Although South Korea's major industrial programs did not begin until the early 1960s, the origins of the country's entrepreneurial elite were found in the political economy of the 1950s. Very few Koreans had owned or managed larger corporations during the Japanese colonial period. After the departure of the Japanese in 1945, some Korean businessmen obtained the assets of some of the Japanese firms, a number of which grew into the chaebol of the 1990s. These companies, as well as certain other firms that were formed in the late 1940s and early 1950s, had close links with Syngman Rhee's First Republic, which lasted from 1948 to 1960. It was alleged that many of these companies received special favors from the government in return for kickbacks and other payments.

Government-chaebol cooperation was essential to the subsequent economic growth and astounding successes that began in the early 1960s. Driven by the urgent need to turn the economy away from consumer goods and light industries toward heavy, chemical, and import-substitution industries, political leaders and government planners relied on the ideas and cooperation of the chaebol leaders. The government provided the blueprints for industrial expansion; the chaebol realized the plans. However, the chaebol-led industrialization accelerated the monopolistic and oligopolistic concentration of capital and economically profitable activities in the hands of a limited number of conglomerates.

The chaebol were able to grow because of two factors-- foreign loans and special favors. Access to foreign technology also was critical to the growth of the chaebol through the 1980s. Under the guise of "guided capitalism," the government selected companies to undertake projects and channeled funds from foreign loans. The government guaranteed repayment should a company be unable to repay its foreign creditors. Additional loans were made available from domestic banks. In the late 1980s, the chaebol dominated the industrial sector and were especially prevalent in manufacturing, trading, and heavy industries.

In the 1950s and early 1960s, chaebol concentrated on wigs and textiles; by the mid-1970s and 1980s, heavy, defense, and chemical industries had become predominant. While these activities were important in the early 1990s, real growth was occurring in the electronics and high-technology industries. The chaebol also were responsible for turning the trade deficit in 1985 to a trade surplus in 1986. The current account balance, however, fell from more than US$14 billion in 1988 to US$5 billion in 1989.

The chaebol continued their explosive growth in export markets in the 1980s. By 1990 the chaebol also had begun to produce for a growing domestic market. By the late 1980s, the chaebol had become financially independent and secure-- thereby eliminating the need for further government-sponsored credit and assistance.

Another reason for the success of the chaebol was their access to foreign technology. Rather than having to develop new areas through research and technology, South Korean firms could purchase foreign patents and technology and produce the same goods made elsewhere at lower costs. Hyundai cars, for example, used an engine developed by the Mitsubishi Corporation of Japan.

The chaebol were responsible for the successful expansion of South Korea's export capacity. According to Steinberg, in 1987 the revenues of the four largest chaebol were US$80.7 billion, a figure equivalent to twothirds of Seoul's total GNP. In that year, the Samsung Group had revenues of US$24 billion; Hyundai, US$22.7 billion; Daewoo, US$16 billion; and Lucky-Goldstar, US$18 billion. The revenues of the next largest chaebol, Sunkyong, totaled US$7.3 billion in 1987.

The five largest chaebol employed 8.5 percent of the manufacturing work force and produced 22.3 percent of all manufacturing shipments. Despite a rash of strikes against the chaebol beginning in 1987, the chaebol generally had higher compensation and better working conditions than their lesser South Korean competitors.

The First Five-Year Economic Development Plan (1962-66) consisted of initial steps toward the building of a self-sufficient industrial structure that was neither consumption oriented nor overdependent on oil. Such areas as electrification, fertilizers, oil refining, synthetic fibers, and cement were emphasized.

Toward these ends, the currency was drastically devalued in 1961 and 1964 and import quotas for raw materials eased. Private saving was encouraged by raising interest rates and funds were borrowed from abroad. Exports also were encouraged by direct subsidies; all taxes and restrictions on the import of intermediate goods that were to be used to produce export products were removed. As the existing industries--textiles, clothing, and electrical machinery, among others--had been stagnant owing to a lack of imported raw materials, these policies produced immediate results

In addition… In 1961 the Korean state extended government control over business by nationalizing the banks and merging the agricultural cooperative movement with the agricultural bank. The government's direct control over all institutional credit further extended Park's command over the business community.

The Second Five-Year Economic Development Plan (1967- 71) stressed modernizing the industrial structure and rapidly building import-substitution industries, including steel, machinery, and chemical industries.

The Third Five-Year Economic Development Plan (1972-76) achieved rapid progress in building an export-oriented structure by promoting heavy and chemical industries. Industries receiving particular attention included iron and steel, transport machinery, household electronics, shipbuilding, and petrochemicals. The developers of heavy and chemical industries sought to supply new industries with raw materials and capital goods and to reduce or even eliminate dependence on foreign capital. New (and critical) industries were to be constructed in the southern part of the peninsula, far from the border with North Korea, thus encouraging economic development and industrialization outside the Seoul area and providing new employment opportunities for residents of the less developed areas.

The Fourth Five-Year Economic Development Plan (1977-81) fostered the development of industries designed to compete effectively in the world's industrial export markets. These major strategic industries consisted of technology-intensive and skilled labor-intensive industries such as machinery, electronics, and shipbuilding. The plan stressed large heavy and chemical industries, such as iron and steel, petrochemicals, and nonferrous metal. As a result, heavy and chemical industries grew by an impressive 51.8 percent in 1981; their exports increased to 45.3 percent of total output. These developments can be ascribed to a favorable turn in the export performance of iron, steel, and shipbuilding, which occurred because high-quality, low-cost products could be produced in South Korea. By contrast, the heavy and chemical industries of advanced countries slumped during the late 1970s. In the machinery industries, investments were doubled in electric power generation, integrated machinery, diesel engines, and heavy construction equipment; the increase clearly showed that the industries benefited from the government's generous financial assistance program.

The late 1970s, however, witnessed worldwide recession, rising fuel costs, and growing inflation. South Korea's industrial structure became somewhat imbalanced, and the economy suffered from acute inflation because of an overemphasis on investment in heavy industry at a time when many potential customers were not in a position to buy heavy industrial goods.

The Fifth Five-Year Economic and Social Development Plan (1982-86) sought to shift the emphasis away from heavy and chemical industries, to technology-intensive industries, such as precision machinery, electronics (televisions, videocassette recorders, and semiconductor-related products), and information. More attention was to be devoted to building high-technology products in greater demand on the world market.

The Sixth Five-Year Economic and Social Development Plan (1987-91) to a large extent continued to emphasize the goals of the previous plan. The government intended to accelerate import liberalization and to remove various types of restrictions and nontariff barriers on imports. These moves were designed to mitigate adverse effects, such as monetary expansion and delays in industrial structural adjustment, which can arise because of a large surplus of funds. Seoul pledged to continue phasing out direct assistance to specific industries and instead to expand manpower training and research and development in all industries, especially the small and medium-sized firms that had not received much government attention previously. Seoul hoped to accelerate the development of science and technology by raising the ratio of research and development investment from 2.4 percent of the GNP to over 3 percent by 1991.

The goal of the Seventh Five-Year Economic and Social Development Plan (1992-96), formulated in 1989, was to develop high-technology fields, such as microelectronics, new materials, fine chemicals, bioengineering, optics, and aerospace. Government and industry would work together to build high-technology facilities in seven provincial cities to better balance the geographic distribution of industry throughout South Korea.

In general terms… in the 1960s, the board allocated resources, directed the flow of credit, and formulated all of South Korea's economic plans. In the late 1980s, the power to allocate resources and credit was restored to the functional ministries. In 1990 the Economic Planning Board primarily was charged with economic planning; it also coordinated and often directed the economic functions of other government ministries, including the Ministry of Finance

A government-led economic development policy during the 1960s was necessary because the less experienced and capital-poor private entrepreneurs lacked the wherewithal to develop several critical industries that were necessary to the nation's economic growth. The government determined that establishing public corporations to develop and manage these highly strategic industries was the fastest and most efficient way to foster growth in a variety of key areas.

During the 1960s, public enterprises were concentrated in such areas as electrification, banking, communications, and manufacturing. In 1990 these enterprises were, in many cases, efficient revenue-producing concerns that produced essential goods and services at low costs, but which also produced profits that were used for new capital investments or to produce funds for public use elsewhere. In the 1980s, Seoul was slowly privatizing a number of these firms by selling stocks, but the government remained the principal stockholder in each company. In the 1980s, an important function of public enterprises was the introduction of new and expensive technology ventures.

In 1985 the public enterprise sector consisted of about 90 enterprises employing 305,000 workers, or 2.7 percent of total employment in the nonagricultural sector. There were four categories of public enterprises: government enterprises (staffed and run by government officials), government-invested enterprises (with at least 50 percent government ownership), subsidiaries of government-invested enterprises (usually having indirect government funding), and other government-backed enterprises. Government-invested public enterprises, such as the Korea Electric Power Corporation (KEPCO) and the Pohang Iron and Steel Company (POSCO), represented the core of the new enterprises established during Park's regime. In the late 1980s, roughly 30 percent of the revenues produced by public enterprises came from the manufacturing sector and the other 70 percent from such service sectors as the electrical, communications, and financial industries.

In the 1960s, the Park government concluded that selfsufficiency in steel and the construction of an integrated steelworks were essential to economic development. Because South Korea had not had a modern steel plant before 1968, many foreign and domestic businesses were skeptical of Seoul's decision to invest heavily in constructing a steel plant. Despite the skepticism, however, POSCO began production in 1972, just four years after the company's inauguration in April 1968 with only thirty-nine employees.

Japan provided the money for the construction of the initial plant, following an agreement made at the Third South Korea-Japan Ministerial Meeting in 1969. Financing included US$73.7 million in government grants and loans, US$50 million in credit from the Japan Export-Import Bank, and technical assistance from Nippon Steel and other corporations. This cooperation was one consequence of the normalization of relations with Japan in 1965 and reflected the view of the government of Japan as noted in the Nixon-Sato communiqué of November 21, 1969, that "the security of the Republic of Korea is essential to the security of Japan."

POSCO is located in the southeastern port city of P'ohang. Previously a fishing port whose major industry was processing fish and marine products, P'ohang is now a major industrial center with almost 250,000 people. In addition to the huge integrated steel mill, P'ohang has an industrial complex housing companies that manufacture finished steel products of raw materials provided by POSCO.

POSCO first began to sell plate products in 1972 and focused its sales policies on the domestic market to improve steel selfsufficiency at home. Special efforts were made to supply quality iron and steel to related domestic companies at below export price to strengthen their international competitiveness.

POSCO's growth has been immense. By the late 1980s, POSCO was the fifth biggest steel company in the noncommunist world, with an annual production approaching 12 million tons worth 3 trillion won. The further expansion of POSCO's productivity and size, however, was sought at a time when the steel industries of the United States and Japan were declining. POSCO's second-phase mill at Kwangyang was completed in August 1988. A third-phase mill was expected, by the early 1990s, to further increase crude steel production to a total output of approximately 17.2 million tons a year. In terms of productivity, POSCO was rated the world's best steel manufacturer throughout the late 1980s and also was rated at the top in terms of facilities.

In 1987 Seoul announced that it was going to transform POSCO into a private company in line with the government's new policy of privatizing state-run corporations. The government planned to retain a majority share of the stock; initial reports in the South Korean press in 1988 indicated that the sale of public shares was going slower than anticipated.

KEPCO is a government agency whose goal is to provide abundant electric power and to develop reliable power resources. The south of Korea traditionally had received its electric power from power stations in present-day North Korea, but the P'yongyang government cut off power to South Korea in 1948. The catastrophes of the Korean War also posed electrical supply problems. The situation had not improved greatly by 1961 when the new military junta merged three smaller electric companies to form the Korea Electric Company (KECO). Seoul invested heavily in KECO, realizing that adequate sources of power were a basic prerequisite to industrialization. In 1982 KECO was reorganized as a public corporation and became known as KEPCO. All shares were owned by the government. In 1988 Seoul decided to sell 30 percent of all shares to the public.

KEPCO, one of the largest public corporations in South Korea, with 30,289 employees, serviced about 99.8 percent of the populace in 1988. It derived about 12 percent of its electricity from hydroelectric sources, 50 percent from thermal sources (coal, oil, and gas-fired), and the rest from a growing number of nuclear power plants. It was hoped that nuclear power would be developed further to lower reliance on oil, gas, and coal imports. KEPCO officials pronounced their nuclear power plants safe from any potential nonmilitary accidents and said that extraordinary measures had been taken to protect the plants in case of a North Korean attack.

Textiles, clothing, and leather products made up about 24 percent of South Korea's manufacturing output in 1980. Over 10,000 textile and footwear enterprises employed more than four workers each, and 34,000 smaller shops manufactured such products in 1978. Throughout the 1980s, textiles played a critical role in Seoul's exports, accounting for US$11.9 billion, or 19.6 percent of total export earnings. In 1989 the export of textiles (valued at US$15,340 million) grew 8.5 percent over the 1988 level. Textile manufacturers, concerned about diminishing export competitiveness because of wage increases and won revaluation, expanded their overseas investments in 1987 and 1988. Seoul approved sixty-six investment projects totaling US$38.4 million from January 1, 1978, through the end of September 1988. Most of these investments were located in the Caribbean Basin region and Southeast Asia. Upgrading product lines---particularly towards high fashion--and further shifting to the expanding domestic market were expected to cause slow growth in the industry in the early 1990s.

South Korea's footwear industry also expanded in the late 1980s. Footwear exports in 1988 totaled US$3.8 billion, a 34.7 percent increase over 1987, 6.3 percent of Seoul's total exports by value. Economic forecasters, however, predicted that the industry would decline in the 1990s despite the surge of orders in 1989; they attributed the 1989 surge to political unrest in China, normally a major producer of footwear.

During the 1970s and 1980s, South Korea became a leading producer of ships, including oil supertankers, and oil-drilling platforms. The country's major shipbuilder was Hyundai, which built a 1-million-ton capacity drydock at Ulsan in the mid-1970s. Daewoo joined the shipbuilding industry in 1980 and finished a 1.2-million-ton facility at Okp'o on Koje Island, south of Pusan, in mid-1981. The industry declined in the mid-1980s because of the oil glut and because of a worldwide recession. There was a sharp decrease in new orders in the late 1980s; new orders for 1988 totaled 3 million gross tons valued at US$1.9 billion, decreases from the previous year of 17.8 percent and 4.4 percent, respectively. These declines were caused by labor unrest, Seoul's unwillingness to provide financial assistance, and Tokyo's new low-interest export financing in support of Japanese shipbuilders. However, the South Korean shipping industry was expected to expand in the early 1990s because older ships in world fleets needed replacing.

Construction has been an important South Korean export industry since the early 1960s and remains a critical source of foreign currency and "invisible" export earnings. By 1981 overseas construction projects, most of them in the Middle East, accounted for 60 percent of the work undertaken by South Korean construction companies. Contracts that year were valued at US$13.7 billion. In 1988, however, overseas construction contracts totaled only US$1.6 billion (orders from the Middle East were US$1.2 billion), a 1 percent increase over the previous year, while new orders for domestic construction projects totaled US$13.8 billion, an 8.8 percent increase over 1987. The result was that South Korean construction companies concentrated on the rapidly growing domestic market in the late 1980s. By 1989 there were signs of a revival of the overseas construction market--the Dong Ah Construction Company signed a US$5.3 billion contract with Libya for the second phase of Libya's Great Man-Made River Project, which, when all five phases were completed, was projected to cost US$27 billion. South Korean construction companies signed over US$7 billion of overseas contracts in 1989.

The chemical industry began full production in the 1970s. Although dependent on imports of raw materials and certain hightechnology commodities, the chemical industry supplied many of the intermediate inputs for textile, plastic, synthetic rubber, rubber shoe, and paint factories, and had made South Korea virtually self-sufficient in fertilizers. The chemical fertilizer industry, a large part of the chemical industry, met most of South Korea's domestic consumption demands.

In 1987 chemical and pharmaceutical exports increased by 27 percent over the previous year, but accounted for only 2.8 percent of total exports; imports in that category comprised 11.2 percent of total imports. The chemical industry was expected to expand in the early 1990s, with new capacity coming online and Seoul committed to spending money for research and development and constructing new production facilities. Pharmaceuticals, agricultural chemicals, dyes, pigments, paint, perfumes, surface active agents (surfactants) including synthetic detergents, and catalysts were targeted as major areas for investment.

In the late 1980s, petrochemical production facilities included twenty-five companies, thirty-six plants, two naphtha crackers, and three aromatics extraction plants, with an aggregate total production capacity of 505,000 tons of ethylene per annum. There were two large petrochemical complexes, one in Ulsan, the other in Yosu. South Korea was an important producer of chemical fertilizers in the late 1970s (671,000 nutrient tons exported in 1980), but both exports and production declined in the

The automobile industry was one of South Korea's major growth and export industries in the 1980s. By the late 1980s, the capacity of the South Korean motor industry had increased more than fivefold since 1984; it exceeded 1 million units in 1988. Total investment in car and car-component manufacturing was over US$3 billion in 1989. Total production (including buses and trucks) for 1988 totaled 1.1 million units, a 10.6 percent increase over 1987, and grew to an estimated 1.3 million vehicles (predominantly passenger cars) in 1989. Almost 263,000 passenger cars were produced in 1985--a figure that grew to approximately 846,000 units in 1989. In 1988 automobile exports totaled 576,134 units, of which 480,119 units (83.3 percent) were sent to the United States. Throughout most of the late 1980s, much of the growth of South Korea's automobile industry was the result of a surge in exports; 1989 exports, however, declined 28.5 percent from 1988. This decline reflected sluggish car sales to the United States, especially at the less expensive end of the market, and labor strife at home.

The industry continued to grow, however, because of a surge in domestic demand, up 47 percent during the first half of 1989. In 1989, for the first time since car exports had doubled in 1985, domestic sales surpassed exports; two-thirds of the cars manufactured were sold domestically. Most of the domestic demand came from first-time car buyers whose savings had been buoyed by double-digit wage increases each year since 1987. Other factors leading to the growing domestic demand for motor vehicles included stable or slightly decreased new car prices because of cuts in special consumption taxes, reduced fuel taxes, and growing economies of scale by manufacturers.

Throughout the 1970s and 1980s, the automobile industry was subject to a series of government controls and directives designed to nurture the industry and prevent excess competition. For most of the 1980s, Hyundai was the only company permitted to manufacture passenger cars, but in 1989 Kia Motors and Daewoo were allowed to reenter the passenger car business. In 1989 Ssangyong Motors became South Korea's fourth car manufacturer.

South Korea's auto parts industry grew rapidly in the late 1980s, from US$3.8 billion in 1987 to US$4.6 billion in 1988 (US$4 billion produced locally). Automotive parts imports, most of which came from Japan, totaled US$610 million in 1988 (down from US$700 million in 1987). In 1989 South Korean automobile and parts manufacturers planned to spend more than 2 trillion won (US$2.8 billion) on facility expansion, research, and development.

In 1989 South Korea was a major producer of electronics, producing color televisions, videocassette recorders, microwave ovens, radios, watches, personal computers, and videotapes. In 1988 the electronics industry produced US$23 billion worth of goods (up 35 percent from 1987), to become the world's sixth largest manufacturer. The total value of parts and components (including semiconductors) produced in 1988 totaled US$9.7 billion, overtaking consumer electronics production (US$9.2 billion) for the first time. Manufacture of industrial electronics also grew significantly in 1988 and totaled US$4.6 billion (20 percent of total production). Electronics exports grew rapidly in the late 1980s to more than US$15 billion in 1988, up 40 percent from 1987--to become Seoul's leading export industry. Although South Korean electronic goods enjoyed substantial price competitiveness over Japanese products, the electronics industry continued to be heavily dependent on Japanese components, an important factor in South Korea's chronic trade deficit with Japan. Some South Korean firms formed joint ventures with foreign concerns to acquire advanced technology. In the late 1980s, South Korea's leading electronics firms (Samsung, Lucky-Goldstar, and Hyundai) began establishing overseas plants in such markets as the Federal Republic of Germany (West Germany), Britain, Turkey, and Ireland.

By 1990 significant shifts were occurring within the electronics industry. In 1989 South Korea had lost some of its cost advantage to newer consumer electronics producers in Southeast Asia. At the same time, production of electronic components and of industrial electronics, particularly computers and telecommunications equipment, continued to expand to such an extent that overall demand for South Korean electronics products was expected to increase modestly in the early 1990s. In 1990 Seoul projected that the microelectronics industry would grow at an annual rate of 17.2 percent in the early 1990s.

South Korea is an important manufacturer of armaments, both for domestic use and for export. During the 1960s, South Korea was largely dependent on the United States to supply its armed forces, but after the elaboration of President Richard M. Nixon's policy of Vietnamization in the early 1970s, South Korea began to manufacture many of its own weapons. These included M-16 rifles, artillery, ammunition, tanks, other military vehicles, and ships. Aircraft were assembled under coproduction arrangements with United States firms. Arms exports, including quartermaster goods, vehicles, and weaponry, reached nearly US$975 million in 1982 but declined during the rest of the decade, reaching only US$50 million in 1988. In 1989 Seoul announced that its fledgling aerospace industry was planning to produce an indigenously designed highperformance jetfighter for its air force within two decades. The South Korean aerospace industry also developed a Korean Fighters Program in cooperation with McDonnell Douglas of the United States, with the goal of "acquiring the capacity to design and manufacture supersonic jetfighters."

________________________________________________________________________________________________________

The presidential and National Assembly elections in 1967 and 1971 were closely contested but won by Park. In order to succeed himself for the third time in 1971, Park amended the constitution in 1969. In December 1971, Park again tightened his control over the country. He proclaimed a national emergency and forced through the National Assembly a bill granting him complete power to control, regulate, and mobilize the people, the economy, the press, and everything else in the public domain. In October 1972, he proclaimed martial law, dissolved the National Assembly, closed all universities and colleges, imposed strict press censorship, and suspended political activities. Within a few days he "submitted" a new draft constitution--designated the yusin (revitalization) constitution--to a national referendum. The 1972 constitution allowed Park to succeed himself indefinitely, to appoint one-third of the National Assembly's members, and to exercise emergency powers at will. The president was to be chosen by the more than 2,000 locally elected deputies of the supposedly nonpartisan National Conference for Unification, who were to cast their votes as an electoral college without debate. _____________________________________________________________

Dr. Frederick Nemani/December 1999