The Miracle on the Han River: South Korean Economic Development
Rahmi Çetin, Songül KaradaşHan Nehri Mucizesi: Ekonomik Kalkınmada Güney Kore Örneği
Rahmi Çetin, Songül KaradaşSouth Korea has had remarkable economic performance since the early 1960s. It has transformed itself from an agriculture-intensive economy into one of the world’s most dynamic industrial economies within 40 years. In the early 1960s, South Korea was a typical developing country with poor natural resources and production, a small domestic market, and a large population. South Korea grew at a speed of 7.3% annually between 1967 and 2015, reaching $27.000 per capita income. Unfortunately, this level of growth was interrupted three times during this period— first in 1980, second in 1998 after the Asian financial crisis, and third in 2009. After each of these crises, the recovery of the economy was fairly quick and more rapid than anyone expected. However, there seems to have been a permanent decline in growth potential because the average gross domestic product growth rate remained at 4.4% over the 2001–2009 period.
Korea’s gross national product in 1962 was only 2.3 billion US dollar (in 1980 constant prices) or $87 per capita, which was mainly obtained from the primary sectors of the economy. International trade was also at a very low level; in 1962, the volume of exports was only $55 million while the volume of imports was $390 million. However, today, the nation is the fourth largest economy in Asia and the 11th largest economy in the world. The high growth performance in the South Korean economy was largely financed by foreign savings from Japan and the US. South Korea experienced a low level of savings in both public and private sectors until about 1985. After 1985, however, the domestic saving rates in the economy gradually increased and borrowing rates from abroad decreased along with the prices of petrol and other materials.
South Korea achieved its economic miracle within 40 years, something that took more than a century for Western countries to accomplish. This economic success is called the “Miracle on the Han River” in the literature and its development strategy has been copied by newly developing countries. In its first part, this paper aims to illustrate the superior economic performance and economic structure of the country during the last century; in the second part, it investigates what sort of policies are behind this long-term growth success. Voluminous literature on Korean growth performance attributes South Korea’s growth success to various internal and external factors. Among the internal factors, the government’s outward-looking development strategy (supported by industrialization and trade policies), a welleducated and well-disciplined labor force (supported by educational policy), and technological innovations have special importance. These three factors have successfully combined to bring about an economic miracle. In addition, an external factor—the country’s close ties with Japan and the US and the subsequent and substantial foreign aid from these two countries—has contributed to this high growth performance.
Three policies should be mentioned here. First, the country’s outward-looking development strategy began with Park’s military regime in 1961. Government intervention in the industrialization policy was significant and determined as to which sectors should be supported. In the first stage of industrialization, production was oriented toward light industrial goods, whereas in the second stage—starting from the mid-1970s—its orientation shifted to heavy machinery and chemical industries. Incentives were also provided to these new sectors that become important. At the end of the 1970s, South Korea began to export items such as ships, semiconductors, electronic equipment, and television sets. After the 1980s, the incentive system was completely changed and was allocated to sectors and large firms that spend money on research and development.
Secondly, South Korea has spent quite a large amount of money on education in order to develop its human resources. Reflecting this investment in education, the school enrolment rate at the tertiary level in Korea increased from 16 percent in 1980 to 52.5 percent in 2000 and 70 percent in 2016. Finally, in 1962, due to the lack of technological capability, Korea had to rely on foreign sources of technology. South Korea set a technology policy to promote the inward transfer of foreign technologies while simultaneously developing domestic capacity to digest, assimilate, and improve upon the transferred technologies.
