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Foreign Influence on the Economic Change in Korea: A Survey

Published online by Cambridge University Press:  23 March 2011

Youngil Lim
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Extract

The purpose of this paper is to explore some salient characteristics of the Korean economy in historical context and to appraise the role of foreign influences in changing the economic structure of Korea since the beginning of Western influence. First, the historical background will be briefly surveyed in terms of evidence of the changes in factor supply, categorized as capital (especially social overhead capital), labor, land, and entrepreneurial factors. The causes of change will be identified with emphasis on causes external to the economic system. Second, the pattern of structural change and the nature of “disequilibrium” will be described and explained. The following items will be relevant for our consideration: dual structure, changes in output composition and occupational distribution, external disequilibrium (i.e., deficits in the balance of international payments, foreign aid), financial disequilibrium (i.e., deficit financing of the government, inflation, overvalued currency), and structural disequilibrium (i.e., unemployment, excess capacity in some sector of the economy). The conclusion summarizes our discussion briefly and speculates on Korea's economic future.

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Articles
Information
The Journal of Asian Studies , Volume 28 , Issue 1 , November 1968 , pp. 77 - 99
Copyright
Copyright © The Association for Asian Studies, Inc. 1968

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References

1 The discussion of structural disequilibrium is not directly related to the theme of this paper but it is important in understanding the problem of the Korean economy today.

2 Are her statistics reliable? I would say that Korean statistics are not unreliable although they leave much to be desired. If these statistics are used with caution and in an undogmatic fashion, useful insight can be gained. The quality of her statistics has been improving due to the conscious effort of the Bank of Korea and the Economic Planning Board.

3 Rosenstein-Rodan, P. N., “International Aid for Underdeveloped Countries,” Review of Economics and Statistics, XLIII (1961), 126–27.Google Scholar

4 Economic Planning Board, Kyungje Baiksuh 1963 (Economic White Paper 1963), Seoul, Korea, 1963, p. 7.

5 Bank of Korea, Research Department, Economic Review of Korea 1548 (Seoul, Korea, 1948), pp. 1–315 and I–237Google Scholar.

6 Kin, Tetsu, Kankoku no Jingko to Keizai (Korean Population and Economy), (Tokyo: Iwanami Publishing Co., 1965), p. 161.Google Scholar

7 Bank of Korea, op. cit., pp. I–158. The area of the Korean peninsula is a little over half the area of California.

8 Haberler, G., International. Trade and Economic Development (Cairo Lecture 1959), Bank of Egypt, p. 2.Google Scholar

9 Bank of Korea, op. cit., pp. I–100.

10 Readers may find the discussion is chronological within each topic.

11 This is due to the result of the Potsdam Conference where the major powers—U.S., U.K., U.S.S.R., China—agreed on a division of Korea for purposes of accepting the surrender of the Japanese, a division which led later to separate regimes in the North and South.

12 If the produced goods were not demanded by the domestic market they could even be exported to foreign markets in order to finance imports which could be consumed by Koreans.

13 For the 1945–48 period, aid consisted of food and agricultural supplies (56.9 percent), clothing (10.2 percent), petroleum products and fuels (12.2 percent), and miscellaneous capital goods and intermediate input materials (20.7 percent). See Hong, Sung-Yu, Hanguk Kyungje wa Miguk Wonjo (Korean Economy and American Aid), (Seoul, Bakmunsa, 1962), p. 49.Google Scholar

14 Hirschman, Albert, Strategy of Economic Development (New Haven: Yale University Press, 1958), pp. 62–72.Google Scholar

15 San-ub-unhang Chosabu, Sanub Kyungje Shimnyunsa (Seoul, 1955), p. 180.

16 Kin, op. cit., p. 196 and Hong, Sung-Yu, Hanguk. Kyungje wa Miguk. Wonjo (Korean Economy and American Aid), (Seoul, 1962), p. 124.

17 A series of policy measures was undertaken during the nineteen sixties such as the five year development plan, export promotion, stabilization, foreign exchange reform, etc. Which policy was most important in growth contribution is a difficult question to answer.

18 The idea is much touted that the decisive factor for increased exports was the U.S. Government's decision to purchase goods necessary in Vietnam from Korean sources. For instance see Newsweek, February 7, 1966. The published statistics do not seem to support this view.

Sources: Bank of Korea, Economic Statistics Yearbook. 1965, p. 242. Ibid., 1967, p. 262.

The Korean export to Vietnam as a proportion of the total was 1.5% for 1962, 13.9% for 1963, 5.3% for 1964, 8.5% for 1965 and 5.5% for 1966. However, it is a moot question how much “U.S. imports” from Korea were to be sent to Vietnam through an “indirect route.” Incidentally, foreign exchange earnings from services and remittances of Koreans in Vietnam seem higher than commodity sales revenues from Vietnam. Private transfer (credit) of the Balance of International Payments recorded 103.3 million dollars for 1966. Presumably a large proportion of it was from Koreans in Vietnam.

19 In 1965 the export of manufactured goods constituted about 52 percent of the total secondary sector's output. This figure shows the importance of the international market for South Korea's manufactured goods.

20 The disequilibria are: (1) external disequilibrium (balance of payments deficit, and overvalued currency), (2) internal financial imbalance (government deficit and inflation), and (3) structural disequilibrium (coexistence of unemployment, excess capacity in manufacturing, and excess demand reflected in inflation).

21 Kin, op. cit., p. 175.

22 Hong, Sung-Yu, op. cit., p. 149.

23 Substitution in consumption enables the conversion of consumer goods aid into capital goods: Sell rice abroad—eat the aid wheat instead—and buy capital goods with the so-earned foreign exchange. An excellent theoretical analysis as to how agricultural surplus (or food from abroad) could be used for labor reallocation for industrial growth, is presented in John C. H. Fei and Gustav Ranis, Development of the Labor Surplus Economy, Theory and Policy, The Economic Growth Center, Yale University, 1964, especially in Chapter 5.

24 For the commodity composition of the foreign aid see, Hong, op. cit., pp. 49, 51–53, 56, 60–63, 75–77. 87. and 91–92.

25 North Korea undertook a currency reform in 1946: North Koreans fleeing to freedom in South Korea brought the Bank of Chosen currency into the South. The South Korean government was then still using the Bank of Chosen currency as a means of exchange.

26 Bank of Korea op. cit., pp. III–66.

27 Sung, Chang-Whan, Hanguk Kyungje Ron (Discourse on Korean Economy), (Seoul: Jang-Whang-Sa Publishing Co., 1957), p. 196.Google Scholar

28 Bank of Korea, Economic Review of Korea 1948, op. cit., pp. I–266.

29 Sung, op. cit., p. 197.

30 The role of the Central Bank to create inflation in Korea was critically appraised by Dr. Chung, N. H., “The Role of the Central Bank and Inflation in Korea, 1945–1960.” Unpublished Ph.D. dissertation, Michigan State University, 1962.Google Scholar

31 What proportion of the rise in price is due to the increased money supply and what proportion to other factors can be answered by multiple regression analysis? An example of this type of analysis is provided by Harberger, Arnold C., “The Dynamics of Inflation in Chile,” in Measurement in Economics, Christ, Carl, ed., (Stanford, 1963), pp. 219–50.Google Scholar

32 There are many other interesting and important questions which must be answered to evaluate the effect of the inflation: What did the inflation do to income distribution? What role did it play in changing the output structure? In what sense was it good or detrimental for economic growth? To what extent had the government contributed to capital formation through deficit financing? Although these questions cannot be dealt with here, evidence suggests that the inflation redistributed income against wage and salary earners, that the inflation changed commodity and factor prices in such a way that manufacturing industries benefited, that the government deficit for financing development projects was one of the major factors in causing the inflation, and thus that the inflation was a necessary concomitant for the development effort in the framework of the South Korean economy.

33 The official exchange rate was devalued 13 times over the period of 1950–65; from 0.9 Won to 1 U.S. dollar in January 1950 to 264 Won to 1 U.S. dollar in March 1965. Since June 1965 South Korea adopted the floating exchange rate system. See Bank of Korea, Economic Statistics Yearbook 1967, p. 252.

35 Bank of Korea, Economic Review of Korea 1948, op. cit., pp. I–9.

36 Im, Tae-bin, “Population Projection in Korea,” Korean Affairs, III, No. 2 (July 1964), 153–56.Google Scholar

37 Bank of Korea, Economic Review of Korea 1948, pp. I–9.

38 Available record shows the number of unemployed as follows: 1.1 million for 1946; 0.9 million for 1949; 1.2 million for 1951; 1.3 million for 1952; 1.1 million for 1953; 1.3 million for 1954; 1.1 million for 1956. Figures are rounded. See ManKee Lee, op. cit., p. 99.

39 Bank of Korea, Yuncha Bogosuh 1966 (Annual Report 1966), p. 156.

40 “Underemployment” is defined as “adoption of inferior occupations by dismissed workers.” Joan Robinson, Essays in the Theory of Employment, 2d ed., London, 1947, p. 61.

41 See his “Disguised Unemployment” in Underdeveloped Areas: with Special Reference to South Korea, (University of California Press, 1963), p. 142.Google Scholar

42 For instance, the central government's tax revenues rose 55.2 percent in 1966 from the level of 1965, while its current expenditures rose 43.2 percent for the same period. See Bank of Korea, Economic Statistical Yearbook. 1967, pp. 34–25.