Economic Development of South Korea under Park Chung Hee (1961-79)


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Economic Development of South Korea under Park Chung Hee (1961-79)

  1. 1. ECONOMICDEVELOPMENT OFSOUTH KOREA UNDERPARK CHUNG HEE(1961-1979)How South Korea escaped poverty andbecame one of the richest countries in theworldHyunsu “Philip” ChoEdmonds-Woodway High School
  2. 2. ► Despite trillions of aid given, 2.6 billion live w/ less than $2 a day► Countries in Africa and Lat. Am. are still dependent on commodity exports► Productivity has stagnated in Lat. Am. - falling behind in intl competitionPOVERTY IS A STUBBORN THING
  3. 3. ► GDP per capita around $100, poorer than Philippines ► Ravaged by the Korean War (1950-3) ► Large standing army - menace from North ► Largely agarian country ► Lack of natural resources - coal, iron, copper, oilSOUTH KOREA IN 1950S
  4. 4. ► GDP growth averaged 9-10% a year► Manufactoring sector took greater share of the economy (close to 30% - comparable to West Germany)► “Boys who grew up working in rice paddies found themselves building oil tankers and designing semiconductor chips.” - Mark L. CliffordSOUTH KOREAN ECONOMYROARS
  5. 5. RESEARCH QUESTIONTO WHAT EXTENT did Park Chung Hee‟s iron rule contributeto South Korea‟s economic growth?
  6. 6. ► Sense of desperation ► U.S. aid kept people barely alive: 1/2 of national budget ► 1/5 of adults unemployed; social unrest fueled by unemployed youth ► Menace from the North► Traditional social structure dismantled ► Land Reform: wiped out traditional landed aristocracy► Tepid economic growth, lack of manufacturing base ► Democracy seemed helpless in mounting economic challenges ► Capital shortage kept businesses from growingPOSTWAR SITUATION
  7. 7. ► seized the capital + other important cities ► purged politicians on corruption charge ► brought businessmen into submission (June 14 law) ► The military was the most modern sector of that time “Western democratic institutions do not harmonize with the underdeveloped conditions of Korea.” – ParkPARK STAGES MAY 16REVOLUTION
  8. 8. ► Economic growth as the historical goal, to be achieved at all cost ► “In human life, economics precedes politics or culture.” – Park► “Guided Capitalism”: The state as the engine of economic development ► central planning + gov‟t intervention in the market ► industrial policy, corporate state► Influenced by state-planning in ManchukuoPARK‟S “DEVELOPMENTALISM”
  9. 9. ► The state intervenes in individual firms‟ decisions► Economic Planning Board (EPB) : planning, national budget► Ministry of Finance (MoF) controlled the banking sector ► Nationalization of banks ► Extraordinary power over credit-starved businesses► All businesses were required to join associations ► Policies, regulations, orders move quickly from ministries to firms ► domestic cartels – steady stream of profit► Enfoncement devices ► Cutting off credit line • Personal connections ► Arbitrary tax audit • Uneven law enforcementKOREAN CORPORATE STATE
  10. 10. Top-down, General Headquarter style Other Gov‟t - Park himself made major decisions Ministries MoF (Ministry of state-owned Finance) banks EPB (Economic Planning Board) MTI (Ministry of industry/business Trade + Industry) associations FKTU (Federation (gov‟t-controlled) Businesses of Korean Trade industrial unions Unions)National Budget Coopted labor
  11. 11. ► Pro ► Allows for great flexibility in policy implementation ► Channel of communication b/w gov‟t and private sector ► Unlike Mussolini, Park utilized corporate state to the fullest► Con ► Coercive element – individual initiatives are often compromised, tight gov‟t control, the state always had upper hand ► Red tape – maze of permits, regulations, and licenses ► Institutionalized corruption ► favors big business over small businessKOREAN CORPORATE STATE(CONT.)
  12. 12. ► Early 1960s: dollars began to run out; U.S. threatened to cut aid► 2nd FYP: Build industries targeted to export markets ► 1960s: S. Korea utilized cheap labor – light manufacturing► Huge incentives for exporters ► Import license conditional on export performance ► Tariff exemption for raw materials and machinery ► Exporters could automatically borrow against overseas orders ► More credit to companies w/ superior export performance► Coercive element: Corporate state had business go alongEXPORT-ORIENTEDINDUSTRIALIZATION (EOI)
  13. 13. 1st Export Promotion Meeting (1960) Park hands over export towers► Monthly Export Promotion Meeting ► President, gov‟t officials, academics, reps from trading companies – “rapid response team” for exporters► Export Day (11/30) ► “Export towers” to companies w/ best export performance EXPORT-ORIENTED INDUSTRIALIZATION (EOI)
  14. 14. ► Scoured the world for new export markets ► Helped Korean businesses how to market their products in foreign countries ► Key to overcoming the obstacles early exporters facedKOREA TRADE PROMOTIONAGENCY (KOTRA)
  15. 15. ► HUGE SUCCESS!► Exports skyrocketed; trade deficit stayed under $1 billion ► S. Korea established a firm international standing in light industries – shoes, wig, clothes, plywood etc ► Foreign borrowing + direct investment plugged the gap► Exports: $33 million -> $3.3 billion (100 times)► Imports: $343 million -> $3.8 billion (11 times) ► Raw materials + machinery for export industries► Investment: 6% of GDP -> 23% of GDPRESULTS (1961-73)
  16. 16. EOI (EXPORT ISI (IMPORT PROMOTION) SUBSTITUTION)► Taiwan, South Korea ► Latin America, Soviet Union, Mussolini‟s Italy, North► Selective, short-term protection – Korea international competition makes infant industries grow up ► Blanket, permanent protection – infant industries don‟t grow up ► Up-to-date machinery introduced ► Lack of competition → ► Experience w/ overseas market drag in int‟l competitiveness► Gov‟t complements market forces ► Inflated wages ► Correction of market failure – high ► Tried to reinvent the wheel: set-up costs of exports; imperfect expensive intermediate goods information ► Gov‟t resists market forces ► Meritocracy in allocating credit ► Balance of Payment crisis lowers► Reduced possibility of BoP crisis quality of inputs► Selective use of FDI (Foreign Direct ► Dependence on FDI and foreign Investment) aidWHAT‟S GOOD ABOUT EOI?
  17. 17. ► North Korea continued its offensive; U.S. threatened to withdraw its troops ► Yushin Constitution ► Nation ruled under martial law; Korea became Single Party State ► Park turned into dictator ► KCIA censored the press, eavesdropped phone callsTHE BIG PUSH (1973-79)
  18. 18. ► HCI (Heavy & Chemical Industries) Plans – 4th FYP► Aim: build up defense► Shipbuilding, machinery, chemicals, steel, electronics, automobile► Unprecedented industrial expansion► Good: gain experience in heavy industries, which create far more added value; acquire managerial skills; economies of scale ► Korea became competitive in semiconductor, shipbuilding, steel► Bad: policy loans caused massive inflation in 1970s; some target industries didn‟t work out in the end (i.e. aluminum)THE BIG PUSH (1973-79)
  19. 19. ► Lure Koreans who‟d been educated overseas with attractive pay packages ► Cutting-edge managerial techniques and scientific knowledge ► KAIST (Korea Institute of Science of Technology) ► engineering education“REVERSE BRAIN DRAIN”
  20. 20. ► State-owned enterprise► World Bank refused to finance the project► Park Tae Joon used personal connection in Japan to channel reparations (for past colonization)► Ran like military ► Rapid construction schedule + high quality standard ► Long work hours (60-70 hour work week)► Became one of the largest, most efficient steel maker in the world► Opened up the way for heavy industriesPOSCO: INTEGRATED STEEL MILL
  21. 21. ► National conglomerates (groups) run by founding families► Profitable firms subsidize less profitable firms within the conglomerate (cross-subsidization)► Factors ► Scarce credit + abounding investment opportunities ► Red tape – lots of paperwork ► Export promotion – bigger is better in export market ► State-owned banking sector – political clout was a must to secure loans► Quite a few became successful global multinationalsRISE OF CHAEBOLS
  22. 22. PARK: A HERO OR A VILLAIN?Controversy still continues
  23. 23. ► Economic growth was impossible w/o Park ► Western-style democracy isn‟t fit for an undeveloped country like Korea ► Nonpartisan planning is the way to rapidly modernize ► Park had a grand vision for economic development Kim Seong Jin – President Park‟s former secretaryCONSERVATIVE HISTORIANS
  24. 24. ► Strength ► EOI wasn‟t as politically palatable as ISI (popular in 3rd world countries) ► Businesses were reluctant to export if left on their own ► State autonomy allowed for quick policy decisions ► Capital market hadn‟t fully developed (curb market)► Weakness ► Park didn‟t have a “vision” (1st FYP didn‟t include export promotion) ► Park adjusted his strategies according to economic realities ► He listened to U.S. AID advisers + foreign-educated technocrats ► Park was luckier than his Latin American counterpartsEVALUATION OF ARGUMENT
  25. 25. ► Military/Economic alliance with the United States ► U.S. wasn‟t so friendly w/ some Latin American countries ► U.S. aid $3 billion by 1968; Vietnam gave military contracts ► The Cold War: need to contain North Korea ► U.S. gave Korea considerable freedom in economic policy► 1960s: rise of international division of labor ► Labor cost too high in developed countries► Opposition was weak/unorganized; the state was autonomous ► Anticommunism: leftists and labor unions were repressed ► Land reform of 1950s: landed aristocracy wiped out ► Bourgeoisie lost wealth during wartime; industrialists and businessmen were dependent on the state for foreign aidEXTERNAL FACTORS
  26. 26. ► Harms done by Park‟s iron rule outweigh benefits of economic growth ► South Korea‟s economic development was mainly driven by external factors above Park‟s control ► Chaebols became a huge liability ► Expansion into many different fields of production, regardless of profits Jin Jung Kwon – a ► High debt-equity ratio – social critic vulnerable to recessions ► Corrupt gov‟t-business allianceLIBERAL HISTORIANS
  27. 27. ► Strength ► Democracy and economic development aren‟t mutually exclusive ► Labor sacrificed too much ► Jeon Tae-il (labor activist) burned himself in 1970 ► External factors ► 1997 financial crisis: gov‟t allowed chaebols to borrow excessively► Weakness ► Efficient developmental state requires autonomous state ► Initial phase of development entails hard time for labor ► Economy of scale is necessary to compete in global market ► Gains in competitiveness stuck after 1997 financial crisis ► Not every leader can take advantage of good environmentEVALUATION OF ARGUMENT
  28. 28. ► Park instilled into people the value of thrift and hard work ► Although circumscribed, private property encouraged investment ► Korea had (virtual) free trade ► Park contained communist North ► Park is guilty of central planning ► Economy is best left to the individual ► Economic freedom and political freedom are intertwinedKim Jeong Ho – president ofCenter for Free Enterprise (CFE)LIBERTARIANS / NEOCLASSICALS
  29. 29. ► Strength ► Saemaul (New Community) Movement mobilized idle workers in countryside ► Businessmen and entrepreneurs maintained their roles ► Exporters didn‟t pay tariffs on raw materials + machinery ► Businessmen couldn‟t speak up against gov‟t, fearing their credit lines might be cut off► Weakness ► Corporate state forced businesses to invest more than they would otherwise; cult of austerity induced people to save ► Gov‟t intervention corrected market failures in exports ► Gov‟t selectively protected + nurtured infant industriesEVALUATION OF ARGUMENT
  30. 30. ► Chaebols served to protect national economy from predatory foreign capital ► Park‟s developmental state offers model for “economic democracy” ► State-owned financial sector ► Extensive control over capital ► A democracy is powerless if it cannot contain the excesses of the marketChang, Ha-Joon – author of23 Things They Don’t Tell You AboutCapitalismCONTRARIAN
  31. 31. ► Strength ► Profits made by chaebols stayed within the border ► Corporate state ensured that businesses act in accordance with the national interests► Weakness ► Modern nations with sizable population have representative democracy. Putting too much financial power to politicians is like putting all eggs in one basket. ► Corporate state requires autonomy of the state – interest groups hamper such development. ► Chaebols are just like other multinationals of the worldEVALUATION OF ARGUMENT
  32. 32. ► Park has built a “Tiger Daddy State” ► Economic development in exchange for political freedom ► Single party corporate state speeded up development ► Businesses were forced to compete overseas► Park was pragmatic and flexible ► Took maximum advantage of int‟l + domestic politics ► EOI as result of policy adaptation ► Acknowledged role of businessmen and entrepreneurs ► Recognized need for advanced foreign technology► While developmental state is somewhat at odds with interest group democracy, Park didn’t need iron rule to advance his agenda; state autonomy had been established since 1950sCONCLUSION
  33. 33. ► It takes right kind of “parenting” to develop a country‟s industrial base to internationally competitive level ► Park‟s South Korea: too authoritarian ► Latin America: too overprotective ► Somewhere in the middle ► Alexander Hamilton‟s American School ► France and Quebec: “indicative planning” ► Countries should integrate into world economy, on their own terms► Infant industries need some time to grow and mature► The individual cannot overcome market failures► The individual succeed only so far as his country provides him opportunities to do soCONCLUSION
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