South Korea’s Export-led Growth

1. South Korea’s Export-led Growth

2. The Korean Economy in 1961 • Per capita GDP (or GNP) US$ 82.- • Industry structure : -Agriculture 40% -Manufacturing/Mining 15% • Cement, Plate glass, Fertilizers, • Light industries processing US aid materials (cotton, wheat, sugarcane syrup) • Illiteracy rate 28% (mostly elders)

3. Absolute Poverty! • Two round annual cultivation – rice (summer) and barley (winter) • Chronic shortage of food grain : The stock of rice used to be exhausted one month ahead of barley crops. “Grass roots-Pine tree skins” • “Spring starvation” or “barley hill” came every year in May throughout the entire history of Korea.

4. Competing for Jobs in Manufacturing • Jobs in manufacturing industry had been occupied exclusively by workers of industrialized economies. • Undertaking industrialization by developing economies takes jobs away from workers of industrialized economies, either indirectly by import substitution or directly by export promotion.

5. Stages of Manufacturing Activity Primary Materials Part & Assembly Resources Components • Technologically accessible : • Techno. not accessible :

6. Industrial Activities and Catch-Up • Pre-Industrial economies (may) provide raw materials and buy industrial products. • Catch-up begins with joining in either accessible assembly or P&C or both.

7. The First Stage of Industrialization <1>Technologically Accessible Manufacturing <2>Factories, Machinery-Equipments, and Technology <3>Provision of Materials and Parts-Components <4>Marketing of Industrial Products “Begin with affordable technology. Build factory, get machinery/equipment and materials/ parts/components. Operate factory to produce. Sell the products.”

8. <1>Technologically Accessible Manufacturing • Unskilled workforce could not afford high value-added manufacturing which are either capital intensive or high-tech intensive or both. • South Korea started with low value-added manufacturing of simple labor-intensive goods such as plywood, garments and wigs, since they were the only accessible industrial activities for her workforce.

9. <2>Factories, Machinery-Equipments, and Technology • Capital was needed for investment in building factories and acquiring machinery-equipment. • Domestic capital for factory site and construction works. • Foreign capital for importing machinery and equipment, and licensing foreign technology.

10. Capital Policy • Domestic Capital • Foreign Capital

11. 1. Domestic Capital 1.1 High Deposit Rate, Low Loan Rate 1.2 Development Inflation and Forced Saving

12. 1.1 High Deposit Rate, Low Loan Rate • Interest rates were desired to set high for deposits to mobilize domestic capital on one hand, and • low for loans to encourage industrial activities on the other. • But interest rates of this kind impose loss on commercial banking and many occasions.

13. continued • Military government forced major stock-holders of commercial banks to donate their shares, after the coup d’etat in 1961, for pardoning their “illicit fortune making” to take over the control of all commercial banks, and • enforced the upside down structure of interest rates.

14. 1.2 Development Inflation and Forced Saving • Poor Koreans were unable to generate enough savings to meet everlasting excess demand for cheap bank loans. • Chronic savings-investment gap as well as the loss of commercial banks was covered by increasing money supply. • Forced saving by Development Inflation

15. 2. Foreign Capital 2.1 No FDI! 2.2 Foreign Loan Was Not easy! 2.3 How To Break Through? 2.4 Deferring Foreign Exchanges Gap

16. 2.1 No FDI! • Widespread misgivings : “Foreign capital is the vanguard of hostile invasion!” • The idea of inviting FDI was rejected in favor of fostering indigenous firms. • As for foreign capital, Koreans’ borrowing was preferred to foreign-owned firms.

17. 2.2 Foreign Loan Was Not Easy! • Global investors rated South Korea as ‘non-investable’ in 1960s under still hostile inter-Korean confrontation. • No Korean entrepreneur had been able to draw any foreign loan on his own. Samsung Electronics was able to borrow on its own in international financial market for the first time as a Korean firm only in early 1980s.

18. 2.3 How to Break Through? • Sovereign debt guarantee : the Korean government selected promising industrial projects and let government-held commercial banks guarantee the repayment of principal and interest of the loan. • But massive inflow of loans from Japan actually took place after normalization of Korea-Japan relation, and this facilitated loans from other countries.

19. 2.4 Deferring Foreign Exchanges Gap • Foreign lenders are only concerned with safe repayment of interest and principal for their loan. • Repayment must be made not in Korean currency but in foreign exchanges. • Foreign loan does not solves foreign exchanges gap but only defers it from the time of importing foreign machinery-equipment to repaying the loan.

20. <3>Provision of Materials and Parts-Components • All the materials and parts-components were to be imported from abroad, in fact mainly from Japan. The more South Korea exported to the USA, the more South Korea had to import from Japan. • South Korean government began to encourage their localization later.

21. <4>Marketing of Industrial Products • Domestic market of South Korea was thin and small then, and did not have purchasing power sufficient enough to buy up what was produced. • Import substituting industrialization limits the market for industrial products, and hence jobs created, by domestic market. • Had to aim at world market.

22. Nature of Early Stage Catch-Up • Countries commanding the on-going industrial process is outsourcing simple labor intensive segment to LD economies. • This segment is connected with upstream of parts-components and material, and downstream of marketing. • This outsourcing is the only accessible chance for developing economies to start catch-up by export promotion.

23. Need for Foreign Exchanges • Foreign exchanges are essential for attaining equipment-machinery, technology licensing, parts-components, and material. • When traditional export cannot provide sufficient amount of foreign exchanges, then it is inevitable to try to export the industrial products as new export items.

24. Dollar Earnings? • In 1960 South Korea exported US$32.83 million and imported US$343.53 million with trade deficit of US$310.07 million. • The deficit was covered mainly by the US economic aid of US$245 million. Still short! • The Korean government lent the Korean currency to the US troops in Korea for their local spending, and the Americans paid back the loan in US dollars. This sum amounted to 62.6 million dollars in 1960.

25. Export • Agro-fishery-mining products such as rice, squid, iron ore, and tungsten were the major export items until 1962, accounting for more than 80% of the total export. • South Korea might then have had comparative advantage in agro-fishery-mining, but its production capacity could not generate enough foreign exchanges needed for early stage industrialization.

26. Export-led Growth 1 • Exporting manufactured goods became an imperative for South Korean industrialization. • Production of plywood, garments, wigs, shoes,… to sell to foreign markets became the core of new industrial activities. • Expansion of export led both economic growth and growth of import in parts-components and materials.

27. Localization: Equipment-Machinery, Parts-Components, and Materials • Expanded export augmented demand for equipment-machinery, parts-components, and materials. • Their localization called forth development of heavy and chemical industry, the task of which was basically import substitution.

28. Heavy and Chemical Industry • Heavy and chemical industry is highly capital-intensive, and its average cost declines as production scale expands due to increasing returns to scale. • Localization demand was certainly non-negligible, but was not big enough to absorb scale economies to a full extent. • HCI production had to aim at export from the beginning.

29. Technological Up-Grading • HCI is by no means simple labor intensive, and requires advanced know-how on technology. • Partners of industrialized economies will not transfer technology of high level. • Reverse engineering : recruit cooperative expertise and mobilize them with extensive support.

30. R&D • Steel : POSCO’ finex method • Shipbuilding : ‘Hyundai Heavy Industry’s LNG tankers. • CDMA : ETRI • Passenger Cars : Pony Design at Torino • Semi-conductors : Samsung’s Palo Alto Lab.

31. Export-led Growth 2 • The entire global market is the market for the South Korean HCI • Failure in HCI export means failure both in business and nation economy of South Korea. • Under current trend of globalization, any economic growth will depend more and more upon export and trade.