South Korea, 1950's.
After more than three decades of Japanese colonization, the division of the country
in two, and three years of fratricidal war, the country was in a shambles.
To make matters worse, almost all the industry, mining and 80% of electricity production that
existed at the time Korea had split in two in 1948 were concentrated in the northern
part.
South Korea was created an extremely poor country.
In the 1950s, its GDP per capita was lower than that of countries such as Haiti, Ethiopia
or Yemen.
The first South Korean president, Syngman Rhee led some reforms, such as land reform
and the creation of a relatively high quality education system.
But that was not enough.
The South Korean economy relied primarily on rudimentary agriculture and international
aid from partners such as the United States.
However, wait a minute because, suddenly, that began to change.
In a matter of a few decades, South Korea would be a completely different country.
This is something we have already talked about in past videos, South Korea is today one of
the richest and most technologically advanced countries in the world.
We're talking about a world-class industrial leader.
And it doesn't matter if we are talking about steel, cars or ships.
South Korea is even a powerhouse in semiconductors, the oil of the 21st century.
Korean companies are capable of manufacturing semiconductors so advanced that not even the
United States can match them.
And let’s not forget the skyscrapers, K-pop or even the popular Netflix series.
And yes, as many of you are probably imagining, this is one of those stories that has a main
character, an absolutely key figure.
In 1961 the economic situation in South Korea was still not improving much, and corruption
and social unrest were spreading like wildfire.
In the end, all this social agitation ended up exploding with a military coup d'état,
which at the time many supported because they thought it would bring some stability.
In this way, General Park Chung-hee overthrew the government of the newly elected Prime
Minister Chang Myon, and installed a reformist military government led by himself.
Park Chung-hee became the all-powerful president in 1962.
His long dictatorship was to last 18 years.
And, pay attention, because when we talk about reformist military government we mean that
this dictatorship had one obsession above all others: industry, industry and industry.
Park was convinced that only in this way could the country escape poverty.
But to achieve this, a plan was needed.
Do you want to know what he did?
To what extent did he succeed in changing things in Korea?
Is this the best possible model for countries that want to escape poverty?
Well...
One thing we are sure of is that this entire story will surprise you a lot.
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Now let’s get back to today’s video.
(THE BIRTH OF AN INDUSTRIAL STAR)
Some years ago, in a past video here on VisualPolitik we already gave you some hints about the development
of South Korea.
Theirs is a model that has nothing to do with the typical formulas of free market, foreign
investment and low taxes that we usually talk about.
In South Korea for a while things were done a little bit differently.
Now, the burning question you are all waiting to be answered is, so what exactly was done?
According to most analysts, we can identify at least three phases:
The first phase was the import substitution policy.
This policy was promoted by President Rhee from the end of the Korean War in 1953 until
Park came to power in 1961.
Basically, it was to try to boost the economy by substituting imported products with ones
made in South Korea.
It did not work.
The second phase was that of export-oriented industrialization, or that of the developmental
State, which was carried out during Park's dictatorship.
Finally, there is the phase of balance and stabilization, which is considered to have
begun in the 1980s, during the military dictatorship that followed Park's assassination, and continues
up to the current period.
In this phase, the South Korean market was opened up with progressive liberalization
and foreign direct investment was encouraged.
Now, wait a minute.
Park... Developmental state?
What on earth is this developmental state?
Well, you see, what is known as a developmental state is a political and economic system quite
common among emerging countries in Asia and Africa.
Basically, it consists of trying to promote economic development through industrialization.
Do you remember what we said earlier about industry, industry and more industry?
Well there you have it.
But of course, talking about industrialization is easy...
It's as if I were to say that I would like to suddenly become a quantum engineer.
The hard part, obviously, is to make it happen.
So the question is, what exactly did the South Koreans do?
Well...
Basically they doped the industrial sector.
To fatten it up as much as possible while at the same time restricting imports.
For the Park Chung-hee regime everything else was of no concern:
No social welfare, no citizen payments, nothing like that.
Virtually all available resources were directed to industry.
The State supported companies to grow.
In return they had to invest and export as much as they could.
The idea was that with strong companies and well-developed industry, wealth would eventually
flood all levels of society.
Now, all this sounds very nice and, it seems, very simple, but don't forget that we have
just told you that South Korea was an extremely poor country and that the State was essentially
dependent on international aid.
So...
How on earth could the industrial sector be boosted given such a scenario?
Well, you see, here comes one of the key moves.
To get the money, the first thing the Park regime did was to devise a system in which
it was the State that sought financing from all over the world and then gave it to companies
with artificially cheap loans.
In this way, the South Korean government only bore the interest cost, while ensuring that
South Korean companies had all the money they needed to grow.
This funding came primarily from two places: the United States and Japan.
But, do you want some data?
Well, in just the decade between 1972 and 1982 the foreign debt grew in absolute terms
by 825%.
It went from about 4 billion to more than 37 billion dollars.
Of course, since the industrial sector was already starting to export and the economic
take-off was beginning thanks to it, debt repayments in relation to the country's wealth
barely grew.
However, not all the money was obtained through loans.
Some of it was also obtained through diplomacy.
Specifically, in 1965, President Park negotiated and signed the Treaty on Basic Relations between
Japan and the Republic of Korea.
Thanks to this treaty, the land of anime, sushi and Origami gave South Korea 800 million
dollars at the time in the form of grants and low-interest loans as reparations for
Korea’s colonial past.
And that was no small change.
That $800 million was equivalent to more than 20% of the entire South Korean GDP that year.
And the question is, what do you think the South Korean government did with all this
money?
Well, it did exactly the same thing it did with the money it borrowed on the international
market: it gave it to companies to build up domestic industry.
To distribute the money, the government relied mainly on a group of business families who
had already done business in Korea, Japan and other countries.
The idea was that these families would not lack the money to build their empire.
An empire that would operate in a totally private and autonomous way on a day-to-day
basis, but in exchange, they had to meet the production targets set by the government.
And right there, VisualPolitik community, was how the chaebols were created, the big
business conglomerates that produced practically everything.
We are talking about giants like the Samsung Group, the Hyundai Group and the Lotte Group
that for decades were tremendously favored by the State.
And when we say that they manufacture practically everything, we mean it: Samsung manufactures
air conditioners, smartphones, televisions, microchips, refrigerators...
They even produce ships.
For example, to give you an idea of what we are talking about, the Samsung Group alone
still accounts for, wait for it, 20% of South Korea's GDP.
Yes, I know, it's really crazy.
Another good example is POSCO, which was the Chaebol that received the most money from
Japanese reparations.
No less than 100 of the 800 million dollars paid by Tokyo ended up in this company.
With that money POSCO built huge, modern steel plants, which along with low wages made it
very competitive.
The result is that almost 60 years later POSCO is still the sixth largest steel manufacturer
in the world.
Curious, don't you think?
I'm sure some of you are reminded of the Soviet Union.
And in a way that is not surprising: in South Korea the government had five-year plans and
set production targets.
Even so, the big difference is that in Korea they never intended for the means of production
to be state-owned.
In fact, the private sector and, above all, these chaebols had a lot of leeway.
In any case, in the first stage, investments were directed to relatively straightforward
and easy to establish industries.
However, as these began to produce, the State financed the development of increasingly complex
production.
And so from steel it went to cars and ships, and from these to electronics.
And so on.
It was the construction of a huge production line made in Korea.
But that's not the end of it.
At the same time, the government also supported openness to foreign trade, albeit in a fundamentally
unidirectional manner.
That is, from Korea to the world, but not the other way around.
The idea was to become a mega-factory for the rest of the world, while forcing South
Koreans to consume their own products in the domestic market.
In practice, the government only gave a free hand to buy abroad those products needed by
the national industry.
Nothing more.
But perhaps the most striking thing is that in order to boost exports, the State did practically
everything: not only did it provide cheap financing, but also a lot of fiscal and regulatory
aid.
For example, companies that exported had all kinds of benefits: profit tax reductions,
tariff exemptions, foreign currency loans and even export insurance paid for by the
State.
And not only that: Imagine they needed to build a new factory or a road?
No problem, the State took care of the expropriations and everything else that was needed.
It was basically an open bar in exchange for investing, producing and exporting.
We can see these privileges perfectly if we take a look at the subsidized interest rates.
In 1965, for example, while loans were given at rates of 26%, loans to export companies
cost a mere 6.5%.
These loans were known as "policy loans" and were mainly granted by the Industrial Bank
of Korea and the Korea Development Bank, two state-owned financial institutions.
In fact, the chaebols even received loans with negative interest.
In other words, they were paid by the state-owned banks to borrow money.
And we are not done yet.
The Park government also depreciated the Won, the national currency, as much as possible
to make it cheaper to buy from abroad.
And yes, I know what you are thinking...
What a barbarity, that destroys wealth!
And it is true, but it also has another effect that at that time was a priority for the dictatorship:
it helped to export more cheaply.
In a way, this functioned as a transfer from the pockets of South Koreans to the country's
large export groups.
Basically the purchasing power of South Koreans was eroded in exchange for enriching the large
conglomerates.
Of course, that was not the only sacrifice.
South Korean workers also had to deal with wage increases that lagged far behind productivity
gains.
Why?
Well, to keep costs from skyrocketing at all costs.
That explains why the chaebols became more and more influential in the national economy.
They had everything going for them.
And yes, I can imagine what you are thinking...
What an unfair system!
Well, yes, but at least they achieved one thing: they reduced poverty a lot.
People stopped working in the fields and started working in factories which, although they
were paid badly, meant they earnt more money than planting rice and cabbages.
And so, while in 1965 more than 40% of the population was considered extremely poor,
this percentage had dropped to 9.8% by 1981.
Of course, at the same time all this boosted a huge exodus of population from the countryside
to the city.
In rural areas, poverty rates were much higher.
And it’s at this point that we come across another of the great icons of South Korea's
take-off: the Saemaul Undong [PRON: Say-ma-ool Oon-dong], which translated into English would
mean something like the New Village Movement.
This was an initiative launched by Park in 1970 with the aim of modernizing rural Korea,
which was still terribly poor.
In this case, instead of giving them money or having the central government decide what
they had to do or not to do in rural areas to get ahead, what the government did was
to give them a fixed and regular amount of building materials.
The communities decided what to do with these supplies and those that made the best use
of the resources were rewarded with extra resources.
The success was such that even today, 53 years after its creation, this movement still exists
to some extent and, in fact, South Korea is trying to export it as a model to developing
countries.
("With the spread of the Saemaul Undong, we are helping developing nations get confident
about affluence by sharing our experience in economic development.”
– Former President Moon Jae–in)
Basically, the idea was: don't give them fish, give them the fishing rods.
But, anecdotes aside, as with all dictatorships, not everything was as rosy as it seems, nor
do they last forever.
President Park Chung-hee was assassinated on 26 October 1979 by the director of the
KCIA, the South Korean secret service, during a private dinner.
Not surprisingly, the country remained under the reins of a military dictatorship until
the early 1990s.
[Yes, South Korean democracy is much younger than you might imagine].
The fact is that in terms of the economy, the 1980s and 1990s did bring about many changes.
Among other reasons because Park's model also had many problems:
Competition was conspicuous by its absence, companies were terribly dependent on low labor
costs, depreciated exchange rates and government subsidies.
Many investments were not fully productive and lack of innovation was a problem.
Let's just say that South Korean companies knew how to copy, but they had much more trouble
creating.
And that's not all, of course the living conditions in the country were worse than what corresponded
to its level of economic development.
In general, escaping poverty is much easier than escaping the so-called middle-income
trap.
In fact, it is possible that South Korea would be wealthier today if Park's model had not
been applied so strictly.
In comparison with the other Asian tigers, it does not fare so well.
And exactly for this reason the post-Park governments, and especially the democratic
governments, have made many reforms to do away with the Chaebols and open the country
to competition and foreign investment.
And guess what?
That has worked even better.
Take a look at this other graph: What you are looking at is foreign direct
investment in South Korea relative to gross domestic product.
As you can see, as the country abandoned protectionism, foreign capital started pouring in like there
was no tomorrow.
And with the opening up, South Korean companies also had to invest a lot more in innovation.
In fact, without the increasing openness of the 1980s and 1990s, it is very likely that
South Korean industry would have been left far behind.
But if one thing is clear, it is that in spite of everything, the industrialization process
was a tremendous success.
Moving from an agrarian economy to an industrial economy is always a great leap forward.
It also happened in the Soviet Union itself.
The difference is that in South Korea they took the gamble that the initiative would
be taken by private companies and not by the State and that was decisive...
But as you can see, it did not solve all the problems either.
But at this point, the question is for you: Do you think that South Korea's development
model can be taken as a reference for a lot of other countries?
What do you think of the role played by the South Korean State?
Well, leave us your opinions below in the comments.
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if you haven't already done so you won't miss anything new.
Once again, thank you very much for watching.
All the best and see you next time!