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.
