The Political Economy of the Korean Industrialisation

Content

1. Introduction

2.1 Rationale for Government Regulation in Korea during the early Stages of Industrialisation.
2.2 Efficiency in Allocation of Investment Resources

3. Regulative Measures by the Korean Government
3.1 The Role of the Economic Planning Board
3.2 Structure of the Economic Development Board

4. Negative Effects of the regulated Market
4.1 Impact on the Credit Market
4.2 Negative impacts for the Korean Consumer
4.3.1 Impact of state regulated Development on the Structure of the Industry
4.3.2 Malformed Structure of Ownership and Corporate Governance
4.4 Impact on the development of the Korean democracy
4.5 Impact of a Regulated Industry on further Economic Integration

5. Conclusion

6. Bibliography

7. Appendix 1

1. Introduction

This paper is going to discuss the state led capitalism in Korea and its disadvantages. It will critically look at the extremely successful industrialisation of Korea after the Korean War, and stress out the price that Koreans had to pay for that rapid and centrally led development.

The first chapter will compare the efficiency of the resources allocation Process by the state with a non-interventionist market system, during the early years of Korea’s industrialization, and is investigating in the rationale for a state regulation of the modernization process. The following chapters are going to deal with the negative impacts of state interventions on democracy, environment, industrial structure and the Korean consumer. The last chapter investigates in the state led capitalism as an obstacle for further economic integration.

2.1 Rationale for Government regulation in Korea during the early stages of

After the Korean War the economy in Korea was mainly based on agriculture. There was hardly any industry in the country. Most of the industrial base of what was formerly Korea was located in the northern part of the country which later became the democratic people’s republic of Korea. The southern part here called republic of Korea had to start nearly from cero. According to economic theory a country should specialise in the sector in which it has a comparative advantage and sell its products on the world market. According to neoclassical theory the market will find its equilibrium by itself and resources will be allocated in the most efficient way. But the government of the republic of Korea did not leave the development solely to market forces but intervened heavily and regulated the market. The rationale for developing countries, which the republic of Korea at that time was, is that if they rely on the market forces and focus on the sector of their comparative advantage there will be no development and no industries are created that ad a higher value. If a new industry is created, due to a low stage on the learning curve and a lack of economies of scale, it is prohibitive inefficient at the beginning. Governments see such a creation of industries as an investment for the future and are given a rationale for protecting this infant industry. The question is why the private sector would not create such a new industry. Proponents of a protective regulation argue that the market is short sighted.

Another rationale for developing countries not to stay with the primary sector is that terms of trade for raw materials and agricultural products deteriorated over time.^[1] This is partly due to the low income elasticity of primary goods^[2] but also due to the protective policies of the high income countries in order to protect their agricultural sector.

2.2 Efficiency in allocation of investment resources

As mentioned above the Korean economy directly after the war was dominated by the agricultural sector. Comparing this sector and the very small industrial sector at that time shows that a free market would have favoured investment in the agricultural sector. One rudimentary way to measure the efficiency of investment would be to compute the ratio of incremental sectoral output or to test comparative productivity of capital by estimating a production function for each sector and compare the capital coefficient.

Both tests suggest that the output per unit of capital would be twice as high in the agricultural sector as in the manufacturing sector.^[3] Taking these results into account, one could state that the allocation of resources by a central planning institution was less efficient than it would have been if there had been no state intervention or under a free market. The equilibrium analysis referring to a study by Adelman and Kim comes to the same conclusion.^[4] These calculations found out, that one US$ investment in agriculture will roughly result in an output of two US$, compared with a lower output of US$ 1.32 in total income per US$ invested. A detailed analysis of the comparative efficiency of the agricultural and manufacturing is given in appendix 1. One could claim that the benefits from lost opportunities may be greater than what was achieved through actual investment. A closer look at “external diseconomies” that have not been taken into account, support the argument that the state intervention has created inefficiencies in resource allocation. Air, water, and noise pollution, congestion, and other public costs have been completely ignored.^[5]

By looking at the net earnings ratio of agricultural and manufacturing products one can clearly see the potential of the agricultural sector to earn foreign exchange and to contribute to economic welfare. Although the export of manufactured goods has reached over 1$ billion in 1971 the ratio of net earnings is just about half the value of exports, contrary to agriculture that reaches nearly 100%.^[6]

Another aspect that shows that the agricultural sector would have been the more profitable sector at this time is that the import content of capital formation is larger in the manufacturing sector than for the agricultural sector. In relation less foreign exchange is needed to finance agriculture. This shows that Korea, which had a comparative advantage in agriculture at that time, could only stimulate the growth of its then uncompetitive infant industries only by a regulated and protected market.

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^[1] M.C. Yang , Primary Commodity Prices, Manufactured Good Prices, And Terms of Trade

^[2] James M. Cypher and James L. Dietz, Static and Dynamic Comparative Advantage

^[3] Lim Youngil, Social and economic costs of industrialisation, page 60

^[4] Lim Youngil, Social and economic costs of industrialisation, page 60

^[5] Lim Youngil, Social and economic costs of industrialisation, page 61

^[6] Lim Youngil, Social and economic costs of industrialisation page 63