South Korea“The Miracle on the Han River”

Group:Rashid AbdullahRaja Shoaib AkberAbdul Aleem ChoudharyAzhar Ali

International Political Economy

How South Korea escaped poverty and became one of the richest countries in the world?

As recently as the early 1960s South Korea, Taiwan, Singapore and Hong Kong (the “Asian Tigers”) were considered to be a part of the third world. Since the 1997 Asian Financial Crisis, praise of the “Asian Miracle” has dwindled in academia, yet the Tigers still stand as rare examples of states which have successfully “developed” in a manner no one could have predicted 50 years ago – and at a considerably faster rate than any of our current efforts at third-world development seem to be proceeding.

The Asian Tigers

Republic of KoreaGovernment: Unitary Presidential Constitutional Republic

Population: 51 Million 2014

HDI: 0.891 Very High

GDP 2014: $1.790 Trillion

Republic of Singapore Government: Unitary Presidential Constitutional Republic

Population: 5.5 Million 2014

HDI: 0.901 Very High

GDP 2014: $297.941 Billion

Hong KongGovernment: Special Administrative Region

Population: 7.2 Million 2014

HDI: 0.891 Very High

GDP 2014: $ 400.607 Billion

Taiwan (Republic of China)

Government: Unitary Semi-Presidential Constitutional Republic

Population: 23 Million 2013

HDI: 0.890 Very High

GDP 2014: $ 517.019 Billion

History of South Korea

First Republic (1948-1960)

Also called the Republic of Korea (ROK). South Korea has been an independent Constitutional Republic since its liberation from Japan on August 15, 1945. Republic of Korea marked by Alternating periods of democratic and Autocratic rules as fellow:

Second Republic

(1960-1961)

Military Rule (1961-1963)

Third Republic (1963-1972)

FifthRepublic

(1981-1987)

Fourth Republic

(1972-1981)

Sixth Republic (1987-

Present)

USAMGIK

(1945-1948)

Under the First Republic

First President of South Korea (1945-1960) Anti-Communist Events under the First Republic of South Korea. South

Koreas first independent government, ruling the country from 1945 to1960-the Syngman Rhee administration.

The government took in vast sums of American Aid in amounts sometimes near the total size of the national budget. (Corrupt and inefficient government of ROK)

Major Events occurred during first Republic Land reform The Korean War

1960 - student demonstrations ousted Syngman Rhee from presidency

Syngman Rhee (1875-1965)

Power Production plummeted down to a miserable level of 11 thousand KHz, about one-eighth of the earlier production level of 80 thousand MHz

Capitalist VS Communist

The Korean

WarAt the start of the Cold War, Communist North Korea Went to war with its Capitalist neighbor . The bloody conflict lasted from 1950 to 1953.

Damage Estimates

The war destroy majority of the industries and industrial infrastructure

By August of 1951, 44% of factory buildings and 42% of Production facilities lay in ruins

Foreign Trade deteriorated from US$208 Million to US$2.9 Million

All these factors led to serious inflation.

POSTWAR SITUATION

The Korean

War

Chemical Industry

70%

Overall Industry Destroye

d

51%

Agricultural Machinery

Industry

40%

Rubber Industry

10%

Power Plants

80%

At the start of the Cold War, Communist North Korea Went to war with its Capitalist neighbor . The bloody conflict lasted from 1950 to 1953.

• GDP per capita around $100, poorer than Philippines.

• Ravaged by the Korean War

• Large Standing Army-Menace from North

• Largely agrarian country• Lack of natural resources Coal, iron,

copper, oil

• U.S. aid kept people barely alive: 1/2 of national budget

• 1/5 of adults unemployed; social unrest fueled by unemployed youth

Menace from the North

Under the Military Rule

Major Events occurred under the Military Rule

The military coup détat led by Major General Park Chung-he on May 16, 1961,put an effective end to the Second Republic.

Miracle on the Han River Five Year Plan (FYP)

Park Chung-he

Under the Military Rule Seized the capital + other important cities Brought businessmen into submission (June 14 law) The first South Korean five-year plan was inaugurated in 1962 Economic growth as the historical goal, to be achieved at all cost

“In human life, economics precedes politics or culture.” – Park Qualification for the special treatment was quantifiable and

objective Per capita output doubled in the following decade South Korea became an industrialized country Influenced by state-planning in Manchukuo “Guided Capitalism”: The state as the engine of economic

development central planning + gov’t intervention in the market industrial policy, corporate state

South Korean economy roars

GDP growth averaged 9-10% a year Manufacturing sector took greater share of the economy (close to

30% - comparable to West Germany) “Boys who grew up working in rice paddies found themselves

building oil tankers and designing semiconductor chips.” - Mark L. Clifford

State-ownedbanks

industry/business associations

FKTU (Federation of Korean Trade

Unions)

(gov’t-controlled) industrial unions

Businesses

Coopted labor

MOF (Ministry of Finance)

Other Gov’t Ministries

MTI (Ministry of Trade + Industry)

Top-Down, General Headquarter (Park himself made major decisions)

National Budget

EPB (Economic Planning Board)

The State Intervenes in individual firms’ decisions

planning, national budget

Economic Planning

Board (EPB)

Korean Corporate State

Controlled the Banking Sector•Nationalization

of Banks.•Extraordinary

power over credit-starved

businesses

Ministry of Finance (MOF)

Policies, regulations, order to move quickly from minister to firms, domestic cartels, steady

stream of profit

All Businesses were required

to join associations

Cutting of credit line, Arbitrary tax

audit, Personal Connections,Uneven law

enforcement

Enforcement devices

President, Gov’t Officials, AcademicsReps from trading companies

Rapid response team for exportersMonthly Export Promotion Meeting

Export Day (11/30)

“Export towers” to companies w/ best export performance

Early 1960s: Dollar began to run out; US threatened to cut aid

2nd FYP: Build industries targeted to export

markets.

1960s: South Korea utilized cheap labor-light manufacturing

Import license conditional or export performance Tariff exemption for raw material and machinery

Exporters could automatically borrow against overseas ordersMore credit to companies w/superior export performance

Huge Incentives for Exports

Coercive element: Corporate state had

business go along

Export-Oriented Industrialization (EOI)

What’s good about Export Oriented Industrialization?

Selective use of FDI (Foreign Direct Investment)

Reduced possibility of BOP crisis

Gov’t Complements market forces

Correction of market failure high set up costs of exports imperfection information.

Meritocracy in allocating credit

South KoreaUp-to-date Selective, short-term protection- International competition makes infant industries grow up.

New Machinery introduced.

Experience w/overseas market

Korea Trade Promotion Agency (KOTRA)

Helped Korean businesses

how to market their products

in foreign countries

Scoured the world for new

export markets

Key to overcoming

the obstacles early

exporters faced

Results (1961-73)

Exports skyrocketed: trade deficit stayed under

$1 billion

Huge Success

Export: $33 Million >

$3.3 Billion (100 times)

Imports: $343

million > $3.8 Billion (11 times)

Investment: 6% of GDP > 23 % of

GDP

South Korea established a firm international standing in light industries e.g. shoes, clothes,

plywood etc.

Raw Materials + Machinery for export industries

Five Year PlanEmphasized

industrial growth rather than food self-

sufficiency

Five Year Plan (FYP)

GOAL: lay a foundation for future economic growth by developing a

base industry in South Korea

Aims to increase wealth within

South Korea and Strengthen

Political stability.

Change in Policy.

Import substitution

industrialization to export

oriented growth

Nathan Plan

UN plan for the economic

recovery of South Korea.

Not Implemented

Second FYP (1967-1971)

South to shift the South Korean

state into heavy industry

Emphasized textile exports as a leading sector

Increasing the Public sector for social overhead

capital investment

The Big Push (1973-79) Fourth FYP 1977-1981 HCI (Heavy and

Chemical Industries)

Five Year Plan (FYP)

Aims: Build up defense

Shipbuilding, Machinery, Chemicals,

Steel, Electronic, Automobile

Unprecedented industrial expansion

Good: gain experience in heavy industries, which create far more added

value; acquire managerial skills;

economies of scale

Bad: Policy loans caused massive inflation in 1970s; some target

industries didn’t work out in the end (i.e.

aluminum)

“Reverse brain drain”

KAIST (Korea Institute of Science of

Technology) •Engineering

education

Lure Koreans who’d been

educated overseas with attractive pay

packages

State-owned

enterprise

World Bank refused to

finance the Project

Park Tae Joon used personal

connection in Japan to channel reparations (for

past Colonization)

Cutting-edge managerial techniques and scientific knowledge

Ran like military

Rapid construction schedule + high quality standard.Long work hours (60-70 hour work week)

Become one of the Largest,

most efficient steel maker in

the world Opened up the way for heavy

industries

Rise of Chaebols

Today South Korea is a highly Industrialized country.

National conglomerates (groups) run by founding families

Profitable firms subsidize less profitable firms within the

conglomerate (cross-subsidization)

Factors

Scarce credit + abounding investment opportunities

Red tape – lots of paperwork

Export promotion – bigger is better in export market

State-owned banking sector – political clout was a must to secure loans

Quite a few became Successful Global Multinationals

Samsung Electronics world’s larges information technology Company, Samsung Heavy industries, Samsung Life insurance worlds 14th largest life insurance company.

SAMSUNGLG Corporation is the 4th largest company in South Korea and become second largest in USA market share.LG Electronics, LG Telecom, LG Display and LG Solar Energy

LG Corporation

DAEWOO Group of Industries, Daewoo Motors, Daewoo Electronics, Daewoo Heavy industries, Daewoo Shipping

DAEWOO GROUP

Hyundai Motor Groups second largest automakers in Asia and fourth largest automakers in the world.

Hyundai Motor Group

Chaebols of South Korea

Earlier : The Centrally planned and government directed investment

Now: Completely market oriented economy

USA$ 16.768

China$ 16.149

India$ 7.277

Japan$ 4.788

Germany$ 3.621

Russia$ 3.559 Brazil

$ 3.073France$ 2.587

Indonesia$ 2.554 UK

$ 2.435 Mexico$ 2.143

Italy$ 2.066

South Korea$ 1.790

GDP in trillions of U.S. dollars. Data: IMF, WB, CIA WFBook.

South Korea is 13th Largest Economy of the World (GDP “2013 by IMF and WB” )

Third Largest in AsiaDonor to international Financial AidMember of OECDFour Asian Tigers (South Korea)G-20

Conclusion “Tiger Daddy State”

Economic development in exchange for political freedom Single party corporate state speeded up development Businesses were forced to compete overseas

Leadership was pragmatic and flexible Took maximum advantage of international + domestic

politics EOI as result of policy adaptation Acknowledged role of businessmen and Entrepreneurs Recognized need for advanced foreign technology

It takes right kind of “parenting” to develop a country’s industrial base to internationally competitive level– South Korea: Too authoritarian– Latin America: Too overprotectiveCountries should integrate into world economy, on their own terms

Infant industries need some time to grow and mature The individual cannot overcome market failures The individual succeed only so far as his country provides him

opportunities to do so

Conclusion

Budget deficits were kept within the limits of their financial limits, as to not destabilize the macro-economyBudget deficits

Debt levels during 1980-1985 was quite high compared to their GNP ratios, it was sustained by the country’s high levels of exportExternal debt

Exchange rates had been changed from long-term fixed rate regimes to fixed-but-adjustable rate regimes with the occasional steep devaluation of managed floating rate regimes

Exchange rates

Degree of Success

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