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

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Adaptive Implementation of the Five Year Economic Development Plans Adaptive Implementation of the Five Year Economic Development Plans Document Transcript

  • 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
  • Adaptive Implementation of the Five-Year Economic Development Plans Younguck Kang
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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.
  • 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
  • 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.
  • 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).
  • 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
  • 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
  • 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.
  • 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)
  • 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-
  • 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.
  • 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
  • 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
  • 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-
  • 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-
  • 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
  • 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-
  • 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
  • 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
  • 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.
  • Introduction 21 Table 1-1. Implementation Process of the Economic Plan after 1964
  • 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
  • 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
  • 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,
  • 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
  • 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,
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 38 Adaptive Implementation of the Five-Year Economic Development Plans “Konzern.” A number of private firms of different tracks with enough wealth contested heavily to win the bid. The final results showed that: Heung-up Bank (later became Hanil Bank and sub- sequently Hanbit Bank) fell under the ownership of Lee, Byung-cheol of the SamSung Trading Co., where he owned 85% of stock; Savings Bank (later became Che-il Bank) under the Chung, Jae-ho of Samho Textile Co.; 50% of the Choheung Bank stock un- der Lee, Byung-cheol of SamSung; Commercial Bank (later merged with Hanbit Bank) under Lee, Han-won of the Daehan Flour-Mill Co.; and Lee, Jung-lim of Daehan Cement Co. created Seoul Bank in 1959. The forming of the modern “Konzern” made securing financial resources a lot easier for these firms, but it also had created un- desirable problems of using deposits of the banks as if it were their own private bank account. Whenever needed, these firms took money from the bank on their own to use it for daily business operations. Subsequently, the general public and the small and midsized firms had difficulty borrowing from these banks and had to rely on personal debt or usury bearing unnecessarily higher in- terest rates. One of the most serious economic and social issues in the 1950s was the severe shortage of food and fuel (firewood). To deal with the food shortage problem, President Lee negotiated with the U.S. for providing food assistance to Korea under the U.S. PL-480 Program in May 1955. In 1957, the aggregate demand for rice was about 4.05 billion tons whereas the total domestic production of rice was about 3.16 billion tons. Beginning from 1956, 238,000 tons of food products arrived from the U.S., which was equal to 15% of the total domestic crop yields. Until 1967, total of $570 million worth of food assistance had flown in to the Korea: 41.3% wheat, 39.4% raw cotton, 8.6% barley, 4.7% rice, 0.9% corn, and 0.9% millet, in addi- tion to others. Although such assistance from the U.S. tremendously helped resolve the food shortage problem at hand, it had con- tributed to forming a relatively lower crop prices in the domestic market, making it difficult for farmers to make profits. Dealing with the food shortage problem was a relatively easy task, compared to the fuel shortage problem. Withstanding the se- verely cold weather during the winter required enough firewood supplied from the nearby mountains, but there weren’t enough trees left standing anymore due to the war and unplanned extortion. President Lee gave an executive order to send military troops to the coal mines for restoring and increasing the production of coal. For two years and nine months between December 27, 1954 and
  • Balanced Growth Approach based on Foreign Aid 39 August 8, 1957, the military delegation led by the Lieutenant General Kim, Il-hwan helped restore and increase the production of coal mines. Through the military delegation, 18,000 units of military cloths, over 200 yards of cotton sheets, 7,000 blankets, and 8,000 units of winter underwear were provided for free, separately from the fifty military trucks for transporting mining timber and con- struction materials. The military construction troops built housings for coal miners, along with schools and classroom renovations, and also provided literacy education to coal miners. They also provided 3,500 tons of government-controlled rice and even salt and cigarettes. To transport the coal produced, the military delegation amassed 100 military trucks and reconstructed the road between the Taebak coal fields and the capital. To continue the Yong-am railroad con- struction that was abruptly stopped by the Korean War, military construction troops were sent to finish the remainder of the rail road tracks, opening it on December 30, 1955. Prior to the con- struction of Yong-am railroad track, coal produced from Taebak area had to be first transported to Mook-ho or Sam-chuck by train and then shipped around the Korean peninsula to the port in Incheon, making the transportation cost exceed the price of the coal itself. Opening of the Yong-am line brought about a revolutionary change, moving coal from the Taebak area directly into capital re- gions, and subsequently brought about rapid shifts from the fire- wood to coals for fuel consumption. The total production of an- thracite coal had rapidly increased from 1.3 million tons in 1955 to 2.44 million tons in 1957, 4.13 million tons in 1959, and 5.35 million tons in 1960. Subsequently, the mining and industry sector recorded average an annual growth rate of 12.3% between 1957~60, and the electricity generated by the thermal power plant had grown 15.4% annually during the same period. There was also a strategic move made by President Lee attempt- ing to deal with the fuel problem: namely nuclear power plants. The Korean government signed an “Agreement of Cooperation for the Use of Nuclear Power for Non-military Purpose” with the U.S. in February 1956, and also became a regular member of International Atomic Energy Agency (IAEA) in March 1958, build- ing a foundation for international cooperation for the peaceful use of atomic power. Research Institution of Atomic Energy was created in December 1958, based on the legislature of the Atomic Energy Act in March of the same year, building the needed institutional structures for research and development of atomic energy. In 1958, President Lee personally selected 20 students for study abroad in England to educate specialists in the area of atomic
  • 40 Adaptive Implementation of the Five-Year Economic Development Plans energy. Considering the per capita income of mere $60 at that time, such a foresight of the national leader in planning and implement- ing the research and development of atomic energy, “the energy source of next generation,” could only be described as a pure wonder. 2-3 Early Versions of Economic Development Plan The genuine beginning of the makings of economic development plan was in the midst of the Korean War, exemplified by the “Nathan Report” of Five-year Korea Economy Restoration Plan. This particular plan was not implemented because many Korean of- ficials were opposed to the idea of beginning the industrialization process of Korea from rebuilding the agricultural sector first. The second economic development plan of a similar nature was the “Terms and Structure of Korea Aid (TASKA) Project” in July 1953. TASKA project was developed by the U.S. government to set the guiding principles of distributing and implementing the eco- nomic relief funds for reconstruction and restoration of the Korean economy, stating the purpose of restoring the Korean economy to the level prior to the Korean War by investing $883 million over a three-year-period beginning 1954. In 1957, the Korean government created the Economic Development Committee under the Ministry of Restoration to develop a series of economic restoration plans, utilizing talented officials, academics, journalists, and those who just returned from abroad finishing their PhD studies. The idea of developing such a committee was born while a few selected Korean government officials were receiving education and training at the Economic Development Institution (EDI) of the World Bank, where those officials acutely realized the necessity of an economic development strategy at a national level. The course materials at the EDI during that time, such as Theory of Economic Development by Arther Louis and Theory of Development Planning by Tin Bergen, were focused upon developing the neces- sary policy measures for the economic growth of developing countries. One of the very first Korean officials who received the EDI edu- cation and training was Mr. Song, In-sang. He received his EDI training in 1956, and according to him, one of the discussion topics was comparing the advantages and disadvantages, in the context of long-term economic development, between the strict implementation of a preplanned five-year economic development plan such as the one used by the Indian central and local governments, and flexible
  • Balanced Growth Approach based on Foreign Aid 41 implementation without preplanning by constantly adjusting and developing economic development strategies based on budget fig- ures each year such as the one used by Brazil. While discussing such topics, he thought that a government-led economic develop- ment plan would be an absolute essential for underdeveloped coun- tries like Korea. Active utilization of the Economic Development Committee began in 1958 when Mr. Song became the head of the Ministry of Restoration. In September of the same year, Minister Song visited the U.S. Department of State with the Director of Policy Coordination Bureau, the Ministry of Restoration Kim, Tae-dong and the Director of Budget Bureau, the Ministry of Finance Lee, Han-bin. They had met with the undersecretary of the Department of State Christian Herter, one of the working officials of the famous Marshall Plan after World War II. During their meeting, the Korean delegation stressed the importance of long-term economic develop- ment plans for a country like Korea, stating: “Korea is a typical underdeveloped country without any of the essential elements of economic development such as technical knowledge and assets and capital, not to mention the lack of natural resources. However, we have human resources with a high level of education. Only by utilizing these human capitals properly could we achieve the eco- nomic development. Also, the current state of the Korean economy must be analyzed thoroughly if we are to prop- erly distribute limited resources, to choose appropriate pol- icy measures, and to enhance the overall effectiveness and implementation feasibility of the plan. To pull this out suc- cessfully, we need to have a long-term economic develop- ment plan. The economic development plan will follow the characteristics of an indicative plan rather than the social- ist-type of plan India is currently using. Namely, we would put the highest priorities in incorporating and uti- lizing the capacities of private business entities while the government would take part in those areas where private efforts could not be effective given the current technologies or capital and in those areas where private businesses would not choose to invest because of low profitability. We will even develop and implement a type of economic development plan that would privatize these govern- ment-vested industries when the appropriate time comes at a later stage of economic development. Especially, for less
  • 42 Adaptive Implementation of the Five-Year Economic Development Plans developed countries, an economic development plan that would give people clear pictures of the future after com- pletion, that would give people hope of ‘so we can live better lives, too,’ and that would inspire people and en- courage them to participate actively in the economic re- storation process is an absolute must.” After a long and persistent persuasion based on such reasoning, Undersecretary Herter finally agreed to the use of U.S. relief funds for making the economic development plan by the Korean government. The reason why Korea had to go through this difficult process of getting agreements from the U.S. even before making an economic development plan of its own had to do with the gen- erally negative perceptions of the U.S. government towards the ef- fectiveness of similar types of economic development plans made by other third world countries. After World War II, the U.S. pro- vided a large amount of economic relief funds to countries like India, Pakistan, and Turkey, but eventually they lost control of the use of such relief funds. Even some people in the U.S. were saying that Korea was the only country that the U.S. had some success with the relief funds. Subsequently, whenever Korean officials were stressing the importance and necessity of economic development, the U.S. officials were questioning themselves whether Korea would follow the tracks of the others by implementing socialist-type of economic development. The Korean delegation had to promise many times that "we would not follow the socialist-type of econom- ic development plan like India, no matter what." The Economic Development Committee (EDC) came into ex- istence in 1958, and the purpose of this committee was stated as: “with the changes in the U.S. foreign aid policy in 1958, the grant-type of economic relief is being replaced by the loan-type of economic relief. This shift in the U.S. policy forces us to rapidly re- move the economic characteristics of underdeveloped countries so that we attain a self-sustainable economy. For this purpose, we cre- ate this committee to serve the function of comprehensively exam- ining economic policies considering the peculiar economic environ- ments of Korea, and to serve as a central advisory body to the Minister of Restoration.” The mandates of this committee were stat- ed as: “inspect and evaluate the current and potential human, phys- ical, and financial resources; discuss and develop the most urgent and promising ways of economic development for resolving the general economic problems and establishing the most appropriate economic and industrial structure; discuss and decide economic and other policies to use the overall resources of Korea efficiently and
  • Balanced Growth Approach based on Foreign Aid 43 to maximize the overall resources of Korea; and provide initiating opinions on developing a series of annual plans for previously stat- ed purposes and mandates.” Serving as an advisory agency to the Minister of Restoration, the EDC had a budget of 76 million Hwan and $125,000 from the ICA fund, and the charter was publicly announced under a Presidential decree. There were 22 regular committee members numerous assis- tant staff, non-regular members, and advisors from every corner of Korean society, including graduates fresh from their study abroad. The young and able personnel, academics and specialists were to utilize existing theories and advanced knowledge of what they had just learned from abroad and were given the task of developing the economic plan as soon as possible. They even invited five pro- fessors from the University of Oregon to serve as a group of advi- sors in this effort. To develop a long-term economic development model, one need- ed to develop an industrial input output table (IOT) which would form a basis for making long-term projections. For instance, if one were to build a steel manufacturing factory, one needed to estimate the budgets and estimate the spillover effects into related industries. By comparing a number of different IOTs of all in- dustries, one could determine the relative priorities of investments. However, there was no one who had the required skills and knowl- edge, and there were no statistics available for developing such ta- bles at the time. By the early 1960s, such IOT tables could be esti- mated by the Research Departmen at the Bank of Korea. The degree of expectations put on the EDC members by Lee’s re- gime could be revealed in their salary. The monthly salary of the Minister of Restoration was 42,000 Hwan, whereas a member of EDC was 180,000, almost four times larger than that of the Minister himself. Each time they held a meeting, 5,000 Hwan was separately provided for related expenses. The highest level of treatment was given to the members of the EDC as extra motivation in order to provide a strong sense of duty to make a great contribution to the economic development of Korea. The most difficult part of making the economic development plan was in projecting the future demands, especially the demand for national defense. Initially, the EDC planned to develop a seven-year plan, but they changed their minds to develop a three-year plan in- stead, since they did not have any prior experience and such pro- jections would be bound to have large margins of errors. They rea- soned that they would correct the errors along with the im- plementation of the first three-year plan, as they had accumulated more experience.
  • 44 Adaptive Implementation of the Five-Year Economic Development Plans After numerous attempts and failures, the historic three-year eco- nomic development plan was finally passed the Cabinet Council in April 15, 1960. Taking 1960 as the basis year, the plan had laid out a set of quantitative tables for each year between 1960 and 1962, clarifying the priorities, sequence and amount of investments and projections of the outcomes of such investments to be used for re- investment in the following year. This marked the beginning of an economic development plan based on quantitative measures rather than descriptive measures. The main target of this three-year eco- nomic development plan was to resolve the undersupply problem of essential goods. The plan clarified the focus industry and pro- jected the annual growth rate of GNP to be 5.2% between 1960 and 1962. This projected growth rate was developed by extending the past trend of the actual growth rates between 1953 and 1958. They also estimated the annual average growth rate by each sector as 3.8% for the primary industry, 11.2% for the secondary industry, and 3.7% for the service industry. The underlying reason for setting a relatively lower target growth rate was to ensure meeting the targeted growth rate rather than failing to meet it. If the actual growth rate exceeded the target, there would be relatively less problems than the other way around. In short, rather than being too ambitious from the beginning, it would make much more sense to focus on the secondary industry for broadening the bases for self-sufficiency for the time being so that the growth rate would follow naturally. The plan projected the necessary financial resources to be 639.3 billion Hwan (pegging to 1955 price index) from domestic capital and $86.6 million from for- eign capital, accounting for the expected decrease in foreign eco- nomic relief by 15% annually. In amassing the needed domestic capital, the plan showed 53% to be provided by the Korean govern- ment and the remainder by private sources such as savings ac- counts, focusing upon amassing needed capital by government ex- penditures and by increasing the savings rate to 13.8% for the pri- vate sector. Unfortunately, this plan did not see the light of the day due to the April 19 student-led revolution just four days later. This origi- nal plan was handed down to Chang Myun’s Liberal Party regime, and later used it as a basis for the First Five-year Economic Development Plan right after the May 16 military-led revolution in 1961, since the same group of government elites at the Ministry of Restoration worked for all three different regimes. In July 1959, the Ministry of Restoration officially published the White Paper of Economic Restoration, sending a message to every corner of Korean society claiming the completion of the restoration
  • Balanced Growth Approach based on Foreign Aid 45 efforts after the Korean War. The Minister of Restoration Shin, Hyun-hwak stated in the introduction of the White Paper as follow- ing: “The strong efforts by our people finally come to bear fruit, enriching the overall variety of goods available for daily consumption and production and lifted the spirits of our people in every corner of society. Especially last year, the production volumes of agricultural goods and in- dustrial goods have increased greatly, the price of these goods has declined for the first time since independence, and the trust of the people in the value of the currency has increased. What is truly amazing among all the changes we have seen so far is that we now have to add more space to the existing markets to sell these goods, and the size of private savings in the financial institutions have increased unlike what we have seen before, normalizing the financial conditions as well as bringing about a new concern of where to invest such money…” The White Paper of Economic Restoration was also published in June 1958, prior to the above one, describing the footsteps of eco- nomic growth since the independence as: “First of all, for the periods between the independence and right before the Korean War, we can describe as ad- justment periods for domestic politics and economics. Namely, our economy needed adjustment periods due to the break-off from the Japanese economy and the cut-off by the North which had abundant electricity and heavy industry. Secondly, for the periods of the Korean War from 1950 to 1953, we lost 11.7% of our industrial facilities and 16.9% of housing, losses amounting to $3 billion. Thirdly, for the periods between mid 1953 to the mid 1956, we focused upon reconstructing the society and the economy. The Korean economy gained control over sky- rocketing inflation, and the level of production returned to that of 1949 and 1950, successfully forming the foundation for future balanced growth.“ The same White Paper continued to describe the transformation of the Korean Economy during 1957 alone as: “The GNP has grown 29% compared to 1956, estimated
  • 46 Adaptive Implementation of the Five-Year Economic Development Plans as from 126.9 billion Hwan to 163.41 billion Hwan. Per capita GNP has also grown from 58,000 Hwan in 1956 to 73,000 Hwan in 1957 by 26%. Such growth rate of GNP was below the inflation rate increase between ‘55 and ’56, whereas the growth rate of GNP now exceeds that of in- flation rate in 1957. The real GNP growth rate lies above 12%, mainly due to the outcomes of the series of invest- ments made with the economic relief funds. The overall balance of the accounts between 1954 and 1957 shows 68.5 billion Hwan in 1954, 97.6 in 1955, 158.3 in 1956, and 175 in 1957 of excess government expenditures, which was fully supported by the economic relief funds. On the other hand, the gap between the total supply and total demand increased, creating excess demand problems due to the worsening of domestic supplies.“
  • CHAPTER 3 Fundamental Shift in Strategy: Unbalanced Growth Approach Focusing on Import-substitute Industries based on Domestic Capital 3-1 Background: Early Achievements and Problems The policy efforts by the Korean government had the potential for many unwanted side effects and unexpected problems. Importing crops based on PL-480 to resolve the food shortage had contributed to the creation of monopolistic firms lobbying for the rights to sell relief goods flowing in along with the crops. Dissatisfaction arising from the not-so-successful Land Reform Act, corruption during the process of sales of government-vested proper- ties, business entities exploiting banks as if it were their own pri- vate safes, profiteering by middlemen, monopolistic prices of daily necessities, and etc. resulted in the mass-scale relocation of people into cities, creating an excess supply of manual labor in cities, in- creasing the absolute number of those in poverty, unemployed, and receiving low income. The political environment during this period was not so promis- ing as well. Lee’s regime tried to strengthen its political power within the National Assembly by relying on physical force based on military and police force, which had increased dramatically since the Korean War. The general public perceived Lee’s Liberal Party government as severely corrupted, increasing the overall public’s dissatisfaction. In 1954, an attempt by the ruling Liberal Party was made in the National Assembly to make a constitutional amend- ment to the clause limiting the reappointment of the president to more than two terms. To pass a constitutional amendment, one needed 136 votes, two-thirds of the total of 203 votes at the time. However, the count fell one short of the 136 needed, thereby reject- ing the bill. The very next day, the Liberal Party declared its vic- tory, overturning the prior decision, by interpreting the majority threshold to be 135, rather than 136, based on the mathematical
  • 48 Adaptive Implementation of the Five-Year Economic Development Plans principle of “rounding off to the nearest integer” where two-thirds of 203 equals 135.333. It seemed that there would be a change in political power by the presidential election of May 15, 1956. However, presidential candi- date Shin, Ik-hwei of the Democratic Party suddenly passed away, vaporizing the chance of making a change in the political leadership. The Liberal Party passed a new election law adding a clause of media restrictions, blocking the media from reporting fraudulent election attempts and coerced public officials to engage in illegal electioneering efforts. Foreseeing the stark election results through normal voting process, the Liberal Party made plans in ad- vance to thwart the presidential election in 1960 by coercing public officials to fraudulent vote counting. The very first attempt came about while the presidential candidate of the Democratic Party, Cho, Byung-ok, was visiting the U.S. to receive medical treatment for his chronic illness. To cease the opportunity, the Liberal Party changed the election date to March 15, two months earlier than the scheduled date in May, along with giving specific secret directions to government officials about allowing preliminary voting, semi-se- cret voting, threatening voters, removing the overseers of opposi- tion party, forcing people not to vote and replacing such with pre-signed votes, switching of ballot boxes, and fabricating the vote counting. However, the secret document got revealed by the Democratic Party before the election, creating political swirls throughout the nation. Unfortunately for the Democratic Party, presidential candidate Cho had passed away suddenly before the election and Lee was elected as the president on March 17, for the fourth time with over 80% of the popular vote. Naturally, Lee’s re- gime lost its legitimacy despite the voting result. Student protests, which began in Daegu on February 28, 1960, quickly spread to other areas, gradually increasing its intensity. Following a series of protests such as the Masan student protest on March 15, the Masan uprising on April 11, and incidents of attack- ing Korea University students on April 18, thousands of students and citizens marched towards the front of the presidential resi- dence, Kyung-Moo-Dae on April 19, demanding a resignation of President Lee. Martial law was proclaimed around Seoul city area at 1 p.m.. that day, followed by the implementation of martial law in Pusan, Daegu, Kwanju area by 4 p.m., and the government pro- claimed martial law throughout Korea by 5 p.m. that day. Gun fire in front of the presidential house initiated a mass confrontation, killing 183 and wounding 6,259 people. On April 25, about 300 professors from 27 colleges and uni- versities around the country assembled in Seoul, marching peace-
  • Fundamental Shift in Strategy: Unbalanced Growth Approach Focusing on Import-substitute Industries based on Domestic Capital 49 fully through the city. On the next day, President Lee announced his resignation, kneeling down to the tides of demands for a change to the political and economic contradictions of Korean soci- ety during the 50s. Subsequently, the Democratic Party seized pow- er, appointing Chang, Myun as the Prime Minister on July 29, 1960 and the Second Republic of Korea was born on August 13, 1960, along with major amendments to the constitution changing the presidential system to a parliamentary government system. Chang, Myun represented the new faction within the Democratic Party. Since his appointment as the Prime Minister under the par- liamentary government system, the social and political environment of Korea became highly unstable due to intraparty factionalism be- tween the new faction and the old faction represented by Yoon, Bo-sun, lack of strong leadership by Prime Minister Chang, corrup- tion within the Democratic Party, and a wide variety of political demands made by diverse ideological circles and interest groups. Reformist circles rose to the ranks of political party, and began na- tionalistic movements and the “promotion of reunification” move- ments, threatening the anticommunist South. To make matters worse, students were excessively involved in day-to-day politics and incidents of crimes increased rapidly due to greatly disturbed public peace. Weakening of the national identity of anticommunism and insufficient and inappropriate cleanup of political henchmen and corrupted military generals made Chang’s government to look like a log. Since 1953, the North violated the truce more than 50,000 times. However, during a one-year-period of 1961, they had provoked the South 736 times, which was far greater in number of such provoca- tions: 445 times throughout the 1950s altogether. The tactics em- ployed by the North at this time involved sending large number of spies to the South, aggravating social disorders, and yet taking peaceful gestures on the outside, proposing reunification of the two based on a federal system. Such an unstable political situation under Chang’s Democratic Party regime, which was quickly losing political support, gave good justification and excuses to a group of young military officers plan- ning a military coup, perceiving the student-led reunification move- ments to be against the national identity of anticommunism. On May 16, 1961, a military coup finally broke out, forcing Chang’s Democratic Party to step down only after nine months of rule. On May 18, 1961, the Commission of Military Revolution changed its name to the Commission of National Reconstruction assuming all powers of the three branches of the government. The Third Republic of Korea began on December 17, 1963 subsequently.
  • 50 Adaptive Implementation of the Five-Year Economic Development Plans The economic development plan under Chang’s regime was not widely known until recently since they were in power only about nine months and it was difficult to find evidence. However, it was found that the fundamental principles and directions of the First Five-year Economic Development Plan (FEDP) by the Commission of Military Revolution were based mostly upon the economic devel- opment plan under Chang’s regime. Namely, all of the major shifts, from economic stability to economic growth, from balanced growth approach to unbalanced growth approach, and from pri- vate-sector-led industry development to government-led industry development had already been laid out by the economic develop- ment plan under the Chang’s regime. The more detailed im- plementation tactics of export-oriented industrialization in achieving high rate of economic growth came to its existence at a later period of time, which was not yet mentioned in both of the plans. The economic development plan of Chang’s regime was consid- ered to be relatively unimportant due to the general perception of the Second Republic of Korea’s disinterest in implementing the plan. Such an argument typically cited a number of reasons such as: the relatively lower growth rate target of 5.6% in the Second ROK’s plan, compared to 7.1% of the Commission of Military Revolution; Chang’s regime lacking the will to implement the plan, not emphasizing enough of the leading role of the government; re- lated tactics of industrialization strategy were not detailed enough; and the plan reflected more of the US’s intention, rather than our own. However, the process of making the economic development plan under Chang’s regime itself could be valued highly since it tried to incorporate and reflect the general concerns of society through collaborative efforts, and tried to overcome the shortfalls of the previous economic development plan under President Lee’s regime. 3-2 Shifting the Strategy Prime Minister Chang Myun sent a letter to President Eisenhower on August 18, 1960, two months prior to his appointment, stressing the necessity of political and economic reforms. In his letter, he emphasized that economic growth would become the renewed focus of the government policies. In addition, he sent diplomatic docu- ment of the “Memorandum of Korean Economic Reform Policy” to the Secretary of the State Christian A. Herter on October 4, 1960, requesting further economic relief funds for economic development. Both governments came to an agreement, signing the memorandum.
  • Fundamental Shift in Strategy: Unbalanced Growth Approach Focusing on Import-substitute Industries based on Domestic Capital 51 In this memorandum, mention of the five-year economic develop- ment plan could already be found along with plans to focus on constructing the industrial bases and to increase the ratio of domes- tic capital in development efforts by decreasing the expenditures on national defense. A high unemployment rate and poverty problems in rural areas were cited as the immediate problems they plan to deal with. For the more detailed plans of operation, he mentioned undertaking of building infrastructures, policy to support the small and midsized firms, rearing of labor-intensive industries, and im- proving the balance of payments. He further stated that Korea was planning to rely mainly on the economic relief funds and government loans from the U.S. for the necessary economic development funds. Subsequently, he requested $420 million for supporting economic development and $80 million for reforming the public sector, totaling $500 million. In the introduction section of this memorandum, the necessity of comprehensive review of the U.S. foreign aid policy towards Korea so far was emphasized, citing the main focus of such aid was on providing consumption goods rather than investing on economic in- frastructure to form industrial basis. It was also expressed that the new government was planning to push the Korean economy to- wards a higher level of economic development and willing to spend its own financial resources as much as possible. In the second chapter of the memorandum titled as “Characteristics of Korean Economy and Systematic Unbalance,” sev- en problems were cited as the social issues of high priorities: high unemployment rate, severe poverty in rural area, large trade deficit, chronic inflation, difficulties in public administration, heavy burden of national defense expenditures, and poor social infrastructure. In the third chapter “Policy Measures for Stated Economic Problems,” a number of policy solutions to the stated problems were provided. To deal with the high unemployment rate, it sug- gested policy solutions such as rearing labor-intensive industrial ba- sis, creation of the “Nation Building Volunteers,” and rearing of small and midsized firms. For rural poverty issue, it suggested the creation of the “Rural Development Service,” which would be in charge of community development projects. In dealing with the trade deficit, promotions of exports utilizing cheap labor, exports of raw mineral products tying it to importing foreign capital, and normalization of Korea-Japan foreign relations were cited as policy solutions. Other policy measures for dealing with chronic inflation, reforming public administration, expansion of social infrastructures were also mentioned. One of the most noticeable policy measures was a plan to de-
  • 52 Adaptive Implementation of the Five-Year Economic Development Plans crease spending on national defense. It listed measures such as cut- ting down the size of the army by 50,000, requesting increased us- age of domestic supplies of the U.S. military stationed in Korea, and providing job-training to solders, as well as utilizing solders for construction projects. In chapter four “Projection of Needed Capital,” the shift of the Korean economy from restoration efforts after the Korean War to- wards economic growth and development was stressed. Economic growth and development would lead to the natural conclusion that pushing the Korean economy forward by decisively and quickly implementing the economic development plan was a must, and, for this purpose, increased economic relief funds and/or government loans would be needed from the U.S. The total amount of invest- ment on infrastructure for economic development requested in this memorandum was $420 million over a five-year-period. Of the total amount, it requested $20 million each year for supporting national defense and $60 million each year in forms of special grants or government loans. Furthermore, it additionally requested $80 mil- lion of “Economic Stability Fund” over two years as a gift-type grant, citing the importance of economic stability for advancing re- forms of public administration such as increasing salaries for public officials to prevent corruptions and reducing the number of public officials. The details of the economic development plan of Chang’s regime were carried out by the Economic Development Committee (EDC) under the Ministry of Restoration, which was the same as Lee’s regime. However, the EDC was given more authority and power under Chang’s regime since it was then headed by Minister- Position Oh, Wee-young under official order of Prime Minister Chang. In one of the hearings held on December 1960, government offi- cials cited that they were already in the process of researching ways to extend the duration of the economic development plan de- veloped by the Liberal Party government from three years to seven years, and that they were also considering the creation of a minis- try that would be entrusted with developing long-term develop- ment plans, execution, monitoring and evaluation. Around this peri- od, the Second ROK was executing the process of collecting ideas and opinions on economic development from various opinion lead- ers through General Conference of Economy. This forum was first held on December 15~19, 1960 with 305 participants from all cor- ners of the Korean society. It was composed of seven sub- committees of Reorganization of Public Institution, Finance and Banking, Reorganization of Industrial Structure, Public Enterprise,
  • Fundamental Shift in Strategy: Unbalanced Growth Approach Focusing on Import-substitute Industries based on Domestic Capital 53 Balance of Payments, Employment and Production Level, and Community Development Project, enlisting policy proposals to the government for economic development. Most of the recom- mendations of this forum were reflected in economic development plans, suggestive of a democratic process of collecting public senti- ments in making the economic development plan under the Democratic Party’s regime. The Second ROK was to implement the economic development plan from 1961. In the New Year’s Address of 1961, the Minister of Restoration announced three major economic policies of the year to be “creation of central economic planning agency,” “execution of community development,” and “establishing long-term economic development plan marking 1961 as the basis year.” The slogan for the year 1961 announced by the Democratic Party was the “Year of Embarking on the Construction of Economy.” "By revolutionizing public awareness from ‘stability’ to ‘growth,’" they said, "we will transform the nation to a ‘Country of Works’ and ‘Country of Construction.’" "Long-term Economic Planning", further continued, "would mean moving away from enumerating sectors and taking a leading sector approach to overcome major bottlenecks. We are al- ready taking such approaches in economic policies, and one such example is the investment in power plants." The Second ROK decided to take an unbalanced growth ap- proach, criticizing the balanced growth approach of the Three-year Economic Development Plan of Lee’s regime. Economy Development Committee focused upon comprehensively reviewing all of the previous development plans including the Three-year Economic Development Plan, and announced its results on February 1961. In this publication, problems of the previous Three-year plan were discussed: 1) the economic development mod- el focused only on extending the past trend without incorporating projected developments; 2) the previous plan fell into a trap of mannerism of formality, ignoring the underlying bottlenecks of eco- nomic structure; and 3) the previous plan did not reflect the overall public opinions because it did not follow the democratic process. Based on such claims, it continued stating that the new principles and direction of economic development planning should to be de- termined as: "In making the long-term development plan, we must put extra efforts into making the planned indexes to be ambitious and yet feasible enough based upon our past ex- periences, and at the same time must take continuously changing domestic and foreign environments into account.
  • 54 Adaptive Implementation of the Five-Year Economic Development Plans It would probably take at least 20 to 30 years to reach a self-sustainable economy while breaking away from the current chronic structural unbalance. Taking this long-run perspective, a series of five-year plans must be repeated continuously. However, we must take a leading sector ap- proach for the first and second plan both to overcome the bottlenecked areas and to develop industrial sectors of strategic importance. Only by taking this approach, can we build the foundation for future accelerated growth." As stated above, the Democratic Party’s regime declared to take a leading sector approach in its first economic development plan, in the context of 20~30 year long-term perspective building a founda- tion for next stages of development. Following such a perspective, the regime further developed the “Three Guiding Principles” of the first five-year economic development plan: 1) build industrial foun- dation through concentrated investments on strategic areas such as electricity and coal; 2) aim at developing the natural domain of the Korean Peninsula and at increasing employment through a max- imum utilization of idle resources; and 3) correct the structural un- balance of the national economy by increasing the productivity of the agricultural sector. The Economic Development Committee prepared an “Outline of Establishing Five-year Economic Development Plan” on February 1961, which formed the backbone of the first five-year plan of the Second ROK. This outline consisted of four chapters: necessity of making a new long-term economic development plan; Reconsideration of the methods used in making the old three-year economic plan; guidelines for the new long-term development plan; and methods for making the new long-term development plan. Namely, the EDC had taken a critical look at the related materials of the previous economic development plans, and developed the guidelines and methods of making the new economic development plan. The first chapter “Necessity of Making New Long Term Economic Development Plan” began by stating, "It is the un- deniable truth that the new government, which came into existence as a result of the April Revolution, is trying to strengthen the foun- dation of the democratic political system and at the same time at- tempting to accelerate the economic growth under the principle of treating economy as the number one priority." It also emphasized the importance of the “intentional guidance of the government” at the early stage of development for underdeveloped economy. Since the development plan and economic policies would require con-
  • Fundamental Shift in Strategy: Unbalanced Growth Approach Focusing on Import-substitute Industries based on Domestic Capital 55 sistency and comprehensiveness, it would, they reasoned, "be diffi- cult to accomplish the anticipated result if we were to follow pre- vious policy methods which can only be described as lacking fixed principles and based mostly on sectionalism." They continued that "having a long-term economic planning is an absolute must for stimulating rapid economic development by allowing rational dis- tribution of overall economic resources." In short, the aim of a long-term economic development plan was to pursue rapid eco- nomic growth with the government planning. There were two reasons cited in this chapter for pursuing rapid economic growth: first of all, per capita income of Korea belonged to the lowest category in the world; and secondly the South fell far behind the North in terms of capital goods facilities and industrial structure. It should be noted that raising the per capita income was considered as the main priority by the Second ROK. The second chapter, “Reconsideration of the Methods Used in Making Old Three-year Economic Plan,” stated that "it would be inaccurate to estimate the future growth rate based on the trend of the past six years since the duration of six years is too short and since it is difficult to perceive the past as the normal state of the economy due to the recovery process from the Korean War." It fur- ther criticized that the three-year economic development plan of Lee’s regime "tends to perceive the dynamic side of the economy too lightly by putting too much emphasis on the formality of bal- anced growth of each sector, and falls short in terms of expressing the subjective will of the government. Subsequently, it argued that the "making of the Korean economic development plan requires putting high priorities in overcoming the underlying bottlenecked areas." In short, it stated the reason for remaking the long-term eco- nomic development plan despite the existence of a previous one. The third chapter, “Guidelines for New Long-term Development Plan,” described the principles of the economic development plan and areas of focus. The principle stated that the “new long-term development plan would focus on areas where the government can employ more direct policy tools. We expect the accumulative spillover effect toward the private sector as well as the voluntary partic- ipation of the private sector. Policies that would induce such effects would be given first consideration.” It concluded that the plan would be executed by taking the form of government focus on the building of the underlying industrial basis and the private sector taking the lead from there on, clarifying the assignment of role expectations between the government and the private sector. The five-year plan of developing a new economy would focus at: 1) build industrial foundation through concentrated investments on
  • 56 Adaptive Implementation of the Five-Year Economic Development Plans strategic areas such as electricity and coal; 2) aim at developing the natural domain of the Korean Peninsula and at increasing employ- ment through the maximum utilization of idle resources; and 3) correct the structural unbalance of the national economy by increas- ing the productivity of the agricultural sector. Furthermore, it en- listed the following additional principles of: improving balance of payments by rearing import-substituting-industries of fertilizers, ce- ment, silk-products, oil refinery and steel products; advancing the community development projects towards comprehensive land de- velopment plan; rearing a diversified farming and agriculture and the Agricultural Cooperative Association; and promoting the con- struction of social infrastructure such as roads, ports and harbors, communication, water supply and drainage, and housing in a paral- lel manner. Lastly, the “Methods for Making the New Long-term Development Plan” chapter stated that "the first five-year plan would focus on those methods employing the leading sector ap- proach to overcome the underlying bottlenecked areas." For the de- tailed methods for making the plan, it proposed: 1) plan the annual amount of investments to be made in each sector during the overall planned period; 2) hypothesize the growth curves of each sector based on such; 3) estimate the optimal size of the needed invest- ment and the employment growth, taking cumulative approach; 4) identify the macro conomic relationships between other variables; and 5) estimate the appropriate growth pattern of the economy as a whole. Simply put, the most important factor in making the eco- nomic development plan was the annual investment plan, which would, then, determine how much the economy would grow at the target year. The point was that the Second ROK would make the annual investment plan of each strategic sector of its choice accord- ing to the grand design of its own. After the completion of the “Outline of Establishing Five-year Economic Development Plan,” the Minister of Restoration, Tae, Wan-sun, asked Dr. Wolfe on March 4, 1961, for his precise and de- tailed evaluation of the outline, especially on the following two ac- counts: comparison of the theoretical basis for the unbalanced growth approach and the balanced growth approach; and the eval- uation of the plan for reorganizing the economic institutions of the government. Namely, he wanted reconfirmation of the strategy of unbalanced growth approach and the plan for reforming economic institutions, which was already concluded by the Economic Development Committee. On March 28, 1961, Dr. Wolfe submitted his report titled “Personal Opinion of the Five-year Plan of Korean Economic
  • Fundamental Shift in Strategy: Unbalanced Growth Approach Focusing on Import-substitute Industries based on Domestic Capital 57 Development,” which consisted of four parts. Most of the Dr. Wolfe’s opinion was taken in the economic development plan of the Second ROK. In part I titled “Current Situation of Korean Economy and the New Five-year Plan,” he emphasized that the most pressing issues with respect to the economic growth rate of Korean economy lied not with the low level of such but with the deceleration of the growth over time, which would demand imme- diate actions to reverse the trend. He cautioned putting too much emphasis on competing with the North, and recommended focusing on welfare and satisfaction of constituents instead. He especially stressed that the government should overcome the imperfect market mechanism and subsequent rigidity. He criticized the general opin- ions of Korean officials complaining about the excessive burden of national defense expenditures and the foreign aid policy of the U.S. centered on consumption goods. Pointing to the fact that the wholesale price index had risen more than 20% between 1957 and 1960, Dr. Wolfe emphasized that it was absolutely necessary to maintain the stability of prices for economic development. He seemed to have some reservations about the Second ROK’s in- tention to finance part of the economic development plan from sav- ings achieved by a reduction in government expenditures on na- tional defense by discharging solders from the military as well as about the intention to pursue rapid economic growth through ex- cessive investments which may destabilize the price undermining the economic gains. In Part II, “Evaluation of the Concept of Balanced Growth vs. Strategically Focused Growth (Unbalanced Growth),” extensive cov- erage of the unbalanced growth theories was provided: “The Stages of Economic Growth” theory by Rostow, taking historical per- spectives of defining different stages of economic growth “The Mechanics of Economic Development” theory by Singer, stressing the focused investments of scarce resources to specific selected areas and the Growth Pole theory, “The Strategies of Economic Development,” by Hirschman, stressing the importance of concen- trating on certain areas given the limited managerial capabilities and decision-making abilities. Dr. Wolfe cited the theories of Singer and Hirschman to be relatively more appropriate in the context of the Korean economy, pointing to the agricultural sector and pow- er-generation sector for concentrated investments. Such recom- mendation gave legitimacy to the unbalanced growth strategy de- veloped by the Economic Development Committee. However, Dr. Wolfe further cautioned that economic development may induce in- flation, and that one should not try to reach a “self-sustainable economy” at the beginning stage of economic development. In
  • 58 Adaptive Implementation of the Five-Year Economic Development Plans short, he basically recommended gradual economic development under the long-term plan. In Part III, “A Number of Suggestions to ‘Outline of Establishing Five-year Economic Development Plan,’” Dr. Wolfe first recom- mended setting the beginning of the plan at 1962 and using 1961 as a preparation period. Other recommendations he made were: "one should not impetuously plan to push the economy towards build- ing a foundation for accelerated growth by the end of the first five-year plan; one should set ambitious and yet realistic growth target that would exceed the one by the North, about 5~5.5% aver- age annual growth rate for planning period targeting 4% growth for the first year and 6~6.5% growth for the ending year; one should gradually increase the capital investments, following the schedule of 13.5% in the first year, 13.5~15% in second, 15~16% in third, 16.5~18% in fourth, and 18~19.5% in the ending year, given 13% in 1960 in planning the scheduled investment; one should an- ticipate the decrease in foreign relief fund during the planned peri- od, and focus upon increasing the tax revenue and domestic sav- ings; and one should consider utilizing the military troops for eco- nomic development projects such as Land Development Project. In Part IV, “Proposal for Reorganizing Economic Institutions of Korea,” he recommended creating a planning committee consisting of minister-level members similar to the one of India, and creating a separate independent agency for evaluating outcomes, such as the Economic Planning Service. The Economic Cooperation Administration (ECA) of the U.S. sup- ported Dr. Wolfe’s recommendations, stating his opinions reflected the U.S. policy. However, they were skeptical about the 5% growth rate Dr. Wolfe had suggested, stating it to be overly optimistic since they did not want a rapid economic growth that would re- quire increase in economic relief fund provided by the U.S. Even some Korean officials were expressing doubts about the Wolfe’s re- port, questioning the efficiency of the unbalanced growth theory or the possibility securing financial resources in achieving 5.5% growth. Those who agreed with his unbalanced growth strategy, in principle, were also criticizing his lack of understanding of the pe- culiar situation of Korea since Dr. Wolfe had recommended main- taining the current level of expenditure for national defense, which was generally perceived as too great a financial burden on Korea at the time. The “First Five-year Economic Development Plan” developed by the Second ROK was completed as a Tentative Plan of the Ministry of Construction (formerly the Ministry of Restoration) during May 1961. The first chapter, “Overview” of the Tentative Plan, was com-
  • Fundamental Shift in Strategy: Unbalanced Growth Approach Focusing on Import-substitute Industries based on Domestic Capital 59 posed of seven subsections, describing the background, purpose, and methods of the economic development plan. The first sub- section, “Significance and Character of the New Long-term Development Plan,” mentioned the economic ideology of Korea in reference to Clause 84 of the Constitution of Korea, where it is written that "the economic order of the Republic of Korea is based upon the attainment of social justice and the pursue of balanced growth of the national economy." It further stressed that the ulti- mate goal of the economic development plan lay in improving the standard of living of the Korean people. Moreover, it stated that the characteristics of the plan were of “a guided system of capitalism and a mixed economic system,” as stated below: “The economic system of Korea is based on a parallel existence of free enterprise and economic policies by the government, and this system is a ‘guided system of capi- talism” which aims at a mixed economic system. The method of the mixed economic system follows treating the spontaneous calculations and subsequent decisions of pri- vate firms in high regard and employing indirect control methods, without contradicting the private choice by the government which serves as the main body of the plan. … The major focus of the underlying characteristics of the plan that is inevitably required for carrying out the mixed economic system lies on abandoning the balanced growth approach across multiple areas and taking the leading sec- tor approach that enables overcoming the underlying bot- tlenecked strategic areas of the underdeveloped country. For such, we decided to allocate the government invest- ments in these bottlenecked strategic areas with top priority. … Accordingly, we will provide plans of highly realizable and as subjective as possible in the public sector where the government directly holds the means of execut- ing the plans. For the private sector, where we can rely on creativity and research in principle, we will provide pre- dictable guidelines which would induce desired outcomes with a maximum efficiency.” In the second subsection, “Process of Korean Economic Growth,” it described the general economic growth since the Korean War (1953~1960), stating that the record of 4.7% annual average growth rate, pointing to the slowing down of the growth since 1957. In the third subsection, “Premises of Making the Plan,” it mentioned
  • 60 Adaptive Implementation of the Five-Year Economic Development Plans 2.88% of the relatively high population growth rate, issues in the South-North relationships, and foreign relations, pointing to the change of the U.S. foreign aid policy from providing grant-type aid to government loans under the circumstance forcing Korea to main- tain a significantly sized military serving as the front battle-line of freedom bloc. Noticeable in this subsection was the emphasis on the necessity of importing foreign capital from both foreign govern- ments and the private sector, and subsequent emphasis on main- taining a good neighbor policy towards Japan. Such would imply that the Second ROK abandoned the previous policy of decreasing the size of the military, reflecting the opinions of Dr. Wolfe and the U.S. government. In addition, it stated that "Considering the un- employment problem, focusing on labor-intensive industries over capital-intensive industries demands our serious consideration." In the fourth subsection, “Planned Goal and Prospect of Economic Growth,” it suggested a 5.6% annual average growth rate between 1961 and 1966, stressing such would be a reachable target, despite the past growth rate of 4.4%, provided the grave efforts by the government and the people. It suggested that a 46.8% growth of GNP between the beginning and the end based on the growth strategy focused on industrialization, further decomposition by in- dustrial sectors: from 38.5% to 34.3% in the primary industry from 20.1% to 27.85 in the secondary industry and from 41.4% to 37.9% in the service industry. In the fifth subsection, “Role of Government and Major Policies,” it emphasized that "the government role in the economic process shall not go beyond the boundary of economic planning based on the free market order." Along with mentioning the political and so- cial situations of Korea, it stressed the necessity of including the re- organization of the government which would grant a “leadership” role for economic development. Five issues identified in the “Outline of Establishing Five-year Economic Development Plan” were enlisted again, along with tax, credit, and price policies to be used for inducing these private efforts. The policy for promoting the growth of small and midsized firms was stressed again. Industrial policies, increasing the productivity of agricultural and fishery industries, currency policy, balance of payment issues were also mentioned here. In the sixth subsection, “Administrative Structure and Suggestions of Improvements,” three different sets of policy meas- ures were described: reorganization of administrative structure; sug- gestions of improvements; and propelling a nationwide movement. For reorganization of the administrative structure, recommendations were made such as the creation of a central comprehensive eco-
  • Fundamental Shift in Strategy: Unbalanced Growth Approach Focusing on Import-substitute Industries based on Domestic Capital 61 nomic planning agency which would oversee the economic plan- ning of the nation, the creation of industry supervision center which would manage the economy and provide guidance on pri- vate management and technology, and the creation of ministry of land construction would solely be in charge of a comprehensive land development project including community development. For suggestions of improvements, it proposed the creation of a pro- duction cooperative association in the areas of agricultural and fish- ery industry and a cooperative association for small and midsized firms in the mining and industry sector, thereby carrying out a pol- icy of promoting the growth of small and midsized firms. An inter- esting policy idea was introduced regarding the relationship be- tween the accumulation of technology and the educational system. Namely, it was recommended that the government scale down the number of university graduates, especially in the areas of Arts and Science schools, and to provide short-term vocational trainings to middle and high school students to mass-produce a low skilled workforce. However, the most important policy idea in this sub- section had to do with propelling a nationwide movement to rid the nation of social and cultural constraints. It was a sign of the re- alization that economic development should be carried out in the context of a nationwide movement in reforming society as a whole, not just some policy for economic development. It suggested form- ing citizen groups by the units of workplace and by the location of residence, inducing voluntary and active participation in the eco- nomic development process, eventually spreading throughout the nation. In the seventh subsection, “Method and Model of Making the Plan,” it criticized the three-year economic development plan based on a balanced growth approach of Lee’s regime, declaring the new approach would be the unbalanced growth approach: “The previous methods of developing the three-year plan seriously lacked a sense of reality by ignoring critical constraints such as the availability of electricity. To over- come the underlying bottlenecked strategic areas faced by the Korean economy and to form a solid foundation to- wards achieving the self-sustainable economy in the long-run, we shall employ a leading sector approach by se- lecting a number of fundamental areas and focusing all our efforts on developing these areas. … What we mean by the ‘fundamental area’ where we need to concentrate our scarce resources is an area where profit growth is blocked by the current constraints or an area serving as an
  • 62 Adaptive Implementation of the Five-Year Economic Development Plans outside economic environment that would stimulate invest- ments in other areas, creating spillover effects. Viewed from this perspective, electricity, coal, fertilizer, cement, synthetic fibers, oil refinery, and agriculture could be such areas that the first five-year plan would focus upon. …In selecting these areas as strategic industries, considerations were given to factors such as spillover effects, society-wide profitability, and the size of contribution of replacing im- ported goods. … Subsequently, we have given special con- siderations to these areas where we have devised enthusi- astic investment plans in each and estimated growth trend by each of the industry.” Following the aforementioned method, the plan set the target growth rate as 6.1%, which was higher than what Dr. Wolfe had suggested. This ambitious goal of 6.1% was argued that it was a necessary minimum to increase the household incomes for sure, considering the growth of the general population. The Chapter II, “Content of the Plan,” described five policy areas of forming the industrial base, projection of other areas and policies of inducement, proper management of finance and banking, im- proving the balance of payments, increasing employment, and im- proving the daily lives of people. Forming an industrial base through the direct investment by the government was the core strategy of the first five-year economic development plan, such as securing energy supply, expanding basic infrastructure, enhancing the productivity of the agriculture and fishery industries, utilization of natural resources and preservation of land, and expanding social capital. Other major projects mentioned in the plan were land develop- ment projects, strengthening the growth of small and midsized firms, increasing employment and improving the standard of living of the people, and eventually achieving a self-sustainable economy through decreasing the dependency on foreign capital by improving the balance of payments. Among these, the land development proj- ect was carried out from March 1961, one year before the actual implementation year of 1962 as recommended by Dr. Wolfe. Moreover, the policy on promoting the growth of small and mid- sized firms relied on restoring the market mechanism to induce them to engage freely in economic activities. 3-3 The First Five-year Economic Development Plan
  • Fundamental Shift in Strategy: Unbalanced Growth Approach Focusing on Import-substitute Industries based on Domestic Capital 63 The underlying policy ideology during the 1960s was based on the “good of the economic growth.” Namely, all other economic problems would be automatically resolved once growth was achieved. Such belief was formed by criticizing the stable growth policy of the 1950s, under the international influences of post-Keynesian economic growth theories. At any rate, it was the will of the government which had contributed the most in employ- ing such an ideology. After the May 16 Revolution, the Commission of National Reconstruction (CNR) studied the Tentative Plan of the Ministry of Construction in order to develop its own economic development plan. On July 1961, the CNR announced its Comprehensive Economic Restoration Plan (CERP). In the foreword section of this plan, it stated that the CERP was developed “after analyzing the Tentative Plan of the Ministry of Construction, the Long-term Comprehensive Economic Development Plan by the Korea Bank, and the Long-term Development Plan by Planning Committee.” Shortly afterwards, the Economic Planning Board (EPB), established in July 1961, began work in early August and developed the tenta- tive plan on December 14, and announced the First Five-year Economic Development Plan (FEDP) on January 1962. The First FEDP was primarily based upon the economic development plan of the Second ROK, modified by the directions given by the CNR and President Park, Jung-hee himself. The First FEDP of the CNR was a small book mainly consisting of statistical tables and charts. Most of the charts took the form of graphs to make it easier for those without economic knowledge to understand what it meant. It also had a “Collection of Acronyms and Technical Terms” towards the end of the book, explaining the economic terms in easy-to-follow manner. One of the more interest- ing examples from the collection was the explanation of the term “leading sector approach” previously used by the Democratic Party’s plan. The collection changed this term to a military term us- ing metaphors of attacking the enemy position with concentrated fire power. This would exemplify the underlying attitudes of the military regime towards the economic development plan. Such difference in description would show the difference in the basic approach towards the economic development plan. The Democratic Party regime’s plan had utilized the forum of Comprehensive Conference of Economy, collecting and reflecting the public opinions in the plan. They continuously announced and published progress throughout the development stages of the plan, trying to build a public consensus. On the contrary, military re- gime’s plan had already decided the targeted goals and direction of
  • 64 Adaptive Implementation of the Five-Year Economic Development Plans economic development plan, and focused on finding practical ways to implement the plan and reach the targeted goals. The Democratic Party regime’s plan approached economic devel- opment through centering on the goals of specific projects where such goals reflected the content of the economic development. Rather than stressing quantified indexes, they tried to emphasize the actual content of the economy, explaining the reasons behind and backgrounds of setting such a goal in details. Basically, the plan was written to persuade people that the economic develop- ment goals were realistic and achievable ones based on analysis of current situations. On the contrary, the military regime’s plan approached economic development through centering on quantifiable economic indexes. By contrasting such with past achievements and projecting the trends and tendencies based on the past achievements, they focused on giving salience to the fact that their goals were far more ambi- tious and swift. It did not explain the reasons behind and back- grounds of why such ambitious and swift goals were developed nor whether such goals were realistic or achievable. It was simply written to emphasize that their goals were dramatically different from the past and by achieving such goals, the outcomes of eco- nomic development would be totally different. In explaining the characteristics of the plan, the Democratic Party’s claimed that the plan aimed at a “guided system of capital- ism” or “mixed economic system.” And they further criticized the strategy of the balanced growth approach by Lee’s regime and stat- ed their new approach of unbalanced growth approach focusing on industrialization where the government would take the policy ini- tiatives in the public sector and would provide policy guidance in the private sector. Interestingly enough, the military regime also claimed that the plan aimed at a “guided system of capitalism.” The major difference lied in the changed role of the government that now the government would take active policy initiatives both in the public and private sector, criticizing that the failures of past economic policies were due to too much stress on the principle of laissez-faire giving too much freedom to the private sector. The more fundamental difference between the two plans, however, lied in terms of placing the goals of economic growth. The development plan of the Democratic Party’s regime had placed the ultimate goal in terms of building the welfare society through improving the daily lives of the people. The set annual average growth target of 6.1% during the planned periods, they ex- plained, was to increase the per capita income just for a little bit given the high general population growth rate of 2.88%. However,
  • Fundamental Shift in Strategy: Unbalanced Growth Approach Focusing on Import-substitute Industries based on Domestic Capital 65 the plan of the military regime did not show the goal of building social welfare. The two plans’ described “Assumptions or Presumptions” greatly contradicted each other. The Democratic Party’s plan described its “Presumptions of Making the Plan’ as the South and the North should achieve re- unification, becoming a single nation again and achieving unity of the economy between the South and the North. However, given the Cold War between the East and the West, the South had no choice but to pursue a self-sustainable economy of its own. Also, it stressed the importance of the good neighbor policy towards Japan. Serving as the front-line of the freedom bloc, Korea had to main- tain a vast military power, changing its original policy position of reducing the size of the military. Despite the heavy burden of na- tional defense, the U.S. would decrease military aid to the South, forcing Korea to rely more on the foreign capital in forms of either borrowing from the foreign governments or borrowing from the private sector. It stressed that such a policy suited the given sit- uation where the U.S. had changed its foreign aid policy from pro- viding economic relief of grant-type funds towards government loans, at the same time would allow Korea to build the capacity to stand alone. Rather than pursuing the technological leaps, they would focus on labor-intensive industries to reduce the unemployment. On the contrary, military regime’s plan enlisted five issues under the “Assumptions of Making the Plan,” of the first two were re- garding anticommunism, stressing the potential invasion by the North. Namely, the Soviet Union and the “puppet state” North were pursuing economic development and building strong military power for the purpose of communizing the world, and making frantic efforts to communize the South by sending numerous spies. To prevent such, the U.S. and other democratic nations “would provide a higher level of economic relief funds and military aid” to help Korea achieve economic independency and a strong military power. Based on the justification of anticommunism policy, the military regime was expecting increased economic relief funds from the U.S. In other words, the economic development plan of the Second ROK had set its ultimate goal as promoting more equitable eco- nomic lives of the people and improving the income level of the people as stated in the Constitution of Korea, perceiving economic competition with the North as an inevitable choice given the sit- uation of the world. On the contrary, the economic development plan of the military regime set its ultimate goal as winning the eco- nomic war with the North.
  • 66 Adaptive Implementation of the Five-Year Economic Development Plans There were two major differences between the plan by the Commission of National Reconstruction and the plan by the Democratic Party, other than those mentioned above. The first dif- ference lied in the targeted growth rate where the CNR set its goal much higher, to 7.1%, compared to 6.1% of the Democratic Party’s. The second difference lied in the choice of strategic industries for focused investments that the CNR decided to focus on those in- dustries with higher rate of turnover in terms of the capital. Considering the two plans had the same root especially in terms of the details of the policy measures, setting of the higher target rate could be interpreted as the expression of the strong will of the mili- tary government to reach the target by utilizing all of the national capacities. The typical achievement targets of the economic development plans were in terms of GNP, capital composition, and unemploy- ment rate. Once the targets of these indexes were set, then the re- mainder would automatically fall into places through the mutual adjustments of the quantifiable numbers. Table 3-1. Comparison of the GNP between the Democratic Party’s Plan and the CNR’s (Pegged to 1955 price, unit: Billion Hwan) 1962 1963 1964 1965 1966 B/A(%) DP 1,337.7 1411.1 1,499.7 1,599.8 1709.7 146.8 Difference -29.2 -18.9 -5.9 +10.5 +34.3 -0.5 Table 3-2. Comparison of Capital Composition (by source) (Pegged to 1961 price) Private Public Total Capital (Billion Hwan) DP 60.4 39.6 3,215.6 EPB 44.4 55.6 3,214.5 Tentative Plan of the Ministry of Construction (Appendix), pp. 560-561, Plan of the EPB, p. 51.
  • Fundamental Shift in Strategy: Unbalanced Growth Approach Focusing on Import-substitute Industries based on Domestic Capital 67 Table 3-3. Comparison of Unemployment Rate 1962 1963 1964 1965 1966 DP 23.1 21.4 19.5 17.4 14.2 EPB 22.3 20.7 19.3 17.3 14.8 Tentative Plan of the Ministry of Construction (Appendix), pp. 4-5, Plan of EPB, pp. 40-41. Table 3-4. Comparison of Total Capital during the Planned Periods (By Origin) (Unit: %) Domestic Foreign DP 75.1 24.9 EPB 72.2 27.8 (By Industry)(Unit: %) Primary Secondary Service DP 14.8 32.7 52.6 EPB 17.2 34.0 48.8 Tentative Plan of the Ministry of Construction (Appendix), pp. 578-579, Plan of EPB, p. 59 Table 3-1, 3-2, and 3-3 showed GNP and its growth rates, the size of total capital, and targets of unemployment rates were all quite similar between the two plans. The difference came mostly from Table 3-2 and 3-4, where the composition by origin showed small differences whereas the composition by industry showed large differences. Also, given the similar size of the total capital, the means for supplying such and the ways of investing such had to be different. Such differences were necessary to meet the goal of 7.1% growth rate, given the size of the foreign capital. Henceforth, by utilizing more of the public capital and adjusting the investment areas moving away from the service industry and targeting more towards the primary and secondary industry, the projected 7.1% rate of growth would be achieved. In other words, rather than in- vesting on expanding social infrastructure, the plan of the military regime sought to achieve a higher growth rate by focusing invest- ments on industries with higher capital turnover ratios in the pri-
  • 68 Adaptive Implementation of the Five-Year Economic Development Plans mary and secondary industries. It would be unrealistic to expect the fruits of such high economic growth to be reached in every corner of society. By taking the un- balanced growth approach, such would be the unavoidable outcome from putting more strategic emphasis on economic growth rather than equal distribution, especially for the urban laborers. Such was evident when the projected wage incomes of the two plans were compared, where the military regime’s plan showed constantly low- er wages and the subsequent wage growth rates. Table 3-5 below shows the wage growth rate of the laborers, where the DP’s plan projected an increase over two times greater than the base year, whereas that of the EPB projected wage growth at 50% over the periods. This probably had to do with the strategic choice of labor-intensive industries based on relatively lower wage income structure. Table 3-5. Comparison of Projected Wage Income Growth (Pegged to 1961Price) (Unit: Billion Hwan) 1962 1963 1964 1965 1966 DP 959.2 1,036.1 1,148.5 1,287.0 1,432.5 EPB 892.2 931.0 967.3 1,012.7 1,061.6 Tentative Plan of the Ministry of Construction (Appendix), pp. 14-15, Plan of EPB, pp. 38-39.
  • CHAPTER 4 Shifting the Focus: Export-oriented Industries based on Foreign Capital 4-1 Achievements and Problems of the First FEDP and the Political, Social, and Economic Conditions To drive the First Five-year Economic Development Plan (FEDP) strongly, the Commission of National Reconstruction (CNR) created the Economic Planning Board (EPB), followed by enacting the “Tentative Enforcement Legislation regarding Banking Institutions” which was designed to restrain the monopolistic conglomerates and force banking institutions to obtain the approval by the Bank Inspection Board in appointing its own directors and executives. On May 1962, CNR enacted “The Bank of Korea Legislation,” position- ing the Korea Bank under the direct authority of the Minster of Finance. On December 1963, CNR strengthened the authority of the EPB by making the position part of the cabinet members and pro- moting the director position to a vice prime minister at the same time. Strengthening the authority and power of the EPB was reflect- ing the strong will of the ruling class trying to establish its political legitimacy of power through achieving high economic growth. The First FEDP went through a series of trial and errors due to changes in foreign aid policy of the U.S., social chaos from the two revolutions of April 19 and May 16, severe crop failures, excessive volition of military culture during the early stages of the military regime, and difficulty of raising the needed domestic capital. Basically, the fundamental aim of the economic development plan was to build a stand-alone production capacity so that the economy could sustain itself without economic relief from the U.S. To ach- ieve such a state, the CNR tried to reduce the dependency on for- eign capital by supplementing it through raising domestic private capital as explained in the previous chapter. Moreover, by promot- ing the growth of import-substitution industries, the CNR tried to block the outflow of valuable foreign currency.
  • 70 Adaptive Implementation of the Five-Year Economic Development Plans The economic relief from the U.S. peaked in 1957, gradually de- creasing thereon. Especially, economic aid for investment purposes (project aids) quickly declined while program aid such as imports of crops and fertilizers had increased. Project aid had reached an annual average of $88 million between 1954~57, but subsequently declined to an annual average of $38 million between 1958~60. Influenced by such a drastic decrease in project aid, the GNP grew a mere 3.9% in 1959. The situation worsened during the 1960s when GNP showed a very low level of growth at 1.9%. Under the Chang’s regime in 1961, the “Import of Foreign Capital Promotion Law” was enacted, followed by the signing of the “Korea-U.S. Economic Cooperation” and the “Korea-U.S. Investment Guarantee Agreement.” However, these series of legislations were not im- plemented in realty. For the first two years after the implementation of the First FEDP, expansionary fiscal policies utilizing government direct in- vestments and loans were extensively employed. However, due to the lack of capital, social chaos from the two revolutions, and se- vere crop failures made the situation worse day after day. In a des- perate move, currency reform was attempted in 1962 without much success, followed by the abandonment of the revenue stabilizing plan which dramatically increased the government’s budget. Subsequent tax reforms were carried out, and decreases in interest rates to promote investment and promoting exports policies were another measure taken. One of the major reasons for executing Currency Reform was to draw out the private capital for investment purposes. Since the project aid from the U.S. was in constant decline, it became neces- sary to secure additional capital sources to compensate for the in- sufficient investment funds, but the available domestic capital then was not enough. Faced with a difficult situation, President Park de- cided to execute the Currency Reform. The plan was to draw out idle cash owned by higher income classes, freeze them, and force them to invest in the Industrial Development Public Company (IDPC). The IDPC would then invest the involuntarily raised pri- vate capital in private companies, and recollect the investment when such companies become financially independent, and reinvest the recollected money in other private companies. By repeating this process, the problem of the domestic capital shortage would be re- solved, he reasoned. Moreover, the IDPC could provide loan guar- antees to foreign investments. Working officials pointed to potential problems from executing the Currency Reform for the purpose of amassing domestic capital, and made strong recommendations to rely on the more traditional methods such as government loans.
  • Shifting the Focus: Export-oriented Industries based on Foreign Capital 71 However, citing the typical attitude of inaction of banks and a hab- it of lending based only on the availability of asset back-ups, President Park and a group of others concluded that the president could not rely on the traditional methods of the banking in- stitutions especially from the given national standpoint of achieving epochal economic development. On June 9, 1962, the CNR decisively enacted the Emergency Enforcement of Currency Reform Act, changing the currency unit from Hwan to Won. The currency papers were already printed by an English company six months prior to the enactment, and were shipped to Korea one month prior to the official announcement. In the public address announcing the Currency Reform Act, it was stated: “Our economy has improved tremendously through a series of government initiatives such as creation of the First FEDP and its subsequent execution, harsh punish- ments for those that accumulated wealth by illicit means, clean sweep of outstanding usurious loans for farmers and fishermen, and numerous reforms to remove the vicious circle of economic nature. Other than the wealth accumu- lation by illicit means, there still exists a large amount of assets, untouched and intact, that have been accumulated in the shadows by taking advantage of the corruption of the old regime. Although the savings in the banking sys- tem have increased drastically, most take forms of short-term savings for making transactions rather than the true form of long-term savings.” It continued, “Such accumulated money supply holds a potential danger of turning them quickly into speculative investments, and the recent trend shows signs of galloping inflation that may be trig- gered by such speculative investment. This would force us to take precautions to prevent such.” It continued by stressing the in- evitability of the Currency Reform to prevent the inflation in ad- vance and to utilize such dormant capital and excessive purchasing power for investment purposes so that anyone can work and enjoy an improved lifestyle and continue to build a wealthy nation, and achieve rapid economic growth with stability. The core of the Currency Reform lied with the Emergency Monetary Circulation Act, determining how much of the assets would be frozen and how much of the assets would be exchanged with the new currency. The government started enforcing the Emergency Monetary Circulation Act from June 16. Basically, the
  • 72 Adaptive Implementation of the Five-Year Economic Development Plans rule stated that: “1) An appropriate pre-specified ratio would be se- lected to be applied depending on a sum of old currency, currency deposits and notes of payment reported for exchange, and transfer the calculated amount (=reported amount*selected ratio) into a fro- zen savings account and the remaining balance to an account with- out restrictions; 2) Demand deposits are similar in characteristics to bank notes, subsequently treating them as the old currency deposits in previous clause; 3) Those of savings accounts over one year of contract, such as time deposits, deferred deposits, special deposits, regular installment savings, unlimited regular installment savings, trust cash fund, and those of special savings such as National Saving Union savings, national debt savings, children’s savings, and postal savings shall be automatically transferred to an account with no restrictions under preferred conversion; 4) Those of time depos- its and installment savings accounts under one year of contract shall be applied the basic deduction first, and by classifying them into under-three-month, between-three-to-six-month, and over-six-under- twelve-month, apply appropriate rate under each category, transfer the amount to a frozen savings account and the remaining balance to an account without restrictions; and 5) For those frozen savings accounts, a yearly interest rate of 15%, which is the same rate as the time deposits over one year of contract, shall be applied count- ing from the date June 18, which shall be converted to stocks of Commercial Development Public Company that is scheduled to be established within six-month-period counting from June 18, and the government will guarantee the payment of annual yield of 15% to those converted stocks with an option to sell such in the stock mar- ket whenever the owner wishes to.” However, such a Currency Reform was carried out without prior consultation with the U.S., an important source of economic relief. The U.S. requested relaxing the frozen accounts, using economic re- lief as a bargaining chip. Subsequently, the CNR announced a “Special Enforcement Act of the Frozen Savings Account based on the Emergency Monetary Circulation Act” on July 13, 1962, stating the changes in the rule as: "one-third of all frozen savings accounts shall be converted to accounts without restrictions, and the remain- ing two-thirds shall be converted to special time deposits account with one-year contract period." As a result, the Currency Reform had failed to achieve its original policy outcome, equivalent to just simply devaluing the currency unit by one-tenth along with un- necessary ground-shaking shock to the national economy. Faced with a situation where the amount of economic relief and military aid from the U.S. were declining each year, Park’s regime decided to ask for economic help from Japan by initiating
  • Shifting the Focus: Export-oriented Industries based on Foreign Capital 73 Korea-Japan Talks, as he was making strenuous efforts to cease the opportunities of economic independence and self-reliance of na- tional defense as well as to achieve rapid economic growth by re- plenishing the insufficient domestic capital. For this purpose, the Director of Korea Central Intelligence Agency (KCIA) Kim, Jong-pil and Foreign Minister Ohira reached a mutual agreement on the ba- sic principles of Japan providing $300 million as economic aid over a 10-year-period, $200 million as government loans with an annual interest rate of 3.5% over a 10-year-period, deferring interest pay- ments for seven years and repaying the principle after 20 years, and over $100 million of private commercial loans. Through sub- sequent negotiations with Japan over the fishery cooperation fund and a shipping-related fund, a proposition from Japan on the prin- ciple of providing private commercial loans that would exceed the private commercial loans specified in the Kim-Ohira Memorandum was received. Through this, renegotiated agreements were reached to raise the previous $100 million of private commercial loans to over $300 million. During the aforementioned negotiating process, Kim, Jung-ryum and Chang, Gi-young were exposed to the economic development strategy of Japan. Unlike the U.S. where a self-sustainable economy could be reached just with its own domestic market, Japan had to import raw materials from abroad, process them and meet the do- mestic demand while amassing capital for importing needed raw materials. To fully utilize the limited resources and capital with maximum efficiency, Japan was relying on an export-oriented in- dustrialization strategy under government initiatives in the form of industrial policies. For instance, Japan was focusing on high-growth industries such as heavy and chemical industry, where con- sumption of imported raw materials were relatively small, where they had relatively high rate of foreign exchange earnings, and where there were no barriers to exports. Considering the various aspects of the Korean economy, the stra- tegic choice of Japan was quite appealing to them. They began to have critical minds that Korea should no longer rely on import-sub- stitution industries. Namely, they reasoned that “by lifting the pro- tective elements for import-substitution and moving towards free competition, it would be possible to strengthen the international competitive edge. At the same time, Korea should start focusing on export-oriented industrialization. In the near future, Korea should advance towards developing heavy and chemical industries and a high technology industry.” As foreign relations between Korea and Japan normalized, the benefits Korea received from this change were more than the $600
  • 74 Adaptive Implementation of the Five-Year Economic Development Plans million in foreign aid and government loans. It was possible for Korea to prepare the foundation for a more rapid economic growth with the help of technology transfers and cooperation, and of in- vestments made by the private capital of Japan and Korean residents in Japan. In short, the First FEDP was not implemented as the way plan- ners had originally intended at the beginning, due to reluctant co- operation from the U.S. and domestic conglomerates. This was mainly due to the development strategy, relying relatively too much on domestic capital. At the beginning of the plan, the focus was on enhancing the productivity of agricultural goods while con- structing key industries such as electric power, coal, oil refinery, colligated steel manufacturing, and cement to a certain degree of independency. Furthermore, the original plan for amassing the needed investments was set at the ratio of 72.2% domestic capital and 27.8% foreign capital, which was going against the notion of economic development based on foreign capital taken from the per- spective of the U.S. This had the potential to disrupt the economic ties between the U.S. and Japan as well. From the position of do- mestic monopolistic conglomerates, rearing the agricultural industry was going against their direct interests since such would remove the monopolistic rents they were enjoying 4-2 Shifting the Focus The process of implementing the First FEDP could be charac- terized as a prompt adaptation to changes in the U.S. foreign aid policies from economic relief of grant-type funds to government loans, as well as the active process of the incorporation in world economy based on capitalism. Rapid economic development and the constraints imposed by insufficient employable domestic capital gave Korea not much of a choice except to rely on foreign capital. Previous regimes under Lee and under Chang had tried to re- solve the domestic economic situation by deepening the depend- ency on foreign aid, not being able to adapt to changing environments. On the other hand, Park’s regime actively sought to induce foreign loans and investments to transplant the productive capacity of foreign countries. Subsequently, this had an effect of forcing Korea to become an inseparable part of the world economic order of capitalism. A series of adaptive moves such as the mod- ification to the original FEDP and subsequent creation of comple- mentary plans as well as the normalization of Korea-Japan foreign relations exemplified the trials and errors of the govern-
  • Shifting the Focus: Export-oriented Industries based on Foreign Capital 75 ment-controlled economic development strategy and the timely re- sponses by the government at the same time. At the time, there were a series of annual conferences between the IMF and the Korean government, where the IMF made strong suggestions to abandon the protective trade policies geared towards import-substituting industries and to adopt a “Market Liberalization Policy” such as the actualization of the currency exchange rates and interest rates, liberalization of imports, lowering tariffs, in addition to others. Speculating a huge shock to the domestic economy and subsequent fierce resistance from the economic circle, the Korean government was reluctant to follow such recommendations made by the IMF. However, the policy measures taken by the government to rear the import-substituting industries such as the fixed dual currency exchange rate system, maintaining low interest rates to promote in- vestments, imposing strict restrictions on imports, and protecting the domestic industry by setting high rates of tariffs were not very effective in terms of achieving the economic growth targets, further undermined by the surrounding conditions worsened by insufficient domestic capital and severe crop failures. To make things worse, there were signs of worsening inflation due to expansionary fiscal policy of the government and increased issue of currency. On top of such, the foreign currency reserves were declining at a faster rate, peaking on March 1962. Foreign currency reserves had de- clined by $39 million in 1962 compared to that of the previous year, and by the end of June 1963, it had further declined by $56 million compared to the figure of $114 million at the end of 1962. To overcome the precarious situation of the balance of payments, the government strengthened export-supporting policies such as ex- port subsidies, link-system of import and export, compensation trade system, and the lowering the interest rates for exporting companies. However, the more fundamental cause of the under- achievement by the export industries had to do with the relatively more favorable market conditions for import-substituting industries, created by the protective policies of the government such as the quota system, limitations or restrictions on imports, differential du- ties, protective duties, lowering interest rates far below than the market rate, overvalued exchange rates, and limitations on trading rights and currency exchanging rights. To increase exports, utilizing the comparative advantage of labor-intensive goods produced by relying on proper technology and production methods under the given situations of oversupply of labor and undersupply of capitals in Korea, it was necessary and critical for the government to em- ploy a market liberalization policy such as the actualization of the
  • 76 Adaptive Implementation of the Five-Year Economic Development Plans currency exchange rates and interest rates, relaxing the restrictions on imports, and lowering tariffs. The tricks of implementing such major shifts toward the market liberalization policy were in finding ways to deal with the antici- pated shocks to the market that would create strong resistance from the economic circle and subsequent political pressure created by such shocks. It was anticipated, for example, if the government would lower the currency exchange rate as well as increase the market rate, both the market rates that had huge differences at the moment, those firms that had borrowed heavily either from the for- eign capital or banking institutions would be faced with financial difficulties with their interest payments as well as the principle re- payments all of a sudden. Moreover, if the government was to re- lax the restrictions on imports and lower the tariffs, those firms protected from foreign competition would have to deal with un- favorable market environments all of a sudden. In both cases, the probability of a firm going bankrupt would rise dramatically if it failed to adjust to sudden changes or if it had no additional finan- cial resources to take the increased financial burdens overnight. Considering the potential aftermath from such a shift, it seemed al- most impossible for the market liberalization policy to be success- fully adopted. On May 1964, the former president of Korea Daily News, Chang, Gi-young, was appointed as the Depaty Prime Minister of the Economic Planning Board. With his appointment, the Depaty Prime Minister Chang pushed forward the market liberalization policy for- ward as he was granted with the full authority and full discretion from President Park, which was a condition for his acceptance of the position when asked by President Park to take the post. Vice Prime Minister Chang had expressed his firm long-held belief to President Park, before his appointment, that a major policy shift from promoting the import-substituting industries towards support- ing the export-oriented industries was critically needed, and ex- plained the critical importance and the urgency of the market liber- alization policy in addition to the anticipated problems and major huddles that would arise during the transition. He further asserted that firm and persistent support from President Park himself as well as the concerted cooperation from all of the relevant govern- ment agencies, especially the Ministry of Finance and the Ministry of Commerce and Trade, were absolute prerequisites to successfully making the needed transition to market liberalization policy. After taking the position, with full support from President Park, Vice Prime Minister Chang pushed forward with change towards market liberalization policy, dealing personally with not only the
  • Shifting the Focus: Export-oriented Industries based on Foreign Capital 77 ministers of those related ministries but also the division heads and department directors. He successfully made the initial transition in no time, earning the nickname “Bulldozer.” The IMF, a long-time advocate of such a policy, was greatly impressed by the success of Korea in making the transition, and widely presented this success- ful case to its own member countries with praise. Such reactions from the IMF greatly contributed to the building of international credibility for the Korean government, earning the image of a coun- try with great administrative and great economic potential. At the time, all of the foreign investments and loans were backed 100% by the government or bank guarantees, and such an image helped Korea to a relatively easier time in bringing in the needed foreign capital. The foreign exchange rate was fixed at 65 Hwan to a dollar throughout the late 1950s. With the devaluation set by the govern- ment in 1961 and May 1964, the rate had changed to 255 Won to a dollar. From March 1965, the foreign currency exchange system was changed to a single floating currency exchange system, in- stitutionalizing the actualization of foreign currency exchange rate. The actualization of interest rates was carried out in 1965, with a sharp increase in the rates. For instance, the real savings rate for one-year maturity in 1964 was –8.4% after taking the inflation rate of the wholesale price index, which was greatly increased to 17.3% in 1965. Various policy efforts were made to relax restrictions on imports and lowering tariffs. Most of the previous link-systems of import and export were abrogated in late 1964, and the list of importable goods with automatic approval among the list of items allowed for imports was dramatically expanded from zero (up until June 1964) to 8% between June and December of 1964, and to 62.7% by December 1965. At the same time, issuance of the import license of the importable goods with automatic approval and authority to set import quotas of such goods were transferred to the Bank of Korea. To prepare for a transition towards a single floating currency ex- change rate system, the list of items applying import quota were dramatically reduced in November 1964, expanding the policy of liberalization of imports. Furthermore, any abnormal transaction practices such as an export subsidy system, the remainders of the link-system of import and export, systems requiring pre-contracts with buyers for imported goods, and compensation trade systems were additionally abrogated in January 1965, except for those under reciprocal trade agreements. Gradually building foundations for im- plementing the single floating currency exchange system through abrogating import quota system, building a market for certificates
  • 78 Adaptive Implementation of the Five-Year Economic Development Plans of exchange, and amassing funds for currency exchange market op- eration, the government announced the change on March 22, 1965. Another revolutionary reform to promote free trade followed in July 1967, moving from a positive list system of allowing imports only for those goods in the list and banning imports of all the rest of goods to a negative list system of banning imports only for those goods in the list and allowing imports of all the rest of goods. As a part of the liberalization of imports, tariffs were also lowered in 1967, greatly reducing the end price of imported con- sumption goods. For instance, tariffs imposed on non-durable con- sumption goods were lowered from 74.2% in 1966 to 43.2% in 1967. In short, the overall economic development policy turned in the op- posite direction from the protective policies for import-substituting industries towards the market liberalization policy, including the liberalization of the trade, which would form a basis for promoting export-oriented industrialization policy. On July 1965, the government selected the first 13 items to be specialized in exports: products from raw silks, cotton cloth, ce- ramic wares, rubber goods, woolen goods, plywood, apparels, leath- ers, craft works, miscellaneous goods, radio and other electronics, fish and shellfish, and mushroom cans. Selection of such items were based on taking international comparative advantages, the ef- fect on the balance of payments, the effect on employment, and spillover effects to other industries having been into account. Concentrated support for producing such goods was designed in dimensions of domestic and foreign capital and technological as- pects, and officials were assigned to each item area to collect in- formation on the situation at hand and the difficulties in pro- duction and to troubleshoot the identified issues. This policy was effective in producing results, and the above items remained as ma- jor export goods leading the export industries for a long while. Furthermore, successful experiences with these policies gave enough confidence to expand the list of items for export industrialization. Subsequently, the target export volume of 1964 was finally ach- ieved, amounting to $120 million. The year 1966 represented the conclusion of the First FEDP and the start of the preparation for the Second FEDP. The demand for financial resources was growing rapidly on a daily basis in im- plementing the FEDP, and finding ways to fulfill such growing needs were the keys to not only the subsequent economic develop- ment but also the stability of the economy. To raise the tax rev- enues that played a central role in amassing the needed domestic capital, the government decided to create a new tax administrative agency, namely the National Tax Service. The government reasoned
  • Shifting the Focus: Export-oriented Industries based on Foreign Capital 79 that tax revenue could be increased by 20~30%, even without changing the current tax system, if the tax administration and au- dits were strengthened enough to prevent tax evasion and omis- sions due to under performance of the tax authority. Since the beginning of the Korean government, a number of changes to the tax system were made to meet the needs of the occasions. However, the tax administrative system had remained nearly the same over 20 years, operated under Department of Tax Services at the Ministry of Finance. The tax administrative system at the time consisted of one central headquarter (the Department of Tax Services at the Ministry of Finance), four regional headquarters (the Regional Tax Services) at Seoul, Dae-jeon, Kwang-ju, and Pusan, and 77 tax offices and two substations. Subsequently, the National Tax Service, overseeing the four re- gional headquarters, and tax offices was newly established on March 3, 1966, with increased power in tax investigations and au- dits, reflecting the will to make such a strong one where the politi- cal responsibility would fall on the Minster of Finance yet the head of the National Tax Services would hold the full independent au- thority to carry out day to day administrative matters. The newly appointed head of the National Tax Services, Lee, Nak-sun, had extensive experience in investigating incidences of tax evasions of a number of large firms. After assuming the position, he publicly announced that he would raise tax by 50%, amounting to 70 billion Won (700 Uk Won in the Korean traditional number- ing system), more than the amount approved by the National Assembly, and changed the license plate number of his official ve- hicle to “Gov 700.” Subsequently, there were large concerns in busi- ness circles that, upon hearing the new head’s public announce- ments and the enhanced power of the new tax authority, there might be grand-scale tax audits to raise the tax revenue. The new tax authority, however, took a different approach, by stressing the rational and scientific ways of administering tax authority and at the same time actively providing guidance and education to the taxpayers so that they would submit more accurate tax reports. Without provoking the massive scale of emergency tax inves- tigations, and by dealing with individual taxpayers and small to large business entities, the total amount of revenue raised had reached 70.4 billion Won in 1966, 68.7% increase from the previous year, and 104 billion Won in 1967, 47.6% increase from the previous year. Such would signify the size and frequency of incidences of tax evasions widespread throughout the society. Throughout the 60s, the Korean government put serious effort in promoting exports. To broaden the bases of export industries, the
  • 80 Adaptive Implementation of the Five-Year Economic Development Plans government concentrated its support to small and midsized firms of export specialized industries, and at the same time improved the export support system and administrative structure, gave incentives to pioneer foreign markets, realigning industries in an ex- port-oriented nature, and established the exportation system. In short, the economic development of the 1960s could be described as the orchestrated materialization of the export-oriented development strategy. The Ministry of Commerce and Trade had prepared com- posite policy packet for promoting exports each year since 1964, im- plementing such policies systematically and comprehensively as: (1) 50% tax deduction on business income from exports made by a firm earning foreign currency and export-related activities and 50% tax deduction of corporate tax; (2) Tax exemption on tariffs of imported raw materials used for producing export goods; (3) Special low interest rates for financing export-related activities; (4) Establishing the KOTRA to collect information of foreign mar- kets and pioneering such and establishing the Korea Trading Co. under KOTRA to support small and midsized firms in ex- port-related activities of smaller scale; (5) Promoting the growth of companies which manufacture ex- portable goods; and (6) Awarding medals and prizes to those individuals (including technicians in manufacturing firms, engineers, salesmen) with large contributions to enhancing exports based on related legislations. The government put up a series of slogans to motivate in- dividuals and firms to concentrate their efforts in promoting ex- ports: “broadening bases for export industry” in 1967; “establishing mass-production system for export industry” in 1968; and “modernization of facilities of export industry” in 1969. Parallel ef- forts were made to improve the general quality of export goods, to improve the general skills of designing and packaging, and to mass-produce the skilled labor forces. As a result, Korea was able to meet the series of export targets: $1 million short of the $360 million in 1967, $500 million in 1968, and $700 million in 1969. One of the most effective policy tools in promoting exports was the Monthly Expansionary Council of Export Promotion Meetings (MECEP) since 1965, presided over by President Park himself. Ministers related to commerce and trade activities, representatives from the business circles, and executive officials from banks and other financial institutions participated on a regular basis. Various
  • Shifting the Focus: Export-oriented Industries based on Foreign Capital 81 measures of export trends by month, products, and region were an- alyzed thoroughly, discussing and debating any kind of policies that may help promote exports as well as bottlenecks and diffi- culties faced by businesses. Awards ceremonies were held from time to time to encourage and acknowledge the efforts made by in- dividuals and businesses in promoting exports. Follow-ups of pre- viously raised issues of bottlenecks and difficulties were always checked by the President directly, demanding solutions and reports from government officials by the next scheduled meetings. Policy ideas for promoting exports were gradually taking shape into a more solid policy measures, leading to systemizing and in- stitutionalizing them one by one over time. Since 1962, exports grew rapidly and induced high rates of eco- nomic growth due to the success of export-oriented industrializa- tion policy focusing on labor-intensive industries. Exports grew at an average of 37.3% each year between 1965 and 1969, contributing to the real GNP growth of average 10.0% each year during the same periods. The weight of exports in GNP rapidly grew from 5.7% to 14.9% during the same period. However, most of the ex- ported goods were the finished products of labor-intensive con- sumption goods, and took the form of so-called processing trade where producers imported those raw materials, processed materials, capital goods and production goods to be used in producing final goods, manufactured the end product using cheap labors, and ex- ported the final goods. It was hoped that, as the export of such fi- nal goods increased, the imports of those mid-process materials would also increase, increasing the demand for such goods. Increased demand would create economies of scale, inducing the domestic production of such mid-process materials. Such would give birth to heavy and chemical industries producing such mid-process materials. And at the same time with the excess capital accumulated by replacing imports of mid-processed goods with do- mestically produced goods, domestic production of goods in other areas will expand and grow, further advancing industrialization of heavy and chemical industry. 4-3 The Second Five-year Economic Development Plan, its Results and Problems As explained above, the First FEDP was faced with a difficult sit- uation after two years of its implementation, making it almost im- possible to reach the set targets. The subsequent fundamental changes in development policy made by the Vice Prime Minister
  • 82 Adaptive Implementation of the Five-Year Economic Development Plans Chang, Gi-young towards an export-oriented development policy and market liberalization policy contributed to achieving the annual average growth rate of 8.5% of GNP and the annual average growth rate of 5.6% of per capita GNP during the First FEDP plan- ning period. The growth of the secondary industry greatly exceeded that of the primary and service industries. The basic characteristics of the investments made and capital resources used during the First FEDP periods were that: the actual investments were less than the planned one, yet the overall economic growth was quite high; and there was considerable growth in foreign capitals among capital re- sources used during this period. Investment rates had increased to an yearly average of 15.1%, and about 60% of financial resources for investments came from abroad, greatly increasing the depend- ency on imported foreign capitals. This greatly contributed to in- stitutionalizing the “high growth economy supported by foreign capitals” structure. Although the First FEDP did not follow the due process of col- lecting and reflecting the opinions of the people both at the plan- ning stage and at the implementation stage, and although it lacked rationality and consistency in terms of its policy contents and re- vealed many problems, positive contributions were made to revital- ize the economy and subsequent rapid economic growth compared to the periods without the plan. Following the First FEDP, the Second FEDP began from 1967 based on the already-shifted policy direction of export-oriented eco- nomic development strategy. The basic target of the Second FEDP was to achieve higher level of industrialization through promoting exports, serving as interim targets towards achieving long-term de- velopment goals by early 1980. Subsequently, the basic target of the Second FEDP was to “modernize the industrial structure and ad- vance forward the establishment of stand-alone economy.” The Second FEDP consisted of three parts: overall plan, by-sector plan, and project plan. The overall plan was developed to achieve a balance between macroeconomic targets such as GNP, Imports and Exports, Investments, Expenditures and Savings and to add validity to such. The by-sector plan projected the anticipated demand by each sector to meet the macro economic targets specified in the overall plan and the needed investments to meet the demand by each sector, thereby providing the basis for the optimal ratio of in- vestments across different sectors. Long-term goals were described as “to reach the state of stand-alone economy and to complete the economic foundation of modernization through maintaining the bal- ance of payments, investing with domestic capitals only, and realiz- ing the full employment” by the early 1980.
  • Shifting the Focus: Export-oriented Industries based on Foreign Capital 83 The more focused goals of the aforementioned basic development goals were stated as: 1) achieve self-sufficiency in foodstuffs, the af- forestation of mountain areas, and development of fishery industry; 2) build the foundation for industrialization at a higher level through building chemical, steelmaking, and machinery industries, and enhance the industrial and technical sectors at the same time; 3) achieve the export target of $700 million (exporting goods to $550 million) and stimulate import-substitution, thereby building foundations for dramatically improving the balance of payments; 4) increase the employment rate, and at the same time control the general population growth by advancing family planning policy; 5) dramatically increase the household income, especially for those of rural (farming) households by diversifying the agricultural prod- ucts; and 6) advance the technology in science and agriculture, and cultivate the required human resources, uplifting the level of tech- nology and productivity. The goals listed above were designed to focus on implementing the plan on a more broad basis and rich in substances by enlisting variety of development targets. During the Second FEDP, the overall economy had grown 9.7% in annual average rate: 19.9% in mining and industry sector; and 12.6% in service industry sector. However, the primary industry had grown by only 1.6% contrary to the targeted growth of yearly average of 5%. Subsequently, the industrial composition had changed from 15.1% in 1967 to 20.9% for mining and industry sec- tor, and social capital and service from 47.4% to 50.3% respectively. However, the primary industry had changed from 37.5% to 28.8% during the same period. The investment rate during the Second FEDP reached 26.4%, higher than planned but mostly from foreign capital growth rather than from the increase in domestic savings. Export recorded $1.13 billion in 1971 due to policy support by the government and the devaluation of the Korean currency. On the other hand, the import recorded $2.18 billion in 1971, three times larger than projected amount, due to rapid increase in im- ports of raw materials and capital goods. As a result, the balance of payments was in red, increasing the gap between the import and export. The problems manifested during the First and Second FEDP could be described as deepening the dependency on foreign mar- kets and capital and deformation of the domestic industrial structure. During the Second FEDP, 40% of the needed investments were from foreign capital. The combined government borrowings and commercial borrowings from abroad amounted to $2.25 billion, creating a huge pressure from maturation of principles by 1971. For firms established with capital borrowing relied heavily on exporting
  • 84 Adaptive Implementation of the Five-Year Economic Development Plans its goods for generating its profits. With the change in foreign mar- ket conditions, especially that of the U.S., those firms had to pro- duce goods under its full capacity. Even some of them had fre- quently used the borrowed capital for speculative investments rath- er than for productive investments to begin with. The steel industry did not grow as expected, relying 41.4% of the total consumption on imports. On the contrary, textile, oil refinery, fertilizers, plate glasses, cement, and shipbuilding had grown substantially. The textile industry especially had a record export of $498 million in 1971. However, most of the exports of the textiles were made to the U.S. and already showed over-investment in pro- duction capacities by then. Productivity of the agricultural sector had declined contrary to the goal of achieving the self-sufficiency of foodstuffs. To maintain the low wage rates, the government had relied on low crop prices, especially for rice, by purchasing the crops at a higher-than-market price and reselling them at a lower-than-market price. However, such had put the rural economy into ruins, and severe rise in in- flation actually decreased the real household income level. Despite the continued economic growth, Korean economy was under the strong influence of growing foreign debt and world eco- nomic crisis between the end of 1960s and the early 1970s. Labor union movements were gradually heightening, threatening the com- parative advantage from having cheap labor forces which would be considered as preferable conditions for making investments. Gradually, Korea was advancing towards a crisis. Park’s regime tried to overcome the situation by actively seeking to increase for- eign direct investments and through systematic oppressions of labor unions. Once we compare the basic goals of the Second FEDP with its more focused goals, we find more structural problems arising from it than its achievements, leaving many of the more focused targets unmet by the Second FEDP. Examples of such were: chronic deficit problems in the balance of payments; dual structure of the large conglomerates vs. small and midsized firms, business concentration and issues of monopoly rents; difficulty in amassing domestic sav- ings as a source for supplying the needed investment resources; problems in the agricultural sector related to self-sufficiency in foodstuffs; issue of severe unbalance between rural and urban areas in terms of community development; and the necessary reform of the industrial structure of “excessive consumption of foreign capi- tals”. In describing the Korean economy during the implementation of the Second FEDP, four topics would require our attention: the deci-
  • Shifting the Focus: Export-oriented Industries based on Foreign Capital 85 sion to send troops to Vietnam during the Vietnam War; the con- struction of the Po-hang Steels Co.; the construction of the Ulsan Petroleum Chemical Industrial Complex; and the construction of the Seoul-Pusan Expressways. With the obvious exception of the Viet Nam War, the remaining three topics would also raise our attention to the fact that they were pursued separately from the Second FEDP, suggestive of the adaptive implementation of projects not specified in the original Second FEDP written in 1966. First of all, on May 1965, during a visit to the U.S., President Park finally agreed, by the request of the U.S., to send troops to Vietnam. He agreed to send troops on the condition that the U.S. provides economic aid to Korea. Naturally, the decision to send troops to war was not welcomed by the Korean people. However, in return of the favor to the U.S. and the UN for helping Korea during the Korean War, and to prepare for another potential war within the Korean Peninsula, he argued in support of the war. Additional considerations such as securing scarce foreign capital, even with the aid from Japan, needed for industrialization as well as the possibility for restoration works needed after the Vietnam War, which Korea would be a natural candidate once it had partici- pated, gave President Park enough reason to participate in the Vietnam War which would bring additional economic effects. Moreover, to modernize the weapons that would be needed to ach- ieve self-reliance of national defense and make the Korean Army stronger, the Vietnam War would represent a good chance for Korea to secure new and superior weapons that the U.S. was re- luctant to give away. His reasoning paid off dearly since Korea en- joyed the special procurement demands from the outbreak of a war during the late 1960s and early 1970s, which contributed greatly to rapid economic growth as well. Secondly, the efforts to build a steels company began in March 1967 by forming the Korea International Steel Associates (KISA), which consisted of 18 companies from the U.S., England, West Germany, France, and Italy in charge of raising the needed capitals internationally. The U.S. based company Koppers had acted as the organizer, carrying out the negotiation for structuring the interna- tional loans between the Korean government and KISA. Due to the extremely unfavorable international environment, having negative views on constructing a steel manufacturing company in the under- developed countries, such negotiation had failed. During the Second Regular Minister-level Talks between Korea and Japan on August 1968, Korean officials requested help from Japan in building a steel manufacturing company in Korea. Once again, citing the dif- ficulty of achieving economies of scale, Japan only agreed to send
  • 86 Adaptive Implementation of the Five-Year Economic Development Plans an investigation team to study the economic feasibility of such a project. To resolve the common concern raised by many others about the lack of economies of scale, Korean officials developed a plan to increase the production volume to 1 million tons. Korean government also proposed to use large portions of the relief money of both grant-types and government loans Japan had agreed to pro- vide once the Korea-Japan foreign relations were restored for the needed foreign investments, greatly reducing financial burdens. Moreover, the Korean government decided to pay for building the necessary infrastructure for steel manufacturing, such as ports, wharves, ground works preparing land for constructions, dredging, paved roads, and railroads to reduce the construction cost greatly by using tax revenues. Furthermore, by enacting the “Law for Rearing Steelmaking Industry,” a number of financial incentives such as tax deductions, reduced tariffs, special amortization, dis- counts of public fees, and support with government funds, Korean government ensured profitability once the production of steels would begin. Relief money from Japan was to be used for compensating those involved in resistance movements against Japan (merit of in- dependence), civil claims against Japan, and fishermen for the loss- es incurred by elimination of the peace line. However, President Park made a decision to use the money for building Po-hang Steels Co. instead. From April 1968, construction of the base works such as railroads, ports, waterlines, and ground works began, followed by the construction of the factory from April 1970. Eventually, on July 1973, Po-hang Steels Co. was created and started producing steel. Thirdly, the construction of the Ulsan Petroleum Chemical Industrial Complex was to replace the imports of the first and sec- ond raw materials needed for producing plastics, synthetic fibers, and synthetic rubbers, where the final products were partly sup- plied to domestic markets, the remainder of which was exported. To have the economic feasibility and profitability, naphtha cracking factory and 12 other lower order factories had to be built and begin their operations at the same time. The Korean government initially tried to find the end users and structure the project around such end users, which had many difficulties in actual implementations. Subsequently, the government changed the nature of the project by selling the factories to the end users after the government had fin- ished building the factories. The Korea Petroleum Public Company and Choong-ju Fertilizer Company owned by the government would lead the project, building all 13 factories, and started the ne- gotiating process to secure the needed foreign capitals. On October 1970, the government began construction of all 13 factories. The
  • Shifting the Focus: Export-oriented Industries based on Foreign Capital 87 minimum production capacity to have any economic feasibility and profitability was 100,00 tons, but such being built by the under- developed country left many in doubts. Eventually, the project suc- cessfully completed in early 70s, and became profitable from the beginning, proving internationally that an underdeveloped country like Korea could successfully create a petroleum and chemical industry. Finally, the construction of the Seoul-Pusan Expressways was an- nounced during President Park’s presidential election campaign for his second term as one of his public pledges on April 1967. He pro- posed, "I’ll advance the Grand Land Construction Projects by build- ing expressways and ports, and by beginning the comprehensive development of the four-river (Han River, Nak-dong River, Keum River, and Yong-san River) areas during the Second FEDP periods." On May 2, in a press conference, he explained the public pledges in details and stated, "the Grand Land Construction Projects are one of the basic designs for modernizing our beloved country," and continued, "Expressways shall link In-cheon, Kang-Reung, Pusan, and Mok-po making Seoul as the center of such expressways." Constructing an expressway would generally require massive manpower and construction equipment, as well as huge capital in- vestments and raw materials, a truly gargantuan project. As such, sagacious perception and conceptions, precise and highly detailed plans as well as various other favorable conditions were the pre- requisites and absolute musts to begin the project. The year after the end of the First FEDP, was surely not the right year to begin such a grand project since Korea lacked the needed public funds, tech- nology, as well as the equipment. The idea to build expressways in Korea began when President Park was paying an official visit to West Germany in 1964, and experienced the Autobahn. He gained his initial knowledge and information about expressways by asking a series of questions on building and maintaining expressways, cost structures and dura- tions, ways to finance, web of expressways, construction equip- ments, and the manpower needed. Impressed by the role that the Autobahn had played in terms of the economic development of West Germany, another divided country like Korea, President Park had been waiting for the right moment to start building expressways. On May 1964, Ulsan Petroleum Oil Refinery Plant be- gan its operation, producing large quantities of asphalt. On top of that, production facilities of cements were expanded, and there was a construction of expressway abroad by the one of the Korean con- struction companies developing the needed technology and know-how. President Park concluded that the right time had come,
  • 88 Adaptive Implementation of the Five-Year Economic Development Plans and began pushing for his idea of building expressways from 1967. From the beginning, many within and outside of Korea had seri- ous concerns or negative responses to his idea of building express- ways, but the President Park argued: that building a expressway was far better than building railroads or ports in terms of the ra- tion of economic gains to investments; that with the limited funds available building expressways were the most effect means to re- solve the transportation problem; and such was highly advanta- geous to the development of the national economy by developing a wider range of businesses, by inducing regional community devel- opments, and by the expansion of zone of life. He further an- nounced that since such expressways were the symbolic project rep- resenting the modernization of our beloved country, construction of such would be based solely on our own capital, own technology, and own efforts. However, the construction cost of building expressways was too high. For instance, the construction cost of the Tomei Expressways between Tokyo and Nagoya showed an average cost per kilometer around 800 million Won, which would suggest that a total of 350 billion Won would be needed to construct an expressway between Seoul and Pusan alone. This estimated amount was twice as much as the total budget of the Korean government in 1967: 164.3 billion Won. President Park gave the order to a number of different govern- ment ministries as well as the Hyundai Construction Co. who had the experience cost of constructing expressways abroad. The range of such estimated varied widely from 18 billion Won of the Seoul City to 65 billion of the Ministry of Construction. Hyundai had esti- mated the cost to be 28 billion Won, and subsequently President Park had set the budget around 30 billion Won. During the 8th Meeting of Economic Ministries on February 1968, the plan for se- curing funds for the construction of expressways was finalized as: 13.9 billion Won from excise tax on gasoline, 6 billion from transit duty, 8.4 billion from sales of borrowed crops, 2.7 billion from the relief funds provided by Japan, 1.5 billion from expressway tolls, and 0.6 billion from regular budget totaling to 33.1 billion Won altogether. In the meantime, right after instructing the Ministry of Construction to develop a plan to build the Seoul-Pusan Expressways on November 1967, he carried out his own secret plan to buy up the land required for constructing such. President Park himself had his ways with reading maps due to his personal backgrounds as an officer of artillery division in the army. Relying on his own skills, he started planning for the routes of Seoul-Pusan Expressways. For
  • Shifting the Focus: Export-oriented Industries based on Foreign Capital 89 the initial routes between Seoul and Suwon, he secretly asked two of the directors of banks to collect data on those candidate lands he had routed. Afterwards, he gathered up the Minster of Construction, the May or of the Seoul City, and the Governor of the Kyong-gi province, giving them highly detailed instructions on knacks and ways to purchase those lands. At the end of the secret meeting, he gave further instructions to finish buying up those lands with a week period. On December 31 1967, he summoned a meeting of governors of local providences giving similar in- structions as before as: "after the routes had been finalized, each governor would follow the footsteps taken by the Governor of Kyong-gi province and finish purchasing those lands as quickly as possible, based on the market prices; and if one would succeed in securing those lands within the planned budget, any such differ- ence could be kept for the roadside zone development projects un- der the full discretion of the governor." On January 12, 1968, routes between Seoul and Dae-jeon were finalized, and on February 1, 1968, a grand ceremony of laying the cornerstone was held offi- cially, with invited guests such as the head of each government branches, the contracting parties, and many citizens. The targeted completion date was publicly announced as June 30, 1971 at the grand ceremony. On July 7, 1970, the Seoul-Pusan Expressways was officially opened for traffic, almost one year earlier than the official deadline, with the actual total construction cost of 42.9 billion Won due to a number of modifications made along the way and in- flation during the period.
  • CHAPTER 5 Concluding Remarks As seen thus far, the underlying characteristics of the First and Second Five-Year Economic Development Plans (FEDP) resembled one of political means to mobilize the energy and efforts of the public and private sector by setting a set of quantifiable targets and subsequently putting efforts to achieve such clearly defined and measurable targets. In implementing the FEDP, it is found that the Korean government constantly adapted to changing international and domestic environments, carrying out plans with maximum flexibilities. Under Lee’s Liberal Party regime, the main focus was on build- ing the foundation for a stand-alone economy through restora- tion-from-war projects based mostly on foreign relief and aid. Too much dependency on foreign relief funds, corruption from a wide variety of privileged businesses, relatively slow economic develop- ment, and the critical political failures of Lee’s regime followed by the April 19 Student-led-revolution forcing President Lee to step down. Subsequently, the Democratic Party’s regime made a funda- mental change in the development strategy from a balanced growth approach towards an unbalanced growth approach focusing on im- port-substituting industries. Before implementing the changes, Park’s regime took control of the nation through the May 16 Military-led-revolution, pressured by potential threats to national security. The economic development plan of the Democratic Party’s regime was adopted by Park’s re- gime without much modification, except for the two factors: the military regime’s plan set the growth rate at 7.1%, much higher than that of the Democratic Party’s; and the military regime’s plan focused on the secondary labor-intensive light industry with a high- er capital turnover ratio, rather than focusing on building the need- ed infrastructure as the Democratic Party’s regime had planned. While implementing the First FEDP, due to changes in the U.S. foreign aid policy, social aftermath from April 19 and May 16 revo- lutions, severe crop failures, overly ambitious implementation due
  • 92 Adaptive Implementation of the Five-Year Economic Development Plans to the influence of the military culture at the beginning of the new government, the one-sided expansionary fiscal policy contributing to a huge hike in inflation rates, failures of the Currency Reform Act and etc., market liberalization policy was adopted since May 1964, with the appointment of Chang, Gi-young to the position of the Vice Prime Minister of the Economic Planning Board (EPB). Another fundamental shift in the economic development plan was made, moving away from import-substituting industries towards export-oriented industries and away from raising the dependency on domestic capital towards relying more on foreign capital to ach- ieve rapid economic growth. Successful implementation of the strategy of export-oriented eco- nomic growth, policy measures such as the Monthly Council of Reporting Economic Trend Meetings, the Monthly Expansionary Council of Export Promotion Meetings, and the wide range of in- centives such as policy support, financial support, and tax de- ductions had played more critical role than the well-planned FEDP. The Second FEDP simply reflected the already-changed develop- ment policy with major shifts, and it was also difficult to say that the actual implementation followed the original plan as it was de- signed at the beginning. Especially, the major development projects during this period such as the construction of the Seoul-Pusan Expressways, the construction of the Po-hang Steels Co., and the construction of the Ulsan Petroleum and Chemical Industrial Complexes were suggestive of the daily implementation practices of the government being quite flexible towards adapting to the chang- ing international environment, exemplified by the extraordinary wartime demands from the Vietnam War, and to the changing do- mestic environment and economic capacities, rather than following the Second FEDP step-by-step as planned at the beginning. In short, it would be inaccurate to describe the main cause of the rapid economic growth of Korea as a step-by-step implementation of the First and Second FEDP. Rather, the flexible implementation of the plans adapting to changing international and domestic politi- cal and economic environments, setting the short-term and long-term goals of economic development that were clearly defined and easily quantifiable, and using the plan as political means to mobilize the national capacities to achieve the targeted goals were the main role the FEDP had played during the period. In other words, the FEDP played a pivotal role of unifying the will of Korean people to develop their beloved country towards a stand-alone economy and the desires of the Korean people to live better lives. Taking this perspective, the number of factors that had con-
  • Concluding Remarks 93 tributed to the rapid economic development of Korea from the un- derdeveloped agricultural society to developing industrial country in a relatively short period of time, both in terms of its growth in volume and its advancements to a higher level, can be listed as: the cultural tradition of placing high priority on education; dissolving of social class under the Japanese occupancy relatively high income equality at the early stage of economic development; pertinent adoption of development policy, effectiveness of adaptive im- plementation; and etc. Most of all, the positive reinforcement from experiencing the rapid economic growth and achieving the targeted macroeconomic goals have contributed the most in terms of amass- ing the productive 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 jumpstarted the will of de- velopment of the people, marking a turning point in modern Korean history, reinforced by the earlier-than- scheduled achieve- ments of development targets, eventually sublimating towards building a strong national pride.
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  • 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