About South Korea

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Korea’s Economic Modernization

Korea

NASA Satellite Picture

Korea Economic Development Policy Experience

• The Korean government has set explicit goals for national development in which the private sector has been instrumental.

– 1960s: Export-promotion strategy

– 1970s: HCI Drive, and Saemaul Undong

– 1980s: Automobile/electronics/household appliances, etc. (adv. Technology)

– 1990s: IT & Communication Leader, Cinema

– 2000s: Cultural leader (‘Hallyu’)

The First Five-Year Economic Development Plan (1962 – 1966)

• The first plan sought to benefit the textile industry and make Korea self-sufficient. At the time, Korea’s status was as a capital poor, inadequate saving, and predominantly U.S.-financed state, in need of independence.

The Second Five-Year Economic Development Plan (1967 – 1971)

• The second five year plan sought to modernize the industrial structure to make Korea more competitive in the world market, which was incorporated into all future five year plans.

• Fears also prevailed that the U.S. would no longer provide military defense for Korea. Plan promoted self-sustaining economic development (encourage import-substituting industries).

The Third Five-Year Economic Development Plan (1972 – 1976)

• Pres. Park implemented the third five-year plan which was referred to as the Heavy Chemical Industrialization Plan (HCI Plan) and, also, the "Big Push". To fund the HCI, the government borrowed heavily from foreign countries (not foreign direct investment, so that it could direct its project).

• Plan aimed at building an export-oriented industrial structure.

The Fourth Five-Year Economic Development Plan (1977 – 1981)

• Development of industries that can effectively compete internationally in industrial export markets (promote technology and improve efficiency. )

• Plan to achieve self-sustaining economy. 

• Promote equity through social development.

The Fifth Five-Year Economic Development Plan (1982 – 1986)

• Establish foundation for price stability, improve quality of life, restructure government’s functions and improve technology.

• Move concentration from the heavy and chemical industries, to technology-intensive industries.

The Sixth Five-Year Economic Development Plan (1987 – 1991)

• Emphases were placed on Research and Development and Manpower Training.

• Establish socio-economic systems, promote creative potential and initiative.

• Industrial restructuring and technological improvement.

• Improve national welfare through balanced growth and income distribution.

The Seventh Five-Year Economic Development Plan (1992 – 1996)

• Promote high-technology fields, such as microelectronics, new materials, fine chemicals, bioengineering, optics and aerospace.

• Promote economy through self-regulation and orderly competition.

• Management innovation and establishment  of sound work and civic ethics.

Seoul 2003

Changes in Industrial Structure

Agriculture to Manufacturing / 

    Light Industry to Heavy and Chemical Industry

Leaders of the past

Some history

King Sejong the Great (世宗大王, 세종대왕)

• South Korea's national language is Hangeul introduced in 1446 under King Sejong of the Choson dynasty. 

The Song of the Dragon Flying to Heaven (龍飛御天歌, 용비어천가)

A tree whose roots are deep: in the wind does not shake; its flowers have luminance; its fruit, fragrance.

Water whose fountainhead is far away; in drought does not dry; it flows and becomes a stream; and to the sea it surely reaches

Shin Saimdang (申師任堂, 신사임당)

• On June 23, 2009, the Bank of Korea released the 50,000 Won note.

Yulgok (李珥, 이이)

Yi Hwang (李滉, 이황)

Coins (up till 2006)

Japanese Rule (일제시대)

• In January 1876, following the Meiji Restoration, Japan employed gunboat diplomacy to pressure Korea to sign the Treaty of Ganghwa [강화도조약], an unequal treaty, which opened three Korean ports to Japanese trade and granted extraterritorial rights to Japanese citizens.

• Korea was under Japanese rule as part of Japan's 35-year imperialist expansion (29 Aug. 1910 to 15 Aug. 1945).

North and South Korea

• The unconditional surrender of Japan, combined with fundamental shifts in global politics and ideology, led to the division of Korea into two occupation zones effectively starting on September 8, 1945, with the United States administering the southern half of the peninsula and the Soviet Union taking over the area north of the 38th parallel.

• The Korean War (25 June 1950 – 27 July 1953) was a war between the Republic of Korea (supported primarily by the USA, with contributions from allied nations under the aegis of the United Nations) and the Democratic People's Republic of Korea (supported by the People's Republic of China, with military and material aid from the Soviet Union).

Presidents of Korea

Recent leaders

Yi Seungman (李承晩, 이승만)

• Yi Seungman or Syngman Rhee (1875–1965) was the first president of South Korea. His presidency, from August 1948 to April 1960.

Kim Gu (金九, 김구)

• What if?

Park Chung-hee (朴正熙, 박정희)

• Park Chung-hee (1917–1979) was a Republic of Korea Army general and the President of South Korea from 1961 to 1979.

• He has been credited with the industrialization and rapid economic growth of South Korea through export-oriented industrialization.

The Economic Policy of 

Park Chung-hee

• Park had seen the development of Manchukuo based on Japanese investment in infrastructure and heavy industries when he was an officer in the Manchukuo imperial army.

• Intending to acquire money and technology for South Korea via Japanese grants and soft loans, Park normalized diplomatic relations with Japan in 1965 (Treaty on Basic Relations between Japan and the Republic of Korea).

• Beginning of Chaebols (Korean conglomerates).

Korea’s Economic Take-off

(The Miracle on the Han River)

• "(When visiting Korea), I recall seeing a billboard in the Korean language (near the airport) that was roughly translated to me by my taxi driver as 'export or die.'...”

• "I heard from the bureaucrats that the president would never cancel a meeting with the business community to receive a visiting dignitary. He knew early on that Korean success would depend on unleashing the potential of the private sector." 

Export-Promotion Strategy (1960’s)

• “Export contests!”

• Monthly/Annual Meetings led by Pres. with ministry officials, business leaders, scholars

• Evaluation/Coordination/Re-alignment/Signaling

• Incentives: Tax benefits (lower rates, exemption); Credit allocation (“policy loans”, low interest rates); Entry barriers (licensing, FX); etc.

• Rise of the Chaebol (Korean large corporations, e.g. Samsung, Hyundai, LG, etc).

• Annual Export Growth jumps from 3% (1950s) +> 30% (1960s) +> 40% (1970s)

Institution Building

• Creation of economic development agencies

• Economic Planning Board (EPB)

• Ministry of Trade and Industry (MTI)

• Ministry of Finance (MoF)

Economic Planning Board (EPB)

• EPB (1961-94)

– “Super ministry” modeled after Japanese MITI in charge of both planning and budgeting..

– Preparing Five-year EDPs and annual EMPs

– Coordinating economic polices

• Head of EPB holding the post of Deputy Prime Minister and chairing Economic Ministerial Meetings

– Allocating domestic and external resources for economic development.

Other Institutions

• Ministry of Finance (1948-94)

– Financial market, monetary policy, tax policy, treasury.

• Ministry of Finance and Economy (1995-)

– EPB and MOF merged to produce MOFE.

– “Planning” effectively abandoned .

– In 1998, transferred budgeting, prudential regulation, and monetary policy to MPB, FSC, and BoK, respectively.

– Still in charge of coordinating economic policies.

• Ministry of Planning and Budget (1998-)

– Responsible for central government budgeting.

– Increasing its role in long-term planning and policy coordination with the introduction of MTEF.

Economic Growth in 1970’s

Promotion of Heavy and Chemical Industries (‘73-‘79) <Shipbuilding, steel, automobiles, machinery and petrochemicals>

• Gradual weakening of competitiveness of labor-intensive light industries:

– Protectionism and world-wide stagnation caused by the first oil crisis.

– Rapid wage increase and fierce competition from other developing countries.

• Fast-forward petrochemical industry development in the aftermath of the fall of Vietnam and U.S. pullout.

• Transform industry to become more capital-intensive and reduce C/A deficit.

• National-defense related industries also encouraged.

• Successful firms in 1960s “selected” to lead HCI industries.

Chun Doo-hwan (全斗煥, 전두환)

• President from 1980-1988

• After his inauguration, Chun clamped down on out-of-school tutoring and banned individual instruction or tutoring.

• In 1981, Chun enacted the "Care and Custody" legislation. 

• In the winter of 1984, before declaring a moratorium on 

         the Korean economy, Chun visited Japan and requested 

         a loan for $6 billion.

• Later he passed the 3S Policy (Sex, Screen, Sports).

        Chun tried to appeal to the citizens in order to ensure 

        the success of the 1988 Seoul Olympics preparations :

    e.g. forming a pro-baseball and pro-soccer team,

           starting the broadcast of color TV throughout the nation,

           lessening censorship on sexually suggestive dramas and movies

           making school uniforms voluntary, etc.

• In 1981, Chun held a large-scale festival called "Korean Breeze", but it was largely ignored by the population.

Democratization

• Sustained economic growth and stability enabled people to pay more attention to human rights, to care for individual freedom, and to demand a full-fledged democracy. Demands for freedom from every corner of Korean society culminated in a democratization movement in 1987.

• One of the first reform movements was the free labor movement. Yet it was translated into incessant labor disputes, a reaction to the oppressed labor movement in the 1960’s and 1970’s.

• Korea’s declaration of democratization in June 1987 paved the way for accelerated political democracy and market liberalization during the Roh Tae-woo regime (1988-1992).

Jeon Tae-Il (1948-1970)

wages

Roh Tae-woo (盧泰愚, 노태우)

• Roh Tae-woo  (born December 4, 1932) is a former ROK Army general and politician.

• He was President of South Korea  from 1988–1993.

Slowdown in Economic Growth : 1989-1993

• The late 1980s saw Korea’s export competitiveness deteriorate due to rising labor costs, rising domestic interest rates, and a sharply appreciating won (the won rose against the US dollar by 18% in 1988 alone).

• The trade surplus of the later 1980’s dwindled to practically nothing in 1989 and was followed by progressively larger deficits in the 1990’s.

• Labor policy helped strengthen union’s influence and favored wage increases: tremendous wage hikes (11% annually during 1989-91) far exceeded the rise in productivity.

• Increased financial costs, excessive administrative regulations on business activities, and low social overhead capital investment were typical of the period, which gradually afflicted industrial and firm competitiveness and entrepreneurship.

Kim Young-sam (金泳三, 김영삼)

• Served as Korea’s (first civilian) President from 1993 to 1998.

• He presided over a massive anti-corruption campaign, the arrest of his two predecessors, and initiated an internationalization policy called Segyehwa 세계화     

    ( lit. Globalization).

• Acceleration of liberalization!

Economic Deregulation

• Deregulation

– land use (1990)

– import liberalization (1992)

– open stock market to foreigners (1992)

– open domestic capital market (1994)

– deregulate loan financing in foreign market (1994)

Phenomenal Growth

Integration into the World

1997/8 Financial Crisis

Kim Dae-jung (김대중)

• Kim Dae-jung (1925-2009) was President of South Korea from 1998 to 2003, and the 2000 Nobel Peace Prize recipient (for the Sunshine policy)

• He successfully shepherded South Korea's economic recovery from the 1997/8 economic crisis; brought in a new era of economic transparency ;

    and fostered a greater role of 

    South Korea in the world stage 

    (including the FIFA World Cup 2002,

     jointly hosted by Korea and Japan).

Roh Moo-hyeon (盧武鉉, 노무현)

• Roh Moo-hyeaon (1 September 1946 – 23 May 2009) was President of South Korea 2006–2008.

• "I will root the method of discussion inside the government. … discussion should be familiarized until we are called 'Republic of discussion'.“

• Dubbed “Participatory Government”.

• Achievements include: the expansion of social welfare, the pursuit of "balanced national development" to help underdeveloped areas, the eradication of corruption, reform of education and tax systems, reform of labor-management relations, reform of mass media, and a recasting of the relationship with the United States and Japan.

Lee Myung-bak (李明博, 이명박)

• Lee won the presidential election in December 2007 with 48.7% of the vote which was considered to be a landslide.

Private companies

Korean Chaebols

Chaebol

• A conglomerate of many companies.

• Companies hold shares in each other.

• Concentration of national economy.

• Does not have own financial institution.

• Spreads across industries.

• Has centralized structure and control.

• Tends to be family-based.

Chaebols

• Family-oriented Korean conglomerates

• Founded in 1938 (by Lee Byung Chull)

– exporter of dried/pickled seaweed and fish, vegetables, and fruits

– flour mill and confectionery machines

• 1950’s Economic Stabilization

– Korean War - Samsung lost all assets

– aimed to help rebuild Korean economy; entered the manufacturing industry (sugar, fabrics 1954: Cheil Industry)

– became a leader in modern business practices (recruiting from outside; 1st HR dept.)

• 1960’s Expansion of Key Industries

– entered electronics and chemical industries

– 1969 established Samsung Electronics Co.

                      Samsung Electronics

• SAMSUNG ELECTRONICS: established in January, 1969

• 1970’s: Bet the future on electronics

– laid the groundwork for electronics in Korea

– helped the domestic economy grow

– paved the way for exports

• 1980’s: A more comprehensive electronics company

– established plants in Portugal and US

– established Semiconductor and Communication corporation

– began memory chip business (DRAM)

• Early 90’s: Integration and Globalization

• Mid-Late 90’s: Implementing new management strategies

• 2000’s: Digital Vision -- “A Company that leads the digital convergence revolution”

• Lee Kun-hee:  "Change everything except your wife and kids“: 1993

• As of 2010, his son Lee Jae-yong is President and COO of Samsung Electronics. 

• Lee Boo-jin, his eldest daughter is President and CEO of Hotel Shilla, a luxury hotel chain, as well as President of Samsung Everland, a theme park and resort operator

• His eldest brother's son is currently chairman of the CJ Group, a company holding businesses in food, beverages and entertainment

• His second eldest brother's sons ran Saehan Media, one of the largest blank media producers. 

• His older sister is the owner of Hansol Group, the country's largest paper manufacturer and producer of electronics and telecommunications. 

• One of his sisters is married to Koo Ja-hak, brother of former chairman of the LG Group and himself a former chairman of LG Semiconductor. He is currently running one of the largest food services firms in Korea. 

• His younger sister, Lee Myung Hee is currently the chairman of the Shinsegae Group, the largest retail company in Korea, with major holdings such as the Shinsegae Department Stores and E-Mart.

• LG Corp. is the second-largest South Korean chaebol following Samsung.

• LG produces electronics, chemicals, and telecommunications products and operates subsidiaries like LG Electronics, LG Display, LG Telecom and LG Chem in over 80 countries.

• LG Corp. founder Koo In-Hwoi established Lak-Hui Chemical Industrial Corp. in 1947. As the company expanded its plastics business, it established Goldstar Co., Ltd., (currently LG Electronics Inc.) in 1958. 

• Chung Ju-yung  (1915 - 2001)

• Pony (1975-1980)

Diversified Businesses

• Daewoo was founded on 22 March 1967 (by Kim Woo-jung) as Daewoo Industrial and was dismantled by the Korean government in 1999.

• The group was reorganized into three separate parts: Daewoo Corporation (a.k.a Daewoo Electronics), Daewoo Engineering & Construction and Daewoo International Corporation.

• Park Tae-joon (1927-Dec 2011): retied 1993

• Began production in 1972, just four years after the company's inauguration in April 1968 with thirty-nine employees (initially funded by Japan.)

• By the late 1980s POSCO's growth had been immense. It was the fifth biggest steel company in the world, with an annual production approaching 12 million tons worth 3 trillion won.

• Listed in NYSE 1994.

• In 2000, full privatization of POSCO was completed.

1973 Oil-crisis

Economic Episodes

The First Oil Crisis (1973)

• Before the crisis, Korea was able to achieve a remarkable economic growth. It was growing at the rate of 9.6 percent each year. Under the environment of free trade and global economic boom, export-driven economic development plans had paid off. 

• The first oil crisis in 1973 dealt a deadly blow to a country without any oil fields.

• Severe stagflation set in: prices of oil and raw materials soared, while production and income fell. Yet when the second oil crisis hit, the Korean government and the public were prepared and managed to get around it. 

The “Three Lows”

Economic Episodes

• The 1985 Plaza Accord lowered the relative value of US dollars and Korean won vis-à-vis the Japanese yen thereby helping Korean exports.

• World oil price fell, helping Korea’s balance-of-payments situation and profitability.

• World interest rates dropped, thereby favoring countries with large foreign debt like Korea.

• Economic performance during the so-called 'three lows' period (1986-88):

• In the era of “Three Lows” (low exchange rates, low interest rates, and low raw material prices), income grew continuously at a high rate, but the inflation rates remained low.

• From 1988, however, CPI inflation began to rise (7.1, 8.6, and 9.3% in 1988, 1990, and 1991 respectively) accelerated largely by increasing labor costs and increased money supply helped on by the mounting current account surplus.

1997/8 Financial Crisis

Economic Episodes

Economic impact of the crisis

• An immediate effect of the crisis was the depreciation of the won to the US dollar—at the end of September 1997, one US dollar bought 915 won, but by the end of the year, the won had fallen to a record low of 1,965.

• Depletion of foreign reserves to US$8.9 billion by end of 1997.

• The depreciation of the won exerted inflationary pressure, which shot up to an average of 7.5% in 1998 (compared to 4.4% in 1997 and 0.8% in 1999).

• Increasing rate of bankruptcy (more than 17,000 firms were bankrupt in 1997 alone).

• Non-performing loans exceed 20% of their total loan portfolio at some banks and total irrecoverable loans were estimated at 32 trillion won (about US$20 billion)

• Korean stock price index dropped to 366 point in December 1997 from about 750 in mid-1997.

• Social disruption increased as the unemployment rate more than doubled from 2.6% in 1997 to 6.8% in 1998.

Recovery

• IMF  announced a bailout package of $58.4 billion(13% of Korean GDP).

• IMF Loans required:

– Higher interest rates*

– Further deregulation; liberalization

– Reform/rejuvenate dormant bankruptcy law

– Allow foreign investment in financial sector

• IFIs: “Don’t try to export your way out!”

• Korean response: Export, export, export

• Repay IMF loans ()

• Rationalize Chaebol (“Big Deal” program)

• Adjust to new structural realities

– More liberal financial system

– Greater foreign presence

– More rights-oriented society

2008/9 Global Recession

Economic Episodes

Not again!

• Korea depends on exports, but somehow Korea was a little better off (better prepared) than in 1997/8.

• In Nov. 2008, government poured $120 billion into financial markets to support the won.

• In Dec. BOK executed $30 billion currency swap with U.S Fed. (increase liquidity in credit market & prop up the economy.)

• Korea’s national debt was 33% of GDP (OECD average was 75%).

• Strong safety nets established (e.g job-training programs like JUMP). Job-sharing.

• Long-term contracts (like ship-building increased market share to 33% in 2008.)

• Cheaper won (Toyota start to purchase Korean steel in 2009).

Japan

Neighbors

Japan Relations

• Rivalry (World baseball classic 2009, football).

• Dokdo island (독도).

• Koreans in Japan (Zainichi) 600,000

• ‘Comfort women’

China

Neighbors

China Relations

• Yellow cloud (황사 [黃砂] )

• Choseonjok  (조선족): Korean ethnicities living in China (2 million).

U.S

International Relations

The U.S

• Trade: From ginseng (인삼) 

            to SUV’s.

• The Republic of Korea-United States Free Trade Agreement (also known as KORUS FTA) is a trade agreement between the US and Korea (April 1, 2007).

• Main issues were food, cars, and services.

• Beef crisis! (Downer in 2003).

• Koreatowns.

Technological Nirvana

Economic Leader

Korea’s Technological Edge

I.T

• 1990’s: US took up dial-up access, while Korea chose DSL.

• By 2000, 90% of Korean homes had braodband connection.

• Korea’s IT exports grew from $20 billion in 1997 to $78 billion in 2005.

• In 2004, gov’t announced the IT 839 policy (8 services, 3 infrastructures, 9 products).

• There have been successes (chose CDMA over GSM for coding wireless signal) as well as failures (DMB).

• A nation of gamers: Korean video game produced more than $2 billion in revenue in 2008 (1/4 from exports). This is double the country’s movie industry.

Samsung again!

Korean Wave

Entertainment

Hallyu (韓流, 한류)

• Korean Wave (Hallyu) refers to the spread of South Korean culture around the world.

• The term was coined in China in mid-1999 by Beijing journalists surprised by the fast growing popularity of Korean entertainment and culture in China.

• The Korean wave is responsible for achieving over one billion dollars in revenue annually for South Korea through cultural exports.

• For example, in 2011 based on international activity the Korean wave added approximately $3.8 billion dollars of revenue to the Korean economy.

K-Pop

Entertainment

S.M. Entertainment

• S.M. Entertainment  is an independent Korean record label, talent agency, producer, and publisher of pop music, founded by Lee Soo-man in South Korea.

S.M. Entertainment (cont.d)

S.M. Entertainment (cont.d)

J.Y.P Entertainment

• JYP Entertainment is a Korean music record label, founded in South Korea in 1997 by Park Jin-young.

J.Y.P Entertainment (cont.d)

Others …

• DSP Entertainment

• YG Entertainment

Series

Entertainment

Winter Sonata

Dae Jang Geum 

Full House

Cinema

Entertainment

Evolution 

• Early period (until 1926) :"Motion pictures have finally been introduced into Joseon … beginning of October 1897”,

• The Golden Era of Silent Films (1926-1930): Na's film, Arirang (아리랑) (1926) considered the start of the era of silent film in Korea.

• Early sound era (1935-1945): Korea's first sound film was Lee Myeong-woo's 1935 Chunhyang-jeon

• Liberty (1945-1950) and War (1950-1953) eras:  Choi In-gyu's Viva Freedom! 자유 만세) about Korean freedom-fighters during the waning days of the colonial period, is considered the major film of this era.

• Golden Age (1953-1973): With the ascension of Park Chung Hee in 1962, government control over the film industry increased substantially. 

• Under the Motion Picture Law of 1963, a series of increasingly restrictive measures were placed on the film industry. The number of films produced and imported were limited under a strict quota system (domestic film-production companies dropped from 71 to 16 within a year.) Government censorship at this time also became very strict, focusing mainly on any hint of pro-communist messages or obscenity.

Evolution (cont.d.)

• "Revitalizing Government" era (1973-1979) :Governmental control reached its height in the mid- and late-1970s, nearly destroying the vibrant film culture that had been established in the preceding decade and a half.  Also, the Korean Motion Picture Promotion Corporation (영화진흥위원회) was created in April 1973.

• (1980-1996): the government's relaxation of censorship and control.

• Current (1997 through present):  This government-enforced screen quota system has stood since 1967, which limits the number of days per year non-domestic movies can be shown on any one movie screen in South Korea.

• There are three important dates in new wave Korean films: 

– 1992, Marriage Story was financed by Samsung, marking the first non-government funded film. 

– 1999, Shiri was released and led to Korean films taking over 50% of the local market.

– Ultimately, My Sassy Girl became the most popular and exportable Korean film in history.

Growth of Creative Industry

Is Hallyu sustainable?

Tourism

CURRENT PERSONALITIES

People to Watch

Psy

Jung Ji-Hoon (RAIN)

Park Ji Sung

Pak Se-Ri

Ban Ki-moon 

Jim Yong Kim

Concluding REMARKS

Main Lesson from Korea’s Developmental Policy Experience

• Marriage of government-private sector

• Policy Cycle (Selection, Support, Evaluation)

• Set up of Institutions for government-control

• Examples: 

– Export-led growth (Formation of chaebol)

– Science and Technology

– Saemaul undong (rural developmet)

Saemaul Undong (새마을운동 )

The future?

Society

• The Korean childhood (over-protection).

• In 2007, Korean families spent $13.6 billion on private schooling.

• English!

• SKY universities.

• Korean women.

• Foreign-wives (and multi-culturalism).

• Aging society.

Challenges ahead

• Korea’s energy challenge.

• The greening of Korea.

• From centralized planning to dispersed leadership.

• Opening the networking system.

References

• Amsden, Alice (1989) “Asia’s Next Giant: South Korea and Late Industrialization”, New York: Oxford University Press.

• Chang, Se-Jin (2003) “Financial Crisis and Transformation of Korean Big Business Groups: The Rise and Fall of Chaebols”, Cambridge: Cambridge University Press.

• Kim, Myung Oak and Sam Jaffee (2010) “The New Korea” New York: AMACOM.

• Song, Byung-Nak (2003) “The Rise of the Korean Economy” 3rd ed.. Oxford: Oxford University Press.

International Championship Host

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