The Government Role in Economic Development of South Korea

In 1961 General Park Chung Hee overthrew the popularly elected regime of Prime Minister

Chang Myon. A nationalist, Park wanted to transform South Korea from a backward agricultural nation

into a modern industrial nation that would provide a decent way of life for its citizens while at the same

time defending itself from outside aggression. Lacking the anti-Japanese nationalist credentials of

Syngman Rhee, for example, Park sought both legitimacy for his regime and greater independence for

South Korea in a vigorous program of economic development that would transform the country from an

agricultural backwater into a modern industrial nation.

Park's government was the beneficiary of the Syngman Rhee administration's decision to use

foreign aid from the United States during the 1950s to build an infrastructure that included a nationwide

network of primary and secondary schools, modern roads, and a modern communications network. The

result was that by 1961, South Korea had a well-educated young work force and a modern infrastructure

that provided Park with a solid foundation for economic growth.

The Park administration decided that the central government must play the key role in economic

development because no other South Korean institution had the capacity or resources to direct such

drastic change in a short time. The resulting economic system incorporated elements of both state

capitalism and free enterprise. The economy was dominated by a group of chaebol, large private

conglomerates, and also was supported by a significant number of public corporations in such areas as

iron and steel, utilities, communications, fertilizers, chemicals, and other heavy industries. The

government guided private industry through a series of export and production targets utilizing the control

of credit, informal means of pressure and persuasion, and traditional monetary and fiscal policies.

The government hoped to take advantage of existing technology to become competitive in areas

where other advanced industrial nations had already achieved success. Seoul presumed that the well-
educated and highly motivated work force would produce lowcost , high-quality goods that would find

ready markets in the United States and the rest of the industrial world. Profits generated from the sale of

exports would be used to further expand capital, provide new jobs, and eventually pay off loans.

In 1961 Park extended government control over business by nationalizing the banks and merging

the agricultural cooperative movement with the agricultural bank. The government's direct control over

all institutional credit further extended Park's command over the business community. The Economic

Planning Board was created in 1961 and became the nerve center of Park's plan to promote economic

development. It was headed by a deputy prime minister and staffed by bureaucrats known for their high

intellectual capability and educational background in business and economics. Beginning in the 1960s,

the board allocated resources, directed the flow of credit, and formulated all of South Korea's economic

plans. In the late 1980s, the power to allocate resources and credit was restored to the functional

ministries. In 1990 the Economic Planning Board primarily was charged with economic planning; it also

coordinated and often directed the economic functions of other government ministries, including the

Ministry of Finance. The board was complemented by the Korea Development Institute, an independent

economic research organization funded by the government. Other government bodies directing the

economy included the Office of the President, which included a senior secretary for economic affairs; the

Ministry of Finance; the Ministry of Trade and Industry; the Ministry of Labor; and the Bank of Korea,

which was controlled by the Ministry of Finance.

Park's first major goal, which was immediately successful, was to establish a self-reliant

industrial economy independent of the massive waves of United States aid that had kept South Korea

afloat during the Rhee years. Modernizing the economy and maintaining overall sustained growth were

additional goals in the 1970s. Significant economic policies included strengthening key industries,

increasing employment, and developing more effective management systems. Because South Korea was

dependent on imports of raw materials, such as oil, a major government objective was to significantly
increase the level of exports, which meant stressing greater international competitiveness and higher

productivity. The early economic plans emphasized agriculture and infrastructure, the latter were closely

tied to construction. Later, the emphasis shifted consecutively to light industry, electronics, and heavy and

chemical industries. Using these strategies, an export-driven economy developed.

The government combined a policy of import substitution with the export-led approach. Policy

planners selected a group of strategic industries to back, including electronics, shipbuilding, and

automobiles. New industries were nurtured by making the importation of such goods difficult. When the

new industry was on its feet, the government worked to create good conditions for its export. Incentives

for exports included a reduction of corporate and private income taxes for exporters, tariff exemptions for

raw materials imported for export production, business tax exemptions, and accelerated depreciation

allowances.

The export-led program took off in the 1960s; during the 1970s, some estimates indicate, Seoul

had the world's most productive economy. The annual industrial production growth rate was about 25

percent; there was a fivefold increase in the GNP from 1965 to 1978. In the mid-1970s, exports increased

by an average of 45 percent a year.

Industrial Policies

The major issue facing the Park regime in the early 1960s was the grinding poverty of the nation

and the need for economic policies to overcome this poverty. A critical problem was raising funds to

foster needed industrial development. Domestic savings were very low, and there was little available

domestic capital. This obstacle was overcome by introducing foreign loans and inaugurating attractive

domestic interest rates that enticed local capital into production. Of South Korea, Taiwan, Hong Kong,

and Singapore, only South Korea financed its economic development with a dramatic build-up of foreign
debt, debt that totaled US$46.8 billion in 1985, making it the fourth largest Third World debtor. Foreign

corporate investments were primarily of Japanese origin.

As noted by consultant David I. Steinberg, Seoul administered a series of economic development

plans. The government mobilized domestic capital by encouraging savings, determined what kinds of

plants could be constructed with these funds, and reviewed the potential of the products for export. In this

sense, the will of the government to undertake economic development played a crucial role; the role of

the government, however, was not limited to such measures as mobilizing capital and allocating

investments.

Steinberg also pointed out that Park's government restructured industries, such as defense and

construction, sometimes to stimulate competition and other times to reduce or eliminate it. The Economic

Planning Board established export targets that, if met, yielded additional government-subsidized credit

and further access to the growing domestic market. Failure to meet such targets led to Seoul's withdrawal

of credit.

Economic Plans

Economic programs were based on a series of five-year plans that began in 1962. The First Five-

Year Economic Development Plan (1962-66) consisted of initial steps toward the building of a self-

sufficient industrial structure that was neither consumption oriented nor overdependent on oil. Such areas

as electrification, fertilizers, oil refining, synthetic fibers, and cement were emphasized. The Second Five-

Year Economic Development Plan (1967- 71) stressed modernizing the industrial structure and rapidly

building import-substitution industries, including steel, machinery, and chemical industries. The Third

Five-Year Economic Development Plan (1972-76) achieved rapid progress in building an export-oriented

structure by promoting heavy and chemical industries. Industries receiving particular attention included

iron and steel, transport machinery, household electronics, shipbuilding, and petrochemicals. The
developers of heavy and chemical industries sought to supply new industries with raw materials and

capital goods and to reduce or even eliminate dependence on foreign capital. New (and critical) industries

were to be constructed in the southern part of the peninsula, far from the border with North Korea, thus

encouraging economic development and industrialization outside the Seoul area and providing new

employment opportunities for residents of the less developed areas.

The Fourth Five-Year Economic Development Plan (1977-81) fostered the development of

industries designed to compete effectively in the world's industrial export markets. These major strategic

industries consisted of technology-intensive and skilled labor-intensive industries such as machinery,

electronics, and shipbuilding. The plan stressed large heavy and chemical industries, such as iron and

steel, petrochemicals, and nonferrous metal. As a result, heavy and chemical industries grew by an

impressive 51.8 percent in 1981; their exports increased to 45.3 percent of total output. These

developments can be ascribed to a favorable turn in the export performance of iron, steel, and

shipbuilding, which occurred because high-quality, low-cost products could be produced in South Korea.

By contrast, the heavy and chemical industries of advanced countries slumped during the late 1970s. In

the machinery industries, investments were doubled in electric power generation, integrated machinery,

diesel engines, and heavy construction equipment; the increase clearly showed that the industries

benefited from the government's generous financial assistance program.

The late 1970s, however, witnessed worldwide recession, rising fuel costs, and growing inflation.

South Korea's industrial structure became somewhat imbalanced, and the economy suffered from acute

inflation because of an overemphasis on investment in heavy industry at a time when many potential

customers were not able to buy heavy industrial goods.

The Fifth Five-Year Economic and Social Development Plan (1982-86) sought to shift the

emphasis away from heavy and chemical industries, to technology-intensive industries, such as precision
machinery, electronics (televisions, videocassette recorders, and semiconductor-related products), and

information. More attention was to be devoted to building high-technology products in greater demand on

the world market.

The Sixth Five-Year Economic and Social Development Plan (1987-91) to a large extent

continued to emphasize the goals of the previous plan. The government intended to accelerate import

liberalization and to remove various types of restrictions and nontariff barriers on imports. These moves

were designed to mitigate adverse effects, such as monetary expansion and delays in industrial structural

adjustment, which can arise because of a large surplus of funds. Seoul pledged to continue phasing out

direct assistance to specific industries and instead to expand manpower training and research and

development in all industries, especially the small and medium-sized firms that had not received much

government attention previously. Seoul hoped to accelerate the development of science and technology

by raising the ratio of research and development investment from 2.4 percent of the GNP to over 3

percent by 1991.

The goal of the Seventh Five-Year Economic and Social Development Plan (1992-96),

formulated in 1989, was to develop high-technology fields, such as microelectronics, new materials, fine

chemicals, bioengineering, optics, and aerospace. Government and industry would work together to build

high-technology facilities in seven provincial cities to better balance the geographic distribution of

industry throughout South Korea.

Revenues and Expenditures

The central government budget has generally expanded, both in real terms and as a proportion of

real GNP, since the end of the Korean War, stabilizing at between 20 and 21 percent of GNP during most

of the 1980s. Government spending in South Korea has been less than that for most countries in the world

(excepting the other rapidly growing Asian economies of Japan, Taiwan, and Singapore). The share of
government spending devoted to investment and other capital formation activities increased steadily

through the periods of the first and second five-year plans (1962-1971), peaking at more than 41 percent

of the budget in 1969. Since 1971 investment expenditures have remained at less than 30 percent of the

budget, while the share of the budget occupied by direct government consumption and transfer payments

has continued to increase, averaging more than 70 percent during the 1980s.

During the 1980s, the largest areas of government expenditure were economic services (including

infrastructural projects and research and development), national defense, and education. Economic

expenditures averaged several percentage points higher than defense expenditures, which remained stable

at about 22 to 23 percent of the budget (about 6 percent of GNP) during the decade. In 1990 the

government was studying plans to lower defense expenditures to 5 percent of GNP. Some observers noted

a trend toward a slight increase in the portion of the budget devoted to social spending during the 1980s.

In 1987 expenditures for social services--including health, housing, and welfare--were 16.4 percent of the

budget, up from 13.9 percent in 1980, and slightly higher than 1987 government outlays for education.

The government revenue structure was virtually totally dependent on taxes. By the early 1980s,

nearly two-thirds of tax money was collected in the form of indirect taxes. Revenues collected by the

central government in 1987 rose to 19,270.3 billion won, up from 13.197.5 billion won in 1984.

Modern Economy of South Korea

South Korea ranks among the wealthiest nations in the world with an economy that ranks 13 th in

by nominal GDP and 30th by purchasing power parity. South Korea is famous for its spectacular rise from

one of the poorest countries in the world to a developed, high-income country in just one generation.

Having almost no natural resources and always suffering from overpopulation in its small

territory, which deterred continued population growth and the formation of a large internal consumer

market, South Korea adapted an export-oriented economic strategy to fuel its economy, and in 2014,
South Korea was the seventh largest exporter and seventh largest importer in the world. Bank of Korea

and Korea Development Institute periodically release major economic indicators and economic trends of

the economy of South Korea.

The economy of South Korea is the global leader of Consumer electronics, Mobile Broadband

and Smartphone. South Korea's LCD TV global market share also jumped to 37 percent in 2009, from 27

percent at the end of 2007, and it will soon replace Japan as the world's number-one LCD-TV supplier.

The economy of South Korea ranks No.1 in the world in ICT Development Index 2015 and 2015

Bloomberg Innovation Index. Despite the South Korean economy's high growth potential and apparent

structural stability, South Korea suffers perpetual damage to its credit rating in the stock market due to the

belligerence of North Korea in times of deep military crises, which has an adverse effect on the financial

markets of the South Korean economy. South Korea was one of the few developed countries that was able

to avoid a recession during the global financial crisis, and its economic growth rate will reach 6.1% in

2010, a sharp recovery from economic growth rates of 2.3% in 2008 and 0.2% in 2009 when the global

financial crisis hit. The South Korean economy again recovered with the record-surplus of US$70.7

billion mark of the current account in the end of 2013, up 47 percent growth from 2012, amid

uncertainties of the global economic turmoil, with major economic output being the technology products

exports.

Although best known for its cars and electronics, South Korea is a dominant force in the world's

shipbuilding. In fact, it controlled 50.6 percent of the global market for shipbuilding in 2008. Technology

and telecommunications make up the largest portion of South Korea's export products, followed closely

by automobiles. Refined petroleum, arms, mining, construction, and tourism make up other large portions

of the economy.
South Korea’s Market System

The economy of South Korea is the fourth largest economy in Asia and the 11th largest in the

world. It is a mixed economy dominated by family-owned conglomerates called chaebols, however, the

dominance of chaebol is unlikely and at risk to support the transformation of Korean economy for the

future generations.

South Korea has a mixed economic system which includes a variety of private freedom,

combined with centralized economic planning and government regulation.

South Korea is famous for its spectacular rise from one of the poorest countries in the world to a

developed, high-income country in just one generation. This economic miracle, commonly known as the

Miracle on the Han River, brought South Korea to the ranks of elite countries in the OECD and the G-20.

South Korea still remains one of the fastest growing developed countries in the world following the Great

Recession. It is included in the group of Next Eleven countries that will dominate the global economy in

the middle of the21st century.