Explaining Korea’s Economic Miracle

January 6, 2020 / Jim Sojourner / Leave a comment

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 11^th 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 20^th 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 1/10^th 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.

Resources and Global Integration: The Worst of Both Worlds

March 10, 2019March 10, 2019 / Jim Sojourner / Leave a comment

Spices, minerals, oil, human bodies: The very blessings that have underpinned the global system of economics and trade for centuries are, for the countries that have them in abundance, a curse. In fact, those countries’ existence as a source of exploitable resources has been, and continues to be, the greatest constraint on the progress of developing countries incorporated into the global economy. For too many resource-rich countries, the result of that incorporation and exploitation has been forced dependence, extracted wealth, twisted institutions, slavery and servitude, and finally, enduring underdevelopment and poverty.

Colonialism to Dual Economies

According to Theotonio Dos Santos, national dependence and exploitation has come in three varieties: 1) a colonial dependence where “commercial and financial capital in an alliance with the colonialist state dominated the economic relations of the Europeans and the colonies by means of a trade monopoly complemented by a colonial monopoly of land, mines, and manpower,” 2) financial-industrial dependence “which consolidated itself at the end of the 19^th century, characterized by the domination of big capital in the hegemonic centers, and its expansion abroad through investment in the production of raw materials and agricultural products for consumption in the hegemonic centers,” and 3) a new dependence that “has been consolidated based on multinational corporations which began to invest in industries geared to the internal market of underdeveloped countries.”[1] Each of these varieties of exploitation has allowed rich, developed nations to grow richer by taking advantage of less developed countries while subsequently limiting those countries’ longer-term prospects.

Dos Santos’s systems of exploitation find their roots in the 17^th century, as Europe’s empires spread out across the world, groping for new markets to dominate. The colonial system forms Dos Santos’s first variety of dependence and laid much of the foundation for the ongoing underdevelopment and exploitation that continues to this day.

Beginning in 1602, the Dutch in Southeast Asia began establishing a monopoly over the spices grown throughout the region.[2] To achieve their goals, they cajoled, threatened, and even massacred native populations to gain control of their spice wealth for export back to Europe.[3] The Dutch cleared whole islands of native peoples and set up their own enduring extractive political and economic institutions to exploit the spices trade via a plantation system.[4] It was hugely successful. “By the end of the 17^th century,” write Daron Acemoglu and James Robinson, “the Dutch had reduced the world supply of these spices by about 60 percent and the price of nutmeg had doubled.”[5] But the Dutch exploitation of Southeast Asia had an even more long-lasting, pernicious effect: To protect themselves, the kingdoms of the region chose to turn inward, cutting their thriving regional economic and cultural networks and becoming more absolutist in their governance. [6] It crushed budding economic and political development. “Dutch colonialism fundamentally changed their economic and political development … In the next two centuries they would be in no position to take advantage of the innovations that would spring up in the industrial revolution.”[7]

A similar story unfolded in the Caribbean, where Europeans hoping to profit off sugar cane set up a plantation system requiring mass exploitation of labor.[8] That labor being unavailable locally, the Europeans turned instead to Africa. The trans-Atlantic slave trade grew from about 300,000 slaves in the 16^th century to 1,350,000 in the 17^th and 6,000,000 in the 18^th.[9] In all, some 10,000,000 slaves where shipped out of Africa, extracting the human resources of one place to fuel the agricultural resource extraction of another place and having lasting consequences for each.[10] Laws and institutions were distorted to serve the slave trade, and warfare invigorated by the slaving industry disrupted the family structure, changed local customs, and decimated the population. [11] The would reverberate into the late 20^th century.

The abolition of slavery – which in any case lingered well into the 20^th century – did not bring an end to the resource-based exploitation, and after slavery came “legitimate commerce” including palm oil, ivory, rubber, and gum arabic.[12] With the demand for slaves forcibly diminished, Africans were instead put to work on African plantations so that “the abolition of the slave trade, rather than making slavery wither away, simply led to the redeployment of slaves, who were now used in Africa rather than the Americas.”[13]

One key example of this is South Africa, a haven for freed slaves who had begun to develop their own institutions and agricultural industry.[14] This budding development, however, did not appeal to the Europeans. To begin with, competition with African farmers drove down the price of crops for European farmers.[15] But more importantly, it deprived South Africa’s lucrative diamond and gold mines of the cheap labor necessary to maximize their profitability. The colonial government had an answer: In 1913, South Africa passed the Native Lands Act, giving Europeans, which made up 20 percent of South Africa’s population, 87 percent of the land.[16] Africans were forced off their farms onto lands too small to be productive, diminishing their ability to compete on the agricultural market and forcing them instead to enter the labor market en masse, driving down the price of labor for the foreign owned mines.[17] Africans abandoned the institutions and technologies they’d adopted, reversing 50 years of development, all while providing the Europeans with the labor needed to extract South Africa’s resource wealth for foreign profit.[18] “The dispossession of African farmers led to their mass impoverishment. It created not only the institutional foundations of a backward economy, but the poor people to stock it.”[19] This system would mutate into South Africa’s apartheid regime, as opportunities for African property ownership and labor specialization were further legally curtailed. The result was an example of a durable dual economy, both domestic and international, represented by Dos Santos’s second variety of dependence, where poor, traditional peripheries produced the raw materials and agricultural products for consumption in the finance-rich hegemonic centers.[20]

So, from the beginning of the 17^th century to the beginning of the 20^th, the natural resources of places like Southeast Asia, the Americas, and Africa cursed the peoples and nations in those places to suffer from exploitation due to their incorporation in the global economy. It halted or reversed development and created the intuitions, integration, and circumstances that would enable future exploitation. As Acemoglu and Robinson summarize, “the profitability of European colonial empires was often built on the destruction of independent polities and indigenous economies around the world, or on the creation of extractive institutions from the ground up.”[21]

Modern Exploitation

The collapse of colonial empires did not mean an end to resource-based extraction to feed the global economy. According to Giovanni Arrighi, after the processes of decolonization in the 1950s and 1960s, the GDP of sub-Saharan Africa stood at 17.6 percent of world GDP; by 1995 it had dropped to 10.5 percent.[22] Up until 1975, Africa had not performed much worse than the world as a whole and better than some parts of the developing and developed world.[23] Through the early 1970s, an excess of global liquidity meant that loan capital flowed into developing regions, including sub-Saharan Africa.[24] But that growth collapsed in the late 1970s.[25] And regardless, even in the best-performing developing countries growth had fallen short of expectations and did little or nothing to alleviate poverty or improve the general welfare for much of the population.[26] The reasons for these failures are manifold.

First, per Dos Santos’s third variety of dependence, in the post-war period the export-based economies of the developing world became dependent on foreign capital and commodity markets.[27] On the international market, raw materials tend to be cheap, while industrial inputs required for production are expensive, so developing countries had rely on foreign capital debt and aid to “[fill] up the holes they themselves created”.[28] Foreign capital, then, built the industrial structure of developing economies in the mid-20^th century, while either reinvesting or remitting its profits out of the country. It “[created] very few jobs in comparison to population growth and [limited] new sources of income,” retarding the growth of a domestic consumer market.[29]

Second, this bad situation grew worse in the 1970s when the United States reversed its polices of the 1950s and 60s that made America a major source for global liquidity and direct investment, becoming instead the world’s main debtor nation and largest recipient of foreign capital.[30] That redirection of capital flows back into America “reflated demand and investment in North America, while deflating it in the rest of the world … Since competitive pressures had become particularly intense in manufacturing industries, these imported goods tended to be industrial rather than agricultural products.”[31] For Asian countries with a large labor pool able to manufacture cheap industrial products for export to America, this reversal sparked the Asian economic miracle.[32] Africa, however, had its historical legacy to contend with: the depopulation of the continent caused by the slave trade left most areas with low population density and small local markets able to produce mainly agricultural products.[33] In this new economic reality, sub-Saharan Africans, with their historical legacy of extraction-based institutions, could no longer realistically compete on the integrated global market.

The natural resource mirage seemed to offer a way out of this trap. It has been only another curse. The discovery of oil in sub-Saharan Africa seemed to portend an economic boom for the region as foreign investment has flowed into these countries to exploit their oil reserves.[34] Rather than improving the economic situation of general populations, however, the wealth promised by oil often redirects capital investment toward oil-related industries, crowding out other sectors that might grow into more sustainable, consumer-based industries, in addition to causing currency appreciation, which undercuts exports.[35] Rents from oil displace taxation as the primary source of government revenue, so for the profits that are not remitted abroad or reinvested, political elites have the incentives to focus on private accumulation of wealth and limit its distribution to their personal political networks.[36] “The result is that oil states generate not public goods for development but private and political goods instead … [The elites] have little reason to use this public treasure to deliver roads, schools, fertilizers, clinics, medicine, and so on.”[37]

This has been the case in Angola, Nigeria, and Sudan,[38] but the case in point is Equatorial Guinea: “Home to over one billion barrels of oil reserves, Equatorial Guinea has exported as many as 400,000 barrels of oil a day since 1995, a bonanza that has made the country wealthier, in terms of GDP per capita, than France, Japan, and the United Kingdom. Little of this wealth, however, has helped the vast majority of Equatorial Guinea’s 700,000 people: today, three out of every four Equatorial Guineans live on less than $2 a day, and infant mortality rates in the country have barely budged since oil was first discovered there.”[39]

From colonialism to the modern capitalist global market, the extraction of resources for the integrated global market has left developing countries stunted and poor. The exploitation of those resources, from spice to labor to oil, has been the primary constraint on developing countries from history to the modern day.

[1] Theotonio Dos Santos (1970). The Structure of Dependence. In Mitchell Seligson and John Passé-Smith (eds.). Development and Underdevelopment: The Political Economy of Global Inequality, 3rd ed. Boulder, Colo: Lynne Rienner Publishers, 2003, pp. 232.
[2] Daron Acemoglu and James Robinson (2012). “Reversing Development” (Chapter 9) in Why Nations Fail: Origins of Power, Poverty and Prosperity (New York: Crown Business), 247.
[3] Ibid, 248
[4] Ibid, 248-249.
[5] Ibid, 249.
[6] Ibid, 249.
[7] Ibid, 250.
[8] Ibid, 251.
[9] Ibid, 251.
[10] Ibid, 251.
[11] Ibid, 253-255.
[12] Ibid, 256.
[13] Ibid, 257.
[14] Ibid, 262-264.
[15] Ibid, 265.
[16] Ibid, 265.
[17] Ibid, 267.
[18] Acemoglu and James Robinson, 267.
[19] Ibid, 268.
[20] Dos Santos, 232.
[21] Acemoglu and Robinson, 271.
[22] Giovanni Arrighi (2002). The African Crisis: World Systemic and Regional Aspects. New Left Review 15 (May-June), 1.
[23] Ibid, 16.
[24] Ibid, 18.
[25] Ibid, 16.
[26] Ibid, 20.
[27] Dos Santos, 233.
[28] Ibid, 233.
[29] Ibid, 234-235.
[30] Arrighi, 21-22.
[31] Ibid, 23.
[32] Ibid, 24.
[33] Ibid, 25.
[34] Larry Diamond and Jack Mosbacher (2013). Petroleum to the People: Africa’s Coming Resource Curse – and How to Avoid It. Foreign Affairs 92: 87.
[35] Katrina Burgess (2019). Natural Resources. Lecture, at the Fletcher School of Law and Diplomacy. February 11, 2019.
[36] Diamond and Mosbacher, 90.
[37] Ibid, 90.
[38] Ibid, 88.
[39] Ibid, 86-87.