Export-orientated Industrialisation in Korea

A.L. MÜLLER*(1)THE REPUBLIC OF KOREA has achieved remarkably rapid economic growth since the 1960s. Between 1963 and 1988 its real percapita GNP increased at an average annual rate of almost 7 per cent. This was the most rapid growth over a quarter-century everachieved by a country with a large population (Mahler 1990:41). During this period the high growth rate faltered only once, in 1980,when GNP declined by 4,8 per cent. This was caused mainly by socio-political unrest following the assassination of President Parkin 1979, the worst harvest since 1963 and the second round of oil price increases. In every year except 1980 the GNP growth rateincreased by more than 5 per cent, usually substantially more. Consequently, per capita GNP, in current United States dollars,increased from $100 in 1963 to $4 040 in 1988 (Song 1990:60).The economic growth was the product of rapid industrialisation, which enabled the country to become a major industrial powerduring this period. Table 1 illustrates the leading role of secondary industry and of manufacturing, in particular, since 1960. Thedouble-digit growth rates attained by manufacturing were consistently far in excess of those of other sectors and of GDP as awhole. This phenomenal growth was closely associated with export-oriented activities, as is vividly illustrated by a comparisonwith China. The population of Korea (42,8 million in 1990) is less than 4 per cent of that of China. In 1965 the value of its exports ofmanufactured goods was one-eighth that of China. By 1986 the size of its manufacturing sector was nearly one-fourth and thevalue of its exports of manufactures was 1,5 times that of China (Srinivasan 1990:116).

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In 1986 Korea completed an important chapter in its economic history. The economy reached a significant level of maturity bybecoming able to finance its continued growth from its own resources. It also achieved, for the first time, a favourable balance oftrade, which allowed Korea to begin to reduce its substantial foreign debt. These conditions gave policy-makers more scope to dealwith previously neglected issues, such as income distribution and regional development.

Table 1. .Average AnnualGrowth Rate of Production

(Per cent).1960- 70 1970-80 1980-91

GDP 8,6 9,6 9,6

Agriculture 4,4 2,7 2,1

Industry 17,2 15,2 12,1

Manufacturing 17,6 17,0 12,4

Services and other 8,9 8,8 9,3

Source: World Bank 1987:137, 1993:241.The aim of this paper is to analyse the nature of Korea's export-oriented industrialisation programme between 1961 and 1986 andthe reasons for its success. The paper starts with a brief outline of the conditions which led to the introduction of the programmeduring the First Five-Year Development Plan (1962-66), before focusing on the most important export incentives and theireffectiveness. It then traces the changing composition of exports, and the move towards more capital-intensive industries. Finally,some conclusions are drawn about the possibility of emulating these policies elsewhere.(a) The First Development PlanKorea had been under the leadership of President Syngman Rhee from the establishment of the republic in 1948 until he was oustedby a national student revolt in 1960. After the end of the Korean War in 1953, Rhee devoted himself mainly to the reconstruction ofthe economy, but he also laid the foundation for subsequent growth by investing in education, introducing land reform andcompleting

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the first stage of import substitution (Sakong 1993:3). The next government, that of Chang Myon, was short-lived and was endedby a military coup in May 1961, led by General Park Chung Hee. Upon assuming power, Park immediately had to contend withserious economic problems. Per capita income was among the lowest in the world, the economy was virtually stagnant, high levelsof unemployment co-existed with inflation and there was rampant corruption. But it was above all because of the serious militarythreat from communist North Korea that Park committed his government to the rapid economic development of the country. Astrong economy was seen as a necessary and sufficient basis for national security (Kim 1992:53). After 1979, Park's successor

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continued this approach.One of the first steps of the new government was to establish an Economic Planning Board, responsible for indicative planning aswell as budgeting and control over foreign aid funds. Park demanded that a development plan for the economy be produced"within a week", which was obviously impossible. By dusting off a dormant plan drawn up under the previous administration,however, the government could produce a five-year plan as early as July 1961 (Kim 1992:49).The main objective of the First Five-Year Development Plan, for 1962-1966, was to increase the rate of growth and lay thefoundations for long-term development by means of infrastructural developments. The economic system was to be one of "guidedcapitalis m" in which "the principle of free enterprise and respect for the freedom and initiative of private enterprise will beobserved, but in which the government will either directly participate in or indirectly render guidance to the basic industries andother important fields" (Whang 1991:87). In the second and subsequent plans the concept of guided capitalism was omitted,although government participation increased in the 1970s.An annual average rate of growth of 7 per cent in GNP was aimed for in the first development plan, to be derived largely from rapidindustrialisation. Secondary industries were envisaged to grow at 15 per cent per year during the plan period, resulting in a

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doubling of output after five years. Special emphasis was to be placed on electric power generation, the production of steel,fertiliser and cement, developing the production of motor vehicles and diesel engines, and embarking on the refining of importedcrude oil. Primary and tertiary industries were expected to grow at 6 per cent and 4 per cent per year, respectively. Thesedevelopments were expected to reduce the unemployment rate from 24 per cent in 1960 to 15 per cent in 1966. The plan also aimedto increase earnings from merchandise exports and from invisibles by 318 and 83 per cent, respectively (Reeve 1963:165). In theevent, exports increased even more rapidly than planned and contributed to the over-achievement of the planned growth rates formanufacturing and the GNP.(b) Export PromotionExport promotion was vital in view of persistently large deficits in the balance of trade and the fact that future industrialdevelopment would inevitably require additional imports of capital goods, intermediate goods and raw materials. As this was trueof both import-substituting industrialisation and export-oriented industrialisation, the latter approach was clearly advisable. Koreawas also influenced to adopt an export-oriented industrialisation (EOI) strategy by its poor resource base, which made it impossibleto increase agricultural and mineral exports significantly. In addition, the "easy stage" of import substitution - that of basicconsumer goods and industrial products - had been completed. The small size of the local market and unfavourable factorendowments did not justify production of a wide range of capital goods or sophisticated consumer goods. Korea was also nudgedin the direction of EOI by the success of Japan with such a policy and by various advisers, including economists working for aidagencies and the International Monetary Fund (Haggard 1988:269).The First Five-Year Plan, however, emphasised exports by the primary industries: agriculture, forestry, fishing and mining. Itgrossly underestimated the volume of industrial exports that would

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take place during the course of the plan. The plan had called for annual exports of US$ 118 million by 1966, but exports surged to$250 million. Of the exports, 62 per cent were manufactured goods, greatly in excess of the target of 22 per cent (Kim 1992:49). Themajor shift to export-oriented industrialisation was therefore the result of market forces, to which entrepreneurs responded. Thisunanticipated development then led the state to sustain export-oriented industrialisation (Cheng 1990:157). Thus, in the beginning,two of Korea's most important manufactured exports were plywood and wigs, "neither of which would have been foreseen bygovernment planners. Rather, they represented a response on the part of entrepreneurs to incentives for exports" (Balassa1988:285).(c) Export IncentivesSome export incentives had been instituted in the 1950s, partly in an attempt to overcome the disincentive effect of the overvaluedcurrency. Successful exporters were, inter alia, given easier access to import permits; permitted to sell their foreign earnings at apremium in the open market; and allowed to obtain their inputs free of customs duty. These incentives pale into insignificancecompared to the incentives given in the 1960s.In 1961 exports were stimulated by a large devaluation of the won and, in 1962, exporters were freed from indirect taxes on theirinputs and their exports. Income taxes and company taxes on profits earned from exports were also decreased; this measuresubsequently continued to be one of the main export incentives. Another major incentive for exporters, particularly from 1965onwards, was preferential access to bank loans, at subsidised rates; thus, in 1966, export industries could borrow funds at less than8 per cent, at a time when the normal commercial bank lending rate exceeded 26 per cent (Das 1992:70). According to Lee (1990:21),the export financing scheme was the most important of all the export incentives, as it enabled any business which had the capacity

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to produce exportables, to attempt exporting even if it did not have the financial resources. Exports were also promoted byfrequently tying the freedom of firms to import goods to their performance as

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exporters.All these measures would have been of little consequence unless Korea's exports were competitively priced on the world market.To achieve this, the won's exchange rate was periodically adjusted to prevent overvaluation, with the most drastic adjustmentbeing made in 1964, when there was a 100 per cent devaluation. Furthermore, customs tariffs were regularly revised so as toeliminate import duties on machinery, raw materials and other inputs required by export industries. This created a virtual free traderegime for export industries. Other industries, however, continued to be heavily protected by tariffs, quotas and even outrightprohibitions of imports. Export promotion, therefore, went hand-in-hand with import substitution.In retrospect, it has become clear that Korea was able to make a smooth transition to an export-oriented policy in the 1960s becauseit did not extend its import substitution policy as far as to create high-cost intermediate and capital goods industries. In that event,pressures from local industries might have prevented duty-free imports of low-cost intermediate and capital goods for exportpromotion. As Krueger has emphasised, under such circumstances Korean exporters would have encountered great difficulty inproducing export goods efficiently enough to be competitive in world markets (Mason et al 1980:164).Monetary incentives were supplemented by a range of administrative support measures which aimed at creating an export culture and facilitatingthe task of producers who wanted to become exporters. The Korea Trade Promotion Corporation (Kotra) was established in 1964 to promoteexports and conduct market research (Lee 1990:21). The Ministry of Commerce and Industry actively investigated the potential for expandingexports of existing or new products. Larger Korean firms were, after consultation with the Ministry, assigned annual export targets. Firmsfrequently saw these targets as virtual orders or minimum levels of exports which had to be achieved. From 1962, progress was monitored duringmonthly export meetings, presided over by President Park himself. These meetings, attended by businessmen, policy-makers and

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bureaucrats, provided a forum for consultation among all the prominent actors in the export programme, speeded updecision-making, and resulted in regular revisions of strategies and official support measures to the private sector.Other support measures included the establishment of industrial estates where potential exporters could obtain sites at veryfavourable prices. The cost of water, electricity, transportation and communication facilities was also kept under price control. Inaddition, the government kept a vigilant eye on the labour costs of exports; it controlled wages where this was deemed necessary,and restricted the bargaining power of trade unions in various ways. At first, however, the presence of a large number ofunemployed workers tended to ensure an elastic supply of productive labour at low wage rates.Great emphasis was placed on moral situation, with good effect, as the Korean Confucian culture stressed obedience to authority(Kim 1991:33). Success in the international market place was elevated to a patriotic duty (Porter 1990:475). The population wasexhorted by Park with slogans to put "exports first", take part in "nation building through exports" and to show "loyalty to thecountry through exports". Korean businessmen were expected to maximise exports rather than profits; from the government'sperspective, profit was generally regarded to be a secondary objective for Korean firms (Song 1990:101). President Park praisedsuccessful exporters in public and recognized their success by means of medals and citations. The President's awards conferredgreat prestige on the recipients and acted as such a strong motivating force that moral suasion appears to have been one of themost important policy instruments in Korea (Song 1990:101).Finally, if financial and moral inducements failed, various sanctions could be applied. Where export incentives were abused, orexports fell short of targeted levels, firms could be subjected to detailed tax audits, which were not only disruptive but could alsoreveal sufficient additional tax liabilities to cause financial distress, even bankruptcy. Control of the commercial banks also gave thegovernment powerful leverage in that it could refuse to extend

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additional credit, or recall bank loans. In addition, the Ministry of Trade and Industry frequently disconnected infrastructuralservices, such as the electricity supply, to punish firms that had failed to achieve a satisfactory export performance (Song1990:145).(d) The Role of ConglomeratesExport incentives were available to all firms and any firm that could export was encouraged to do so (Krueger 1990:109). However, afeature of Korean industrialisation was that it was achieved by the expansion of existing firms rather than the creation of new firms.To be sure, hundreds of independent manufacturing firms sprang up after 1961. But the bulk of the increase in productive capacity,and of the increase in exports, was provided by a small number of very large conglomerates (jaebol). There were two obviousreasons for this. Large firms were best equipped for new ventures because they had a pool of experienced entrepreneurs,

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engineers, skilled workers and other resources on which to draw. In addition, the government administration and thegovernment-controlled banking system found it easier and more cost-effective to deal with a few large firms than with many smallones.In 1989, there were 43 jaebol, including such well-known firms as Hyundai, Daewoo, Samsung and Lucky-Goldstar. At the time, acompany was classified as a jaebol if its assets exceeded 400 billion won (about US $500 million). The 43 jaebol controlled 672industrial companies, including almost all the largest enterprises (Song 1990:114). This represented a very high degree ofconcentration of economic power. However, their existence did not necessarily inhibit competition. According to Porter, "anessential underpinning of Korean competitive advantage is the fierce and even cut-throat rivalry that characterizes everysuccessful Korean industry. At least four or five companies compete in every successful industry", often including a subsidiary ofeach of the leading jaebol (Porter 1990:473).The same trend occurred in international trade, particularly after 1975 when the Ministry of Trade and Industry created a newvehicle for export expansion, the General Trading Company (GTC).

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This was the Korean counterpart of a Japanese institution with the same name, and was intended to reap the economies of. scaleavailable in foreign trade, particularly by removing the excessive transaction costs involved where products were traded in smallvolumes (Jones and Sahong 1980:62). The first Korean GTC, Samsung Trading Company, was established in May 1975, and wassoon followed by others, including Hyundai and Daewoo. GTCs obtained various benefits, including cash subsidies tied toexports. Because the total value of these various benefits exceeded, at the margin, the marginal costs of expanding exports, theGTCs had a clear incentive to increase exports as much as they could (Song 1990:100). However, the threshold for qualifying as aGTC was continually raised. In 1975 a company had to have at least ten overseas branches and annual exports of US $50 million;by 1979 the export value requirement exceeded $300 million and some companies had lost their accreditation as GTCs. In 1985 thenine GTCs still in existence handled more than 50 per cent of Korea's export. This was similar to the situation in Japan, where tentrading houses handled more than half of the country's foreign trade.Despite the existence of GTCs, Korean exporters continued to meet head-on in foreign markets and this competition createdcontinued pressure to invest, improve productivity and introduce new products (Porter 1990:474). In addition, this rivalry ensuredthat even when low labour costs provided the main competitive advantage to Korean producers, exporters had to pay attention tothe quality as well as the pricing of their products.(e) The Diversification of ExportsThe phenomenal success of Korea's export drive is shown by the fact that the country moved from being the 101st biggest exporterin the world, in 1962, to fourteenth in 1986 (Wade 1990:231). Between 1960 and 1970, the average annual growth rate of exports was34,1 per cent. During the next decade the growth rate of exports remained high, at 25,7 per cent for the period 1970-1979 (WorldBank 1981:149). These rates of growth were far in excess of

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those of other countries. Not many countries succeeded in increasing exports by more than 10 per cent per annum during the twodecades. One of the more successful exporters, Hong Kong, had an average annual growth rate of 12,7 per cent in the 1960s and 8,3per cent in the next decade - about one-third of that of Korea.The composition of Korea's main exports changed rapidly from primary products, to which relatively little value had been added, toindustrial products. By 1974, all of Korea's main exports were manufactured consumer goods or intermediate goods. Primaryproducts contributed 73 per cent of the value of total exports in 1962, but less than 10 per cent in 1974 (Song 1990:103).As Chen (1988) has shown, in the early 1960s the most important factors of production were active entrepreneurship and plentifulsupplies of productive labour. Their availability gave Korea comparative advantages in fields where capital requirements werelimited, the scale of production was not too large and where standardised technology was used. At the same time, entrepreneurs,spurred on by various inducements, reacted quickly to changes in world markets and rapidly diversified their production ofmanufactures for export. They also used the scarce factor of production, capital, highly efficiently. The incremental capital-outputratio averaged 2,5 in 1964-1973, one of the lowest in the developing world (World Bank 1981:68). This achievement was related tothe relative neglect of social overhead capital formation in Korea at the time, in favour of directly productive investment.During the first and second five-year plans (1962-71), Korean manufacturers, therefore, specialised in labour-intensive lightindustries, producing miscellaneous goods such as wigs, wood and cork products, footwear, toys, textiles and clothing. Thesewere initially sold mostly under foreign brand names, a reflection of the reliance of exporters on overseas firms for merchandising(Westphal et al. 1981:64). An exception, where capital-intensive methods were used, was the fishing industry, which provided foodfor local consumption and export. Fishing occurred primarily in international waters off Alaska and Africa, and in the Pacific (Porter1990:464).

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At first, the clothing and textile industries were two of the leading sectors of the economy in terms of growth of output and ofexports. In the 1960s a start was made with the local production of synthetic fibres and fabrics, which eliminated the need to importthese requirements and, during the 1970s, these products became important exports in their own right. Exports of clothing andtextiles rose rapidly during the 1960s. Korea benefited from quota restrictions placed on Hong Kong and Japanese exports andrising production costs in these two countries. Big department stores in the United States and other mass distributors began toshift their orders to Korea, where wages were still low (Oshima 1988:113). Between 1965 and 1970, the value of exports of text ilesrose from 6,0 per cent of total exports to 10,2 per cent; and the value of clothing exports from 11,8 per cent of the total to 25,6 percent (Das 1990:63-4).In the early 1970s the volume of Korean exports began to cause concern in the United States, resulting in an undertaking by Koreato "voluntarily" curb cotton textile exports to that destination in 1971. In 1973 Korea's exports of synthetic fibres were similarlyrestrained when the country signed the Multifibre Agreement (Cheng 1990:162). Some firms, however, overcame restrictions onexports by establishing factories in other countries, such as Bangladesh. Around this time, these developments as well as the rapidrise of other export industries, began to cause a decline in the relative importance of the textile and clothing industries. Footwearexports began to rise rapidly in the 1970s, as did exports of electric and electronic products, iron and steel products, ships androlling stock.Invisible exports also increased, in a rather unusual way, through foreign construction projects. The construction sector ofsecondary industry benefited from the abundance of limestone, one of Korea's few natural resources and the main ingredient ofcement. The industry gained valuable experience after 1945, when it became involved in construction projects for American forcesstationed in the country, and again during the reconstruction phase after the Korean War. This was followed by constructioncontracts for the

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United States in Vietnam (Porter 1990:468). During the 1970s the proven expertise and cost-effectiveness of Korean companiesserved as a springboard for expansion into the Middle East. This move not only helped the economy to earn sufficient additionalforeign exchange to overcome the first oil price 'shock', but also enabled Korea to repay some of the foreign debt incurred in theearly 1970s. By the end of 1980 construction projects in the Middle East had generated revenues of $8 billion (Das 1992:30).Another unusual feature of Korean industrialisation was that some industries were developed as export industries only, with localsales being prohibited, usually on the grounds of the social consequences of such sales. Thus, the domestic sale of colourtelevision sets was not allowed until 1980, as it was felt that this would aggravate feelings of deprivation among the poorer sectionof the population, and perceptions of injustice, in income distribution. The same applied to other luxury goods such asphonographs, portable telephones and mink coats (Song 1990:58).(f) Towards Capital-Intensive GrowthDuring the early 1970s, changing government perceptions about the outlook for the Korean economy, as well as changes in theinternational geo-political environment, caused a drastic adjustment in the industrialisation strategy. Korea's exports oflabour-intensive light consumer goods were becoming threatened by increasing protectionism in major markets, and by competitionfrom other newly industrialising countries. Rapidly rising labour costs had started to negate Korea's comparative advantage inlabour-intensive industries. In 1974 the average monthly wage in Korea was US $62.41, which was much higher than in many otherAsian countries and rapidly approaching the average wage level in Japan, which was $92.34 (Lee and Yamazawa 1990:xxv). Thesedevelopments signalled the end of Korea's era as a so-called labour surplus economy, and with it the applicability to Korea ofLewis's model of development with "unlimited" supplies of labour. Henceforth Korea had to focus increasingly on attainingintensive growth.A change in emphasis also appeared to be justified by a series

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of international events. During the early 1970s, America's rapprochement with China, its defeat in Vietnam, its human rightspolicy, and the possibility of the complete withdrawal of American troops from Korea, increased the desirability to build the basisfor a domestic defence industry (Haggard 1988:272). This required an expansion in the heavy and chemical industries producingstrategic goods such as metals and metal products, industrial chemicals and transport equipment. At the same time, thegovernment helped to create a consensus that electronics should become one of the country's main manufacturing sectors (Wade1990:252).Industrial policy, therefore, began to favour the establishment of heavy and chemical industries (HCIs), shifting the emphasis fromlabour-intensive industries to capital-, skill- and knowledge-intensive industries. The products of these industries included iron

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and steel, industrial chemicals, petroleum products, nonmetallic mineral products, nonferrous metals, fabricated metal products,nonelectric machinery, electronic products, electrical machinery, transport equipment, scientific measuring and controllingequipment, and photographic and optical products. Expansion of these industries not only created new exports and importsubstitutes but also resulted in increased inter-industry linkages, which facilitated the expansion of sectors such as construction,shipbuilding and automobile production.Iron and steel played a crucial role in the HCI drive and the State took the lead with the establishment of the state-owned PohangIron and Steel Limited (Posco), at the port of Pohang, in 1970. Korea had been producing steel, on a small scale, from imported iron,but had not produced any iron locally. Posco was the first integrated iron and steel plant, and when it came into production in 1973,it had an initial capacity of more than 1 million tons of steel products per year; by 1981 production had increased to more than 8million tons per year (Enos and Park 1988:177). Together with other, smaller enterprises, Posco immediately made Korealargely self-sufficient in respect of steel products and, by the end of the decade, Korea was exporting pig iron as well as steelproducts. During the 1980s iron and steel exports increased pari

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passu with total exports, and regularly contributed around 10 per cent of the value of Korea's annual commodity exports. Table 2illustrates the phenomenal growth in manufacturing subsequent to 1960, including the rapid spurt in the production of basic metalsand fabricated metal products, which were the fastest growing sectors during the 1970s.Table 2. Growth of Output in Some Industries

1960 1965 1970 1975 1980

All manufacturing 7,6 11,9 35,3 100 215,9

Food, beverages 19,8 22,8 56,4 100 208,8

Textiles, clothing 5,6 8,2 26,6 100 195,9

Wood, wood products 13,6 15,8 56,6 100 122,8

Paper, paper products 17,0 28,3 54,7 100 203,8

Chemicals, rubber and petroleum 7,6 13,4 51,4 100 219,0

Basic metals 5,0 8,4 25,3 100 319,1

Fabricated metal products and machinery 2,8 6,5 18,9 100 257,4

Source: Korean Statistical Year Book, as reproduced in Das, 1992: 47-8There had initially been strong opposition to the establishment of Posco, both from Koreans who were apprehensive about thelarge amounts which the government needed to borrow to finance the mill, and from economists of the World Bank, who doubtedthe profitability of the project and who recommended its cancellation. Ironically, Posco was subsequently often cited by WorldBank economists as a successful case of industrial promotion (World Bank 1987:71).The HCI drive, however, had mixed results. In the longer term most of the new industries operated profitably but in the short term itappeared that there had been substantial overinvestment in shipbuilding and other heavy industries, as well as the accompanyinginfrastructure, at the expense of light industries, with adverse effects on the latter's export performance (Das 1990:30). Some of thenew firms in the petro-chemical, engineering and transport fields failed because of insurmountable production or marketingproblems. In other cases, excess capacity in heavy and chemical industries resulted in heavy losses and lower than expected

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export earnings. The complementarity of some new enterprises as well as backward and forward linkages made the situation worse(Park 1990:119). These conditions contributed to a slackening of the rate of economic growth in 1979 and an actual decline in 1980,for the first time in decades.Many other factors contributed to the negative growth of 1980. The economy was disrupted by mass rioting following PresidentPark's assassination. The rioting reached its peak in May, 1980 (Rees 1981:19). The second oil price shock increased Korea's oilimport bill by $2,7 billion during 1980, to $6,2 billion - 28 per cent of total imports (Kincaid 1983:21). Moreover, inflation had, for thefirst time in the modern growth era, become a central concern for Korean policy-makers as it created disparities in incomedistribution, which resulted in labour unrest. The government, therefore, restrained the economy by reducing current expenditure,raising interest rates and reducing subsidised lending. Apart from the need to combat inflation, high world interest rates and the

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high level of foreign debt meant that Korea could not go for growth and borrow its way through the second oil shock, as it hadthrough the first. On top of this, 1980 saw a collapse of world markets for Korean products and a very poor rice crop. The decline inagricultural production alone reduced GNP by 4 per cent (Dornbusch and Fischer 1993:29). However, economic growth resumed in1981 and inflation was soon reduced to low levels.(g) Acquisition of TechnologyIndustrialisation involved a massive absorption of foreign technology within a short period of time. This technology transfer lay atthe heart of Korea's "economic growth miracle".Initially, during the 1960s, acquisition of technology was facilitated by the fact that much of it was non-proprietary technology,embodied in equipment and in knowledge provided by customers when specifying their orders and making plant inspections(Westphal, Rhee and Pursell 1981:3). Production and exports increased most rapidly in older, labour-intensive industries, such astextiles and clothing, where there were few restrictions on

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the acquisition of technology from industrialised countries. In addition, use of the technology typically involved mechanicalknowledge rather than knowledge of electronic, biological, or chemical principles that would have required more formal educationof employees (Pack 1993:296). Many of the heavy and chemical industries established in the 1970s also used highly standardisedand mature technologies. In these cases the technology could often be acquired without the need for licensing arrangements ordirect foreign investment (Kim and Lee 1990:87).Where more sophisticated technology was involved, Korea imported technology mainly by acquiring licenses to patentedprocesses, as well as by means of imports of capital goods (Enos and Park 1988:39). Efficient absorption of the new technologyrequired the training of a large number of Korean engineers, managers and workers, either locally or abroad, in the use of the newprocesses and capital goods. The rapid rise in the level of literacy and education of the population after 1960 facilitated theacquisition, absorption and use of foreign technology. In addition, the outward-looking policy itself facilitated the acquisition oftechnology as buyers of Korean products and foreign sellers of capital equipment and raw materials became important channels oftechnology transfer (Sakong 1993:207).In contrast with most other rapidly developing countries, relatively little of the technology was provided by foreign directinvestment. Following its experience as a Japanese colony, Korea remained wary of foreign investment. As McCune observed,initially "fear of domination through economic penetration was an obsession" in both North and South Korea (McCune 1950:4). In1966 diplomatic ties with Japan were normalised, whereafter Korea obtained easier access to the Japanese market, capital andtechnology (Kim and Lee 1990:88). However, the government continued to permit foreign direct investment only on a selectivebasis and usually required that it be undertaken by means of a joint venture with Koreans.On the other hand, given the uncertain political environment, there was also little foreign interest in investing in Korea during the

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1960s, despite the rapid economic growth that was being achieved. In 1971 the Japanese government relaxed control over foreigninvestment, which resulted in a rise of Japanese investment in Korea, usually via joint ventures, in industries such as textiles,clothing, electronics and petrochemicals (Hughes 1988:115). During the 1970s, a few free trade zones were established, whichattracted mainly Japanese but also some American investment in offshore assembling plants for electronic and other products - amodern version of the early capitalist putting-out system. The overall effect of foreign investment remained modest, however, asshown by the fact that in 1975 wholly or partially foreign-owned firms were responsible for only 17,6 per cent of Korea's exports(Das 1992:68).(h) Investment and Foreign DebtThe Korean "miracle" was fuelled by high levels of investment, much of which was financed by foreign borrowing, whose servicingplaced heavy demands on the balance of payments. Gross domestic investment (GDI) increased from about 10 per cent of GNP in1960 to more than 20 per cent in 1966 and to more than 30 per cent in 1974. Subsequently, it continued to fluctuate just below orabove 30 per cent. Table 3 indicates the trends of GDI in relation to GNP and of saving relative to GDI.At first, investment outstripped local savings by far and there was a heavy reliance on foreign aid, foreign loans and some foreigndirect investment. As shown by Table 3, in 1961 local savings financed only about a third (34,6 per cent) of GDI. The subsequentrapid growth in per capita income, however, resulted in a rise in saving in both absolute and relative terms. The absence of anelaborate social welfare system also encouraged private savings. Gross private saving began to exceed 10 per cent of GNP in thelate 1960s and 20 per cent in the late 1970s (private saving includes household and corporate saving). From 1964 onwards, thistrend was aided by the adoption, by the monetary authorities, of a policy of offering high real rates of interest to savers (Krueger1990:110). Thus, in 1965 the nominal rate on one-year deposits was 30 per cent

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and the real rate was about 15 per cent (Das 1990:33). However, this was inadequate to finance the high levels of investment of the1970s; consequently foreign debt rose during the course of the HCI driveTable 3 Gross Domestic Investment and Its Saving

GDI/GNP (%) National Saving / GDI (%)

Total Private Government

1961 13,2 34,6 36,6 -2,0

1965 15,0 57,4 37,7 19,8

1970 23,2 62,2 36,9 25,3

1975 27,3 63,6 51,2 12,4

1980 28,8 64,6 47,8 16,9

1985 30,2 91,1 70,9 20,2

Source: Economic Planning Board, as reproduced in Lee 1990:23.During the 1980s, the relative importance of foreign funding decreased substantially, as local savings continued to rise rapidly. Thefourth five-year plan (1977-81) already anticipated a situation where all investment would be financed from domestic savings.During the 1980s gross national saving began to approach 30 per cent of GNP but foreign debt continued to increase, until itreached a peak of US $46,7 billion in 1985 (Table 4). This meant that Korea's foreign debt was more than $1 000 per head of thepopulation, whose per capita income was $2150 in 1985, making Korea one of the most heavily indebted countries in the world.(i) Self-sustaining GrowthIn the mid-1980s Korea achieved several milestones in its economic history. In the first place, it reached the stage where itsmanufacturing sector had become sufficiently sophisticated for skill-intensive goods such as computers, semi-conductors, colourtelevision sets and automobiles to dominate manufacturing exports.

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Table 4 Korea's Foreign Economic Relations: (U.S.$ Millions)

Year TradeBalance

Exports Foreign Debt Exchange Rate(Won: US $)

1960 - 310 33 65,0

1965 - 240 175 206 272,1

1970 - 922 882 2245 316,7

1975 - 1671 5003 8456 484,0

1980 - 4384 17214 27170 659,9

1985 - 19 26442 46729 890,2

1986 4206 33913 44500 861,4

1988 8848 60649 31500 684,1

Source: Song 1990:60-61Table 5 illustrates the dramatic changes in the composition of Korea's exports between 1962 and 1986. Secondly, continued rapidgrowth - based on export-oriented industrialisation - and high real interest rates raised the level of national saving, until it exceeded60per cent of GNP and began to be adequate to finance gross investment. The economy, therefore, became capable of self-sustaining growth.Table 5. Ten Most Important Exports

1962 Silk, tungsten, fish and fish products, animal oil and fat, plywood, miscellaneous products,textile fabrics, machinery, clothing, chemical products

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1974 Clothing, electronic products, ships, textile fabrics, sweaters, plywood, footwear, steelplate, cotton goods, synthetic resin products

1986 Textiles and garments, electronic products, steel products, footwear, ships, automobiles,fish and fish products,-general machinery, electric products, synthetic resin products

Source: Song 1990:103This achievement was, in turn, related to a series of favourable external developments which stimulated exports while reducing thecost of imports and of foreign capital. There were the so-called "three lows". The first low occurred when the price of crude oil fellby about 50 per cent between 1984 and 1986. The second low was

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a depreciation of the US dollar, which reduced the cost of dollar-denominated imports. The third low which benefited Korea was aconsiderable reduction in interest rates on world capital markets; Korea benefited immediately because more than half of its externaldebt had been contracted at variable Eurodollar interest rates (Kincaid 1983:21). In addition, Korean exports were stimulated by anexpansionary fiscal policy in the United States and by strong economic growth in Japan, as well as by a 59 per cent depreciation ofthe won against the yen between 1985 and April 1987 (Das 1992:172).The culmination of these favourable influences was that the economy simultaneously attained three macro-economic objectives in1986: high economic growth (12,3 per cent), price stability, and -for the first time since the establishment of the Republic - a surplusin the balance of trade. This and subsequent surpluses enabled Korea to undertake substantial prepayments of its foreign debt,both public and private, causing the total debt to fall rapidly from the peak reached in 1985. This again contributed to aconsiderable increase in foreign investors' confidence in Korea, and to a strengthening of the exchange rate after 1985 (as shown inTable 4 above).(i) Towards Less State GuidanceAfter 1979 the experience of the late 1970s brought about a change in industrial policy. It became clear that much of what had gonewrong was the result of government failure - particularly failure to interpret and forecast market trends correctly - and that this wasat least partially caused by the increasing size and complexity of the economy. To improve the efficiency of the economy, a greaterdecentralisation of decision-making was required, with more autonomy given to the private sector and greater reliance placed onthe market (Choi and Lee 1990:69). The government consequently reduced its own role in economic planning and resourceallocation, in different ways. Whereas up to 1979, the government had taken part in all negotiations involving large technologytransfers and had

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scrutinised agreements involving smaller transfers, the private sector had much greater scope for autonomous decision-makingabout new investments subsequent to 1979 (Enos and Park 1988:35).As it had also become apparent that the private sector could operate public enterprises at least as efficiently as the government, apolicy of privatisation was adopted (Song, 1990: 119). This was one of the key ingredients of the fifth Five-Year plan (1982-6) andinvolved industrial enterprises as well as the commercial banks. The privatisation of commercial banks further reduced thegovernment's ability to influence investment decisions. Other steps to move towards more market-orientation and less governmentintervention included the encouragement of competition, by liberalising imports and reducing controls over foreign investment inKorea. The use of interest rate subsidies and other types of industrial and export incentives also decreased.

ConclusionGiven its paucity of material resources, Korea's achievements can ultimately be explained only in terms of the exceptionalcapabilities of its human resources as well as the ability of the government to create a favourable environment for development.This paper has been confined to the much narrower issue of export-oriented industrialisation, which is justifiably regarded as themain proximate cause of the country's economic growth since 1961. When the EOI strategy was implemented, exports constitutedless than 5 per cent of GNP.By the mid-1980s, when Korea for the first time achieved a surplus in its balance of trade, exportsexceeded 30 per cent of GNP.The paper showed that Korea's industrialisation was essentially the product of dynamic entrepreneurship aided by pragmaticgovernment policy-making. Rapid acquisition and absorption of foreign technology, the existence of a productive labour force andstrong competition within most industries, contributed to Korea's success. Exports were stimulated by a variety of monetary as well

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as non-market incentives. The former included income tax reductions, duty free imports of inputs, subsidised loans, the linking ofthe availability of imports to export achievements and periodic devaluations of the currency in order to maintain internationalcompetitiveness.In evaluating Korea's use of export incentives, it is somewhat surprising that most of the financial incentives given to exporterswere similar to those commonly found in other countries. The only exception is possibly the ready access to subsidised loans,which was a very successful means of encouraging exports. Economic institutions were also not markedly dissimilar from those ofother market economies. Government control of commercial banks was helpful but was not a necessary requirement for exportpromotion by means of subsidised loans. It was only from 1975 onwards, with the formation of general trading companies capableof achieving new economies of scale, that Korea's formal institutional framework appears to have become superior to that of mostother countries.To supplement monetary incentives, the government from the beginning provided an exceptionally wide range of administrativesupport measures to exporters. This gave rise to the most distinguishing characteristic of Korea's export orientation, which goesbeyond the confines of economics and which would be difficult to replicate elsewhere, namely Korea's national obsession withexports since 1961. Economic development became the central theme of the Park administration and the president's exhortations of"loyalty to the country through exports" and "exports first" were embraced with enthusiasm by the population. Successfulexporters achieved the status of celebrities and derived great psychological satisfaction from the prestige associated with theirachievements. This served as a powerful non-economic inducement to expand exports.The national consensus about exports was fostered by the Five-Year planning process, which involved all the major economicdecision-makers in the public and private sectors (Kim 1992). Such consensus-building is something that other countries could tryto

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emulate. But it is doubtful whether many countries would be able to generate the same pervasive sense of urgency as Korea, whereexport-oriented industrialisation was accepted as the vital key to the nation's very survival in a hostile world.

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Endnotes1 Department of Economics and Economic History, University of Port Elizabeth.

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