǔl) Movement in the winter of 1971–1972 to promote rural development. Local governments were enlisted in programs to educate farmers to modernize their farms and their homes. Much of this was carried out in a heavy-handed manner. For example, he ordered all rural households to replace their thatched roofs with tiles, which were more fireproof and considered more modern. These were expensive, and the poor often had to settle for corrugated metal roofs painted blue or orange to simulate tiles. Village committees were established to formulate and carry out their own improvement schemes. Rural-urban income disparities, however, were closed only in the 1980s and 1990s, when the state increased the prices it paid for the agricultural produce in order to protect farmers from the imports. As urban incomes rose, workers could afford higher food costs. In general, by the 1990s, there was greater income and regional equality than in most developing and many developed countries.
South Korea’s swift economic development was accompanied by an equally swift decline in the birth rate. The Park regime’s technocrats generally accepted the argument by Western advisors that cutting the birthrate was essential for fast economic growth and modernization. Working with the Planned Parenthood Federation of Korea, which was formed in 1961 by the International Planned Parenthood Federation, the state sent family planning staff to local clinics. In 1968, the Ministry of Health and Social Welfare created Mother’s Clubs for Family Planning and introduced oral contraceptives. A government program to recruit and train women in rural communities to instruct their neighbors in birth control proved effective. The state carried out major family planning campaigns in 1966 and in 1974 and began a female sterilization campaign in the 1980s.23 By the early 1990s, the birth rate had fallen to replacement level and soon fell below that. While family planning efforts were probably important at first, the country’s shift to smaller families was characteristic of most societies as they became more urbanized and more middle class, and as women became better educated.
Educational development also proceeded rapidly throughout the period from 1961–1996, with secondary education becoming close to universal in the late 1980s, and higher education enrollments reaching the levels of developed countries by the 1990s. Higher education enrollments, however, did not lead to a significantly higher percentage of labor participation by women who also entered the professional and managerial careers at much lower rates than that of most states at comparative levels of economic development. Health standards saw considerable improvement, with infant mortality rates matching those of most European countries by 1996. Consumer growth was lower than the GDP growth. Lack of a social welfare safety net encouraged high rates of savings, as did the bonus system, in which workers received bonuses, usually set aside for savings, up to 400% of the monthly salary. Consumer desire was also constrained by state policies, such as keeping the prices of luxury goods extremely high and restricting foreign travel.
A Maturing Economy
On October 26, 1979, President Park Chung Hee was assassinated. A period of political turmoil followed, compounded by the 1979 oil price hikes, a bad rice harvest, and an alarming 44 percent inflation rate, resulting in the economy contracting 6 percent in 1980. But the economy quickly recovered. The 1980s saw high rates of GDP growth, peaking in the years 1986–1988, at 12 percent annually the highest in the world. After that the growth rate slowed down, but the economy continued to expand through 1996 at an average rate of 7 percent.24
Chun Doo Hwan, another military man who had served as president from 1980 to 1988, continued Park’s developmental policies for the most part. However, as the South Korea economy matured in the 1980s and 1990s several major changes in the economy took place. Exports diversified and shifted to medium and high tech goods, with the industry becoming more capital and less labor intensive. Textiles exports declined in relative terms in the 1980s, replaced by consumer electronics, computers, and semi-conductors as lead exports. In 1983, the first Hyundai cars were exported. By then, the country had become one of the largest shipbuilders and steel exporters in the world. Export markets also became more diversified, with less dependence on the United States. A serious problem was massive trade imbalances with the United States, still the biggest overseas market, which led to American pressure on the ROK to adopt a code of voluntary restraints on exports. Despite large trade surpluses with the United States, the South Korean economy continued to suffer from trade deficits as a whole. This was due partly to large imports of oil to fuel its heavy industry, although a drop in oil prices after 1982 helped somewhat. The ROK also suffered from huge trade deficits with Japan, which supplied Korean firms with capital equipment and industrial parts. South Korea, however, maintained its ability to work out technology transfer arrangements so that this dependency on imported technology diminished over time. Government-funded research centers such as the KIST, meanwhile, made impressive strides in promoting technological and scientific expertise. Gradually, the country expanded its trade with Southeast Asia, Europe, and, significantly, with China, after 1991, when Seoul and Beijing opened trade offices in each other’s countries.
There was also a shift back in terms of attracting direct foreign investment and becoming less dependent on foreign borrowing. The country’s foreign debt rose from $2.2 billion in 1970 to $27.1 billion in 1980.25 It peaked at $47 billion in 1985, but declined after that.26 While the state reduced its foreign debt, however, corporate debt rose as the chaebŏls borrowed money to finance their expansion drive. To prevent overexpansion and needless duplication of investments the National Assembly passed a Chaebŏl Specialization Reform in 1993. The top thirty chaebŏls had to list core industries that would be their focus. This, however, was not effectively implemented; the number of subsidiaries owned by the major chaebŏls actually increased by 10% between 1993 and 1996.27
From 1987, economic development was impacted by democratization. That year the country held free and open elections for president, and the state lifted most political censorship, and many over of its controls over civil society ended or lessened. The administrations of the popularly elected presidents, former general Roh Tae Woo (1988–1993) and former opposition leader Kim Young Sam (1993–1998) did not possess recourse to the wide range of actions available to their predecessors. The era of strong-armed governments was over, and the economy had to contend with a newly empowered labor movement and a politically active middle class that now had a real input into policy-making processes. The years 1987, 1988, and 1989 saw widespread strikes and soaring membership in militant, non-government affiliated labor unions. Wages rose sharply in the late 1980s and early 1990s, in part due to the greater power of labor unions, the membership size of which increased approximately 15 percent a year. While benefitting millions of working class Koreans and increasing domestic purchasing power, wages from 1988 to 1996 rose much faster than productivity, threatening the competitiveness of Korean exports. Rising wages also contributed to inflation, leading to the appreciation of the won.
Democratization, likewise, brought about the end of some of the measures to control foreign exchange. For example, restrictions on foreign travel were ended in 1988, resulting in a surge of overseas tourism by the new middle class. Importation of luxury foreign products increased. The state countered this by carrying out campaigns to avoid “excessive consumption,” in some cases threatening tax audits for those who bought goods such as luxury foreign cars. However, the overall rise of consumption in the 1990s was further aided by increasing pressure from the United States and the signatories of the Uruguay Round of the General Agreement on Trade and Tariffs to open its markets. It also proved harder to discipline the larger chaebŏls that became “too big to fail”—their bankruptcies now risked damaging the national economy. There was also increasing concern among the public about the crony capitalism involving bureaucrats and politicians. Bribery, kickbacks, secret political funds, and bank accounts by officials and businessmen under false names were very much a part of the South Korean system. By the early 1990s, the pervasive corruption in business and government not only offended the moral sensibilities of the public but was also seen as a hindrance to the nation’s transition into a modern, First World country. A series of scandals in the mid-1990s, involving all nine of the leading chaebŏls and their connections with former presidents Chun and Roh, brought to light the depth of crony capitalism. Nonetheless, the same patterns of alliance among big business, the bureaucracy, and the ruling government persisted.
In 1996, South Korea became a member of the Organization of Economic Cooperation and Development (OECD), a thirty-member group of developed nations. Symbolically, South Korea had graduated from a developing country to the ranks of the wealthy developed nations. But it still faced many economic problems. South Koreans still worked among the longest hours of workers among the OECD nations, and the quality of life had not reached the levels of developed countries. Many South Korean companies had over-extended themselves, staying afloat only with low-interest loans from the state-controlled banks. The size of corporate debt reached frightening proportions when, in 1997, the Asian financial crisis hit the country, requiring an international rescue package. Newly elected President Kim Dae Jung carried out a number of needed reforms, forcing chaebǒls to reduce subsidiaries in order to concentrate on the core businesses and reduce their debt-equity ratios, and he carried out measures to liberalize the labor market. The effects were immediate, with a brief near double-digit growth rate during 1999–2000, and South Korea moved from a debtor to a creditor nation in just a few years. Unfortunately, the speedy recovery reduced the urgency for further needed reforms. The economy continued to be dominated by huge conglomerates with enormous economic and political influence. South Korea entered a period of slower growth after 2000, although it was still fairly high compared to most OECD members.
By 2017, the Republic of Korea had a global reputation for technological innovation, its GDP per capita was slightly above the EU average, and it ranked among the highest in the world in health standards and educational attainment. Yet it faced many challenges. China, which by 2004 had replaced the United States as South Korea’s largest trading partner, was a profitable market, but it was also becoming a formidable competitor. Unemployment, once negligible, was rising among both university and non-university graduates. The country had become a major exporter of entertainment, but other sectors of the service economy were underdeveloped. Many South Koreans feared that the domination of the economy by a few huge chaebǒls such as Lotte and Samsung (the latter the world’s third largest publically traded company by sales volume) was stifling many smaller start-ups and having too much influence on public policy. With one of the lowest birthrates and longest-lived population, it was facing an aging population, a shrinking workforce, and an inadequate social safety net. The country began importing immigrants, but it was difficult for such a highly homogeneous society to accept the challenges of multiculturalism. And there were concerns about air and water pollution and other environmental costs of its economic development. These were mostly the problems of a mature, prosperous, technologically advanced country, for by the second decade of the 21st century, that is what South Korea had become.
Discussion of the Literature
The so-called South Korean “economic miracle” has attracted considerable attention from students of economic development. Much of the literature, especially in the 1980s and 1990s, focused on explaining the reasons for the country’s successful development and drawing lessons for other developing nations. Some scholars have viewed South Korea’s economic growth as a product of a unique set of historical circumstances. These include the timing of its development—when there were fewer export-led economies to compete with—the openness of the U.S. market, the proximity of Japan at a time when the Japanese were seeking to move production to low cost countries, the rivalry with North Korea for legitimacy and the need to compete with it, and the relative lack of ethnic and sectarian strife in this homogenous society.28
Some scholars have pointed to the importance of U.S. aid, technical assistance, and the presence of U.S. troops to guarantee security and assure foreign investors. From 1946 to 1976, the United States provided $12.6 billion in economic assistance: only Israel and South Vietnam received more on a per-capita basis.29 Korean immigrants also played some role; they provided a link to the American wig business, to name one industry.30 Some historical studies have placed a great deal on the importance of Japan, providing some of the foundations during colonial rule and serving as a model to emulate.
South Korea’s economic development has often been examined within the context of the general rise of the Pacific Rim of Asia after 1950, and particularly as one of the “four tigers” along with Taiwan, Hong Kong, and Singapore. It has been argued that they were developmental states, a term coined by Chalmers Johnson for postwar Japan—states that gave overwhelming priority to economic development. Researchers have also seen South Korea along with most of the other miracle economies as possessing a strong state capable of overriding vested interests.31 The general interpretation is that South Korea inherited a powerful centralized bureaucracy and national police from the Japanese colonial administration, and that the security-minded American military occupation and the subsequent Syngman Rhee regime made use of these instruments to suppress leftist dissent and maintain internal security. After 1961, military rulers further centralized authority and directed the state toward economic development. The state then was able to achieve autarky and impose its will on society. This argument appears most valid for the 1960s and 1970s, when the military government was able to exercise discipline over the business class and suppress labor movements. Just how strong the South Korea state was and how important the role of business, labor, and other interest groups were in shaping policy has been a matter of discussion.32
Some Korean and Western writers tend to refer to the so-called “Confucian ethos” that contributed to the economic success of South Korea, along with that of Singapore, Hong Kong, and Taiwan. South Koreans came to attribute much of their success to these traditional values as well. By this, they mean hard work, discipline, respect for learning, frugality, and the importance of family, the emphasis on education, the high esteem in which civil servants were held that attracted talented technocrats to serve the state, and even to the willingness to delay gratification that resulted in the high savings rate that characterized the period of rapid economic growth. Yet, South Koreans possessed this “Confucian” heritage before 1961, as did North Koreans. Many scholars found it necessary to look at specific development policies and historical contingencies to explain the economic transformation of South Korea, including the roles played by land reform, by educational development, and by the ways the country achieved technical transfers.
A great deal of attention has been paid in recent years to the social cost of economic development. The suppression of labor and political dissent, the authoritarian nature of the Park Chung Hee and Chun Doo Hwan regimes, and exploitation of cheap female labor have been cited among negative consequences of rapid economic development. Hundreds of thousand young women worked and lived in cramped company dormitories called “beehives,” for long hours and low wages. But by concentrating close together, often suffering from sexual assault by police, they often organized and resisted. In the 1970s and to the mid-1980s, women participated in labor unions and in labor strikes at a higher rate than male workers. The role of women in the labor force constitutes a burgeoning new field for scholars of Korean economy.33 The labor force grew rapidly in the 1960s under Park’s drive for industrial development, but the workers were kept under tight restrictions. South Korea had a system of company unions relatively easy for large employers to control. Efforts to organize strikes were brutally repressed by the police. Corporate heads were quick to call upon riot police to break up demonstrations. They also employed thugs called kusadae (“save our company troops”) to beat up labor organizers, a practice that became common in the 1980s.34 Working conditions were often appalling, with scant regard to safety and long hours. Working conditions began to improve in the 1980s and 1990s, and the workweek peaked at 54.5 hours in 1986 and was even into the 1990s the longest in the world.35
A number of scholars have specifically examined the role of Park Chung Hee administration in promoting South Korean economic development. Some regard his authoritarian but disciplined and goal-oriented leadership as a key to the country’s economic take-off. Others have argued that he largely borrowed from the economic plans already drawn up by the democratically elected previous regime headed by Chang Myun, or that his heavy-handed policies were sometimes counter-productive.36 Other scholarship has looked at the close cooperation between state and business, including the network of corruption that has plagued the country. The exact nature of the cooperation has been the subject of a number of studies.37 Scholars continue to examine the concentration of the economy into a small number of family-owned and run chaebǒls.
Bank of Korea. Economic Statistics Yearbook (Kyǒngje t’onggye yǒnbo). Seoul: Bank of Korea. Published annually in Korean and English since 1960 with a great deal of statistical data.Find this resource:
Korea Herald. Many articles and editorials on economic and social issues since 1953; tends to be pro-government.
Korea Times. Contains many articles and editorials on economic and social issues in Korea since 1950; sometimes critical of government policies.
Park, Chung Hee. The Country, The Revolution and I. Seoul, South Korea: Hollym Corporation, 1970. President Park Chung Hee’s justification for his rule. Worth reading for the insights it brings into the thinking and aims of his regime.Find this resource:
Republic of Korea, Economic Planning Board. Economic Statistical Yearbook (Kyǒngje t’onggye yǒn’gam) Seoul, South Korea: Economic Planning Board. Published annually from 1961, contains statistics and other factual data in Korean and English.Find this resource:
Republic of Korea, Korean Development Institute. Social Indicators in Korea. Seoul, South Korea: Korean Development Institute. Published annually since 1979 with many useful statistics on economic and social development.Find this resource:
Amsden, Alice. Asia’s Next Giant: South Korea and Late Industrialization. New York: Oxford University Press, 1989.Find this resource:
Brazinsky, Gregg. Nation Building in South Korea: Koreans, Americans, and the Making of Democracy. Chapel Hill: University of North Carolina Press, 2007.Find this resource:
Chang, Chan Sup, and Nahm Joo Chang. The Korean Managerial System. Westport, CT: Quorum Books, 1994.Find this resource:
Chang, Kyung-sup. South Korea under Compressed Modernity: Familial Political Economy in Transition. Abingdon, U.K.: Routledge, 2010.Find this resource:
Eckert, Carter J. Offspring of Empire: The Koch’ang Kims and the Origins of Korean Capitalism. Seattle: University of Washington Press, 1991.Find this resource:
Eichengreen, Barry, Dwight Heald Perkins, and Kwanho Shin. From Miracle to Maturity: The Growth of the Korean Economy. Cambridge, MA: Harvard University Asia Center, 2012.Find this resource:
Heo, Uk, and Terrence Roehig. South Korea’s Rise: Economic Development, Power, and Foreign Relations. Cambridge, U.K.: Cambridge University Press, 2014.Find this resource:
Hundt, David. Korea’s Developmental Alliance: State, Capital, and the Politics of Rapid Development. London: Routledge, 2012.Find this resource:
Kim, Byung-Kook Kim, Ezra Vogel, and Jorge I. Dominguez, eds., The Park Chung Hee Era: The Transformation of South Korea. Cambridge, MA: Harvard University Press, 2011.Find this resource:
Kim, Choong Soon. The Culture of Korean Industry: An Ethnography of Poongsan Corporation. Tucson: University of Arizona Press, 1992.Find this resource:
Kim, Eun Mee. Big Business, Strong State: Collusion and Conflict in South Korean Development, 1960–1990. Albany: State University of New York Press, 1997.Find this resource:
Kim, Janice C. H. Kim. To Live to Work: Factory Women in Colonial Korea, 1910–1945. Stanford, CA: Stanford University Press, 2009.Find this resource:
Kim, Linsu. Imitation to Innovation: The Dynamics of Korea’s Technological Learning. Boston: Harvard Business School Press, 1997,Find this resource:
Koo, Hagen. Korean Workers: The Culture and Pattern of Class Formation. Ithaca, NY: Cornell University Press, 2001.Find this resource:
Lett, Denise P. In Pursuit of Status: The Making of South Korea’s “New” Urban Middle Class. Cambridge, MA: East Asian Research Center, Harvard University Press, 1998.Find this resource:
Lew, Seok-Choon. The Korean Economic Development Path. London: Palgrave Macmillan, 2013.Find this resource:
Lie, John. Han Unbound: The Political Economy of South Korea. Stanford, CA: Stanford University Press, 1998.Find this resource:
Nam, Hwasook Nam. Building Ships, Building a Nation: Korea’s Democratic Unionism under Park Chung Hee. Seattle: University of Washington Press, 2009.Find this resource:
Ogle, George E. South Korea: Dissent within the Economic Miracle. Atlantic Highlands, NJ: Zed Books, 1990.Find this resource:
Oh, Ingyu. Mafioso, Big Business, and the Financial Crisis: The State-Business Relations in South Korea and Japan. Surrey, U.K.: Ashgate, 1999.Find this resource:
Park, Soon-won. Colonial Industrialization and Labor in Korea: The Onoda Cement Factory. Cambridge, MA: Harvard University Press, 1999.Find this resource:
Pirie, I. The Korean Developmental State: From Dirigisme to Neo-Liberalism, New York: Routledge, 2008.Find this resource:
Sakong, Il. The Korean Economy: Six Decades of Growth and Development. Singapore: Cengage, 2010.Find this resource:
Woo, Jung-en. Race to the Swift: State and Finance in the Industrialization of Korea. New York: Columbia University Press, 1991.Find this resource:
(1.) David Hundt, Korea’s Developmental Alliance: State, Capital, and the Politics of Rapid Development (London: Routledge, 2012), 39.
(2.) Byoung-Lo Philo Kim, The Two Koreas in Development (New Brunswick, NJ: Transaction, 1992), 66–67.
(3.) John Lie, Han Unbound: The Political Economy of South Korea (Stanford, CA: Stanford University Press, 1998), 56.
(4.) Oh Seok Gon and Park Tae Gyun, “Suggestions for New Perspectives on the Land Reform in South Korea,” Seoul Journal of Korean Studies 26.1 (2013): 1–23; and Cho Jae Hong, “Post-1945 Land Reforms and Their Consequences in South Korea” (PhD diss., Indiana University, 1964).
(5.) Lie, Han Unbound, 9–18.
(6.) Chung Hee Park, The Country, The Revolution, and I (Seoul, Korea: Hollym, 1972), 28.
(7.) Hyung-A Kim, Korea’s Development under Park Chung Hee: Rapid Industrialization, 1961–79 (London: Routledge, 2004), 87.
(8.) Jung-en Woo, Race to the Swift: State and Finance in the Industrialization of Korea (NewYork: Columbia University Press, 1991), 84.
(9.) Eun Mee Kim, Big Business, Strong State: Collusion and Conflict in South Korean Development, 1960–1990 (Albany: State University of New York Press, 1997), 105.
(10.) Lie, Han Unbound, 73.
(11.) Byung-Kook Kim, “The Leviathan: Economic Bureaucracy under Park,” in The Park Chung Hee Era: The Transformation of South Korea, ed. Byung-Kook Kim, Ezra Vogel, and Jorge I. Dominguez (Cambridge, MA: Harvard University Press, 2011), 200–232.
(12.) Barry Eichengreen, Dwight H. Perkins, and Kwanho Shin. From Miracle to Maturity: The Growth of the Korean Economy (Cambridge, MA: Harvard University Press, 2012), 235.
(13.) Stewart Peter Lone and Gavan McCormack, Korea since 1850 (Melbourne, Australia: Longman, 1994), 148.
(14.) T. W. Kang, Is Korea the Next Japan? Understanding the Structure, Strategy, and Tactics of America’s Next Competitor (New York: The Free Press, 1989), cited in Byoung-lo Philo Kim, Two Koreas in Development: A Comparative Study of Principles and Strategies of Capitalist and Communist Third World Development, (New Brunswick, NJ: Transaction, 1992), 193.
(15.) Woo, Race to the Swift, 132.
(16.) Seok-Choon Lew, The Korean Economic Development Path (London: Palgrave Macmillan, 2013), 104–107.
(17.) Woo, Race to the Swift, 128–129; and Eun Mee Kim, Big Business, Strong State, 51.
(18.) Chan Sup Chang and Nahm Joo Chang, The Korean Managerial System (Westport, CT: Quorum Books, 1994), 40.
(19.) Kyung-sup Chang, South Korea under Compressed Modernity: Familial Political Economy in Transition, (Abingdon, U.K.: Routledge, 2010), 122–124.
(20.) Eun Mee Kim, Big Business, Strong State, 114.
(21.) Chang and Chang, The Korean Managerial System, 40.
(22.) Philo Kim, Two Koreas in Development, 73.
(23.) Seungsook Moon, Militarized Modernity and Gendering Citizenship in South Korea (Durham, NC: Duke University Press, 2005), 84–85.
(24.) Eichengreen, et al., From Miracle to Maturity, 44–45.
(25.) Linsu Kim, Imitation to Innovation, 32.
(26.) Lew, The Korean Economic Development Path, 144.
(27.) Young Whan Kihl, Transforming Korean Politics: Democracy, Reform, and Culture (Armonk, NY: M. E. Sharpe, 2005), 120.
(28.) Marcus Noland, “Six Markets to Watch: South Korea: The Backwater that Boomed.” Foreign Affairs (January/February, 2014).
(29.) Woo, Race to the Swift, 45.
(30.) Lie, Han Unbound, 66–67.
(31.) See Alice Amsden, Asia’s Next Giant: South Korea and Late Industrialization (London: Oxford University Press, 1989); Stephan Haggard and Chung-in Moon, “Institutions and Economic Policy: Theory and a Korean Case Study,” World Politics 17.2 (January 1990): 210–237; Chalmers Johnson, “Political Institutions and Economic Performance: The Government-Business Relationship in Japan, South Korea, and Taiwan,” in The Political Economy of the New Asian Industrialism, ed. Frederic C. Deyo (Ithaca, NY: Cornell University Press, 1987), 136–164; and Edward S. Mason, et al., The Economic Social Modernization of the Republic of Korea (Cambridge, MA: Harvard University Press, 1980).
(32.) Michael J. Seth, “Strong State or Strong Society?” Korean Studies 21 (1997).
(33.) Jeong-Lim Nam, “Labor’s Control of the State and Women’s Resistance in the Export Sector of South Korea,” Social Problems 43.3 (1996), 327–338.
(34.) George E. Ogle, South Korea: Dissent within the Economic Miracle (London: Zed Books, 1990), 62.
(35.) Hagen Koo, Korean Workers: The Culture and Pattern of Class Formation (Ithaca, NY: Cornell University Press, 2001), 48–49.
(36.) Hyung-A Kim, Korea’s Development under Park Chung Hee; and Byung-Kook Kim, Ezra Vogel, and Jorge I. Dominguez, ed. The Park Chung Hee Era.
(37.) See Ingyu Oh, Mafioso, Big Business, and the Financial Crisis: The State-Business Relations in South Korea and Japan (Surrey, U.K.: Ashgate, 1999); and Mark Clifford, Troubled Tiger: Businessmen, Bureaucrats, and Generals in South Korea (Armonk, NY: M.E. Sharpe, 1994).