South Korea THE GOVERNMENT ROLE IN ECONOMIC DEVELOPMENT
Woman worker, Hyundai Corporation
Courtesy Embassy of the Republic of Korea, Washington
In 1961 General Park Chung Hee overthrew the popularly
elected regime of Prime Minister Chang Myon. A nationalist, Park
wanted to transform South Korea from a backward agricultural
nation into a modern industrial nation that would provide a
decent way of life for its citizens while at the same time
defending itself from outside aggression. Lacking the antiJapanese nationalist credentials of Syngman Rhee, for example,
Park sought both legitimacy for his regime and greater
independence for South Korea in a vigorous program of economic
development that would transform the country from an agricultural
backwater into a modern industrial nation.
Park's government was the beneficiary of the Syngman Rhee
administration's decision to use foreign aid from the United
States during the 1950s to build an infrastructure that included
a nationwide network of primary and secondary schools, modern
roads, and a modern communications network. The result was that
by 1961, South Korea had a well-educated young work force and a
modern infrastructure that provided Park with a solid foundation
for economic growth.
The Park administration decided that the central government
must play the key role in economic development because no other
South Korean institution had the capacity or resources to direct
such drastic change in a short time. The resulting economic
system incorporated elements of both state capitalism and free
enterprise. The economy was dominated by a group of
chaebol (see Glossary),
large private conglomerates, and
also was supported by a significant number of public corporations
in such areas as iron and steel, utilities, communications,
fertilizers, chemicals, and other heavy industries. The
government guided private industry through a series of export and
production targets utilizing the control of credit, informal
means of pressure and persuasion, and traditional monetary and
fiscal policies
(see
The Origins and Development of Chaebol, this ch.).
The government hoped to take advantage of existing technology
to become competitive in areas where other advanced industrial
nations had already achieved success. Seoul presumed that the
well-educated and highly motivated work force would produce lowcost , high-quality goods that would find ready markets in the
United States and the rest of the industrial world. Profits
generated from the sale of exports would be used to further
expand capital, provide new jobs, and eventually pay off loans.
In 1961 Park extended government control over business by
nationalizing the banks and merging 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. It was headed by a deputy prime
minister and staffed by bureaucrats known for their high
intellectual capability and educational background in business
and economics. Beginning in the 1960s, the board allocated
resources, directed the flow of credit, and formulated all of
South Korea's economic plans. In the late 1980s, the power to
allocate resources and credit was restored to the functional
ministries. In 1990 the Economic Planning Board primarily was
charged with economic planning; it also coordinated and often
directed the economic functions of other government ministries,
including the Ministry of Finance. The board was complemented by
the Korea Development Institute, an independent economic research
organization funded by the government. Other government bodies
directing the economy included the Office of the President, which
included a senior secretary for economic affairs; the Ministry of
Finance; the Ministry of Trade and Industry; the Ministry of
Labor; and the Bank of Korea, which was controlled by the
Ministry of Finance.
Park's first major goal, which was immediately successful,
was to establish a self-reliant industrial economy independent of
the massive waves of United States aid that had kept South Korea
afloat during the Rhee years. Modernizing the economy and
maintaining overall sustained growth were additional goals in the
1970s. Significant economic policies included strengthening key
industries, increasing employment, and developing more effective
management systems. Because South Korea was dependent on imports
of raw materials, such as oil, a major government objective was
to significantly increase the level of exports, which meant
stressing greater international competitiveness and higher
productivity. The early economic plans emphasized agriculture and
infrastructure, the latter were closely tied to construction.
Later, the emphasis shifted consecutively to light industry,
electronics, and heavy and chemical industries. Using these
strategies, an export-driven economy developed.
The government combined a policy of import substitution with
the export-led approach. 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.
The export-led program took off in the 1960s; during the
1970s, some estimates indicate, Seoul had the world's most
productive economy. The annual industrial production growth rate
was about 25 percent; there was a fivefold increase in the GNP
from 1965 to 1978. In the mid-1970s, exports increased by an
average of 45 percent a year.
Data as of June 1990
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