Explaining Korea’s Economic Miracle

To the American advisors stationed in Seoul in the late 1950s, the South Korea that limped out of the Korean War was strategically vital and otherwise hopeless. That South Korea was shattered and poor, its workforce reputedly lazy and its leadership corrupt. Development was an afterthought, content as it was to slurp from the turgid flows of American dollars that sloshed through the upper ranks of Syngman Rhee’s government. But today, the neon lights of Seoul advertise a different reality. Korean-made technology is renowned across the globe—things given shape by Korean steel, infused with Korean microprocessors, and delivered to market on Korean ships.

Korea is becoming a rich country. Its approximately $31,000 USD per capita GDP is about equal to that of Spain or Italy.[1] In the span of 50 years, Korea has gone from one of the world’s dimmest to one of the its shining stars. Its purchasing power parity of $280 USD in 1960 grew to $28,384 in 2010, riding a 50-year average GDP per capita growth rate of 9.52 percent.[2] In 1960, foreign trade amounted to $377 million; in 2013, it was $1,068 trillion, making little Korea the 11th largest trading nation in the world.[3] How can we explain that tremendous development? And might it have lessons for other developing countries mired in poverty and corruption as South Korea itself once was?

Maybe … and probably not. The set of policies pursued by South Korea from 1962 through the early 1980s first set up Korea for its developmental run and then enabled that growth. Those policies might be carefully replicated by developing nations hoping to follow in the footsteps of the Asian tiger. But blazing those policy paths required a set of unique circumstances both internally and externally that created the conditions for Korean growth and, often, supported it. Those circumstances owe their existence to Korea’s particular niche in the history of the 20th century.

So how did Korea get rich? The centerpiece of its developmental model was a concerted effort to create an export-driven economy under military junta Park Chung-Hee, who wrested control of Korea from the notoriously corrupt Rhee government in a nearly bloodless military coup in May of 1961. Park immediately got to work weening South Korea from American developmental aid. In the first decade of Park’s rule, South Korea prioritized light industry with an eye toward foreign exports.[4] The Park government shifted the Korean economy away from the import substitution model that bogged down in Latin American countries and toward an export-based structure. Under a system of five-year plans, the first of which called for a transformation from aid-dependent to independent, a central economic planning board unified national budgeting, planning, and review and directed money into diversified manufacturing industries.[5] By the middle of the 1960s, Korea was exporting everything from radios and batteries to steel products and textiles to rice and fish.[6] The value of Korea’s manufacturing exports grew from $41 million to $81 million from 1961 to 1963 alone, and it multiplied 24 times between 1961 and 1975, from $41 million dollars to $2 billion.[7] The emphasis on exports was accompanied by financial sector reforms, including nimble monetary policy to counteract  the inflation endemic during the Rhee days, as well as deregulation of investment and import restrictions. In this reformist environment, savings grew from 2 percent of GDP in 1961 to 14 percent in the 1970s.[8]

Park’s mercantilist government did not let the market decide where those savings went. By offering negative interest rates on loans guaranteed by the government, the bureaucracy monopolized investment decisions and directed those savings out of the informal banking sector and into certain productive channels—not for short term returns on investment but to serve long-term national goals.[9] Park’s government directed investment first into those light industries and later into steel, chemicals, and electronics, especially during Park’s Heavy-Chemical Industry Drive (HCI) in the early 1970s, which emphasized heavy industries such as steel, ship building and especially chemical production, a counter to its scarce natural resources.[10] These industries, many of which did not even exist at the beginning of the drive, fed off each other in interlocking supply chains, the steel industry feeding the machine tools industry feeding the shipping industry as Korea climbed up the value chain, defying American economic advisors and the International Monetary Fund.[11] Park’s government told those industries what to produce, and it built the infrastructure for those industries, provided them property and preferential treatment, and secured buyers in foreign countries, especially the United States.[12] These industries congealed into Korea’s famed and giant chaebol conglomerates. And slowly, under government-directed development, Korea got rich.

Salient internal realities made these policies possible. Park himself deserves much of the credit for the transformation of the Korean economy. Park learned many lessons as an officer in the Japanese Imperial Army. Key among them was its strategy of forced industrialization in Manchuria. Park, who admired what Japan had done during the Meiji Restoration and after, borrowed much from Japan’s own development, including its economic structure, corporate culture, and five-year plans.[13] That experience gelled with Park’s personal proclivities and fed his hopes for a different kind of Korean nation. Another lesson Park learned was the utility of political repression. Park ruthlessly quashed worker and social resistance to his economic program and his regime.[14] Park was a man with a vision and an iron fist. He kept that fist gripped on the tiller, despite resistance from his American backers and international financial authorities. Park believed that “steel is national power.” He dragged his country toward that particular brand of hard power by instilling a “can do” spirt among Korea’s people, as well as by building national infrastructure, much of which at the time seemed imprudent.[15] It is difficult to believe Korea’s astounding development would have happened as it did without that kind of leadership. Despite his dictatorial excesses, Park remains South Korea’s most popular leader.[16]

Park was aided by other characteristics inherent to Korean social culture. As a model Confucian polity for thousands of years, meritocratic, scholar-official leadership was not alien to the Korea people. Park drew on Confucian ideals of filial piety, obedience, and loyalty to secure his technocratic government’s position, and he deployed Confucian reverence for education to develop an educated, trainable, and still-cheap labor force. Drawing on the Confucian belief in the “perfectibility” of people, Rhee and Park’s South Korea implemented a stringent compulsory education requirement.[17] Literacy rates shot up from 20 percent to 80 percent in 20 years,[18] achieving a level above 90 percent by 1964.[19] The educated workforce provided the basis of the economic growth. Korea had a homegrown, abundant supply of educated workers—workers that were 2.5 times as productive as American workers at 1/10th of the cost.[20] The Korean people, working in concert with Park’s leadership, were a critical piece of its economic miracle.[21]

Those internal factors—strong leadership for government-directed growth and an emphasis on abundant, educated labor—could (and should) be replicated by developing countries today. The external factors that were also critical to Korea’s success, however, are more difficult to replicate. Korea, like Japan, began its industrial rise from a nearly blank slate; the Korean War had wiped out existing infrastructure and leveled social hierarchies.[22] During wartime, this meant opportunities for a new class of entrepreneur who seeded businesses that served the omnipresent American military.[23] Those individuals and businesses were then “fertilized by the inconceivable amounts of American cash that flowed into the country.”[24]  After the war, the destruction of existing infrastructure also allowed state planners to build power and industry infrastructure that served the goals of the development plans rather than having to work with existing inefficiencies.

The United States continued to be a critical piece of Korean success. Aside from providing for the defense that kept South Korea in existence—no small thing—the USA poured aid dollars into South Korea in the years after the Korean War. Although these aid dollars—which reached $12 billion between 1945 and 1975, according to official sources that exclude private American expenditures and black-market transactions—created in Korea a dependent and deficient state under Rhee, they also helped pay for the infrastructure that would prove critical for Korean industrial development.[25]

Finally, the international situation in 1965 proved momentous for Korea. In May 1965, Korea got help from its old enemy Japan. Under pressure from Washington and facilitated by the American involvement in both countries, the normalization of relations between Korea and Japan in the spring 1965 injected $800 million into the Korean economy (a mix of loans, grants, and credit) at a time when Korean exports amounted to only $200 million.[26] That financing provided the basis for significant sectors of industrial development, including Korea’s indigenous steel industry.[27] Korean manufactures energized by that “Japanese Marshall Plan” quickly found an outlet for their products, too: another American war in Asia. By the middle of the 1960s, increasing American involvement in Vietnam required equivalent investment. Korea provided it in both people and stuff. In exchange for what would amount to more than 300,000 South Korean combat troops, the United States paid more than $1 billion in foreign exchange to Park’s government by 1970, close to 10 percent of its total GDP.[28] That foreign exchange facilitated purchases of the raw materials needed for Korea’s fledgling industry to pump out products. Those products then returned to the American effort in Vietnam. As much as 94 percent of Korean steel production and 52 percent of its transportation equipment exports went to Vietnam during the war.[29] These flows of foreign capital into domestic industry provided the energy behind Park’s HCI in the early 1970s and launched Korea on the trajectory to developed nation. In the background to all of this, American and Japanese light industries were declining just as Korean manufacturing began to take off.

There are lessons to be taken from the Korean economic model. Through a combination of leadership and culture, Korea embarked on a successful, long-term, state-led project of export-driven development. That, at least, is a path other developing nations could try to follow. Korean development did not happen in a domestic vacuum, however, and significant external factors contributed to the environment in which Korea succeeded. Most notably was its connection to the United States, which not only supplied Korea with money and markets but also facilitated its rapprochement with Japan as well as its lucrative involvement in the Vietnam War. Korea’s unique historical position, then, makes the Korean economic miracle a difficult one to fully replicate.

[1] International Monetary Fund data (imf.org, accessed December 11, 2019).
[2] Hayam Kim and Uk Heo, “Comparative Analysis of Economic Development in South Korea and Taiwan,” Asian Perspective (Volume 41, Number 1, January-March 2017).
[3] Ibid.
[4] Princeton Lyman, “Economic Development in South Korea: A Retrospective view of the 1960s,” in Edward Reynolds, ed., Korean Politics in Transition (Seattle: University of Washington Press, 1975), 244.
[5] Kim and Heo, “Comparative Analysis of Economic Development in South Korea and Taiwan.”
[6] Lyman, “Economic Development in South Korea,” 248.
[7] Ibid, 246-248.
[8]Ibid, 247-248
[9] Cumings, Korea’s Place in the Sun: A Modern History (New York: WW Norton, 1997), 314-331.
[10] Ibid, 320-324.
[11] Ibid, 320-324.
[12] Ibid, 314.
[13] Sung-Yoon Lee, “Korea Under Park Chung Hee” (lecture at The Fletcher School at Tufts University, October 28, 2019).
[14] Cumings, Korea’s Place in the Sun, 314.
[15] The RoK’s Seoul to Busan highway, built before many Koreas even owned cars, is one example. Sung-Yoon Lee, “Korea Under Park Chung Hee” (lecture at The Fletcher School at Tufts University, October 28, 2019).
[16] Ibid.
[17] Cumings, Korea’s Place in the Sun, 300.
[18] Lyman, 255
[19] Kim and Heo, “Comparative Analysis of Economic Development in South Korea and Taiwan.”
[20] Cumings, Korea’s Place in the Sun, 313.
[21] Lyman, 247.
[22] Cumings, Korea’s Place in the Sun, 300.
[23] The Chairman of Hyundai is one such individual who began his business career moving supplies for American military bases, according to Cumings, Korea’s Place in the Sun.
[24] Cumings, Korea’s Place in the Sun, 306.
[25] Cumings, Korea’s place in the Sun, 301.
[26] Lee, “Korea Under Park Chung Hee.”
[27] Cumings, Korea’s Place in the Sun, 320-322.
[28] Lee, “Korea Under Park Chung Hee.”
[29] Cumings, Korea’s Place in the Sun, 320-321.

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