Notes on: Korean Economic Development: An Interpretive Model by Paul Kuznets
South Korea in recent decades has been one of the most dynamic economies in the world. Over the period 1965 to 1990 the rate of growth of per capita GNP was greater than any other country in the world. But the Korea economy was not always so dynamic.
From 1945 to 1949 South Korea was under the control of the American Military Government. In the fall of 1949 the Republic of Korea was created and Syngman Rhee was made president. In the summer of 1950 the Korean War started and devastated the country. During the period from the end of the Korean War to the early 1960's South Korea pursued a policy of import substitution for economic development. Rhee was overthrown by a student revolution in 1960. Chang Myon was elected president but overthrown in 1961 by a military coup led by Park Chung-hee. There had been virtual stagnation from 1959 to 1962. Park was elected president in 1963 and economic development was seen a the major economic issue.
The reduction of U.S. aid in the 1960's made infeasible the import-substitution strategy South Korea had pursued. Korea then shifted to an export-oriented strategy for development. The government tried to direct this development but made major mistakes in direction. The Park Regime initially emphasized heavy industry and the chemicals industry. After Park's assassination and the second oil shock in 1979 the Chun Regime stopped the projects devoted to the heavy and chemicals industries and shifted credit to light industries. Although South Korea is a case of what Robert Wade calls Governed Market development the size of the public sector in South Korea was relatively small.
South Korea did create some important government enterprises; i.e., Pohang Iron and Steel Company, Korea Telecommunications Authority, Korea Electric Power Corporation, the Office of the Railroad, and Korea Monopoly Corporation (for tobacco and ginseng products). The public sector provided 80-90 percent of the financial services, two thirds of the gas, electricity and water supplies, 30 percent of transportation and communications, 30 percent of mining, and 15 percent of manufacturing.
Some of the public enterprises were originally Japanese firms which were taken over by the government in 1945. (In the 1980's the government began a program of privatization of some of these public enterprises.)
The rate of growth in GNP soared to 9.7 percent in the period 1963-68. Fiscal deficits were eliminated by sharp cuts in government expenditures in 1963 and 1964. Wages of government employees were frozen. The Korean won was devalued in 1964 from 130 to the dollar to 255. Banks (state-controlled) began to offer higher interest rates to savers in 1965. Previously the interest rates offered were insufficient to offset inflation. As a result deposits jumped from 9 billion won in September 1965 to 50 billion won by the end of 1966. The savings ratio began to increase and by 1990 reached about 30 percent.
Large conglomerate corporations, called chaebol, are an important factor in Korean industry. These diversified companies under single family ownershipe arose in the 1950's as corporations with political influence for obtaining scarce credit.