How South Korea broke the mould
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How South Korea broke the mould

South Korea is one of just a few countries to transform itself from a low- to high-income economy and the only country to go from a recipient of aid from the OECD's Development Assistance Committee to a DAC donor. It achieved this not by blindly following a pre-designed development path but by taking the right detours.

There is no shortage of narratives purporting to explain South Korea's development success, but most have serious flaws. For example, some scholars assert that, from the start, South Korea enjoyed important advantages, especially physical infrastructure and human capital that had been built up under Japanese colonial rule. But most of South Korea's infrastructure was destroyed during the Korean War. Moreover, the Japanese colonial government offered Koreans only a primary education, and just 47% of Korea's children were actually enrolled. It was not until after the end of colonial rule in 1945 that primary school enrollment surged, reaching 82% in 1949, with primary education made compulsory in 1950.

As many African countries can attest, beginning one's development journey after decades of colonial rule and years of civil war is hardly advantageous.

When Park Chung-hee's military government seized power in 1961, it had to prioritise feeding the population over advancing industrialisation. To that end, the government instituted a dual-price policy for grain, purchasing it from farmers at high prices and selling it to consumers for low prices.

Though some scholars view South Korea's economic miracle as a kind of vindication of the so-called Washington Consensus, the truth is that the government took a measured approach to financial and trade liberalisation. Notably, one of Park's first acts after taking power was to nationalise commercial banks, in order to cope with extreme scarcity of capital due to low domestic savings.

The benefits of rapid financial and trade liberalisation, as the Washington Consensus prescribes, have tended to be short-lived or to follow stop-and-go cycles in developing economies because the private sector lacks the capabilities it needs to keep up. For example, in some African countries, such as Uganda, commercial and foreign banks charge very high interest rates that undermine critical investment in domestic manufacturing capabilities and encourage capital flight.

But in South Korea, banks were privatised only after the government had spent nearly two decades keeping interest rates low, thereby stimulating investment, and making sure that savings were being channelled toward boosting manufacturing capacity.

South Korea took a similarly judicious approach to trade liberalisation. When a country liberalises trade, local firms must be able to compete with foreign companies. If they cannot, foreign firms could establish monopolies or destroy the local industrial base unless the government implements protective measures.

In South Korea, that protection came in the form of very high tariffs on consumer goods aimed at allowing the export industries of the future to flourish before they were subjected to excessive foreign competition. Meanwhile, capital goods, which Korea had to import, were subject to very low tariffs.

Another prominent development narrative focuses on the role of institutions. Daron Acemoglu, Simon Johnson, and James A Robinson argue that developing economies with extractive institutions -- typical in state-capitalist systems -- fail to progress, whereas those with inclusive institutions, like South Korea, tend to succeed.

But South Korea's development success occurred under an authoritarian state-capitalist system. The real story seems to be that South Korean investment in human capital under the authoritarian regime spurred growth, thereby giving rise to a middle class that demanded democracy.

The problem was that, to produce goods for export, domestic firms had to import capital and intermediate goods from abroad-- an expensive proposition that contributed to South Korea's persistent trade deficits through the late 1980s.

Over the past several decades, South Korea has transformed itself from an authoritarian regime with a half-closed, state-led economy into a robust democracy with a very open market economy. But it did not run directly toward this outcome. Instead, it went slow where it needed to and took calculated detours, which turned out to be the most efficient development path. ©2024 Project Syndicate

Keun Lee, a former vice chair of the National Economic Advisory Council for the President of South Korea, is Distinguished Professor of Economics at Seoul National University, a fellow at CIFAR, an editor at 'Research Policy', and the author of 'Innovation-Development Detours for Latecomers: Managing Global-Local Interfaces in the De-Globalization Era' (Cambridge University Press, 2024).

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