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A brief economic history and government policy of korea

The dramatic history of living standards in Korea presents one of the most convincing pieces of evidence to show that institutions — particularly the government — matter for economic growth.

From the late sixteenth to the early seventeenth century, invading armies from Japan and China shattered the command system and forced a transition to a market economy. The damaged bureaucracy started to receive taxes in money commodities — rice and cotton textiles — and eventually began to mint copper coins and lifted restrictions on trade.

The wars also dealt a serious blow to slavery and the pre-war system of forced labor, allowing labor markets to emerge. Markets were slow to develop: Population and acreage, however, recovered quickly from the adverse impact of the wars. Population growth came to a halt around 1800, and a century of demographic stagnation followed due to a higher level of mortality.

During the nineteenth century, living standards appeared to deteriorate. Both wages and rents fell, tax receipts shrank, and budget deficits expanded, forcing the government to resort to debasement.

South Korea’s Economic Development, 1948–1996

Peasant rebellions occurred more frequently, and poor peasants left Korea for northern China. Given that both acreage and population remained stable during the nineteenth century, the worsening living standards imply that the aggregate output contracted, because land and labor were being used in an ever more inefficient way.

The decline in efficiency appeared to have much to do with disintegrating system of water control, which included flood control and irrigation. Population growth caused rapid deforestation, as peasants were able to readily obtain farmlands by burning off forests, where property rights usually remained ill-defined.

This contrasts with Tokugawa Japan, where conflicts and litigation following competitive exploitation of forests led to forest regulation. While the deforestation wrought havoc on reservoirs by increasing the incidence and intensity of flooding, private individuals had little incentives to repair the damages, as they expected others to free-ride on the benefits of their efforts. Keeping the system of water control in good condition required public initiatives, which the dynastic government could not undertake.

During the nineteenth century, powerful landowning families took turns controlling minor or ailing kings, reducing the state to an instrument serving private interests.

Failing to take measures to maintain irrigation, provincial officials accelerated its decay by taking bribes in return for conniving at the practice of farming on the rich soil alongside reservoirs. Peasants responded to the decaying irrigation by developing new rice seed varieties, which could better resist droughts but yielded less.

Economy of South Korea

They also tried to counter the increasingly unstable water supply by building waterways linking farmlands with rivers, which frequently met opposition from people farming further downstream.

Not only did provincial administrators fail to settle the water disputes, but also some of them became central causes of clashes. The uprising quickly developed into a nationwide peasant rebellion, which the crumbling government could suppress only by calling in military forces from China and Japan. An unforeseen consequence of the rebellion was the Sino-Japanese war fought on the Korean soil, where Japan defeated China, tipping the balance of power in Korea critically in her favor.

The water control problem affected primarily rice farming productivity: Peasants and landlords converted paddy lands into dry farms during the nineteenth century, and there occurred an exodus of workers out of agriculture into handicraft and commerce. Seasonal fluctuations in rice prices in the main agricultural regions of Korea were far wider than those observed in Japan during the nineteenth century, implying a significantly higher interest rate, a lower level of capital per person, and therefore lower living standards for Korea.

In the mid-nineteenth century paddy land productivity in Korea was about half of that in Japan. Colonial Transition to Modern Economic Growth Less than two decades after having been opened by Commodore Perry, Japan first made its ambitions about Korea known by forcing the country open to trade in 1876. Defeating Russia in the war of 1905, Japan virtually annexed Korea, which was made official five years later. One important project was to improve infrastructure: Another project was a vigorous health campaign: The mortality transition resulted in a population expanding 1.

The third project was to revamp education. As modern teaching institutions quickly replaced traditional schools teaching Chinese classics, primary school enrollment ration rose from 1 percent in 1910 to 47 percent in 1943. Finally, the cadastral survey 1910-18 modernized and legalized property rights to land, which boosted not only the efficiency in land use, but also tax revenue from landowners.

These modernization efforts generated sizable public deficits, which the colonial government could finance partly by floating bonds in Japan and partly by unilateral transfers from the Japanese government. The colonial government implemented industrial policy as well. The Rice Production Development Program 1920-1933a policy response to the Rice Riots in Japan in 1918, was aimed at increasing rice supply within the Japanese empire.

In colonial Korea, the program placed particular emphasis upon reversing the decay in water control. The colonial government provided subsidies for irrigation projects, and set up institutions to lower information, negotiation, and enforcement costs in building new waterways and reservoirs.

Improved irrigation made it possible for peasants to grow high yielding rice seed varieties. Completion of a chemical fertilizer factory in 1927 increased the use of fertilizer, further boosting the yields from the new type of rice seeds. Rice prices fell rapidly in the late 1920s and early 1930s in the wake of the world agricultural depression, leading to the suspension of the program in 1933. Despite the Rice Program, the structure of the colonial economy has been shifting away from agriculture towards manufacturing ever since the beginning of the colonial rule at a consistent pace.

From 1911-40 the share of manufacturing in GDP increased from 6 percent to 28 percent, and the share of agriculture fell from 76 percent to 41 percent. Finally, subjugating party politicians and pushing Japan into the Second World War with the invasion of China in 1937, the Japanese military began to develop northern parts of Korea peninsula as an industrial base producing munitions. The institutional modernization, technological diffusion, and the inflow of Japanese capital put an end to the Malthusian degeneration and pushed Korea onto the path of modern economic growth.

Both rents and wages stopped falling and started to rise from the early twentieth century. As the population explosion made labor increasingly abundant vis-a-vis land, rents increased more rapidly than wages, suggesting that income distribution became less equal during the colonial period.

Per capita output rose faster than one percent per year from 1911-38. Per capita grain consumption declined during the colonial period, providing grounds for traditional criticism of the Japanese colonialism exploiting Korea.

However, per capita real consumption increased, due to rising non-grain and non-good consumption, and Koreans were also getting better education and living longer. In the late 1920s, life expectancy at birth was 37 years, an estimate several years longer than in China and almost ten years shorter than in Japan. Life expectancy increased to 43 years at the end of the colonial period. Male mean stature was slightly higher than 160 centimeters at the end of the 1920s, a number not significantly different from the Chinese or Japanese height, and appeared to become shorter during the latter half of the colonial period.

South Korean Prosperity With the end of the Second World War in 1945, two separate regimes emerged on the Korean peninsula to replace the colonial government. The de-colonization and political division meant sudden disruption of trade both with Japan and within Korea, causing serious economic turmoil.

Dealing with the post-colonial chaos with economic aid, the U. The first South Korean government, established in 1948, a brief economic history and government policy of korea out a land reform, making land distribution more egalitarian. Then the Korean War broke out in 1950, killing a brief economic history and government policy of korea and half million people and destroying about a quarter of capital stock during its three year duration.

After the war, South Korean policymakers set upon stimulating economic growth by promoting indigenous industrial firms, following the example of many other post-World War II developing countries. The government selected firms in targeted industries and gave them privileges to buy foreign currencies and to borrow funds from banks at preferential rates.

It also erected tariff barriers and imposed a prohibition on manufacturing imports, hoping that the protection would give domestic firms a chance to improve productivity through learning-by-doing and importing advanced technologies. Under the policy, known as import-substitution industrialization ISIentrepreneurs seemed more interested in maximizing and perpetuating favors by bribing bureaucrats and politicians, however. This behavior, dubbed as directly unproductive profit-seeking activities DUPcaused efficiency to falter and living standards to stagnate, providing a background to the collapse of the First Republic in April 1960.

  • The size of corporate debt reached frightening proportions when, in 1997, the Asian financial crisis hit the country, requiring an international rescue package;
  • University Press of Hawaii, 1979;
  • As wages rose, economic development shifted from labor to capital-intensive industries;
  • The dramatic history of living standards in Korea presents one of the most convincing pieces of evidence to show that institutions — particularly the government — matter for economic growth;
  • Wages rose sharply in the late 1980s and early 1990s, in part due to the greater power of labor unions, the membership size of which increased approximately 15 percent a year;
  • Net - Economic History Services.

The military coup led by General Park Chung Hee overthrew the short-lived Second Republic in A brief economic history and government policy of korea 1961, making a shift to a strategy of stimulating growth through export promotion EP hereafteralthough ISI was not altogether abandoned. Under EP, policymakers gave various types of favors — low interest loans being the most important — to exporting firms according to their export performance. As the qualification for the special treatment was quantifiable and objective, the room for DUP became significantly smaller.

Another advantage of EP over ISI was that it accelerated productivity advances by placing firms under the discipline of export markets and by widening the contact with the developed world: In the decade following the shift to EP, per capita output doubled, and South Korea became an industrialized country: One important factor contributing to the achievement was that the authoritarian government could enjoy relative independence from and avoid capture by special interests.

The withdrawal of U. The government intervened heavily in the financial markets, directing banks to provide low interest loans to chaebols — conglomerates of businesses owned by a single family — selected for the task of developing different sectors of HCI.

Successfully expanding the capital-intensive industries more rapidly than the rest of the economy, the HCI drive generated multiple symptoms of distortion, including rapidly slowing growth, worsening inflation and accumulation of non-performing loans.

In the 1980s, the succeeding leadership made systematic attempts to sort out the unwelcome legacy of the HCI drive by de-regulating trade and financial sectors. In the 1990s, liberalization of capital account followed, causing rapid accumulation of short-term external debts.

This, together with a highly leveraged corporate sector and the banking sector destabilized by the financial repression, provided the background to the contagion of financial crisis from Southeast Asia in 1997. The crisis provided a strong momentum for corporate and financial sector reform. In the quarter century following the policy shift in the early 1960s, the South Korean per capita output grew at an unusually rapid rate of 7 percent per year, a growth performance paralleled only by Taiwan and two city-states, Hong Kong and Singapore.

The portion of South Koreans enjoying the benefits of the growth increased more rapidly from the end of 1970s, when the rising trend in the Gini coefficient which measures the inequality of income distribution since the colonial period was reversed.

South Korea

The growth was attributable far more to increased use of productive inputs — physical capital in particular — than to productivity advances. The rapid capital accumulation was driven by an increasingly high savings rate due to a falling dependency ratio, a lagged outcome of rapidly falling mortality during the colonial period.

The high growth was also aided by accumulation of human capital, which started with the introduction of modern education under the Japanese rule. Finally, the South Korean developmental state, as symbolized by Park Chung Hee, a former officer of the Japanese Imperial army serving in wartime Manchuria, was closely modeled upon the colonial system of government.

In short, South Korea grew on the shoulders of the colonial achievement, rather than emerging out of the ashes left by the Korean War, as is sometimes asserted. Founders of the regime took over the system of command set up by the Japanese rulers to invade China. They also benefited from the colonial industrialization concentrated in the north, which had raised the standard of living in the north above that in the south at the end of the colonial rule.

While the economic advantage led the North Korean leadership to feel confident enough to invade the South in 1950, it could not sustain the lead: North Korea started to lag behind the fast growing South from the late 1960s, and then suffered a tragic decline in living standards in the 1990s. After the conclusion of the Korean War, the North Korean power elites adopted a strategy of driving growth through forced saving, which went quickly to the wall for several reasons.

Finally, the despotic and militaristic rule diverted resources to unproductive purposes and disturbed the consistency of planning. However, they could not push the institutional reform far enough, for fear that it might destabilize their totalitarian rule. Efforts were also made to attract foreign capital, which ended in failure too.

Having spent the funds lent by western banks in the a brief economic history and government policy of korea 1970s largely for military purposes, North Korea defaulted on the loans.

ADDITIONAL MEDIA

Laws introduced in the 1980s to draw foreign direct investment had little effect. The collapse of centrally planned economies in the late 1980s virtually ended energy and capital goods imports at subsidized prices, dealing a serious blow to the wobbly regime.

Desperate efforts to resolve chronic food shortages by expanding acreage through deforestation made the country vulnerable to climatic shocks in the 1990s. The end result was a disastrous subsistence crisis, to which the militarist regime responded by extorting concessions from the rest of the world through brinkmanship diplomacy. Further Reading Amsden, Alice.