History Of Asian Economies
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 In the economic
development, the government’s creation of economic rent for certain segments
of business takes critical role. It can be either a source of political