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Development Overview

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Overview of Korea’s development experience

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Development Overview
Official Aid Production

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Establishment of POSCO

1. Background
 
As development of the steel industry was considered indispensable for Korea’s industrialization, discourse on the possibility of creating a major steel plant in the country pervaded the postwar economic reconstruction atmosphere. Even so, not much movement was seen in this area until the early 1960s or so, leaving Korea’s steel industry in its cottage-like, pre-modern state for some years to come.

Korea’s first-ever plan for the construction of a steel mill involved building a plant in Mukho based on around USD 3 million in aid from the US International Cooperation Agency (ICA). The plan was proposed in June 1957 but never realized since Washington doubted its feasibility.

The Korean Ministry of Commerce and Industry then devised another plan, this time for setting up an integrated steel mill, capable of producing 200,000 tons of steel, in Yangyang in August 1958. The Ministry’s plan to secure a foreign investment of USD 37.45 million in total for its construction, however, also came to naught.

The Second Republic, which came into being in 1960, too envisioned the construction of a steel mill in its First Five-Year Economic Development Plan. Yet the plan for producing 250,000 tons of pig iron via a plant that would cost USD 32 million and 30 billion hwan also fell flat, as the Second Republic quickly disappeared by military coup. The leaders of the Third Republic sought to secure investments from Demas, Krupp, GHH (DKG) of Germany as well as from American financiers in the early 1960s for creating a steel plant in Korea. Again the attempts ended in vain.

By contrast, the European Community and other countries around the world had successfully begun to foster their steel industries based on the active support they had received since the late 1950s, increasing output from 100,000 tons in the early 1960s to 500,000 tons in the early 1970s. As the demand for steel and other basic industrial goods began to rise explosively in Korea in the early 1960s, Koreans came to perceive the need for establishing a modern steel industry in their country with amplified urgency.

Nevertheless, the West, having the means and capacity (financial and technical alike) to support the establishment of such a steel industry in Korea, was generally skeptical of the success of such efforts. Material industries tended to require massive amounts of capital investment as well as technical expertise, and the project of establishing such an industrial complex in Korea simply did not appear sufficiently feasible or prospective.

Notwithstanding the general pessimism abroad, the commitment of Korean policymakers to economic self-sufficiency and stronger national defense, via the routes of industrialization and modernization, continued to fuel the Korean government’s drive to kick-start the decades of development with the creation of a steel mill.
 
 
2. Planning and Implementation
 
A more specific plan for building a steel plant was included in the Integrated Development Plan of Taebaek Mountain, which was part of the First Five-Year Economic Development Plan announced in January 1962. The Economic Ministers’ Meeting, held in December 1964, passed a resolution on the Plan for Fostering Steel Manufacturing in Korea according to an earlier mid- to long-term plan, envisioning the creation of a steel mill capable of producing up to a million tons of steel per year.

The excessive ambition of the plan, however, was what left it out of the final version of the First Five-Year Plan. The Second Five-Year Plan, established in July 1966, required the construction of a first-phase general steel mill, capable of producing 500,000 tons of steel per year, by 1971. The plan led policymakers to seek support abroad for its realization, in particular, they sought to secure loans of USD 30 million from Yawata Steel of Japan, another USD 30 million from the US Agency for International Development (US AID), and another USD 20 million from West Germany’s fund for development loans.

These fundraising efforts culminated in the assembly of an international group of loan providers, led by Corpus of the United States, in December 1966. The representatives of seven companies in the United States, Germany, England, and Italy gathered together in Pittsburg, Pennsylvania, to review Korea’s plan. The meeting resulted in the creation of the Korea International Steel Associates (KISA), which soon after began to coordinate multilateral meetings on Korea’s steel plan.

The second KISA meeting was held in January 1967, with the KISA delegation visiting Korea in April that same year to sign a provisional agreement on setting up a steel plant. The Korean government and the KISA also signed a basic agreement in October 1967, marking significant progress.[1] However, the skeptical turn in the American parties to this project[2] and in international development organizations[3] left the fate of the plan hanging in mid-air. The agreement with the KISA became all but meaningless by April 1969, setting the steel mill construction plan back to its original point.

As unexpected setbacks continued to challenge the steel mill plan, Korea’s Economic Planning Board organized the Research Commission for the Construction of Pohang Iron and Steel Company Limited (POSCO) in June 1969 to conduct a comprehensive and thoroughgoing review of the plan from its outset and establish a new, more workable plan. The biggest obstacle, the researchers found, was the problem of garnering the massive funding required.

As it became clear that Korea could no longer expect funding from the likeliest sources—i.e., the United States and Germany—the Korean government necessarily turned its attention to a new candidate: Japan. However, the research committee was soon forced to conclude that it would be equally difficult to secure sufficient investment from Japan, too. The research committee’s new plan, revealed in June 1969, envisioned creating a steel mill on par with major steel mills worldwide, capable of producing one million tons of steel per year. The Korean government thus decided to withdraw money from the Japanese Reparation Fund for Korea (JRF) instead of seeking new investments.

The third Korean-Japanese Cabinet Officials Meeting, held in August 1969, saw much progress on this front. After several rounds of negotiations, the two governments finally signed the Basic Agreement on the Construction Finance of Pohang Iron and Steel Company Limited in December 1969. The plan obligated that Korea adjust its plan on the size, make-up, and process of construction according to the report of a Japanese investigators’ group, and that Japan provide Korea with USD 123.7 million of the JRF for construction. Deepening its resolve to foster a steel industry in Korea with the creation of POSCO, the Korean government enacted the Steel Industry Fostering Act in January 1970, and finally broke ground for the construction of the historic steel mill in April that year.

The first phase of the POSCO project, with a production capacity of 1.03 million tons of steel per year, was finally completed in July 1973, three years after the groundbreaking. The second, third, and fourth phases also proceeded without much interruption, culminating in the completion of a world-class steel mill by January 1982, capable of producing 9.1 million tons of steel yearly. As part of its heavy and chemical industries (HCIs) drive that began in the early 1970s, the Korean government also launched the construction of a second steel complex, in Gwangyang this time, in 1982, and completed the plant, with a production capacity of 11.4 million tons per year, by October 1992.
 

 
[1] Agreement between the Government of the Republic of Korea and Korea International Steel Associates, entered into on October 20, 1967. The parties to this agreement were Koppers Company and Blaw-Knox (a member of the Westing Electric International Group) of the United States, Demag and Siemens of Germany, Wellman Engineering of England, Societa Italiana Impianti of Italy, and ENSID of France, aside from the Korean government. The agreement provided for funding of USD 95.7 million in total for the construction of an early steel plant in Korea that would produce 600,000 tons of steel per year at first, and later expand to 1.1 million tons.
[2] USAID/K, Comment on Analysis of Pohang Iron and Steel Co. Financial Plan, April 8, 1969.
[3] Although the KISA had conducted a feasibility study during its visit to Korea in May 1967, its decision-makers concluded the project unworkable. When the International Bank for Reconstruction and Development (IBRD) submitted its Economic Surveys: Korea, 1968 in March 1969, they insisted that it was too early for Korea to build such a plant.

Source: Korea International Cooperation Agency. 2004. Study on Development Aid and Cooperation for South Korea: Size, Scope and Exemplary Effects. Seoul.