south korea the miracle on the han river
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South Korea“The Miracle on the Han River”
Group:Rashid AbdullahRaja Shoaib AkberAbdul Aleem ChoudharyAzhar Ali
International Political Economy
How South Korea escaped poverty and became one of the richest countries in the world?
As recently as the early 1960s South Korea, Taiwan, Singapore and Hong Kong (the “Asian Tigers”) were considered to be a part of the third world. Since the 1997 Asian Financial Crisis, praise of the “Asian Miracle” has dwindled in academia, yet the Tigers still stand as rare examples of states which have successfully “developed” in a manner no one could have predicted 50 years ago – and at a considerably faster rate than any of our current efforts at third-world development seem to be proceeding.
The Asian Tigers
Republic of KoreaGovernment: Unitary Presidential Constitutional Republic
Population: 51 Million 2014
HDI: 0.891 Very High
GDP 2014: $1.790 Trillion
Republic of Singapore Government: Unitary Presidential Constitutional Republic
Population: 5.5 Million 2014
HDI: 0.901 Very High
GDP 2014: $297.941 Billion
Hong KongGovernment: Special Administrative Region
Population: 7.2 Million 2014
HDI: 0.891 Very High
GDP 2014: $ 400.607 Billion
Taiwan (Republic of China)
Government: Unitary Semi-Presidential Constitutional Republic
Population: 23 Million 2013
HDI: 0.890 Very High
GDP 2014: $ 517.019 Billion
History of South Korea
First Republic (1948-1960)
Also called the Republic of Korea (ROK). South Korea has been an independent Constitutional Republic since its liberation from Japan on August 15, 1945. Republic of Korea marked by Alternating periods of democratic and Autocratic rules as fellow:
Second Republic
(1960-1961)
Military Rule (1961-1963)
Third Republic (1963-1972)
FifthRepublic
(1981-1987)
Fourth Republic
(1972-1981)
Sixth Republic (1987-
Present)
USAMGIK
(1945-1948)
Under the First Republic
First President of South Korea (1945-1960) Anti-Communist Events under the First Republic of South Korea. South
Koreas first independent government, ruling the country from 1945 to1960-the Syngman Rhee administration.
The government took in vast sums of American Aid in amounts sometimes near the total size of the national budget. (Corrupt and inefficient government of ROK)
Major Events occurred during first Republic Land reform The Korean War
1960 - student demonstrations ousted Syngman Rhee from presidency
Syngman Rhee (1875-1965)
Power Production plummeted down to a miserable level of 11 thousand KHz, about one-eighth of the earlier production level of 80 thousand MHz
Capitalist VS Communist
The Korean
WarAt the start of the Cold War, Communist North Korea Went to war with its Capitalist neighbor . The bloody conflict lasted from 1950 to 1953.
Damage Estimates
The war destroy majority of the industries and industrial infrastructure
By August of 1951, 44% of factory buildings and 42% of Production facilities lay in ruins
Foreign Trade deteriorated from US$208 Million to US$2.9 Million
All these factors led to serious inflation.
POSTWAR SITUATION
The Korean
War
Chemical Industry
70%
Overall Industry Destroye
d
51%
Agricultural Machinery
Industry
40%
Rubber Industry
10%
Power Plants
80%
At the start of the Cold War, Communist North Korea Went to war with its Capitalist neighbor . The bloody conflict lasted from 1950 to 1953.
• GDP per capita around $100, poorer than Philippines.
• Ravaged by the Korean War
• Large Standing Army-Menace from North
• Largely agrarian country• Lack of natural resources Coal, iron,
copper, oil
• U.S. aid kept people barely alive: 1/2 of national budget
• 1/5 of adults unemployed; social unrest fueled by unemployed youth
Menace from the North
Under the Military Rule
Major Events occurred under the Military Rule
The military coup détat led by Major General Park Chung-he on May 16, 1961,put an effective end to the Second Republic.
Miracle on the Han River Five Year Plan (FYP)
Park Chung-he
Under the Military Rule Seized the capital + other important cities Brought businessmen into submission (June 14 law) The first South Korean five-year plan was inaugurated in 1962 Economic growth as the historical goal, to be achieved at all cost
“In human life, economics precedes politics or culture.” – Park Qualification for the special treatment was quantifiable and
objective Per capita output doubled in the following decade South Korea became an industrialized country Influenced by state-planning in Manchukuo “Guided Capitalism”: The state as the engine of economic
development central planning + gov’t intervention in the market industrial policy, corporate state
South Korean economy roars
GDP growth averaged 9-10% a year Manufacturing sector took greater share of the economy (close to
30% - comparable to West Germany) “Boys who grew up working in rice paddies found themselves
building oil tankers and designing semiconductor chips.” - Mark L. Clifford
State-ownedbanks
industry/business associations
FKTU (Federation of Korean Trade
Unions)
(gov’t-controlled) industrial unions
Businesses
Coopted labor
MOF (Ministry of Finance)
Other Gov’t Ministries
MTI (Ministry of Trade + Industry)
Top-Down, General Headquarter (Park himself made major decisions)
National Budget
EPB (Economic Planning Board)
The State Intervenes in individual firms’ decisions
planning, national budget
Economic Planning
Board (EPB)
Korean Corporate State
Controlled the Banking Sector•Nationalization
of Banks.•Extraordinary
power over credit-starved
businesses
Ministry of Finance (MOF)
Policies, regulations, order to move quickly from minister to firms, domestic cartels, steady
stream of profit
All Businesses were required
to join associations
Cutting of credit line, Arbitrary tax
audit, Personal Connections,Uneven law
enforcement
Enforcement devices
President, Gov’t Officials, AcademicsReps from trading companies
Rapid response team for exportersMonthly Export Promotion Meeting
Export Day (11/30)
“Export towers” to companies w/ best export performance
Early 1960s: Dollar began to run out; US threatened to cut aid
2nd FYP: Build industries targeted to export
markets.
1960s: South Korea utilized cheap labor-light manufacturing
Import license conditional or export performance Tariff exemption for raw material and machinery
Exporters could automatically borrow against overseas ordersMore credit to companies w/superior export performance
Huge Incentives for Exports
Coercive element: Corporate state had
business go along
Export-Oriented Industrialization (EOI)
What’s good about Export Oriented Industrialization?
Selective use of FDI (Foreign Direct Investment)
Reduced possibility of BOP crisis
Gov’t Complements market forces
Correction of market failure high set up costs of exports imperfection information.
Meritocracy in allocating credit
South KoreaUp-to-date Selective, short-term protection- International competition makes infant industries grow up.
New Machinery introduced.
Experience w/overseas market
Korea Trade Promotion Agency (KOTRA)
Helped Korean businesses
how to market their products
in foreign countries
Scoured the world for new
export markets
Key to overcoming
the obstacles early
exporters faced
Results (1961-73)
Exports skyrocketed: trade deficit stayed under
$1 billion
Huge Success
Export: $33 Million >
$3.3 Billion (100 times)
Imports: $343
million > $3.8 Billion (11 times)
Investment: 6% of GDP > 23 % of
GDP
South Korea established a firm international standing in light industries e.g. shoes, clothes,
plywood etc.
Raw Materials + Machinery for export industries
Five Year PlanEmphasized
industrial growth rather than food self-
sufficiency
Five Year Plan (FYP)
GOAL: lay a foundation for future economic growth by developing a
base industry in South Korea
Aims to increase wealth within
South Korea and Strengthen
Political stability.
Change in Policy.
Import substitution
industrialization to export
oriented growth
Nathan Plan
UN plan for the economic
recovery of South Korea.
Not Implemented
Second FYP (1967-1971)
South to shift the South Korean
state into heavy industry
Emphasized textile exports as a leading sector
Increasing the Public sector for social overhead
capital investment
The Big Push (1973-79) Fourth FYP 1977-1981 HCI (Heavy and
Chemical Industries)
Five Year Plan (FYP)
Aims: Build up defense
Shipbuilding, Machinery, Chemicals,
Steel, Electronic, Automobile
Unprecedented industrial expansion
Good: gain experience in heavy industries, which create far more added
value; acquire managerial skills;
economies of scale
Bad: Policy loans caused massive inflation in 1970s; some target
industries didn’t work out in the end (i.e.
aluminum)
“Reverse brain drain”
KAIST (Korea Institute of Science of
Technology) •Engineering
education
Lure Koreans who’d been
educated overseas with attractive pay
packages
State-owned
enterprise
World Bank refused to
finance the Project
Park Tae Joon used personal
connection in Japan to channel reparations (for
past Colonization)
Cutting-edge managerial techniques and scientific knowledge
Ran like military
Rapid construction schedule + high quality standard.Long work hours (60-70 hour work week)
Become one of the Largest,
most efficient steel maker in
the world Opened up the way for heavy
industries
Rise of Chaebols
Today South Korea is a highly Industrialized country.
National conglomerates (groups) run by founding families
Profitable firms subsidize less profitable firms within the
conglomerate (cross-subsidization)
Factors
Scarce credit + abounding investment opportunities
Red tape – lots of paperwork
Export promotion – bigger is better in export market
State-owned banking sector – political clout was a must to secure loans
Quite a few became Successful Global Multinationals
Samsung Electronics world’s larges information technology Company, Samsung Heavy industries, Samsung Life insurance worlds 14th largest life insurance company.
SAMSUNGLG Corporation is the 4th largest company in South Korea and become second largest in USA market share.LG Electronics, LG Telecom, LG Display and LG Solar Energy
LG Corporation
DAEWOO Group of Industries, Daewoo Motors, Daewoo Electronics, Daewoo Heavy industries, Daewoo Shipping
DAEWOO GROUP
Hyundai Motor Groups second largest automakers in Asia and fourth largest automakers in the world.
Hyundai Motor Group
Chaebols of South Korea
Earlier : The Centrally planned and government directed investment
Now: Completely market oriented economy
USA$ 16.768
China$ 16.149
India$ 7.277
Japan$ 4.788
Germany$ 3.621
Russia$ 3.559 Brazil
$ 3.073France$ 2.587
Indonesia$ 2.554 UK
$ 2.435 Mexico$ 2.143
Italy$ 2.066
South Korea$ 1.790
GDP in trillions of U.S. dollars. Data: IMF, WB, CIA WFBook.
South Korea is 13th Largest Economy of the World (GDP “2013 by IMF and WB” )
Third Largest in AsiaDonor to international Financial AidMember of OECDFour Asian Tigers (South Korea)G-20
Conclusion “Tiger Daddy State”
Economic development in exchange for political freedom Single party corporate state speeded up development Businesses were forced to compete overseas
Leadership was pragmatic and flexible Took maximum advantage of international + domestic
politics EOI as result of policy adaptation Acknowledged role of businessmen and Entrepreneurs Recognized need for advanced foreign technology
It takes right kind of “parenting” to develop a country’s industrial base to internationally competitive level– South Korea: Too authoritarian– Latin America: Too overprotectiveCountries should integrate into world economy, on their own terms
Infant industries need some time to grow and mature The individual cannot overcome market failures The individual succeed only so far as his country provides him
opportunities to do so
Conclusion
Budget deficits were kept within the limits of their financial limits, as to not destabilize the macro-economyBudget deficits
Debt levels during 1980-1985 was quite high compared to their GNP ratios, it was sustained by the country’s high levels of exportExternal debt
Exchange rates had been changed from long-term fixed rate regimes to fixed-but-adjustable rate regimes with the occasional steep devaluation of managed floating rate regimes
Exchange rates
Degree of Success
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