INTRODUCTION
D. Attending the Court Hearing
VIII. ECONOMIC DEVELOPMENT AND GOVERNMENT STRATEGIES
A major change in the direction of the South Korean economic development began with the military government that took power in 1961. Its economic policy aimed at rapid industrial development based on export-oriented industrialization strategy, active inducement of foreign capital, and various institutional reforms (Sakong 1993; Kim 1994).
To carry out the outward-looking development strategy, the government devaluated its currency in May 1964 by almost 50% from 130 to 214 won per U.S. dollar, and large-scale foreign borrowing to finance investment in export industries flowed into South Korea. Furthermore, substantial imports of raw mate- rials, components, and machinery were also necessary to perform the export drive policy. It provided the most successful exporters a range of benefits, including preferential access to loans at subsidized interest rates, tax incentives, discounts
on power and freight costs, and access to important licenses for machinery and components (Bloom 1993).
These measures enabled a few major exporters to expand their export and led to a concentration of economic power into Chaebols, which accumulated profits and branched into new lines of business across industries to form groups.
They became further diversified and grew faster than the rest of the economy.
The 46 largest Chaebols grew at an average annual rate of 22.8% between 1973 and 1978; the nation’s GDP grew at an average annual rate of 9.9% for the same period (see Table 1). Their share in GDP also increased from 9.8% to 17.1%
during the same period (Sakong 1993). A major factor in the fast growth of the conglomerates in the 1970s was the government’s new industrial policy based on the heavy and chemical industries (HCI). The government supported them further in order to reach its target of economic growth. HCI’s preferential access to bank credit enabled big conglomerates participating in the government’s HCI promotion policies to receive nearly 60% of the total bank loans from 1975 to 1977 and almost 95% of policy loans in 1978. It resulted in the neglect of the light manufacturing industries that were significant exporters as well as producers of daily necessities. At the same time, the overinvestment in targeted industries based on supply-side considerations occurred rather than realistic demand-side forecasts at the firm level.
Consequently, the government announced a set of comprehensive stabiliza- tion measures including restrictive aggregate demand management through a tighter monetary and fiscal stance in 1979. It means that the growth-first strategy in the 1960s and 1970s turned to stabilization policy in the 1980s, though the
Table 1 Average Annual Growth Rate of Chaebols, 1973–1978 (%)
Total Value added
value added in manufacturing
Top 5 30.1 35.7
Top 10 28.0 30.0
Top 20 25.9 27.5
Top 46 22.8 24.4
1 to 5 30.1 35.7
6 to 10 22.8 16.8
11 to 20 19.9 22.4
21 to 46 12.8 16.4
1 to 46 22.8 24.4
GDP 9.9 17.2
Source: Sakong (1993).
latter was based on the short-term strategy. The policy shift caused severe prob- lems in the nontargeted, labor-intensive sectors of the economy and the balance of payments crisis created by the second oil shock. However, it was well timed and South Korea took advantage of the boom in manufactured exports in the mid-1980s.
Moreover, selective industrial promotion laws oriented to sunrise industries such as electronics and petrochemicals were replaced by the Industrial Develop- ment Law in 1986 which mainly focused on rationalization of declining industries such as the textile industry, ferro-alloys, and fertilizers. The new law also sup- ports technological upgrade instead of providing only credits. It enabled the gov- ernment to establish a basic principle. The government was ready to be involved in industries only in cases of obvious market failure. In the second half of the 1980s trade liberalization became essential for maintaining a cooperative relation- ship with the United States in particular, and a liberalization in financial sector began with a limited form.
The close association of government and business in South Korea’s eco- nomic development has been regarded as Korea Inc. (Cumings 1987; Wade 1990). However, although this government-business relationship contributed to the rapid industrialization, the national economy suffered from fundamental dis- tortion of the competitive market structure, misallocation of resources, severe inflationary pressure, and imbalanced development of the industrial structure cre- ated by excessive government intervention until the first half of the 1980s (Kim 1994).
Furthermore, the domestic environment has changed rapidly since the end of the 1980s. The technology-intensive sector has continuously expanded at the same time as the manufacturing sector has become more sophisticated and diver- sified. Big conglomerates such as Hyundai, Samsung, Lucky Goldstar, Daewoo, etc., are becoming more integrated into the world economy through corporate alliances and foreign direct investments that enable them to evade government directives. Thus, the new directions of the economy ought to concern themselves with technology-related market failures based on the lack of human and relatively underdeveloped subcontractors.
In the beginning of the 1990s external environment also changed rapidly through new regional alignments and new order of world trade system based on the World Trade Organization (WTO). In order to overcome trade barriers, the government and businesses promote overseas direct investments on the one hand, and they are keen to increase their competitiveness against foreign firms on the domestic and international market on the other. Hence, the role of the government is focusing on supporting for research and development activity to upgrade tech- nological standards. The present government has been also keen to upgrade in- dustrial structure oriented from industrial widening toward industrial deepening, and to improve industrial competition environment created by well-developed
infrastructure, stable labor and land supply, etc. (Ministry of Trade, Industry, and Energy 1994).
IX. SOUTH KOREA’S INDUSTRIAL CHALLENGE AND