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. |