History Of Asian Economies Essay Research Paper

History Of Asian Economies Essay, Research Paper

Korea was one of the poorest countries in world after experiencing two wars.

World War II and Korean war (1950 ~ 1953). The country even experienced a food

shortage so that it had to heavily rely on the foreign aid. Yearly per capita

consumption was a mere $88 as late as 1965. However, since 1965, Korea has been

transformed from its underdeveloped agricultural economy to a leading Newly

Industrializing Country. Between 1965 and 1981, its gross national product GNP

multiplied twenty times from $3 billion to $63 billion and per capita GNP

increased sixteen times from $88 to $1,554. There have been many explanations

for Korea.s successful story. Among those, the strong role of government would

be probably the most important one. At the same time, this would be also

responsible for current recession. After Koran war, the government in fact had

no sense of direction and also due to the unstable political situation, the

country didn.t have specific economic policy until 1961 when military

government came to power and established the major institution guiding its

economic planning called Economic Planing Board (EPB). This government set

economic development as the top national priority and recognized the financial

system in support of economic development plan. To achieve this purpose, it

focused its policies mainly on export expansion moving its emphasis from import

substitution. The result was considered quite successful for economic growth.

Between 1965 and 1973, exports grew at average annual rate of 45%, from $175

million to $3,271 million. The success of the expansion was due primary to three

factors (Kwack, 72). The first was a favorable international economic

environment, which saw total world imports expand from $175 billion in 1965 to

$536 billion by 1973. This boom in imports of the world reflected the fact that

the industrialized had not yet erected import barriers against exports from

developing countries and were, on the contrary, quite active importers of

cheaper goods from Newly Industrializing Countries such as Korea. A second

significant factor was the Korean government.s policy of promoting exports,

which was set in motion in 1965. Initially, the government introduced a number

of fiscal and financial incentives, which I will discuss more later. A third

factor was Korea.s abundant and highly productive labor force. This gave Korea

a strong comparative advantage in producing labor intensive products and

provided the impetus for the notable expansion for exports. In order to expand

total exports over time periods, however, Korea turned to new export industries

that were expected to have a comparative advantage with abundant labor, but

skilled labor at this time, such as shipbuilding, electronics, and steel

industries. This attempt was viewed as a manufacturing shifting of its emphasis

from light industries to heavy industries which later started to produce

intermediary goods as substitutes for imports (Kwack, 77). However, this

government.s promotion of heavy industries for large-scale economies led to

under-investment in light manufacturing industries causing productive gap

between small and large firms. Actually, the large firm that runs heavy

industries has been given priorities, and small and medium firms relatively

disregarded in government.s allocation of loanable funds and other

administrative preference. As a result, conglomerates later known as chaebol

(family owned conglomerate) have been formed through this expansion of heavy

industries. Government.s Policy Before 1961 As seen above, the Korean

government has been focused on import substitution for economic growth during

1953 ~ 65 period and followed by export expansion policy after 1965. However, to

progress its policy efficiently, the government had to face to one of serious

problem, poverty. After two major wars, the country even with a food shortage

experienced lack of capital. There was no source for savings and investment to

finance economic growth domestically, so it depended heavily on foreign capital

which inflow in a form of mostly aid and loan in the early stage of economic

growth. The proportion of foreign capital to total capital formation in 1965 was

approximately 40 percent. In addition to inflow of foreign capital, the

government faced allocation of capital with using its financial system. Before

the military government in 1961, the loan decisions of commercial banks were

heavily influenced by political interference (Haggard, 26). Well, in fact the

loan decisions in Korea mostly were affected by political interference rather

than bank themselves until recent time, but during the 1948 ~ 1961 period, the

rent generated by low interest rate was used for its political activities rather

than economic growth. Government.s Export Promotion Policies I

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