Kick-up of the Economic Growth. Contents Introduction Body – Exogenous Factor A loan from West Germany Korea-Japan Arrangement ‘Right’ International Politics.

Kick-up of the Economic Growth

Contents

• Introduction• Body

– Exogenous Factor• A loan from West Germany• Korea-Japan Arrangement• ‘Right’ International Politics with U.S. (Vietnam

war)• Special procurement Boom from Middle East Asia

– Endogenous Factor• Social capital• Human capital

• Conclusion

Korean War (1950.6.25 ~1953.7.27)

• A Historically Highest number of casualties(H and L)

• Completely Destroyed industrial foundation

The amount of physical damage : about 2.2 billions $

The background of Korean economy in 1960’s

• GDP : 85$/capita• The balance of trade IM(344 mil $)- EX (33 mil $) = 311 mil

$ deficit• Private saving ratio : 3%• Annual inflation rate : 42%• Foreign-exchange reserve: 23

million $• An unemployment rate : 23%• Breaking off diplomatic relations

with Japan as a result of WWII • Relying on U.S.A.’s economic aid • Lack of industrial infrastructure

The political background

• Jung Hee,Park , former Communist sympathizer, carried out a

miliattary coup de tat and succeed.(1961.5.16)

• U.S.A. cut off economic aid to Korea.• President Park visited in U.S.A., but U.S.A. rejected economic

aid.(1961.11.13)• U.S. was opposed to Korean inudstrialization; the U.S. will

give economic aids but only for its U.S. military operation in Korea.

• The Korean gov. looked for other countries which would grant a credit (loan).

• Finally, The Korean gov. requested a loan to West Germany.

Koreans’s saving rates were rising, but not enough to make a critical mess.Korea desperately needed ‘seed money’ for start-up and take-off of economic growth

The Koreans were determined to sacrifice anything to get them.Sweat and blood……

• U.S. was opposed to Korean industrialization or

Investment on Heavy Industry for political reasons.

“Seed money”: A Loan From

West Germany

A loan from West Germany

• “Rhine river miracle” : After WWII, West Germany’s economic growth has been increased considerably.

• West German government requested to find a guarantor for a loan.

• Any banks wouldn’t want be a guarantor.

• West German government asked for sending labors (miner and nurse) instead of a guarantor.

• Term for granting a loan Korean worker’s salary was used as

a collateral for a loan

A loan from West Germany (cont’)• Korean government sent many mining

/medical workers to West Germany (1963~1977)

• The number of dispatched Korean workers to West Germany

Miner s: 7,844 persons Nurse s: 5,346 persons

• The amount of loan from West Germany with their salary as deposits:

The 1st long-term loan (1963): 30 million $

The 2nd long-term loan(1964): 40 million $

Commercial Loan from overseas

1962-1965 1966-1972 1973-1978 1979-1985 1986-1992

Amount

RatioAmou

ntRatio

Amount

RatioAmou

ntRatio

Amount

Ratio

U.S.A. 28 39.4 607 31.11,54

826.4

1,716

21.6 133 2.6

Japan - - 531 27.21,27

021.7

1,696

21.42,37

045.5

WestGerma

ny23 32.4 167 8.6 241 4.1 237 3.0 250 4.8

UK 1 1.4 174 8.9 868 14.81,38

417.4

1,115

21.4

France 17 23.9 194 10 405 6.9 381 4.8 157 3

Total 69 1001,95

0100

5,858

1007,93

7100

5,206

100

( Unit : million , % )

Korea industrial bank 1993

Where was a loan invested in?

• Korean government used this loan to extend SOC (social overhead capital)

• Investment in key industry

Key industryKey industry

Cementfactory

Cementfactory

Fertilizer plant

Fertilizer plant IronworksIronworks Power

plant

Powerplant

Implication of a loan from West

Germany

Korean seed moneyKorean seed money

The motive power of Korean economyThe motive power of Korean economy

Loan from West GermanyLoan from West Germany

-> Compensation from Japan in exchange for the Normalization of Diplomatic Relationship between Korea and Japan

Other seed money: from Japan

Unlike China, Korea has no wealthy overseas Koreans

who could bring money back to Korea.

However, it could bet some money from ‘enemy’

The Korean-Japanese Arrangements(1965.6.22)

• Back Ground

– There were some reasons

•Political side

•Economical side

The Korean-Japanese Arrangement(1965.6.20)

Political side

• U.S.A’s pressure on Korea– If Korea and Japan could be in mutual

assistance, this could became advantage of USA toward Future East Asian wall against China and U.S.S.R. along with North Korea.

Political side

• Japan– “This issue is just

the side of Economic aid but it is not our duty”

• I have no Idea!• But Why???

What Korea wants:

• There was political social ambiguity.

• However, there was a clear Economical Reason: Seed Money for Economic development

How much Korea get Money By Korea-Japan Arrangement

• Korea received

– The Grant type aid=$300 million – The Credit Assistance= $200 million – The Commercial loan=$300 million

–Total $800 million

Now we know

• Korea might confront wind of change– Korea needed Money

• Korea could be preparing export-oriented by some money from where?– Japan Through Korea-Japan Arrangement

Third Seed Money: from

U.S. via Vietnam War

Vietnam War

• When: 1960~1975

• Where: Vietnam

• Who: USA vs Viet Cong

• Strategy of USA to block up communism in Asia

Participation of Korea

• From 1964~75

- Annually 50,000 soldiers were sent to Vietnam war Total Cumulative Number 310,000

Background

• Political side - To improve amicable relationship with USA (Park wanted to prove he was an anti-communist• Economic side - Desire to economic development

Economic Effect• Increase economic growth rate 12%

• Increase export especially USA

- USA : import rate from Korea increase annually 47.5% - Buy American Policy (Except Korea) Increase economic

growth rate 12%

• Foundation of Che-bal -Hyundai Han-Jin Dong-Ah

Economic Effect

Rising of foreign image about

Korea

Easy to attract foreign money

Seed money of economic development

In Korea,

Vietnam war was not just a war.

It was a “Market”

Not just the Korean government but

Korean companies got seed money:

Hyundai

Dong-A

Hanjin = KALEtc, etc.

More importantly,

• U.S. has regarded Korea as “a major alliance country in Blood”

• Adopted “Buy Korea Policy”• Transferred military technologies.• Korea is now an integral part of U.S.

supply chain.

When the Vietnam War was over, there occurred Special

procurement boomFrom Middle East Asia

4th Seed Money: from Middle East

Special procurement boomFrom Middle East Asia

New crisis in Korea 1.Vietnam War finished!

(it means no money from out side)

2.Oil shock in the early 70’s

The Great chance

• The Middle East Asia got lots of oil money and they need lots of people for infra structure expanding works.

• Korea got experiences and abilities to do construction war from Vietnam war and economic development plan.

Backlog of construction orders

1975 – 750 million dollar

1976- 2.4 billion dollar

1978- 8 billion dollar

* Jubail habor of Saudi Arabia - Almost a billion dollar scale. It was 20% of Annual GDP of

Korea

The general effect on Korea

• The change of industrial structure (Light industries heavy industries)

• The promotion of employment

• Retain strong economical ties with the middle East and the developed countries

Comparison

• Indonesia

• Argentina

Indonesia

-An unjust Government Expanditure-The corruption of government officials

Argentina

Basically, Economy wasn’t based on the growth but the distribution of wealth

The Explanation for Economic

Development of Korea

The Trends of Economy Efficiency

Efficiency of Economy system

Inte

rnati

on

al

Con

ditio

n

Korean War

Oil Shock

Korea-Japan Cooperation on Economy Section

Heavy and Chemical Industry

Low Factor

Cold war

Recovery after Korea war

Foreign aid

GATT and Free Trade

Rising of Japan

International Firm

Seed Money

•Economic development plan

•Efficient resource allocationKorea government channeled capital

into efficient and focused areas/agents

How to enhance efficiency of capital

Main purposesMain purposes

Expanding Energy IndustryExpanding Energy Industry

Expanding Key IndustryExpanding Key Industry

Expanding of S.O.CExpanding of S.O.C

Significant Capital Inflow from Foreign Country

GDP per Capita

Investment (%)

Growth(%) Saving(%)

Loan from West Germany

Korea-Japan Arrangement

Vietnam War

Middle east Asia Boom

There are one of the Evidences

This picture is the figure of POSCO

It is the Core function called Blast Furnace

Current Korea

2Cell phone Industry

1Digital TV Industry

5Car Industry

1Shipbuilding Industry

7IT Competitiveness

2Diffusion rate of internet

13GDP

0Literacy rate

RankField

Survey year: 2006

The Endogenous

Factors

• Social Capital has been the basis for rapid and stable economic growth

• Income distribution has been relatively

equitable.

Neo-Confucian Leadership of President Park

• The Leadership Of President Park– Asceticism– Dictatorship– Social Contract for Chaebol “Chaebol”

is not a private company, but belongs to the society

Agents for Economic Development

Neo-Confucian Elite (Capability + Ethics)Meritorious Circles: Reward - Honours• Competent Government Officials

• Respected Scholars/Techicians

• Socially responsible Entrepreneurs at Chaebol

-> Relentless competition and constant purging

What about taking care of the grass root people?Reward – Material Wealth

• The intense desire for Growth– Ex. 새마을 운동 (Sae-

Ma-Eul-Un-Dong) “New Village Movement” 1971

• % of middle school attendance 1960: 33.8% 1980: 95.1%

• % of high school attendance 1960: 19.3% 1980: 63.5%

Rapidly increaseThe Result in Trained Skilled worker;Social Mobility has increased

Human Capital

Conclusion

Exogenous Factors Exogenous Factors

Endogenous Factors Endogenous Factors

A loan from West Germany A loan from West Germany

Korean Seed Money

Korean Seed Money

Korea- Japan Agreement Korea- Japan Agreement

Vietnam War Vietnam War

Special Procurement Boom from Middle East Asia

Special Procurement Boom from Middle East Asia

Accumulated Capital Accumulated Capital Efficient Capital Use by Economic Plan

Efficient Capital Use by Economic Plan

Korean economic Growth Korean economic Growth