Doug Irwin has an excellent new paper describing how the Korean economy took off in the late 1960s:
In the early 1960s, South Korea was close to being considered a failed state. It suffered from political turmoil and economic stagnation. One of the poorest countries in the world, it had a lower per capita income than North Korea, and its standard of living was not much higher in 1959 than it had been in 1945. Domestic savings were virtually nonexistent, and foreign assistance was required to finance most domestic investment. Exports were less than 1 percent of GDP, and it could afford imports of about 10 percent of GDP only because of US foreign aid.
Today, South Korea is an economic success story and an export powerhouse. The key transition period is widely agreed to have been the mid-1960s, when it began a sustained period of rapid economic growth. Although the many factors behind the country’s transformation are still debated, the decision to promote exports is generally accepted to have been a key part of its success. In 1959, South Korean exports were just 0.7 percent of GDP. A decade later exports were about 10 percent of GDP, and by the early 1970s they reached 20 percent of GDP.
The key policy initiative was a move toward less restrictions on trade:
The United States opposed the military government’s initial policy stance and withheld aid to force it to devalue the won and liberalize the foreign exchange regime. With US encouragement, the previous, short-lived administration of Chang Myŏn had introduced these liberalizing reforms to stimulate exports and reduce the rent-seeking that came with government allocation of foreign exchange. Although these changes were deeply unpopular in Korea and resisted by government officials, the United States wanted a return to those policies and had enormous leverage because it financed most of the country’s desperately needed imports. In 1964, the Park government, in a weakened position because of domestic crop failures, relented and appointed an economic reform team that was strongly committed to export promotion as a national priority. Expanding exports was seen as a way of earning foreign exchange to pay for imports and ending the country’s excessive dependence on the United States.
The financial sector was also liberalized:
In September 1965, Korea lifted interest rate controls that had depressed savings and financial development. The cap on deposit rates was lifted from 15 percent to 30 percent and that on loan rates was raised from 16 percent to 26 percent, though the rate on export credit remained 6.5 percent. The result was a dramatic increase in private savings, which were channeled through the banking system and produced an astonishing increase in investment that further propelled exports. Gross domestic investment rose from 15 percent of GDP before the reform to more than 25 percent of GDP after, reaching nearly 30 percent by 1969.
There are no economic miracles. Rather there are countries held far below their potential due to bad government policies. South Korea in the early 1960s was one example, while China under Mao was another. In the Korean case, economic success resulted from following the recommendation of US policymakers. In the German case, economic success came after domestic policymakers ignored the advice of US policymakers and freed up domestic prices (in 1948).
The common thread is that almost all economic “miracles” involve some form of economic liberalization. What looks like a “miracle” is the rapid growth after the removal of growth constraints.
HT: David Levey
READER COMMENTS
Ahmed Fares
Sep 22 2021 at 4:26pm
[quote]
The country’s fertility rate hit a rock-bottom of 0.84 babies per South Korean woman this year, according to a 2021 statistics report on South Korean births and deaths released by the South Korean government.
It’s a far cry from its 1960 peak of six births per woman, according to data from the World Bank. South Korea now has the lowest fertility rate in the world.
[end quote]
That means each cohort is less than half the previous cohort, well under the 2.1 replacement fertility rate, and an inverted population pyramid with a high aged dependency ratio.
The future is not bright for South Korea.
Jose Pablo
Sep 23 2021 at 5:03pm
Why not?
If I follow your rational them the future of Niger, Angola and Congo should be the brightest in the world since they have the highest fertility rates: 6.91, 5.9 and 5.7
I don’t know …
Ahmed Fares
Sep 23 2021 at 6:58pm
In agrarian societies, children are an asset by the age of 10. Also, the older ones take care of the younger ones. In Niger, for example, agriculture is 87% of the economy.
As for South Korea, agriculture is only 4.8% of the economy. Those 10-year-olds are still in school, and it will be many years before they contribute to the economy. Not only that, a lot of them will end up taking care of that huge number of old people, leaving less people to produce for exports for example.
Jose Pablo
Sep 23 2021 at 9:08pm
… and that is precisely the reason why they have so few: they are not an asset. Let’s say, for the sake of the argument, that they are a “liability”. Then, what South Koreans are doing is “having less liabilities”, which does not seem like a terrible thing “for the future”.
I tend to trust the Koreans individual criteria on what represent an asset (and it is good to have more of them) and what represents a liability (and it is good to have less ), much more that any “central planner” vision on the “right” fertility rate for the future of Korea.
[As a minimum, individuals consuming $32,000 of goods and services per year, the GDP per capita of South Korea, are a liability for the planet. And this “cost for the planet” is not properly included in the “price signal” that is already making the South Koreans to have so few kids. With this “liability for the planet” properly internalized you could argue that they would be having even less children]
Ahmed Fares
Sep 23 2021 at 11:46pm
For developing economies, children are an asset of the family. For developed economies, children are an asset of the state. The result of this is a collective action problem, where it is in society’s interest to have children, but not in anyone’s individual interest to bear the cost of raising children.
[quote]
According to the World and Korea Population Forecast released by the National Statistical Office, South Korea’s population aged 65 or older will reach 37.0 percent in 2045, surpassing Japan’s 36.7 percent, and thereby becoming the world’s most aged population (The report is based on a comparative analysis of the UN’s World Population Outlook for 201 countries and the National Statistical Office’s special estimate of the future population between 1967 and 2017.) South Korea’s portion of the elderly population is projected to grow at the fastest pace in the world from 14.9 percent in 2019 to 46.5 percent in 2067.
[end quote]
Check out the chart at the top of this page titled “South Korea population pyramid 1960-2020”. That’s that inverting population pyramid I was referring to before.
https://en.wikipedia.org/wiki/Aging_of_South_Korea
Jose Pablo
Sep 24 2021 at 9:38am
“Society” has no “interest” since there is no meaningful way of adding up all the individual preferences (Arrow’s Impossibility Theorem is pretty useful on that).
When the State (meaning the group of people actually holding power) has an “interest” that oppose the individual interest, bad things tend to happen.
Demographics are a fact but when qualifying them as bad or good we are prone to “Malthusian mistakes”: overconfident in extrapolation and lack of confident in human ingenuity.
On demographic decisions, trust the Korean individuals, not the “Korean State” (whatever it means).
Ahmed Fares
Sep 24 2021 at 6:07pm
The end result of not having children to replace yourself is extinction. Long before that happens, some other country will invade and take you over.
North Korean fertility rate – 1.91 births per woman (2021 est.)
Demography is destiny.
Matthias
Oct 3 2021 at 6:57am
That inversion doesn’t work.
Just because very little fertility might be bad, doesn’t mean that very high fertility is necessarily good.
Perhaps there’s an optimal amount of fertility?
(No judgment on the facts inplied. Just a comment on your logic.)
tpeach
Sep 22 2021 at 4:59pm
Yes but it also seems that countries like South Korea, Japan and Singapore also used “industrial policies” to promote manufacturing and exports, which supports the “infant industries” argument for state-directed subsidies and intervention to develop an industrial base in export goods.
On the other hand although there may be a few successful examples of industrial policy I’d guess there are many more failed cases in other countries where the subsidies for “infant industries” lasted decades and resulted in enormous waste and inefficiencies.
What conditions do you think allow for successful industrial policies and set the few success stories apart from the numerous failures?
Scott Sumner
Sep 22 2021 at 5:35pm
I doubt that there have been any successful examples of industrial policy. Based on what I read, Japan’s industrial policy was a net drag on growth.
Alain Rizk
Sep 23 2021 at 10:26am
There really has bee far too much written on the topic to dismiss the role of industrial policy. Much has been written on South Korea itself not least by Alice Amsden and Ha-Joon Chang decades ago. The whole economy was oriented towards supporting investment by subsidising corporate investment, targeting certain industries etc etc. There is also a lot that has been written about how the financial sector was managed to this end (all to subsidise investment, allow for capital equipment imports etc). Similar cases have been illustrated with variation in approach about Japan, Taiwan, Western European countries and even China. Are you really not familiar with this literature or is your argument that, like you suggest for Japan, all this growth would have been even stronger if the State had gotten out of the way? It isn’t really that complicated. When your industrial sector is starting from an uncompetitive position, liberal markets will tend to favour those on top so you need to protect your internal market while subsidising during a phase of catch up. East Asian countries in particular had the discipline to do this while still pushing for international competitiveness (and exports) as the ultimate goal and succeeded. The issue is that this politically very difficult as it essentially requires the broad population to accept polices that favour production and investment at the expense of consumption and probably also requires a lack of natural resources so there isn’t an elite that has the incentive to maintain imports for their own consumption (thereby keeping the currency strong and negatively impacting the potential success of export policies that support productive pursuits rather than natural resources). But I’m certainly curious to read the book if it has a novel reading of this history.
Jose Pablo
Sep 23 2021 at 5:55pm
From a) Country X implemented industrial policies and b) Country X economy was a success, does not follow c) Industrial policies causes the success off Country X.
The “post hoc ergo propter hoc” fallacy is always a risk. For a to be the cause of b, b should have not happened in the absence of a. Which is a much taller bar that a and b happening consequently in Country X.
Two factors that should make us skeptical of a causing b being what happened in Korea.
Similar industrial policies were implemented in many other countries: South America, India, etc. with very little success
Many “other things” were going in Korea at the same time. Mainly a very sensible macroeconomic policy.
From “Industrial Policy in an Era of Globalization: Lessons from Asia “by Marcus Nolan and Howard Pack:
“(..) in this volume we attempt to evaluate one part of the overall economic growth strategy of Japan, Korea, and Taiwan, namely the effects of their attempt to discriminate among various industrial sectors. As will be seen we are skeptical that this was the major key in their success”
and
“(…) an alternative view of this Asian success [Korea, Japan and Taiwan] success stories are that they are largely the result of getting macroeconomic policies right: responsible government monetary and fiscal policy, low inflation and maintaining the correct real exchange rate were key to their success (..)”
From “Industrial Policy in an Era of Globalization: Lessons from Asia”by Marcus Nolan and Howard Pack:
“(..) in this volume we attempt to evaluate one part of the overall economic growth strategy of Japan, Korea, and Taiwan, namely the effects of their attempt to discriminate among various industrial sectors. As will be seen we are skeptical that this was the major key in their success”
and
“(…) an alternative view of this Asian success [Korea, Japan and Taiwan] success stories is that they are largely the result of getting macroeconomic policies right: responsible government monetary and fiscal policy, low inflation and maintaining the correct real exchange rate were key to their success (..)“
Andrew_FL
Sep 22 2021 at 6:25pm
Interest rate controls is an interesting topic to me. I’ve long wondered whether the most important policy that held back premodern societies were prohibitions on usury.
tpeach
Sep 23 2021 at 5:35am
But the paper you linked to says:
Although the many factors behind the country’s transformation are still debated, the decision to promote exports is generally accepted to have been a key part of its success.
As well as keeping the interest rate on export credit artificially low.
And I think Singapore also successfully did something similar in the 60s and 70s.
ssumner
Sep 23 2021 at 1:39pm
Sure, but the most important way they boosted exports was by removing government barriers to exports.
Michael Rulle
Sep 23 2021 at 8:51am
Agree with conclusion for sure. But how did they make the right decision? Irwin says we basically forced them thru extremely onerous negative incentives——as they seemed not able to see the positive incentives on their own. So, one could say, the “miracle” was the US had the right ideas—-and imposed them on a somewhat unwilling government and its cronies.
From the perspective of today, that seems miraculous. We also supported China 30 years ago.
But we cannot even support ourselves with these ideas anymore, let alone anyone else.
Comments are closed.