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THE GOVERNMENT ROLE IN ECONOMIC DEVELOPMENT
In 1961 General Park Chung Hee overthrew the popularly elected regime
of Prime Minister Chang Myon. A nationalist, Park wanted to transform
South Korea from a backward agricultural nation into a modern industrial
nation that would provide a decent way of life for its citizens while at
the same time defending itself from outside aggression. Lacking the
antiJapanese nationalist credentials of Syngman Rhee, for example, Park
sought both legitimacy for his regime and greater independence for South
Korea in a vigorous program of economic development that would transform
the country from an agricultural backwater into a modern industrial
nation.
Park's government was the beneficiary of the Syngman Rhee
administration's decision to use foreign aid from the United States during
the 1950s to build an infrastructure that included a nationwide network of
primary and secondary schools, modern roads, and a modern communications
network. The result was that by 1961, South Korea had a well-educated
young work force and a modern infrastructure that provided Park with a
solid foundation for economic growth.
The Park administration decided that the central government must play
the key role in economic development because no other South Korean
institution had the capacity or resources to direct such drastic change in
a short time. The resulting economic system incorporated elements of both
state capitalism and free enterprise. The economy was dominated by a group
of chaebol , large private conglomerates, and also was supported by a
significant number of public corporations in such areas as iron and steel,
utilities, communications, fertilizers, chemicals, and other heavy
industries. The government guided private industry through a series of
export and production targets utilizing the control of credit, informal
means of pressure and persuasion, and traditional monetary and fiscal
policies
The government hoped to take advantage of existing technology to become
competitive in areas where other advanced industrial nations had already
achieved success. Seoul presumed that the well-educated and highly
motivated work force would produce lowcost , high-quality goods that would
find ready markets in the United States and the rest of the industrial
world. Profits generated from the sale of exports would be used to further
expand capital, provide new jobs, and eventually pay off loans.
In 1961 Park extended government control over business by nationalizing
the banks and merging the agricultural cooperative movement with the
agricultural bank. The government's direct control over all institutional
credit further extended Park's command over the business community. The
Economic Planning Board was created in 1961 and became the nerve center of
Park's plan to promote economic development. It was headed by a deputy
prime minister and staffed by bureaucrats known for their high
intellectual capability and educational background in business and
economics. Beginning in the 1960s, the board allocated resources, directed
the flow of credit, and formulated all of South Korea's economic plans. In
the late 1980s, the power to allocate resources and credit was restored to
the functional ministries. In 1990 the Economic Planning Board primarily
was charged with economic planning; it also coordinated and often directed
the economic functions of other government ministries, including the
Ministry of Finance. The board was complemented by the Korea Development
Institute, an independent economic research organization funded by the
government. Other government bodies directing the economy included the
Office of the President, which included a senior secretary for economic
affairs; the Ministry of Finance; the Ministry of Trade and Industry; the
Ministry of Labor; and the Bank of Korea, which was controlled by the
Ministry of Finance.
Park's first major goal, which was immediately successful, was to
establish a self-reliant industrial economy independent of the massive
waves of United States aid that had kept South Korea afloat during the
Rhee years. Modernizing the economy and maintaining overall sustained
growth were additional goals in the 1970s. Significant economic policies
included strengthening key industries, increasing employment, and
developing more effective management systems. Because South Korea was
dependent on imports of raw materials, such as oil, a major government
objective was to significantly increase the level of exports, which meant
stressing greater international competitiveness and higher productivity.
The early economic plans emphasized agriculture and infrastructure, the
latter were closely tied to construction. Later, the emphasis shifted
consecutively to light industry, electronics, and heavy and chemical
industries. Using these strategies, an export-driven economy developed.
The government combined a policy of import substitution with the
export-led approach. Policy planners selected a group of strategic
industries to back, including electronics, shipbuilding, and automobiles.
New industries were nurtured by making the importation of such goods
difficult. When the new industry was on its feet, the government worked to
create good conditions for its export. Incentives for exports included a
reduction of corporate and private income taxes for exporters, tariff
exemptions for raw materials imported for export production, business tax
exemptions, and accelerated depreciation allowances.
The export-led program took off in the 1960s; during the 1970s, some
estimates indicate, Seoul had the world's most productive economy. The
annual industrial production growth rate was about 25 percent; there was a
fivefold increase in the GNP from 1965 to 1978. In the mid-1970s, exports
increased by an average of 45 percent a year.
Woman worker, Hyundai Corporation
Courtesy Embassy of the Republic of Korea, Washington
Industrial Policies
The major issue facing the Park regime in the early 1960s was the
grinding poverty of the nation and the need for economic policies to
overcome this poverty. A critical problem was raising funds to foster
needed industrial development. Domestic savings were very low, and there
was little available domestic capital. This obstacle was overcome by
introducing foreign loans and inaugurating attractive domestic interest
rates that enticed local capital into production. Of South Korea, Taiwan,
Hong Kong, and Singapore, only South Korea financed its economic
development with a dramatic build-up of foreign debt, debt that totaled
US$46.8 billion in 1985, making it the fourth largest Third World debtor.
Foreign corporate investments were primarily of Japanese origin.
As noted by consultant David I. Steinberg, Seoul administered a series
of economic development plans. The government mobilized domestic capital
by encouraging savings, determined what kinds of plants could be
constructed with these funds, and reviewed the potential of the products
for export. In this sense, the will of the government to undertake
economic development played a crucial role; the role of the government,
however, was not limited to such measures as mobilizing capital and
allocating investments.
Steinberg also pointed out that Park's government restructured
industries, such as defense and construction, sometimes to stimulate
competition and other times to reduce or eliminate it. The Economic
Planning Board established export targets that, if met, yielded additional
government-subsidized credit and further access to the growing domestic
market. Failure to meet such targets led to Seoul's withdrawal of credit.
Economic Plans
Economic programs were based on a series of five-year plans that began
in 1962. The First Five-Year Economic Development Plan (1962-66) consisted
of initial steps toward the building of a self-sufficient industrial
structure that was neither consumption oriented nor over dependent on oil.
Such areas as electrification, fertilizers, oil refining, synthetic
fibers, and cement were emphasized. The Second Five-Year Economic
Development Plan (1967- 71) stressed modernizing the industrial structure
and rapidly building import-substitution industries, including steel,
machinery, and chemical industries. The Third Five-Year Economic
Development Plan (1972-76) achieved rapid progress in building an
export-oriented structure by promoting heavy and chemical industries.
Industries receiving particular attention included iron and steel,
transport machinery, household electronics, shipbuilding, and
petrochemicals. The developers of heavy and chemical industries sought to
supply new industries with raw materials and capital goods and to reduce
or even eliminate dependence on foreign capital. New (and critical)
industries were to be constructed in the southern part of the peninsula,
far from the border with North Korea, thus encouraging economic
development and industrialization outside the Seoul area and providing new
employment opportunities for residents of the less developed areas.
The Fourth Five-Year Economic Development Plan (1977-81) fostered the
development of industries designed to compete effectively in the world's
industrial export markets. These major strategic industries consisted of
technology-intensive and skilled labor-intensive industries such as
machinery, electronics, and shipbuilding. The plan stressed large heavy
and chemical industries, such as iron and steel, petrochemicals, and
nonferrous metal. As a result, heavy and chemical industries grew by an
impressive 51.8 percent in 1981; their exports increased to 45.3 percent
of total output. These developments can be ascribed to a favorable turn in
the export performance of iron, steel, and shipbuilding, which occurred
because high-quality, low-cost products could be produced in South Korea.
By contrast, the heavy and chemical industries of advanced countries
slumped during the late 1970s. In the machinery industries, investments
were doubled in electric power generation, integrated machinery, diesel
engines, and heavy construction equipment; the increase clearly showed
that the industries benefited from the government's generous financial
assistance program.
The late 1970s, however, witnessed worldwide recession, rising fuel
costs, and growing inflation. South Korea's industrial structure became
somewhat imbalanced, and the economy suffered from acute inflation because
of an overemphasis on investment in heavy industry at a time when many
potential customers were not in a position to buy heavy industrial goods.
The Fifth Five-Year Economic and Social Development Plan (1982-86)
sought to shift the emphasis away from heavy and chemical industries, to
technology-intensive industries, such as precision machinery, electronics
(televisions, videocassette recorders, and semiconductor-related
products), and information. More attention was to be devoted to building
high-technology products in greater demand on the world market.
The Sixth Five-Year Economic and Social Development Plan (1987-91) to a
large extent continued to emphasize the goals of the previous plan. The
government intended to accelerate import liberalization and to remove
various types of restrictions and nontariff barriers on imports. These
moves were designed to mitigate adverse effects, such as monetary
expansion and delays in industrial structural adjustment, which can arise
because of a large surplus of funds. Seoul pledged to continue phasing out
direct assistance to specific industries and instead to expand manpower
training and research and development in all industries, especially the
small and medium-sized firms that had not received much government
attention previously. Seoul hoped to accelerate the development of science
and technology by raising the ratio of research and development investment
from 2.4 percent of the GNP to over 3 percent by 1991.
The goal of the Seventh Five-Year Economic and Social Development Plan
(1992-96), formulated in 1989, was to develop high-technology fields, such
as microelectronics, new materials, fine chemicals, bioengineering,
optics, and aerospace. Government and industry would work together to
build high-technology facilities in seven provincial cities to better
balance the geographic distribution of industry throughout South Korea.
Revenues and Expenditures
The central government budget has generally expanded, both in real
terms and as a proportion of real GNP, since the end of the Korean War,
stabilizing at between 20 and 21 percent of GNP during most of the 1980s.
Government spending in South Korea has been less than that for most
countries in the world (excepting the other rapidly growing Asian
economies of Japan, Taiwan, and Singapore). The share of government
spending devoted to investment and other capital formation activities
increased steadily through the periods of the first and second five-year
plans (1962-1971), peaking at more than 41 percent of the budget in 1969.
Since 1971 investment expenditures have remained at less than 30 percent
of the budget, while the share of the budget occupied by direct government
consumption and transfer payments has continued to increase, averaging
more than 70 percent during the 1980s.
During the 1980s, the largest areas of government expenditure were
economic services (including infrastructure projects and research and
development), national defense, and education. Economic expenditures
averaged several percentage points higher than defense expenditures, which
remained stable at about 22 to 23 percent of the budget (about 6 percent
of GNP) during the decade. In 1990 the government was studying plans to
lower defense expenditures to 5 percent of GNP. Some observers noted a
trend toward a slight increase in the portion of the budget devoted to
social spending during the 1980s. In 1987 expenditures for social
services--including health, housing, and welfare--were 16.4 percent of the
budget, up from 13.9 percent in 1980, and slightly higher than 1987
government outlays for education .
The government revenue structure was virtually totally dependent on
taxes . By the early 1980s, nearly two-thirds of tax money was
collected in the form of indirect taxes. Revenues collected by the central
government in 1987 rose to 19,270.3 billion won up from 13.197.5 billion won in 1984. |
