South Korea: An Emblematic Model of Central Intervention and Development State

Development Economics - Virginia Robano

26.11.2016

Research Paper

SOUTH KOREA

An emblematic model of central intervention and development state

Jiacheng Zheng

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South Korea, a sovereign state in East Asia, is one of the most emblematic model of the economic miracle of East Asia. Witnessing stages of different economies, from the period of Malthusian trap from 1392 to 1910 when the Chosôn dynasty controlled the Korean Peninsula for centuries, to the period of the attachment to China and the annexation of Japan, to the post colonial period during which the living standards between South and North Korea differentiated drastically. This trajectory of economy of South Korea and the discrepancies between the economic development of South and North Korea exhibit some of the most revealing pieces of evidence to indicate that central intervention from institutions like governments do have a phenomenal impact on economic growth and the theory on ‘developmental state’ has a potent and emblematic instance.

This research paper is going to focus on what impacts the macroeconomic regulations of the colonial government and South Korean government during the period from 1911 to 1980 has on economy of South Korea and how the economic performance of South Korea can be qualified as a ‘development state’. What is the definition of ‘developmental state’? We could first summarise it as the assumed role of the state in facilitating the structural transition from a primitive or agrarian to a modern or manufacturing society. According to this structure, this paper is first going to analyse through the economic history of South Korea. Second, this paper is going to provide evidence and data for the impacts of the central intervention on the economy and how it has the properties of a ‘developmental state’. Lastly, this paper will come to a conclusion.

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With the defeat of Russia in the war of 1905 with Japan, Japan included Korea under its control. Referring to the Meiji government’s experience of ‘development state’, the colonial government induced a whole set of measures to modernise Korea. First improvement is on infrastructure as railway lines were extended and roads and harbours were constructed, which incited rapidly goods and factor markets both nationally and internationally. Moreover, health condition in Korea was placed emphasis on, especially public hygiene institutions and materials like hospitals, modern medicine and vaccinations. Finally, the colonial government launched the cadastral survey which was registration of land and by doing so, it modernised and legalised property rights to land and increased the efficiency in the use of lands and amounts of tax revenues. Regarding industrial policy, new waterways and reservoirs were built to fix the decay in water control. The colonial government supplied subsidies for irrigation projects to ameliorate the yields of rice. Besides, the structure of the colonial economy has been changing its centre, from agriculture towards manufacturing. During the colonial rule from 1911-1940, the share of manufacturing in GDP increased from 6% to 28%, and the share of agriculture fell from 76% to 41%. Major reasons for structural change were diffusion of modern manufacturing technology, the world agricultural depression and Korea’s cheap labor and natural resources. Finally, after Japan’s invasion of China in 1937, Japan began to develop northern parts of Korea peninsula as an industrial base which produced munitions. The institutional modernisation, technological diffusion, and the infusion of Japanese capital ended the long period of Malthusian trap and introduced Korea to the track of modernised economic growth. Despite the fact that per capita grain consumption declined during that time, per capita real consumption increased and Koreans were

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getting better education and longer life expectancy than people in China. Life expectancy rose to 43 years at the end of the colonial period.

With the defeat of Japan in the second World War, the Korean peninsula was torn apart separately by the US and the Soviet Union. Apart from the political division, the sudden interregnum of domestic trades and economic dependence on Japan took its toll on the economy of South Korea. The Korean War devastated most of the industrial facilities and per capita GDP was around US$60-80. Another statistics to note is that foreign aid accounted for more than 40% of the government revenue. After the Korean War, the policy makers provided selected firms in certain industries with privilege to buy foreign currencies and to borrow funds from banks at lower rates. They also imposed a policy which constructed tariff barriers and a prohibition on manufacturing imports hoping to improve domestic productivity through importing advanced technologies. But this entailed import import-substitution industrialisation and led to corruptions planted by entrepreneurs to bureaucrats, which resulted in directly unproductive profit-seeking activities and the collapse of the First Republic in 1960. After the takeover of the military government, Economic Planning Board was established in 1961 with wide powers to draft and implement economic planning and to control the budgets.Heavy state interventionism was particularly manifest in the financial sector as all commercial banks were placed under the direct control of the Ministry of Finance.And the First Five-Year Plan was put forward,focusing on labor-intensive sectors like textiles as Korea has abundant cheap labor forces. Moreover, due to the shift to export promotion from importsubstitution industrialisation, directly unproductive profit-seeking was reduced since standard for low interest loans was changed to export performance.With the

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establishment of maturity and discipline of export market, per capita output doubled and South Korea officially became an industrialised country because the share of agriculture in GDP fell from 45% to 25% from 1960 to 1975 during which the share of manufacturing increased from 9% to 27%. The Second Five-Year Plan from 1967 to 1971 stressed modernising the industrial structure placing electronics as a strategic export policy.