You will review the evolution of the Korean economy decade by decade since Korea’s independence from Japan in 1945. Major policies of each decade will be explained and their effect on the Korean economy will be analyzed. Also, the backgrounds and limitations of important policies will be scrutinized. By doing so, you will be able to compare the Korea experience with the other developing countries’. 1. You will be able to explain how the miracle of the Korean economic development was made possible. 2. By examining internal and external conditions behind the decision making of major policies in Korea, you will be able to draw lessons that can be applicable to today’s developing countries. 3. You can explain how the Korean economy has interacted with the global economy in the past. 4. You can observe how economic theories and models can be applied to the Korean case.
Export Promotion Policy of the 60s
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The Korean Economic Development
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1960s
Module 6. Export Promotion of the 60s: From the early 1960s, Korea has changed its development strategy from IS (import substitution) to EP (export promotion). This module introduces backgrounds, major policies, and results of EP policies. Also it compares the Korean experiences of EP to those of Japan. Module 7. Five Year Development Plan and Mobilization of Capital: This module explains how the Five Year Development Plans were launched from the early 1960s. Also, it introduces efforts of the Korean government to mobile capital inside and outside Korea during the 1960s.
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Doo Won LeeProfessor
School of Economics
Welcome back.
Today's lecture is about 1960s Korean economy.
As I told you previously,
by the end of the 1950s, Korean economy has faced some problems.
Aid, economic aid was declining, and there was a need to change policies.
It is under this background that in the early 1960s,
Korean government has initiated new policies.
Let's take a look at the backgrounds first.
There was a continuous warning from USA and
also United Nations that economic aid will be reduced.
So Korea has to prepare something else.
And even though the Import Substitution Policy
in basic consumer goods almost completed.
Still the reliance on import persisted.
Also economic growth rate slowed down.
So we needed to find a new engine of growth.
But more than anything else, we had a political change.
In 1960, the first government led
by President Lee Seung-man fell down by student demonstration.
And then we had the new government, however,
the new government was in big chaos politically.
So the new government could not implement any meaningful changes.
In 1961, May 16th, we had a military coup.
Young military elites led by major general
Pak Chung Yi, tried military coup and he succeeded.
So he succeeded to seize power, and after he seized power,
he promised to promote economic growth.
And then, he realized that Korean economy needed to change its main policies.
So, from import substitution to export promotion,
meaningful changes took place from 1962.
Here are some examples of policy changes.
More than anything else, the most important
policy of the 1950s Import Substitution was overvalued exchange rate.
However, when the exchange rate was over valued, the export industry
of Korea cannot enjoy price competitiveness in the global market.
So in order to promote export, the exchange rate has to be depreciated.
But before depreciation, exchange rate was unified.
In 1950s we actually had multiple exchange rate system.
So let's unify it first and then depreciate it.
Briefly, let's take a look at the exchange rate table first.
If you look at the first column of the table, you see that currency
has been depreciated almost 100% from 1961 to 1962.
And throughout the course of 60s and 70s, Korean exchange rate
continued to increase, meaning that Korean currency was depreciating.
This was the major change of macroeconomic policy.
But in terms of the microeconomic measure, Korean government
provided a lot of incentives to encourage more of the export.
Here are some examples.
Export import linkage system.
So if you export a lot, you could have a right to import.
Subsidies and policy loans.
In the beginning of the 1960s after the military coup,
many of the commercial bank were put under the control of the government.
So that's very convenient for the government to implement
industrial policy using these kinds of financial tools.
So export industry could borrow money at fairly low interest rate from bank.
Tax incentives.
If you export a lot, you could enjoy tax cut.
Tariff reduction, or exemption for
imports of intermediate inputs for export industry.
In addition to these kinds of policy change, we had institutional reform too.
Economy Planning Board was set up right after the military coup in 1961.
National Tax Authority, 1966, and
Korea Institute of Science and Technology was established in 1966.
These kinds of institutions have played a very
significant role in the later 60s and 70s as well.
We have looked at this table already, and all of these incentives paid off.
Look at the table of export and import.
From 1962, you can observe that the export of Korea increased rapidly.
Well along with the increase of the export, import also increase too,
because we had to import a lot of raw materials, intermediate inputs or
machineries to produce our export product.
However, look at the gap between export and import and compare 50s and 60s.
In 1950s, import was easily ten times bigger than export.
However, as we go into 60s, this gap narrowed.
Import was probably only two or three times larger than export.
One thing very interesting is that in the beginning of 1960s, even the new
government did not realize that export would be led by manufacturing sector.
This table shows the initial plan and the actual result of the export by sector.
If you look at it initially according to the plan,
export was supposed to be led by food or low materials.
However, over time gradually
export was led by product by materials or miscellaneous product.
Basically they were manufacturing sector.
This was something that even Korean government did not realize.
This is a summary of export competition, as I just mentioned,
gradually manufacturing sector took the lion's share.
This is top ten export items 1961 and 1970.
In 1961, most of these top ten export products were primary products.
Agricultural product, fishery product or mineral product.
But look at 1970.
All of them, almost all of them, are manufacturing products.
And you can notice that almost all of these manufacturing products
in 1970 were labor intensive manufacturing products.
It shows that in 1960s, the competitive advantage of Korean
export lied in labor intensive industry.
That's a very natural result of Korea's endowment.
Korea was endowed with abundant amount of cheap and relatively good labor forces,
so naturally we had advantage in labor intensive industry.
When you compare it to Japan, Korean economy in 1960s
looks almost exact the same as Japan in the early 1910 and 1920.
In terms of the competition of the export,
also in Japan, manufacturing sectors export overtook
the agricultural export in the early 20th century.
You can see how rapidly Japan increased export in the early 20th century.
At the time the biggest item of the export in Japan was textile and clothing.
Look at this global market share of Japan, it was only 2% at the turn of the century.
However, by 1930's Japan was actually,
the second largest exporter of textile and clothing, overtaking France.
It shows how rapidly Japan could
increase its export volume to the rest of the world.
Now when you compare Japan and Korea, there are many similarities.
In terms of the policy, in terms of the structure,
in terms of the performance, there are many similarities.
We do have couple of differences.
However between Korea in 1960s and
Japan in early 20th century, Korea's export
actually increased much faster than Japan did in the early 20th century.
Probably because 1960s was the era of global trade and gross accelerating.
Korea took advantage of it.
And Korea also relied more on the inflow of foreign capital
as we needed to invest more than we saved.
But this table summarized very well about the comparison between Korea and Taiwan.
And so again, export promotion.
State would be P2 state in this table, and
we do have some time lag between Korea and Japan.
Now that we moved onto the export promotion policy,
let us compare experience of East Asian countries,
including Korea, and Latin American countries.
In the beginning 1950s both region actually started
is industrialization with import substitution.
That's the first stage of import substitution focusing on consumer goods.
However, in 1960s Korea moved on to export promotion, and
then Korea moved on to the second stage of import substitution later in 1970s.
In the second stage, the main focus was to produce heavier chemical industry.
However, the past, the Latin American countries was different.
After the completion of the first stage of Import Substitution,
Latin America moved onto the second stage of Import Substitution.
But it didn't quite work out.
They had trouble in 1980s.
But after they clean up they're trouble from 1990s,
many of Latin America countries, they moved back to Export Promotion policies.
But this is a fairly simplified version of
economic development strategy between East Asia and Latin America.
In the next lecture I will try to emphasize
more on the policies of Korean government in 1960s,
in terms of economic plan, andthe mobilization of CAFTA.
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