Japanese plan at colonial period on Korean peninsula has created a highly integrated but dual economy, with heavy industrialization mainly in the North and agricultural facilities in the South. As a result of Japanese division, the South left with nearly two-thirds of population and much of the arable land, while the North, with its abundant supply of hydroelectric power and minerals, kept most of the industrial and more than 90 percent of the electricity production. As a result of the World War II, Korea became liberated from Japan, and its lead to the sudden interruption of the trade with Japan and loose connection with power supplies at North. This period had a huge downward effect on South Korea and led them to an internal war.The Korean war (1950-1953) had both stabilization and destructive effect on the economy.
The war cost to South Korea is too high in terms of current economy, but, the war also have effect on demolishing some of the oppressive elements of South Korea’s colonial legacy and to set the foundation for future growth. After the war, the government implemented a comprehensive land reform program that had unintentional outcome of starting equalization of distributions of the income in the developing world.To reconstruct the country, South Korea have accept foreign aid. South Korea received over $15 billion assistance from 1946 to 1976. Foreign assistance not only used to reconstruct, it is also used to stabilize the economy, which was suffering from high inflation.Up to 1962, South Korean development strategy was mainly inward looking.
The government used to set high-trade barriers to encourage import while export growth was minor and only secondary consideration. After the military takeover in 1961, development strategy shifted from inward looking to aggressive export promotion. The government started to promote export in terms of tax breaks, and preferential credits. The government also used to do devaluation the exchange rate to promote export to be competitive in the world market.
The result of this actions was a rapid expansion in exports and one of the world’s fastest-growing economies. In ten years export increased $33 million to $865 million and annual grow rate of about 40 percent in value terms. Mainly exporting product also have changed in these years from primary product to manufactured goods.
As a result of rapid export expansion lead to country economically grow more than 9 percent per year.South Korea entered a new phase in 1973 with the giving more importance in heavy and chemical investments (HCI). The main idea was to shift from light manufacturing to heavy industrialization in six key sectors – chemicals, electronics, machinery, metals, iron, and steel. The government promote that change with tax incentives, preferential credit and public spending on technical training and research and development. Individual “chaebol”, the Korean version of the Japanese “zaibatsu”, or large conglomerates, by the loans giving government-controlled banks to perform specific tasks with the heavy investment.
Despite fact that “chaebol” was successful it also created insufficiency which combined with the oil shock of 1974, had devastating impact upon the economy. That leads to financial crisis in late 1990s because the HCI drive burdened the banking system with large non performing loans and moral hazard problems. Role of government and the markets in formulating development policy became more controversial and sparked an important debate on the industrial policy of “picking winners”.The government of South Korea became more market-friendly stance after the growing problems created by HCI drive. In late 1979, the government start to liberalize key sectors of the economy, including trade, the financial system, and the capital markets but heavy protection of agriculture and other infant industries make the progress slower. Starting with 1981, the government start to deregulate interest rates and privatized some commercial banks, but the government also have to support privatized banks because of weakening by HCI drive.
Liberalization progress was slow because of concerns over foreign takeover of Korean assets. In late 1997, South Korea faced one of the largest financial bailouts in history due to the problems in the corporate and financial sector. Crisis process start with devaluation of Thai currency in July 1997 and quickly spread to all Asia and hitting the South Korea in November. South Korea’s exchange rate was in a freefall and its international reserves virtually depleted.This situation was forced the South Korea to turn to the International Monetary Fund (IMF), and led to a $58 billion financial package, the largest of its kind at the time. The country was vulnerable to financial contagion because of expansion of short-term external debt, a highly leveraged corporate sector.
However, South Korea regain their old position faster than the other Asian crisis countries. After a year and a half South Korea established its pre crisis output level. Export Oriented DevelopmentSouth Korea is the one of the most impressive long-term success story according to scholars and world’s developing countries. Most countries have reached the middle-?ncome status but they couldn’t pass the middle-income trap to join high-income status. The countries that reached that goal could be still considered as developing country instead of fully developed country by scholars and development economists.
There is a few country that managed to considered as advanced industrialized economies. South Korea considered as number one example of this situation. Export-oriented industrialization is the one of the sources that make this change happened.Export-oriented Industrialization (EOI) considered as a policy in trade and economic development field. To accelerate the industrialization, country should export its goods which the nation has a comparative advantage. In this case, developing country is willing to open its markets to foreign competition in exchange of getting access in other countries. After World War II, this initiative considered as a landmark of the development of the national economies, such as South Korea.To adopt export-oriented industrialization, South Korea’s government has granted numerous incentives in order to maintain export-led economic growth.
South Korea’s export revenues started become more important as the percentage of its GDP. In 1963, South Korea gained $87 million as a result of governments incentives. This revenue gained from export has increased over time.
Revenue from export has reached $17.5 billion in 1980, and then to $363.5 billion in 2009. Although export revenues was 6 times lower than import expenditures in 1963. This ratio reached 2.3 times lower in 1971. In 1998, South Korea experienced trade surplus for the first time its history.
South Korea’s economy shows high trade dependence started from 1972 which was 46.6 percent of its GDP. This ratio has increased through time, 78.9 percent of its GDP accounted for trade in 1980. Eventually it has reached 98.6 percent in 2009. Export-oriented industrialization has also impact on per capita GNP.
Per capita GNP was less than $100 in 1960. After adaptation of EOI, South Korea’s per capita GNP has reached $1,688 in 1980, $12,581 in 1996. The South Korean government believed that implementing aggressive export promotion was necessary in order to achieve this kind of improvement, especially in the early stage of economic development. The government issued tax and financial incentives to promote export through time. Thus, the experience of economic growth of Korea has been regarded as an example of pursuing the export-led economic growth strategy. In order to achieve EOI, South Korea used too many major types of export-promotion oriented industrial policy interventions.
South Korea’s government under valuated their currency to reflect a pro-export bias. They decided to keep their effective exchange rate in favor of exporters. South Korea’s effective exchange rate was 281 for exporters and 247 for importers, in 1964.The government provided preferential incentives for imported intermediates which were used in production for export. To prevent abuse, the government only refunded documented exports.The government’s main mission was to protect targeted infant industries as they starting export drive. The government maintained a high dispersion of protection.South Korea imposed tariff incentives for exporting activities.
For exporters, the government issued domestic indirect tax incentives and lowered direct tax rates on income.To encourage domestic production, South Korea provided tax breaks for domestic suppliers of inputs to exporting firms.To make South Korean exporters more attractive in the market, South Korea accelerated depreciation on its currencySouth Korea founded The Korean Traders Association and the Korea Trade Promotion Corporation in order to promote South Korean firms worldwide.South Korea enlarged size of the market by creation of free-trade zones, industrial parks, and export-oriented infrastructure.
To encourage firms, the government promised monopoly rights for the firm that achieved exports in the targeted industries.South Korea also founded the Korean Export-Import Bank which enabled a system that allows export credit insurances and guarantees for overseas marketing and post-shipment export loans.In order to secure better terms, the government of South Korea conducted foreign technology licence agreements in behalf of private firms.Since the early 60s, South Korea is setting export targets for the firms.As a result, South Korea generated more than 8 percent growth rate each year since 1960s. This kind of growth makes South Korea’s economy fastest growing economy in the world.
Despite the fact that South Korea’s history has several obstacles such as the Korean War and heavy military expenditure under national partition, South Korea achieved an impressive performance.The South Korea’s policy change from import substitution to export orientation development has a major effect on unprecedented economic growth started with 1960s. Aggressive export promotion policies has resulted in expansion of export and improved growth rate of the economy. Also, the South Korean government ensured tariff, tax and financial incentives in addition to their policy changes to export-oriented development. That’s why, South Korean economic development can be considered as an example of pursuing the export-led economic growth strategy.