By Ahn Choong-yong
Exactly half a century has passed since Korea launched its first five-year economic development plan, which triggered the country's compressed economic transformation. As we reflect on the last 50 years, we can see that both change and continuity have followed through Korea's ensuing consecutive five-year plans until 1996 and subsequent market-based policy formation toward an advanced Korea. The country has gone through a truly volatile evolutionary process in responding to challenges due to a rapidly changing international environment. However, there has been a constant factor thus far, one that will continue: A consistent and flexible outward-looking orientation.
It is hard to believe that Korea embarked upon an outward-looking and export-oriented economic development strategy in the early 1960s amid the then-prevalent inward-looking development doctrine of backward nations. Immediately after World War II, most underdeveloped nations sought economic independence from former colonial powers. But there were a few exceptions ― Korea, Taiwan, Singapore and Hong Kong. Korea was a war-torn country and one of the poorest agrarian economies in the world in the early 1960s, engulfed hopelessly in a vicious cycle of poverty. Recognizing that both Hong Kong and Singapore are urban city states without an agricultural sector, Korea is a normal country in terms of population, land and economic structure with co-existing primary, manufacturing and service sectors. Singapore and Hong Kong are considerably smaller than Korea's southernmost island of Jeju. Taiwan, an island state, has about a third of Korea's land and half its population.
Korea's outward development plan had four basic components: First, an "unlimited" but educated labor force, which was married. Second was foreign loans to ignite a stalled development engine to produce labor intensive products such as wigs, plywood, footwear and clothing for, third, export in world markets, which allowed scale economies for producers. Fourth, was the government, which combined the three forces to drive export-oriented machinery with performance-based incentives and a disincentive system. President Park Chung-Hee was commander-in-chief in the export battle, setting annual export targets for the nation and for large individual companies, clearing any administrative rigidity to achieve targets and decorating outstanding performers.
As Korea entered the 1970s, the government-led development system acutely realized the targeted heavy and chemical industries such as shipbuilding, iron and steel, oil refinery, petro-chemicals, textiles, machinery and electronics while seizing a latecomers' advantage. Its heavy industrial policy was financed by administered credit allocations. However, during the full-fledged industrial policy period, the government basically adopted a policy of picking the winner. Despite much trial and error in a compressed growth regime, the fundamental values attached to competition and efficiency have remained intact. In the 1980s and 1990s, Korea pursued a series of domestic market liberalization measures with the formation of a family-controlled chaebol system but was hit hard by the Asian financial crisis. In the past decade, the country has faced a new set of challenges.
Korea's outward-looking development strategy has enabled the nation to cultivate two essential ingredients. First is the notion of competition and efficiency. To win export orders, the business sector must produce better products at reasonable prices compared with foreign competitors in overseas markets so as to achieve efficiency. Second is costless access to advanced markets for Korean export firms to learn, from arm's length, advanced ways of doing business through overseas business contacts.
How can Korea overcome its present challenges, which range from a declining potential growth rate to worsening income inequity and massive unemployment? It must extend the underlying spirit of its outward orientation from the inception nexus of the five-year plans to service sectors such as finance, medicare, tourism, education, new town development and business services, which produce not only jobs but also enhance linkage effects with competitive manufacturing. The more sophisticated outward-looking orientation must be rooted in service sectors to ensure sustainable and resilient growth in this globalizing world.
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It is hard to believe that Korea embarked upon an outward-looking and export-oriented economic development strategy in the early 1960s amid the then-prevalent inward-looking development doctrine of backward nations. Immediately after World War II, most underdeveloped nations sought economic independence from former colonial powers. But there were a few exceptions ― Korea, Taiwan, Singapore and Hong Kong. Korea was a war-torn country and one of the poorest agrarian economies in the world in the early 1960s, engulfed hopelessly in a vicious cycle of poverty. Recognizing that both Hong Kong and Singapore are urban city states without an agricultural sector, Korea is a normal country in terms of population, land and economic structure with co-existing primary, manufacturing and service sectors. Singapore and Hong Kong are considerably smaller than Korea's southernmost island of Jeju. Taiwan, an island state, has about a third of Korea's land and half its population.
Korea's outward development plan had four basic components: First, an "unlimited" but educated labor force, which was married. Second was foreign loans to ignite a stalled development engine to produce labor intensive products such as wigs, plywood, footwear and clothing for, third, export in world markets, which allowed scale economies for producers. Fourth, was the government, which combined the three forces to drive export-oriented machinery with performance-based incentives and a disincentive system. President Park Chung-Hee was commander-in-chief in the export battle, setting annual export targets for the nation and for large individual companies, clearing any administrative rigidity to achieve targets and decorating outstanding performers.
As Korea entered the 1970s, the government-led development system acutely realized the targeted heavy and chemical industries such as shipbuilding, iron and steel, oil refinery, petro-chemicals, textiles, machinery and electronics while seizing a latecomers' advantage. Its heavy industrial policy was financed by administered credit allocations. However, during the full-fledged industrial policy period, the government basically adopted a policy of picking the winner. Despite much trial and error in a compressed growth regime, the fundamental values attached to competition and efficiency have remained intact. In the 1980s and 1990s, Korea pursued a series of domestic market liberalization measures with the formation of a family-controlled chaebol system but was hit hard by the Asian financial crisis. In the past decade, the country has faced a new set of challenges.
Korea's outward-looking development strategy has enabled the nation to cultivate two essential ingredients. First is the notion of competition and efficiency. To win export orders, the business sector must produce better products at reasonable prices compared with foreign competitors in overseas markets so as to achieve efficiency. Second is costless access to advanced markets for Korean export firms to learn, from arm's length, advanced ways of doing business through overseas business contacts.
How can Korea overcome its present challenges, which range from a declining potential growth rate to worsening income inequity and massive unemployment? It must extend the underlying spirit of its outward orientation from the inception nexus of the five-year plans to service sectors such as finance, medicare, tourism, education, new town development and business services, which produce not only jobs but also enhance linkage effects with competitive manufacturing. The more sophisticated outward-looking orientation must be rooted in service sectors to ensure sustainable and resilient growth in this globalizing world.
Dr. Ahn is also the foreign investment ombudsman at the Korea Trade-Investment Promotion Agency.
