Billy Moore

Introduction

Today, South Korea’s economy is world renowned for its advancement of technological innovation. Companies such as Hyundai, Samsung, and LG have all served as testament to South Korea’s surging economic growth since its independence in 1945. The advancement of such industry has helped grow South Korea’s economy from a mere $40.9 million GDP post Korean War in 1953 to $1.64 trillion GDP in 2020.^[1] However, South Korea’s economic development cannot not be singularly pinpointed as a result of American investment or influence, although that is also a factor. Instead, South Korea’s economic growth can also be accredited to the strongman administration of President Park Chung-Hee from 1961-1979. (See also the next chapter about his government’s human rights’ record.) The purpose of this chapter is to highlight President Park Chung-Hee’s development in establishing an economic identity for South Korea.

Background

After Korea’s independence from Japanese occupation in 1945, South Korea had little industrial infrastructure due to its largely agrarian role in sustaining Imperial Japanese infrastructure. The period of the United States Army Military Government in Korea’s (USAMGIK) occupation in South Korea , from 1945-1948, provided minimal infrastructure improvement as the political tension of post-World War II reconstruction heightened between the East and West. The development of, and the outbreak of, the Korean War from 1948-1953 completely exacerbated the minimally existing infrastructure of South Korea. By the first 3 months of the war’s start, South Korea’s existing economy utterly collapsed. Total money in circulation increased by 72% and temporary tax increases could not meet the immense demand for growing war expenses. This resulted in severe hyperinflation to the Korean won (national currency) and South Korea accruing large amounts of national debt specifically bound under the Taegue Agreement – an agreement between South Korea and the UN to pay back UN forces expenditures. By December 31, 1952 the amount of money in circulation had multiplied by 1,008 times pre-war, the biggest increase coming between July 31, 1953 – December 31, 1953 when circulation increased by 4,200% alone.^[2]

The Korean War decimated the existing agrarian production and little industrial infrastructure that was left in South Korea from the Japanese occupation. Emerging from the armistice between North Korea on July 27, 1953, South Korea started from scratch in developing a national economy. The first President of South Korea, Syngman Rhee (1953-1960) originally instituted an “import substitution industrialization policy” where foreign imports were blocked to encourage the establishment of domestic industries. However, South Korea could not sustain this approach because it lacked a large internal market and natural resources. Instead, during the period of 1954-1961, foreign aid constituted approximately 33% of South Korea’s total budget in 1954, 58.4% in 1956, and 38% in 1960. This substantially came from the United States who’s economic aid bill invested $200 million in 1954, peaked at $365 million in 1956, and $200 million again in 1958. Foreign aid was crucial to South Korea’s development during this period of time, it accounted for about 64% of overall annual gross investment into South Korea to build its foundation.^[3] This stabilized the South Korean economy from the economic hardships experienced from 1948-1953.

However, under First South Korean President Syngman Rhee, South Korea was plagued by mass relocation (following the war) and a rapid increase in population. This drove up unemployment and plagued South Korea with an inefficient economic production since a majority of the population was illiterate. A refocus of intensive investment in education, beginning in 1954, allowed South Korea to prepare a high quality labor force ready to meet future demands. This revaluation of priorities contributed substantially to the economic growth witnessed in the development phase of the 1960s. Still, under President Rhee’s leadership between 1954-1958, the South Korean economy grew painfully slow. The economy had a minuscule annual economic growth rate of 3.5% and annual inflation was only temporarily reduced from 120% from 20%, until its re-emergence in 1959.^[4] Ultimately, culminating problems such as relying on US foreign aid, slow economic growth, and political corruption led to President Rhee’s downfall on April 26, 1960 as many South Koreans became increasingly frustrated with the country’s economy. This allowed for Park Chung-Hee to seize power in a military coup in 1961, and thus began the development of South Korea’s economy.

Development period (1961- 1971)

After his successful military coup in 1961, Park Chung-Hee began the economic development of South Korea by instituting a government-oriented statist economy. Inspired by his roots in the Japanese military during the 1930s and early 1940s, Park’s governmental structure can be characterized as nationalistic, authoritarian, and centralized. This meant Park’s government of South Korea was the inherent entity that designed, implemented, and enforced economic policies. The government was specifically important in navigating economic policy, from its implementation to its oversight, since the drive of new incentives led to quick rising economic growth and a multitude of various industries to begin emerging as vital players in South Korea’s export-driven economy.

Beginning his tenure in 1961, Park began the transformation of South Korea’s economy by establishing entities of government bureaucracy to act as mediators between government and business to institute economic incentives. Initially, the early years of Park’s administration incorporated agencies such as the Economic Planning Board (EPB) and the Korean Central Intelligence Agency (KCIA) to develop and maintain strong relationships with the Chaebol. The Chaebol can best be described as a group of crony capitalist business elites that emerged under President Rhee’s presidency after the Korean War. Particularly, the Chaebol played an instrumental role in developing emerging industrial enterprises. The relationship between President Park’s government and the Chaebol could be best characterized as an ongoing negotiation between the state and the private sector. However, the Chaebol were neither captives nor its masters of the state; instead, they were organizations based not only on traditional family ties but also on modern rational business enterprises that made their own decisions within the confines of President Park’s directed state policies.^[5]

With U.S. aid declining, Park’s actions focused on transforming the South Korean economy from being foreign aid dependent to becoming independent. To this end, the government provided assistance to basic industries and invested in the improvement of social and economic infrastructure. Through the first five-year economic plan, the government aimed to improve the foundation of the economy before the initiation of export-oriented industrialization policy.^[6] The creation of state owned banks, who were once private but now were forced to become agents of the state, helped finance the implementation of government development plans for the Chaebol to carry out and emerge. This allowed President Park, between 1962-1967, in his first five-year economic plan, to accomplish South Korea’s plans to escape the confines of scarce natural resources and its narrow domestic market. President Park predicated this agenda by anticipating expected export growth and facilitated the Chaebol to implement domestic production facilities in line with South Korea’s export oriented industrialization strategy. Specifically, Park developed a labor intensive light industry to successfully establish this foundation which included the development of the textile, plywood, and footwear industries that maximized both employment and technology that was easy to learn for its now educated society.

Park’s second five-year economic plan, between 1967-1972, continued to establish the development of light industry and continued to maintain progression towards South Korea’s export oriented industrialization vision. However, this period specifically developed South Korea’s trade relations. Park began initiating the development of trade by re-establishing diplomatic relations with Japan in 1965, allowing Korea to access a larger economic market. Moreover, the development of institutions such as the Korea Trade Promotion Agency (KOTA), Korea Traders Association (KTA), and the Federation of Korean Industries (FKI) further bolstered South Korea’s facilitation of trade to the outside world. ^[7]As a result of this trade, the economic growth rate doubled to an average annual growth of 8.8% during the period of 1962 to 1971 and the per capita GNP grew from $82 in 1961 to $289 per capita in 1971. As light industry prospered, the proportion of the economy accounted for by agriculture and fishing diminished from 39.1% in 1961 to 27.2% in 1971. Instead, industries such as mining and manufacturing began to emerge growing from 15.5% to 22.5% during the same period. As a result, exports increased rapidly which in 1961 accounted for $41 million of the economy in 1961, to $1.06 billion of the economy in 1971. ^[8] All in all, the accomplishment of economic development in the 1960s was the successful completion of a solid economic foundation that allowed Korea to wean itself from foreign aid and create opportunities to allow itself to grow on its own.

Establishment period (1972-1979)

In 1972, the Korean economy continued its economic growth under President Park. The period of 1972-1980 can be best characterized as the period where Park became the most authoritarian in his leadership of South Korea. In the governmental sphere, he began to overlook democracy and it is widely acknowledged that he interfered with the election process in 1972. After the election, Park declared martial law and changed the constitution to make himself the president of South Korea for life. This was met with heavy protest, and is usually the defining point of his presidency during the 1970s. However, during that time South Korea’s economy transitioned from developing its economy to establishing its economy. This perspective of Park’s presidency is largely overshadowed by the civil unrest witnessed, but is the most significant period of his presidency in terms of growing South Korea’s economy exponentially.

Park began establishing the economy with the third five-year economic development plan (1972-1976), which was highlighted by the Heavy Chemical Industrialization drive (HCI) and HCI declaration in 1973. The initiatives of industry came from a multitude of acts put through in the late 1960’s/early 1970’s with the Industrial Machinery Promotion Act (1967), the Shipbuilding Promotion Act (1967), the Electrical Industry Promotion Act (1969), the Steel Industry Promotion Act (1970), and the Petrochemical Industry Promotion Act (1970).^[9] Further, under the HCI drive, the development of nonferrous metals, petrochemicals, general-type machinery, shipbuilding, and electronics were developed and allocated as five strategic industrial initiatives. These acts, in combination with the allocation of funds under the HCI declaration, expanded South Korea’s economy from light industrial production towards more heavy industrial production. One of the ways Park initiated this was by incentivizing businesses to make production for exports more profitable. These incentives included devaluation (deliberately devaluing currency to reduce the cost of a country’s exports), promoting more free trade by negotiating with other foreign governments, and cutting taxes on domestic inputs that were used for exports. As a result, the various policy loans and tax incentives provided under HCI, to promote both the heavy and chemical industries, resulted in currency expansion and further aggravation to the budget deficits of South Korea. Some of these investments made under Park were made without careful study into their effect on the national economy and were high-risk/high-reward. The dependency of business on Park’s government for credit increased business ties between the government and business but strained South Korea’s state-backed financial system.

However, these risks taken by Park’s regime paid off for the South Korean economy. As a result, between 1972-1978, the economy grew at a rate of more than 10% and per capita GNP exceeded $1,000. Moreover, between 1972 and 1978, commodity exports increased by 39.1%, reaching $10 billion in value by 1977. ^[10]Heavy industrial production and chemical industry exports overwhelmingly began to dominate. While investment in agriculture and fishing declined during this period, compared to the 3.5% economic growth rate and $82 per capita GNP, when these industries dominated the Korean economy in 1962, the economic difference in South Korea was better off then at the beginning of Park’s presidency. Importantly, this resulted in the increase of domestic savings growth by 15.2% annually between 1972-1978 compared to the nonexistent domestic savings in 1962. ^[11] Some of the major industries and companies established as a result of Park’s shift during the 1970’s were:

• Steel: Pohang Iron and Steel Company established (1973)
• Machinery: Changwon Machinery Industrial Complex groundbreaking (1974)
• Shipbuilding: Hyundai Shipbuilding Company established (1973
• Petrochemicals: Ulsan Petrochemical Industrial Complex completed (1972)
• Electronics: Kumi Electronic Industrial estates (1971)
• Automobiles: Hyundai Automobile Company established (1972)^[12]

Thus, the vigorous implementation of Park’s HCI and economic development policy made a tremendous contribution to the acceleration of economic growth and the advancement of the South Korean economy. The implementation of these policies mainly defines the essence of Park’s presidency in conjunction with the economy of South Korea.

Finally, the period between 1976 and 1979 also had some developments before Park’s assassination on October 26, 1979. The economy was further bolstered in 1976 by a combination of  participating in the development projects of the Middle East and the increase in facility investment, export expansion, and infrastructure modernization. However, these expansions did create some problems for Park’s economy in the tail end of his presidency. One problem was that the pricing regime the government implemented to boost the incomes of construction workers and farmers inhibited South Korea’s ability to balance the national budget. This meant that the government could not raise the price it charged consumers and instead had to pay more overhead on workers. This resulted in a loss of revenue for the regime and induced a major inflation problem. This problem largely came about because of economic inefficiency witnessed from the 1960’s and 1970’s since the government chose strategic industries instead of the culmination of its entire industry which included light production industries as well. While the average annual wage increased for South Koreans by 30%, the economic inefficiency helped South Korea in the short term and not the long term.^[13] It hurt export competitiveness and eventually endangered growth prospects for the economy. One of Park’s last moves of his tenure to reduce this was by switching strategies under the “Comprehensive Policy Measures of Economic Stabilization Act” in April 1979 and also focusing on market forces to implement those policies rather than his administrative powers. These series of policy measures sought to reduce the government’s role in export support, adjust investment in both heavy and chemical industries, and reduce investments in domestic infrastructure.^[14]

Conclusion

At the beginning of Park Chung-Hee’s presidency in 1962 South Korea’s economy was almost non-existent. Starting out with a minimal 3.5% economic growth rate and $82 per capita GNP in 1962, Park’s presidency left South Korea in a better position with a GNP of over $1,000 per capita and a consistent GDP increase that was never seen prior to Park’s tenure. ^[15] While foreign aid played a considerable role before Park’s presidency, and while Park’s presidency is largely overshadowed as anti-democratic, this textbook chapter shows that President Park Chung-Hee’s leadership played an important role for South Korea in establishing itself as an economic powerhouse in East Asia.

Bibliography

Seth, Michael. “An Unpromising Recovery: South Korea’s Post-Korean War Economic Development: 1953-1961.” Education about Asia 18, no. 3 (2013): 42-45. https://www.asianstudies.org/publications/eaa/archives/an-unpromising-recovery-south-koreas-post-korean-war-economic-development-1953-1961/.