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South Korea Economic Development
South Korea's economy grew rapidly under Park. The military
leaders, with little previous political or administrative
experience, and lacking a developmental program, later turned to
the economists and planners for assistance. The Economic Planning
Board was established in 1961. A program of rapid
industrialization based on exports was launched. The shift in
orientation was reflected in the First Five-Year Economic
Development Plan (1962-66), and the subsequent second (1967-71),
third (1972-76), and fourth (1977-81) five-year economic
development plans.
Park's policies encouraged private entrepreneurs. Businesses
were given powerful incentives to export, including preferential
treatment in obtaining low-interest bank loans, import
privileges, permission to borrow from foreign sources, and tax
benefits. Some of these businesses later became the
chaebol
(see Glossary;
The Origins and Development of Chaebol, ch. 3).
Toward these ends, the currency was drastically devalued in
1961 and 1964 and import quotas for raw materials eased. Private
saving was encouraged by raising interest rates and funds were
borrowed from abroad. Exports also were encouraged by direct
subsidies; all taxes and restrictions on the import of
intermediate goods that were to be used to produce export
products were removed. As the existing industries--textiles,
clothing, and electrical machinery, among others--had been
stagnant owing to a lack of imported raw materials, these
policies produced immediate results.
These developmental programs required enormous amounts of
capital. As the level of United States assistance had stabilized,
the Park regime turned to "financial diplomacy" with other
countries. The normalization of relations with Japan in 1965
brought Japanese funds in the form of loans and compensation for
the damages suffered during the colonial era. Park made a state
visit to the Federal Republic of Germany in 1964 that resulted in
the extension of government aid and commercial credits. The
availability of funds and the increasing level of exports
elevated Seoul's credit rating, making it possible to increase
borrowing in the open international market. Further, the conflict
in Indochina stimulated economic growth. Seoul's export drive
also owed much to the availability of an educated labor force and
a favorable international market.
South Korean businesses discovered that they could
successfully compete abroad. As idle capacity was used up and the
demand for new manufacturing investment rose, increasing numbers
of foreign investors were attracted to South Korea.
Foreign exchange earnings improved as export and foreign
receipts rose. The government also took steps to increase tax
revenues and stabilize consumer prices. Much of the price
stabilization program was carried out at the expense of farmers,
who were forced to accept the government's policy of low grain
prices. Agricultural development lagged behind until 1971, when
the government shifted to a policy of high grain prices and
inaugurated the Saemaul undong (New Community) Movement aimed at
improving the farm village environment and increasing
agricultural production and income
(see The Agricultural Crisis of the Late 1980s
, ch. 3).
Official statistics indicated rapid economic growth.
Substantial successes were achieved under the first two five-year
economic development plans. The manufacturing sector provided the
main stimulus, growing by 15 percent and 21 percent,
respectively, during the two plans. Domestic savings rates grew
and exports expanded significantly
(see Economic Plans
, ch. 3). A
new economic strategy emphasizing diversification in production
and trade proved generally successful in the 1970s. Under the
third plan, the government made a bold move to expand South
Korea's heavy and chemical industries, investing in steel,
machinery, shipbuilding, electronics, chemicals, and nonferrous
metals. South Korea's capability for steel production and oil
refining rose most notably. Refineries for zinc and copper and
modern shipbuilding facilities were constructed; automobiles
began to be exported to a few markets. The plan sought to better
prepare South Korea for competition in the world market and to
facilitate domestic production of weaponry.
The quadrupling of oil prices beginning in 1973 severely
threatened the South Korean economy, which depended heavily on
imported oil for energy production. Construction contracts in the
Middle East, however, provided the necessary foreign exchange to
forestall a balance-of-payments crisis and to continue the high
rate of growth.
The growth-oriented economic strategy emphasizing exports
inevitably produced side effects. Although the government
previously had been able to manage these side effects and
effectively surmount various economic crises, the situation began
to deteriorate in 1978. The emphasis on exports had produced a
shortage of domestic consumer goods that was exacerbated by the
increasing demands brought about by rising wages and the advance
in living standards. Price controls imposed on producers of
consumer goods discouraged the manufacture of these goods.
Meanwhile, the inflow of dollars rapidly expanded the money
supply and inflation became a serious problem. According to a
Bank of Korea report, consumer prices rose only 14.4 percent in
1978, but most observers agreed that the actual rate was near 30
percent.
The high rate of inflation continued into 1979. According to
a report issued by the Economic Planning Board in August 1979,
the average household's cost of living had gone up 26.3 percent
from the previous year. Although wages had been rising rapidly
during the previous several years--spurred by shortages of
skilled and semiskilled workers--the rise in wages began to slow
down. The average wage increased 12 percent during the year
preceding August 1979.
To address these ills, Park had replaced the economic team in
the cabinet in December 1978 and adopted stabilization measures
entailing the lowering of the growth rate: a stringent
tight-money policy; a switch of investment capital planned for
heavy industries to light industries producing consumer products;
a reduction of price controls to encourage more production of
consumer goods; and assistance for the poor. But these measures
caused a recession, produced a succession of bankruptcies among
small and medium loan-dependent enterprises, and increased
unemployment.
Data as of June 1990
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