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South Korea (henceforth referred to as Korea) is being looked upon as the role model by different countries for their economic development. Korean history and culture, state intervention, policy reforms, and Chaebols have been the corner stones for Koreas success. As B N. Song (1990) describes The way the Korean economy has grown, and the way the Korean people have shared the fruits of economic growth, have been greatly influenced by Koreas history and culture. Korea was among the very poorest countries in the world, the out come of the Korean War was devastating. Recovery of the country started in early 1950 s, with extensive support and assistance from United States.
According to B N. Song The period from 1953 to 1961 was one of very slow recovery from the worth trend curve changed abruptly, however with the beginning of first five year plan in 1962. Thereafter, Koreas climb up the ladder of development accelerated by 1970 Korea had achieved NIC (Newly Industrial ising country) status. In Korea the Chaebols and the State, played an important role in initiating development.
With the start of the first five-year plan, The Korean economy entered the take off stage. as, described by W W. Rostow (1983). The development policy chosen by many developing countries is inward looking rather than outward looking because they believe it to be safe and correct. But it was the boldness of Korea to choose an outward looking growth strategy, which paved the path to its success. B N.
Song describes Koreas growth strategy as It is growth oriented than equity oriented Koreas strategy has been industry oriented rather than resource or service oriented Koreas approach has been outward looking rather than inward looking. The economic growth started with the rapid industrialisation of export industries. According to C B. Hollis and M Syrquin (1977) The expansion of exports has been almost forced by the government, export industries and the economy as a whole were run by the government, in many cases beyond normal capacity. The officials in Ministry of Trade and Industry assigned export targets to Korean firms.
Firms which met the export goals were rewarded by numerous benefits reserved for exporters, like preferential credit and loans, administrative support and other benefits like tax reduction. On the other hand firms that could not meet the export target risked themselves with heavy administrative sanctions from the government. Therefore the business strategy of the firms was to increase exports along with profit making. The exports increased rapidly, due to various reforms in trade and economic policies. According to B N. Song When the first five year economic plan (1962 - 6) began, the total value of Korean exports amounted to only US $ 55 million, but by 1988 this had increased to US $ 55 billion.
The other strategy of the government was to promote few firms rather than developing every field and promoting overall business, therefore a few large business conglomerates emerged. These firms were in direct link with the government and followed the states action plan. To regulate these growth strategies the state used various policy reforms. One of the important tools to guide the private enterprise was the control of banks by the government. It exercised control on the amount borrowed, interest rates and loan terms. Tax structure and administration was the second important tool in the hands of the government.
According to B N. Song Firms were exempted from indirect taxes on income earned from export sales Administrative support for the business also served as an effective supplemental policy instrument. The government developed export industrial estates and provided help for building a plant in every provincial capital. (GTC) was established by ministry of trade and industry in 1975 to speed up export expansion. A unified exchange rate system was introduced, to boost the growth of export industries. The state was not always supportive, as B N. Song describes sticks or threat systems, such as tax inspections, withdrawal of financial support and legal punishment to enforce policies were used.
However Korean firms lacked business expertise and they succeeded, just because of government support. The state launched HCI programme to develop heavy and chemical industries, the performance of these industries was spectacular, which contributed substantially towards the GNP. H J. Chang (1993) suggests that The HCI programme, far from being a failure, produced impressive growth and trade performance, especially in the heavy industries. Under this programme the Korean ship building industry grew up to be the worlds second largest ship building industry. The Korean economy has been able to succeed with the state intervention because, the state received extensive support from the Chaebols, also as H J.
Chang describes The Korean state played a central role in the countrys economic development through its cunning use of state created rents as an instrument for industrial development. Of course such a result was only possible because the Korean state was a strong state which could discipline firms. The reforms and policies changed with every five-year plans, the state designed steady growth strategies to reach a developed economy stage. According to B N.
Song Koreas per capita income rose, above US $ 2000 (1980 prices) in 1985, there by passing Arthur Less threshold between development economies and developed economies. The state had excessive control over the economic activities, and as it was the only decision maker in the strategic development of the country, a small mistake would have proved to be fatal. In the development of exports, the state forgot the overall development of the economy. Korean banks have also faced the problem of getting bankrupt because of they lacked commercial expertise and they were used as mere tools to implement governments financial policies. According to B N. Song The premature over expansion of heavy and maritime industries by the government on the eve of second oil crises resulted in a heavy loss for the banks, which has been forced by the government to provide these industries with tremendous loans.
W W. Rostow predicted Korea will become an advanced country shortly before the year 2000. But to everybody's surprise Korea is in severe economic crises. The Korean growth strategy is derived from the Japanese model, however some distinctive factors make Japanese economy the worlds second largest market economy. - As quoted by Ministry of Foreign affairs, Japan (2001). This very reason makes me compare Korean economy with the Japanese economy, but before that we need to have a brief insight on the development of Japanese economy. The Japanese economy started with state capitalism, first long term (ten year) development plan was started in 1884, since then Japan was on the threshold of acquiring western technology, and gaining access in the modern economic world.
Japan suffered heavy devastation during World War II; the nation's economy was almost dead from wartime destruction. In the beginning of 1952 the main focus of the government was to increase coal and steel output. Increase in the production of steel laid the foundation for growth of the economy. According to Ministry of Foreign affairs, Japan Japan averaged an annual growth rate of 8 %, enabling it to become the first country to move from "Less-developed" to "developed" status in the post-war era... The reasons for this include high rates of both personal savings and private-sector facilities investment, a labour force with a strong work ethic, an ample supply of cheap oil, innovative technology, and effective government intervention in private-sector industries. In the year 1973 Japan faced recession due to the oil crises, in 1979 Japan was exposed to second oil crises.
This forced the government to change its strategies on development of heavy industries towards development of technology industries. In 1970 s and 1980 s exports played an important role in the economic growth, however increasing balance of payments made Japan to concentrate on domestic markets to achieve economic growth. Japanese economy was facing a downfall in the late 1980 s. The value of yen and land prices dropped abruptly, this was known as the bubble economy. The recession continued until mid 1990 s. In 1997 the Asian crises worsened the recession.
Government initiated various reforms to fix this problem, according to Ministry of Foreign affairs, Japan. In 1998 the government established a 60 trillion yen funding framework to provide the public funds necessary to promote economic recovery. The economy started recovering in early 2000, stock prices increased and there was an increasing demand for Japanese products due rapid growth in information -technology business. Korean and Japanese economies have similarity in their approach, but disparity in there reforms. The development strategies and the way they have grown are almost astonishing.
According to B N. Song For most...
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Research essay sample on Analysing The Growth Of Korean And Japanese Economy
