A Korea until the Japanese Annexation

The history of the Korean peninsula goes back very far. In the Common Era, three epochs can be distinguished, up until the current period. The first extends throughout the first millennium and witnessed a constant rivalry between two or three kingdoms, some of them stretching at times far north into Manchuria and even Siberia, with repeated interventions by China and Japan within peninsular conflicts. The second covers the second millennium until the early twentieth century. One of the aforementioned kingdoms had become dominant and thus was able to rule over the whole peninsula. Two dynasties, the Goryeo and the Joseon, occupied the throne for almost 500 years each, but in both cases they were in a subservient position with respect to China for a large part of their rule. The third period witnessed the entry of Korea into the modern age, essentially through its being forced to end its isolationist policy and to open up to trade, first with Japan and then with the West. The influence of Meiji’s Japan and its push to promote the modernisation of Korea grew during the last third of the nineteenth century, until the first Sino-Japanese war in 1894–5 freed Korea from China’s suzerainty and saw it fall under Japanese control. Efforts to resist that pressure, notably by seeking support from Russia, failed, and Korea became a Japanese protectorate in 1905. Five years later, after the assassination of the Japanese resident general, the country became a Japanese colony.

B Japanese Rule

Japanese colonisation lasted forty years, until the defeat of Japan in World War II. It was particularly severe at the beginning of the period, as Japan sought to quickly impose its rule and way of life on Korean society, and again in the last ten years, as Japan first prepared for the war and then fought it, first against the Republic of China and then against the Allies. During these two episodes, particularly the last one, the coloniser engaged in the forced Japanification of the Korean population and its mobilisation for its own benefit and as part of the huge war effort. This went as far as forcing Koreans to adopt Japanese names and prohibiting the Korean language in schools. In between these two periods, however, life in Korea could be said to resemble the days of allegiance to the Chinese emperor, except that the Japanese suzerain was more severe – but also more modern and entrepreneurial. Moreover, with time, Korea acquired a kind of central place in the colonial power’s strategy of expanding across the Asian continent, and benefited from the development of transport infrastructure and industrial hubs aimed at supplying military equipment for the Japanese troops and settlers in Manchuria – or Manchukuo as it was called under Japanese rule.

The jury is still out about how to evaluate Japanese colonial rule and its contribution to the foundation of modern Korea. The legacy of that period is complex, with both positive and negative elements. Some historians emphasise the fact that colonial rule coincided with the modernisation of the economy and suggest that the former facilitated the latter. This view, which refers to ‘colonial modernity, has much in its favour.Footnote ² Undeniably, Japanese rule brought huge investments in infrastructure (railroads, roads, and ports), industrialisation opportunities, initially for both local and Japanese markets and later for war equipment and weaponry provision, up-to-date technology, a modern schooling system, high standards of efficiency in business as well as in government matters, and the effective training of local bureaucrats. Even though it cannot be discarded that such an evolution would have taken place by mere replication of what could be seen across the strait that separates the peninsula from Japan, the latter’s oversight may have accelerated and deepened this process by bringing its example closer to the Koreans and by providing opportunities for new developments.

Several of the aforementioned development factors were already in gestation before Japan’s annexation. For instance, education had been flourishing in the last two decades of the Joseon dynasty. Private schools were increasing in number, and a public educational system was about to be created. If the Japanese introduced new schools and a new curriculum (although the latter was initially shorter for Korean students), unlicensed private traditional schools spread because of the limited space in the formal system, especially in rural areas. This appetite for education has undoubtedly been a characteristic of Korean society ever since. Likewise, some industries already existed before Japan’s takeover, although apparently concentrated in the north. Moreover, this small group of entrepreneurs was able to take advantage of, and to learn from, collaboration with Japanese business, in particular the zaibatsus present in Korea (zaibatsu refers to large family-controlled and multi-firm conglomerates that developed in Japan after the Meiji Restoration of 1868). These large Japanese business conglomerates were later to inspire the Korean chaebols.

The benefits from this modernisation of the Korean society and economy went primarily to the coloniser. Korean workers were underpaid in comparison with Japanese workers, and landlords and farmers were dispossessed by Japanese settlers and firms, which acquired swathes of land and transformed a portion of farmers into tenants, tenants into landless workers, and workers into jobless migrants who moved to the cities. The traumatic experience of the war period, when Japanification became the watchword of the colonisers and Koreans were controlled based on the needs of the occupier, must also lie on the negative side of the balance, even though it is sometimes considered that this experience forged the national spirit that would later reveal itself in the postcolonial era. The tearing apart of families and communities through migration to various neighbouring countries, and the near-total breakdown of society, were aspects of this trauma.

Beyond these hardships, and beyond the economic legacy of Japanese colonisation, the model offered to the Korean population of Japanese state-directed economic development, first across the Korea Strait and then on its own territory, would later prove important in the post-war period and after the North–South separation. There is no doubt that key players in the modern history of Korea were very much influenced by this example.

Koreans rejoiced at the end of the war and the departure of the Japanese occupiers. They certainly thought that the trauma of war was behind them and immediately started to think about a new structure of government for the peninsula. They did not know that a still more dreadful tragedy was awaiting them.

A The Korean War

War broke out in June 1950. The North, militarily stronger than the South and counting on the support of unofficial volunteer forces from China and equipment from the USSR, saw the opportunity of unifying the country under its own rule. Its army crossed the 38th parallel demarcation line and invaded the South. After early successes, the Northern forces were repelled by the Southern army, powerfully backed by the US army and other United Nations allies. In turn, the Southern forces invaded the North, triggering a strong intervention by China, which could not accept the military presence of the United States near its border. With such support, the North succeeded in crossing the demarcation line again, only to be repelled once more a few months later. A stalemate around the line then settled in, lasting almost two years, while difficult armistice negotiations involving UN forces, China, and the Northern army took place. A conclusion was finally reached in July 1953, which ratified the division of the peninsula into two countries. However, the treaty was not signed by Syngman Rhee for the South and the North never fully dropped the idea of reunifying the peninsula, as was evident in its multiple attempts to intervene south of the 38th parallel demarcation line, which had become a 4-km-wide demilitarised zone.

The damage of the war was enormous. It is estimated that approximately three million Koreans, or 10 per cent of the population, lost their lives, two-thirds of them civilians killed in aerial bombings. Around ten million families were broken apart because of the war and the division of the country. Material losses amounted to roughly one year of GDP, approximately 30 per cent of all productive assets and infrastructure. Experts estimate that GNP in the first year after the war was 30 per cent below the pre-war level in North Korea and a little more than half this in South Korea.Footnote ³ Not only was the South less affected than the North, but its physical capital was also less damaged and numerous refugees from the North made up for the loss of population. The North had initially been more industrialised and richer, thanks to mineral natural resources, but it would take much more time to rebound. By contrast, the South was back to its pre-war income levels by 1953, although it is fair to say this was very much thanks to generous US aid.

B Post-War Politics

Three stages can be distinguished in the history of post-war South Korea: the reconstruction during the first normal years of democratic life until 1960, the dictatorship under Park Chung Hee and later Chun Doo-Hwan, and the definitive return to democracy in 1987 (which is outside our period of interest in the present analysis). Interestingly, this periodisation fits rather well the main features of economic development and the strategies that were implemented during this period.

Post-war South Korea was to be dominated by the personality and authority of Syngman Rhee, who was president from 1948 onwards. Rhee was a rather rigid and authoritarian character, and had a very personal sense of the interest of the country. He headed the Liberal Party, which had no clear ideology other than seeking to enrich its most notable members. Very quickly, the issue arose of Rhee’s serving a third four-year term, which required a modification of the constitution. The necessary amendment was passed (though it was one vote short of the two-thirds majority required). Rhee was re-elected in 1956, but with a much smaller lead than in the previous elections. Ageing, heading a deeply corrupt regime that was perceived as ineffective in pushing the economy forward and curbing poverty, his personal aura as a nationalist figure had started to fade by this time, whereas the opposition, regrouped within the Democratic Party, was gaining increasing support.

Rhee stood again as a candidate in 1960, together with a vice-president who it was supposed would be his successor if he had to resign because of his age. He won by a landslide thanks to flagrant vote-rigging, but his election triggered vigorous protests. Students organised a march towards the presidential residence and police fired on and killed 139 of them. Protests continued the following day, but the army refused to fire on demonstrators. Having clearly lost the little popular support that was left him, Rhee resigned. An interim government was then formed, which set out to write a new constitution that would reduce the power of the executive in favour of the parliament.

The government that came out of this process faced a difficult situation. The economic recovery process was slow, inflation was accelerating, the political context was essentially unstable due to the relatively inexperienced political parties and a constitution that reduced the power of the executive, workers were striking for higher wages, students were demonstrating almost uninterruptedly, while some voices were rising in favour of opening a dialogue with the North. It was in the middle of this chaos that some high-ranking army officers, concerned about the increasing climate of corruption, the incapacity of the politicians to re-establish order, and the danger of showing too much weakness in the face of the threat posed by Communist North Korea, organised a coup in May 1961. While General Park Chung Hee was placed at the head of the military junta that would govern the country for a few years, his rule was to last almost two decades in total.

C The Park Era

Park’s career before the coup had been rather turbulent. Initially a schoolteacher, he went on to enrol in the Japanese army. After graduating from officer school in Manchukuo and spending some time as a foreign student at the Japanese Military Academy in Tokyo he served in the Manchurian Infantry Corps. He was then twenty-seven, and this Japanese experience was to have a big influence on his later views about economic development and industrialisation. At independence, he entered the Korean Military Academy and was then assigned to the US–Korean force. Before reporting for duty, however, he was arrested because of his links with Communist movements within the Korean army. He eventually got himself out of trouble and was attached as a civilian to the intelligence unit at army headquarters. Two years later he was reinstated in the army at the outbreak of the Korean War. Amid strong suspicions regarding leftist attitudes within the South Korean army, it is remarkable that Park was not only reinstated but then pursued a brilliant military career, despite his past Communist record – not only during the war, when the army expanded massively, but also thereafter. This indicates an impressive personality, which appealed to his superiors, as well as a powerful friendship network within the army.

The political platform of the junta was unambiguous in its anti-Communist orientation and its aim of reinforcing links with the United States. It also had a revolutionary element, in its determination to root out corruption and to eradicate the misery of the masses. In addition to consolidating Park’s control over the army, and the political system in general, the first years of the junta were devoted to establishing the administrative structure that would be able to achieve Park’s ambitions. Especially important in this respect were the Korean Central Intelligence Agency (KCIA), a formidable organisation with observers in practically all business, academic, political, and social groups, and the Economic Planning Board (EPB), staffed with highly competent technocrats and responsible for designing and managing the country’s economic growth strategies, starting with the first Five-Year Development Plan.

However, the junta did not last long. The US mission in Korea, which had remained powerful since the end of its de facto protectorate in the post-war years, if only through the huge aid it was providing to the economy, impressed upon Park the need to return to a civil regime. Somewhat reluctantly, Park accepted, and democratic rule was re-established. Park resigned from the army and, with the implicit support of the KCIA, created his own Democratic Republican Party. He was elected president in 1963, though by a relatively small margin. His tight, quasi-military control over the political system was maintained during his term, within the apparent limits imposed by democracy. Then, in the election in 1967, with satisfactory results on the economic front, Park easily won again.

The prospect of the 1971 election reopened the issue of a constitutional amendment that would allow Park to seek a third term. The opposition tried to resist this and several student demonstrations were organised to mobilise opinion against it. Yet the amendment was passed, although allegedly in a somewhat suspicious way. However, the newly re-elected president’s position was much less secure than it had been previously. Soon after, Park declared a state of emergency, officially because of renewed threats from North Korea and geopolitical changes that were leading the United States to reduce its military presence. One year later, martial law was instated, the Assembly and political parties were dissolved, and the existing constitution was replaced by a new one, called the Yushin constitution, officially to permit South Korea to adjust more flexibly to the changing international security order.

Practically speaking, the new regime was a barely concealed dictatorship that empowered Park to rule without constraint and that sheltered him from legislative and judicial controls. He had become, to all intents and purposes, a life-long president, his re-election relying on a hand-picked National Congress for Unification. South Korea then entered a dark period of authoritarianism and ubiquitous repression, and in some cases elimination, of all political enemies of the president. At a later stage, Park even had to separate from old supporters he thought were becoming too ambitious as competitors. Amid mounting public discontent he became a more and more solitary ruler. The economic situation itself was becoming critical at the end of the 1970s, because of swelling domestic and foreign debt and the shocks caused by oil price booms. Had he lived, Park would probably have faced a difficult time, but he was shot in October 1979 by the KCIA director, a friend whose motivation for the assassination is still unclear.

The rest of the country’s political history is of lesser importance for our purpose since we aim to adopt a perspective that corresponds to the early history and the situation of South Korea in the mid- or late-1970s – say, some time before Park’s death. For the sake of completeness, however, some major events that took place in the next decade must be mentioned because they shed light on the state of South Korean society and the inherent difficulty it faced in those times as regards installing a stable democratic regime.

D The Chun Dictatorship and the Difficult Return to Democracy

For a brief period, Koreans thought they would return to a freer regime and the Yushin constitution would be abolished. A kind of caretaker government was appointed until a new constitution could be voted on and a new government elected. All parties prepared to compete, but in a kind of repeat of 1961, a group of generals organised a coup and took power. Chun Doo-Hwan, the new strong man, easily stepped into Park’s shoes. Yet the coup aroused the ire of the public. Students protested the martial law, as well as the continuation of the Yushin constitution. One massive demonstration was repressed by the army, leading to 2,000 casualties. Although forever discredited in public opinion, Chun was able to consolidate his power and ruled until the end of his term, which he had pledged not to go beyond. Chun then tried to singlehandedly impose his protégé Roh Tae-Woo as the new president. Huge protests immediately took place, with a large part of the population, not only the students, taking to the streets and demanding a new constitution. Chun gave in, the constitution was amended, and – apparently fair – elections took place in 1987. It was eventually won by Roh. His five-year term was essentially transitional, but it represented a major turn in Korean society towards democracy.

The constitution, which had gone through no fewer than ten changes since the first republic in 1948, was not reformed again. Elections went on to be held every five years in a peaceful way, and with perfect regularity.

A Growth and the Structural Transformation of the Economy

It took some time for the rate of growth of the South Korean economy to reach the stellar level that made it possible to later approach the ranks of the advanced economies. This progressive acceleration reflects the gradual rise of its main engine, the manufacturing sector. Until 1975, manufacturing value-added systematically grew at a rate roughly double of the rest of the economy, but its contribution to overall growth increased with its size: it was small in the late 1950s, when the manufacturing sector represented only 10 per cent of GDP (at current prices), but it was much more important when it approached 20 per cent ten years later – see Table 5.1.

Unsurprisingly, a major structural transformation of the economy accompanied this performance. As has been the case for practically all development experiences in history and across countries in the contemporary period, the share of agriculture fell rather regularly over time, on average by one percentage point of GDP every year. This drop in the agricultural share benefited both manufacturing and the rest of the economy, mostly the former until 1965 and both equally afterwards – at least when considering GDP at constant prices. In this respect, it may be noted that the relative price of manufactured products relative to that of other sectors tended to fall throughout the period, in line with the fact that productivity gains are faster in industry – partly thanks to a greater substitutability of labour by equipment – than in services. In the case of South Korea, this phenomenon was amplified by the outward orientation of the manufacturing sector and its exposure to foreign competition. The same cannot be said of the agricultural sector, even though it also produces a tradeable good.Footnote ⁵

The structural transformation must also be considered from the point of view of employment. This is done in the second part of Table 5.1. Because employment data are not comparable before and after 1963,Footnote ⁶ the beginning of the period had to be ignored. Over the next fifteen years, however, the share of agriculture in total employment, which was initially close to 60 per cent, was halved. Given the progression of total employment, the volume of employment in the sector increased until the mid-1970s, but then decreased at a fast pace afterwards. Initially, the manufacturing sector was the main beneficiary of the net flow of workers leaving agriculture. In a later stage, however, this flow went to other sectors, among which services was the most important.

Sectoral changes in labour productivity underpin this bi-dimensional reallocation of output and labour. In this respect, it is interesting to observe that the first phase of South Korean development illustrates – but also somewhat contradicts – the familiar Lewis–Kuznets view in development theory. This theory holds that the structural transformation of the economy led by the movement of workers from rural informal production to modern industry and services is the main engine of growth in early phases of development. Capital accumulation takes place in the modern sector of the economy, which easily expands employment by drawing on under-employed workers, or surplus labour, in the informal or traditional agricultural sector. If the former is sufficiently dynamic and labour-intensive, there comes a moment at which the surplus labour disappears in the informal sector. A ‘turning point’ is thus reached at which labour earnings begin increasing in both sectors and the agricultural sector starts to modernise. Such a scenario fits well the development of South Korea until the early 1970s: labour productivity was approximately constant in agriculture, whereas labour flowed from agriculture to (mostly) the manufacturing sector.

Where South Korea fits the theory less well is in the observation that the structural reallocation of labour away from low-productivity agriculture to the rest of the economy did not contribute much to the overall productivity gain in the economy. The latter amounted to a little less than a doubling in the decade after 1965. However, as can be seen at the bottom of Table 5.1, the main contribution to those gains was not so much the reallocation of labour away from agriculture – the row titled ‘structural change’ – as the autonomous productivity gain within manufacturing and other non-agricultural sectors. The reason for this is essentially that the labour reallocation took place mostly between agriculture and manufacturing, and the productivity gap between these two sectors was initially limited. The productivity gains within manufacturing and other sectors thus proved to be the dominant force behind the overall productivity gains. An explanation of this evolution within the Lewisian framework is that the composition of those sectors changed because of major policy choices and, most importantly, the deliberate export orientation of manufacturing, its necessary increase in international competitiveness, and the accompanying changes in supporting sectors. Later, things changed substantially, when the economy settled into this new regime and the productivity gap between agriculture and the rest of the economy was drastically amplified, especially with respect to the manufacturing sector – possibly because of the progressive shift there from light to heavy industry. Structural change was then the dominant contributor to overall productivity gains between 1975 and 1980, even though the average within-sector, or ‘autonomous’, productivity gains were still substantial.

The increasing productivity gap between agriculture and the rest of the economy in the early part of South Korea’s take-off should be emphasised because it is somewhat original when compared to other successful development stories in Asia, particularly Japan and Taiwan.Footnote ⁷ In contrast to those countries, where initial major agricultural productivity gains permitted the development of the manufacturing sector, agricultural productivity in South Korea was low by international standards and stagnant. Such a state of affairs was due to the quality of the soil, the limited size of farms consequent upon a strongly egalitarian land reform, the low productivity of labour-intensive traditional farming techniques, and the lack of incentives and capacity to innovate in an over-populated rural sector. As a matter of fact, it is only when the development of the manufacturing and ancillary sectors had permitted absorption of the labour surplus in agriculture that productivity growth accelerated. The productivity figures in Table 5.1 suggest that this ‘Lewisian turning point’ could have been reached in the early 1970s,Footnote ⁸ and this seems to be confirmed by the fact that the volume of agricultural employment started to fall around the same time. Yet agricultural productivity and rural incomes continued to lag behind the rest of the economy, to such an extent that the government had to engage in a vigorous policy to support farmers’ income, through infrastructure investment, ambitious agricultural extension programmes, and heavy price subsidies. Yet it was only after 1980, well after the South Korean economy had taken off, that agricultural productivity got off the ground.

A factor that is worth stressing – because it contributed to growth in income per capita that was faster than the growth in labour productivity – was the increase in the participation rate of the population to the labour force. This is due to two factors. On the one hand, the share of the population that was of working age tended to increase due to the fast reduction in fertility rates. On the other hand, an increase in the female participation rate was observed in the last 1960s, possibly because of the opening up of numerous female jobs in newly exporting factories.Footnote ⁹

As a final comment on interpreting the figures shown in Table 5.1, it is important to stress that the contribution of the manufacturing sector to the overall growth of the economy went beyond its share in GDP times its growth rate. If it had not done so, then the contribution of manufacturing to South Korean growth in the earlier phases of its take-off would have been modest, despite its phenomenal growth rate. However, this argument ignores first that the expansion of a sector that was mostly oriented towards exports fed domestic demand, and therefore the growth of domestic-oriented, or non-tradeable, sectors and, second, the powerful backward and forward linkages between manufacturing and other sectors such as transport, communication, trade, and finance. On top of this, by making foreign exchange available, manufacturing exports contributed to facilitating imports of equipment and, through them, the diffusion of modern foreign technology throughout the economy. Unfortunately, no precise quantitative estimate of the actual contribution of the manufacturing engine of growth – beyond strict accounting practice – seems to be available.

B The Financing of Accumulation and Industrialisation

How was such a successful industrialisation take-off possible? The answer is through fast-growing investment that was largely funded by foreign sources, especially foreign aid in the first phases of the industrialisation process, quickly supplemented by growing domestic savings. Table 5.2 shows that the rate of fixed capital formation over GDP progressively increased from 11 per cent in the 1955s to more than 30 per cent by 1980, although the bulk of the increase really started only in the late 1960s. Given the limited initial stock of capital, even a low investment rate in these early years was able to generate a rapid increase in the equipment and infrastructure available for production. Young (Reference Young1994, Reference Young1995) has estimated that the annual rate of growth of capital may have been above 16 per cent on average between 1965 and 1980 for the whole economy, excluding agriculture, contributing to a little less than half of the 11 per cent average annual GDP growth, the rest being almost all due to the growth of the labour force, after accounting for its increasing education level (on which more below), thus leaving a very limited role (roughly 1 per cent per year) of total factor productivity (TFP).Footnote ¹⁰ Early growth in South Korea was thus mostly guided by factor accumulation.

Capital accumulation in a low-income country requires savings and domestic currency to buy equipment, which is mostly imported. In the case of South Korea, both came from foreign savings and the deliberate export orientation of industrialisation throughout the period under analysis. Up to the mid-1960s, foreign aid, the bulk of which was provided by the United States, played a leading role, as it covered a major part of imports, including in the 1950s in the form of agricultural products. Things changed when the country approached self-sufficiency in the 1970s and donors’ assistance was progressively phased out, at which time foreign loans were used to finance the accumulation of capital that was not covered by domestic savings, even though the propensity to save was making huge progress – part of which was generated by the implicit taxation of depositors in a fully nationalised bank system.Footnote ¹¹ Relying on foreign loans implied a rapid accumulation of debt. From an almost insignificant level in 1960, foreign debt grew to 40 per cent in the early 1970s. It then went down, only to surge again in the early 1980s during the global macroeconomic crisis that followed the second oil price boom. It is remarkable that the growth rate of GDP was little affected by debt. As a matter of fact, the investment rate kept increasing, reflecting a rather voluntaristic macroeconomic management.Footnote ¹² As the domestic saving rate stayed on an upward trend, the country soon became autonomous in the financing of its investment operations.

Sustaining a high investment rate in a developing economy requires having enough foreign currency to buy goods that are not produced at home. Here lies South Korea’s major achievement: its capacity to expand manufacturing exports, which became the true engine of growth, not only through their contribution to GDP but also through making foreign currency available for the import of equipment and foreign technology within the manufacturing sector itself, and also within the whole economy. Exports grew at an annual rate that was rarely below 15 per cent and was frequently above 30 per cent throughout the two decades from 1960 onwards, going from 4 per cent of GDP in 1960 to 30 per cent fifteen years later. Exports initially comprised chiefly food products, inedible oils, and crude materials, including various types of metal ores but during the 1960s the composition of exports drastically moved towards light manufactured goods – with clothing and footwear in the first place. As a result of an ambitious and resolute policy, however, they were then increasingly directed towards heavy and chemical industries (HCI) in the late 1970s, apparently against what had seemed to be the country’s comparative advantage – that is, labour-intensive exports based on cheap and high-quality labour. It is the success of this bold policy that can be fairly termed the South Korean miracle.

The destination of exports also changed radically over time. The main client in the late 1950s was Japan and exports consisted of traditional products. Then destination countries were diversified, with the United States becoming the prime client at the expense of Japan, while exports concentrated on light manufacturing, mostly clothing and footwear. In the late 1970s, the composition of exports shifted again and started to include an increasing proportion of heavy industry, and clients comprised more developing and emerging countries.

Back in the early 1970s, however, foreign currency sources had had three major origins. First, Japan’s reparations payments for its forty-year colonial rule, after South Korea reconciled with its former coloniser; second, payments made by the United States in return for South Korea’s participation in the Vietnam War; and, third, public works and building contracts in the Gulf countries after the first oil price boom – which, incidentally, provided Hyundai’s founder, Chung Ju-Yung, with a leg up into big business. These last two items show another key feature of South Korean development: the capacity of its rulers and entrepreneurs to take advantage of all opportunities that might arise and that might be profitable for the country or for private business.

C Social Aspects: Education, Inequality, and Agriculture

The preceding tables and comments summarise in a very succinct way the first twenty-five years of South Korea’s outstanding economic development. However, this picture would be incomplete without looking at their social counterpart. Here, too, the achievements were quite remarkable.

On the educational front, South Korea invested massively after its liberation from the Japanese coloniser, which had not done much in regard to the schooling of the indigenous population. Primary education was made a right in the 1948 constitution and the number of schools then mushroomed, despite a lack of resources in terms of teachers, school buildings, and textbooks. It has been said that student–teacher ratios were frequently as high as 100, and most schools operated two or three shifts a day. An important point is that this resulted as much from political will and policy decisions as from the fact that households themselves were eager to have their children educated so that they could qualify for good jobs – to such an extent that an author referred in those days to the ‘widespread Korean obsession with learning’.Footnote ¹³ In many instances, however, the burden of providing schooling was on communities, with little help from local or central governments. Whatever the case, primary school enrolment was nearly universal by 1960, and the demand for secondary and tertiary schooling was also extremely high by international standards. On the other hand, the role of university students in the events that led to the resignation of Syngman Rhee in 1960, and later on in the country’s political history, testifies to the importance of universities in the social and political life of the country already in those days.

This appetite for education never dwindled, so that fast progress was achieved at the level of the whole population. According to the Barro and Lee database, the average number of years of schooling in the working-age population increased from 4.5 in 1950 to 7.12 in 1975.Footnote ¹⁴ As a basis for comparison, the same figure is still below six in Bangladesh and Tanzania, forty-five years later. South Korea was also ahead of other late industrialisers – for example, Singapore, Brazil, and Turkey – on several key education indicators, such as secondary and post-secondary school enrolment, the number of tertiary students abroad, and the number of engineering students as a proportion of university students. As a sign of the strong demand by the population for good education, Amsden (Reference Amsden1989) mentions the fact that teachers in South Korea were relatively well paid in comparison with army officers – at a time when the military were at the head of the whole society – or professionals and technicians.

Despite this clear quantitative advantage, several weaknesses affected the educational sector, including too generalist a curriculum, a poor vocational training programme, and, above all and for quite some time, a clear over-supply of educated workers for the existing demand. There were periods characterised by high levels of unemployment among highly educated people, and the preparation of the first Five-Year Plan in 1963 found an excess of high-level personnel in the bureaucracy. This issue was sufficiently serious for the Park administration to impose quotas to reduce college enrolment at a certain stage.

Another important social aspect of the early decades of South Korea’s development concerns the moderate degree of inequality of the distribution of income, its stability over time, and its impact on the speed of poverty reduction. A side issue is that of the maintained income balance between the rural and the urban sector, where the engine of growth of the whole economy lay.

The relatively low level of inequality in comparison to many developing countries at the same income level is partly explained by the agricultural reform that was launched at independence, which redistributed land from Japanese and large domestic landowners to small farmers and former tenants, with a 3 hectares cap on each farm. The reform also abolished the tenant status. Given the importance of agriculture at that stage of the development process, the impact on the equality of the income distribution was substantial. This was reinforced by the relative equality in the distribution of educational levels in comparison with many developing countries.

To prevent an increase in inequality, the challenge was then to maintain a balance between the booming urban sector, led by manufacturing development, and the agricultural sector. As mentioned earlier, the balance initially moved against the latter. On the one hand, productivity was often low because farm size was too small.Footnote ¹⁵ On the other hand, grain production was rather heavily taxed, making life extremely difficult for small farmers. Average productivity was low – see Table 5.1 – and, if it increased somewhat during the 1960s, this was because of the flow of under-employed agricultural workers towards employment in the expanding industry. In the 1970s, the government’s action to level off productivity and incomes across sectors yielded effective results. Especially important had been the reversal of the production tax into a subsidy through guaranteed prices that were above market level. Some of the support to agriculture went through the Saemaul programme, which was the first community-driven development experience in the world. This programme was as much social as economic, one of its goals being to achieve rice self-sufficiency.

With a roughly constant distribution of income – except for some short-run fluctuation episodes – the reduction of poverty followed the continuous increase in mean income per capita. The poverty headcount – the proportion of people below a certain income threshold defined as the ‘poverty line’ – cannot be computed for Korea before 1965, due to a lack of representative household income and consumption expenditure data. However, available estimates for the following fifteen years suggest that the poverty headcount declined rapidly, from 40.9 per cent in 1965 to 23.4 per cent in 1970, 9.8 per cent in 1980, and 4.5 per cent in 1984.Footnote ¹⁶ Thus, poverty was virtually eliminated within twenty years.

Such was the spectacular economic take-off achieved by South Korea in the twenty-five years or so after the end of the Korean War and the division of the peninsula that had led to it. It is now time to describe the way that such results were achieved, or, in other words, the strategies that were designed to that end, as well as the institutional framework within which they were elaborated and implemented

A The 1950s: Recovery, Import Substitution, and Corruption

It is not clear why this early period of South Korean development has been given the ‘import substitution’ label. It was, rather, a disorganised period of economic recovery after independence from Japan and the Korean war, which would better fit the expression ‘everything goes’.Footnote ¹⁷ It is true that imports played a dominant role since the production capacity of the economy was limited. This explains the early formation of big trading businesses, which took advantage of the relationship with Rhee’s government to obtain import rights in certain key areas. As a matter of fact, this is when the first big South Korean business groups (chaebols) appeared or expanded, as was the case for Samsung, which had engaged in trading activities since the period of Japanese rule, or LG, which was founded in 1958 to provide the local population with imported home appliances. Progressively, however, these trading companies got into local production, benefitting as they did from comfortable import barriers.

As was seen earlier, the generalised climate of corruption, including a government that maintained itself in power through bribery, vote-rigging, and intimidation, a flourishing black market in foodstuffs provided by the United States, and rents granted to a few business groups through import rights or high-level protection, severely undermined Syngman Rhee’s regime. Student protests and accompanying turmoil pushed him out of the political arena. However, the democratic government that replaced him did not prove more effective in improving the country’s economic prospects or in curbing corruption or political decay.

B The Economic Policy under the Military Junta and the Park-Led Civilian Government

As a matter of fact, there was little difference between the military and the civilian governments headed by General Park. However, several institutional reforms that were to have long-lasting implications were imposed by the military junta, which could probably not have been affected otherwise.