The Economic Growth of Late-comer Korea: The Role of Government icon

The Economic Growth of Late-comer Korea: The Role of Government



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The Economic Growth of Late-comer Korea: The Role of Government

S. Choi(Seoul National University)


Ⅰ. Introduction


In early 20th century the Korean Peninsula was under Japanese colonial rule, and the Korean Peninsula, upon liberation in 1945, was divided into the two Koreas, in spite of their economic complementary relations. Furthermore South Korea(hereinafter Korea) fell into utter turmoil because of conflict between ideologies, eventually in 1950 it led to Korean War which lasted for three years. After Korean War, GNP per capita of Korea was 67 dollars(current prices) in 1953, 79 dollars in 1960, the annual growth rate in 1950s was 4 percent(National Statistical Office 1996, p.116). But great transformation was undergone in early 1960s. Most importantly, the growth rate was more than double 1950s’s rate, and this pace was going on keeping for almost 30 years. As a result, many changes in political, economic and social areas were made since 1960s. This paper, therefore, focuses on 1960s’ and 1970s’ period when the high growth started and lasted in Korea.

How could the high performance be possible? We can review this issue from the two viewpoints. One is to review it from the perspective of business growth, the other from the perspective of government’s role. But I will examine the economic growth of late-comer Korea from the latter’s viewpoint.

Many researchers began to pay attention to the role of government since A. Gerschenkron(1966) proposed that the role of government, unlike advanced countries, was a very important factor in the economic growth of late-comer countries. The role of government, of course, was assessed as either neo-classical view which argued that it was the intervention to get the prices right, or developmental state view which argued for the intervention to get the prices wrong. The former studied mainly the effect of market-friendly policies on the export promotion, and the latter focused on risk-sharing system to increase investment. The incentive system to change the behavior of economic players, of course, matters greatly to economic growth. Therefore, many researchers have ever studied the characteristics of incentive system that were made by policies and institutions.

This paper focused on government organization to formulate and implement policies and institutions, also tried to study the causes to have an effect on the policy execution than the incentive system. This paper will study three topics as follows. 1) What are the characteristics of the Korean development strategy to be formed in the early 1960s? 2) It is to study the role of Economic Planning Board to execute this development strategy effectively. 3) It is to study the institution to help coordinate the incentive system with the changes in economic situation.


II.
Formation of the Korean Development Strategy


There has been an argument that Korean economy achieved quick growth due to the introduction of export-oriented industrialization policy. Of course, it's not completely wrong, but it doesn't provide an accurate explanation about the process of its quick growth, either. If it's true that a shift from import substitution industrialization policy to export-oriented industrialization policy is the only factor for quick growth, the problems with the economic growth of developing countries will be considered much easier. This chapter will review the formation process and characteristics of the development strategy introduced in the early 1960s.


1. Military Government's Development Strategy

The military government was strongly driven by growth target. The government set the goal of attaining 7.1 percent of annual growth rate for the First Five-Year Plan(hereafter the First Plan). When the military government, therefore, set the goal of 7.1 percent, with minus growth for 1961 anticipated, it was to show its strong willingness to development(SCNR 1961; EPB, 1962, p. 19).

In order to achieve the target, industrialization policy employed by the military government can be divided into two parts; one was for light industry that made certain growth through import substitution industrialization in the 1950s, and the other for heavy chemical industry that mostly depended on imports because the production facilities were not enough to meet the domestic demands. In light industry, the most important task was to secure a market to sell goods. The early military government tried to solve the problem of limited market by expanding the domestic market and accordingly put great emphasis on agricultural development. That is, it planned the growth of light industry in the cycle of "growth of agricultural productivity->increase of farmers' income->expansion of the domestic market->growth of light industry"(EPB 1962, p. 15).

However, it was the growth policy of heavy chemical industry that the military government valued most. The military government based the growth of light industry on "the principles of free companies to respect the freedom and creativity of private companies" and "directly intervened in heavy chemical industry or indirectly induced it"(EPB 1962, p. 16). The heavy chemical industries which the government promoted through active interventions, were synthetic fiber, oil refinery, fertilizer, cement, integrated iron and steel, and machinery. All of those sectors had characteristics of import substitution industry which domestic demands were met through imports because domestic production was not enough for them.


Exports plan by industry in the First Plan

(unit: in million US $)




1962

1963

1964

1965

1966

1962-66

sum

share

The primary industry

Foods

Mineral products

47.7

20.1

27.6

54.4

23.2

31.2

62.6

27.6

35.0

82.1

31.6

50.5

90.3

35.8

54.5

337.1

138.3

198.8

76.6

31.4

45.2

Manufactured goods

10.4

13.7

17.4

19.1

22.0

82.6

18.8

Others

2.8

3.6

4.1

4.4

5.2

20.1

4.6

Total

60.9

71.7

84.1

105.6

117.5

439.8

100.0

Source: EPB, the First Five-Year Development Plan, 1962, pp. 81-82.


The early military government emphasized import substitution industrialization more than export-oriented industrialization, as it is confirmed in its export plans. As you can see in , the primary industry goods such as foods(agricultural and marine products) and mineral products were the main exports and accounted for 77 percent of all exports. Accounting for 19 percent, manufactured products were mostly some light industry goods including plywood, cotton fabrics and rubber shoes and some homemade craft works.


2. Revision of the Development Strategy

The early military government's development strategy had two problems; the first one concerned how to raise investment funds for import substitution industrialization. As it's clear in
, foreign currency was important for secondary and tertiary industry. The military government resorted to the American loans for such foreign currency needs, but the American government wasn't actively supporting the First Plan for political and economic reasons. Thus the import substitution industrialization of heavy chemical industry that the government tried to grow through active intervention was faced with a crisis because of the delayed American loans.


The allocation of Investment funds by industry and source in the First Plan

(unit: in million us $)




1962

1966

1962-66

Domestic

Foreign

Domestic

Foreign

Domestic

Foreign (a)

Sum

(b)

a/b

Primary

70.3

2.8

90.7

4.5

401.1

25.4

426.5

6.0

Secondary

70.7

44.2

108.7

92.2

475.2

365.0

840.2

43.4

Tertiary

144.9

46.5

235.0

40.9

912.8

293.2

1,206.0

24.3

Total

285.9

93.5

434.4

137.6

1,789.1

683.6

2,472.7

27.6

Source: EPB, the First Five-Year Development Plan, 1962, pp. 56-59.

Note: 1)calculation at 1961 constant price.


And secondly, the importance of exports was clearly recognized for two reasons. First, there was a need to search for ways to directly raise foreign currency required for the import substitution industrialization of heavy chemical industry. The other reason was that they started to advance into foreign markets actively once the domestic market of light industry goods was not expanded according to the plan and thus the industry gradually faced growth limitations.

Reflecting those circumstances, the government revised the First Plan in the latter half of 1962 and announced the supplementary plan in January, 1964. The Korean development strategy was not single-lined from import substitution industrialization to export-oriented industrialization as it's commonly understood. It was, in fact, a double-lined development strategy composed of a shift from the early focus on import substitution industrialization to export of light industry and simultaneously the import substitution industrialization of heavy chemical industry. Of course, it should be noted that export-oriented industrialization and import substitution industrialization were not separately pursued. Import substitution industry grown through the industrial policies was soon converted into export industry. The organic combination of the industrial policies and export-oriented industrialization made the long-term high growth possible.


III. Policy Coordinating Agency: Economic Planning Board


It's a well-known fact that a wide range of factors are needed for economic growth. One factor the researchers all agree on is a planning agency to formulate and administer development plans. After the World War Ⅱ was ended, many developing countries set up development plans and founded planning agencies for the reason. However, only a few of them including South Korea achieved economic growth. In this chapter, I will discuss what kind of organization Korea's Economic Planning Board(EPB) was and what activities it engaged in to achieve great economic performance.


1. The Administration-Dominant Policy Decision System and the Status of EPB

 The diverse policy decision systems can be simply categorized into two types; one is the legislature-dominant policy decision system. The U. S. A. that Johnson(1984, pp. 21-25) called a "regulatory state" is a good example. The other is the administration-dominant policy decision system. In such a system, the legislature is relatively weak. Thus the administration creates laws and institutions and submits them to the congress, and the legislature reviews them. Japan that Johnson called a "developmental state" is a good example, and so is Korea's Park Jung-hee administration.1

There are differences in the operation mechanism of the administration-dominant policy decision system according to political systems. Under the presidency system like South Korea, the most important thing was the president's interest and willingness to development. As pointed out in Chapter 2, the Park administration in the initial stage showed a very strong willingness to development, and President Park maintained "growth firstism" throughout his terms. What comes next is how effectively and efficiently the bureaucratic organization operates to implement and practice the president's interest and willingness. In those aspects, the foundation of EPB has considerably important meanings.

The foremost characteristics of EPB are the facts that it was newly founded as a planning agency and that it's endowed with institutional autonomy not related to economic interests unlike other executive bodies closely related to the private sector. Thus EPB was able to recognize and analyze economic situations in a less prejudiced and more objective manner and further suggest desirable directions for Korean economy for national interests. Furthermore, the minister of EPB doubled as the deputy Prime Minister, who's one grade higher than the heads of other ministries. Based on those institutional grounds, EPB formulates development strategies reflecting the president's willingness to development under the administration-dominant policy decision system and played a pivotal role as a policy coordinating agency to manage the policy executions of other government bodies.


2. Organization and Functions of EPB

EPB was set up in July, 1961 right after the establishment of the military government. There was a planning agency before EPB, but EPB's organization was unique in comparison. EPB was different from Ministry of Reconstruction(MOR) in three ways.2

First, planning function of EPB was greatly reinforced. The formulation of economic plan was divided into three stages. The policy coordinating functions of EPB were considerably reinforced, because EPB with institutional autonomy took the lead in a planning process. Of course, if political leader isn’t enough for willingness to development and the government doesn't provide continuous support for the plans, the goal of plan, even well-formulated plan, cannot be achieved.3 Also, if the policies are not coordinated smoothly among the ministries, even though that condition are satisfied, the economic plan was not implemented well and thus its performance too cannot help being poor.

Secondly, the allocating function of domestic and foreign currency was granted to EPB in order to guarantee its policy coordinating function institutionally. The private firms were able to introduce foreign currency needed for investment projects by the approval of the Economic Cooperation Bureau in EPB. When EPB was set up, domestic currency, namely the function of compiling the budget was transferred from the Finance Ministry to EPB. Although there was much controversy in the process, the transference happened following the opinion that it should be integrated into EPB in order to reinforce its planning and policy coordinating functions. By allowing EPB to administer domestic and foreign currency, its status was institutionally secured, as well.

Finally, the Bureau of Statistics was also integrated into EPB, which should analyze the current economic situations, identify problems, and suggest development directions and strategies in order to set up economic plan. Feasibility of economic plan get higher only when there is an accurate understanding of the current economic state. Thus the bureau was moved from Ministry of Home Affairs to EPB.

In short, EPB made two contributions to the economic growth of Korea; first, EPB which was not introduced within existing executive body but newly founded, and had institutional autonomy, was able to analyze economic situations objectively and suggest directions for Korean economy; and secondly, it considerably improved the performance of the economic plan by enhancing its policy coordinating function. Even the greatest plan will be nothing but a list of hopes if it is not implemented. EPB introduced two devices to do so; first, it invited the staffs of executive bodies into its planning process to coordinate short- and long-term policies. And further it handled domestic and foreign currency and thus increased its coordination. As a matter of fact, Korea's EPB is considered as a government organization with such powerful functions and authority unprecedented in the world history(Waterston 1968, p. 437).


IV. Policy Promotion Agency: The Enlarged Meeting for Export Promotion


One of the main factors of Korea's long-term high growth was export-oriented industrialization and its persistent promotion. The exports exceeded the goals set by the economic plan, and the annual growth rates of exports were impressive with 47% for the First Plan, 36% for the Second Plan, 47% for the Third Plan, and 20% for the Fourth Plan. In this chapter, I will discuss the reasons behind Korea's speedy growth in exports around the Enlarged Meeting for Export Promotion(hereinafter EMEP).


1. Participants

If it's true that the EMEP had effects on exports, how could it be possible? To answer the question, we needs to accurately understand the nature of the meeting and analyze its participants.

Before the meeting, there was a consultant agency of export policies called Export Promotion Committee set up in December, 1962. The committee was composed of total 12 members including the Prime Minister, the head of the committee, eight government officials, two representations of government agencies, and two representations of private economic organizations. The structure remained the same in August, 1964. Only the number of members increased to 16.


The number of EMEP by year





1965

1966

1967

1968

1969

1970

1971

1972

No. of Meetings

5

11

12

12

12

12

11

11

No. of President Attendance

5

11

9

12

12

12

11

10




1973

1974

1975

1976

1977

1978

1979

Total

No. of Meetings

10

11

10

10

10

9

6

152

No. of President Attendance

10

11

10

9

10

9

6

147

Source: The Chosun Ilbo & The JoongAng Daily, 1965-1979.


It was the first EMEP in February, 1965 that the organization and number of participants went through a huge change. There were two huge changes; first, the president himself started to attend those meetings. It's said that the Ministry of Commerce and Industry suggested the idea to the president based on the assumption that export policies would be decided and coordinated with such speed if the president presided instead of the Prime Minister. shows the number of meetings each year and the number of meetings that the president attended. The first EMEP was held in 1965 and became regular in 1966.4 What's noteworthy here is that the president almost never missed the meetings. According to the remaining documents, the president attended the all the meetings except for three(April, May and October) in 1967, one(April) in 1972, and one(April) in 1976.

And secondly, the scope of participants gradually broadened. The total number of participants in the February meeting in 1965 was 30(excluding the president) (The presidential Secretariat 1965). Since the information about the participants of the meetings is limited and thus it's difficult to get accurate numbers, it's for certain that the number of participants continued to grow since the first one. The January meeting of 1966 had total 30 participants including the top 5 exporters(The JoongAng Daily, Jan. 24, 1966), and the October meeting of 1969 had total 51 participants(The Chosun Ilbo, Oct. 28, 1969). The increased number of participants mostly reflected the increased participation of government staffs and heads of government agencies and partially that of private sectors.

The meetings moved to the Capitol Building since March, 1972.5 It was around that time that the number of participants grew bigger and the scope wider. The June meeting of 1976 had 172 participants whose agencies are confirmed. They included the president, 11 from the presidential secretariat, 18 ministers, three ambassadors(from the Middle East), 18 vice-ministers, 33 directors and staffs of the major ministry, 10 representations of local governments, four congressmen, two representations from the ruling party, eight representations of general and government banks, five representations of government and private research centers, four representations of universities, 39 representations of industry∙trade∙export associations, and 11 representations of corporations(Rhee․Ross-Larson․Pursell 1984, p. 30). The number of participants considerably grew, and the scope expanded to include local governments, politics, and academia as well as the government staff and representations of private sectors.


2. Performance-Oriented Officials and Coordination of Export Policies

Under the administration-dominant policy decision system, the president's presence at the EMEP had great significance. It's widely known that the president put enormous emphasis on export as a means of economic growth. For instance, at the January meeting of 1972, he emphasized "The only way for our survival is exporting"(The Office of the Presidential Security 1972). By attending the meetings every month with an idea that "Exporting is the way for us to live," the president sent out a loud and clear signal that export was extremely important to officials and private companies.6

According to the audio records of the meetings in 19727, the meeting had some regular patterns. The meetings would usually follow the order of commendation of mans of merit in export, presentation of the minister(Commerce and Industry), report of Commerce and Industry Ministry, report of Ministry of Foreign Affairs, suggestions of corporations(representation's presentation), and the president's instruction. What were especially important were the reports of Commerce and Industry Ministry and Ministry of Foreign Affairs directly related to the export. Their presentations accounted for about 2/3 of the meeting. This indicates that the EMEP were run around the reports of the two ministries.

For example, Commerce and Industry Ministry’s reports included overall changes such as monthly performance and increases compared to the same period of last year and performances by the product structures such as agricultural, marine, mineral, and industrial products. The reports on export performance at those meetings were analyzed and evaluated in multifaceted ways according to product structures, product categories, regions, countries, and concerned departments.

The fact that reports were made at meetings where the president was almost always present must have put great pressure on economy officials. At the January meeting of 1969, the president said, "The heads of diplomatic offices overseas will be warned for their failure to meet the goals. And the results will be reflected in their evaluations."(JoongAng Ilbo Jan. 20, 1969). At the November meeting of the same year, he instructed the participants "to review an award to public servants and technicians that contributed to exports and submit a report."(JoongAng Ilbo Nov. 17, 1969). Since it's established that the government departments(officials) would be evaluated according to whether they succeeded or failed to meet the export goals, the export goals set by the government became an "order" to the government officials, who were further driven towards performance. It's a strong device to make export performance exceed set goals each year.

Another important contribution of the meetings to export growth is that it provided a forum to coordinating export incentives quickly according to the changes to the economic environment. That is, the meetings offered information needed to coordinating export incentives(Rhee∙Ross-Larson∙Pursell 1984, pp. 15-17, p. 29).


References

Adelman, I. ed., 1969, Practical Approaches to Development Planning: Korea’s Second Five-Year Plan. The Johns Hopkins Press.

Amsden, A., 1989, Asia’s Next Giant: South Korea and Late Industrialization, Oxford University Press.

Choi, S., 2008, “The Establishment and Reorganization of Korean Planning Agency in 1950s,” Review of Economic History, No. 45. (in Korean)

Cole, D. and P. Lyman, 1971, Korean Development: The Interplay of Politics and Economics, Harvard University.

EPB(Economic Planning Board), 1962, Korea’s First Five-Year Plan. (in Korean)

EPB(Economic Planning Board), 1964, Revision Plan: Korea’s First Five-Year Plan. (in Korean)

Gerschenkron, A., 1966, “Economic Backwardness in Historical Perspective,” in Economic Backwardness in Historical Perspective, Harvard University Press.

Ha, Y., 2006, Late Industrialization and the Dynamics of the Strong State in South Korea: Debureaucratization and Hollowing out, Seoul National University Press. (in Korean)

Haggard, S. and C. Moon, 1990, “Institutions and Economic Policy: Theory and a Korean Case Study,”, World Politics 42(2).

Johnson, C., 1982, MITI and the Japanese Miracle, Stanford University Press.

Kim, G., 1967, “The Historical Review of Korea’s Economic Development Plans”, Master’s Thesis in Seoul National Unversity. (in Korean)

Lim, W., 2000, The Origin and Evolution of the Korean Economic System, Policy Study 2000-03, Korean Development Institute.

Maddison, A., 1995, Monitoring the World Economy, 1820-1992, OECD.

MGAH(Ministry of Government Administration and Home Affairs), 1998, The History on the Changes of Central Government Bodies, Republic of Korea.

MOR(Ministry of Reconstruction), 1959, Korea’s Economic Development Three-Year Plan, MOR. (in Korean)

National Statistical Office(Korea), 1996, Economic and Social Changes of Korea for the Past 50 Years. (in Korean)

Oh, W., 1995, Economic Policy based on Korean Model 1, The Institute for Korean Economic Policy.

Park, C., 1988, IDang Reminiscences, Pakyoungsa. (in Korean)

Rhee, Y., B. Ross-Larson and L. Pursell, 1984, Korea’s Competitive Edge: Managing the Entry into World Markets, The World Bank.

SaKong, I. and L. Jones, 1981, Government, Business and Entrepreneurship in Economic Development: The Korean Case, Korean Development Institute. (in Korean)

SCNR(Supreme Council for National Reconstruction), 1961, Comprehensive Plan for Economic Reconstruction. (in Korean)

The Chosun Ilbo Company, 1965-1979, The Chosun Ilbo. (in Korean)

The JoongAng Daily Company, 1965-1979, The JoongAng Daily. (in Korean)

The Office of the Presidential Security, 1972, The Enlarged Meeting for Export Promotion-January Recording Material, National Archives of Korea.

The Presidential Secretariat, 1965, Daily Log on President. (in Korean)

Wade, R., 1990, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton University Press.

Waterston, A., 1968, Development Planning: Lessons of Experience, The Johns Hopkins Press.

World Bank, 1993, The East Asian Miracle: Economic Growth and Public Policy, Oxford University Press.

1 It's known that the administration-dominant policy decision system under Park administration had three characteristics; 1) they exhibited such speed and flexibility in deciding policies. Once government goals were set, the concerned policies were quickly decided. Of course, speedy policy decisions could create errors, which could be avoided by investing enough time to review. Thus speed also meant speedy corrections of errors. 2) Pragmatism was in effect in making policy decisions. Pragmatism allows for any useful means in order to achieve set goals. Instead of sticking to market-friendly policies according to theoretical prejudices, they would judge which of the market agency and the government's active involvement would work regardless of theory. And 3) the officials enjoyed the wide scope of discretionary decisions, which is common to the administration-dominant policy decision system. In general, the legislature offers very abstract provisions of laws. Implements of laws requires very specific administrative orders, which means individual contacts with concerned government offices are crucial to understand the government's policy directions accurately(SaKong & Jones 1981, pp. 86-95; Ha 2006, pp. 117-154).


2 See Choi(2008) for more details about the organization, functions and limitations of Korea's planning agencies(MOR) in the 1950s.

3 According to Waterston(1968, p. 103) who analyzed 55 underdeveloped nations' economic plans and their executions after WWII, the failure cases outnumbers the success ones. He pointed out that the governments' lack of strong determination was one critical cause.

4 According to the recollections of Park(1988, p. 94), the Minister of Commerce and Industry back then, he suggested the enlarged meeting to the president when he made an annual visit to the ministry in 1965. It was on February 5, 1965 that the first meeting was held(Chosun Ilbo, Feb. 6, 1965).

5 The meetings were held at Cheongwadae(the Presidential Residence) in most cases before March, 1972. The number of meetings by this time was total 78, 68 held at Cheongwadae, and 11 held at Capitol Building. The meetings were held at Capitol Building only in two occasions; when the president was absent and when the participants were too many for the meeting to be held at Cheongwadae.

6 All the officials of Commerce and Industry Ministry agreed that the president's interest in exports was the primary cause of rapid growth in Korea's exports(Park 1988, p. 222; Oh 1995, p. 328).

7 Starting in 1972, they left audio records of such meetings. Of course, they were not intact with some parts edited. But they are the only data with which to understand the operation of such meetings.




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