South Korea’s Economic Success: Factors and Policies

South Korea in recent decades has been one of the most dynamic economies in the world. Over the period from 1965 to 1990, the rate of growth of per capita GNP was greater than that of any other country in the world (Watkins 1999). Major Korean enterprises such as Lucky Goldstar and Samsung are now common household brand names all over the world. As well, Hyundai and Daewoo, the two leading South Korean auto manufacturers, both offer products that are able to compete on the worldwide market along with other major car producers.

In analyzing the South Korean economy, it is important to look at the various factors behind this remarkable success story. The boom and rapid expansion of the Korean economy is due largely in part to the radical changes and new policies introduced under the Park Chung Hee government of 1961-1979. Significant new economic policies included reinforcing the system of chaebol, creating a policy of import substitution with an export-led approach, fostering the development of industries designed to compete effectively in the world's industrial export markets, nationalizing the banks, as well as working on to educe Korea's large external debt.

It is these policies, introduced throughout the 1960's and 70's, which caused a future boom in South Korea's economy and continue to influence it at the present day. One extremely important aspect of the South Korean economy is the concept of chaebol. Fathered by Park Chung Hee in the early 1960's, chaebol are conglomerates of many companies clustered around one holding company. The parent company is usually controlled by one family.

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It started off as a few specially selected large firms encouraged to tailor their growth and production targets to meet South Korean government objectives and were dependant on state-owned banks for the credit they needed to operate and grow. Government-chaebol cooperation was essential to the subsequent economic growth and astounding successes that began in the mid-1960's. The chaebol were able to grow because of two factors - foreign loans and special favors (Song 1997). Access to foreign technology also was critical to its growth throughout the 1970's and 80's.

Under the guise of "guided capitalism", the government selected companies to undertake projects and channeled funds from foreign loans. The government guaranteed repayment should a company be unable to repay its foreign creditors. Additional loans were made available from domestic banks. In the late 1980's, the chaebol dominated the industrial sector and were especially prevalent in maufacturing, trading, and heavy industries. Today, the chaebol remains the backbone of South Korea's economy. Examples of chaebol include Samsung, Daewoo, and Goldstar.

To give an idea to how successful and powerful this economic concept evolved into, in 1983, the country's three largest corporations, all under the chaebol system, accounted for over a third of South Korea's entire Gross National Product (Ibid, p63). The 1960's saw the reduction of U. S. aid to South Korea, aid which had largely kept the country afloat for the past decade following the Korean War. This made feasible the import substitution strategy the Park Chung Hee government had established.

Combining a policy of import substitution with an export-led approach, government policy planners selected a group of strategic industries to back, including electronics, shipbuilding, and automobiles. New industries were nurtured by making the importation of such goods difficult. When the new industry was on its feet, the government worked to create good conditions for its export. Incentives for exports included a reduction of corporate and private income taxes for exporters, tariff exemptions for raw materials imported for export production, business tax exemptions, and accelerated depreciation allowances (Kim 1997).

This strategy was largely responsible for establishing Korea's strong export-led industries that exist today. Favorable conditions mean that there will always be a demand for their product, both domestically and overseas. In the latter part of Park's reign as president, he fostered the development of industries designed to compete effectively in the world's industrial export markets. These major strategic industries consisted of technology-intensive and skilled labor-intensive industries such as machinery, electronics, and shipbuilding.

The plan stressed large heavy and chemical industries, such as iron and steel, petrochemicals, and nonferrous metal. As a result, heavy and chemical industries grew by an impressive 51. 8 percent in 1981 (Amsden 1992); their exports increased to 45. 3 percent of total output (Ibid, p103). These developments can be ascribed to a favorable turn in the export performance of iron, steel, and shipbuilding, which occurred because high-quality, low-cost products could be produced in South Korea. By contrast, the heavy and chemical industries of advanced countries slumped during the late 1970's.

This strategy helped to establish South Korea's economic role as a major worldwide industrial exporter, even in a time of turmoil created by the OPEC debacle. It was a plan that was carried right through the 1980's and well into the 90's by successive governments, who recognized its formula for success. When Park took control in 1961, one of his first orders of business was to extend government control over business by nationalizing the banks. As well, he merged the agricultural cooperative movement with the agricultural bank.

The government's direct control over all institutional credit further extended Park's command over the business community. The Economic Planning Board was created in 1961 and became the nerve center of Park's plan to promote economic development (Kearny 1991). The Board exists to this day; it is charged primarily with economic planning, as well as coordinating the economic functions of other government ministries. The Bank of Korea continues to exist as a government-controlled financial institution, operated by the Ministry of Finance.

In 1975 South Korea was the fourth largest debtor among developing countries with external debt totaling nearly $47 billion U. S. (52 percent of GNP) (Kim 1997). The Park government used its substantial current account surpluses between 1976 and 1979 to reduce and even repay its foreign debt. South Korean banking institutions were banned from obtaining long-term bank loans until the end of the year. The government also reduced the availability of foreign currency loans. This strategy worked, and as a result, South Korea's gross foreign debt dropped to $29. billion U. S. in 1979 (Ibid, p. 74).

The dramatic reduction of the debt by the Park government established a solid groundwork for economic growth and expansion by successive governments in the 1980's and 90's. Today, South Korea has in place solid debt management policies and has graduated from its status as a World Bank loan recipient. In analyzing the South Korean economy, it is not hard to see why it has developed into the world's 11th largest economic system (Song 1997). The truth is in the numbers.

During the 1970's, some estimates indicate, Seoul had the world's most productive economy. The annual industrial production growth rate was about 25 percent (Ibid, p131); there was a fivefold increase in the GNP from 1965 to 1978 (Ibid, p131). In the mid-1970's, exports increased by an average of 45 percent a year (Ibid, p132). Today, it is a major exporter of electronics, heavy machinery, and automobiles. The remarkable success of this dynamic economy can be attributed to the radical new economic policies and changes brought about by the Park Chung Hee government of 1961-1979.

Significant new economic strategies included developing the system of chaebol, creating the import-substitution policy, fostering the development of industries designed to compete in the world's industrial export markets, nationalizing financial institutions, as well as working on to reduce South Korea's large external debt. Successive governments continued to implement these policies and many are still in place today. South Korea is definitely an economic powerhouse to be reckoned with, and the world may still have yet to feel the wrath of this Asian Tiger.

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