IPE of Korea: Development and Globalization * Some parts of this note are summary of the references for teaching purpose

1. IPE of Korea <Lecture Note 2> 13.03.15 IPE of Korea: Developmentand Globalization * Some parts of this note are summary of the references for teaching purpose only. Semester: Spring 2013 Time: Friday 9:00~12:00 am Class Room: No. 331 Professor: YooSoo Hong Office Hour: By appointment Mobile: 010-4001-8060 E-mail: yshong123@gmail.com Home P.: //yoosoohong.weebly.com 1

2. TheColdWar (1945-1991), the Korean War (1950-1953), the Korean Economy from 1945 to 1960

3. USA Democracy Its government is chosen in free democratic elections USSR Communism One-party dictatorship Elections controlled by the Communist Party World Divided by Capitalist • Business and property owned by private individuals, market mechanism with government intervention State-owned planning • Economy is planned and managed by the government with social/state ownership Freedom • Individual rights are protected, the government does not interfere with people’s lives. Control • The state is more important than the individual, people’s lives are tightly controlled.

4. The Cold War [1945-1991]: An Ideological Struggle Soviet & Eastern Bloc Nations“Iron Curtain” US & the Western Democracies GOAL “Containment” of Communism & the eventual collapse of the Communist world. GOAL spread world-wide Communism • METHODOLOGIES • Espionage [KGB vs. CIA] • Arms Race [nuclear escalation] • Ideological Competition for the minds and hearts of Third World peoples [Communist govt. & command economy vs. democratic govt. & capitalist economy]  “proxy wars” • Bi-Polarization of Europe [NATO vs. Warsaw Pact]

5. Division of the World • First World: The United States and Western Europe (also Turkey, Australia, South Africa, Japan) • Second World: Soviet Union, Eastern Europe (Poland, Czechoslovakia, Yugoslavia, Romania, Bulgaria, Hungary) • Third World: Latin America, China & East Asia, Africa & Middle East, India (former colonies) • Each believed that theirs was the best. • USA – worried that Russia was trying to spread communism throughout Europe and the rest of the world. Believed that other countries should be run in the American way. • USSR – believed that capitalist countries wanted to undermine communism in Russia. Believed that other countries should be run in the communist way.

6. Response of USA • 1949 : China communist, PRC– A massive huge communist state • American intelligence team reported to President Truman that Stalin was using Cominform (Communist Information Bureau – coordinates work of the Communist Parties of eastern Europe ) to help Communists win power in Asia (Malaya, Indonesia, Burma, the Philippines and Korea…) . •  Conspiracy hypothesis: communist countries acting together to spread communism •  Anxiety of the communists overrunning all of Asia, with country over country being toppled like a row of dominoes • ‘Contain’ communism, that is ‘to stop communism from spreading’: ‘Policy of containment’

7. Before the War • 1904 -1945 Japan controlled Korea • August 1945: Russian forces in the NORTH, American troops the • SOUTH • The two halves were divided by the 38thparallel, intended to be • temporary • Both armies would be withdrawn from their respective areas so that • the United Nations (UN) could organize an election for a united Korea • When the Cold War began, no agreement could be reached for its • reunification. • Soviet Union wanted unification under Kim, US wanted unification • under Rhee even though both withdrew their troops between 1948 • and 1949.

8. MAPS E A S T S E A /

9. Russia and the Korean War • USSR shared a common border with Korea • Korea under Kim’s rule would strengthen its security • Give access to natural resources like water • Keeps Japan at bay • Involved indirectly by sanctioning Kim’s intention of invading South Korea • Opportunity to attack South Korea was available after America’s • announcement of its defensive perimeter • Kim Il Sung made known his plans to Stalin and Mao; soviet military experts • helped draw up final plan of attack.

10. USA and the Korean War • Initially focused on Japan in its policy towards Asia. • Demilitarization and democratizationof Japan • With the start of the cold war, control of Japan became even more crucial – to contain the threat of Soviet expansion and communism across Asia • Communist Party of Japan gaining popularity due to damages incurred by Japan’s industries and agriculture • As cold war progresses, USA recognized that communist forces in China, South Korea and Vietnam ought to be contained – supported anti-communist forces in these countries • American policy of containment was not very successful . By 1950, it had ‘lost’ China to communism and communist forces were growing in strength in Indochina and Kim Il Sung was determined to reunite Korea under his authoritarian rule.

11. The Start of the Korean War • North Korea invaded South Korea on June 25, 1950. • Most leaders in the United States were surprised by this attack. • American troops stationed in South Korea since WW II had recently completed their withdrawal. • The United States was not well prepared to fight in Korea; however, the decision to fight was made quickly. • Truman decided that the United States would take a stand against Communist aggression in Korea. • The United Nations Security Council voted unanimously in favor of the use of force in Korea.

12. US Involvement in the Korean War • USA’s involvement in the war: • Supplied troops and military supplies to South Korea • Pushed for resolution through UN security council for military action to be taken by UN members against North Korea • Question : Why didn’t the Soviet Union use its veto rights? • Motivation behind USA’s involvement: • Domino theory • Conspiracy theory behind the invasion • to send a strong signal to the international community on its strong commitment to resist the spread of communism

13. Role of the United States South Korea was where the United States had to take a stand against Communist aggression. Truman ordered American naval and air forces to support Korean ground troops. Truman asked the United Nations to approve the use of force to stop the North Korean invasion. Role of the United Nations The UN Security Council supported the use of force in Korea. Truman sent ground troops to Korea. The troops sent to Korea were to be a United Nations force. Instead of calling this a war, the whole effort was referred to as a UN police action. US and UN Involvement

14. Combat in the Korean War • UN forces made an amphibious landing behind North Korean lines at the port city of Inchon. • MacArthur’s surprise attack worked beautifully. • The September 1950 invasion at Inchon was a key victory for UN forces. The Inchon Landing • Offensives from Inchon and Pusan resulted in the destruction or surrender of huge numbers of North Korean troops. • By October 1950 all of South Korea was back in UN hands. North Korea on the Run • UN forces had begun to move into North Korea, but the when 260,000 Chinese troops joined the North Koreans the UN began to retreat. • UN forces retreated all the way back to Seoul. It was the longest fallback in U.S. military history. UN Forces Retreat

16. Process of the Korea War • 1950 to 1953, North Korea invades South Korea. • North Korea was a communist nation and South Korea was a democracy. • First war of “containment” policy to stop communism • “Police Action” not a declared war • President Truman leads United Nations. • General Douglas MacArthur commands US and UN troops. • Called “forgotten war”.

17. UN Resolution of 27 June 1950 "The Security Council, "HAVING DETERMINED that the armed attack upon the Republic of Korea by forces from North Korea constitutes a breach of the peace, "HAVING CALLED FOR an immediate cessation of hostilities, and "HAVING CALLED UPON the authorities of North Korea to withdraw forthwith their armed forces to the 38th parallel, and "HAVING NOTED from the report of the United Nations Commission for Korea that the authorities in North Korea have neither ceased hostilities nor withdrawn their armed forces to the 38th parallel and that urgent military measures are required to restore international peace and security, and "HAVING NOTED the appeal from the Republic of Korea to the United Nations for immediate and effective steps to secure peace and security, "RECOMMENDS that the Members of the United Nations furnish such assistance to the Republic of Korea as may be necessary to repel the armed attack and to restore international peace and security in the area."

18. China and the Korean War China’s concerns: - China wanted to maintain North Korea as a buffer state from the Americans in Japan and South Korea. - They saw the American invasion as a threat to their borders. China’s involvement in the war: - Attacked South Korea and American troops at the end of October. - Came about as a result of MacArthur’s troops reaching the Yalu River, close to Chinese border. - Mac Arthur ignored Chinese warning that they would attack should Mac Arthur moved further .

19. The Shifting Map of Korea(1950-1953)

20. Negotiating for Peace In July 1951 peace talks began. One major obstacle was the location of the boundary between the Koreas. Meanwhile battles such as Bloody Ridge and Heartbreak Ridge continued, inflicting heavy casualties on both sides. In October 1951 peace talks stalled over prisoners of war. Negotiators in Panmunjom continued to argue over the details of a peace agreement throughout 1952. Events of 1953 In 1952 Dwight D. Eisenhower—who promised to end the war—was elected president. Fighting remained deadly—in the final two months of the war, UN forces lost 57,000 men and the Communists lost 100,000. An armistice agreement was finally reached on July 27, 1953. The Korean War left the map of Korea looking much as it had in 1950. The human costs were huge. Fighting Ends in Korea

21. Consequences of the Korean War • Marked the start of the Cold War arms race (conventional and nuclear) • High increases in USA’s military budget to position itself as a global ‘policeman’ against communism – by 1953, US military production was 700% higher than in 1950. • Japan’s economy ballooned – boosted by the US troops stationed in Japan. • Sovereignty was returned to Japan through the San Francisco Peace Treaty (in return it signed a security agreement with USA). • Japan also signed a trade boycott (the Yoshida Letter) against communist China (to weaken and eventually cause the collapse of Mao’s regime • Taiwan became more important strategically to USA – more military and economic aid provided for Taiwan • 20-year period of Sino-American hostility followed • USA signed two new Cold War treaties with Philippines, Australia and New Zealand.

22. Results to S Korea • S Korea remained ‘free’ • Containment had worked • Both Koreas badly damaged • The human cost • Still two separate countries today • Still US troops in Korea

23. The Cost in Human Life

24. The Role of the Korean War in Post-WWII Japanese Economic Development Japan becomes factory for US war effort in S. Korea making items like rope, canvas for bags and tents, uniforms, etc. Influx of capital and increase in Japan’s industrialization to aid war effort stimulated Japanese economy. Timing of war perfect catalyst for economic development of Japan in the 1950s Most Japanese infrastructure rebuilt by 1950 By 1952 industrial production equal to that of 1931 Korean war as boost to Japan’s economy By 1955 reconstruction of Japan complete. Possible because of national group effort to rebuild Japan. The Japanese people were willing to postpone their economic improvement to ensure Japan’s economic development.

25. After the Korean War (1953~A Few Years)

26. Situation from 1945 to 1960 • Poorly endowed with natural resources and devastated by the Korean War (1950~1953), Korea until the end of the 1950s had remained an agrarian society and its industrial activities were mostly confined to light industries such as simple assembly and procession of raw materials. • During this period, the Korean government had implemented two important policies; (1) compulsory education and (2) land reform. • The introduction of compulsory education helped create an abundant pool of knowledgeable people that would be instrumental for industrialization in later years. • The land reforms done twice in 1947 and 1949 respectively laid another foundation for later industrialization, in that more equated wealth distribution enabled to give equalized opportunities for the people.

27. The three-year war devastated almost completely the country’s emerging industrial bases. Postwar efforts to re-build the country’s roads and railroads, buildings and plants had shown only minor achievement, because of the limitations of the government budget and the shortages of necessary resources. • Industrial and trade policies during the postwar 1950s had been based on important-substitution that aimed to restrict imports and try to produce daily necessaries. High tariffs were levied and the quantities of imports were tightly controlled in order to protect domestic industries. • The restoration of domestic consumer goods industry was aided by overvalued foreign exchange rates, but this had detrimental effects on exports so that the yearly volume of exports decreased until 1960. • After the military coup in 1961, the new political leadership decided that modernization of the Korean economy and rapid economic growth should have the highest priorities.

28. Supply-side Demand-side Shortage of capital and technology (monopolized by the Japanese) Immense immigration of the overseas Korean people (10%) Shortage of natural resources and electricity (separation of North and South) Monetary expansion by the Japanese (war financing) Hyperinflation ** (Agricultural) land reform in 1950 From Independence to the Korean War (1945~1950)

29. From the Korean War to 1960 (1950~1960) The Korean War • 1 million casualties (Some estimate 3 million) • Economic losses over US$ 3 billion The Korean War • The US$ 2.3 billion aid through 1953~1961 • Foreign aid mostly contributed economic recovery • However, they are mostly through consumer goods • which didn’t contribute to the accumulation of capital resources

30. Outward-Looking Development

31. Overview of the Korea’s Development Process • Korea’s industrial transformation and increase in income levels have been achieved through the intensive learning processes where technological capability building and human resource development has played a decisive role. • Another distinctive aspect of Korea’s industrialization process is the active role that government played in a way to intervene into the market to initiate the great transformation. • Korea’s development process can be divided into three stages; • Factor driven stage during 1960s and 1970s • Investment driven stage during 1980s and 1990s • Innovation driven stage in 2000s

32. Korea: From Ash to a G20 Country - Korea was one of the least developed countries in terms of industrial development in the early 1960s. It has been transformed into one of leading industrial countries in the world during the last 50 years. 1960 2010 • Pop: 50 million • GDP (2010f): US$1,012.4 billion (14th) • GDP per capita (2010f): $20,450 • Exports (2010f): $459,803 million (12th), (In 2012, 8th in world trade) • Industry: Semi-conductor, Smart phone, TV, Auto, Shipbuilding, etc. • Diplomacy: UN, OECD, G20, etc. • Pop: 25 million • GNP (1960): US $1.1 billion • GNP per capita (1960): $82 • Exports (1960): $33 million • Industry: Plywood and wigs • Diplomacy: No member in • major intern’l organizations • GNP(1960): US $1.1 billion • GNP per capita (1960): $82 • Exports(1960): $33 million • Industry: Plywood and wigs • Diplomacy: No member in major international organization 32 32

33. Financial crisis Transformation of the Korean Economy (1945~2000) Per capita GDP($) 16,460 15,000 10,307 10,000 6,742 5,000 Five year economic development plan Liberation from Japanese colonial rule 87 67 1945 1953 1962 1970 1980 1990 1997 2000 2005 Growthtrend in per capita GDP Source: KDI

34. Semi-conductors Mobile communications Digital home electronics E-commerce Bio products Fine parts Semi-conductors IT Automobile Shipbuilding Textile Petro-chemicals Home Electronics Semi-conductors Iron & Steel Automobile Shipbuilding Textile Home electronics Iron & Steel Overseas construction Food Plywood Wig 1960 1970 1980 1990 2000 Changes in Dominant Industries and Top Exports 34

35. Development Stages in the Korean Economy 1950s 1960s 1970s 1980s 1990s 2000s Aid,Labor intensiveproduction Imitation Simple tech. Import of oldplant/ machinery Heavy industry Assimilation Minorinnovations R&D New product development R&D intensiveincrease in scienceNew productinnovation Innovationfrontier Traditional Imitative Catch-up Innovative Catch-up Innovative Economy “Intensive Growth” Transition to Innovation-driven Economy Outward-looking Invesment-driven Economy“Extensive Growth” Agricultural Economy Factor-driven Economy “Extensive Growth” Outward-looking Stages of Development 35 35

36. Focus of Economic Development Strategy in Each Administration 36

37. Launching Industrialization: 1960s • The majority of workforce was employed in the agriculture, forestry and fishery sector, mostly producing foodstuffs for domestic use. But the very limited area of arable land available did not allow much scope for expansion for output or the production of substantial quantities of exportable agricultural products. • In the mining sector there was no natural endowment of resources, except for limited quantities of tungsten and some other exportable minerals. In the manufacturing sector, 80% of the products were consumer goods, particularly food and textiles. • Services such as transportation and electricity were in extremely short supply. • The development strategies of the 1960s aimed at terminating the vicious cycle of low savings, low investment and low growth, through policies designed to promote an increase in government savings, and a rise in foreign capital flow, with priority attention given to export-led industrialization.

38. The development strategy of the 1960s was based on the promotion of both the export and import-substitution industries, starting out from the labor-intensive light manufacturing sectors. • In a country such as Korea, with limited raw materials, a non-integrated industrial structure, and a skilled labor force that receives low real wages, it is inevitable that export should consist mainly at this stage of labor-intensive processing of imported raw materials and intermediate goods. • The capital accumulation which has been attained through this process can be used both for the development of the agricultural sector and for the promotion of the heavy and chemical industries in order to accelerate the industrialization process.

39. Capital shortage Abundant labor Weak ? High level of technology base education Underdeveloped Strong private sector economic will Source: KDI Economic Conditions of the Early 1960s

40. Economic growth Foreign capital inducement (Economic aids/ external debt) Reproduction Export promotion Manufacturing processing Private enterprises Financial tax support Capital good imports Government Raw material imports Foreign technology imports Technology Well-educated labor force development Source: KDI Working of the Outward-looking Development Strategy 40

41. 7 Initial Conditions before Take-off • Korea was war-torn and divided, and was one of the poorest country • with per capita GNP of $89 in 1961 (101st out of 125 countries) • Vicious cycle of low savings and low growth * Domestic private savings : only 5% of GNP in 1961 • Worldviewon Korea • - “Korea’s prospect for development is anything but bright!”(A World Bank report) - “No hope for democratization” (The Times) * The three slides here are borrowed from the ‘required reading 2’: KDI

42. 8 Outward-looking Development Strategy • Policy shift from “Import Substitution” to “Export Promotion” in the • early 1960s • Export-promotion policy focused on labor-intensive industries in view of abundant and well educated labor force • Key steps: Implementation of exchange rate reform (1964) and export incentive system such as export financing • International relations with Japan and United States • Relations with Japan were normalized in 1965 despite fierce objection from Korean Citizens. • Dispatched Korean troops to the Vietnam War during 1965-1973 to support the US forces.

43. 9 • A total of reparations from Japan: US$ 500 million • 300 mil $: for free (Japanese grants), • 200 mil $: Japanese governmental loans (maturity: 20 years with • 7-year grace period, interest rate: 3.5%) • Use of the funds: construction of POSCO (Grant: 30.8 mil $, Loans: 88 mil $), Gyeongbu(Seoul-Busan) Express Way (6.9 mil $), and Soyang River Dam • Burma, Philippines, Indonesia, Vietnam also received reparations from Japan.

44. Government Financial regulation Suppressed labor movement Industrial Policy Finance Chaebols Labor Financial support Labor input Inflationary enforced savings Low wage National mobilization Phase – I Model 44

45. The Role of the Government in the Phase- I Model Concentration of capital ownership and management by the government Strong control of the government over financial institutions, resources allocations, wages and prices Government-led economic development strategies : Export-oriented industrialization : Growth first, distribution later : Leadership in tech capability building Source: Lee, Jong Won. 2004. 45

46. The Five Year Economic Development Plan Interest rate reform(1965) - To mobilize domestic resources Five Year Plan (1st & 2nd) • An emphasis on the light industries • Export-oriented development plan • Investment in infrastructure • Development of key industries • Importance of foreign loans • Normalizing relations with Japan • The BOK provided repayment • guarantees for foreign loans Increased tax revenues - Establishment of the NTS(1966) Target GNP growth rate: 7.1% “Economy First” principle

47. Korean Economic Development Model in the Catch-Up Period Capital financingthrough foreign loans Authoritative government inin the center of development motivated people Intervention Private enterpriseencouragement Export Promotion High savings rate Technology catch-up Well-educatedwork force 47

48. Korean Chaebol Owner (family) Owner (family) Holding company Affiliated companies Affiliated companies

49. Export Promotion Policies • The Korean government provided a set of incentives that made exporting a profitable activity for private-sector entrepreneurs. • The private sector, encouraged by comprehensive incentives, channeled resources into export oriented activities with little direct involvement by the government. • Spurred by the government’s export-promotion policy and favorable trade environment, the labor intensive light manufacturing sectors recorded remarkable export growth and absorbed large numbers of unskilled and semi-skilled labor.

50. Major Macroeconomic Performance (1961~1970)