In the early 1970s, the changing international economic environment had a significant impact on Korea. In 1971, the Nixon Administration reduced the number of U.S. armed forces stationed in Korea by about one-third. In response, the government resolved to develop Korea's own defense industry to support a self-sufficient military force.

Also that same year, the Bretton Woods system that had sustained stability in the international financial system collapsed. For Korea, the subsequent fluctuation in exchange rates had a damaging effect on the balance of payments. The worldwide commodity shortage of 1972-1973 and the oil shock of 1973-1974 merely compounded the problem. Korea had to respond decisively to the deteriorating trade balance by modifying its export promotion strategy. The measures undertaken by the government were to restructure the composition of commodity exports in favor of a more sophisticated, higher value-added products, to diversify its trade partners, and to increase domestic agricultural output.

To upgrade the composition of its exports, Korea turned to the Heavy and Chemical Industry (HCI). Already an important priority in the Third Five-Year Development Plan (1972-1976), HCI received greater emphasis because of the changes in the external environment. With the announcement of the Heavy and Chemical Industry Development Plan in 1973, the government set forth an accelerated development schedule for technologically sophisticated industries. Investment in new industries produced significant results, and the country soon developed successful undertakings in electronics, shipbuilding, and other fields. However, the HCI drive also resulted in a number of negative effects. To initiate these industries, extensive investment in capital intensive industries had to be made, such as power generation equipment, heavy machinery, and diesel engines.

Firms that made such investments accumulated excessive debt in the process. In addition, the sharp demand for low-interest loans swelled the domestic money supply. The government's low interest rate policy to support HCI reduced savings, and producers of light manufactured goods were losing investment funds to the new industries.

As the HCI drive spread, the growing demand for skilled workers pushed up domestic wages. As a result, the wage differential between skilled and unskilled workers widened during the 1970s. Also, HCI accelerated the urbanization of Korea, as workers flocked to industrial centers where there were jobs available. In order to improve the income distribution among skilled and unskilled labor, as well as urban and rural workers, the government initiated the self-help Saemaeul Undong (New Community Movement) to improve productivity and living standards in rural areas. The government adopted a grain price support program.

These programs were successful in raising crop yields and rural income and in reducing the regional imbalance in standard of living. The HCI drive policy produced impressive results. Between 1972 and 1978 the GNP growth averaged 10.8% annually, and the annual growth rate from 1976 and 1978 reached 11.2%. The share of HCI products in total exports rose from 21.3% in 1972 to 34.7% in 1978. However, this progress came at the cost of high inflation.

Wholesale price increases accelerated to nearly 18% each year from 1972 to 1979, compared to 12% between 1962 and 1971. In addition, Korea's industrial structure was distorted by over-investment in HCI and under-investment in light industries. The government controls also distorted prices and stifled competition. At the same time, real wages were increasing faster than productivity, weakening export competitiveness.