Post-colonial Korea: economy and society
1. 1953-1960 – enormous devastation after the war. Social legacy – uprooted majority, and very cohesive wealthy minority of former (and current) landlords (Kim Sŏng-Su’s group) who mainly staffed the political parties (both ruling and oppositional). New bourgeois circles – mainly people collaborating with the Americans (Chŏng Chu-Yŏng, the father of “Hyundai” – auto shop and construction business for the Americans) and with Syngman Rhee’s protection. Some of them are “pariahs” – the Northern refugees who have nothing to lose (“pariah capitalism” in SEA). Rhee’s best crony – “Samsung”’s Lee Byŏngch’ŏl, who could acquire former Japanese sugar and textile industries at bargain prices and paid then for Rhee’s electioneering. The system – extremely person-centered and totally corrupt – was based on the improbable amount of American aid ($ 12 billions for 1945-1965, almost $600 for every Korean; 70% of imports are aid-financed). American aid: accounts for 75% of the military budget, 50% of the civil budget, and nearly 80% of the foreign exchange. Military prostitution around American bases – main foreign exchange earned in non-governmental sector. Economical policies – import substitution industrialization (ISI). Mostly cement, food, and textiles protected by the over-valued currency. 3-4% growth rates. Agrarian country (70% - peasants) – crop output growth (due to land reform), offset by rapid populace growth (20 mln. in 1953 – 25 mln. in 1960).
Patterns of life in the city – more education (1960: 85 universities with 100 thousands students), great unemployment, inflation, and general deprivation and discontent, widespread hatred of corrupt dictatorship. Offset by army (600 thousand) which greatly “disciplines” all strata of the society (Weberian concept of modern industry as an extension of army discipline). Active students and those studying abroad – could get conscription deferment, symbol of semi-privileged status.
A Korean-manned military jeep of USAF 6006 – Air force intelligence that used to send spies to North Korea. For many Koreans, working with American military (very often at the risk of their lives, as in case with the intelligence) was the only way to escape starvation.
American views on the 1950s South Korea: stock phrase was “basket case”.
- George Kennan (the father of the “containment” strategy of the Cold War): Japan was “most important single factor in Asia” and it had to “regain its usual influence in Korea” while “preserving Korea’s formal independence”, so that “Soviet threat” on the Korean Peninsula could be “contained”.
- Special National Intelligence Estimate SNIE 42-61 Washington, March 21, 1961.
(Source: Kennedy Library, National Security Files, Countries Series, Korea, General, 1/61-3/61. Secret. ):
“Underlying the political unrest in South Korea is the weak and uncertain state of an economy poor in natural resources and diverted from the major problems of reconstruction by the requirements of one of the largest military establishments in proportion to population in the entire world.”
“Combustible materials are present. Design, incident, or a combination of accidents could ignite street demonstrations, converting them into destructive mob action and a major crisis. The Communists would, of course, exploit such an event.”
“In any event, South Korea's fundamental problems will continue to plague any ROK leadership. Faced with an impoverished economy, drained by defense costs, and handicapped by inexperience in self-government, South Korea will remain heavily dependent on outside economic and military assistance for the foreseeable future. There will, moreover, be increasing political pressures arising out of growing nationalist spirit and incipient neutralist sentiment. In short, South Korea is basically so weak economically and unsteady politically that internal crisis or threat of crisis will be the norm, not the exception, over the years ahead”
In a word: South Korea treated as a “problem”, a “weak spot” of the “free world”. Thus – readiness to support a dictatorship once it would prove useful for “strengthening” South Korea – “bastion of anti-Communist defenses” in Asia.
2. Park Chong-Hee period (1961-1979). Americans’ attitudes:
- W.W. Rostow and his idea of the labor-intensive growth in Korea. Komer’s memo, “Action in Korea” (Kennedy Library, National Security Files, Countries Series, Korea, General, 1/61-3/61. Secret):
“b. Buildup of ROK economy, stressing public sector, creation of light labor-intensive industry, and full utilization of main ROK resource--people.
c. Much more vigorous, imaginative US action in directing and supervising ROK economic development. In addition to basic long-term projects, the undertaking as well of a number of high-impact, short-term projects for political effect. Closer and more active instruction and supervision of ROK government, in such projects, but also more attribution to ROK government of their benefits.”
- General American view of Korea after Park Chong-Hee came to power: Notes of the 485th Meeting of the National Security Council, Washington, June 13, 1961.
(Source: Johnson Library, Vice Presidential Security File, National Security Council (III).)
“In taking up the report of the Task Force on Korea, Rusk summarized the history of political development of that country and outlined U.S. aims and intentions. He also cited certain economic figures. In response to a question by the President about the relative status of North and South Korea, Mr. McConaughy replied that approximately 35% of the working force is unemployed or only partially employed in South Korea, in contrast to no unemployment in North Korea. He added quickly that this figure for North Korea was deceiving because of the Communist methods of utilizing labor, frequently under slave conditions. Although agriculture is better in South Korea, manufacturing is more highly developed in the north where the gross national product is rising, but only to be plowed back into the industrial base and war potential. He went on to say that the greatest hindrance to Korean development was the continued animosity between Japan and South Korea and the failure to re-establish relations, which would prove mutually beneficial. He said that one of the principal missions of Ambassadors Berger and Reischauer should be to attempt to establish a reconciliation between the two countries.” – acknowledgement of N.Korea’s successes and belief that South Korean economy should be again linked to the Japanese to become viable.
US economic aid (gratuitous) came to end in 1965, and then American loans (Korea – world’s fourth biggest debtor in the 1970th , and 1984 external debt - $ 46 billions) came instead, and Japanese compensations ($ 800 millions in 1965; four times Korea’s total exports at that time). Next for. ex. bonanza – Vietnam (1966-1973). $1 billion in direct payments (1965-1970). Business earnings from Vietnam – 20% of Korea’s overall for. ex. income. 300 thousands Koreans went through Vietnam (50 thousands a year) – “school of authoritarianism and anti-communism”. Foreign direct investment – Japanese first and foremost ($ 400 millions to American $88 millions in 1972-1976). 25-40% of all Korean trade of 1965-1980 – with Japan (heavily concentrated in several Zaibatsu). Share of foreign-invested firms in Korean total exports of 1961-1979 – around 20-30%, and foreign investment accounted only for 7-8% of foreign capital inflow, the rest were mainly loans (FDI ratio much lower than Latin American average – most of the foreign capital in state-guaranteed loans went to Korean firms; general loan, not investment-based development pattern, and that meant higher state role). FDI’s share in gross domestic capital formation – negligible (2-3%). Still, in some key export sectors (especially, electronics in 1970th ), the share of foreign-invested firms with foreign technology in total exports was extremely high (almost 90% - in electronics) – the pattern of high-priority sector foreign investment and technological dependence in key sectors (also true for chemicals, metallurgy, and oil-refining). Bureaucracy’s fear of total foreign domination (similar to that of MITI) – thus the administrative limits on FDI: 50% limit on foreign ownership in labor-intensive sectors, permission of 100% foreign ownership only in 100% export sectors. Other reason – domestic firms were to support regime financially, something foreigners not always willing to do. On the whole – state-led, bureaucracy-guided foreign-dependent development.
Textile and other light industry-centered labor-intensive growth of 1963-1973. The currency was drastically devalued in 1961 and 1964 (official rate of exchange of Korean currency to American – 60 in 1960 and 300 in 1970) and import quotas for raw materials eased. Private saving was encouraged by raising interest rates (26% in 1967) and funds were borrowed from abroad. Exports also were encouraged by direct subsidies; all taxes and restrictions on the import of intermediate goods that were to be used to produce export products were removed. 50% tax exemption on the export earning. Non-monetary stimuli – Presidential citations, medals, “export conferences” (monthly), and so on. Strict wage controls. As the existing industries--textiles, clothing, and electrical machinery, among others--had been stagnant owing to a lack of imported raw materials, these policies produced immediate results. High growth rates (harshly fluctuating – 12% in 1966, 6,6% in 1967), alleviation of unemployment (from 11% in 1960 to 5% in 1970) and some alleviation of poverty, but not in the rural areas hit by governmental low grain price policy. Exodus from the villages, labor shortage in the countryside from 1975.
From the 1973 – 3rd and 4th 5-year plans, “the decade of steel and heavy industries” (connected to the government’s build-up of the defense industry in the wake of USA’s failure to protect South Vietnam). P’ohang Steel Mill (state-run, Japanese technology and partly Japanese loans) – came onstream in 1973, to produce 8,5 mln. t. of steel in 1980 (14 times growth). Chemical complex in Ulsan in 1973 – and “Koreisation” of textile fiber’s production (export dependence ratio – down to 10%). Ch’angwŏn machinery complex and the “Koreisation” of auto details (90%). Still, in high-tech sectors, foreign technology was dominating – royalty payments totaled $ 85 mln. in 1978. Highly regionally lop-sided development – P’ohang, Ulsan, and Ch’angwŏn are one region, Kyŏngsang Province (Pak’s birthplace and its vicinity). Development is led either by the state directly (state-owned enterprises: steel, heavy machinery, chemicals), or by several chaebŏls (basically, “big four”: “Hyundai” in ships and autos, “Samsung” in electronics, “Daewoo” in textiles, ships, construction, and electronics, and “Lucky Goldstar” in consumer goods and electronics). Founders of “big four” chaebŏl: all (except one) from one region, Kyŏngsang Province (just like Park Chong-Hee himself). Regionally unfair development, chaebŏl-led development (“big four” alone accounted for 40%), government-guided development (Park’s great aim – military independence from the USA and superiority over the North). Problems – underdevelopment of non-priority sectors, overborrowing (and land speculations with borrowed money by well-connected capitalists), surplus capacity (bad calculation). Social costs – terrible (labor deprivation, regional discrimination, etc.). “Oil shock” triggered general crisis and the demise of Park regime.
Chŏn Du-hwan’s economy (1980-1987) – opening to foreign investment with the dual aim of gaining legitimacy and technology/money. Around 50% of sectors opened to 100% foreing ownership, minimal investment requirement drastically lowered. Japanese penetration into industries, American penetration into services (banking). Japanese money – bailed Korea out of crisis in 1983 ($ 4 billions). Labor – again severely repressed, and overlapping chaebŏl investment patterns – administratively corrected (the principle – “1 sector – 1 chaebŏl”). Result – double-digit growth (among the highest in the world), inflation curbed, per capita income - $ 3500 in 1986 (threshold of affluence), and foreign debt – slightly curbed (to $ 30 billions in 1989). The unemployment – negligible (2,5%). Korea economy’s strength – cars (1,5 mln. vehicles a year), shipbuilding, increasingly semi-conductors and computers (priority of the 1980th).
Aggravation of the problems in the end of 1980th and in the 1990th . End to the low wage-based export economy and labor-cost advantage in 1987, with the democratization, great strikes, and wage hikes averaging 25-30%. USA trade pressures and opening of most important markets to foreign goods (end to domestic market protection). Competition from the lower labor-cost countries (primarily, China). Inflation – 5-7% annually. Worsening trade balance, dropping growth rates. Chaebŏl’s problems – high indebtedness, low profits, bureaucratization. Result – 1997 crisis.
Prospects now (from ADB):
Republic of Korea
Economic
performance
Economic growth: Just a year after
resorting to a rescue package led by the International Monetary Fund (IMF), the
Republic of Korea's economy recovered quickly. Reflecting the consistent
finance and corporate sector restructuring and favorable export environment,
the GDP growth rate reached 10.7 percent in 1999, which was in sharp contrast
to the 6.7 percent contraction in 1998, and was the highest GDP growth rate
achieved since 1988. Responding to higher export and domestic consumer demand,
the manufacturing subsector led the recovery. On the demand side, the rapid
increase in private consumption, facility, and equipment investment, and slower
pace of inventory reduction, contributed to the recovery. The economic recovery
led to a decline in the unemployment rate to 4.8 percent by December 1999,
after peaking at 8.6 percent in February 1999. While the rise in employment was
led by the manufacturing subsector, the growth of new businesses in the
services subsector also contributed to the decline in the unemployment rate.
However, the unemployment rate is still higher than the precrisis level of 2-3
percent, and the share of transitory employment grew in 1999.
Inflation: Despite expansionary
economic policy and rapid economic recovery, prices were stable. The inflation
rate dropped from 7.5 percent in 1998 to 0.8 percent in 1999, which is the
lowest level in recent Korean history. The Korean won contributed significantly
to this deflationary trend.
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External sector: Economic conditions
dramatically improved in 1999. Foreign exchange liquidity recovered rapidly. As
a result of the high interest rate policy, domestic demand collapsed, and the
current account recorded a $41 billion surplus in 1998. The surplus contributed
to the rapid accumulation of usable foreign exchange reserves from less than
$10 billion at the end of 1997 to more than $74 billion at the end of 1999. As
the foreign exchange liquidity improved, the exchange rate stabilized to 1,150
won to the US dollar by December 1999, compared with 1,700 won to the US dollar
in January 1998. Exports, which declined sharply in 1998, picked up in 1999,
reflecting the yen appreciation and the recovering Asian markets. As in the
past, heavy and chemical industries were the leading exports. The value of
imports expanded rapidly with the recovery of domestic demand. While exports
increased by 10.0 percent in 1999, imports grew by 29.0 percent. In addition,
the deficit in nontrade accounts such as service and interest payments widened
from $1 billion in 1998 to around $3.7 billion in 1999. As a result, the
current account surplus decreased from $41 billion (13.0 percent of GDP) in
1998 to $25 billion (6.0 percent of GDP) in 1999. The capital account showed a
surplus of $0.6 billion in 1999, despite the repayment of the IMF emergency
loan of $11 billion. The Republic of Korea had net inflow for nondebt
instruments, such as foreign direct investment (FDI) and equity investment in
1999 as a result of the policy requiring chaebols (conglomerates) to
reduce their debt-equity ratio.
Domestic policies: The Government maintained
the expansionary policy stance adopted in mid-1998 to stimulate the economy. It
was initially planned to increase the budget by 5-6 percent from the 1998
level, with the expectation of an overall fiscal deficit of 5 percent of GDP.
The Government twice increased the budget during the 1999 fiscal year. As a
result, fiscal expenditure increased by 9.7 percent above the 1998 level, which
itself exceeded the 1997 level by 13.5 percent. Main contributors to the
expansion were support for finance and corporate subsector restructuring,
strengthening of social safety nets, and increased investment in
infrastructure. Nevertheless, the rapid recovery enabled the Government to
reduce the fiscal deficit to 2.9 percent of GDP for the year. For monetary
policy, the Central Bank lowered short-term interest rates until May 1999. By
that time, economic recovery had begun to gather considerable momentum. The
call rate was maintained below 5 percent for the rest of the year. Because it
had adopted a free floating exchange rate system in December 1997, the
Government refrained from directly intervening in the foreign exchange market
except to smooth out fluctuations.
During the last two years, with significant
financial assistance from multilateral development finance institutions, the
Republic of Korea has made considerable progress in reforming and restructuring
the domestic finance and corporate sectors. In the finance sector, many
nonviable financial institutions have been closed, viable institutions have
been recapitalized, prudential regulations and supervision of the sector have
been strengthened, and information disclosure and transparency standards have
been improved.
The Government's corporate restructuring program
focused on restructuring corporate finance and improving standards of corporate
governance. Capital adequacy ratios of banks are now more than 8 percent,
debt-equity ratios of most large chaebols have been reduced, more than
87 percent of the cross-guarantees between the affiliates of the top 30 chaebols
have been phased out, rights of minority shareholders in companies have been
strengthened, and chaebols are now required to present consolidated
financial statements. In summary, substantial progress has been attained in
implementing reforms in the finance and corporate sectors; however, more needs
to be done particularly in the corporate sector.
Social price of the obvious economic successes following the 1997 crisis (repayment of the IMF loans, growing foreign exchange reserves, general growth of exports and production): fast growth of the “new underclass” of the urban part-time, short-term contract workers. More than 45% of the total number of the employed worked on fixed term-contracts in 1998, and the number approached 60% in 2002 (70% among the female employees). Around 300 thousands of foreign workers (705 of them – “illegal immigrants”) – exploited in the harshest way among this “underclass” group. “Underclass” struggles for recognition and better conditions – bitter, prolonged strikes (like the 110-days strike by the hospitals’ nurses this year) which usually end in defeat or very incomplete victory due to the “information blockade” imposed by the corporate media, and brutal police repression. Thus – S.Korea as a capitalist country escaped the impoverishment and “peripherization” (unlike Argentina, for example), but a sizeable part of the working population was “peripherized” inside the society instead. Also to note – the methods Kim Dae Jung’s government used to lead the economy out of crisis, were not primarily “neo-liberal” – corporate accounting was strengthened, state re-capitalized major banks with “public funds” in order to solve the “bad loans” issue, venture and high-tech businesses received “privileged” financing, etc. Basically, “administrative guidance” remained in place. “Liberalized” was labor market only – and the workers had to bear the biggest share of the restructurement-related difficulties.