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South Korea The Miracle on the Han River

This presentation present by Rashid Abdullah, Raja Shoaib, Azhar Ali and Abdul Aleem Choudhry

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South Korea The Miracle on the Han River

  1. 1. International Political South Korea “The Miracle on the Han River” Group: Rashid Abdullah Raja Shoaib Akber Abdul Aleem Choudhary Azhar Ali Economy How South Korea escaped poverty and became one of the richest countries in the world?
  2. 2. The Asian Tigers As recently as the early 1960s South Korea, Taiwan, Singapore and Hong Kong (the “Asian Tigers”) were considered to be a part of the third world. Since the 1997 Asian Financial Crisis, praise of the “Asian Miracle” has dwindled in academia, yet the Tigers still stand as rare examples of states which have successfully “developed” in a manner no one could have predicted 50 years ago – and at a considerably faster rate than any of our current efforts at third-world development seem to be proceeding. Republic of Korea Government: Unitary Presidential Constitutional Republic Population: 51 Million 2014 HDI: 0.891 Very High GDP 2014: $1.790 Trillion Republic of Singapore Government: Unitary Presidential Constitutional Republic Population: 5.5 Million 2014 HDI: 0.901 Very High GDP 2014: $297.941 Billion Hong Kong Government: Special Administrative Region Population: 7.2 Million 2014 HDI: 0.891 Very High GDP 2014: $ 400.607 Billion Taiwan (Republic of China) Government: Unitary Semi-Presidential Constitutional Republic Population: 23 Million 2013 HDI: 0.890 Very High GDP 2014: $ 517.019 Billion
  3. 3. History of South Korea Also called the Republic of Korea (ROK). South Korea has been an independent Constitutional Republic since its liberation from Japan on August 15, 1945. Republic of Korea marked by Alternating periods of democratic and Autocratic rules as fellow: First Republic (1948-1960) Military Rule (1961-1963) Second Republic (1960-1961) Third Republic (1963-1972) Fourth Republic (1972-1981) Fifth Republic (1981-1987) Sixth Republic (1987- Present) USAMGIK (1945-1948)
  4. 4. Under the First Republic Syngman Rhee (1875-1965)  First President of South Korea (1945-1960)  Anti-Communist  Events under the First Republic of South Korea. South Koreas first independent government, ruling the country from 1945 to1960-the Syngman Rhee administration.  The government took in vast sums of American Aid in amounts sometimes near the total size of the national budget. (Corrupt and inefficient government of ROK) Major Events occurred during first Republic  Land reform  The Korean War 1960 - student demonstrations ousted Syngman Rhee from presidency
  5. 5. Capitalist VS Communist Power Production plummeted down to a miserable level of 11 thousand KHz, about one-eighth of the earlier production level of 80 thousand MHz Damage Estimates The Korean War At the start of the Cold War, Communist North Korea Went to war with its Capitalist neighbor . The bloody conflict lasted from 1950 to 1953. The war destroy majority of the industries and industrial infrastructure By August of 1951, 44% of factory buildings and 42% of Production facilities lay in ruins Foreign Trade deteriorated from US$208 Million to US$2.9 Million All these factors led to serious inflation.
  6. 6. POSTWAR SITUATION The Korean War Chemical Industry 70% Overall Industry Destroye d 51% Agricultural Machinery Industry 40% Rubber Industry 10% Power Plants 80% At the start of the Cold War, Communist North Korea Went to war with its Capitalist neighbor . The bloody conflict lasted from 1950 to 1953. • GDP per capita around $100, poorer than Philippines. • Ravaged by the Korean War • Large Standing Army-Menace from North • Largely agrarian country • Lack of natural resources Coal, iron, copper, oil • U.S. aid kept people barely alive: 1/2 of national budget • 1/5 of adults unemployed; social unrest fueled by unemployed youth Menace from the North
  7. 7. Under the Military Rule The military coup détat led by Major General Park Chung-he on May 16, 1961,put an effective end to the Second Republic. Major Events occurred under the Military Rule Miracle on the Han River Five Year Plan (FYP) Park Chung-he
  8. 8. Under the Military Rule  Seized the capital + other important cities  Brought businessmen into submission (June 14 law)  The first South Korean five-year plan was inaugurated in 1962  Economic growth as the historical goal, to be achieved at all cost “In human life, economics precedes politics or culture.” – Park  Qualification for the special treatment was quantifiable and objective  Per capita output doubled in the following decade  South Korea became an industrialized country  Influenced by state-planning in Manchukuo  “Guided Capitalism”: The state as the engine of economic development central planning + gov’t intervention in the market industrial policy, corporate state
  9. 9. South Korean economy roars  GDP growth averaged 9-10% a year  Manufacturing sector took greater share of the economy (close to 30% - comparable to West Germany)  “Boys who grew up working in rice paddies found themselves building oil tankers and designing semiconductor chips.” - Mark L. Clifford
  10. 10. Top-Down, General Headquarter (Park himself made major decisions) State-owned banks industry/business associations Other Gov’t Ministries MOF (Ministry of Finance) MTI (Ministry of Trade + Industry) FKTU (Federation of Korean Trade Unions) (gov’t-controlled) industrial unions Businesses Coopted labor EPB (Economic Planning Board) National Budget
  11. 11. The State Intervenes in individual firms’ decisions All Businesses were required Ministry Economic of Planning Finance Board (MOF) (EPB) Enforcement devices to join associations Policies, Cutting of credit line, Arbitrary tax audit, Personal Connections, regulations, to planning, order move quickly from national minister to firms, cartels, budget domestic steady stream of profit Korean Corporate State Controlled the Banking Sector •Nationalization of Banks. •Extraordinary power Uneven over law credit-enforcement starved businesses
  12. 12. Export-Oriented Industrialization President, Gov’t Officials, Academics Reps from trading companies Rapid response Monthly Export team for exporters Promotion Meeting Export Day (11/30) “Export towers” to companies w/ best export performance Early 1960s: Dollar began to run out; US threatened to cut aid 2nd FYP: Build industries targeted to export markets. 1960s: South Korea utilized cheap labor-light manufacturing  Import license conditional or export performance  Tariff exemption for raw material and machinery Exporters could automatically borrow against overseas orders More credit to companies w/superior export performance Huge Incentives for Exports Coercive element: Corporate state had business go along (EOI)
  13. 13. What’s good about Export Oriented Industrialization? Selective use of FDI (Foreign Direct Investment) Reduced possibility of BOP crisis Gov’t Complements market forces Correction of market failure high set up costs of exports imperfection information. Meritocracy in allocating credit South Korea Up-to-date Selective, short-term protection- International competition makes infant industries grow up. New Machinery introduced. Experience w/overseas market
  14. 14. Korea Trade Promotion Agency (KOTRA) Helped Korean businesses how to market their products in foreign countries Scoured the world for new export markets Key to overcoming the obstacles early exporters faced
  15. 15. Results (1961-73) Exports skyrocketed: trade deficit stayed under $1 billion Huge Success Export: $33 Million > $3.3 Billion (100 times) Imports: $343 million > $3.8 Billion (11 times) Investment: 6% of GDP > 23 % of GDP South Korea established a firm international standing in light industries e.g. shoes, clothes, plywood etc. Raw Materials + Machinery for export industries
  16. 16. Five Year Plan (FYP) Five Year Plan Nathan Plan UN plan for the economic recovery of South Korea. Change in Policy. Emphasized industrial growth rather than food self-sufficiency GOAL: lay a foundation for future economic growth by developing a base industry in South Korea Aims to increase wealth within South Korea and Strengthen Import substitution industrialization Political stability. to export Not oriented growth Implemented Second FYP (1967-1971) Increasing the Public sector for social overhead South to shift the South Korean state into heavy Emphasized textile exports as a leading sector capital investment industry
  17. 17. Five Year Plan (FYP) The Big Push (1973-79) Fourth FYP 1977-1981 Bad: Policy loans caused massive inflation in 1970s; some target industries didn’t work Good: gain experience in heavy Shipbuilding, industries, which create far more added Machinery, Chemicals, Steel, Electronic, Unprecedented industrial expansion HCI (Heavy and Chemical Industries) Aims: Build up defense value; acquire out managerial Automobile in the end skills; (i.e. economies aluminum) of scale
  18. 18. “Reverse brain drain” KAIST (Korea Institute of Science of Technology) •Engineering education Lure Koreans who’d been educated overseas with attractive pay packages State-owned enterprise World Bank refused to finance the Project Park Tae Joon used personal connection in Japan to channel reparations (for past Colonization) Cutting-edge managerial techniques and scientific knowledge Rapid construction schedule + high quality standard. Long work hours (60-70 hour work week) Ran like military Become one of the Largest, most efficient steel maker in the world Opened up the way for heavy industries
  19. 19. Rise of Chaebols  Today South Korea is a highly Industrialized country.  National conglomerates (groups) run by founding families  Profitable firms subsidize less profitable firms within the conglomerate (cross-subsidization) Factors  Scarce credit + abounding investment opportunities  Red tape – lots of paperwork  Export promotion – bigger is better in export market  State-owned banking sector – political clout was a must to secure loans
  20. 20. Quite a few became Successful Global Multinationals SAMSUNG LG Corporation is the 4th largest company in South Korea and Samsung Electronics world’s larges information technology Company, become second Samsung largest Heavy in USA industries, market Samsung share. Life insurance worlds LG Electronics, 14th largest LG Telecom, life insurance LG Display company. and LG Solar Energy LG Corporation DAEWOO Group of Industries, Daewoo Motors, Daewoo Electronics, Daewoo Heavy industries, Daewoo Shipping DAEWOO GROUP Hyundai Motor Groups second largest automakers in Asia and fourth largest automakers in the world. Hyundai Motor Group Chaebols of South Korea Earlier : The Centrally planned and government directed investment Now: Completely market oriented economy
  21. 21. USA $ 16.768 China $ 16.149 South Korea is 13th Largest Economy of the World (GDP “2013 by IMF India $ 7.277 Japan $ 4.788 Germany $ 3.621 and WB” ) Russia $ 3.559 Brazil $ 3.073 France $ 2.587 DoFnoourr tAoTs hiMinairtendem T rLnbiagaGeretr-gir2 oeos0ns f( taOS iloEn Fu CAitnDhsai Kancoiraela A)id Indonesia $ 2.554 UK $ 2.435 Mexico $ 2.143 Italy $ 2.066 South Korea $ 1.790 GDP in trillions of U.S. dollars. Data: IMF, WB, CIA WFBook.
  22. 22. Conclusion “Tiger Daddy State”  Economic development in exchange for political freedom  Single party corporate state speeded up development  Businesses were forced to compete overseas  Leadership was pragmatic and flexible  Took maximum advantage of international + domestic politics  EOI as result of policy adaptation  Acknowledged role of businessmen and Entrepreneurs  Recognized need for advanced foreign technology
  23. 23. Conclusion  It takes right kind of “parenting” to develop a country’s industrial base to internationally competitive level – South Korea: Too authoritarian – Latin America: Too overprotective Countries should integrate into world economy, on their own terms  Infant industries need some time to grow and mature  The individual cannot overcome market failures  The individual succeed only so far as his country provides him opportunities to do so
  24. 24. Budget deficits were kept within the limits of their financial limits, as to not destabilize Budget deficits the macro-economy Debt levels during 1980-1985 was quite high compared to their GNP External debt ratios, it was sustained by the country’s high levels of export Exchange rates had been changed from long-term fixed rate regimes to fixed-but-adjustable rate regimes with the occasional steep devaluation of managed floating rate regimes Exchange rates Degree of Success
  25. 25. THANK YOU