From Cottage Industry to Global Leader

I By Kim Yoon-bae

Economic growth in Korea over the past six decades has been phenomenal. For 60 years until 2008, real GDP rose at the annual rate of nearly 7 percent. The growth of exports was even more staggering. In dollar terms, exports rose from a meager $28 million in 1952 to more than $400 billion in 2008. As a result, the export dependency or openness ratio ― measured by the ratio of exports to GDP ― rose from a level less than 5 percent in 1960 to a level exceeding 40 percent in the past few years.

Until the early 1960s, the main exports were entirely composed of raw materials, minerals, lumber, agricultural and fishery goods. It reflected the miserable fact that the country possessed no industrial manufacturing ability with international competitiveness. In 1970, export items were mostly light-industry, labor-intensive products such as textiles, plywood and wigs. Electronics started to emerge only at number five.

In 1980, as a result of the heavy and chemical industrialization drive initiated during the previous decade, iron and steel products and ships appeared among the top five exports although textiles continued to take the top position.

By 2000, Korean exports had gone through another major transformation. The main export items were semiconductors, computers, automobiles, petrochemical products and ships with wireless telecommunication equipment at number six.

Major trading partners have shown remarkable changes as well. Until the end of the last century, the United States and Japan had long been Korea's two major export markets, often accounting for a third or more and nearly 20 percent, respectively.

Since 2003, China became the number one market for Korea's exports. The rapid growth of East Asian countries such as Taiwan, Hong Kong and Singapore, among others, makes East Asia the most important trading region accounting for more than half of Korea's exports. At the same time, Korea's export markets have become far more diversified.

A number of factors were responsible for the astounding growth of exports in Korea. An abundance of good-quality, low-cost labor and efficient bureaucracy are among the factors which have helped boost the nation's export drive. An egalitarianism and cohesive society due to cultural homogeneity, land reform and war helped. Expanding trade with major partners such as the United States can be listed as a stimulus as well. One also cannot dispute the executive role of the government.

Industrialization in Korea began in the 1950s under the government of President Syngman Rhee who adopted the policy of import substitution in basic consumer products. The Rhee government also paved the way for future economic growth by focusing on education.

Import substitution did its share in Korea's economic development by General Park Chung-hee's rise to power in 1961. With limited national savings and a gradual reduction in foreign aid, the situation became even more critical.

The rapid industrialization, vigorously pursued by generalturned- President Park (1961-1979), had turned Korea's eye to exports. The policy shift to export promotion was inevitable for a country that had to earn foreign exchanges necessary to import capital equipment and buy technology licenses that were needed for the 'infant' industries that often required a large-scale production for efficient operations for a small domestic market.

What is remarkable is that the policy choice was made when the prevailing wisdom for economic development was infant industry protection along with import substitution. Under President Park, export promotion became a religion with the guiding principle of “Export in All Industries.” It was viewed as a means of obtaining hard currency, accelerating industrialization and securing economic and political independence. Ever since, boosting exports has been the engine of growth and the organizing principle under which international competitiveness, industrial upgrading, infrastructure development and human resource development could be pursued. The amount of exports provided the undeniable objective measure of performance for the national economy as well as enterprises.

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An arch above Sejongno Boulevard, central, Seoul, reads “Congratulations for $20 Billion

in Exports” in 1981. Nov. 30 was designated as “Export Day” in Korea to commemorate

the first achievement of $100 million in exports in 1964. In 1987, the name was changed

to “Trade Day” to promote balanced growth of exports and imports

As means to speed up the economic growth, Park created four ministries in charge of economic affairs ― the Economic Planning Board, the Ministry of Commerce and Industry, the Ministry of Construction and the Ministry of Finance ― all agencies responsible for building infrastructures for growth. Five-year development plans, initiated in 1962 under the leadership of the powerful Economic Planning Board, provided a long-term vision while monthly meetings offered an opportunity to secure sustained attention from top political leadership, to monitor progress on the long-term vision and identify emerging problems and devise solutions.

Although firms set their own export targets and the enforcement of them were mostly moral or “cultural” in nature, meeting or exceeding the aims has been among the most powerful incentives for the exporters. Many rituals were employed to reinforce the incentives. The most noticeable one was the Monthly National Trade Promotion Meetings, chaired by the president himself. These were gatherings of the ministers, top bureaucrats responsible for trade and the economy, the chief executives of export associations, research organizations and educational institutions and the heads of a few firms and general trading companies. The meetings were far more than perfunctory. The exchange of information, ideas and goals improved coordination and mutual understanding between the private and public sectors.

Awards were presented for excellent export performances at the Monthly Meetings. On a national scale, November 30 has been designated as “Export Day” to commemorate the first achievement of the $100 million in exports in 1964. The name of the day has been changed to “Trade Day” since 1987 to promote the balanced growth of exports and imports. On the 46th Trade Day ceremony in 2009, Korea celebrated the achievement of a 3 percent world market share, which was the eighth largest in the world while the overall size of the economy stood at 13th. In comparison, the share was merely 0.04 percent in 1962 on the eve of the export promotion era.

Various and often aggressive government support has been provided to exporters. They included, among other things, tax breaks, subsidized credit from nationalized banks, state guarantees on private sector borrowing, tariff exemptions and preferential access to imported intermediate inputs needed for producing exports.

The reform of the exchange rate system together with a major devaluation of the domestic currency greatly raised the profitability of exports by reducing the transaction costs. The government also provided important informational and institutional services through the newly established Korea Trade Promotion Corporation and the Korea International Trade Association to help small and medium-sized companies overcome their limited capabilities in overseas markets. Public enterprises were created to lead the way in establishing a new industry in such areas as shipbuilding and petrochemicals.

Export promotion has received positive reviews after several East Asian countries were able to achieve remarkable growth by following in Korea's footsteps. Empirical evidence continues to corroborate that the miraculous achievement of the Korean economy was guided by government policy in which a strong export drive was the essential ingredient.

The development studies of Korea and several other East Asian countries provide a number of lessons. One should not ignore the importance of sound fundamentals in terms of stable macroeconomic policy, nor neglect maintaining competitive exchange rates, able workers and efficient bureaucracy. Maintaining an open economy orientation is important. Import substitution as industrialization policy should be employed on a temporary basis. Government policies should not handicap exporters. In Korea, industrial policy has been closely integrated with the export strategy. One important reason behind Korea's success in export promotion is that the target industries were selected in a realistic manner in consideration of the country's technological capabilities and world market conditions.

Export production alone will not guarantee a foothold on the next rung of the development ladder. Likewise, it does not automatically provide sustained increases in real income. Government investment in education, training, R&D and infrastructure; streamlined bureaucracies; and stronger and deeper financial systems are each important and complementary ingredients in moving up the production ladder.

Korea's main export items have shifted dramatically over the past six decades. The years when the top export items included minerals and raw materials, or plywood and wigs have long gone. By the year 2000, information communication technology (ICT) products such as semiconductors, computers and wireless telecommunication equipment became the most significant export items. IT-related products account for almost one third of Korea's total exports.

A nation's comparative advantage constantly changes in a dynamic world. In a rapidly growing economy like that of Korea, the pace of development is expected to be even faster. Semiconductors and microchips did not even exist in the early 1960s when the export drive began.

Looking back on the automobile industry, another major export item, Korea produced its first car called “Sibal” in 1955 when a mechanic with his three brothers mounted an engine on a modified U.S. Army Jeep. Hyundai exported its first Korean-developed vehicle, “Pony Excel” to the United States in only 1986. That's less than 25 years ago.

Industrial policy has been boldly put into practice targeting light manufacturing in the 1960s and heavy chemical industries in the 1970s. It has been transformed into a neutral and functional policy in the 1980s.

In the beginning, export growth was largely driven by the low labor cost as it was in the 1960s. In the 1970s and 1980s, it was the result of a strong leadership and driven by heavy capital investment. The fiveyear planning that symbolized the era of the government-led industrial and trade policy ended in 1993.

The export promotion policy under President Park Chunghee no longer continued in Korea. The policy became more indirect, especially in the new international trading regime set by the World Trade Organization.

In the 1990s, economic development and export growth became innovation-driven. Government policy shifted from industry targeting in the 1970s to R&D support in the 1980s, provision of information infrastructure, R&D support, human development and labor training in the 1990s and more recently the promotion of new engines of growth and the upgrading of R&D.

The government has doubled its efforts to enhance Korea's economic competitiveness and productivity through the aggressive promotion of the IT industry and its application throughout society as a whole.

In 2004, then the Ministry of Information and Communication, whose administrative business is quite akin to the current Korea Communications Commission, launched an initiative called the IT838 master plan which was later revised to u-IT839 in which the government planned to nurture eight new services such as wireless broadband, invest in three infrastructures such as a ubiquitous sensor network and develop nine hardware-related businesses such as next-generation mobile communication devices.

In 2008, the incumbent Lee Myung-bak administration embarked on a new master plan called the “3-3-7” IT strategy led by the Ministry of Knowledge Economy in which 13 items were selected and divided into three categories: Three strategic items (e-government, DMB and WiBro), three flagship items (semiconductors, displays and wireless communication) and seven potential items including robots and software. Certain elements of the u-IT839 were maintained. However, the new plan recognized the need for increased government marketing support schemes that could help invigorate the globalization of the ICT sector.

Korea became one of the leading ICT countries. Nearly 90 percent of households use broadband Internet. The e-government readiness index is second only to the United States. World market shares of Korea's ICT products such as PDP, D-RAM, Digital TVs, and mobile phone handsets draws worldwide attention.

The ICT sector became the main engine of growth. In the past year, it accounted for nearly 20 percent of the GDP, contributed to growth by over 40 percent and was the main source of the current account surplus.

One important characteristic of today's globalized economy is the size of the rewards for the winners. In the latest news, Samsung's 2009 profits were greater than those of the largest 10 Japanese companies combined.

Ranking second was LG with profits nearly half as large. No doubt, the stakes are huge and international competition is fiercer than ever before. Moreover, Korean products in major markets have been squeezed between low-end products from eveloping countries like China and high-end products from advanced countries like Japan.

Implications for the future are impossible to ignore. While the semiconductor industry has been performing well, there is room to grow as indicated by the fact that in highly profitable items such as software, non-memory chips and computer systems, market presence is still minimal. Investment in R&D and human resources cannot be neglected.

Korea should establish a basis for which it can leverage the upcoming transition period that will be accompanied by a major change in the world economic order and the emergence of large markets in emerging market economies. Securing new growth engines such as renewable energy and the health-care industry would be important. History shows market diversification has helped export gains.

In addition to China, the Middle East region, Southeast Asia and the Commonwealth of Independent States ― including Belarus, Kazakhstan, Moldova, Ukraine and Uzbekistan ― rose tremendously. Free Trade Agreements with Chile, Singapore and the European Free Trade Area have been in effect. An FTA with the European Union and one with the United States are expected to have much greater effects.

Another important characteristic of the modern globalized economy is the size and volatility of international capital movement. Unregulated capital flows can easily swamp a small economy. Both financial crises, in 1997 and 2008, from Korea's perspective, were closely related to unregulated massive capital inflows that suddenly stopped and reversed direction.

An important role of the government is to provide a stable environment, by safeguarding the economy from undesirable side effects from huge capital movement. Even if government policy such as setting and enforcing export targets with subsidies is no longer allowed under the current international regulations, there are many other things the government can do for the economy.

The least, the government can do, is to share in the collecting and disseminating information service to domestic producers and exporters. President Lee Myung-bak's recent efforts to help a Korean-led consortium win a landmark contract, valued at about $20 billion, to build four nuclear reactors in the United Arab Emirates is an example of a well-functioning coordination between the private and public sectors.

Globalization brings in a concentration of economic power within as well as across national borders. In Korea, this is also a legacy of past development strategies that generally gave preferences to larger firms for promoting industrialization. Large corporations will grow even larger as if they are equipped with an autopilot system while small-and mediumsized firms continue to struggle. It should not be forgotten that the latter could also be an important source of innovation and future growth. Providing a level playing field for them would be an important task for the government.

The 1997 financial crisis was a moment of transition for Korea, from analogue to digital technologies, to become a market leader in the TV industry. In the aftermath of the 2008 global financial crisis, Korea emerged as an even stronger trading nation with powerful ICT industries. This bodes well for the future. It appears that the Korean government and the business sector have well adapted to the changing international environment. In particular, the government has been successful in its pursuit of a new industrial policy by emphasizing innovation-driven growth and balanced development in regions and sectors.