Chapter

Chapter 5. Industrial Diversification in Korea: History in Search of Lessons

Author(s):
Reda Cherif, Fuad Hasanov, and Min Zhu
Published Date:
April 2016
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Author(s)
Meredith Woo

Koreans define their predicaments in terms of absences. One of the first absences they will lament is that of exportable natural resources, from which stemmed a path of industrialization squarely focused on manufacturing and on continually moving up the industrial ladder in order to survive in an inhospitable world for economic upstarts. What lessons Korea can offer the Gulf Cooperation Council (GCC) nations is an intellectually challenging question, because their starting points are as different as can be, as are the paths they have travelled in the past century. One can describe how the Koreans jump-started their economy, then diversified and upgraded it, but description does not make a prescription for the GCC nations to follow.

A long tradition in Western social sciences says that starting points do not really matter, nor does history, for an eventual economic convergence to occur. “Modernization theory” posits that in spite of unevenly paced development, nations progress along more or less a linear path and eventually resemble each other. Karl Marx thought Western capitalism would knock down the walls of China and drag it, kicking and screaming, into modernity; or that Germany, a country late to unified statehood and modern industrialization, would see, in the mirror the United Kingdom held, a reflection of its future self.

The idea that capitalist development is more or less homogenizing at each of its stages has been debated ad nauseam. If, however, countries already have similar attributes (in factor endowments, history, outlook and institutions, and perhaps geographical proximity), it is indisputably easier to move as a pack through the Rostowian “stages of growth” (Rostow 1962). In the pack, nations learn from each other—through examples, conversations, conferences, and simple travel—and the lessons can be meaningfully implemented because the institutional and cultural contexts are familiar and recognizable.

In that sense, the United Kingdom did hold a mirror for Germany, as did Japan for Korea. Singapore held the mirror for so many cities that dot the coasts of China; and Korea, with its history of industrial policy has lessons for Beijing (if not for Shanghai), as it did for Mahathir Mohamad’s Malaysia.

In spite of geographical and cultural distance, it is still possible that nations of the Middle East and East Asia can learn from each other. Some countries have similar trajectories. Dubai has much in common with Singapore and Hong Kong: they have long been committed to being open cities, more oriented toward trade, more laissez-faire in their attitude than some of their surrounding countries. They are also hub cities—in education, transportation, and finance—for their regions, and they grapple as best they can with the challenges and opportunities of running multiethnic cities that employ large expatriate populations.

Algeria also had, until the end of the 1970s, a trajectory not dissimilar to Korea’s. Both were colonized by countries that were themselves late industrializers, France and Japan, with soft spots in their hearts for industrial policy and economic planning. This planning tendency was carried on into the independent period in both Algeria and Korea. Houari Boumedienne (1965–78) and Park Chung Hee (1961–79) had long tenures as authoritarian rulers, presiding over extremely ambitious projects of social and industrial transformation—and with not inconsiderable success. They were in some ways “industrial sovereigns.” Unfortunately, the relative economic success and stability of the Boumedienne years were not sustained in Algeria, as they were in Korea.

This chapter distinguishes among East Asian countries by crude ideal types, based on their historical and institutional trajectories, and attempts to draw a more meaningful comparison and identify greater possibilities for generating “lessons” from experiences between these countries—mostly Korea—and the GCC countries. Using the analytical requirements discussed in Chapter 1 of this volume by Reda Cherif and Fuad Hasanov, the chapter then describes how Korea overcame the obstacles to growth. Some of the Korean experiences may resonate, in context and history, with policymakers in the GCC countries.

There are three very different worlds in East Asia, and these worlds came into being over a long period. The first world was created by Japan, starting in the late nineteenth century. It took shape through the intense mobilization and transformation of itself and its colonies—Taiwan Province of China first, then Korea, then Manchuria, and later pockets of territories occupied in the Pacific War. This world bore the birthmark of its creator—nationalistic, insular, militaristic, and state-oriented in its policies. Like Japan, these colonies eventually became oriented toward manufacturing, using multiyear plans and industrial policies based on intense mobilization of the population. Largely homogeneous in racial makeup and culture (although one could argue this point about Taiwan Province of China), they remained intact as nations for a relatively long time, which made national mobilization for economic growth less problematic.

Another world was created by Western colonialism, particularly in Southeast Asia—Hong Kong Special Administrative Region, Indonesia, Malaysia, the Philippines, Singapore—but also in the old treaty ports along the coasts of China. This is a world that is quite different from that of the former Japanese imperium. Born as maritime trading cities or entrepôts, they are open to the world (and the West), more market friendly and laissez-faire. These countries are multiethnic and multicultural, and thus the effort at both institution building and economic transformation involved some ethnic give and take, a balance predicated on some reasonable expectation of trickle-down from an ever-growing economic pie.

Third there is the world that China inhabits. Its multiple tendencies have persisted over time: a nationalist orientation in Beijing, with the same preferences as in other Northeast Asian countries toward multiyear planning, industrial policy, and manufacturing. But throughout coastal China a pronounced pattern similar to maritime Southeast Asia exists: trade-oriented, open, munificent, multiethnic, easygoing. The capitalism that developed in coastal China has often been described as “petty capitalism,” or “peddler capitalism,” which thrived in the interstices of whatever big-picture nationalist policy was brewing in the minds of the rulers in Beijing. Finally, China has a tendency that derives from its socialist past. China’s hinterland, especially in its west, still needs to develop a viable consumer base with the help of the government to redistribute resources from the coastal area to inland through various fiscal and financial incentives. Only when this happens will China have a truly unified national market, much as the United States created one through the intervention of the state.

Chapter 1 provides a useful scaffolding to enable comparison across time and place—a kind of elegant sine qua non for sustainable development. In Cherif and Hasanov’s analysis of the GCC countries, the hurdles to sustainable growth are immediately recognizable to those familiar with recent industrial histories of East Asian nations, as varied as they have been. Their arguments are based on economic theory, one that is validated by successful practices and experiences, particularly in the past few decades, in a constellation of countries in East Asia. What they suggest is that there is a kind of unshakable truth about development economics—all the gyrations of emphasis over the past seven decades notwithstanding—that is borne out by real industrial experiences.

Cherif and Hasanov argue that the standard prescriptions for growth—open economies, avoidance of government failures, macroeconomic stability, investment in infrastructure, and so on—are important; and it is true that the GCC countries have done relatively well in this regard, with impressive results in improvement along the numerical indices on quality of life, from health, life expectancy, and education. But for growth to be sustainable and with improved productivity, the tradable industries have to be promoted, deepened, and constantly upgraded. Even Dubai, a city long committed to openness and which has had spectacular success in diversifying away from natural resources, has not been as successful in broadening its exports, which remain predominantly in gold and jewelry.

Cherif and Hasanov also argue that the deepening of the tradable sector has to be meaningfully articulated with the rest of the economy to reap the benefit of externalities. Economic diversification is not a new agenda in GCC countries and dates back to the 1970s, if not earlier; but this diversification, mostly with a focus on the petrochemical and metal industries, has lacked linkage with the rest of the economy.

Industrial deepening in the tradable sector, and its linkage with the rest of the economy, requires an active agent: the market cannot accomplish this on its own. This is where Cherif and Hasanov’s third argument comes in: the critical role of the government, if no longer as an all-seeing master planner, then as a “coordinator,” an honest broker, venture capitalist, and partner with the civil sector. (Vibrant civil society and civil sectors are required for this to occur.)

Let me take these three prescriptions for growth, and see how they were followed in Korea—over a relatively long period. Historical origins are important—social scientists have an infelicitous phrase to underscore this point, “path dependency”—but locating this origin (the “path”) is a bit more complicated than simply saying that origins matter.

In my brief sketch of the three worlds of East Asian capitalism, I suggested that the Korean path to industrialization cannot be understood except through its experience throughout the entire twentieth century. This is another way of saying that, impressive as Korean economic growth has been, it did not exactly bolt out in the 1960s like Athena from the head of Zeus.

Korea was an integral part of the Japanese colonial empire, one that was unlike anything that the Europeans—let alone Americans—created. It was not far-flung. It was based on addition of contiguous territories, so Japan had the core country, which was Japan itself; it had a semi-periphery, which was Taiwan Province of China, Korea, and later, Manchuria; and then it stretched, during the war years, on to coastal China.

Western colonialists in Southeast Asia were primarily interested in resource extraction, and thus their expedient economic model was a dual or enclave economy, and the political model was “divide-and-conquer” along ethnic or tribal lines. In the first half of Japanese colonialism in Korea, Japan too followed this Western model. Korea served as a breadbasket, its economic structure geared toward exporting agricultural commodities to Japan. In some ways, Japanese policy exhibited a pattern parallel to the one that Albert O. Hirschman described for Germany vis-à-vis its trading partners before World War I: namely the attempt to prevent the industrialization of its agricultural partners, thus to create export markets for the colonizer’s goods and to destroy the competitive industries already established.1 In both the German and Japanese cases, there was remarkable coherence in the planning and execution of this policy.

Japanese policy aborted Korean industrialization in two ways: a cadastral survey and agricultural reorganization to transform Korea into an exporter of rice, and later, a Corporation Law that empowered the colonial government to control and dissolve, as necessary, new and established businesses in Korea. The effect of the decade-long cadastral survey was to establish a system of capitalist ownership in the countryside, stripping peasants of the motley benefits that feudal arrangements had guaranteed them, and confiscating or snatching up at fire-sale prices vast tracts of unclaimed land for the benefit of Japanese colonizers, most of them originally from Kyushu. The Corporation Law, on the other hand, limited Korean ownership and was aimed at insuring a monopoly position for Japanese manufactured goods, and severely curtailed investment in the nonagricultural sector; no Korean was permitted to start a factory without permission (which was almost always denied) and direct private Japanese capital inflow was discouraged, lest colonial industries compete with those at home. Through 1919, therefore, industries that thrived in colonial Korea were mostly household concerns that did not require company registration; industrial production accounted for only 13 percent of agricultural production in 1920—mainly in cottage industries such as dyeing, papermaking, ceramics, leather processing, rice milling, soy sauce making, brewing, rubber shoemaking, candlestick making, and so forth.2

The 1930s changed all that. Ironically, the global depression relieved the Korean landscape of its stagnant monocrop export economy, and thrust it fully into the Japanese industrial complex as an integral part. The precipitating factor was the deterioration of the Japanese rural economy, which, to reverse the trend, required a halt to the expansion of Korean rice production. More important, however, was a complex set of policy changes in Japan as a response to domestic crisis and the rapidly fluctuating international environment: the decision, following the boycott of Japanese products by other nations through tariffs and quotas, to pursue autonomous development, to create a self-sufficient economy within its sphere of influence.

Ugaki Kazushige, the Governor-General of Korea from 1931 to 1936, believed deeply in the need for a Japanese imperium of economic autarky and industrial self-sufficiency. Thus, in the 1930s, the real growth of Korea’s manufacturing production and value-added would average over 10 percent a year, and the value added from Korea’s mining sector increased at an annual compound rate of 19 percent, more than four times the rate of growth achieved before 1927. In other words, these were the first years of Korean “double-digit growth,” although Koreans, who were ruthlessly exploited, found it rather less than “miraculous.”

Colonial Korea was, in ways that Japan proper was not, a “capitalist paradise.” Taxes on business were minimal in order to attract the zaibatsu, or conglomerates, there was nothing equivalent to the “law Controlling Major Industries” that regulated business in Japan proper, legislation for protecting workers was nonexistent, and wages were half of what they were in Japan. The Government-General of Korea granted financial priority and preferential treatment to the zaibatsu with respect to capital, materials, and equipment procurement; mining firms received a subsidy for prospecting and for the processing of low-grade iron ores. For producers of synthetic petroleum, mica, aluminum, and tungsten, the subsidy was over 90 percent.

The colonial state also offered big business the two most fundamental preconditions for investment: the guarantees of political stability and of state investment in the infrastructure necessary for industrialization. Relying on a special budget set aside for a five-year industrial plan for Korea, and other subsidy funds and revenues from bond sales in Japan, the colonial government invested heavily in railways, ports, roads, and communications.

The colonial government also took upon itself the leading role in creating this “spurt” of industrialization; its share of capital formation in Korea was consistently high, becoming more than half in the 1930s and declining thereafter as the Japanese zaibatsu began moving into the peninsula. Most critical in the Japanese private sector’s decision to invest in Korea was the financial incentives created by the Japanese government and the latter’s willingness to share the risk should investments turn unprofitable.

In a relatively short time, the grip of zaibatsu groups on the Korean economy became tight and concentrated, and by the 1930s they substituted for the national policy companies as the spearhead of the industrial expansion drive. Three-quarters of capital investment in Korea was estimated to have been made by leading Japanese zaibatsu in 1940, the roster containing names like Mitsubishi, Mitsui, Nichitsu, Nissan, Asano, Mori, Riken, Sumitomo, and Yasuda (Woo 1991).

Politically, economic transformation and reorganization of this magnitude demanded a vast strengthening of the colonial state’s functions: repression, legitimation, and intervention with the aim to restructure social relations. This phenomenon was not confined to Korea, and occurred in Japan proper and in Taiwan Province of China. Yet, it was more accentuated in Korea, in part because the populace proved particularly recalcitrant, and in part because of the suddenness and magnitude of change.

This colonial experience, so painful that many Koreans would prefer it expunged from memory, made a feeble reappearance in the 1970s. The Korean state in the 1970s was consanguineous with the earlier state some 40 years back, in much the same way that the corporatist state of Brazil in the 1930s made an atavistic return in 1964 with the inauguration of the Castello Branco regime. What makes such a return visitation possible still remains, on a theoretical level, moot.

Postindependence Korea could not see itself finding a usable past in the wartime industrialization of the 1930s; the very idea was anathema to Koreans. But sometimes history proceeds as a straightforward text, and at other times important forces appear—as it were—in the parentheses. The 1930s bequeathed a set of patterns, a model, that could be a silent companion of Korean development, and the unspoken force of the truth that people make their own history but not in the circumstances of their own choosing.

The lesson of the colonial industrialization pattern was that it worked, and that its success was based on close collaboration between the state and the zaibatsu, and on building economies of scale. Perhaps nobody knew and appreciated this better than President Park Chung Hee, a military cadet in Manchuria in 1940 and a lieutenant in the Kwangtung Army—the architect of industrialization in Japan’s continental territory—when the war came to a halt in 1945.

The kind of industrial deepening—and its overall articulation with the rest of the economy—Cherif and Hasanov describe took place in Korea in the 1970s. Perhaps not so surprisingly, it happened at the time of a global shift in political and economic orientation, as in the 1930s.

The Korean economic boom in the late 1960s, much of it helped by American patronage, was a splurge on borrowed time. As American fortunes turned for the worse in Vietnam at the close of the decade, Korea braced for hard times and a new set of tasks: how to bargain with America so as to prevent the turning-off of the economic and military spigot that the Korean and Vietnam Wars had kept open, and how to handle the predictable eventuality of a U.S. troop reduction in Korea. But what the Korean leadership failed to anticipate—and the same could be said of all American allies—was just how systematic and imperious the devolution of the U.S. global burden was to be.

The new world according to Richard Nixon was an unfriendly and unforgiving one, where God only helped those who helped themselves: the Nixon Doctrine wrote off Indochina, and shoved off, through protectionism, economic parvenus like Korea. No longer could Korea find refuge in the indulgence of the Mutual Security Act and the exuberance of the Development Decade.

In what were perceived as the waning days of Pax Americana, the end of the Bretton Woods system, and the quadrupling of petroleum prices—a veritable disaster for a nation utterly bereft of oil—the first provision for survival was to purge all uncertainties from both the body politic and industry through the elimination of electoral uncertainties and the replacement of a self-regulating market with a regulated one. With the steering mechanism thus made predictable, the nation then veered toward the Big Push: massive investments in steel, automobiles, shipping, machine building, metals, and chemicals. The ambition was to turn Korea in the span of one decade from the final processor of export goods to one of the world’s major exporters of steel, ships, and other producer goods. The development of basic industries also held the promise of a vibrant defense industry to end reliance on American largess in weaponry and various attendant political inconveniences.

In 1973, six industries—steel, chemical, metal, machine building, shipbuilding, and electronics—were officially targeted for rapid growth, becoming objects of intense government scrutiny and development. The Heavy and Chemical Industrialization Plan sought to create one large industrial complex with “state of the art” production facilities for each target industry. Once ensconced, the enterprises were the first to receive available foreign capital (and the last to pay it back), with low interest to boot. They were first to receive government funding to purchase raw materials and machinery; first to be directed through administrative guidance; and first to receive discounts on freight rates, harbor-use fees, and on the cost of water, electricity, and gas. Heavy and chemical industries swiftly moved into these complexes. The projected economies of scale for the plan were truly breathtaking.

What was highly unusual about Korea’s Heavy and Chemical Industrialization Plan was that the production of producer goods had to substitute for imports and simultaneously (or with as little lag as possible) to be good for export.

There were three ways to finance the new export industries. One was through the banking system, the Bank of Korea rediscount rate; the second was fiscal, taken out of the state budget; and the third was through the National Investment Fund and other policy loans, which together accounted for over 40 percent of total domestic credit through the second half of the 1970s.

Of all policy loans, export credits and National Investment Fund loans were the most compelling for the Big Push. Export loans at real interest anywhere between minus 19 percent and minus 10 percent were the most plentiful loans to get: exporters merely had to produce letters of credit from foreign buyers to turn on the spigot.

The tight sequencing of import substitution industrialization, as found in Latin America, became condensed in Korea, and entailed a huge risk, given the massive economies of scale for heavy and chemical industrialization: if markets for new exports could not be found, then enormous waste, idle capacity, unemployment, and serious financial problems would ensue.

To avoid this problem, the state also became a harsh disciplinarian. Export credits were wonderful gifts but to get them, one had to be deserving, otherwise licenses were immediately revoked. Every year, the state slapped stringent performance criteria on the big exporters with respect to their capital, export volumes, and the minimum number of export items, destinations, and overseas branches required. Companies meeting these requirements were allowed the dollar amount of the letter of credit at favorable exchange and interest rates.

The Heavy and Chemical Industrialization Plan coasted along (even hovered above) the basic 1973 projection, and it was completed before the end of the decade. Just as the World Bank and other detractors of the Korean plan feared, Koreans achieved their goals by claiming a disproportionate share of resources for heavy industry. This was by design, not accident; the guiding principle of the heavy industrialization scheme had always been the achievement of scale economies through exporting and by participation of a few handpicked monopoly conglomerates.

The Korean “industrial deepening” of the 1970s is difficult to comprehend without the security threat, real and perceived, from outside. And the timing makes no sense without paying attention to the decline in American prowess that left Korea—its longtime ward—out in the cold. This was really what set Korea apart from the Latin American version of the “industrial deepening” that was orchestrated in the absence of a massive security threat.

If existential threats were the environmental factors that enabled economic diversification in Korea, one might say that the same enabling factors exist for GCC countries: existential threats to statehood emanate not only from region-wide political instability but also from domestic economic problems. At home, the GCC countries struggle with overgrown state sectors that sustain employment for most of the working population. The pressure this places on the state budget, along with the problem of the large population of young people and the joblessness that afflicts them, should make industrial diversification (and the job creation and skills acquisition it promises) a priority for government.

The Korean path to industrialization is perhaps too draconian for emulation; in any event, the world trade regime today is very different from the 1970s, and export subsidies of the kind the Korean government was able to provide to private enterprises—with all the carrots and sticks—are anathema in the current climate. It is also true that countries do not emulate, even if it were desirable, the entire economic Gestalt of another country unless it happens in colonial contexts or through voluntary associations (as in economic unions).

There are other ways to learn from each other, piecemeal. Those lessons abound in this volume: best examples from education and skills acquisition that can be emulated; the roles that development banks have played in another resource-dependent country, Brazil, which has diversified its industrial base over the past eight decades; the roles that governments play to affect technological leapfrogging by nurturing scientific talent—if not at home, then abroad, by recruiting students from inside and outside the country and educating them at the best universities in the world. Singapore is a fine example of this, as is Saudi Arabia. This volume also contains another chapter on Korea, focused on Saemaul Undong—one might call this the Great Leap Forward that actually worked—a self-help program to increase rural income, promote cottage industries, and stop the hemorrhage of rural population to cities. This massive mobilization of the countryside had a political purpose to serve, but it also accomplished its goal on its own terms, giving agency and purpose to rural inhabitants who had remained in the shadow of the intense glare of heavy industrialization. Saemaul Undong played an essential role in achieving balanced growth in Korea.

Good examples of how disparate countries learn from each other piecemeal can be found in East Asia. The notion of “the Pacific Rim” added some specificity to the promise of globalization, with the “three worlds” of East Asia coming closer together in their economic practices. In spite of varying economic origins and paths travelled, they have become, instead of members of the “three worlds,” members of “the Pacific Rim,” learning from each other through intense interactions, comparing notes, competition, simple travels, and conversations—as well as through conferences and books, just like this one. There are, in other words, many mirrors of the future that policymakers hold for each other the world over, at different times and places. The point of it all is to have the imagination and willingness to find one’s reflection in a few of them.

References

    HirschmanAlbert. 1945. National Power and the Structure of Foreign Trade.Berkeley: University of California Press.

    RostowWalt Whitman. 1962. The Stages of Economic Growth. London: Cambridge University Press.

    WooJung-En. 1991. Race to the Swift.New York: Columbia University Press.

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