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Korean Economic Development in Historic Perspective

2009. 7. 1 Joon-Kyung Kim KDI School of Public Policy and Management . Korean Economic Development in Historic Perspective. Contents. 1. Overall View of Korea’s Economic Transformation. 2. Contributing Factors behind “Shared Growth” during the Take-off Period.

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Korean Economic Development in Historic Perspective

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  1. 2009. 7. 1 Joon-Kyung Kim KDI School of Public Policy and Management Korean Economic Development in Historic Perspective

  2. Contents 1. Overall View of Korea’s Economic Transformation 2. Contributing Factors behind “Shared Growth” during the Take-off Period 3. Lessons from the Korean Experience

  3. 1. Overall View of Korea’s Economic Transformation

  4.  Achieving “shared growth” and democracy 1 Korea has been able to achieve rapid growth with equity since early 1960s. • Free from poverty and foreign aid, and becoming self- sufficient economy • Rapid transformation from light manufacturing to HCIs • (Heavy and Chemical Industries) • Joining the OECD confirms Korea’s economic advance • Economic development open the way to political democratization, all within one generation Korea’s performance of the growth with equity contradicts Kuznet’s hypothesis. • Kuznet’s hypothesis: Distribution of income would worsen during the early stage of industrialization.

  5.  Per Capita Income (US$) 2 6 20,240 18,372 16,291 Per Capita Income (US$) 14,193 11,432 10,000 Six 5-Year-Economic- Development Plans 7,355 Financial Crisis 5,000 Liberation from Japanese Colonial Rule 1,000(1977) OECD Member 100(1964) 89 67 1945 1953 1995 1970 1980 1990 1998 2004 2006 2007 1961 Source : Bank of Korea

  6.  Changes in Employment Structure 3 1963 2007 Agriculture / Fisheries 7.4% Service Manufacturing 17.6% Service Manufacturing 75.0% Agriculture / Fisheries Source : National Statistical Office

  7.  Rapid Growth and Low Income Inequality 4 Korea has been cited as one of successful countries with relatively low income inequality and rapid growth. <Gini coefficient and GDP per capita growth rate: 1965-1990> Gini coefficient Per capita GDP growth rate (%)

  8.  Reducing Poverty 5 Absolute poverty declined steeply from 48% in 1961 to less than 10% entering 1980s. <Absolute Poverty (%) : 1961-1993>

  9.  Bird-Eye View of Korean Economy (1962-2007) 6

  10. 2. Contributing Factors behind Shared Growth

  11. 2.1 Initial Conditions before Take-off 7 Korea was war-torn and divided, and was one of the poorest country with per capita GNP of $89 in 1961 (101st out of 125 countries) • Vicious cycle of low savings and low growth * Domestic private savings : only 5% of GNP in 1961 “Korea’s prospect for development is anything but bright!” (World Bank report) “No hope for democratization” (The Times)

  12. 2.2 Outward-looking Development Strategy (1/3) 8 Policy shift from “Import Substitution” to “Export Promotion” in the early 1960s • Export-promotion policy focused on labor-intensive industries in view of abundant and well educated labor force • Key steps: Implementation of exchange rate reform (1964) and export incentive system such as export financing International Coordination with Japan and United States • Relations with Japan were normalized in 1965 despite fierce objection from Korean Citizens. • Dispatched Korean troops to the Vietnam War during 1965-1973 to support the US forces.

  13. <Annex 1> Japanese Reparations Fund 9 A total of reparations from Japan : US$ 500 million • 300 mil $: for free (Japanese grants), • 200 mil $: Japanese governmental loans (maturity: 20 years with • 7-year grace period, interest rate: 3.5%) • Use of the funds: construction of POSCO (Grant: 30.8 mil $, Loans: 88 mil $), Gyeongbu [Seoul-Busan] Express Way (6.9 mil $), and Soyang River Dam • Burma, Philippines, Indonesia, Vietnam also received reparations from Japan.

  14. Anti-government demonstration against Normalization of relations with Japan on June 3, 1964

  15. 2 17 Gyeongbu [Seoul-Busan] Express Way

  16. Dispatched Korean Troops in Vietnam (1965-73)

  17. 2.2 Outward-looking Development Strategy (2/3) 10 Export-driven policy focused on promoting heavy and chemical industries (HCIs) in the 1970s • Motivation: To secure national security interests * Nixon Doctrine (1969): “defense of each Asian nation lay in the individual nation itself” - Reduction of US forces stationed in Korea by a third in 1971  Iron and Steel  Electronics  Petro-Chemical Products  Automobile  Ship-building  Machinery Policy Shift Toward HCI Development

  18. 2.2 Outward-looking Development Strategy (3/3) 11 Strong export promotion led to rapid export growth of 40% per year between 1964-80. In particular, focus on labor-intensive exports in the 1960s led to large employment opportunities. • Unemployment rate continued to decline steadily as employment opportunities outgrew the labor force

  19. <Annex 2> Explosive Growth Korea’s Export 12

  20. <Annex 3> Changes in Export Commodity Profile: From Light industry to HCI 13 Wig Textile Automobile Semiconductor, Mobile Phone, DTV, Display, Automobile, Ship-building, etc. Export Commodity Profile Semiconductor 79.8% HCI Product 50% Light Industry Product 14.1% Agricultural Product 6.1% 1980 1990 2003 1960 1970 1999

  21. <Annex 4> Job creation 14 <Labor force growth, Employment growth, and Unemployment rate (%)>

  22. 2.3. Educating Manpower (1/2) 15 Broad access to education raised level of manpower • It was during the Korean War that compulsory primary education was declared in the Korean constitution. • Why so strong education fever (敎育熱)in Korea? There also was strong demand for education, motivated by the unusual homogeneity of Korean society. * Such equitable social structure was brought out by 1) the dissolution of traditional hierarchical social status system through the Japanese colonial occupation and 2) the land reform after the liberation from the Japanese occupation * Easy social mobility has made education as a unique important means of individual advancement. ※ Korea’s equitable social structure seems to be unique: In Japan, a hereditary member of the Diet, about 30% out of total congressmen, that is unimaginable in Korea !!!

  23. 2.3. Educating Manpower (2/2) 16 Promoting engineers and skilled workers • In the area of mechanical engineering, a total of 11 technical high-schools were established in each province\ • Korea excelled in International Vocational Training Competition (the Vocational Olympics), wining 9 times in a row during 1977-1991.

  24. 17 <Annex 5> Why promote technical high school? 2 Absolute shortage of technicians • Composition of Engineer : technician : simple • unskilled worker (graduate from elementary school) • as of 1969 • * Korea 1 : 2 : 15 • * US 1 : 25 : 5 • ☞ Korean government, with a top priority, promoted • technical high school education. • * Target: producing 50,000 technicians every • year nationwide

  25. <Annex 6> Focus on practical technique training (1/2) 18 2 Government established technical high-schools, which trains their students practical technique, that can be directly applied to workplaces, after graduation. • The practical technique training programs were specified into finer and more specialized fields • Curriculum consists of 1) general education and 2) special technique training • * The ratio of general education vs. special technique • training was 40 : 60 • * In the special technique training, the ratio of theory vs. • practical training was 30 : 70

  26. 1 8 19 2  Case of Kum-Oh Mechanical Technical High-School 8 Kum-Oh Technical School was the best technical high school in Asia in terms of facilities and teachers. • Practical training equipment was imported from Japan • and financed by Japan’s ODA which amounted to 1.2 • billion yen between Dec. 1971 – Sep. 1974. • 8 Japanese teachers were recruited for 3 years until the • first class was graduated. Korean teachers were also • dispatched to Japan for training. In the case of 1976, 126 out of 400 incoming freshmen was valedictorians, 256 were top 5% students, and only 23 were top 10%. • The students began to get license for precision machine technician, and to win in Vocational Olympic

  27. Car Parade in Seoul honored Vocational Olympic Medalists

  28. President Park encouraging Medalists in Vocational Olympic at Chongwadae 1969. 7

  29. 2.4. Dynamism in Agricultural sector 20 Green Revolution of the Agricultural Sector • Government support in 1) agricultural research, 2) investment in irrigation, and 3) forestry sectors. * Developed new variety of crops, built dams on major rivers Saemaul (New Village) Movement (rural community development program) to improve income as well as living conditions • Self-help, diligence, and cooperation were three pillars of the Movement Rising productivity in agricultural sector • Between 1970 and 1977 the rice yield per hectare rose from 3.5 tons to 4.9 tons • Income distribution between farmers and urban workers had improved from the mid 1970s.

  30. 21 14 <Annex 7> RiceYield per Hectare (ton/ha) 2 Japan Korea

  31.  The Saemaul Movement (1/2) 22 Survey result by a daily newspaper in 2008, asking Korean people, what was the most important national event in Korea for the past 60 years.(Multiple responses)

  32.  The Saemaul Movement (2/2) 23 Emphasis on Self-Help • Stick and Carrot Approach * In 1970, a total of 34,656 villages were given free of charge 300-350 bags of cement to be used for community project that would improve living conditions (such as roads, bridge, wells, drainages, etc.) • * Under the principle of giving priority to successful villages, • material support was given only to the self-help villages • through the government evaluation. • - In 1971, only 16,600 villages(48% of total villages) with good • evaluation continued to receive 500 bags of cement with 1 ton of iron • reinforcing rod. • - Furthermore, electricity supply policy for a village was strictly linked to • its performance of Saemaul Movement. (Shares of villages with • electricity access in Korea: 20% in 1971  more than 97% in 1980) • * As a result, spirit of competition and cooperation spread • throughout the country.

  33. <Annex 8> The Saemaul Movement 24 <Hypothetical Layout of a Typical Village and Saemaul Project Undertaker > 1. Village access roads 2. Old bridges 3. Village roads 4. Sewage system 5. Thatched roofs 6. Old fence of farm house 7. Traditional Wells 8. Village halls 9. Banks of brook 10. Feeder roads 11. Rural electrification 12. Village owned telephone 13. Village owned hot bath 14. Children’s playground 15. Cloth washing place 16. Planting of trees

  34. 2.5 The Role of “Monthly Meeting” (1/7) 25 5-year economic development plans and the role of “Monthly Meetings” • 5-year plan: suggesting blue print and vision • Monthly meeting: monitoring and trouble-shooting session • * Monthly Export Promotion Meeting and Monthly • Economic Trends Report Meeting Bureaucrats, bankers, business associations attended • During 1965-1979, about 300 monthly meetings were held

  35.  The Role of “Monthly Meeting” (2/7) 22 8 26 Monthly Export Promotion Meeting prepared by MCI • Export targets were set for each firm based on projected sales. • Best performers were rewarded with financial supports and were given achievement awards Monthly Economic Trends Report Meeting prepared by EPB • Success stories of Saemaul Projects were presented at this meeting. Between 1971 and 1979, 150 Saemaul leaders presented their success stories.

  36. Monthly Export Promotion Meeting

  37. Monthly Export Promotion Meeting

  38. Monthly Economic Trends Report Meeting Honoring Saemaul Leaders

  39. 15 19 2 29 Honoring Saemaul Leaders

  40. <Annex 9> Frequency of Monthly Meetings 2 27

  41. <Annex 10> List of Participants for the Third Monthly Export Promotion Meeting in 1967 (1/2) 22 28 8 8 24

  42. <Annex11> List of Participants for the Third Monthly Export Promotion Meeting in 1967 (2/2) 22 29 8 8 24

  43.  The Role of “Monthly Meeting” (3/7) 22 8 30 24 Troubled shooting session: identification of major bottlenecks & immediate policy responses • If some projects were found to be lagging behind schedule, the causes of the delay were analyzed and a decision on corrective action was taken, often on the spot. By doing so, this led to vision sharing among gov’t and private sector that allowed better policy coordination

  44.  The Role of “Monthly Meeting” (4/7) 22 8 31 24 Examples of Troubled shooting session • When the government assessed the progress of plant • constructions for the chemical industry complex and found that • they were well behind schedule because the lending banks were providing insufficient support, it summoned the bank presidents and asked them for greater cooperation in supporting the project • When exporters reported in the monthly export promotion • meetings that the international market was slow and that they • had begun accumulating inventory, the government urged • bankers to extend greater working capital credit to exporters.

  45. 28  The Role of “Monthly Meeting” (5/7) 2 32 Presentation of success story by village leaders in front of ministers and political leaders. • President Park emphasize the importance of success story of Saemaul project. He believed the success story itself could be a good textbook. • Success story were presented in the Monthly Meeting, which key ministers and political leaders attended. • * Listening to the success story, the ministers and political • leaders realized and understood the Saemaul movement • better

  46.  The Role of “Monthly Meeting” (6/7) 22 8 33 24 Monthly Economic Trends Report Meeting served as a trouble shooting session for Saemaul project • In one of the meetings, a village leader told how he was frustrated because he could not find any hospital in the village when an urgent sick person needed help. • → The government responded to establish a village clinic • at each village, where a medical college graduated • intern and a nurse dispatched. • Another leader told about the inconvenience occurred in emergency situation because they do not have a telephone. • → President Park instructed to install a village telephone.

  47.  The Role of “Monthly Meeting” (7/7) 22 8 34 25 Monthly Meetings helped review both bureaucratic and firm performance → “Beauty contest” for gov’t officials • Every official had to be alert to ensure that a project on his authority did not become an object of negative attention at the meeting in the presence of the President. • Performance of officials was the critical element of their evaluation and promotion. • Relatively corruption-free

  48. 3. Lessons from the Korean Experience

  49.  Lessons from Korea’s Experience 35 Major contributing factors for shared growth were: • Equal opportunity (dissolution of traditional hierarchical social status system ) • Competition, performance-based government support • Broad access to education and raising technical know-how • Growth with job-creation, initially led by labor intensive export promotion • Promoting spirit of self-help: Saemael movement

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