9 -7 1 2 -0 5 2

REV: APRIL 18, 2012

ALDO MUSACCHIO

RAFAEL DI TELLA

JONATHAN SCHLEFER

The Korean Model of Shared Growth, 1960–1990

At the turn of the twenty-first century, politicians and academics wondered how the Republic of
Korea, which was a poor agricultural area in 1960, had become the 25 th richest country in the world
(by GDP per capita in US$ PPP) by 2010, just below Japan, France, and the United Kingdom, and had
sustained the fastest growth in GDP per capita in the world (at 7% per year for 50 years) (see Exhibit
2). Starting as a poor, agrarian society, in a generation Korea went from exporting labor-intensive
textiles in the 1960s to heavy industrial products such as steel and chemicals in the 1970s and latest-
generation memory chips in the 1980s. How is it that this small country that had a GDP per capita of
$1,095 US dollars in 1960, had reached an average income per head of $31,753 by 2010? Particularly
puzzling was the fact that in 1960 countries like Mexico, Brazil, and Argentina were significantly
richer than Korea, but by 1990 the small Asian republic had surpassed them following many policies
that on paper seemed relatively similar?

Under an authoritarian military regime for most of the years from 1960 to 1990, Korea
industrialized without worsening inequality. Gainsaying the myth invented by Nobel Prize winner
Simon Kuznets that in order to industrialize countries must accept an increase in inequality, Korea
kept an egalitarian income distribution. Its model of “shared growth” yielded industrialization while
maintaining a low Gini index of income inequality of about 0.33.1 In contrast, in Brazil the Gini index
increased from an already high level of 0.57 in the 1960s to 0.60 in the 1980s.

The shared growth model benefitted both industrialists and the wider population. Huge
privately-owned business conglomerates called chaebols, each spanning diverse industries, received
trade protection, low-interest loans, and other subsidies from the government—as long as they
advanced into producing more advanced goods, achieved ambitious export targets, or met other
requirements. The Korean people as a whole benefitted by receiving good—and improving—
education, while gaining access to employment opportunities in growing industries.

In the second decade of the twenty-first century, policy makers wondered whether there were
important lessons for other developing countries from the Korean experience. How did the
government of the Republic of Korea do right? What were the lessons? Were there any lessons for
education policy? Could the Korean system work in mature democracies? How could governments
avoid capture and corruption of the industrial policy apparatus?

________________________________________________________________________________________________________________

Professors Aldo Muscacchio and Rafael Di Tella and Research Associate Jonathan Schlefer prepared this case. This case was developed from
published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of
primary data, or illustrations of effective or ineffective management.

Copyright © 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

A Nation under Foreign Dominance

With practically unchanged boundaries for 1000 years, Korea occupied a peninsula reaching down
into the Pacific Ocean between two great powers: China to the west and Japan to the east (see Exhibit
1).2 For a millennium its population remained ethnically, linguistically, and culturally
homogeneous—a heritage that fostered a powerful sense of national identity. 3

But Korea was long subject to foreign powers. A tributary state of China from 1392 to 1895, it
enjoyed a few years of independence, then became a colony of Japan from 1910 until the end of
World War II. Moreover, Korea was not blessed with plentiful raw materials. The southern half of the
peninsula that would become South Korea would suddenly find that it had to import all of its
petroleum and most of its metallic minerals, including iron ore.4

Compared with other colonies, Korea enjoyed a good educational system under the Japanese.
However, except for medicine and agriculture, no technical skills that might be useful for engineers
and managers were taught.5 Assigned the role of exporting agricultural goods to Japan, the Korean
puppet state supported the yangban, or landlord, class. Landlords paid taxes, which in turn they
extracted from landless tenants.6 The result was a socially polarized countryside.7 Japan established
manufacturing industries in Korea in the 1930s as it prepared for World War II, but it excluded
Koreans from managerial positions, blocking the formation of an indigenous industrial class.8

When the Japanese were driven out of Korea in 1945, they left behind a class-torn society.
“Peasants opposed landlords, and those who resisted Japanese colonialism opposed those who
collaborated,” notes Alice Amsden in Asia’s Next Giant.9 She adds that Japan also left a “police force
accustomed to domestic repression, and a miniscule army incapable of national defense.”

An Economy Torn between U.S. Aid and Corruption

After the United States liberated Korea, a wave of activist worker, peasant, and youth groups
proclaimed “the aim of a People's Republic and a commitment to social as well as political
liberation,” Stephan Haggard notes in Pathways from the Periphery.10 U.S. occupying forces did not
much like the looks of these movements and deployed repressive tactics to strengthen rightist forces,
namely landlords, the former colonial bureaucracy, and the police; these forces ultimately coalesced
under Syngman Rhee, a nationalist who had received a Ph.D. in government from Princeton.11
Unable to unify northern and southern portions of the peninsula, the United Nations held separate
elections for each area. Rhee won in the south, while another government was elected in the north.
The devastating Korean War (1950-53) ensued, leaving South Korea split from North Korea.

Though the Americans insisted on formally democratic institutions, Rhee adopted a National
Security Law effectively prohibiting groups opposed to the state and, after several years, secured an
amendment exempting himself from the original constitution’s two-term limit.12 The bureaucracy and
police allied with him “were present in all parts of the country, highly centralized, [and] feared by the
general population,” notes Sungjoo Han in The Failure of Democracy in South Korea.13 Repressing rural
uprisings and activist unions, Rhee gained control over student, peasant, and labor movements.14

U.S. occupying forces and Rhee instituted two major changes that would help lay the groundwork
for the subsequent miracle on the Han. First, to fight the Korean War, they strengthened the
military—critical for a nation that had been subject to foreign powers for nearly a millennium. The
strengthened military would later control the developmental state.

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 The Korean Model of Shared Growth, 1960-1990 712-052

Second, land reform, beginning under the U.S. occupation and continuing under Rhee, distributed
former Japanese properties and Korean landlords’ estates to tenant farmers. The Americans and Rhee
passed land reform in part to buy off rural insurgencies, strengthen support for the war, and soften
the allure of land reforms in Soviet-backed North Korea.15 The result was to improve income
distribution, boost food production, and terminate the landlord class.16 Land reform, Amsden argues,
would provide industrial development with a “plausible vision.”17

Industrial plants that had been owned by the Japanese were initially nationalized by the
government but then sold off to Korean entrepreneurs, including former landlords and plant
managers appointed by the state.18 Banks that had also been nationalized were sold off as well,
somewhat later, to essentially the same new groups.19 These sales to politically connected individuals,
at undervalued prices, strengthened the nexus between state and business.20

The Rhee administration used its access to U.S. aid—constituting 15% of GDP and 80% of foreign
exchange from 1953 through 1958—to gain political support from businessmen in exchange for
special favors.21 Capitalists who paid kickbacks to Rhee’s Liberal Party were awarded U.S. dollars at
the undervalued exchange rate, which they turned around at a profit, or were allowed to import
essential goods such as fertilizer at below-market prices, which they sold for immediate gain.22 They
were also awarded “loans” on which they often repaid neither interest nor principal.23

Behind tariff barriers, significant import substitution—domestic production to replace imports—

principally in textiles and light consumer goods, as well as construction gained some impetus.24
Indeed, manufacturing grew about 20% a year between 1953 and 1958.25 Moreover, the seeds of
developmentalist thinking of the day, which emphasized national planning and targeted subsidies to
strengthen import substitution, germinated. 26 In 1958 Rhee established an Economic Development
Council staffed by foreign-trained economists that drafted a three-year plan in loose coordination
with the U.S. Embassy. 27 At the time, nothing came of this thinking, as it was sidelined by ministries
tied to business patronage networks. 28

In the end, rather than promoting development, the Rhee regime fell captive to the patronage
networks it had fostered.29 As political opposition gained some traction in the late 1950s under the
formally democratic institutions, Rhee had his work cut out to maintain political support. 30 The
private sector provided support and donations in exchange for continuing access to speculative
activities, which it often found more profitable than productive investment.31

By the late 1950s, the economy was experiencing problems often seen in import-substitution
regimes. Production focused heavily on the domestic market, depending on imported capital goods
and industrial inputs, while exports were meager—total manufactured exports reached a paltry $4.1
million dollars in 1960—and current-account deficits became chronic.32 In response to balance-of-
payments problems, inflation, and an overvalued exchange rate, American officials kept pressing for
stabilization, while Rhee used his strategic leverage as the line of defense against North Korea to
resist them.33 The results were not salubrious. By 1958 investment was falling in real terms, and a
year later the economy was in deep recession. 34 In 1960 unemployment was estimated at 20%.35

“The narrowness of Rhee's base of support, the corruption of the regime, and the lack of a
coherent economic strategy produced a general political crisis in 1960,” Haggard concludes.36 After
massive demonstrations on April 19, 1960, protesting electoral fraud, in which many demonstrators
died, Rhee resigned. An administration led by President Yun Po Son attempted to institute
democratic reforms, but, torn between resurgent groups on the left—akin to the youth, rural, and
labor organizations the Americans had faced after World War II—and the continuing influence of
interests on the right that had prospered under Rhee, the government collapsed.

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

Military, Bureaucracy, and Society

On May 16, 1961, the military, led by General Park Chung Hee, seized control in a coup, dissolved
the National Assembly, banned political activity, and imposed martial law. 37 As opposition forces
gathered some room to maneuver over the next two years, Park set presidential elections for October
15, 1963. He led the newly formed Democratic Republican Party (DRP) to a narrow victory, amid
fraud charges.38 In 1967 he was re-elected to a second term, again winning amid fraud charges. This
time, with the DRP holding a large majority in the assembly, Park passed a constitutional amendment
making himself eligible for another four-year term so he could run again in 1971. Throughout his
time in power, he would use the Korean CIA (KCIA) to maintain political control.39

Park saw economic development as essential to maintaining the military regime’s legitimacy and
was determined to end the corruption that had proliferated under Rhee. 40 A new actor on the political
scene, the military brass derived from a different social background than businessmen who had
profited under Rhee. Officers mostly came from modest rural backgrounds, tended to see life in
moralistic terms, and harbored some resentment toward the urban business class.41

Just a month after taking power, the military government passed an Illicit Wealth Accumulation
law, paraded industry magnates through the streets in ignominy, carrying signs saying such things as
“I am a corrupt pig,” arrested some, and threatened others with confiscation. 42 But the military saw it
needed the private sector drive economic growth. Even if the military might have preferred to
nationalize Korean industry, Korea’s dependence on U.S. aid precluded any such strategy. So the
military spared businessmen from prosecution or confiscation, requiring in exchange their agreement
to establish vital new industries.43 The resulting arms-length alliance formed the basis of Korea’s
subsequent economic development.

Maintaining that too much democracy obstructs development, Park banned numerous
organizations, barred some 4,300 individuals from politics, put controls on the press, outlawed
strikes, and arrested many union leaders.44 Labor was organized under the compliant umbrella of the
Federation of Korean Trade Unions (FKTU). The government financed it and vetted candidates for
leadership posts. Wages were initially suppressed. In the economic deterioration of the late Rhee
administration, they began falling in 1959; they would not rise back to that level until 1967.45

Several of the cohesive group of officers who had led the coup were appointed to top government
posts, but in general the military strengthened Korea’s traditional bureaucracy.46 It had for nearly a
millennium been composed of an elite corps; to gain admittance, individuals were required to pass
civil-service examinations in the top 2%. Rhee had undermined this system, filling positions via
“special appointments” to high ranks. Park purged that bureaucracy, restored the civil-service exam
as the entrance requirement, and returned to internal promotion to fill high-level positions. Imposing
stringent qualifications on civil servants not only meant that they were more competent, but helped
create a sense of purpose based on interpersonal relationships. Some 55% of those who passed the
civil service exam had graduated from the elite Seoul National University.

Economic Planning and the Turn to Manufactured Exports

A month after the coup, when businessmen were being cajoled to turn their energies to
production rather than speculation, Park established the Economic Planning Board (EPB). Borrowing
from thinking explored by the Economic Development Council and technocrats who had been
appointed by Rhee but could not affect decisionmaking, the EBP served as the central agency for
economic planning and industrial policy. Other agencies such as the Ministry of Trade and Industry

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 The Korean Model of Shared Growth, 1960-1990 712-052

could and did contest EPB policies, but it remained the pilot.47 Peter Evans argues in Embedded
Autonomy: States and Industrial Transformation that “the existence of a given agency with generally
acknowledged leadership in the economic area allows for the concentration of talent and expertise
and gives economic policy a coherence that it lacks in a less clearly organized state apparatus.”48

Headed by a deputy prime minister, the EPB exercised substantial power in directing government
spending, setting tariffs, allocating loans to firms, and maintaining economic statistics to track
results.49 While the government left industrial firms in the private sector, it re-nationalized banks,
thus securing the ability to allocate loans as one of its principal industrial-policy tools.

Korean economic agencies were hardly aloof from the private sector. On the contrary, unlike
Indian bureaucrats who had imbibed utopian thinking at Cambridge or Oxford, Evans argues,
Korean officials maintained close ties with producers.50 Often along with Park himself, they met with
business leaders monthly, weekly, or even daily to discuss industrial plans, allocate subsidies to
support those plans, and set performance targets, such as the level of exports, that firms would be
required meet in exchange for subsidies.51 These were not covert meetings between a few officials
and businessman to trade favors for cash, but included representatives of relevant agencies and
firms, ensuring that all who had an interest in a matter knew what was being said and promised.

At first, in line with developmentalist ideas proposed earlier under Rhee, and indeed general
academic views of the 1960s, Korea’s first Five Year Plan, drafted shortly after the coup, envisioned
primarily import substitution; agricultural goods and raw materials would dominate exports.52 The
plan proposed “guided capitalism,” in which “the principles of free enterprise . . . will be observed
but in which the government will either directly participate or indirectly render guidance to the basic
industries and other important fields.”53 A year later Park wrote that “the key problems facing a free
economic policy are coordination and supervisory guidance, by the state, of mammoth economic
strength”—mammoth strength that would be embodied in conglomerates known as chaebols.54

Several concerns led Korea to promote manufactured exports. For one thing, the military saw
industrialization as essential to survival in the face of the threat of North Korea and its Communist
backers, while the small domestic market made exports imperative to efficient production. 55 As well,
in the early 1960s, the United States warned South Korea it would have to begin reducing the level of
aid.56 A series of conjunctural problems also contributed. As inflation rose from 10% in 1960 to 35% in
1964, prices of food imports soared 250%, a balance-of-payments crisis erupted, and a U.S.-sponsored
austerity plan to stabilize the economy failed to meet its targets. Consequently, economic planners
lost confidence in import-substitution.57 American advisors discussed a strategy of promoting
manufactured exports with the EPB.58 Park announced the promotion of manufactured exports in his
January 1965 State of the Nation message, and public-private-sector meetings to implement that
strategy began.59

Breaking Away from Comparative Advantage

Neoclassical trade theory—specifically the so-called Heckscher-Ohlin model developed by two
Swedish economists—suggests that countries’ comparative advantage in exporting products depends
on their relative abundance of factors such as capital, labor, or natural resources. Countries with
abundant low-skilled labor should export products such as textiles that require large amounts of low-
skilled labor.60 South Korea had abundant, cheap labor (recall that per capita income in 1960 was only
$155) and did, in fact, begin by exporting textiles.

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

However, textile export did not proceed as Heckscher-Ohlin would have predicted. Although
South Korean had excess textile capacity to supply the domestic market, it was not exporting in any
volume.61 Total manufactured exports were still only $9.2 million dollars in 1962, a pittance even for a
small, poor country. The government decided to take matters into its own hands. It allowed textile
mills to buy cotton (which had to be imported) for cheap subsidized prices, at the exchange rate of
130 won per dollar, and to export them at a high subsidized prices, at an effective exchange rate of
190 won per dollar. Manufactured exports, mostly textiles, boomed, reaching $106 million dollars in
1965.62 Among the subsidies provided by the government were tax exemptions, tariff exemptions for
raw material imports, and low interest-rate loans for capital investment and operating expenses.

Despite an egalitarian income distribution, economic grievances accumulated in the late 1960s—
agriculture had been neglected, while inflation eroded real wages—and complaints of political
corruption surfaced.63 Much the same social movements that the Americans had faced in the late
1940s and Rhee in the late 1950s re-emerged: militant unions, student groups, church organizations.64
Kim Dae Jung, leader of the New Democratic Party, mobilized these groups and nearly defeated Park
in the April 1971 presidential election. Now what had been a comparatively soft authoritarian state
bared its teeth. In December, Park declared a state of emergency; in 1972 he imposed martial law,
disbanded the National Assembly, outlawed political parties, and imposed a draconian constitution
that, among other things, allowed the president to be reelected for an unlimited number of terms.65

In 1973 the government embarked on the Heavy and Chemical Industrialization (HCI) policy to
advance import substitution and export promotion of steel, other metals, chemicals, machinery,
autos, ships, and electronics.66 The impetus was both economic and military. The U.S. withdrawal
from Vietnam left Korea more exposed militarily, and as the United States requested that Korea
“voluntarily” reduce textile exports under the global Multi-Fiber Arrangement (MFA), the Park
administration decided it had better export something else.67 By 1980, it, Korea would have $10
billion a year in exports and per capital income of $1,000.68 In fact, by 1980, it had overachieved these
goals, with annual exports of $16.2 billion and per capita GDP of $1,674.69 By 1984, 60% of Korean
exports came from HCI sectors.70

There was no typical Korean industrial policy; each was tailored to circumstances. Integrated iron
and steel making seemed an unpropitious industry for Korea to enter in the 1960s, since its managers
and engineers lacked steel-making skills, massive investments were required to build an efficiently
scaled mill, the technology was highly complex although known, and the nation had no iron ore.71 In
short, the World Bank declared any such Korean venture to be “without economic feasibility.”
Convinced that steel was critical, the state invested $3.6 billion in the Pohang Iron and Steel Company
(POSCO).72 By 1986 it was one of the lowest-cost steelmakers in the world and was supplying more
than half of the steel imported by Japan.73 That year it helped U.S. Steel modernize its Pittsburgh,
California, plant, supplying half the capital and training managers and workers.

In automobiles, the government deployed trade protection, tariff-free import of components, and
tax breaks to induce three private-sector chaebols—Hyundai, Kia, and Daewoo—to compete for a
domestic market of only 20 thousand vehicles in the late 1960s.74 The HCI plan envisioned that local-
content requirements would impel Korean firms to produce 90 percent of the value of small cars by
the late 1970s, and that incentives would generate large exports by the early 1980s. The chaebols
received direct export subsidies such as cheap credit, as well as indirect subsidies, such as being
allowed to finance exports from sales in the protected domestic market. In 1979 the Hyundai Pony
cost $3,700 to build, sold abroad for $2,200, and sold at home for $5,000.

Moreover, as a way to develop a domestic automobile market, General Park developed a network
of freeways way before there was demand for it. Before the 1970s, it was faster to sail from Seoul to

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 The Korean Model of Shared Growth, 1960-1990 712-052

Busan (on the Southeast tip of Korea). General Park developed the Busan-Seoul highway (with eight
lanes) inspired by the German autobahns.75

After the 1979 energy crisis and recession, the government forced Kia and Daewoo out of the
saturated passenger car market (instead assigning them to light trucks and power equipment), thus
concentrating on Hyundai for the moment. Racking up a debt-to-equity ratio of five to one, Hyundai
Motors achieved startling export success, in developing-country, Canadian, and U.S. markets. By
1988 it was producing 650,000 vehicles, 63% of which were exported, even as Kia and Daewoo moved
back into the sector.

Going beyond Heavy Industry

In semiconductors, a designated HCI sector even though, as Robert Wade quips in Governing the
Market, they were “neither heavy nor chemical,” the Korean state continued to provide strong
support but, beginning in the mid-1980s, left decisionmaking increasingly to private producers—
Samsung, Goldstar, Daewoo, and Hyundai. 76 The Korean semiconductor industry started in the 1960s
doing labor-intensive assembly for U.S. producers. To build local semiconductor production capacity,
the HCI Plan first established the Korea Institute of Electronics Technology (KIET), a public-private
partnership. It coordinated Korean semiconductor research, assisting local firms, and importing
foreign technologies. It opened an office in Silicon Valley to better understand the progress of
technology there, send Korean researchers to work in U.S. firms, maintain a network among those
Korean researchers, and help Korean firms license foreign technologies.

By the late 1970s, the Korean industry had mastered basic semiconductor production but was
hardly thriving. Several small firms were fabricating low-end chips such as for watches, while major
chaebol were buying foreign-made chips for consumer electronics. The government deployed the
Ministry of Communications to kick-start the semiconductor industry. Starting with 3 million phone
lines in 1980, the MOC’s operating company announced a multi-billion-dollar expansion, installing
new telephone service at the rate of a million lines a year.77 Multinationals such as ITT and AT&T
were allowed to enter joint ventures with Korean chaebols to supply this guaranteed, lucrative
market, if they transferred telecommunications equipment and semiconductor technologies to the
chaebols. Supported as well by subsidized credit of $350 billion and tax breaks, in 1984 the chaebols
began producing 64 kilobyte chips, at the time considered very large-scale integration (VLSI) chips.

In the mid-1980s, in the face of fast-moving technology, the government drew back from
attempting to specify policies or goals for semiconductor producers. But it did promise them a
lucrative market: supplying computers, software, and chips for the National Administrative
Information System (NAIS) project, which would first build computer networks for public agencies
and later merge into what would become known as the Internet.78 “NAIS is the springboard that
South Korean hardware and software suppliers have been looking for,” noted Datamation.

To help the chaebols master advanced chips, the government offered $175 million in R&D loans,
but with a twist. Chaebols that achieved standards specified by the government research institute,
now renamed the Electronics and Telecommunications Research Institute (ETRI), would not
have to repay the loans; those that failed would. One of the four did have to repay.

By 1988 Samsung had a seven-to-one debt-to-equity ratio, much of the debt provided at near zero
interest rates and with long grace periods before principal had to be repaid. It enjoyed massive cross-
subsidies by selling electronics products on the protected home market. But it was shipping 1.5
million one-megabyte chips per month, more than all independent U.S. chipmakers combined. It
followed Toshiba by only six months in introducing the state-of-the-art 4 MB chip. And in 1989 it

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

signed a cross-licensing agreement with IBM, giving each access to the other’s patents—the only firm
from a developing country (if Korea still belonged to that category) to enter such an agreement.

Industrial Policy in Theory

In the first decade of the twenty-first century, Dani Rodrik, a Harvard economist, defended the
idea that industrial policy was behind the success of the rapid industrialization of Asian countries.
He argued that while the theory of comparative advantage had countries specializing on exporting
the products that they were relatively good at producing, empirical evidence showed that as
countries developed they diversified their exports. Specialization into a few products came only later,
when countries were richer. For him, the key for development seemed to be acquiring “mastery over
a broad range of activities, instead on concentrating on what one does best.” 79

According to Rodrik, there are two externalities that blur the vision of industrialists and that
complicate the process of diversification of exports. First, diversification requires “discovery” of cost
structures in new industries. How can the entrepreneurs of a country know if they are cost-
competitive in a new industry? Entrepreneurs need to experiment before finding that out and that
costs money and time. If an entrepreneur is successful at finding out a new activity can be produced
in a specific country, he bears all the cost of experimentation, but then other entrepreneurs in that
country can replicate his success. If the said entrepreneur fails, he bears the full cost of
experimentation. The harder it is for other companies to get into the new industry, the more
incentives entrepreneurs have to experiment. Thus, Rodrik suggests, industrial policy should be
focused on helping this discovery process by providing as much information on costs and new
industries, financial incentives should be for short periods of time (just enough to help in the
discovery process), subsidies should not go to industries, but to fund new activities, and the
incentives have to be phased out if the process of discovery fails. 80

Second, Rodrik defends that coordination externalities are a second obstacle entrepreneurs face to
discover new industries. Imagine some of the new industries require scale economies and some of the
inputs need to be produced locally and close to the manufacturing site (e.g., a steel mill needs iron
ore and coal). Then, coordinating the different entrepreneurs to locate in the same place and to
produce what is needed to develop a new industry can be a problem. This is what economists call a
“big push” and what Harvard Business School’s Michael Porter calls a “cluster” development
strategy. To promote this coordination, subsidies are not needed, because once all producers are in
one place, the industry should be profitable. The best way to promote coordination, Rodrik argues is
to aid entrepreneurs to coordinate their location or by having the government provide guarantees
against failure (for example, if entrepreneur X and Y open a factory in location Z, the government will
guarantee a minimum return on investment). The advantage of these guarantees, he argues, is that
they may not have to be paid at all if the project is successful. Rodrik warns, however, that all of these
policies can be subject to capture. Entrepreneurs with connections may bribe officials to benefit them
over their competitors or to phase out subsidies more gradually. The only way around it, according
to Rodrik, is to keep the bureaucrats in charge of industrial policy in an intermediate position: close
enough to industry to pass on information that can aid the discovery process, but autonomous
enough to avoid corruption. Transparency is key, he maintains.81

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 The Korean Model of Shared Growth, 1960-1990 712-052

Industrial-Policy Incentives
Before looking more closely at why Korean industrial policies often worked when similar policies
elsewhere could generate more waste and corruption, it is useful to list some of the principal
incentives the government provided.

The government heavily subsidized loans to targeted sectors.

Shortly after the 1961 coup, the government re-nationalized all banks. The Bank of Korea
channeled loans through commercial banks to sectors specified by EPB and Ministry of Finance
plans.82 These loans could cover capital investment, imports of raw materials and intermediate goods,
operating expenses, and exports. 83 The government, says Amsden, could “determine where, when,
and how much to invest in which industries.”84 It also let some firms borrow abroad, guaranteeing
firms against exchange rate depreciation and guaranteeing foreign lenders against default.85 The
banks were privatized again in the mid-1980s but even so remained under close government control
and provided favorable loans to targeted sectors such as semiconductors. 86

Trade protection provided learning ground for exports and subsidized profits.

Beginning in the 1960s, the government established the home market as a learning ground for
production in successive industries by deploying tariffs, quotas, and “sheer administrative
complexity” to block imports, Haggard notes. 87 The dispersion of Korean tariffs across sectors was
comparable to that of Argentina, Colombia, or Taiwan in the late 1960s, but since average Korean
tariffs were lower, the effect in Korea more heavily favored targeted industries.88 In the 1970s, Korean
tariffs increased substantially, reaching the high end of the spectrum for a developing country.89

For example, as mentioned, the government tightly controlled imports of finished vehicles to
promote automakers in the 1960s. As soon as domestic parts makers learned to produce components
of adequate quality and price, imports of those components were also shut off.90 Tariffs did not
impede exports but rather subsidized domestic sales to finance them. Recall that automakers were
allowed to make high profits by importing kits of parts and selling luxury models at home based on
export volume. The protected market for electronic products let chaebols to subsidize semiconductor
exports.91 In response to U.S. pressure in the late 1980s, Korea announced liberalization of auto
imports—beginning by lowering duties from 200% to a hardly modest 100% by 1990.92 Even full-
sized cars that supposedly could enter freely were often blocked by complex import procedures.

Government procurement provided an even stronger captive market than protectionism.

Government procurement policies were critical in some industries, providing a guaranteed

market. As mentioned, the Ministry of Communications, with annual revenues in the billions of
dollars, assured chaebols that if they produced electronic switching equipment, it would buy that
equipment from them. Along with R&D subsidies, the MOC’s massive procurement needs assured
that “what would otherwise have been an impossibly daunting project became an attractive one,”
notes Evans.93 The National Administration Information System’s promise to purchase advanced
computers and software provided an even larger opportunity. 94

Foreign direct investment was severely restricted so as to favor domestic firms.

Foreign direct investment averaged less than 1% of GDP.95 Although the government would itself
help firms enter into joint ventures, it made sure that control remained with the Korean firms.96

The government helped firms pay for R&D and even constructed pilot plants.

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

The Korea Institute of Electronics Technology and its successor, the Electronics and
Telecommunications Research Institute, played training Korean engineers at home, sending them
abroad to learn state-of-the art skills, helping firms negotiate foreign licenses, and subsidizing
private-sector research. The Ministry of Communications devoted 3% of its telephone operating
company’s multi-billion dollar revenues to R&D subsidies for electronic switching equipment.97 In
the case of autos, the government itself just started a state-owned enterprise to begin production, then
privatized it in three years.98

The government subsidized exports and helped firms market abroad.

The government supplied credit to foreign purchasers of Korean products. For example, once
chaebols were bidding for contracts to sell telecommunications switching equipment abroad, the
government set up a fund to help foreign purchasers buy the equipment, and the Korean
Telecommunications Authority, the MOC’s telephone company, established a subsidiary to help
chaebols market it overseas.99

Industrial promotion continued under Chun in the 1980s.

The 1980s saw major changes in the political basis of the Korean government. In the late 1970s,
opposition movements again precipitated a political crisis, culminating in the assassination of Park.
General Chun Doo Hwan imposed martial law in October 1979, banning political activity and
ruthlessly suppressing opposition movements. He was elected president in August 1980. By the late
1980s yet another wave of popular unrest demanded basic civil rights and democratic institutions.
This time, finally, a constitution embodying these demands was approved in a national referendum,
and the next year, for the first time ever, power was transferred peacefully through the ballot box.

These political change were accompanied by privatization of banks and some liberalization of
trade, but the changes often had less effect in practice than in theory. In the 1980s and early 1990s the
government increased the portion of imports supposedly given “automatic approval” from 69% to
99%, but a “surveillance system” still required Korean industry associations to review supposedly
unrestricted items to be sure imports would not injure domestic producers. 100 Likewise, even though
commercial banks were privatized in the early 1980s, as mentioned in the case of semiconductors, the
Bank of Korea retained the capacity to direct subsidized loans to targeted sectors.

Why Did the Korean System Work?

Few nations have wielded industrial policies as effectively as South Korea, though it is by no
means unique. Even in nations such as Brazil, where the results were more mixed, Evans argues that
industrial promotion had “substantial effects.” 101 Indeed, according to Ha-Joon Chang of Cambridge
University, though some industrial policies have succeeded and others failed, no nation has reached
developed status without deploying them. 102 In the early nineteenth century, the major nation with
the highest tariffs—in the 50% range—was none other than that great champion of free trade, the
United Kingdom.103 It was surpassed in mid-century by that other great free-trade champion, the
United States, which maintained tariffs between about 40% and 60% roughly until World War II. The
German historical economist Friedrich List, known for his industrial-policy theory, notes that he
borrowed many ideas from Alexander Hamilton, the first U.S. treasury secretary.104

Education and R&D

The question about Korea stands. Why did its industrial policies work so well? One key to several
success stories, including the United States in its period of rapid industrialization, was a top-notch

10

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 The Korean Model of Shared Growth, 1960-1990 712-052

educational system. The Japanese colonial system had already established a legacy of basic literacy in
Korea, though little technical education.105

After the Korean War, the government focused on elementary and secondary education, while
leaving most education beyond the secondary level to the private sector. Korea had one of the highest
enrollment educational rates among developing countries. By 1967 it had near universal enrollment
in elementary school and 35% in secondary education. By 1987 it had almost 90% enrollment in
secondary education. In contrast, enrollment in secondary education enrollment circa 1987 was 46%
in Indonesia, 28% in Thailand, 59% in Malaysia, and 21% in Brazil. 106

The logic for focusing on elementary and secondary education was twofold. First, having more
graduates from primary school would increase enrollment in secondary schools, and having more
enrollment in secondary schools would increase the number of students going to college. The
resulting rise in average skill levels would provide an essential ingredient for industrialization.

Second, a focus on primary and secondary education would minimize income inequality. If more
students graduated from basic and secondary education, the number of skilled workers would
broadly increase. The opposite situation—a lack of skilled workers—tends to raise their salaries and
increase the gap with salaries of unskilled workers, worsening income inequality. The Korean
education system thus preferred to invest in having a broader base of skilled workers and less
difference in salaries between top-income earners and low-income earners.107

The emphasis on elementary and secondary education yielded significant reductions in inequality
in the long run. In 1976, in Korea, workers with a high school education earned 47% more than
workers that only graduated from primary school. By 1986 that difference had been reduced to 30%.
The difference between the salary of someone with a college diploma and an elementary school
diploma also declined from 97% to 66% in the same period. By producing more high-school
graduates, the government ensured an abundance of skill labor, reducing income inequality.108

At the university level, the Korean government placed special emphasis on technical institutes.
This strategy, also, shared similarities with that of the U.S. government in the nineteenth century, as it
gave away large amounts of land to finance the establishment of agricultural and technical
universities, including the Massachusetts Institute of Technology (MIT). By the late 1980s, although
Korea had less than a third the population of Brazil, it had one and a half times as many students
studying mathematics and engineering beyond the secondary level. 109

Also as in the United States in the late nineteenth century, where the modern research-and-
teaching university emerged, Korea combined R&D with technical education. 110 The government
began to build Daeduk Science Town from the ground up in 1974 some 200 kilometers south of Seoul.
First it established public research institutes there, such as the Electronics and Telecommunications
Research Institute (ETRI), then it built technical educational institutions. The most elite were the
Korean Institute of Science and Technology (KIST) at the graduate level and the Korean Institute of
Technology (KIT) at the undergraduate level. By the late 1980s, the town housed nine public research
institutes, three institutes of higher education, and four private research institutes.

Public investment in R&D, along with the other ingredients, catalyzed even more private R&D
investment. In the early 1960s, the government took the lead, financing 97% of R&D.111 Even though
the state vastly increased its own research spending—it had risen by a factor of 50 by the late 1980s—
private research spending rose even faster, now accounting for 80% of the total.

11

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

Along with its strong base of primary and secondary education, Korea required higher technical
education and research. Late industrialization is, at bottom, a system of industrial transfer: rapidly
absorbing advanced nations’ technical expertise and practical know-how to adapt technologies at the
frontier and to local circumstances. “Salaried engineers are a key figure in late industrialization
because they are the gatekeepers of foreign technology transfers,” says Amsden. 112

Inequality and Development

Until the 1980s economists assumed that rapid industrialization usually led to increased levels of
income inequality. The so-called Kuznets Curve (because of the research of economist Simon
Kuznets, Nobel Prize winner in economics) predicted that as industrialization levels increased, there
would be an increase in inequality. In his view, as rural workers migrated to cities and found higher
paying jobs inequality would increase until the mass of people in the higher paying jobs was high
enough that inequality for the whole population would start decreasing. This inverted U-shaped
curve became known as the Kuznets Curve.

The experience of Korea, however, cast doubt on this prediction, as rapid growth was coupled
with no major increase in income inequality. For instance, Brazil, the fastest growing country in Latin
America between 1960 and 1980 had a marked increase in inequality in the same period. Korea, in
contrast kept income inequality relatively constant. By the late 1970s and early 1980s, in Brazil the
poorest 20% income earners received 2.4% of total income, while in Korea the same group earned
5.7% of income.113 According to World Bank economists, in Korea rapid industrialization led to a
rapid increase for skilled labor and in the income of skilled workers. Before the 1980s economists
believed that rapid industrialization would lead to higher inequality as the number of graduates of
secondary and post-secondary education usually could not keep up with the increase in demand for
their skills. Therefore, salaries for skilled workers, they thought, would increase more than those of
unskilled workers. Between 1960 and 1980, in Korea the supply of educated labor force grew rapidly
enough actually avoid a big increase in the salary differential between educated an uneducated
workers. Additionally, educational improvements also benefited unskilled workers, thus keeping
wages relatively compressed across income levels. In contrast, in Brazil, during the same period the
“relatively slow pace of educational expansion and the rapid growth of demand for educated
labor…” led to a widening of incomes between skilled and unskilled workers. 114

Sustained Rapid Investment

Capital formation is also fundamental to growth. The East Asian miracle saw countries with ratios
of total investment to GDP greater than 30%. One important characteristic of the shared growth
model is that the government does not do the bulk of investment; the private sector contributes
significantly to it. In Korea the private sector took a leading role by investing, on average, over 20% of
GDP in new capital per year between 1970 and 1990.115

Of course, the government promoted private investment by providing an array of loan subsidies,
along with other incentives. Not only did the Bank of Korea channel subsidized loans through
commercial banks to the private sector, but the government directed foreign loans to chaebols by
guaranteeing them against default and devaluation, to sustain capital formation.

Macroeconomic policies also helped to support private-sector investment by maintaining

relatively stable aggregate demand and interest rates. 116 While macroeconomic stability hardly
guarantees high levels of investment, macroeconomic instability, sewing uncertainty about future
sales, will likely undermine confidence and hence willingness to invest.

12

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 The Korean Model of Shared Growth, 1960-1990 712-052

For countries affected by macroeconomic shocks, the International Monetary Fund (IMF) often
prescribed fiscal austerity and tight monetary policies, causing recession and attendant declines in
investment. South Korea typically took the opposite approach, borrowing to cover balance-of-
payments problems, holding interest rates down to support investment, and adopting expansionary
measures to sustain growth.117 For example, in the 1973 oil crisis, the government held down oil
prices, subsidizing the difference between domestic and global prices, meanwhile expanding credit
by more than 40%.118 Investment rose from 26% of GDP in 1973 to 32% in 1974. Foreign debt rose to
40% of GDP in 1975 but—as sustained investment and growth paid off—fell back to 30% of GDP by
1978. Inflation hovered in the double digits, averaging 18.4% from 1962 to 1979, but evidently
without undermining growth.119

Sustained investment and growth, in turn, had important effects on the labor market, supporting
social, if not always political, improvement. Despite the growing abundance of skilled labor, excellent
growth rates assured that the demand for skilled labor increased rapidly. Thus, salaries of skilled
workers went up (yet as explained before, they went up in a way that did not increase income
inequality).

Corruption, Cronyism, and Discipline

An obvious concern when governments pursue active industrial policy by providing subsidized
credit, trade protection, tax breaks, and other benefits to specific companies—rents, in the term
economists apply to such special privileges—is the risk that lobbying groups can organized to
capture those benefits. The more concentrated the groups, thus the easier they are to organize and the
greater benefits each member secures, the worse this danger is likely to be, according to Mancur
Olson’s often cited book, The Logic of Collective Action. And industry was concentrated in Korea.

Rent-seeking was rife in South Korea in the 1950s, by all accounts, and the benefits doled out to
firms seemed to yield political contributions to Rhee more dependably than development. All
principal sources on South Korea agree that corruption did not continue on anything like that scale
after the 1961 coup. Although the sources cannot quantify corruption—governments do not maintain
reliable statistics on it—they agree that it did persist in some measure. Haggard notes that corruption
in the 1960s contributed to a resurgence of opposition movements late in the decade.120 Chun Doo
Hwan and Roh Tae Woo, Korean presidents in the 1980s and early 1990s were later convicted of
corruption—Roh admitted to having amassed a $650 million political slush fund—and nine chaebol
executives were convicted of bribing them.121 Amsden says that “most of the government’s friends . . .
have undoubtedly been bailed out on at least one occasion.”122

Why did corruption and cronyism seem to have declined sharply after the 1961 coup? And—since
not all corruption does equal damage—why did whatever corruption that continued evidently have a
less deleterious effect? There are several hypotheses. The fact that military leaders (from low-prestige
rural backgrounds), bureaucrats who ran agencies (top graduates of prominent universities), and
businessmen (the same corrupt group that financed Rhee) came from different social backgrounds
was probably important. It is hard to imagine the military ignominiously parading business leaders
through the streets carrying signs declaring themselves corrupt pigs if they had grown up in the
same social milieu. Evans argues that the elite status of bureaucrats, the stringent exam the had to
pass to enter the civil service, and their progressive advancement through the bureaucracy all
conspired to strengthen their cohesion and reduce temptations to benefit from corruption.

According to early observers of Korea’s “Shared Growth Model,” another factor in fending off
influence-buying was the Korean government’s use of relatively inclusive business councils.123

13

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

Discussing industrial policy in a more transparent way within business councils, rather than in covert
meetings between select individuals—thus making policy information available to all concerned
parties—limits the scope to distribute unmerited favors.

Whereas firms seemed to have the upper hand over the Rhee administration in the 1950s, under
military rule, government control of the financial system turned the tables. True, it had a diffuse,
long-term need for firms to promote economic growth, but firms, which often carried high debt-to-
equity ratios, had a specific, immediate need for government financing. State control over banking
“helped orient the chaebol toward accumulating capital rather than toward seeking rents,” says
Amsden.124 In fact, under the military, there was not much to do with capital other than invest it in
production. The minimum sentence for capital flight was ten years; the maximum was death. 125

Although the government would often bail out firms or extend generous low-interest loans when
a whole sector was threatened, for example in the wake of both oil crises, if the sector was healthy but
a badly managed firm got into trouble, the government was not so reluctant to let it fail.126 For
example, a firm by the name of Shinjin had a larger market share in autos but could not compete with
the Hyundai Pony after the first oil shock. The government let Shinjin fail. Similarly, when the
construction industry was prospering but two large firms got into trouble, the government let them
go bankrupt. After the second oil crisis, the government rationalized automaking by forcing two
firms out of the sector.127 Occasionally, the government even disciplined an entire sector. In 1973 Park
ordered a comprehensive audit of the Textile Industry Association was ordered. Over 100 officials
were dismissed for taking bribes, and most of the association board of directors were forced to
resign.128

The government, in general, tried to exercise “discipline” over firms by imposing performance
requirements in exchange for industrial policy support.129 The requirements were of three types:
meeting export targets, introducing new products, and achieving R&D goals, as, for example, with
ETRI’s grants for developing advanced chips. 130 Indeed, benefits were often scaled to requirements:
the better a firm did, the more benefits it got. 131 When the Park administration sought to promote
textile exports, it adjusted firms’ quotas to import cotton—not sufficiently available in Korea—based
on their export performance.132 When it started enforcing domestic-content requirement on
automakers in the 1970s, if they failed to meet the requirement, it would cut off preferential hard
currency at preferential exchange rates.133

The government also did not neglect the market mechanism, even if in a limited way, to discipline
firms. Even though many sectors were highly concentrated—and even though the government
supported concentration so firms would obtain economies of scale—it almost always maintained at
least some oligopolistic competition. 134 And it was not hesitant to blunt firms’ ability to obtain what it
deemed exorbitant profits on protected domestic markets. In 1986 it controlled the prices of some 110
basic commodities, from flour to steel and sugar to televisions. 135

Lessons for Other Countries

As Korea continued its path of development way into the twenty-first century, academics and
policy-makers all around the world wondered if there were any lessons from the Korean experienced
that could be exported to other countries. Others thought the Korean experience was unique to a tiny
peninsula off the coast of China that had been colonized by Japan for half of the twentieth century.
Moreover, other countries had tried to replicate the Korean (and Singaporean) model of development
without much success. What elements made the Korean model work? What elements could be
replicated by other emerging nations?

14

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 The Korean Model of Shared Growth, 1960-1990 712-052

Exhibit 1 Map of the Republic of Korea

Source: University of Texas Perry-Castañeda Library Map Collection.

15

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

Exhibit 2 GDP per capita and World Rank in Selected Countries, 1960 and 2010

GDP per Avg.

GDP per capita in growth in
capita in Rank 1960 (US$ Rank Change GDP per
US$ of 2005 in of 1990, in in capita (%
Country (PPP) 2010 PPP) 1960 ranking p.a.)
Qatar 102,891 1 25,356 2 1 2.8
Singapore 59,936 3 2,310 51 48 6.7
Norway 53,376 4 7,210 16 12 4.1
United Arab Emirates 48,597 6 19,429 3 -3 1.9
United States 48,147 7 11,328 5 -2 2.9
Netherlands 42,330 9 8,284 13 4 3.3
Australia 40,836 11 8,865 10 -1 3.1
Sweden 40,613 13 9,000 7 -6 3.1
Canada 40,457 14 8,927 8 -6 3.1
Ireland 39,507 15 8,480 12 -3 3.1
Germany 37,935 17 7,685 14 -3 3.2
Taiwan 37,931 18 1,468 66 48 6.7
Denmark 37,741 19 8,814 11 -8 3.0
United Kingdom 35,974 22 8,887 9 -13 2.8
France 35,048 23 7,544 15 -8 3.1
Japan 34,362 24 3,986 25 1 4.4
Korea, South 31,753 25 1,095 83 58 7.0
Spain 30,622 28 3,452 30 2 4.5
Italy 30,165 29 5,916 20 -9 3.3
Portugal 23,204 42 2,988 38 -4 4.2
Argentina 17,376 51 5,561 21 -30 2.3
Russia 16,687 52 3,935 27 -25 2.9
Chile 16,171 55 4,320 24 -31 2.7
Malaysia 15,578 58 1,590 62 4 4.7
Uruguay 15,469 59 5,040 22 -37 2.3
Mexico 15,121 61 3,485 29 -32 3.0
Brazil 11,845 74 2,382 49 -25 3.3
China, People's Rep. of 8,394 90 678 103 13 5.2

Source: Data for 2010 comes from the IMF, www.imf.org; data for 1960 comes from Angus Maddison, downloaded from Global
Financial Data. The ranking of countries for 1960 was done using only countries for which data is available. Average
growth rates of GDP per capita are compound average growth rates. Figures in bold are the fastest growing countries in
the world.

16

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 The Korean Model of Shared Growth, 1960-1990 712-052

Exhibit 3 Exports as a Percentage of GDP in Selected Countries

Exports as a percentage of GNP

Late XIX century Pre-World War I 1920s 1950s 1980s
United Kingdom 21.6 43.5 38.1 30.4 43.1
France 18.0 53.7 51.3 41.2 39.8
Germany 36.7 38.3 31.4 35.1 51.2
Italy 20.6 28.1 26.3 25.0 45.7
Denmark 45.6 61.6 57.3 52.6 56.2
Norway 55.5 69.2 63.5 77.4 66.7
Sweden 27.7 40.3 31.9 36.5 57.5
United States 12.9 11.0 10.8 7.9 14.9
Canada 30.9 32.2 41.5 31.2 48.7
Japan 10.3 29.5 35.5 18.8 24.0
Republic of Korea n.a. n.a 69.6 8.8 69.2

Source: Created with data from Alice Amsden, Asia's Next Giant: South Korea and Late Industrialization, Oxford Univ. Press, 1986,
p. 71.

Exhibit 4 Gross Capital Formation of the Private Sector (as a % of GDP), 1970–1990
Private Investment/ GDP 1970-75 1975-80 1980-85 1985-90
HPAEs
Japan 25.6 21.9 20.7 22.7
Hong Kong 20.4 22.5 23.3 21.9
Indonesia 10.5 11.1 12.5 11.9
Republic of Korea 18.5 23.1 23.8 26.3
Malaysia 16.0 16.3 18.0 16.4
Singapore 28.3 26.0 31.4 26.3
Taiwan 14.1 14.0 13.0 11.8
Thailand 17.3 17.8 19.4 24.7
Average 18.8 19.1 20.2 20.3
Other countries
Argentina 13.1 15.5 16.2 12.7
Bolivia 10.8 9.3 4.9 4.2
Chile 5.6 9.2 9.8 10.1
Cote d'lvoire 13.6 14.0 8.9 4.8
Ghana 6.7 4.0 3.9 4.2
India 9.1 10.1 10.1 11.9
Mexico 12.6 12.9 12.6 13.4
Nigeria 9.5 8.3 4.7 4.0
Philippines 11.4 18.6 18.7 15.5
Sri Lanka 10.8 14.0 22.5 17.2
Turkey 12.2 11.8 8.5 11.2
Venezuela 15.7 18.5 9.3 9.9
Average 10.9 12.2 10.8 9.9

Source: Created by the authors using data from Hilton L. Root and Jose Edgardo Campos, “The Key to the Asian Miracle,”
Brookings Institution, 1996, p. 27.

17

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

Exhibit 5 Infrastructure Indicators in Selected Countries, 1971--1986

Population per % of paved roads

phone
country 1975 1985 1971 1986

High Performing Asian Economies

Republic of Korea 25 5 14 54
Taiwan 4 2 n.a. 91
Singapore 7 3 n.a. 96
Indonesia 435 205 25 62
Thailand 133 68 67 40
Malaysia 42 12 85 80
Hong Kong 4 2 100 100
Other Asia
India 352 203 35 48
Nepal 1,167 903 n.a. n.a.
Pakistan 296 186 57 43
Sri Lanka 187 135 70 n.a.
Philippines 96 67 n.a. 13
Latin America
Argentina 13 10 13 23
Brazil 35 12 5 7
Colombia 19 14 11 8
Chile 24 16 12 12
Mexico 21 11 60 33
Peru 41 32 10 n.a.
Venezuela 19 12 43 33
Sub-Saharan Africa
Botswana 108 56 n.a. n.a.
Ghana 164 179 n.a. n.a.
Kenya 113 72 7 n.a.
Malawi 262 175 8 n.a.
Mauritius 35 16 1 92
Sudan 281 281 n.a. n.a.
Zambia 91 90 9 17

Source: Created by the casewriters using data from Root and Campos, “The Key to the Asian Miracle,” Brookings Institution,
1996, Tables 1-10 and 1-11.

Exhibit 6 Level of Schooling of the Labor Force in the Republic of Korea, 1946-1983

1946 1963 1983

No schooling 39.6 5.5 n.a.
Primary 53.0 53.0 41.2
Secondary 7.4 33.9 48.6
College 0.01 7.6 10.2

Source: Created using data from Alice Amsden, Asia's Next Giant: South Korea and Late Industrialization, Oxford Univ. Press,
1986, p. 71.

18

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 -19-

Exhibit 7 Growth in GDP per capita, Income Inequality and Education Levels in Selected Countries

GNP per capita Income Share of: Ratio Gross Enrollment Rates
growth, per of top
annum Bottom Top to Primary Secondary Tertiary
Country 1960-81 1965-85 20% 20% bottom 1965 1985 1965 1985 1965 1985
ASIA
Fast Growers:
Korea (1975) 6.9 6.8 5.7 45.3 9.95 101 95 35 94 6 32
Hong Kong (1980) 6.9 6.3 5.4 31.3 5.79 103 105 29 69 5 13
Japan (1979) 6.3 4.3 8.7 22.4 2.57 100 102 88 96 13 30
Taiwan (1975) 6.6 n.a. 9.5 36 3.68
Slower growers:
Indonesia (1987) 4.1 4.3 8.8 26.5 3.01 72 118 12 39 1 7
Philippines (1985) 2.8 1.6 5.5 32.1 5.84 113 106 41 65 19 38
Thailand (1975-76) 4.6 4 5.6 49.8 8.89 78 97 14 30 2 20
Malaysia (1987) 4.3 4 4.6 34.8 7.57 90 99 28 53 2 6

LATIN AMERICA
EI Salvador (1976-
77) 1.5 -0.5 5.5 47.3 8.6 82 70 17 24 2 14
Peru (1985) 1 0.1 4.4 35.8 8.14 99 122 25 65 8 24
Costa Rica (1986) 3 1.4 3.3 38.8 11.76 106 101 24 41 6 23
Brazil (1983) 5.1 3.6 2.4 46.2 19.25 108 104 16 35 2 11
Mexico (1977) 3.8 2.3 2.9 57.7 19.9 92 115 17 55 4 16
Panama (1973) 3.1 2.2 2 61.8 30.9 102 105 34 59 7 26
Argentina (1970) 1.9 0 4.4 50.3 11.43 101 108 28 70 14 36
Venezuela (1987) 2.4 -0.9 4.7 34.2 7.28 94 108 27 45 7 26

Source: Created with data from Root and Campos, “The Key to the Asian Miracle,” Brookings Institution, 1996, Table 9.1.

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

Exhibit 8 Compensation Differentials between Production Workers and Other Professions

(Production Worker Salary= 100)

500
450
400
350 Technicians

300 Managers

250 Workers

200 Salesmen

150 Service Men

100 Production Workers

50
0
1971 1973 1975 1977 1979 1981 1983

Source: Created using data from Alice Amsden, Asia's Next Giant: South Korea and Late Industrialization, Oxford Univ. Press, 1986,
p. 230.
Note: The salaries include bonuses, overtime and other forms of compensation. A negative trend in the graph
indicates a reduction in inequality.

Exhibit 9 Compensation Differentials by Level of Education (Elementary school=100)

350

300

250

200

150

100

50

0
1975 1976 1978 1980 1982 1984

Colleges, University Junior College

High School Middle School

Source: Created using data from Alice Amsden, Asia's Next Giant: South Korea and Late Industrialization, Oxford Univ. Press, 1986,
p. 230.
Note: The salaries include bonuses, overtime and other forms of compensation. A negative trend in the graph
indicates a reduction in inequality.

20

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 The Korean Model of Shared Growth, 1960-1990 712-052

Endnotes

1
On the Gini indices of South Korea and Brazil: Hilton L. Root and Jose Edgardo Campos, “The Key to the
Asian Miracle,” Brookings Institution, 1996, p. 11, Table 1-2.
2 On Korea’s unchanged boundaries: Robert Wade, Governing the Market: Economic Theory and the Role of

Government in East Asian Industrialization. Princeton: Princeton University Press, 1990, p. 322.

3 Alice H. Amsden, Asia's Next Giant: South Korea and Late Industrialization, Oxford: Oxford University Press,

1989, p. 28, on the homogeneous population. Wade, p. 322, on the powerful sense of national identity.

4 Encyclopædia Britannica Online Academic Edition, topic "South Korea." www.britannica.com, accessed

Feb. 5, 2012.

5 Amsden, p. 33.

6 Amsden, p. 34.

7 Stephen Haggard, Pathways from the Periphery: The Politics of Growth in the Newly Industrialized Countries,

Cornell University Press: Ithaca, 1990, p. 52.

8 Amsden, p. 33.

9 Amsden, p. 35.

10On political activism after World War II, the Americans’ strengthening the right under Rhee, and the
elections that split North and South: Haggard, pp. 52-53.

11On Rhee’s Ph.D. under Wilson: Tun-jen Cheng, "Political Regimes and Development Strategies: South
Korea and Taiwan," in Gary Gereffi and Donald L. Wyman, Manufacturing Miracles: Paths of Industrialization
in Latin America and East Asia. Princeton: Princeton University Press, 1990, p. 149..

12Encyclopædia Britannica Online, “South Korea,” on the National Security Law and amendment
exempting Rhee from the two term limit.

13Sungjoo Han, The Failure of Democracy in South Korea. Berkeley: University of California press, 1974, p. 17,
cited in Haggard, p. 54.

14 Haggard, 53-54.

15 Haggard, p. 55; likewise Amsden, p. 37.

16 Amsden, p. 37.

17 Amsden p. 38.

18 Amsden, p. 37, emphasizes that former landlords often became industrialists. Cheng 146, footnote 3, says

that “there is no proven link between the landed class and the newly merged capitalist class.” Both concur that
the individuals who bought the plants generally had political connections.

19 Cheng, p. 148.

20 Cheng, p. 147; Haggard, p. 51.

21

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

21
Many sources agree on this point, including Amsden, p. 39; Haggard, pp. 56-57; Cheng, pp. 151-52; and
Peter Evans, Embedded Autonomy: States and Industrial Transformation. Princeton: Princeton University Press, 1995,
pp. 51-52. Amsden, p. 39, provides the amount of U.S. aid as a percent of GDP and foreign exchange.

22
Haggard, pp. 56-57, and Cheng, p. 151, on the mechanisms of selling undervalued dollars and imported
goods for a profit.

23 Amsden, p. 39.

24 Haggard, p. 59.

25 Amsden, pp. 40-41.

26 Amsden, p. 51.

27 Haggard, pp. 58-59.

28 Haggard, pp. 58-59, and Amsden p. 51.

29 Evans, pp. 51-21; Cheng, p. 152.

30 Haggard, p. 61.

31 Cheng, p. 151.

32 Haggard p. 59; manufactured exports in 1960 from Amsden, p. 67.

33 Haggard, pp. 55-56.

34 Haggard, p. 59; Amsden, pp. 40-41.

35 Amsden, p. 48.

36 Haggard, p. 51.

37 Encyclopaedia Britannica Online, “South Korea,” on this paragraph, except as otherwise noted.

38 Haggard, p. 63.

39 Haggard, p. 63.

40 Haggard, p. 71.

41 Cheng, p. 159.
42 Evans, p. 53; Amsden, p. 72; Haggard, p. 72; and Cheng, p. 156 tell essentially the same story. The detail

about the signs is from Seok Ki Kim, “Business Concentration and Government Policy: A Study of the
Phenomenon of Business Groups in Korea, 1945-1985,” doctor of business administration dissertation, Harvard
Business School, 1987, cited in Yasheng Huang, “Korea: On the Back of a Tiger (Abridged),” HBS case 708-052,
June 9, 2008.

43 Amsden, p. 72; Haggard, p. 72; and Cheng, p. 159 concur.

44 Haggard, pp. 63-64, on these measures, including the organization of the FKTU.

22

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 The Korean Model of Shared Growth, 1960-1990 712-052

45 Haggard, p. 63.

46 Evans, pp. 51-52, on the bureaucracy and civil-service recruitment. Cheng, pp. 155-56, concurs.

47 Evans, p. 32.

48 Evans, p. 32

49 Haggard, p. 64-65. Amsden, p. 51, also notes that the EPB drew ideas from the Economic Development

Council appointed by Rhee.

50 Evans, p. 249.

51
On both the meetings and the fact that all parties with an interest in them sent representatives: Root and
Campos, pp. 89-91. Likewise Chalmers Johnson, “Political Institutions and Economic Performance: The
Government-Business Relationship in Japan, South Korea, and Taiwan,” in The Political Economy of the New Asian
Industrialism, edited by Frederic C. Deyo, Ithaca: Cornell University Press, 1987, cited by Huang.

52 Cheng, p. 156.

53 Quotes are from a summary of the plan, cited in Haggard, p. 68.

54 Amsden, p. 50.

55 Evans, p. 245.

56 Haggard, p. 68.

57 Cheng p. 156, likewise Haggard pp. 69-70.

58 Haggard, pp. 69-70.

59 Amsden, p. 68, on the State of the Nation message, Haggard, p. 71, on export meetings.

60
Paul R. Krugman and Maurice Obstfeld, International Economics: Theory and Policy, second edition, New
York: HarperCollins, 1991, p. 68, briefly summarizes the point; chapter 4 presents the model. It often fails to be
borne out in practice. In 1973 Nobel Prize winner Wassily Leontief pointed out that the capital-abundant United
States imported more capital-intensive products and exported less capital-intensive products. Broad tests of
Heckscher-Ohlin show that it is often violated, or that the so-called Leontief paradox holds widely: “Trade just
does not run in the direction that the Heckscher-Ohlin theory predicts” (Krugman and Obstfeld, p. 82).

61 Amsden, p. 65, on domestic excess capacity and the volume of exports.

62 Amsden, pp. 66-67, particularly table 3.4.

63 Haggard, p. 130.

64 Haggard, p. 130, Cheng, p. 165 on the movements and Kim’s mobilization of them.

65 Haggard, p. 131, Encyclopaedia Britannica Online, “South Korea.”

66 Wade, p. 317, on the list of HCI sectors.

67 Haggard, p. 131, and Cheng, p. 162, on these motives for the HCI policy.

23

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

68 Cheng, p. 167.

69 World Bank, World Development Indicators, http://data.worldbank.org, accessed February 2012.

70 Wade, p. 319

71 Amsden, pp. 291-92, on steelmaking.

72 Evans, pp. 74-75.

73 Evans, pp. 74-75, on Japanese imports of Korean steel.

74Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian
Industrialization, Princeton: Princeton University Press, 1990, pp., 309-312, on automaking. Initially, the
automakers were actually Hyundai, Kia, and GM-Korea, but the last was later absorbed by Daewoo.

75
Myung Oak Kim and Sam Jaffe. The New Korea: An Inside Look at South Korea’s Economic Rise. American
Management Association, 2010, pp. 106-109.
76 Wade, p. 313, on the quote. The entire discussion of the semiconductor industry is from Wade, pp. 312-

317, except as otherwise noted.

77 Evans, p. 142, on the rate of expansion.

78 Evans, p. 144, on some details on NAIS (also discussed by Evans), as well as the Datamation quote.

79
Dani Rodrik, One Economics, Many Recipies: Globalization, Institutions and Economic Growth. Princeton
University Press, 2007, p. 103.
80 Ibid, pp. 105–106
81 Ibid, pp. 106–112
82 Haggard, pp. 65-66.

83 Haggard, pp. 65-66.

84 Amsden, p. 73.

85 Amsden, p. 73.

86 Wade, pp. 307, 317, on semiconductors

87 Haggard, p. 66.

88 Wade, p. 307.

89 Wade, p. 308.

90 Wade, pp. 309-11.

91 Wade, p. 313.

92 Wade, p. 311.

93 Evans, p 142.

24

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 The Korean Model of Shared Growth, 1960-1990 712-052

94 Evans, p. 144. Wade, pp. 312-19, discusses these same pivotal procurement policies.

95 Amsden, pp. 76-77.

96 Wade, p. 307.

97 Evans, p. 142.

98 Wade, p. 309.

99 Evans, p. 143.

100 World Bank, Korea: Managing the Industrial Transition, p. 65, cited in Huang.

101 Evans, p. 178.

102 Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective. London: Anthem,
2002.

103 Chang, p. 17.

104 Chang, p. 25.

105 Amsden, pp. 219-220

106 Root and Campos, p. 60. Brazilian data from www.ibge.gov.br, accessed February 14, 2012.

107 Root and Campos, p. 57.

108 Root and Campos, pp. 57-58.

109 Evans, p. 147.

110 Evans, pp. 147-148, on the research and educational institutes at Daeduk Science Town.

111 Evans, p. 147, on public and private Korean investments in R&D.

112 Amsden, p. 9.

113
Young-Bum Park, David R. Ross and Richard H. Sabot, “Educational Expansion and the Inequality of Pay
in Brazil and Korea” in Nancy Birdsall and Richard H. Sabot (eds.), Opportunity Foregone: Education in Brazil, The
Johns Hopkins University Press, 1996, p. 268
114 Ibid. , p. 271.
115 Root and Campos, p. 27, Table 1-12.

116 Wade, p. 307.

117 Amsden pp. 105, 112; Huang makes the same point.

118 See Amsden, pp. 95, 98, including Table 4.7, on Korea’s response to the first oil crisis.

119 Amsden, p. 49.

120 Haggard, p. 130.

25

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.
 712-052 The Korean Model of Shared Growth, 1960-1990

121 Encyclopaedia Britannica Online, “South Korea.”

122 Amsden, p. 15.

123 Root and Campos, pp. 89-91.

124 Amsden, pp. 16-17.

125 Amsden, p. 17.

126 Amsden, p. 15, on this general statement, Shinjin, and the construction firms.

127 Wade, pp. 309-11.

128 Evans, pp. 89-90.

129 Amsden, p. 8, but most of the literature on South Korean industrial policies concurs.

130 Amsden, p. 14.

131 Haggard, p. 66, re benefits in exchange for exports.

132 Evans, p. 89, endnote 41.

133 Wade pp. 309-11.

134 Amsden, p. 17.

135 Amsden, p. 17.

26

This document is authorized for use only in Diego Grijalva's ECONOMIA Y GERENCIA at Universidad San Francisco de Quito - USFQ from Aug 2019 to Feb 2020.