AN OVERVIEW OF THE ECONOMIC DEVELOPMENT OF SOUTH KOREA AND ETHIOPIA

Assefa Abebe

Paper Prepared for Presentation at

Fourth International Conference on the Ethiopian Economy

Organized by

Ethiopian Economic Association

June 10-12, 2006

UNCC, Addis Ababa

Table of Contents

Section			Title	Page
	Abstract			3
1	What is Economic Development?			4
2	Economic Development of Korea: Transition from Aid recipient to Donor			5
	2.1	Internal Factors		6
		2.1.1	Political Leadership	6
		2.1.2	Economic Development Policies	8
		2.1.3	Culture	18
	2.2	External Factors		19
		2.2.1	Good Use of Foreign Resources	19
		2.2.2	Japanese and American Influence	20
3	An Overview of Economic Development of Ethiopia			21
	3.1	Internal Factors		22
		3.1.1	Political System	22
		3.1.2	Economic System	24
		3.1.3	Culture	28
	3.2	External Factors		30
4	Concluding Remarks			30
	References			32

AN OVERVIEW OF THE ECONOMIC DEVELOPMENT OF SOUTH KOREA AND ETHIOPIA

Assefa Abebe

email: assefaabebe@yahoo.com

Abstract

Some literatures indicate that in 1960s South Korea and Ethiopia were almost in the same stage of economic development. But currently, we are observing the huge difference between the stages of economic development of these two countries. South Korea, a country that had been in abject poverty in 1960s, has become one of the rich countries in the world by registering recognized economic success story. The economic growth that took Japan almost a century has been accomplished by the South Korea in less than half of that time. The question is how this was done? What were the factors that have contributed to this fast economic growth and success? Why the economic development that happened in South Korea couldn’t happen in Ethiopia? What has Korea done to achieve fast economic development that Ethiopia didn’t? What could we learn from the Korean development experience to improve the performance of Ethiopian economy?

This paper tries to shed some light on the history of economic performances of South Korea and Ethiopia in order to seek answers for the above raised and similar questions. The objective of the study is to draw some lessons for Ethiopia by analyzing the dynamics of South Korean economic development and by identifying some of the constraints that Ethiopian economy had and still having. The methodology of the study is reviewing secondary sources of information and analyzing these information/data to reach upon conclusion and recommendations.

AN OVERVIEW OF THE ECONOMIC DEVELOPMENT OF SOUTH KOREA AND ETHIOPIA

1. What is Economic Development?

Before we embark upon discussion about the economic development of South Korea and Ethiopia, it would be helpful to define what the economic development is. Economic Development refers to progress towards achievement of more quantity of resources (wealth) and more quality of life (access to education and health care, employment opportunities, availability of clean drinking water, as well as existence of good governance). It is also progress towards improving country’s ability in economic productivity, employment of human and physical resources, business activity and investment. Unlike economic growth, which is concerned with annual increases in quantity of production, economic development deals more with the basic fabrics of society including cultural beliefs, institutions that govern the way an economy and society function. Soubbotina and Sheram (2000, p. 96) define economic development as:

Qualitative change and restructuring in a country's economy in connection with technological and social progress. The main indicator of economic development is increasing GNP per capita (or GDP per capita), reflecting an increase in the economic productivity and average material well being of a country's population. Economic development is closely linked with economic growth.

They define economic growth as:

Quantitative change or expansion in a country's economy. Economic growth is conventionally measured as the percentage increase in gross domestic product (GDP) or gross national product (GNP) during one year. Economic growth comes in two forms: an economy can either grow "extensively" by using more resources (such as physical, human, or natural capital) or "intensively" by using the same amount of resources more efficiently (productively).

Regarding the indicators of economic development, there is a difference of opinion among the economists. For instance, Todaro (2002, pp. 14-15) argues that since a number of developing countries which experienced relatively high rates of per capita income showed relatively little or no improvement or even an actual decline in employment, equality, and real income of the lower segment of their population, reduction of poverty, inequality, and unemployment within the context of a growing economy could be better indicators of economic development rather than GDP or GNP.

For the purpose of this paper, economic development is a process that involves economic growth (the process of steady increase of productive capacity of the economy over time to bring about more national output and income) plus positive changes in quality of life of the citizen of a country as a result of improved performance of the factors of production and improved technique of production. Put other way, economic development is multidimensional including sustained real per capita income; reduction of a number of people below poverty line who are unable to meet basic human needs including food, shelter, and health; lessening of income inequality that affects self-respect of a person and that makes a person susceptible to ignorance, misery, and dominance of other people. In sum, economic development is a process and means of obtaining a better life both in physical reality and a state of mind. Indicators of economic development also should take these qualitative and non-market values into consideration.

2. Economic Development of Korea: Transition from Aid Recipient to Donor

South Korea has a recognized economic success story. A country that was in abject poverty in 1960s, is now a member of the Organization of Economic Cooperation and Development (OECD), an organization considered as a group of richest countries of our world. The economic growth that took Japan almost a century has been accomplished by the South Korea in less than half of that time. The questions to be raised here are how was this done? What were the elements that have contributed to this fast economic growth and success?

Different scholars have studied the dynamics of South Korean economic development and its contributing factors. Based on these studies, it is possible to categorize the contributing factors of Korean economic growth in to two broad categories--- internal and external factors. These will be discussed below in turn.

2.1 Internal Factors

2.1.1 Political Leadership

The Korean economic system during its early development stage, for that matter up to mid 1990s, was “ government guided capitalism”. This system was clearly indicated in the First Five Year Plan (1962-1966) of the country: “ Through out the plan period [1962-1966], the economic system will be a form of ‘guided capitalism’, in which the principles of free enterprise and respect for the freedom and initiative of private enterprise will be observed, but in which the government will either directly participate in or indirectly render guidance to the basic industries and other important fields” (Economic Planning Board/EPB, 1962, p. 28).

Korea was liberated in 1945 from the 36 years (1910-1945) of Japanese colonialism and the Republic of Korea was officially established on August 15, 1948, three years after liberation. After its liberation, Korea had been under U.S. Military Administration for three years (1945-1948). The first president of South Korea, Syng-Man Rhee was a man who spent most of his adult life in USA and after his resignation on April 26, 1960 mainly because of students’ protest against election fraud, corruption, and dictatorship in late February and March 1960, he also went back to USA where he died. Korea’s economic growth during the president Rhee, particularly from 1954 to 1960 was modest achieving an average GDP growth of 3.7% per annum (Cho, 1998, p.6). After President Rhee’s resignation, the interim government headed by Ho Chong led a country for four months and held election in which Yun Po-Sun was elected as a president. During the presidency of Yun Po-Sun (1960-1961), which lasted only for nine months, Korea adopted parliamentary form of government and the real power was in the hands of Prime Minister Chang Myon. The government of Chang Myon was taken over on May 16, 1961 by the bloodless coup led by General Chung-Hee Park that forced president Yun Po-Sun to resign.

By the election held in December 1963, General Park was elected and the military government was replaced by the civilian government, though the leadership remained in the hands of president Park. The real miracle of Korea’s economic development began with the coming to power of President Park who led the country from 1961 to 1979. Albeit it is not free from critique, his economic policy pulled South Korea out of the economic malaise. President Park who was educated in the Japanese Military Academy in Manchuria and used Japanese experience as a model for economic development, made protecting his country from communist invasion (from North Korea) and alleviation of poverty the primary goals of his government (Cho, 1998, p. 6). During 1961-1979, the real GDP of Korea grew on average by 11% per year and per capita GNI increased on average by 8.9% per year (Kim, 2002, p. 2). That period was the time of Korea’s economic development take-off.

Following president Park’s assassination on October 26, 1979 by Chief of the Korea’s Central Intelligence Agency (CIA), Kim Jae-Kyu, Vice President Kyu-Ha Choi became Acting President. However, the student movement that consistently demanded the removal of martial law which was instituted following the assassination of the president Park and mushrooming demonstration in opposition of the continuity of remnants of Park’s regime in power posed a challenge to the government. After about ten months in office, Vice President Choi relinquished power in August 1980.

The political instability occurred following the assassination of President Park coupled with other internal factors such as failure of agricultural products due to unusual cool weather during the summer of 1980 and external factors such as the second oil shock of 1979 which adversely affected the world economy affected Korean economic growth. In 1980, the Korean economic growth saw negative growth rate (-4.8%) for the first time since the liberation (Stern, Kim, Perkins, and Yoo, 1995, pp. 84-85).

After the resignation of President Choi, General Chun Doo Hiwan who was acting Chief of the Korean CIA and Head of the Defense Security Command was elected president and ruled Korea for seven years (1981-1987). During his period substantial economic liberalization in trade and industrial policies were achieved in part due to the government’s own initiative and in part due to pressure from Korea’s largest trading partner, the USA (Cho, 1998, p.9).

The end of President Chun’s term of office was followed by the government of President Tae-Woo Rho, who was another former military General and close friend of President Chun (Chu, 1998, p.9). He was elected for five years term (1988-1992). Above all, his period was known for allowing political democratization.

In 1993, President Yong-Sam Kim (1993-1998), the first head of state who was not from military background since 1961, was elected. His government was pressed internally by the globalized Chaebols (large business conglomerates of Korea) and externally by USA, OECD, WTO, and IMF to take economic liberalization and market opening measures. In short, his period was a period when Korea joined OECD and launched various economic liberalization measures and the period of financial crisis that surfaced in November 1997.

The period of President Dae Jung Kim (1998-2002) was the period of recovery from the financial crisis and it is too early to comment at this juncture on the performance of the current government led by president Moo-Hyun Roh (2003-2007).

2.1.2 Economic Development Policies

As mentioned above the Korean economic development is known as government led economic development. By putting in place necessary economic policies and suitable strategies as well as showing flexibility in implementation of these policies and strategies, the government played very important role in the economic development of the country. These policies and strategies will be discussed below briefly.

2.1.2.1 Inward Looking Economic Development Policy, 1948-1960

The first president of South Korea, Syng Man Rhee, adopted an economic policy known as “Revised Capitalism” which allowed private ownership within the limit of what his government believed would maximize public welfare. His trade policy was import substitution, which then used by many less developed countries. Korea maintained an overvalued exchange rate and strove to substitute imports with domestically produced goods (Sohn, Yang, and Yim, 1998, p. 13). To implement its import substitution policy, the government used strategies such as restricting imports through tariff and non-tariff mechanisms and at the same time giving incentives to exporters through subsidies and export credits.

Three years after the establishment of South Korea, the Korean War (1950-1953) broke out and caused huge human causalities and tremendous economic destructions. During the war, 1.5 million people were killed and 40% of the country’s industrial facilities were destroyed (OECD, 1996, p. 1). Fortunate enough, by 1957, with the massive economic assistance mainly from USA and from United Nations, the Korean economy had largely recovered from damage inflicted during the Korean War (EPB, 1962, p. 27).

Even though the government of president Rhee was criticized by some for giving more attention to maximizing foreign assistance in order to rebuild industries and finance imports rather than to domestic savings and export earning (Sohn, Yang, and Yim, 1998, p. 15), the GDP growth was not bad. Korea’s GDP growth for years from 1953 to 1960 was an average annual rate of 4% (Kim, 2002, p. 2.).

Table 3.1: Key Economic Indicators for Korea, 1948-1960

Year	GDP (Bil.Won)	Per Capita GDP (US$)	Export (Mil.US$)	Imports (Mil.US$)	Exchange Rate (Won/US$)	Foreign Exchange Reserve (Mil. US$)
1948	-	-	22	208	-	20
1949	-	-	14	133	-	22.4
1950	-	-	29	48	-	26.8
1951	-	-	16	155	-	38.0
1952	-	-	28	214		82.7
1953	48	67	40	345	6.6	108.7
1954	66	70	24	243	18.0	107.8
1955	115	65	18	341	30.2	96.1
1956	152	66	25	386	50.0	98.6
1957	197	74	22	442	50.0	115.6
1958	205	80	17	378	50.0	146.5
1959	218	81	20	304	50.0	147.3
1960	245	79	33	344	62.8	157.0

SOURCE: National Statistical Office and Ministry of Commerce, Industry, and Trade. Quoted in Chan Hyun Sohn, Jun Sok Yang, Hyo Sung Yim (1998). Korea’s Trade and Industrial Policies, 1948-1998: Why the Era of Active Policy is Over. Korea Institute for International Economic Policy (KIEP), Working Paper No. 98-05, p.14.

2.1.2.2 Outward Looking Economic Development Policy, 1961-1972

The outward looking economic development policy, also known as export oriented industrialization (EOI), was came to operation with coming to power of General Chung Hee Park. The main goal of this policy was to transform the aid-based economy of Korea into an export-led manufacturing based economy. The main reasons for choosing this policy were to overcome Korea’s lack of natural resource and small domestic market, need for foreign exchange in the face of decreasing volume of foreign aid, and belief that Korea has comparative advantage in production of labor intensive export products (OECD, 1996, p.1 and Kim, 2002, p. 2).

Here, the reader should bear in mind that the shift of policy from inward looking development that was based on import substitution to outward looking development policy that was based on export promotion did not mean liberalization of import. The government continued import restriction using both mechanisms of quantitative restriction and tariff. For quantitative restriction, the government used what was know as “ positive–list system” under which only those commodity items listed could be imported with or without prior government approval depending upon the system of semi-annual trade program designed to control imports quantitatively. After the second half of 1967 the “positive-list system” was changed to “negative-list system” under which only the imports of those items listed were prohibited or restricted (Kim, 1994, p. 22).

Besides restriction of imports by the use of positive and negative list system, the government of Korea also used the complete prohibition of import of certain items considered inessential. According to the Law Prohibiting Sales of Special Foreign Products enacted in 1961, sale of certain foreign products such as foreign made cigarettes, coffee, cosmetics, high-quality clothes and the like were banned and transcending this ban was a crime (Kim, 1994, p. 9). In short, the trading behavior of Korea during this period may be characterized as promoting exports as much as possible and keeping imports to the minimum necessary level by giving preferential treatment only to capital goods in order to accelerate investment activities and to raw materials and intermediate goods which were used for the production of goods for export. The import liberalization seen in the field of raw materials and intermediate goods, which were used to produce export goods, was because of the reason that the objective of export promotion strategy cannot be achieved while maintaining extreme forms of import restriction.

During 1961-1972, the Korean government used various export promotion measures to promote export. These measures include, but not limited to, the following:

1. Vigorous administrative support for export promotion;

2. Giving preferential export credit (policy loan), a loan on which interest rate was lower than the normal interest rate, to exporter;

3. Sending economic missions consisting of leading business persons to Western industrialized countries to negotiate on financing for selected projects;

4. Allowing investors to import capital goods on long term-settlement basis using the long-term export credits of capital exporting countries;

5. Foreign loan repayment guarantee;

6. Tariff exemption on imports of raw materials and intermediate goods used for export production;

7. Indirect domestic tax exemption on intermediate inputs used for export production and on export sales;

8. Direct tax reduction on income earned from exports and other foreign exchange earning activities;

9. Wastage allowance for raw materials imported for export production, allowing export producing importers more than normally needed to compensate wastage occurred during production;

10. Tariff and indirect tax exemption for domestic suppliers of intermediate goods used in production;

11. Accelerated depreciation allowance for fixed assets of major export industries;

12. Export targeting system, setting annual export targets by major commodity groups and by destination;

13. Support for overseas’ marketing activities of Korean exports through Korea’s diplomatic missions and governmental agency called Korea Trade Promotion Agency (KOTRA) overseas’ networks;

14. Dissemination of necessary information and solving problems associated with export on Monthly Trade Promotion conference which was attended by the president of the country, all cabinet members, head of major financial institutions, business association leaders, and representatives of major export firms (Frank, Kim & Westphal 1975 Quoted in Kim, 1994, p.18 and pp.19-20 for items listed in numbers 8, 9&10).

The export promotion policy of Korea is often cited as a successful example of a government led outward looking (export based) economy. This policy worked in favor of Korea’s comparative advantage of that time which was in light manufacturing.

Unlike other developing countries, which tried to induce heavy manufacturing without adequate capital base or experience, the focus on light manufacturing allowed Korea to make the most of what it had. Exports resulting from such a strategy brought Korea the foreign exchange it needed to upgrade its capital stock, build up entrepreneurial experience, and set up the necessary foundation to move into heavy manufacturing in the late 1970s and 80s (Sohn, Yang, and Yim, 1998, p.24).

It was with this experience that Korea registered a successful record in implementing its Heavy and Chemical Industries development policy.

Table 3.2: Key Economic Indicators for Korea, 1961-1972

Year	GDP (Bil.Won)	Per Capita GDP (US$)	Export (Mil.US$)	Imports (Mil.US$)	Exchange Rate (Won/US$)	Foreign Exchange Reserve (Mil. US$)
1961	294	82	41	316	127.4	207.0
1962	356	87	55	422	130.0	168.6
1963	503	700	87	560	130.0	131.5
1964	716	703	119	404	214.2	136.4
1965	806	105	175	463	266.3	146.3
1966	1,037	125	250	716	371.3	245.2
1967	1,281	142	320	996	270.5