The Export Policy: Backbone of Korean Economy

Introduction:

In the 1950s, Korea today was predominantly agrarian, underdeveloped and still trying to survive the ravages of the war with foreign aid. That picture today appears unbelievable as Korea sets new records of economic growth. What changed in the following years was a focussed policy package eliminating the woes of Koreans both economically and socially. What was a tomb of illiteracy, disease and starvation became a shrine of economic and technological development. Many researchers call this “The Miracle on the Hangang River''. The term directly points to the ever-increasing exports witnessed by South Korea. What substantiates this claim is the Export Promotion Policies released by the South Korean Government time and again.

Battling the War’s Blow

As previously stated, in the 1950s Korea depended on the agricultural sector like many underdeveloped countries of its time. It remained an underdeveloped country for a decade. The war expenses took a toll on the economy. The Korean Transportation Ministry’s calculations revealed destruction of 46.9% of railroads, 1,656 roads and around 1,453 bridges. The list does not end here. Industries manufacturing rubber, textile, chemical and agricultural machinery were reduced to 40% of their working capacities. The power industry remained the worst affected, around 80% of power plants were shut and hence this brought a halt to almost all the productive activities. Supply channels were destroyed and rice crop production fell to 65% of what it was in 1945-50. These happenings led to serious inflation. Foreign trade crumbled from US$208 million in 1948 (including US$188.3 million government imports) to US$2.9 million in 1950. (2001)

Once the war ended and these numbers raised every brow, some lended a helping hand. South Korea received financial aid from the IMF, USA among others to rebuild and restore it’s prestige. The government might have pursued a path to control and direct every industry leaving some, as done by India, but rather it placed special emphasis on “Export Promotion Policy”. 

EXPORT PROMOTION POLICIES- “THE MIRACLE OF HANGANG RIVER”

Right after the war, the Korean government chanted the slogan- “Export Number One” as it pursues export promotion policy to rejuvenate the economy. The policy unfolded slowly and gave different benefits to the economy.

Right Foot Ahead:

In the 1960s, the government tried a mix of policies to facilitate economic development. First step was to nationalise all the commercial banks and take control of the credit system of the country. Along with this, the government was determined to reduce its Foreign dependency, as around 50% of the government budget came directly from the USA. Among various policies were Import Substitution, Tax exemption for export related activities and setting up free trade zones. To achieve these, the government started promoting the export of Light Industries products, which were labour intensive and gave a comparative advantage to South Korea. Around the same time, the exchange rate fell and this proved a boon for export promotion. The industries that benefited were plywood, leather, craftwork, raw silk, cotton fabrics, potteries, rubber products, radio and electric appliances, fisheries and mushroom cans, wool products, clothes, and miscellaneous products, all of which were labour intensive. 

After entering into the 1970s, a transition was made from Light Industries to Heavy Industries like Iron and steel, Chemical, metal, shipbuilding and electronics. This transition was welcomed positively by the numbers as there was a noticeable increase in Export values.

South Korea changed its pattern of exports many times over to accommodate the changes in economy. 

Import substitution policy: A success or a failure?

When world war 2 finally came to an end, underdeveloped economies like South Korea and Taiwan started analysing different policies and initiatives that  could be taken to make situations better.

One particular policy that caught the most attention at that time was the ‘IMPORT SUBSTITUTION POLICY’, after analysing this policy, leaders could not find any strong reason to not implement it.

It offered everything an underdeveloped economy looks for,  increase in employment, output, income, exports, and foreign exchange reserves, decrease in imports and basically a holistic growth of the economy.

But as fancy as it sounds, the reality was just the opposite. These economies lacked capital and investment that were the two basic prerequisites for the success of this policy. Government was left with no other option than to provide subsidies to establish infant industries in the hope that once these industries mature, subsidies would no longer be needed. Now in the long run these subsidies just end up adding to the existing fiscal deficit, also to produce domestically on a large scale, imports of raw material and machinery are required. Hence Total imports might not end up falling at all because the imports of final goods are replaced with imports of intermediate goods. Thus, before implementation of any policy, the long term effects of it should be analysed.

Foreign currency reserves:

South Korea was one of the biggest recipients of foreign aid especially after world war 2, still the country didn’t show any economic growth and was stagnant for many years. The prime reasons for such disappointing results were lack of central planning, misallocation of funds, corruption etc. But despite all of this, South Korea came out of bankruptcy and showed results that had never been seen before in such a short span of time. This rollercoaster journey of South Korea has many contributing factors. Many changes were implemented in the direction of economic development.A shift from labour intensive to capital intensive production, Producing capital goods and shifting to heavy industry and enforcement of restrictive FDI( Foreign Direct Investments) policies led to South Korea’s economy reaching new heights. Contrary to the beliefs of many foreign experts that South Korea was neither ready nor large enough to support a heavy industrial base, the plan was largely successful as the economy showed a double digit growth in successive years.

A Brief Analysis 

Crisis is the birthplace of opportunities. Korea today has overcome it’s dark past economically. But are the export promotion policies the only reason to conclude it? Many researchers gave a straight yes. Some calculated that in the year 1960-84, each 1% increase in subsidy led to roughly 2% increase in export supply (Export Promotion Policies, Export Composition and Economic Development of Korea”,” 2010). But are these policies only the root cause of development? Apart from export policies, the Government of Korea followed trade liberalization policies to bring Korea to the path of development. The ease of trade along with other tax exemption benefits aided the process and made it smooth. 

Export Promotion cannot be the only factor resulting in growth of the economy. In the years 1945- 1960, the school enrollment rate was shocking, about 3 fold growth in Primary school Participation rate, more than 8 fold in Secondary schools and 10 fold in Higher education.(Seth, 2017). Apart from school going children (96% of the total), Adult literacy campaigns were successful. A well educated and well - equipped human resource is the best addition to any developing nation. 

Flaws in the policy: The funds directed towards this policy were at the cost of other necessary endeavours like social development. Government promoted exports at the cost of productivity in non-exportables. Also, the tax exemptions granted by the government resulted in the loss of revenue. Developing economies have a narrow tax base and tax waivers thus have all negatives. 

Export promotion benefitted the exporters in every way possible, but on the other hand producers engaged in non-export production faced the perils of the policy. 

Conclusion 

Despite facing multiple challenges, South Korea has achieved wonders when it comes to economic growth. Over 3 decades the annual real income growth in Korea averaged over 8% which was huge. Although at the same time economies such as Hong Kong and Singapore also enjoyed rapid growth, it was a much bigger accomplishment for South Korea being a country of almost 50 million people to sustain such high growth rates for many years.

REFERENCES:

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