It emerged from a fratricidal war with its Northern brothers, a devastated country. So poor it was exporting mere tungsten and fish that with $82 national per capita income, it ranked among the bottom line nations. Even in 1962 — the year its industrialisation took off — the country was such a ‘’basket case of development failure’’ that when USAID called it ‘’bottomless pit’’, it wasn’t considered disdainful.
But starting from 1962, things drastically changed for good for this poor agrarian society in a way that the world was taken unawares by economic development storm.
Such an unprecedented structural transformation meant that South Korea had to learn a lot of lessons from Japan, its former coloniser until 1945. In other words, it did nothing extraordinary than just follow the industrialisation footsteps of Japan, an economic nationalism driven by hard working disciplined workforce, committed and highly patriotic citizens, who understood that their national survival depended more on looking after national than individual interests. Its second-to-none academic excellence based on meritocracy was another important inheritance from Japanese occupiers.
But who was behind this sudden and unstoppable phenomenal rise, thanks to its adoption of an unprecedented protectionist economic transformation strategy, with a GDP growth at 8.6 per cent between 1962 and 1997 resulting in a dramatic rise of the country’s meager $2.3bn to whopping $474bn? It’s the work of an ambitious nationalist, Gen. Park Chung-Hee, who even though took power in a military coup in 1961, wasted no time in transforming his country from a poor agrarian nation into an economic miracle through his First Five Year Plan for economic development.
As draconian as his foreign exchange policy was, it’s designed to ensure that every dollar earned from the sweat of its ‘’industrial soldiers,’’ fighting the export war in the country’s factories, was recognised as the blood to be treated as sacred which should only be made available for the import of critical machinery and other inputs for the country’s industrialisation. For this very reason also, spending foreign exchange on anything not considered essential for industrial development was prohibited or strongly discouraged through import bans, high tariffs and exercise taxes (called luxury consumption taxes).
Luxury items included even relatively things as simple as small cars, whiskey, cookies, etc. Foreign travels were completely banned unless one had explicit government permission to do business or study abroad. Thus, discouragement of consumption of imported goods was as clear as the law could be to the extent that anyone caught trying to squander the hard-earned foreign exchange on frivolous consumption of foreign goods of any kind — from cigarettes, to liquor, to clothes, shoes and just name it — was not only treated a traitor and economic saboteur, but also could face the death penalty. Such absolute control over scarce foreign exchange was critical for carefully channeling foreign currencies to national priorities, particularly importation of vital machinery and industrial inputs.
With such a phenomenal success recorded in launching his country into an economic revolution guaranteeing him three consecutive landslide victories in presidential elections, Park in 1973, launched an ever-ambitious “Heavy and Chemical Industrialisation Programme,” including the launching of the country’s first steel mill, its first modern shipyard, and its production of the first locally designed cars (even though made from imported parts). Others were new firms in electronics, machinery, chemicals, and advanced industries like biotechnology.
Because the government owned all the banks, it was able to be directing credit — the life blood of business — promoting inclusive communitarian capitalism, where both state sector driven by state-owned enterprises and private sector work hand in hand. For this same reason, the South Korean government had to control foreign investments in such a way that it only welcomed it with open arms in those areas they’re needed while blocking completely access to those areas considered sensitive to strategic national interest. For the country to catch up with advanced countries, the policy towards foreign patent was a lax one, done with the goal of encouraging reverse engineering and patented products piracy.
Following the footsteps of Japan during these catch-up years, besides pursuing reverse engineering, South Korea used intellectual property piracy to leapfrog itself into a high-tech, high valued-added industrial economy. As a result of these industrial inroads driving the country to an unprecedented growth, and with exports growing by 900 per cent between the 1973 and 1979, so did the per capita income grow phenomenally by equally unheard-of 500 per cent that by early 1980s, South Korea had indisputably emerged a middle-income economy with $1,000 per capita.
From 63 per cent in 1962 to 12 per cent in 1996 as farmers, the agrarian nation had become a country advanced in high-tech, high-value-added industrial and service economy that to reward it for its phenomenal rise to economic stardom, establishing itself as one of the world’s leading high-tech economies, its leader in shipbuilders, electronics, semiconductors, and automobiles, in recognition of its superpower economic status, South Korea was invited to join the exclusive club of the world’s richest industrial countries, the Organisation for Economic Cooperation and Development in 1996. Making the same growing of national per capita income 14 times that took the United States not less than one and a half centuries, to have taken South Korea a mere three decades.
They Korean people demonstrated their unparallelled patriotism in 1997 when some ferocious western financial terrorists attached South Korea along with other Asian Tiger economies. Not only that they were on the side of government to protest such a financial invasion by the IMF-led western financial terrorists but went as far as selling their pricey personal treasures such as gold and diamonds and handed the money to their government in its efforts to revamp the economy and quickly exit the IMF’s draconian debt conditionalities.
Like its fabricated story about Japan’s emergence, western neoliberal economists have equally attributed the spectacular rise of South Korea to an economic star as a result of following the dictates of the free market as well as its embracing of a tight monetary. That history is always by the victors has been demonstrated by the way the history of capitalism has been rewritten by today’s developed nations that nothing about how they got to where they are today has been mentioned in today’s history, which is upside down.
No matter their writing the history of how countries transform themselves from agrarian economies to industrial powerhouses, the indisputable truth remains that South Korea’s eight per cent annual miraculous growth only happened because the country banned most imported goods while imposing high tariffs on those it failed to ban. And that as it’s the case with most rapidly growing economies, the South Korean economy too witnessed high inflation averagely 20 per cent during in the 1960s and 1970s.
In other words, the truth about how the Korean economic miracle was wrought is that the country’s leaders nurtured certain new industries selected by the government in consultation with the private sector, and through tariff protection, subsidies and other forms of government support, including overseas marketing information services provided by the state export agency, the country’s infant industries were able to grow, enough to withstand international competition.
Exports of labour intensive, low value-added things like garments and cheap electronics helped the country raise hard currencies needed for paying for the advanced technologies and expensive machines that were necessary for the new, more difficult industries, which were protected through high tariffs and subsidies.
Since they needed time to absorb new technologies and establish new organisational capabilities until they too could compete in the world market, the government used high tariff protection and subsidies to shield these industries from international competition. That is why the Korean economic miracle became the result of a clever and pragmatic mixture of market incentives and state direction.
South Korea’s approach is no exception. What it did starting from the 1960s, England did starting from 1489, America did starting from 1791, Germany did starting from 1841, Japan did starting from 1868, and so it continued after Korea by China in 1978, and India in the late 1980s.