How did South Korea Develop so Rapidly?

Abstract

South Korea started as an agriculture-based economy in the 1950s but has become the 11th largest economy in the world contributing 2% of world GDP in 2020. Growing at the average rate of more than 5% per annum, its total GDP is over $1 trillion and a per capita income of over $42,000 (PPP adjusted). South Korea is now one of the top 10 exporters in the world, and its exports as a percentage of GDP are more than 56 percent

How did this miracle take place? This article tries to answer this question by looking at the historical record of economic development, the policies it adopted to kick start and accelerate its growth trajectory as well as the special circumstances which facilitated it grow at such a fantastic speed in such a short period.

If you are interested to know why didn’t Pakistan become an Asian Tiger, then kindly read my two part article on this issue at

http://www.shahidhussainraja.com/comparing-economic-progress-of-pakistan-with-south-korea-part-1/

http://www.shahidhussainraja.com/comparing-economic-progress-of-pakistan-with-south-korea-part-2/

Introduction

South Korean success story has been well documented but contested. Some attribute its phenomenal success to following the market economy while others think that it was due to the strict state control, at least in the first crucial three decades after independence, which made it possible for South Korea to transform itself so rapidly. As usual, the truth lies in between-one must be very cautious in interpreting the data and drawing correct conclusions.

The speed and content of the economic development of a country depends upon several constants and variables out of which the following four are the most crucial namely

  1. Initial conditions at the start of its economic development
  2. Economic policies adopted to kick-start/accelerate the economic progression
  3. Global Environment available
  4. Unknown Factors                              

South Korea enjoyed certain extra advantages in the above mentioned four areas which other developing countries like Pakistan did not. Let us examine

  1. Initial Conditions

It is just naivete to believe that South Korea was an extremely underdeveloped country like ex-colonies of the British Empire lacking any industrial base or capitalist agriculture. Quite the contrary, South Korea was treated by the Japanese as one of its provinces and developed it accordingly. Consequently, when South Korea became independent, it inherited a robust industrial base, a capitalist agricultural sector, and a vast pool of educated and skilled labour force. Some of the ways Japan had developed South Korea are as follows

  1. State Building: Applying the lessons learned during the Meiji Revolution that a strong state is a sine qua non of successful execution of any societal project, Japan after occupying Korea, destroyed its landed aristocracy, built a strong state and packed it with more than 50,000 Japanese civil servants. This new strongly centralized state structure extracted resources needed by Japan for its imperial designs but also developed its human resource, provided a congenial environment for savings & investment, and gave it a direction on how to go forward.
  2. Socio-political Re-engineering: Even more importantly, the Japanese transformed the entire Korean socio-political landscape and cultural norms within a short span of three decades by carrying out redistributive land reforms, nurturing a dynamic commercial middle class, adopting Western laws, and creating a strong police/security force which ensured rule of law. This sociopolitical re-engineering resulted in releasing the human and financial resources, the emergence of a technically competent middle class, and a strong state structure that could extract resources through coercion. The number of students who had grown from 10,000 in 1910 to 1.7 million in 1945 would form the backbone of the state bureaucracy and the future industrial policy.
  3. Agricultural Development: Korean agriculture benefited immensely from Japanese technical expertise in farming, and heavy investment which permitted Korea to become the granary of the Japanese Empire. Korean rice production increased by 2% per annum from 1910–1940. The export-oriented nature of Korean agriculture led to major increases in productivity and efficiency of Korean food production but also created a class of commercial exporters who played a crucial role later.
  4. Industrial Development: Side by side the agricultural revolution in Korea, an industrial revolution, although initially discouraged to protect Japanese manufacturing, started taking place. Because of the rising labour costs in Japan, the Japanese companies already flush with capital, started investing in low-cost Korea. It had also other motives; to dampen the Korean nationalist fervour by co-opting its businessmen and buying local elite’s loyalties. These alliances of convenience not only ensured the easy availability of semi-processed inputs for Japanese firms at low prices but also resulted in creating 50 conglomerates (Chaebols) of South Korea’s business class which are now global brands. Korean industrial growth averaged 10% per annum from 1910 for the next three decades with the result that by 1940, nearly 40% of all commodities produced in Korea originated from the industrial sector in Korea. As a result of agricultural and industrial revolutions, the Korean economy grew more than 3% per anum for three consecutive decades up until Korean independence, nearly 35% of which consisted of manufacturing and mining sectors.

With this level of economic development at the time of its independence, Korea just followed the model left by the Japanese with ruthless efficiency by adopting the same policies

  1. Economic Policies Adopted

 

This is the most misreported and misinterpreted aspect of the South Korean success story churned out by the liberalists who maintain that the secret to the rapid development of an underdeveloped country is to follow the policy package adopted by South Korea. However, they fail to point out that the policies adopted by South Korea were quite the opposite of what was being suggested by the mainstream economists to the developing countries, i.e internal economic deregulation and external trade liberalisation.

A cursory look at some of the policies adopted by South Korea in its early but crucial stage of economic development from 1945 to 1970 would reveal that it was the strict economic regulation and intensive import substitution during this period which created that critical mass of industrialisation that came in good stead when South Korea started its export orientation being praised by everyone. It was the single-minded dedication of the South Korean ruling elite to pursue these policies at the right time, assisted of course by the American security umbrella and their close supervision, which helped South Korea to excel. Some of the policies adopted were

  1. Political Dictatorship: After the Japanese defeat in World War 2, the USA occupied the Korean peninsula after a two-year war split into two, with the Southern part coming under American control. To obviate the possibility of unleashing the revolutionary forces in South Korea that were budding in the north, the American occupation forces kept the Japanese colonial state intact in post-war South Korea. A façade of civilian government under Syngman Rhee, who had spent 39 years in Washington, was set up. He effectively used the repressive state apparatus bequeathed by the retreating Japanese to repress communist and other revolutionary flavours, even killing the freedom fighters who had fought to liberate Korea from the Japanese.
  2. Infrastructural Development: However, besides allowing a reign of terror by the puppet regime, the US military carried out the socio-political re-engineering and fine-tuning of the political economy of South Korea. After seeing the popularity of Communist land reforms and massive infrastructural development in the North, they launched their land reforms in the South and started a massive programme of infrastructural development. Utilising the US$ 1,500 million military aid provided by the USA, they built roads, bridges and other infrastructures which greatly helped Korean industrial firms.
  3. State Patronage: As South Korea lacked natural resources, growth through industrial development became the priority for which the state played a pivotal role. Following the MITI model of Japan, South Korea created a planning board that steered the economic development of the country with an iron hand. The State took over the farming surplus by making it compulsory for farmers to deliver to State entities at a price determined by the authorities. The State kept on patronising the colonial era chaebols, like Samsung, Hyundai, Lucky Goldstar, Daewoo, Kia, etc. They benefited tremendously from the numerous subsidies, tax and non-tax concessions from the state, financial institutions, USA and Japan. This state patronage was instrumental in converting these Chaebols into global MNCs.
  4. Human Development: Similarly, the state played an extremely crucial role in the creation of a vast pool of educated and skilled manpower readily available to the manufacturing firms at the cheapest possible wage rate. It was supplemented by the huge amount of resources allocated for the Research & Development whose fruits were accessible to firms almost free of cost. For two years, 1977-79, almost 80 % of all state investments were devoted to establishing heavy industries by these conglomerates through deficit financing, diversion of pension funds, and massive foreign loans.
  5. Labour Exploitation: One of the components in the Korean miracle was the exploitation of industrial manpower with impunity. They were subjected to extreme exploitation: the longest working hours, extremely low wages, no trade union capable to fight for their rights. Fierce repression resulted in all opposition leaders being arrested, which led to violent urban uprisings leading to the imposition of martial law in May 1989. Paratroopers were sent out and killed demonstrators (including young girls) with their bayonets.
  6. External Environment:

Besides the above mentioned factors, there were certain fortuitous circumstances and its geostrategic location helped South Korea to grow by leaps and bounds in several ways

  1. Massive Foreign Aid: The advent of the Cold War soon after the end of the 2nd WW was a shot in the arm for South Korea. To obviate the possibility of this extremely important and strategically located country becoming a communist ally, the USA provided a massive amount of civil and military aid and technical assistance. At the same time, all the global institutions were very generous towards South Korea while disabusing aid and loans. South Korea was fourth on the list of most heavily indebted countries in absolute figures (43 billion dollars) but got bailouts because of its strategic position. The grants Korea received from 1945 to 1961 amounted to more than the World Bank’s total loans to newly independent developing countries with the result that South Korea did not rely on loans for 17 years after the end of WWII.
  2. American Security Umbrella: Because of its strategic location, the USA based its forces in South Korea during the Korean War. The stationing of thousands of American forces in Korea absolved South Korea to spend huge resources for its defence and used maximum resources and attention to its rapid economic development.
  3. Little America in South-East Asia: The presence of large contingents of American forces inside and around Korea provided the South Korean firms an opportunity to manufacturing goods and services and improving them as per specifications needed in mainland America for subsequent export. By the 1970s, 20 % of South Korean exports comprised supplying to the American forces in Vietnam and other countries of the region. In fact, the top 50 Chaebols of South Korea’s business class which had their roots in the Japanese colonial era, became global MNCs and international brands by supplying goods and services to the American forces in the region.
  4. Era of Washington Consensus: Another fortuitous event which immensely helped South Korea was the start of the golden period of Washington Consensus. This world economic order backed by strong American commitment and supported by the World Bank/IMF created an economic environment that helped the world economy to grow at rates never witnessed before. Increased prosperity in the USA and its allies resulted in the creation of a growing middle class willing to spend on luxury goods which South Korea was producing at comparatively affordable prices
  5. Smallness of South Korea: Lastly, South Korea was a small country as compared to China, India, Pakistan, Brazil etc. And this very smallness of theirs was a blessing in disguise for them; their exports, being a small percentage of import bill of the USA and Europe, did not result in any substantial dislocation of the American and European industries. Consequently, South Korean firms were able to export their industrial products to the USA and Europe without let or hindrances. South Korea was lucky that all the big giants like China, India, and Brazil were unable to take benefit from the free trade regime which helped South Korea and other Asian Tigers to get a big share of these markets. If China and India had also started exporting similar goods and services to these countries, all types of sanctions could have been imposed to protect their domestic industries.
  6. Unknown Factors

In Irma Adleman’s famous development model identifying the factors instrumental in accelerating the growth rate of an economy, there is a set of factors bracketed under the word U-Unknown factors. These are the geographical, historical, socio-economic, and political characteristics unique to a country or a region causing its rate of economic growth to be better or worse than other countries starting with similar initial conditions or adopting the same set of economic policies. Some of these U factors which made all the difference in their efforts to grow can be listed as follows

  1. Confucianism: Confucianism with its principles of loyalty towards authority and strong work ethics was the bedrock of the economic development in the South-East Asian regions. As one scholar has rightly pointed out that “the Confucian values and tradition lead to a model of maximal government, with its myriad responsibilities, duties, and obligations. The State is not just supervisory and regulatory in function but to a very large extent developmental, educational, and mobilizational in emphasis. The bureaucracy is not just administrative and government functionaries but acts as guidance of national interests and is often perceived as leaders, intellectuals, and teachers”.
  2. Compactness: Secondly, South Korea is a compact nation-state, without any racial or religious fault lines needing huge resources of the state to maintain internal harmony. It is situated in proximity to the sea, thus their transport and shipping costs are relatively small, and the ratio between the population living near the coasts to the land area is one of the highest in the world. It also means it does not have any border disputes with any neighbouring country except its sibling North Korea.
  3. Resource Poverty: Thirdly, and paradoxically, South Korea, like its model Japan, is short of natural resources; consequently, it has no option but to go for early and rapid industrialisation because of the shortage of natural resources.
  4. City-states: And finally, not only South Korea but the three other Asian Tigers were more like the city-states of ancient Greece without any poverty-stricken hinterland to carry along. If someone wants to make a meaningful comparison, then compare them with Karachi, Shanghai, or Mumbai-the cities which had been the milking cows for their respective vast poor hinterlands.

Conclusion

Notwithstanding the above mentioned fortuitous circumstances which helped South Korea to develop at a rapid speed, we must give credit to the resilience of its people, the sagacity of its successive ruling elites, and the innovative entrepreneurial spirit of their industrial class for taking maximum advantage of the opportunities whenever available and not letting them squander. South Korea has an enviable record of macroeconomic stability to weather the worst global recessions with fortitude. 

Asian Financial Markets Crisis of the late 1990s led to wide-ranging economic reforms which helped them to avoid the 2007-09 recession, one of only a small handful of advanced nations to do so. Thus far South Korea has avoided the process of de-industrialisation, indeed her service sector is relatively weak by global standards· The economy runs a current account surplus, and the budget (fiscal) balance is strong – South Korean national debt is very low (less than 40% of GDP) – this provides a buffer if and when South Korea has to fund the costs of integrating a failing North Korean economy after reunification.

From the book “20 Global Issues: A Handbook” by Shahid Hussain Raja

Published by Amazon  https://www.amazon.com/dp/B07C1BT6KD

 

Previous Post
Next Post

Leave a Reply

Your email address will not be published. Required fields are marked *