Adaptive Implementation of the Five Year Economic Development Plans

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Title: Adaptive implementation of the five-year economic development plans
Material Type: Report
Author(English): Kang, Younguck
Publisher: Seoul:KDI School of Public Policy and Management
Date: 2008-12
Project: Knowledge Sharing Program(KSP)
Series Title; No: Knowledge Sharing Program /
ISBN: 978-89-953695-8-6 93320
Pages: 120
Subject Country: South Korea(Asia and Pacific)
Language: English
File Type: Documents
Original Format: pdf
Subject: Economy < General
Economy < Macroeconomics
Holding: KDI School of Public Policy and Management
Organizer: KDI School of Public Policy and Management
Sponsor: Ministry of strategy and finance
Project Term: 2008-01-01 ~ 2008-12-31

User Note
Government Publications Registration Number: 11-1051000-000023-01

Published in: Technology, Economy & Finance
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Adaptive Implementation of the Five Year Economic Development Plans

  1. 1. Knowledge Sharing Program Adaptive Implementation of the Five-Year Economic Development Plans December 2008 AdaptiveImplementationoftheFive-YearEconomicDevelopmentPlansDecember2008 MINISTRY OF STRATEGY AND FINANCE Ministry of Strategy and Finance, Republic of Korea Government Complex 2, Gwacheon, 427-725, Korea ● Tel: 82-2-2150-7712 KDI School of Public Policy and Manangement 87 Heogiro Dongdaemun Seoul, 130-868, Korea ● Tel. 82-2-3299-1114 Korea Knowledge Sharing Program Office for Development Cooperation, KDI ● P.O. Box 113, Cheongnyang, Seoul, 130-740, Korea ● Tel. 82-2-958-4224 www.kdischool.ac.kr www.ksp.go.kr www.mosf.go.kr
  2. 2. Adaptive Implementation of the Five-Year Economic Development Plans Younguck Kang
  3. 3. ISBN: 978-89-953695-8-6 93320 Government Publications Registration Number: 11-1051000-000023-01 Copyright ⓒ 2008 by Ministry of Strategy and Finance, Republic of Korea
  4. 4. Government Publications Registration Number 11-1051000-000023-01 December 2008 MINISTRY OF STRATEGY AND FINANCE KDI School of Public Policy and Management Korea Knowledge Sharing Program Adaptive Implementation of the Five-Year Economic Development Plans
  5. 5. Foreword Poverty is one of the major concerns of the in- ternational community. At the beginning of the cur- rent century, the United Nations adopted the Millenium Development Goals that put the highest pri- ority on poverty reduction in the world. More than 100 countries adopted the Paris Declaration of Aid Effectiveness in 2005. Korea is one of the few coun- tries that can effectively contribute to the goal of pov- erty reduction. Korea has an experience of economic develop- ment that is quite different from that of Western in- dustrial countries. Their economic systems evolved alongside their political, social, and legal institutions, and economic achievements were the results of such evolutionary processes. Korea, in contrast, achieved economic development under institutions that were not as modernized as those of the Western countries'. For this reason, Korea's experience is more relevant to most developing countries aspiring towards rapid growth and industrialization. The ongoing Knowledge Sharing Program that shares Korean cases of development experiences and policies with developing countries can serve as effective technical assistance, useful to the developing countries participating in the program and to Korea as well. In order to enable the Program to realize its potential of enhancing participating countries' economic performance, it was decided to document, study and
  6. 6. draw lessons from concrete examples in Korean devel- opment experiences and policies. Five specific cases were selected for that purpose and reports are hereby published. This volume represents one of such studies. I would like to take this occasion to thank the authors who took part in these studies and hope that their studies prove to be useful to those who are in- terested in developing countries' economic performance and poverty reduction. Also, I would like to note that the opinions expressed in these studies are those of the authors' and are not necessarily the same as those of the KDI School of Public Policy and Management. Jung Taik HYUN President, KDI School of Public Policy and Management
  7. 7. Contents Foreword CHAPTER 1. Introduction ············································································· 1 1-1 Pursuing Economic Development Plans ······················· 1 1-2 Lessons from the Economic Planning Experiences ······ 2 1-3 Working Process of the First and Second Five-year Economic Development Plans (Flowchart of Working Process) ····································· 8 CHAPTER 2. Balanced Growth Approach based on Foreign Aid ········· 23 2-1 Domestic and International Political, Social, and Economic Situations ··············································· 23 2-2 Restoration Efforts after the Korean War ···················· 32 2-3 Early Versions of Economic Development Plan ········· 40 CHAPTER 3. Fundamental Shift in Strategy: Unbalanced Growth Approach Focusing on Import-substitute Industries based on Domestic Capital ······························· 47 3-1 Background: Early Achievements and Problems ······· 47 3-2 Shifting the Strategy ······················································· 50 3-3 The First Five-year Economic Development Plan ······ 62
  8. 8. CHAPTER 4. Shifting the Focus: Export-oriented Industries based on Foreign Capital ································································ 69 4-1 Achievements and Problems of the First FEDP and the Political, Social, and Economic Conditions ··· 69 4-2 Shifting the Focus ··························································· 74 4-3 The Second Five-year Economic Development Plan, its Results and Problems ················································ 81 CHAPTER 5. Concluding Remarks ···························································· 91 Reference ··································································································· 95
  9. 9. Tables CHAPTER 1. Table 1-1. Implementation Process of Economic Plan after 1964 21 CHAPTER 3. Table 3-1. Comparison of the GNP between the Democratic Party’s Plan and the CNR’s ·········· 66 Table 3-2. Comparison of Capital Composition (by source) ····· 66 Table 3-3. Comparison of Unemployment Rate ··························· 66 Table 3-4. Comparison of Total Capital during the Planned Periods ······················································ 67 Table 3-5. Comparison of Projected Wage Income Growth ······ 68
  10. 10. CHAPTER 1 Introduction 1-1 Pursuing Economic Development Plans Gaining its independence in 1945, the three-year Korean War had massively damaged the political, economic, social, and cultural as- pects of Korea. As a result, the Republic of Korea faced the beginning of a modern democratic governance system with a crippled economic system lacking the basic elements of production such as skilled manpower, capital, industrial infrastructure, social infrastructure, and etc. The Syngman Rhee regime at the beginning of the Republic of Korea had put its first priority on restoring the econo- my, taking the basic approach of relying on foreign aid for the needed capital and focusing on restoring the basic elements of pro- duction to the state before the Korean War. To carry out such plans, Lee’s regime actively sought effective ways to allocate the limited financial resources efficiently. During the period, socialist economic development models that would determine the resource allocation and production of goods and services by a centralized plan under the government’s initiative had been quite popular among less developed countries such as India, Pakistan, and the former Soviet Union. Adoption of a central- ized plan of economic development model could be described as a natural choice for Korea considering its state of limited resources, capital, and skills. Fortunately enough, the Korean government had taken a modified approach in adopting the planning model, recog- nizing the importance of a market economy system, as the central government takes initiatives, leads and motivates the private sector to follow the government’s initiatives. In other words, the govern- ment would determine the priority of capital resource allocation, develop and implement the economic development policies accord- ingly, and guide the private economic activities without suppress- ing individual property rights and ownership. Such an approach to economic development is fundamentally dif- ferent one from that of a socialist economic development model
  11. 11. 2 Adaptive Implementation of the Five-Year Economic Development Plans and has been faithfully followed in subsequent economic develop- ment plans during the restoration periods and the 60s~70s. Towards the end of 70s, a major shift towards gradually reducing the central government’s initiatives had taken place, but the early versions of so-called “unbalanced” economic development strategies of nurturing import-substitution industries based on foreign aid and export-oriented industries based on foreign capital have also created many structural problems in the Korean economy. 1-2 Lessons from the Economic Planning Experiences Korea has achieved miraculous economic growth between the 60s and late 80s boasting an average of 9.3% annual growth rate of GNP, and the series of Five-Year Economic Development Plans (FEDP) have undoubtedly played a very important role in such rapid development. However, the relationship between the “plan” and “implementation” of such differs from the notion of a planned economy, where the plan focuses on developing a series of pro- duction schedule to be followed strictly. The main function of the Five-Year Plan was to mobilize the energy and efforts of the public and private sectors in order to achieve set targets as measured by a set of macroeconomic indicators. By building and sharing a gen- eral consensus upon basic principles or strategies for achieving the target, the Korean government tried to incorporate private efforts under the strong government leadership and policy initiatives. It is generally known that the First FEDP was developed under the President Park’s regime, but the matter of fact is that the strate- gic principles and subsequent action plans moving away from the balanced-growth towards unbalanced-growth approach has already been developed under the leadership of the Democratic Party prior to the change in the regime. The main differences in the two plans lie in setting a higher average annual growth rate of 7.1% and fo- cusing upon light-industries with high rates of capital turnover. However, the initial plan, which resembled more in the character- istics of a “planned” economy, failed to achieve the targeted growth two years after the implementation due to the realities of complex problems such as, changes in the United State’s foreign aid policy moving away from grant-type aids; unsettled social disorder from the two revolutions; serious crop failure from the severe cold wave; overly ambitious military leadership; difficulty in securing domestic assets and capital failure of the Currency Reform in 1962; high inflation rates due to expansionary fiscal and monetary poli- cies, and etc.
  12. 12. Introduction 3 Subsequently, Vice Prime Minister Chang, Gi-young of the Economic Planning Board made dramatic changes in the strategic direction of the economic development in May 1964, towards a more market-oriented economic growth strategy through the liberal- ization of the market, focus upon export-oriented industries, and the greater reliance upon foreign capital due to the difficulty in se- curing domestic capital. Such change exemplifies the adaptive and flexible implementation, rather than strict adherence to the original plan, by the government searching and employing appropriate poli- cy solutions to the problems at hand. Accordingly, the Second FEDP merely reflects the changed eco- nomic development strategy, and the actual implementation of the Second FEDP do not show strong evidence to support the argu- ment that the outcomes of miraculous economic growth have main- ly been due to the step-by-step implementation of the well-planned FEDP. Especially, the historical construction of the Seoul-Pusan (Kyong-bu) Expressways, Po-hang Steel Co., and Ulsan Petroleum and Chemical Industrial Complex being carried out separately from the Second FEDP, as well as the special procurement demands due to the Vietnam War, suggest that the Korean government has taken an adaptive and flexible approach in implementing the plan, taking into account of the state of the domestic economic and technical ca- pacities and of amassing foreign capital needed for such large investments. In retrospect, the social and economic conditions in the 50s and 60s, such as limited natural resources, human and social capital, and an underdeveloped domestic financial market and scarcity of domes- tic capital forced the Korean government to inevitably take an un- balanced economic growth approach focusing on export-oriented industries. Fortunately enough, Korea has achieved miraculous eco- nomic growth during the 60s and 70s based on such strategy. However, this strategy has unintentionally brought about structural problems in the economic system as well as in society. The Second Oil Shock and the assassination of President Park towards the end of the 70s mark the beginning of the series of attempts by the Korean government to deal with such structural problems in Korean society and the economic system. Such efforts happened well before the making of the Fourth FEDP (1982~86), which again reflects the adaptive and flexible nature of implementation. In short, the function of the series of FEDPs was in setting the short-term and long-term targets of economic achievements and in mobilizing national capacities towards achieving such targets through adaptive implementation of the FEDP. In order to do so, constant adjustments to foreign and domestic environments, rather
  13. 13. 4 Adaptive Implementation of the Five-Year Economic Development Plans than following the pre-defined strategic steps of the plan in achiev- ing the targeted goals, was the major step that was taken. Namely, the FEDPs served as a locus of consensus of the public and private sector representing the will to accomplish a self-sustainable econo- my and a higher state of wellbeing for the Korean people. From a such perspective, the number of factors that have con- tributed to the rapid economic development of Korea in terms of its national production and industrial composition, from the under- developed agricultural society to developing industrial country, can be listed as: the cultural tradition of placing high priority on educa- tion; dissolution of the social class under the Japanese occupancy; relative income equality at the early stage of economic development due mainly to efforts of land reform by President Lee and the dev- astation brought about by the Korean War; and pertinent adoption of development policy and the effectiveness of adaptive implementation. Moreover, the positive reinforcement from experi- encing the rapid economic growth and achieving targeted macro- economic goals contributed the most in terms of amassing the pro- ductive energy and strong will of the Korean people, eventually leading to the formation of a “can-do” spirit. In other words, the initial success of the FEDP jump started the will of development of the people, marking a turning point in modern Korean history, re- inforced by the earlier-than-scheduled achievements of development targets, eventually sublimating towards building strong national pride. The following retrospectively summarize the underlying proposi- tions in the context of economic development of Korea in the 60s: (1) Economic growth is an absolute must for increasing employ- ment and household income, which are desired by the Korean people; (2) The Korean government must lead such growth, and achieve- ment of the targets and goals of the development plan is the supreme task of the economic development strategy; (3) Due to the relatively small total population and low average income of Korea, the given size of the domestic market is highly confined. Henceforth, exported goods must be the na- tion’s number one priority in order to achieve the economic growth targets; (4) To materialize and support the export industry, the govern- ment should fully mobilize scarce domestic capital and lim- ited resources first and unavoidably must rely on foreign cap- ital and imported natural resources; and (5) Private businesses should lead the industrialization of the economy if we are to base our market system on capitalism.
  14. 14. Introduction 5 Henceforth, the government shall provide full support, through whatever means deemed necessary, to establish such private firms. The outcomes of the economic development plans based on the aforementioned premises of placing the first priority on economic growth led by the government’s decisions have been quite tremendous. A point-blank comparison of such achievement prior to the FEDP demonstrates this point quite vividly. The Korean economy achieved an annual average growth rate of 4.4% between 1953, right after the Korean War, and 1961. Even a growth rate of 4.4% is relatively a remarkable one considering the devastation of the Korean War as well as comparing to the 3~5% growth rate of advanced countries during their early stages of industrialization. On the contrary, the Korean economy has boasted an annual average growth rate of 9.8% between 1962, the beginning of the First FEDP, and 1969, doubling its previous growth rate. The com- position of such growth rate by industries during the same period shows 6.0% for agricultural and fishery industry, 17.3% for mining and industry, and 11.1% for social capital and other services industry. Such results are mainly due to the selective and focused government investments on strategically chosen export-oriented in- dustries based on market principles, which cannot be described as results of a “planned” economy. Such efforts by the government eventually paid off since the light-industry, manned by a relatively high quality labor force, ac- quired a competitive advantage in the international market. The to- tal export of $55 million in 1962 has rapidly grown to $623 million in 1969, almost 12 times larger than before. As a result, the Korean economy moved towards internationalization much faster than expected. Moreover, the unemployment rate dropped dramatically from 9.0% in 1962 to 4.8% in 1969 due to the rapid transition of the labor force from the agricultural sector towards the light-industry, increasing the absolute number of urban wage workers. The relative weight of the agricultural and fishery industries in the composition of GNP declined from 44% in 1962 to 27.9% in 1969, whereas that of the mining industry has increased from 16% to 21.7% during the same period, showing the rapid progress to- wards the status of being an “industrialized nation.” To support the export-oriented economic development strategy, the Korean government had employed a number of tactical yet aged policy tools. Examples of such tactical tools are the revived Monthly Briefing of Economic Trends (MBET) and Monthly Expansionary Council of Export Promotion Meetings (MECEP).
  15. 15. 6 Adaptive Implementation of the Five-Year Economic Development Plans Policy measures included, but were not limited to, various policy favors, financial incentives such as preferred loan rates and repay- ment structure, and numerous tax incentives to those business enti- ties exporting goods and services. The MBET is resided by the head of the Economic Planning Board (EPB) where President Park actively participated. The major functions of this particular forum is to concentrate all of the gov- ernment’s efforts towards dealing with the economic issues at hand in order to ensure that the same perspectives and definition of problems are shared, as well as the political intention to strengthen the relative power of the EPB within the government so that it is easier for the head of the EPB to lead policy coordination and im- plementation efforts. Also, the major functions of the MECEP forum, which President Park presided over, were to troubleshoot the bottlenecks and hold-ups faced by exporting firms. At this forum, the president himself would make sure that the previous bottlenecks and hold-ups of these firms would be properly dealt with by mandating the appropriate government agencies to report the policy efforts and measures by the next monthly meeting. Members of this MECEP include, as the name suggests, owners of the private corpo- rations, which allowed them to raise issues directly to the president himself. Another example of policy favors given to exporting firms is il- lustrated by the short-term bank loans practice. A firm with a letter of credit proving a purchase of goods by foreign entities can bor- row, by default, loans for a three-month-period without interest, without back-up of assets holdings, and without owning production facilities or factories. If a firm is able to produce and export the goods and services earlier than the due date, for example, within one or two months, the firm is free to use the loans for the remain- ing periods. Numerous trading companies started this way by uti- lizing the loopholes in this practice, and they have exported goods and services left and right, which, in turn, contributed tremen- dously to the rapid economic growth. Such miraculous economic growth has its own price since such favorable policy measures also created structural problems within the Korean economy. Focusing on processing industries with cheap labors and imported raw materials created an economic structure where total imports automatically increases with the increase in to- tal exports. Export-oriented light-industry with cheap and un- believably long hours of labor has become industrial standards where the well-being of blue-collar workers is of low priority in the policy, subsequently resulting in the slow growth of real wage
  16. 16. Introduction 7 incomes. Cheap imported crops and price ceilings imposed by the government on domestically produced agricultural goods destroyed the rural economy, which sped up the already-too-rapid urbanization. This increased the supply of wage workers forming low income class in urban areas, creating a source of constant social unrest. The export-oriented unbalanced growth approach with protective policies towards the domestic market also contributed to the birth of large monopolistic firms with strong ties to government bureau- crats and politicians, distorting the economic system. Government policies of export-promotion, preferential financial favors in busi- nesses investments and loans, protective trade policy, and giving priorities in allocating foreign capital contributed to the rapid growth of Chaebols. On top of those already-established chaebols such as Samsung, Lucky Goldstar, and Ssang Yong, there have been numerous others who rapidly joined the status of chaebol in the 1960s such as Hyundai, Daewoo, Hanjin, Sunkyung, Daenong, Kolon, Lotte, Keumho, Kukjye, Dae Lim, and Hanil. Moreover, increasing reliance on foreign capital in the face of an insufficient domestic financial market increased the sensitivity to changes in currency exchange rates. Foreign debt has accumulated over time, which forced the constant outflow of scarce capital in the form of interest payments rather than reinvestment of the gains in the domestic market. Towards the late 60s, single-mindedly growth-oriented economic policy created numerous problems such as inflation, economic gaps between the agricultural and industrial sectors as well as regional gaps, rising income inequalities, pollution and the destruction of the natural environment as a result of rapid expansion of industries. This case study focuses mainly upon the history of social, politi- cal and economic development after the U.S. military government (after 1953) and the makings of the First and Second FEDP. The overall state of Korea between 1948~61 is examined in chapter two and focuses on the restoration effort after the Korean War. In chap- ter three, a detailed comparison is made between the economic de- velopment plans developed by the Democratic Party and the First FEDP, developed by President Park’s military regime, highlighting the shift in the economic development strategy from bal- anced-growth towards an unbalanced-growth approach. Social and economic problems faced by Park’s regime after two years of im- plementation of the FEDP is described in chapter four, followed by policy measures taken by the Vice Prime Minister Chang, Gi-young focusing upon the liberalization of the market and the subsequent
  17. 17. 8 Adaptive Implementation of the Five-Year Economic Development Plans shift in the development strategy from import-substituting industries towards export-oriented industries. Other major government-initiated investment projects will be briefly discussed in the same chapter. 1-3 Working Process of the First and Second Five-year Economic Development Plans (Flowchart of Working Process) The main contributions of the First and Second FEDPs were on building a nation-wide consensus on the necessity of economic de- velopment efforts, and it is difficult to say that the actual im- plementation of the FEDP was carried out according to the original plan. However, there is no doubt that the critical turning point in Korea’s modern economic history could be marked as the early 1960s when industrialization efforts manifested itself in the midst of political and social upheavals through the official public announce- ment of the First FEDP in 1962. Even though there are earlier ver- sions of economic development plans such as the Nathan Report and the TASKA Plan in 1953, such plans were not the official plans adopted by the Korean government. The first economic plan that was officially adopted by the Korean government was the first three-year plan, a part of the Seven-year Economic Development Plan, prepared by the Committee of Economic Restoration (CER) under the Ministry of Restoration in March 1959. However, the following 4.19 Movement and sub- sequent changes in leadership of the Second Republic of Korea put the plan under the table. Shortly after, the CER of the Second Republic developed yet another plan based on the first part of the Seven-year Economic Development Plan, but it was also dis- regarded due to the 5.16 Military Coup in 1961. Both plans served as the basis for the First FEDP. The First FEDP is the first comprehensive mid-range economic development plan of any kind that was actually implemented to build the economic basis for economic independence and to over- come the structural constraints of the Korean economy. The First FEDP had a number of issues in its implementation because the de- velopment targets were set too ambitiously to meet the expectations of the people, because the suggested methods for securing needed financial resources were unrealistic, and because working officials lacked the technical skills for developing the plan on top of poor statistical data. Subsequently, supplementary plans were developed to correct for the shortfalls of the First FEDP to increase the feasi- bility of the implementation.
  18. 18. Introduction 9 The fundamental goal of the First FEDP was “establishing the economic basis for a self-sustainable domestic economy and break- ing the vicious circle of existing economic and social ties.” The Supreme Committee of Nation Rebuilding (SCNR) established the Advisory Committee of Economic Plan (ACEP) in July 1961 by se- lecting professionals from academia, government, and national banks and putting them in charge of developing the structure of the economic development plan that would reflect the will of the new government. The ACEP developed a set of principles for the economic development plan based on the political will of President Park, developed a structure of the plan, and handed it to the Ministry of Construction (later known as the Economic Planning Board) to work out the details. However, there was not much room for making the needed adjustments due to the specific principles al- ready set by the ACEP. The Economic Planning Board (EPB) final- ized and announced the First FEDP, along with its own birth, based on the plan developed by the Ministry of Construction. In developing the First FEDP, focus was put first on targeting the economic growth rate along with modeling the needed production level of each industry and total size of investment. Additionally, the development of individual business plans and the production targets and the amount of capital investments by industry, and ad- justing the set targets and investment amounts to maintain con- sistency was the second focus. More specifically, efforts were made to first develop the basic growth model based on the overall economic growth rate, pro- duction level by each industry as well as the amount of total in- vestment and, secondly, to select the individual development plans in each industry and to target the relevant investment amounts, and, lastly, coordinating and adjusting the details of the plan. In the first stage, the main priority was to focus on developing the basic national accounts in terms of Gross National Product, based on a macro approach. In projecting the overall economic growth rate, factors such as the past trend of economic growth, the needed amount of capital inputs, the relative ratio of such by each industry, the projected total amount of financial resources available, trade account, and temporary adjustments were taken into account. In the second stage, a micro approach was taken to estimate the production, consumption, and investments of ten economic units such as agriculture/fishery, mining, manufacturing, construction, electricity, transportation, safekeeping, housing, infrastructure, and other services. In the last stage, a cross-examination between the economic growth model based on the national accounts (macro approach)
  19. 19. 10 Adaptive Implementation of the Five-Year Economic Development Plans and the 10 individual plans by industry (micro approach) was car- ried out using an input-output table. However, such was done in a limited scope due to a number of constraints. Accordingly, plan- ning efforts focused only on ensuring the feasibility of the target growth rate and the subsequent balancing of each industry to ach- ieve coherence in planning of total capital accumulation, savings, investment plan, plan for securing the needed foreign capital, pro- jected level of domestic financial assets, and trade account. Major corrections were made to the First FEDP and its targeted economic growth rate, soon after its conception, due to the follow- ing reasons: 1) the targeted economic growth rate was too ambi- tious that it exceeded the growth potential of the time; 2) the eco- nomic complications caused by the Currency Reform only one year after the implementation of the First FEDP plan; and 3) the changes in the economic environment caused by massive crop failures from sudden climate changes. The overly ambitious pursuit of the first FEDP created develop- ment inflation which, in turn, created an unnecessarily large num- ber of unforeseen obstacles such as: 1) immediate budgetary deficit inflation caused by the mandatory savings policy that aimed to draw out the hidden capital to compensate for limited financial re- sources; and 2) foreign currency inflation and the subsequent cur- rency crisis caused by the unbalanced rapid growth between the sudden increase in imports and the underachievement of plans for foreign capital inflows, especially due to sudden changes in the U.S. foreign aid policy. Subsequently, the EPB initiated a major mi-dcourse correction of the First FEDP beginning in November 1962, and announced a modified plan on February 1964, which targeted the latter three years (between 1964 and 1966) of the First FEDP. However, this modified plan was not enacted due to the major shift in economic development strategy towards export-oriented economic develop- ment based on foreign capital only after the three months of im- plementation as the vice Prime Minister Chang, Gi-young became the head of the EPB in May 1964. The modified plan focused upon enhancing the implementation feasibility by reestablishing the targeted economic growth rate, size of capital investments, as well as the plan for securing the needed capital. The projected overall economic growth rate was lowered from 7.1% to 5% in order to achieve stable economic growth, and the growth rates of the mining industry and electricity sector were readjusted accordingly. Also, the ratio of capital investment to total available capital was decreased from 21% to 15.5%, and the con- sumption ratio was increased from 79% to 84.5% to reflect the real-
  20. 20. Introduction 11 ity of resource allocation. Furthermore, the targeted amount of capi- tal resources supply plan supported by the foreign aid and foreign borrowing were lowered as well. The overall investment ratio was reduced to 17% by lowering the domestic savings ratio from 9.2% to 7.2% and the foreign savings ratio from 11.6% to 9.9%. Preparing and implementing the First and the modified FEDP gave the planning officials some experience and confidence, and they eagerly wanted to develop a “better” FEDP for the second peri- od in terms of content in addition to the technical skills needed for development planning. Planning of the Second FEDP began in late 1964 to reflect the major shift in the economic development strategy and to allow ample time for the development of the Second FEDP. Furthermore, planners wanted to involve government officials from other ministries from the outset of the planning process. To do so, the planners needed to develop a set of directives which other min- istries could refer to in coming up with their own plans. Consequently, the officials in the EPB, with the help of a handful of scholars in academia, laid out the outline of the plans based on a number of alternative economic development models that would enable the realization of the growth potential along with a set of different goals for each major industrial sector. Time was the essential component in this endeavor to ensure the successful development of the Second FEDP which would be based upon a wide range of participation from the executive branch of the government as well as related public agencies. Developing and distributing a set of directives in a relatively short period of time was also essential to ensure the quality of sub-components of the plan that would be developed by associated ministries and agencies. A set of directives specifying the overall development targets was finalized and authorized in early 1965 by the Cabinet Council, and was delivered to all of the ministries and associated agencies. These directives focused less on specifying the quantitative development targets and more on the core strategy of the Second FEDP, the ex- pected priorities of capital investment areas, instructions to the min- istries and associated agencies on how to develop the individual plans for investment projects of their own, and specifying the dead- line for submitting individual plans. The major reason behind this open participatory process of devel- oping the Second FEDP was to strengthen the reliability and trust- worthiness of the plan, and especially to ensure the successful im- plementation of the Second FEDP by creating ownership of the plan among officials from the ministries and associated agencies who would be in charge of the actual implementation of the plan.
  21. 21. 12 Adaptive Implementation of the Five-Year Economic Development Plans For those economic development issues that would require more professional skills and expert knowledge, outside experts composed of professors, think tanks, and technical experts from various fields were hired through academic research contracts to examine issues and come up with creative solutions. Topics included, but were not limited to, “Long-term Prospects of Korean Economic Development,” and “Study on Korean Economic Development Based on Input- Output Tables,” examining the export potential of domestically pro- duced goods, and international market analysis for major export products. Over a dozen of sublevel task groups were formed to study the details of the Second FEDP as well as the related issues in each economic sector, such as the overall macro economic performance, individual plans by each sector, trade account, fiscal performance, agricultural/fishery sector, mining sector which was further divided into 10 subcategories (each with its own task groups), and social infrastructure. Each task group consisted of government officials from associated ministries, planning staff and technicians from state-owned companies, and academic experts. Significant contributions were made by foreign experts in devel- oping the Second FEDP, such as the Economic Division of United States Operation Mission (USOM) which was quite active in the de- velopment process. Nathan Advisory Delegation and Advisory Delegation of German Government both visited the EPB for ex- tensive periods to participate in developing the Second FEDP from the beginning of the process. Moreover, internationally renowned academic scholars from various fields were invited from abroad to provide consultation in the areas of quantitative modeling, banking and finance, tax and public finance, and trade. The gross economic development model of Irma Adelman had been the fundamental backbone of the Second FEDP, giving authority to the Second FEDP of being a co-product of domestic as well as international scholars and experts. The Second FEDP was based on the three pillars of the Gross Plan, the Industrial Sector Plan, and the Capital Investment Plan. The Gross Plan was based on the national income account includ- ing the gross target, finance, banking, and trade account, and was carried out by the Comprehensive Planning Division, Financial Resource Planning Division, and the Inflation Planning Division. The Industrial Sector Plan was developed by categorizing all of the industries into 43 sectors and projecting the production level and the necessary capital for each based on input-output table and was carried out by the Comprehensive Planning Division and Capital Investment Planning Division to ensure the consistency and
  22. 22. Introduction 13 feasibility of the Second FEDP. The Capital Investment Plan was developed by first examining the investment-earnings ratio, marginal effect to value-added, and marginal effect to trade account of the major investment plans, and then selecting and reflecting those investment projects that made economic sense to the Second FEDP. The plan was carried out by the Capital Investment Planning Division and the Industrial Sector Working Groups. The Capital Investment Plans for the area of electricity was based upon the Long-term Plans of Electricity Generation prepared by the Korean Electricity Company, and the portion of the plan that co- incided with the Second FEDP periods were taken with some minor adjustments. Also, plans for the area of transportation infrastructure was developed based upon the recommendations made by French experts on traffic and transportation with the support of the World Bank. Predicting how long the U.S. government would continue its for- eign aid policy, the main source of financial resources that the Korean government could rely upon, was one of the most difficult tasks in preparing the Second FEDP. Such information had huge implications in terms of the fiscal account plan and trade account plan, as well as the political rhetoric of achieving a self-sustainable economy. Some had argued that such foreign aid should be kept into the late 70s, but the planning officials concluded to end the foreign aid before the end of the Second FEDP, and such foreign aid was kept until the year 1970. The Industrial Sector Plans prepared by each task group were an- alyzed and readjusted by higher committees such as the Committee for Economic Planning and Coordination, consisting of the vice ministers of economic-related ministries, the vice presidents of cen- tral banks and state-owned banks, professors, columnists of major newspapers, representatives of business/economic organizations, and etc. The “Joint Committee for Developing the Second FEDP,” another higher committee, consisted of ministers of economic-re- lated ministries, the speaker of the ruling party, and representatives from the USOM and Foreign Advisory Board. The latter was higher in the decision-making chain and most major decisions were ac- tually made by this group. The above committees met once or twice per month during the initial stages of the development of the Second FEDP, and in- creased their meetings to once or a couple of times per week, or even once a day as the Second FEDP reached its final stage. The meetings were held at 10:30 a.m. every time, thereby earning the nickname of the “ten-thirty meeting.” In most cases, the ministers
  23. 23. 14 Adaptive Implementation of the Five-Year Economic Development Plans themselves could not attend due to their busy schedules, and thus the vice ministers attended such meetings instead. However, this was the most utilized venue for the development of the Second FEDP. The preparation process lasted nearly two years, and was authorized by the Cabinet Council on July 29, 1966, after the brief- ings to President Park. In 1967, there were rising opinions among government officials that the economic growth target set in the Second FEDP would be reached “within three and a half years” due to Korea’s respectable economic performance. Gaining confidence from the successful im- plementation of the First FEDP, President Park had announced in a public address for the general election, claiming that the goals set in the Second FEDP could be reached earlier than the targeted date. The idea of “within three and a half years” became a hot topic and drew much public attention, especially in the business com- munitys as well as in the political arena, when the vice Prime Minister Chang, Gi-young publicly declared in July of 1967, that the targets set by the Second FEDP would be reached within three and a half years. The minority party and the media attacked this idea as being overly ambitious and would put too great of a tax burden on the Korean people and would accelerate the rate of inflation. Eventually, President Park gave an order to “not to pursue the idea of early achievement too aggressively” to calm the public political debates, which ended when the Deputy Prime Minister Chang step- ped down from his office in October 1967. The successor, Park, Choong Hoon, reinvigorated this idea in 1968 by ordering an expansionary modification to the Second FEDP. Although this expansionary modification faced some political oppo- sition, it was approved in May 1968, with a 50% increase in the number of investment projects, resetting the annual growth rate from 7.0% to 10.5%, targeting national savings to 16.0%, and raising the total investment to 25.8%. The foreign savings rate was also raised by 2.4% to an average of 9.8%. Judging from the past pro- ductivity, capacity gains, and the export-product sales trend, it was projected that the $1 billion total exports target would be reached by 1971, the last year of the Second FEDP. By the end of the Second FEDP implementation (1971), the in- dustrial structure was estimated to change dramatically due to the rapid economic growth, especially in the areas of mining and heavy industry and social infrastructure. The expected growth rates in such sectors were as follow: agricultural and fishery industry sector to be 28.1% of the GNP; mining and heavy industry to be 30.2%; social infrastructure and other service industries to be 41.7%; and the reduced growth rate projection from 5.0% to 4.3% in the agri-
  24. 24. Introduction 15 culture and fishery which was originally set too high. It can be said that the consensus building approach in develop- ing the Second FEDP and the political emphasis on the necessity of economic growth in both the first and Second FEDP had con- tributed much to the rapid economic growth. Similarly, there were two other factors not readily visible in their large contribution to the implementations of the series of FEDPs and to the rapid eco- nomic growth: 1) the relentless pursuit of economic development in its highest priority and strengthening of political power and deci- sion power of the EPB through the Monthly Council of Reporting Economic Trend meetings (CRET); and 2) swift policy decision-mak- ing and expedited process of developing pro-industry policy deci- sions supporting private efforts in the market through the Monthly Expansionary Council of Export Promotion meetings (ECEP). The CRET meeting was first introduced along with the beginning of the military regime and was only occasionally held to brief the overall economic trend to military officers with no background knowledge in economy. From May 1964, when Chang, Gi-young was appointed as the vice Prime Minister and head of the EPB, the CRET was held once a month on a regular basis until the late 1970s, serving as one of the decision-making forums for economic development policy coordination across ministries and government agencies to cope with rapidly changing economic conditions. The critical role and the large contributions that the CRET was able to play out in the economic development of Korea came from the following reasons: 1) the range of participants on the CRET was vastly diverse from all of the cabinet members, working officials, committee chairs in the National Assembly related to economic is- sues, and members of the Special Committee of Economics and Science 2) the president himself resided over all of the CRET meet- ings thus, giving a tremendous political support to the EPB; and 3) as a consequence agendas on the CRET drew grave attention from the public. Typical agendas on the CRET consisted of monitoring the actual implementation of major policy issues, analyzing the economic trends, and decision-making and coordination of important policy issues based on such. From the third FEDP, typical agendas were broadened to include the celebration of the successful cases of the SaeMaEul Movement (Rural Town Renovation Project), which could be interpreted as functional expansion to include the evaluation of the economic development policy outcomes. As the CRET was ad- ministered by the EPB, it had contributed greatly to heightening the prestige of the EPB and strengthening the planning functions of the Korean government, leading to effective and efficient economic pol-
  25. 25. 16 Adaptive Implementation of the Five-Year Economic Development Plans icy decisions and coordination within the government. Another facet of the CRET was that it served as a learning ground for President Park himself on economic policy issues, and he actively used this chance to encourage and reprimand govern- ment officials at the same time. For instance, he would ask ques- tions during the presentations to reconfirm the content of the brief- ings or express his thoughts on the issues at hand. He asked such questions not just to the presenter but to anyone present in the CRET, forcing them to be well-prepared before attending the CRET. During the session, President Park sometimes openly and harshly reprimanded those government officials that would not follow his initiatives and directions. Yet another function of the CRET was to put everyone involved in the government on the same page in terms of the coordination and direction of the policies, sometimes inviting committee chairs from the National Assembly, the head of the policy committee of the ruling party, the president of the central bank, the head of oth- er financial institutions, the special secretary to the President, and those working officials who were directly in charge of implementation. This was the group of people who were in charge of designing, adopting, implementing, and evaluating economic de- velopment policies as well as those in charge of reviewing and ap- proving budget proposals and various regulations. Those government officials who were directly in charge of de- signing and implementing economic policies especially wanted to use the chance to get approval from the President himself for their own policy agendas in front of other related ministries. The President, on the other hand, wanted to use the chance to align those officials in the direction he wanted by monitoring the prog- ress of the policies and asking questions. This had the effect of re- ducing the disharmony that may arise from implementing the poli- cies by sharing information and putting everyone on the same page on the current issues at hand. The EPB had utilized the CRET to gain political power to control the others in government, where the typical planning ministry would not be able to have such power. The EPB and others also utilized the CRET as a policy battlefield to gain final approval from the President, where the CRET provided chances for direct commu- nication between the President and lower ranking government offi- cials who would normally not have the chance to talk to the President directly. All in all, the EPB having a leading role in the CRET and providing the room for the event was able to strengthen its influence in the economic development policy making process as the executive branch had higher ground than the legislative branch
  26. 26. Introduction 17 during President Park’s regime. According to the memoirs of former Deputy Prime Minister Chang, the primary reason for reinvigorating the CRET was that “the President and the Prime Minister should know about the eco- nomic conditions and related issues so that the Korean economy would advance,” where such represented “an opportunity to report directly to and to get directives directly from the President himself once a month” as well as “a chance to show-off the skills and capa- bility as a government official in order to heighten his own authority.” There was no doubt that the CRET played a major role in the long-term economic development of Korea. Another similar forum that contributed greatly to the rapid eco- nomic growth of Korea was the Monthly Expansionary Council of Export Promotion (MECEP) meetings, led by the Ministry of Commerce and Industry (MCI), where the plans for exports and policy decisions and coordination to promote and support ex- port-related market activities were made. The beginning of the MECEP in February 1965 would have the symbolic meaning as the Korean government began to heavily stress the export-driven eco- nomic development policy. In other words, such a policy would mark the shift from an import-replacement focused economic devel- opment strategy towards an export-oriented one supported by for- eign capital. The mandate of the MECEP was to push for export-driven poli- cies and regularly analyze, monitor and evaluate the outcomes of such policies. Initially, the forum was headed by the Prime Minister and led by the MCI to function as grounds for developing and im- plementing export-driven policy measures and government-wide supportive structure for such initiatives. Soon, it was found that the export policy decisions were delayed, and subsequently it became difficult to guarantee the competitive edge of export industries due to such delays, where the timing of the decisions were critical mat- ters in promoting exports. As a result, President Park himself resided over the MECEP from January 1965, where functional implications would be very similar to that of the CRET but only in the areas of export policy-related decision-making. Another symbolic meaning of the presence of the President at all MECEP meetings was the official recognition and approval of the export-driven economic development policy as fun- damental engines of economic growth, not just within the govern- ment but to the private sectors that would be in charge of ex- port-related activities in the international market. Considering the political power of the President, there would be no doubt that such actions sent a very strong signal, which changed the behavior of of-
  27. 27. 18 Adaptive Implementation of the Five-Year Economic Development Plans ficials as well as business communities. By clearly showing that the performance evaluation criteria based on the performance of the export industries to the government offi- cials who would be in charge of developing, designing, and im- plementing policies, opportunistic behaviors were curtailed and ef- forts were directed towards productive directions. In addition, the curtailed rent-seeking behavior of private firms may have arisen from the protective regulations by strengthening the discipline of government officials. Furthermore, clearly stated policy deci- sion-making criteria based on export promotion in quantitative measures enabled a system of policy decision-making and coordina- tion in a relatively easier way. The MECEP functioned as an incentive mechanism for govern- ment officials to devote their full energy and efforts into the policy agenda of the President as well as an incentive mechanism for pri- vate sector companies by reducing uncertainties in the business cli- mate through continuous emphasis on export-oriented policy meas- ures and their implementation, thereby contributing to a heightened confidence in government policies. The most active participants of the MECEP were the officials from the MCI and the Ministry of Foreign Affairs, who would be in charge of collecting and disseminating information of foreign markets, promoting economic ties with foreign countries, and pio- neering and expanding foreign markets. The MECEP also func- tioned as a direct communication channel between the President and representatives from a wide array of business communities. It was quite apparent that the MECEP placed tremendous pres- sure on government officials from the MCI or related agencies who had to report the figures directly to the President on a monthly ba- sis, of which the main focus was on export promotion. It was quite apparent that the MECEP served as an open communication chan- nel to attend to the difficulties that business communities faced and to celebrate their successes. In short, the MECEP functioned as a highly responsive mechanism to cope with a rapidly changing eco- nomic environment by monitoring the progress of policy planning and implementation, developing new export policy measures, and modifying and coordinating existing policy measures under the strategic guidance of the FEDP. A successful implementation of the government-led economic de- velopment strategy required an establishment of an incentive mech- anism that would ensure the voluntary compliance from the private sector businesses would be highly critical. Designing and providing enough incentive mechanisms as well as advocating and publicizing policy measures among private businesses in order to enhance
  28. 28. Introduction 19 credibility was of the utmost importance. In this sense, the MECEP, along with the FEDP, had strong ceremonial characteristics in its nature in building a consensus on the export-driven development strategies and subsequently promoting related policy measures of the government. It can be said that the successes of the export-driven strategy might have not been accomplished without the nation-wide atten- tion it had enjoyed. There would be no doubt that the presence of the President in every MECEP meeting ensured such attention, giv- ing direct messages to private companies of the strong-will to push for export promotion by inviting their participation. The typical participants of the MECEP were the President, Prime Minister, Deputy Prime Minister of EPB, ministers from related agencies, president of the Central Bank of Korea, president of Korea Trade-Investment Promotion Agency (KOTRA), president of the Korea Chamber of Commerce and Industry, president of the Korea International Trade Association, export industry promotion commit- tee chair of the Federation of Korean Industries, the president of the National Agricultural Cooperative Federation, the president of the National Fishery Cooperative Federation, minister without port- folio, the members of the Economic-Science Council, Chief of Planning and Coordination Division, head of the Maritime Affairs & Fisheries Office, president of the Korea Development Bank, presi- dent of the Industrial Bank of Korea, president of the Korea Exchange Bank, president of the Korea Federation of Small and Medium Business, president of the Korea Tourism Organization, head of the Korea Shipping Office, in addition to others. Individuals from major export industries as well as large trade companies had also participated in the MECEP on a regular basis. It surely was a “mammoth meeting” that easily exceeded 100 or more participants from all the three branches of the government, economists, media, banking industry, business communities, and owners of export companies. Especially since January 1967, under the direct order from President Park to ‘use the MECEP as a feed- back channel by inviting representatives from the media, academics, and business communities for their opinions and criticisms,‘ the MECEP had grown quite large in size that extended its member- ships to local government officials and those representing regional business communities. The MECEP was also a celebrating place in order to publicly rec- ognize those individuals who had contributed to export promotion initiatives. Based on a wide set of criteria, those company heads of outstanding performance in exports, those engineers who had come up with new ways of production, those developed or discovered
  29. 29. 20 Adaptive Implementation of the Five-Year Economic Development Plans new export products, those contributed in increasing the pro- ductivity, and etc. were identified and publicly praised by the President and the media, which also served as a strong incentive mechanism. Of course, there were a wide range of policy favors that provided access to cheaper capital and preferential treatment in conducting their own businesses once someone or a company had been recognized as one of the major contributors to the ex- port-driven policy initiatives. Naturally, everyone wanted to jump on the ship called the “export-drive,” in order to have the chance to grow quickly through a relentless export of goods.
  30. 30. Introduction 21 Table 1-1. Implementation Process of the Economic Plan after 1964
  31. 31. CHAPTER 2 Balanced Growth Approach based on Foreign Aid 2-1 Domestic and International Political, Social, and Economic Situations As of August 15, 1948, after the rule of three years of U.S. mili- tary government, the First Republic of Korea began its first modern independent government based upon a presidential system headed by the President-elect Syngman Rhee. However, it was an in- complete beginning since the sovereignty of the government lied within the south of the 38 latitude line drawn by the U.S. and Soviet’s military governments, dividing the Korean Peninsula into two regions. More than 500 years of monarchy under the Chosun dynasty and 36 years of Japanese colonization deprived the Korean people of any self-governing experiences, and the modern demo- cratic government based on the presidential system was something very foreign to the people. Three years of experience under the U.S. military government did not deepen the understandings of the proper roles of those governing as well as those governed under this new modern government structure, contributing to the political and social instability and confusion. Since gaining independence, more than 3 million refugees returned from overseas. Those relocated from the North were struggling to survive day to day. Politically left-wing organizations established the National Council of Chosun Labor Unions (NCCLU), and the right-wing organizations established the Korea Independency- Promotion Federation of Labor Union (KIPFLU) to counter the movements made by the left-wing organizations. The NCCLU was established in November 1945, and it organized a general strike on September 1946, hindering the normal practices of business activ- ities and organizing numerous walk-outs, sabotages, demolition of machineries and tools, and demanding resignations of the management. The Japanese colonial government had developed the industrial base of Korea according to the strategic needs of the Japanese
  32. 32. 24 Adaptive Implementation of the Five-Year Economic Development Plans mainland government, spreading the industrial bases auxiliary to the industries in Japan. As a result, the southern part of the Korean peninsula had agricultural products mostly in the form of rice fields and light-industry mostly of textiles, and the northern part had power and fertilizer plants. The total production capacity of the power plants right before the independence was 1,722,695kw, of which 11.5% generated from the power plants located in the south- ern region and 88.5% generated from those in the northern region. Utilizing the abundant excess electricity, the North had industrial bases such as Heung-nam Nitrogenous Fertilizer Plant, whose prod- ucts were used as far as the south-west region full of rice fields and the Manchurian region. On the contrary, there were a handful of smaller scale light-industrial bases operating with the electricity supplied by the power plants located in the northern regions of the Korean Peninsula. Over 90% of the metalworking industry was located in the North and over 85% of the textile industry was located in the South. The natural resources for the metalworking industry such as iron ores and pig irons were almost non-existent in the South, not to men- tion other natural resources such as bituminous coal, anthracite, graphite, tungsten, in addition to others. To make matters worse, 94% of the total assets of the cotton-textile industry were owned by the Japanese, and over 80% of skilled labor-technicians were Japanese, bankrupting or closing down almost all of the textile fac- tories along with the independence. Junk trade based on bartering began right after the independence. Such trade involved agricultural products, chemicals and medicines, and industrial products previously stored under the Japanese mili- tary or trading companies in China with dried squid, dried shrimps, seaweeds, Japanese isinglass, and Ginseng produced in Korea. It was not much different from smuggling. Shortly after, such junk trades were replaced by goods flowing-in from Macao and Hong Kong, and the typical goods traded then were wrist watches, clothing materials, newsprint materials, crude rubber, cot- ton yarn, silk fabrics, miscellaneous goods, penicillin, and sugar, in addition to others. The overall situation of Korea after gaining independence can be summarized as follows: lack of manpower with public and business managerial experiences and those with skilled labor, especially en- gineers and technicians; lack of understanding of democratic proc- ess; lack of essential raw materials in order to restore the economy; crippled public education system caused by the withdrawal of Japanese teachers; a currency without gold standard and interna- tional currency exchange status; urgent national defense problems
  33. 33. Balanced Growth Approach based on Foreign Aid 25 without sufficient military manpower; and the U.S. economic aid mostly focusing on relief work for daily consumptions rather than focusing on needed investments in production facilities. Under the given situations, President Lee declared to build an in- dustrial nation under a primary principle of an agricultural-industry balanced development approach. To achieve this particular develop- ment objective, he developed a series of annual plans to promote the productions of goods and services which would, in turn, work towards reducing the unemployment problem at the same time. These annual plans focused upon increasing the production of crops, achieving self-sufficiency in the basic necessities of life, build- ing power plants, aggressive development of underground natural resources and fishery resources, fostering related critical industries, and the quick restoration of transportation and communication infrastructures. President Lee’s government developed a number of production plans in each of the areas described above, primarily based on eco- nomic grant-type aid provided by the U.S. The government first in- vestigated the actual conditions of the textile industry, steel in- dustry, ceramic wares industry, carbide industry, oil and fat manu- facturing industry and developed production plans in each, fol- lowed by the investigations on war plants in the Kyong-in area and raw material reserves for industrial production. Based on the find- ings, the government was to develop a comprehensive production plan from the 1950s and to prepare blueprints for actual im- plementation, utilizing the economic grant-type aid from the U.S. mostly to develop critical industries such as steel-manufacturing, shipbuilding, cement, fertilizers, plate glasses as well as for building power plants and natural resource development. During his exile in U.S. and while carrying out independence movements, President Lee had perceptively gained a deep un- derstanding of western capitalism, values of freedom and de- mocracy, and the strengths of industrialized countries. After as- suming presidency, President Lee developed a radical idea of “giving the cropland back to peasants” to bring about funda- mental changes in the Korean society as a whole, thereby push- ing it towards an industrialized country. He reasoned that only by squaring away the thousands-years-long old-fashioned eco- nomic ties between the landowner-peasants would it be possible to form a basis for industrialization of Korea. President Lee concluded that “if we were to follow the precedents of a land reform policy of the North based on the principles of ‘confiscation-without-compensation and allotment-without-owner- ship,” we are only replacing the landowners with the government,
  34. 34. 26 Adaptive Implementation of the Five-Year Economic Development Plans only making peasants slaves to the government instead of making them slaves to landowners.“ He further reasoned that ”since the ma- jority of assets are in the forms of land, it is critical for landowners to form needed capitals with the due compensations from the gov- ernment so that they would begin investing such in the in- dustrialization process.“ Based on such reasoning, President Lee pur- sued an aggressive land reform based on the principles of ”confiscation-with-due-compensation and allotment-with-ownership.“ Simply based on his strong will and even before legislating the nec- essary rules and regulations for land reform, the government began issuing the ”Notification of Planned Cropland Allotment“ to peas- ants starting from March 1950. Landowners received Certificates of Land Value (CLV) on the condition of releasing their properties of paddies and dry fields. Three months after the initiation of land re- form, the Korean War broke out. Between 1945 and 1953, the wholesale price index skyrocketed 508 times. Those landowners evacuated to Pusan city sold their CLV 40~80% under the face value, using the funds from the sales for daily expenses. As a result, the majority of those landowners centered on the southwestern (Ho-nam) area had gone completely bankrupt. The capital to be used for economic revival and in- dustrial development began disappearing at a faster rate as the landowners had no choice but to use the CLV for daily con- sumption and expenditure. Recognizing the seriousness of this im- pending problem, the government hurriedly began allowing others to buy up the CLV to be used for purchasing government-vested properties. Such an attempt made it easier for newly rising en- trepreneurs to become industrial capitalists relatively quickly by taking advantage of the changed policy, but only about 54% of the total outstanding value of the CLV was used for such purposes. The remainder vanished as it was used for living expenses and ex- penditures on daily goods. The three years of the Korean War brought devastation to every corner of society, not to mention the loss of millions of lives. The war destroyed 60% of social infrastructure and manufacturing facili- ties and 16.9% of housing, amounting to about $3 billion, twice the size of the GNP of the 1949~50 accounting year. A series of bomb- ing and battles destroyed or brought down 67% of the textile in- dustry, 75% of the printing industry, 32% of the machinery in- dustry, 30% of the food industry, 24% of chemical industry, and 26% of the metalworking industry. Just one year into the Korean War, 67% of spinning and weaving machineries and 47% of weav- ing machineries became heaps of scrap and junk, which once repre- sented, before the war, the one and only industry boasting the
  35. 35. Balanced Growth Approach based on Foreign Aid 27 economies of scale in production in the South. The war vaporized the efforts of the newly established govern- ment towards restoring economic stability, and crumbled what re- mained as the meager industry bases after the independence. Military operations such as Incheon Ashoring Maneuvers and vari- ous attempts to recapture the capital, Seoul, turned Kyong-in in- dustrial complex, the heart of industries, into ruins by bringing down the remaining industrial facilities. Words cannot accurately describe the devastating social and economic conditions of Korea in the early 50s. As the Korean War brought down the production fa- cilities left after the independence, political leaders, high-ranking government officials, and business owners began coming together and started pushing the Korean economy towards industrialization. After a moment of reflection by government officials, embrace- ment of development came, once again, with the “Nathan Report.” The United Nations General Assembly initiated the United Nations Korea Reconstruction Agency (UNKRA) in December 1950 in order to restore the Korean economy to the state it was at before the war and began its operations from July 1951. UNKRA immediately be- gan the urgent relief operations along with the war, and at the same time investigated the conditions of production facilities of plate glasses, briquette manufacturing, cement, fertilizers, and pow- er plants, that were internally decided to be in the top priorities for restoring the Korean economy. In the midst of the war, UNKRA initiated consultation in search for the action plans to restore the Korean economy after the war, and subsequently the Nathan Report was published in 1952. The re- port suggested that in order to construct the basis for industrializa- tion, the Korean government would need first to concentrate its in- vestments in rice production increasing productivity and supply the materials urgently needed for relief using the proceeds from export- ing rice. The main point of this report was that it was necessary to invest $120 million each year for five years starting from 1954 and to increase GNP by $50 million each year, so that the GNP would rise to $2.510 billion by the target year of 1959. A lot of criticism and controversy arose with the Nathan report. Korean government officials were actively opposed to the idea of investing in the agricultural sector, citing the anti-feudalistic eastern ways of a petty farming agricultural structure. Rather, they insisted on an industrialization strategy that could utilize the generally high level of education and abundant cheap labor force in Korea. While the talks of truce were going on in 1953, the provisional government, located in Pusan, actively pursued efforts to rebuild the steel manufacturing facilities, especially for rebuilding houses,
  36. 36. 28 Adaptive Implementation of the Five-Year Economic Development Plans as a part of the restoration plan for after the war. The government decided to establish the Dae-han Heavy Industry Public Corporation as a national enterprise which reconstructed an open-hearth furnaces with a yearly production volume of 50,000 tons and building steel- making and rolling mill as well. At the time, the Korean economy relied entirely on the U.S. grant-type aids. Naturally, the Korean government requested addi- tional funds for building steel manufacturing facilities, but the U.S. turned down the request since the U.S. aid policy was primarily for providing emergency relief rather than investment. President Lee fi- nally decided to invest the necessary capital of $1.4 million from the government foreign currency reserves for building steel manu- facturing facilities. This decision was not an easy one to make con- sidering the situation in which there was a great difficulty securing dollars at the time of war. He asked Dr. Hoover, Director of the Red-Cross Hospital, for help in contacting West Germany’s govern- ment to request technical support for building the facility. Demarg of West Germany, which specialized in constructing steel pro- duction facilities, won the international bidding for the construction of 50,000 ton open-hearth furnace in 1954 as well as for the con- struction of a rolling mill worth $3.8 million in 1956. Many of the Korean technicians and managers were sent to West Germany dur- ing the construction phase to learn details about the modern steel manufacturing industry. This particular group of technicians and managers, after they had returned, formed a solid basis of restoring the steel manufacturing industry in Korea. During this period, there were other movements in the private sector that had influenced the early versions of the economic devel- opment strategies of Korea. Namely, those business entrepreneurs who accumulated capital through war-time trade started to look for ways to produce imported goods domestically. The major exporting items at the time of war were scrap metals, empty cartridges and bullet-casings collected from the battle fields, serving as an im- portant source of valuable dollar currencies. For instance, the mid-sized Samsung Trading Co. invested $300 million in 1951 for international trade, and in the following year it invested $6 billion, a 2000% jump in growth within a year, where most of the capital was raised by exporting scrap metals, empty cartridges and bul- let-casings and by importing medicine and necessities of life. Among those entrepreneurs who had accumulated tremendous wealth by such trade, some pioneers began to look for ways to pro- duce these imported goods domestically rather than simply enjoy- ing the proceeds from the trade. They wanted to produce and sup- ply cheaper and higher quality necessities of life goods to domestic
  37. 37. Balanced Growth Approach based on Foreign Aid 29 markets by providing solutions to food and clothing shortage prob- lems, and, at the same time, they wanted to offer jobs to the dish- eartened Korean people, thereby contributing to the economic re- storation efforts. These pioneers who pushed the tide of “transformation of commercial capital to industrial capital” became a dominating force in forming conglomerates in later stages of Korean economic development. The industrialization of the Korean society jump started while ex- periencing dramatic changes originating from the war and restora- tion efforts. The U.S. grant-type aid played an undoubtedly critical role in this process. Based on the aid, the Korean government could afford to import raw materials for production such as agricultural products, oil products, crude rubbers, and timbers, and brought about a railroad transportation revolution by importing diesel engines. Based on such aid, the Korean government was able to im- port the telephone system made in West Germany improving com- munication services, and built “AID housings” that marked the be- ginning of the housing businesses of Korea. Since Korea had become independent from the Japanese, the U.S. military based in South Korea helped the restoration efforts of the troubled Korean economy through the Government and Relief in Occupied Area plan. The U.S. began operating systematic eco- nomic relief through the Economic Cooperation Administration in 1949 and provided about $1.3 billion worth of grant-type aids to Korea until 1961. The International Cooperation Administration was established as the U.S. discontinued previous practices of providing grant-type economic relief. The Korean government established a counterpart fund in the Korean currency from the grant-type aid received in dollars by using a prearranged currency exchange rate between the two governments. Such a counterpart fund was used for the war expenditures of the UN troops or transferred as tax revenues of the Korean government to be included as a part of the government budget. Some of such counterpart fund was released into private sector in the form of government loans or investments. For instance, $2.7 million worth of counterpart funds was lent to more than 400 small and midsized businesses, spreading the seeds of development to small and midsized businesses in Korea. The U.S. government also provided technical assistance in numer- ous areas by sending their technicians and technocrats to Korea, helping the industrialization of Korea. Learning and receiving train- ing from these specialists, Korean officials, technicians, and business owners began to open their eyes towards industrialization and modernization. By agreeing to the truce only on the condition of signing the
  38. 38. 30 Adaptive Implementation of the Five-Year Economic Development Plans Korea-U.S. Mutual Defense Treaty and by using the release of war prisoners as a bargaining chip, President Lee was able to secure agreements from the U.S. on providing initial economic relief of $200 million and subsequent economic aid over the long haul, thereby greatly reducing the burden of national defense and security. In retrospect, such agreements between the U.S. and Korea allowed the Korean government to focus exclusively upon industrialization. Furthermore, President Lee focused upon reducing the overall illiteracy rate and upbringing the quality of manpower through the extensive restoration of and large-scale investments in the education system to build solid foundations of mass-producing the manpower needed for industrialization in Korean society. Without dispute, education was the central theme of Lee’s regime, putting all-out efforts to plant the seeds of industrialization through educating future generations. Rebuilding and improving schools from elementary schools to universities was always given the top priority among other government policies. To increase the overall number of educational facilities, President Lee granted large num- ber of permits for opening private institutions, opening up the nar- row educational circle. At one point, the number of private schools exceeded the number of public schools due to his expansionary ed- ucation policy. The degree of importance placed upon education by the Lee’s regime can be illustrated by the following fact: through- out the 1950s, 20% of the government budget was allocated to- wards the education system, making it the second largest budget item next to the national defense marking 50% of the budget. One of the subcategories of economic relief provided by the U.S. was “technical assistance,” where the recipient government could use this money to send its people abroad for the needed training and education in areas deemed necessary for its social and econom- ic development, transfer of technologies, enhancing the efficiency and effectiveness of public administration, or inviting the needed technicians and skilled workers from abroad. The former Minister of Restoration Ministry and also the former Minister of the Finance Ministry Song, In-sang, under Lee’s government, made the follow- ing comments: “If you would ask me to pinpoint the most success- ful programs of the U.S. economic relief, I would not hesitate, even for a second, to put my finger on the plans of technical assistance.” Almost all of the government officials during that time had re- ceived their education under the Japanese system, making it diffi- cult for them to communicate effectively with their U.S. counterparts. Naturally, the decision-makers thought that “to prop- erly manage the country as a whole, not just the public sector, we need to send people abroad, have them trained, and have them
  39. 39. Balanced Growth Approach based on Foreign Aid 31 work in every corner of society.” Subsequent examples would illus- trate the efforts made by the decision-makers in upbringing the highly needed human resources. With a contract of $7 million between Seoul National University and the Minnesota State University in the areas of Science, Engineering & Technology School, Medical School, and Agriculture School, faculty exchange programs were established along with sending many Korean students for study abroad. A large number of research equipment and machinery was imported through this channel. Efforts of improving the educational programs of middle and high schools were carried out in partnership with the Peabody College of Education. Management schools were newly established through the MOUs between Korea and Yonsei University and the University of Washington, which contributed tremendously to train- ing the needed managers in the private sector, giving Korean stu- dents the chance to learn the advanced techniques of management. With the fund from the “technical assistance,” Public Administration School of Seoul National University and the Graduate School of National Defense under the Ministry of Defense were established as well. Sending government officials, managers in the private sector, technicians and skilled labors abroad for three, six, and twelve month periods of practical training were other ways of utilizing “technical assistance.” One of such example is illustrated by the training of operators and technicians for power plants. Under President Lee’s regime, Dang-in-ri (100,000kw), Muk-ho (50,000kw), and Ma-san (50,000kw) power plants were constructed. To operate these power plants, young technicians with backgrounds in science and engineering were sent to the Edison Electricity Company in Detroit using funds from the “technical assistance,” where they seamlessly operated these up-to-date power plants after they had returned. There were 180 technicians working at the Dang-in-ri power plant, far smaller in numbers compared to one of the same capacity plant built by the U.S. in Pakistan where 1,500 personnel were at work. This crude comparison suggests the dedication and talents of those sent abroad for training. In addition, the Korean government could invite technicians from the U.S. using the funds from the “technical assistance.” The most successful example of such was the railroad program, among many other similar programs in various areas. There were total of 25 members in the advisory group for railroad operations and technology. Unlike other advisory groups of similar programs, this group was mainly composed of field technicians. The head of the advisory group was an experienced train operator from Texas, and
  40. 40. 32 Adaptive Implementation of the Five-Year Economic Development Plans they had put tremendous effort into running the trains between Seoul and Pusan on time, contributing to a finalization of the sys- tems of scheduled runs when it was almost a miracle to see a train depart or arrive on time. At the time, all of the trains in Korea were steam engines using bituminous coals for fuel, and there was a rise in public concern about illegal circulation of these coals to restaurants in Myong-dong area. After a series of debates, the U.S. and Korean officials agreed upon importing diesel engines to deal with the illegal circulation of fuel by sealing the fuel inside fuel tanks, not to mention the im- proved fuel efficiency from 5% of steamed engine to 18% of diesel engines. Twenty seven diesel engines were imported from General Electric, along with the training of the needed operators and main- tenance workforce. Rumor had it that the members of the advisory group were quite impressed by the talent and intelligence of the trainees. After years of hard work, the chronic transportation prob- lems were successfully resolved by the early 1960s. As these examples suggest, the “technical assistance” provided by the U.S. government had highly productive influences throughout the Korean society, especially in terms of education and training of the needed manpower. Many of the elite in government under the President Park’s regime received education from abroad, using the funds from “technical assistance.” Government officials fully uti- lized the funds from the “technical assistance” in order to reduce the illiteracy rate and providing education to the future leaders of Korea, making Korea one of the countries with the largest number of people with college degrees. 2-2 Restoration Efforts after the Korean War After signing the truce in 1953, every effort was focused towards undoing the damages of the war and restoring the economy, along with attempts to gain control over the war-time inflation. It could be described as a horrific struggle to survive day to day. In December, the U.S. and Korean governments signed the treaty of Joint Economic Committees for Rebuilding Economy and Fiscal Stabilization Plan. According to the agreements from the treaty, the Korean government laid the fundamental principles in restoring the economy such as maintaining fiscal balances, a fixed single ex- change rate, free-enterprise economy, and basic rules of administering counterpart fund. The size of the U.S. grant-type funds between the 1950~51 fiscal year was about $100 million, which later doubled to $200 million
  41. 41. Balanced Growth Approach based on Foreign Aid 33 each year from 1953. Of the total loans and investments made by the Korean government, 41.4% in 1954 and 68.4% in 1957 were fi- nanced by the counterpart fund raised by the sales of the goods re- ceived through the U.S. aid. Based on such foreign aid, the Korean government started rebuilding the foundation for economic growth. In February 1954, to appropriate the U.S. relief funds as part of the total government revenue to be used for economic restoration purposes, the Korean government enacted the “Special Accounting Law for Counterpart Fund” and the “Special Accounting Law for Economic Restoration.” In May 1954, the Korean government en- tered into an agreement with UNKRA, signing the “Treaty for Korea Economic Relief Plan.” Technical details got cleared in July for securing military and economic aid and importing relief goods from the U.S. The total amount of economic relief dramatically in- creased since the signing of the Korea-U.S. Farm Surpluses Agreement in May 1955. A series of such efforts jump-started the engines of economic restoration. The state of the key industries in Korea at the time of the begin- ning of the economic restoration was quite insignificant. In 1945, the total production of coal was 175,000 tons the total production of electricity was 120,000kw including those sent from the North, and the total production of cement was a meager 40,000tons. Three years of war massively damaged the industrial bases, making it dif- ficult for the government to raise any tax revenue. Electricity was cut-off by the North and all the power plants were destroyed ex- cept the one in Ma-san, which generated only 20,000kw, the abso- lute total amount of electricity in the South. Due to the damage in- curred to Sam-chuck Cement Factory, the total production volume of cement was a meager 25,000tons. The bigger problem lied in lack of engineers and specialists in each industrial sector. All figures of Korea right after the war sug- gested a typical agricultural country. The transition from an agricul- tural society towards an industrial society would not happen over- night, but the government of Korea tried all it could to begin re- storing the economy. Each step of restoring industrial facilities and developing eco- nomic development policies between 1954 and 1960 would vividly show the complexity and multitasking nature of restoration efforts by the government, constantly adapting to changing environments. The Industrial Bank of Korea was opened in April 1, 1954, to sup- port the restoration of industries. The Hwa-chun power plant began its operations in July 21, 1954, and the Five-year Economic Restoration Plan was announced on July 28, 1954. The total number and composition of registered vehicles in 1954, under the Seoul city
  42. 42. 34 Adaptive Implementation of the Five-Year Economic Development Plans registration office, was 5,017 passenger cars, 7,466 trucks, and 2,542 buses/vans. In April 1955, the Five-year Plan of Electricity Production Plan was announced, and the Korean government joined the IMF-IBRD on August 26, 1955. Diesel engines began operating on October 1, 1955, marking the beginning of the transportation revolution, and the amount of electricity generated exceeded 100,000kw on November 23 of the same year for the first time. The Young-am railroad tracks became operational in January 16, 1956, bringing in the anthracite coals from the Tae-back coalfield belt into the capital, and Dang-in-ri thermal power plant subsequently began its oper- ation on February 15 of the same year. Restrictions on the use of electricity had been lifted on April 28, 1956, and the Exhibition of Nuclear Power was held for the first time in Korea on September 17, 1956. On December 17, 1956, farm surpluses began flowing in from the U.S. following the Korea-U.S. Farm Surpluses Agreement that was commonly referred as PL-480. On February 3, 1957, the Five-year Economic Restoration Plan was announced, boasting a total investment figure of $2.375 billion. On April 39, 1957, the Ten-year Coal Mining Plan was announced. On August 22, deep-sea fishing vessels sailed into the Indian Ocean for the first time, and the Moon-kyung cement factory owned by the Dae-han Cement Company opened on September 25. The Han-river Footbridge, which was blasted into pieces to slow the North Korean troops from advancing quickly towards the South at the beginning of the Korean War, was finally restored on May 15, 1958. On June 12, 1958, the White Paper on Economic Restoration was published. On October 30 of the same year, the number of black and white TV sets exceeded 7,000 for the first time. The Chung-book railroad track began its operation on January 10, 1959. On April 2 of the same year, the Five-year Shipbuilding Plan was announced and on April 8, the Eight-year Coal Development Plan was announced respectively. May 13 of 1959 marked the first day of exporting plate glasses to the U.S. On March 24, 1960, an Enforcement Ordinance on Promoting the Induction of Foreign Capital was officially announced by the Korean government. On March 30 of the same year, construction of the Pusan Diesel Electric Engine Factory began. Shortly after, Lee’s regime of Democratic Party disappeared from the scene of history due to the April 19 uprising by students. The most critical moment during the breathtaking restoration of production facilities and the gradual economic restoration described above came when the Korean government became a member of the International Monetary Fund (IMF) and the International Bank of
  43. 43. Balanced Growth Approach based on Foreign Aid 35 Reconstruction and Development (IBRD) on August 26, 1955, which signified the beginning of the Korean economy’s joining the world economic order. Joining international institutions such as the IMF and IBRD signaled to others around the world of the serious efforts by the Korean government to overcome the devastation brought about by the Korean War. What was more important was the back- ing-up of the national credit deemed necessary for international trade and foreign currency exchange with hard currency holdings. The symbolic meaning of the decision to join the IMF and IBRD was that the Korean economy had become a part of the world eco- nomic order of free trade. Earnest restoration efforts since 1954 concluded in just four years, owed to the hard work by government officials, business owners and entrepreneurs, and the Korean people who endured the eco- nomic hardship without much complaint. This did not mean that there were no major bottlenecks. Before 1957, there was a perpetual friction between the U.S. and Korea about how to manage the proc- ess of restoration. The most fundamental cause of such friction was the difference in the opinions on how to spend the economic relief funds. The Korean government wanted to invest in the areas of critical manufacturing facilities such as oil refineries or fertilizer plants, whereas the U.S. government insisted on importing urgently needed consumer goods to resolve the pending problems of “hunger and disease.” For instance, UNKRA had projected that the aggregate demand for chemical fertilizers would be 400,000 tons between 1953~57, amounting to $288 million in total. This meant that $60 million, 20~30% of the annual economic relief fund of $200 million, would be thrown away each year just to import the needed fertilizers. Korean officials viewed this as being no different from wasting val- uable relief funds for importing non-durable goods that would dis- appear after just a single usage. Rather, they wanted to use the money for building the urgently needed fertilizer plants instead. The U.S. government was persistently against this idea, forcing President Lee to look for other ways to fulfill this desire to have fertilizer plants. President Lee began negotiating with UNKRA, per- suading them to use the relief funds for building plate glass plant in Incheon and a cement factory in Moon-kyung. UNKRA agreed to do so since, they reasoned, plate glass was critical construction material for economic restoration and it would make economic sense since there were enough raw materials in Korea as well as the needed experiences in producing such products. In February 1956, the construction of a plate-glass plant with an annual pro- duction volume of 120,000 boxes of plate glasses finally initiated by
  44. 44. 36 Adaptive Implementation of the Five-Year Economic Development Plans UNKRA, totaling $3.63 million and 602,510 thousand Hwan (the old Korean currency) from the counterpart fund. During 1955, 70% of the total consumption of 189,000 tons of ce- ment had to be imported. Subsequently, a cement factory was con- structed in Moon-kyung as the second project carried out by the UNKRA. The building of the Incheon plate glass factory and the Moon-kyung cement factory utilizing the UNKRA relief fund gave a strong signal to the U.S., forcing them to follow the footsteps of UNKRA. As a result, an agreement between the U.S. and Korea to build fertilizer plants using the Agency for International Development (AID) funds was reached in 1955, finalizing a basic principle of allowing maximum of 25% of the total relief funds to be used for investment purposes. Financial resources were assembled from AID loans of $33.8 mil- lion and 275 million Hwan of domestic funds. While building the Chung-ju fertilizer plant, the Korean government selected 68 train- ees to be sent to a fertilizer plant in the U.S. The original plan was to start the construction in April 1958, but due to a number of problems such as slow process of securing the needed financial re- sources from the U.S. and lack of expertise of domestic technicians, the first test-run was conducted in 1959 and began full operation producing 85,000tons each year from April 1961 a long time after President Lee was forced to step down. Despite the strong desire of the Korean government officials to use the relief funds for invest- ment purposes, the actual use of the relief funds during 1954~61 showed 74.7% of the total relief fund being used for importing raw materials and 23.6% being used for importing machineries for production. The talks of the Chung-joo fertilizer plant in 1957 marked the be- ginning of the rapid advancement of restoration activities. The con- cerned parties of the two governments gradually began to narrow gaps in opinions, subsequently increasing the quantity of imported goods dramatically. Using the repayments of outstanding loans made to the UN troops, the supply of essential goods including food products began improving. Another critical turning point of restoration efforts came with the increased supply of electrical pow- er since all other plants would not be able to operate in full ca- pacity without electricity. Construction of the Young-well thermal power plant, with the help of the U.S. economic relief agencies, fol- lowed by the construction of the Dang-in-ri thermal power plant, greatly contributed to such a change in electricity supply. A large number of engineers was needed to operate the newly built power plants. President Lee gave a special executive order to the minister of National Defense to select 45 military officers with
  45. 45. Balanced Growth Approach based on Foreign Aid 37 college degrees from the top universities from the army, navy, and air force, discharge them from military duty, and send them to the U.S. for nine-months of training in electrical engineering. These un- expectedly discharged military engineering officers received training in the U.S., gaining detailed knowledge in the areas of the gen- eration, transmission, and distribution of electricity as well as the management and daily operations of power plants, becoming a crit- ical source of manpower in the electric power industry. The not-widely-known efforts made by the cabinet members and those involved in developing economic policies also contributed greatly to hasten the progress of economic restoration. To name a few, the Vice Minister of Economic Restoration, Shin, Hyun-hwak, and the Director of Planning Bureau, Song, In-sang, who led the Planning Committee played pivotal roles in the restoration process. The Director of Budget Bureau, Lee, Han-bin, and the Director of Financial Bureau, Kim, Jung-ryum, who led the Financial Affairs Committee, also played critical roles in stabilizing the money sup- ply through fiscal and monetary policies. In 1957, skyrocketing in- flation rates turned direction, recording –0.27%, and, for a brief pe- riod in 1958, the Korean economy marked a positive growth for the first time. The dreadful inflation finally settled down from this point, stabilizing the overall economy. The overall speed and content of economic recovery of Korea dif- fered greatly from that of Japan‘s, however. Although Japan had lost the Second World War, it already had an industrial base strong enough to invade China and Southeast Asia and to wage the Pacific War with the U.S. With the “rare opportunity” of the Korean War, Japan was able to not only recover from the loss of war but also grow dramatically. On the contrary, Korea was se- verely damaged from the Korean War on top of already-lacking technological knowledge, unfavorable industrial conditions, and a drastically small number of entrepreneurs and managers not to mention the lack of assets and capital. In March 1956, the Korean government finally sold off its stake of nationalized banks, the only remaining government-vested prop- erty at the time, after a series of similar attempts, beginning from November 1954, had not succeeded in finding the right bidders. Private firms constantly struggled in securing needed financial re- sources for investment due to the lack of overall assets and capital in Korea at that time. To alleviate the financial difficulties faced by these private firms, the Korean government decided to form a mod- ern form of “Konzern (pool)” composed of private firms and a leading bank. The officials were expecting to speed up the overall restoration process and industrialization of the Korea through

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