3 Pillars Fuel Korea’s Economic Development
President, Bureaucrats, Entrepreneurs Co-led Miracle
By Kim Tae-gyu
As far as Korea's economic development is concerned, former Prime Minister Nam Duck-woo is a living legend. Under his stewardship, the nation has evolved to one of the world's major economies from a backwater.
In his memoir published late last year, Nam says a strong resolve of political leaders, entrepreneurs ready to take risks and financial bureaucrats to support them are the Holy Trinity to enable the fast growth of Asia's fourth-largest economy.
``Without the three pillars, Korea Inc. would have been unable to overcome the shock of the first oil crisis in October 1973. The process is hard to explain with merely economic theories,'' Nam said.
``After tiding over the first oil crisis, heavy
industries, which were sought after in the early 1970s under the leadership of President Park Chung-hee, spearheaded our exports and economic growths,'' the 85-year-old said.
When then President Park took power of the impoverished country four decades ago, he tried to modernize it mostly through boosting labor-intensive light industries such as shoes, textile and paper manufacturing to name a few.
However, the model had its own upside limits ― they were easy to start, thanks to the poor country's large workforce, but were not enough to catapult Korea into becoming one of the world's leading economies.
To break through the ceiling, Park and his economic team turned to heavy industries such as steel, chemicals, automobiles and ships in the early 1970s; and there was Nam, who was appointed as finance minister in 1969.
``To my knowledge, President Park was motivated by his belief that the real economic strength of a country was derived from the strength of its heavy industry, as was well illustrated by the Japanese experience before and after World War II,'' Nam wrote in another book.
The result: Korea clocked gross national product (GDP) growths amounting to 14 percent in 1973 and 8.5 percent the next year thanks in no small part to the heavy industries. Exports of the products nudged past those of light industries starting in 1982.
This compares to the economic slumps of other industrialized nations ― the United States and Japan recorded contractions of 3 percent and 3.7 percent, respectively, during the first half of 1974
The government-initiated growth format of involving the three pillars from both the public and private sectors might sound like outright collusion between politicians and businessmen.
Nam also recognizes the criticism but at the same time it is precisely the way Japan nurtured its heavy industries in the early 1950s.
``It is hard to push for heavy industries through merely economic considerations. That was the case for Japan, which rebuilt itself as a global powerhouse through them, despite hard-core opposition from some policymakers and economists,'' Nam said in his memoir.
``The focus on heavy industries weighed on our economy in many ways. But if we did not do that at the time, I was worried about what direction Korea Inc. would take afterwards.''
How to Deal With Inflation
While the Korean government forging ahead with heavy industry-oriented policies in the 1970s, the biggest hitch was how to finance them because the pool of national savings was so shallow.
Firms could not take advantage of sufficient private savings. They could not borrow money from overseas either since most of them were no-names on the international scene.
In this climate, the government stepped up to secure loans itself from global players or more often than not just printed money.
The latter way was kind of a tax ― dubbed inflation tax ― as it debases the value of the local currency. This ended up depreciating the won in circulation, making people with money in hand worse off.
In other words, the government garnered funds to boost the heavy industries at the expense of ordinary citizens.
The downside of the easy-to-adopt policy was inflationary pressure caused by an oversupply of money, which was arguably public enemy No. 1 for many economists such as Nam.
``Back then, corporations asked for fresh loans just as thirsty patients demand water. The government responded to the corporate requests by devaluing money, which resulted in chronic inflation,'' Nam said.
He attempted to tackle these problems by introducing market principles as well as bringing long-term financing to domestic companies.
Toward that end, Nam's team reformed the stock market to stimulate public offering. Plus, all private debts of companies were frozen under a presidential emergency decree on Aug. 3, 1972, a revolutionary measure aimed at alleviating firms from the burden of heavy debts.
``In 1974, there were about 10,000 stock companies. But only around 50 were open to the public. Hence, the government issued a special step midway through 1974 to encourage public opening,'' Nam said.
Yet, inflation was not fully tamed despite his efforts, partially because the country had little sources of investment back then without printing money. It is one of Nam's biggest regrets.
Economic Development & the Political System
One of the time-honored disputes in the economic growth of underdeveloped nations is the importance and role of the political system. It typically zeroes in on whether a dictatorship is inevitable for fast economic expansion.
Park took power through a military coup in 1961 and was elected as the country's president two years later while relinquishing his initial promises that he would retreat after political unrest was eased.
After being sworn in for his third term by a relative slim margin in the 1971 election for which the opposition parties cried foul, Park phased in very authoritarian rules by changing the Constitution.
The new Basic Law allowed him unrestricted power with which he more often than not cracked down on pro-democracy movements and his political rivals, including Kim Dae-jung who became the country's president in the late 1990s.
Back then, many democratic organizations were accused of spying for North Korea and some of their leaders were even executed, and it was only in the new millennium that they were eventually vindicated.
Park's response to such criticisms is widely known here: ``Just spit on my grave.''
Regarding the thorny controversy on whether hard-line dictatorships such as that of Park help emerging countries rack up quick economic growth, the answer from Nam seems to be yes, but with very strict conditions.
``When we asked for international support to build social infrastructure, they tended to say that Korea's human rights issues made it difficult to extend a helping hand,'' Nam said.
``Then I told them that under Korea's market system, we would eventually attain political democracy after achieving economic growth. I asked them to understand the situation while requiring fresh funds.''
A Few Things to Regret
Although he seemingly deserves credit for much in the country's industrialization, he has a very low-key approach in evaluating his performance.
``In hindsight, I was not a successful policymaker or successful economist. I did have my opinions as an economist but I lacked the political and administrative prowess needed to realize them,'' Nam recollected.
``But I can say this for sure ― I tried to brace for President Park Chung-hee's strong policy initiatives under the framework of the market economy.''
Under such a mantra, he picked a few things to regret such as the dearth of policies on land ownership and the failure to tame inflation. Some appear to be a result of his own policies, while others are those of other administrations.
``The fast growth accompanied by steep inflation was an outstanding feature in economic development in the 1970s. Some factors such as oil crises were beyond our control but I still regret failing to curb the price upsurge,'' Nam said.
``Furthermore, development schemes were conducted without proper consideration of land policies. As a result, speculations on real estate and high-rising land prices have always plagued administrations. We should have come up with ways of enabling more social use of lands without damaging property rights''
The high inflationary pressure and appreciating real estate have been one of the biggest headaches over the past few decades. The former has been dealt with to some extent but the latter still remains as a real threat.
``Consistency is a real value in seeking the advancement of the economy. We suffered a currency crisis (in the late 1990s) because we failed in public offerings of corporations and in preventing poor management of some firms from 1972 to 1974.''
``If we don't embrace global standards before opening up the economy, we will be destined to experience currency crises and financial debacles. Along the same line, the frequent change of financial ministers for political purposes is also bad.''
Finally, Nam pointed out that the nation lacked an economic education for the people, which he insinuates is at least partially responsible for the notorious discord between the management and labor.